SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One):
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED] For the fiscal year ended September 30,
1996, OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to
____________________ to _________________
Commission File Number: 0-24330
BEDFORD BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
Virginia 54-1709924
- --------------------------------------------- ------------------
(State or other jurisdiction of incorporation I.R.S. Employer
or organization) Identification No.
125 West Main Street, Bedford, Virginia 24523
- --------------------------------------- ----------
(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code: (540) 586-2590
--------------
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 $0.10 per share
---------------------------------------
(Title of Class)
Check whether the issuer: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES X NO .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $9,999,000.
As of December 6, 1996, there were issued and outstanding 1,143,669 shares
of the registrant's Common Stock.
The registrant's voting stock is traded over-the-counter under the symbol
"BFSB." The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing price of the registrant's common stock as
reported by the Nasdaq National Market on December 6, 1996, was $16,207,987.
Transition Small Business Disclosure Format (check one)
YES NO X
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year ended
September 30, 1996. (Parts I, II and IV)
2. Portions of Proxy Statement for the 1997 Annual Meeting of stockholders.
(Part III)
<PAGE>
PART I
Item 1. Business
The Company
Bedford Bancshares, Inc. (the "Company") is a Virginia corporation
organized in March of 1994 at the direction of Bedford Federal Savings Bank
("Bedford Federal" or the "Savings Bank") to acquire all of the capital stock
that the Savings Bank issued in its conversion from the mutual to stock form of
ownership (the "Conversion"). On August 19, 1994, the Savings Bank completed the
Conversion and became a wholly owned subsidiary of the Company. The Company is a
unitary savings and loan company which, under existing laws, generally is not
restricted in the types of business activities in which it may engage provided
that the Savings Bank retains a specified amount of its assets in housing
related investments.
The Savings Bank
Bedford Federal, a wholly owned subsidiary of the Company, was founded in
1935 and is primarily engaged in attracting deposits from the general public and
using those funds to originate real estate loans on one- to four- family
residences and, to a lesser extent, multi-family, commercial real estate and
consumer loans. The Savings Bank has offices in the city of Bedford and in
Forest and Moneta, which are located in Bedford County, Virginia. In addition,
the Savings Bank invests in investment securities and mortgage-backed
securities. The Savings Bank offers its customers fixed-rate, and
adjustable-rate mortgage loans, as well as consumer loans, including home equity
and savings account loans. Adjustable-rate mortgage loans are originated for
retention in the Savings Bank's portfolio while fixed-rate mortgage loans are
generally sold upon origination into the secondary market. All consumer loans
are retained in the Savings Bank's portfolio.
The principal sources of funds for the Savings Bank's lending activities
are deposits, the amortization, repayment and maturity of loans and investment
securities and advances from the Federal Home Loan Bank ("FHLB") of Atlanta.
Primary sources of income are interest and fees on loans and investment
securities and customer service fees and commissions. The Savings Bank's primary
expense is interest paid on deposits.
Market Area/Competition
The City and County of Bedford are the Savings Bank's primary market area.
The Bedford City/County area consists of over 770 square miles and is located in
the west-central portion of Virginia known as the Piedmont Plateau. The Savings
Bank's main office is located at 125 West Main Street in the City of Bedford,
Virginia, and two other offices are located at opposite ends of Bedford County.
An office in Forest serves the eastern part of the county, as well as parts of
the City of Lynchburg, Campbell and Amherst Counties. The office located in
Moneta serves the southern and western parts of Bedford County, as well as the
area surrounding Smith Mountain Lake which includes portions of Franklin and
Roanoke Counties.
The City of Bedford is located approximately 25 miles west of the City of
Lynchburg and 30 miles east of Roanoke. The City of Bedford serves as the county
seat and the commercial and retail hub of the area with a market of over 55,000
persons. The Bedford area enjoys a diversified economy comprised of
manufacturing, wholesale, retail, service, agriculture and tourism.
<PAGE>
The Savings Bank is the only financial institution headquartered in
Bedford City/County. This area is also served by branch offices of five regional
commercial banks and a branch office of a thrift headquartered in Lynchburg. The
Savings Bank encounters strong competition both in the attraction of deposits
and origination of real estate and other loans. Competition for deposits comes
primarily from commercial banks and competition for loans comes primarily from
branches of commercial banks and thrifts, as well as mortgage companies that
operate in the areas which comprise the Savings Bank's primary market area. Due
to their size, many of the Savings Bank's competitors possess greater financial
and marketing resources.
Lending Activities
General. The Savings Bank's loan portfolio predominantly consists of
adjustable-rate mortgage loans or short-term fixed-rate loans secured by
one-to four family residences and to a lesser extent, commercial real estate,
construction and consumer loans. Fixed rate mortgage loans with maturities
exceeding 15 years generally are sold with servicing rights retained by the
Savings Bank in the secondary market.
The following table sets forth the composition of the Savings Bank's loan
portfolio in dollar amounts and in percent of the respective portfolios at the
dates indicated.
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
Percent of Percent of
Amount Total Amount Total
------ ---------- ------ ----------
(Dollars in Thousands)
Real estate:
Residential:
<S> <C> <C> <C> <C>
One- to four-family............ $ 84,235 74.53% $ 75,341 74.08%
Multi-family................... 1,000 .88 223 .22
Commercial....................... 4,998 4.42 4,379 4.31
Construction..................... 9,783 8.66 9,732 9.56
Land............................. 4,127 3.65 3,588 3.53
Consumer and commercial business... 8,878 7.86 8,436 8.30
------- ------ ------- ------
Total loans.................. 113,021 100.00% 101,699 100.00%
====== ======
Less:
Unearned discounts, premium,
deferred loan fees, net........ 299 396
Loans-in-process................. 3,199 2,994
Allowance for credit losses...... 650 640
------- -------
Total loans, net............... $108,873 $ 97,669
======= =======
</TABLE>
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<PAGE>
The following table sets forth the maturity of the Savings Bank's loan
portfolio at September 30, 1996. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totalled $23.6 million for the year ended September 30, 1996.
Adjustable-rate mortgage loans are shown as maturing based on contractual
maturities.
<TABLE>
<CAPTION>
At September 30, 1996
-------------------------------------------------------------------------------
Consumer
One- to and Total
Four- Multi- Commercial Commercial Loans
Family Family Real Estate Construction Land Business Receivable
------- ------ ----------- ------------ ---- ---------- ----------
(In thousands)
Amounts due:
<S> <C> <C> <C> <C> <C> <C> <C>
One year or less .................... $ 38 $ 1 $ 1,956 $ 7,736 $ 21 $ 2,229 $ 11,981
------ ------ ------- ------- ----- ------- -------
After one year:
More than one year to three years.. 260 -- 54 866 170 2,212 3,562
More than three years to five years 669 -- 288 717 1,853 2,996 6,523
More than five years to 10 years... 6,337 300 828 47 1,181 1,348 10,041
More than 10 years to 20 years..... 26,871 699 1,872 352 902 87 30,783
More than 20 years ................ 50,060 -- -- 65 -- 6 50,131
------ ------ ------- ------- ----- ------- -------
Total due after one year ......... 84,197 999 3,042 2,047 4,106 6,649 101,040
------ ------ ------- ------- ----- ------- -------
Total amounts due ................ 84,235 1,000 4,998 9,783 4,127 8,878 113,021
Less:
Loans-in-process .................... -- -- -- 3,199 -- -- 3,199
Unearned discounts, premiums and
deferred loan fees, net ............ 239 3 14 28 12 3 299
Allowance for credit losses ......... 445 1 50 40 25 89 650
------ ------ ------- ------- ----- ------- -------
Loans, net ........................ $ 83,551 $ 996 $ 4,934 $ 6,516 $4,090 $ 8,786 $108,873
====== ====== ======= ======= ===== ======= =======
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1997, which have fixed interest rates and which have floating or
adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- ---------
Real estate loans: (In thousands)
One- to four-family.... $10,645 $75,599 $ 86,244
Multi-family........... 171 828 999
Commercial real estate 955 2,087 3,042
Land................... 2,856 1,250 4,106
Consumer and commercial
business................ 3,174 3,475 6,649
------ ------ -------
Total................... $17,801 $83,239 $101,040
====== ====== =======
One- to Four-Family Residential Loans. The Savings Bank's primary lending
activity consists of the origination of one-to four-family, owner-occupied,
residential mortgage loans secured by property located in the Savings Bank's
primary market area. Management believes that its policy of focusing on
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<PAGE>
one- to four-family lending has been effective in contributing to net interest
income while reducing credit risk by keeping loan delinquencies and losses to a
minimum.
The Savings Bank currently offers adjustable-rate mortgage loans ("ARMS")
that adjust every one or three years, some have a fixed rate for seven years
before adjusting annually and have terms from 10 to 30 years. Generally, the
interest rates on ARMs are based on treasury bill indices and are adjustable
once a year with certain limitations on adjustments per period and over the life
of the loan. All ARMs have a "floor rate", whereby interest charged on such
loans cannot be reduced below the rate set forth in the loan documents, thereby
insulating the Savings Bank from lower yields due to further reductions in
interest rates. The Savings Bank considers the market factors and competitive
rates on loans as well as its own cost of funds when determining the rates on
the loans that it offers. The Savings Bank does not originate loans with
negative amortization.
Bedford Federal originated $19.0 million and $16.8 million of
adjustable-rate, one- to four-family permanent and construction mortgage loans
during the fiscal years ended September 30, 1996 and 1995, respectively. The
Savings Bank's total one- to four-family ARM portfolio amounted to $75.6 million
of the Savings Bank's gross loans receivable at September 30, 1996.
The retention of ARMs in the Savings Bank's portfolio greatly helps to
reduce the Savings Bank's exposure to changes in interest rates. However, there
are unquantifiable credit risks which would result from potential increased
payments to the borrower as a result of repricing of ARMs. It is possible that
during periods of rapidly rising interest rates, the risk of default on ARMs may
increase due to the upward adjustment of interest cost to the borrower.
Additionally, the ARMs originated by the Savings Bank historically have provided
for initial rates of interest below the fully indexed rates that would prevail
were the index used for repricing applied initially. These loans are subject to
increased risk of delinquency or default when the higher, fully-indexed rate of
interest subsequently comes into effect and replaces the lower initial rate. The
Savings Bank attempts to limit such potential risk by placing limitations on the
interest rate adjustments. Although the potential exists for a higher rate of
delinquency on ARMs versus fixed-rate loans, Bedford Federal has not experienced
a disproportionate share of delinquencies or defaults in its ARM portfolio.
Generally, during periods of rising interest rates, the risk of default on
ARMs is considered to be greater than the risk of default on a fixed-rate loan
due to the upward adjustment of interest costs to the borrower. To help reduce
such risk, the Savings Bank qualifies the loan at the fully indexed accrual
rate, as opposed to the original interest rate. ARMs may be made at up to 95% of
the loan to value ratio. Although ARMs allow the Savings Bank to increase the
sensitivity of its asset base to changes in interest rates, the extent of this
interest sensitivity is limited by the periodic and lifetime interest rate
adjustment limitations. Accordingly, there can be no assurance that yields on
the Savings Bank's ARMs will adjust sufficiently to compensate for increases in
the Savings Bank's cost of funds.
The Savings Bank also offers conventional fixed-rate one- to four-family
mortgage loans with terms from 10 to 30 years. Fixed-rate loans are generally
underwritten either according to the Federal Home Loan Mortgage Corporation
("FHLMC")or Federal National Mortgage Association ("FNMA") guidelines, utilizing
their approved documents so that the loans qualify for sale in the secondary
mortgage market. The Savings Bank originates and holds its fixed-rate mortgage
loans with maturities not exceeding 15 years in its portfolio. Bedford Federal
originated $2.2 million and $3.0 million in permanent fixed-rate, one- to
four-family mortgage loans during the years ended September 30, 1996 and 1995,
respectively. The Savings Bank sold $152,000 and $184,000 of the loans
originated during the fiscal years ended September 30, 1996 and 1995,
respectively. In addition, the Savings Bank originated $167,000 and $262,000 in
fixed-rate one-to four-family mortgage loans for the Virginia Housing
Development Authority ("VHDA") in fiscal 1996 and 1995, respectively.
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<PAGE>
While one- to four-family residential real estate loans are normally
originated with terms from 10 to 30 years, such loans typically remain
outstanding for substantially shorter periods. This is because borrowers often
prepay their loans in full upon sale of the property pledged as security or upon
refinancing the original loan. In addition, substantially all of the mortgage
loans in the Savings Bank's loan portfolio contain due-on-sale clauses providing
that the Savings Bank may declare the unpaid amount due and payable upon the
sale of the property securing the loan. The Savings Bank enforces these
due-on-sale clauses to the extent permitted by law. Thus, average loan maturity
is a function of, among other factors, the level of purchase and sale activity
in the real estate market, prevailing interest rates and the interest rates
payable on outstanding loans.
Construction Lending. The Savings Bank engages in construction lending
involving loans to qualified borrowers for construction of one- to four-family
residential properties and, on a limited basis, involving commercial and
multi-family properties. These properties are located in the Savings Bank's
market area.
Construction loans are made to builders on a speculative basis and to
owners for construction of their primary residence on a construction/permanent
basis. Loans for speculative housing construction are made to area builders only
after a thorough background check has been made. This background check includes
an analysis of the builder's financial statements, credit report and reference
checks with subcontractors and suppliers. The Savings Bank usually will have no
more than three construction loans outstanding at any time to any builder.
Construction loans on speculative properties are limited to a maximum
loan-to-value ratio of 80% and have a maximum maturity of 12 months. Loan
proceeds are disbursed in increments as construction progresses. Accrued
interest on loan disbursements is paid monthly. At September 30, 1996, the
Savings Bank had $1.2 million in construction loans outstanding secured by
unsold properties, with $271,000 in loans-in-process (funds being held for
construction progress) outstanding and attributed to these loans. The Savings
Bank has experienced increased residential construction lending in its market
area, primarily in the Forest, Virginia area. This increased lending is a result
of the recruitment by the Savings Bank of several financially strong small
builders as customers in the Forest area.
Construction/permanent loans to owner/borrowers have either fixed or
adjustable rates and are underwritten in accordance with the same terms and
requirements as the Savings Bank's permanent mortgages on existing properties
except that the builder must qualify as a Savings Bank approved contractor, and
the loans generally provide for disbursement of loan proceeds in stages during a
construction period of up to six months. Borrowers are required to pay accrued
interest on the outstanding balance monthly during the construction phase. At
September 30, 1996, there was $9.8 million outstanding in construction loans to
owner/borrowers with $3.2 million outstanding loans-in-process allocated to
these projects. Construction loans originated on commercial and multi-family
properties amounted to $0 and $385,000 during fiscal 1996 and 1995,
respectively. The Savings Bank originated $9.9 million and $10.8 million in
construction loans on one- to four-family properties during fiscal years 1996
and 1995, respectively.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, it may
be necessary for the Savings Bank to advance funds beyond the amount originally
committed to permit completion of the construction. If the estimate of value
proves to be inaccurate, the Savings Bank may be confronted, at or prior to the
maturity of the loan, with collateral having a value
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<PAGE>
which is insufficient to assure full repayment. As a result of the foregoing,
construction lending often involves the disbursement of substantial funds with
repayment dependent, in part, on the success of the construction. If the Savings
Bank is forced to foreclose on a property prior to or at completion due to a
default, there can be no assurance that the Savings Bank will be able to recover
all of the unpaid balance of, and accrued interest on, the loan as well as
related foreclosure and holding costs. The Savings Bank has sought to minimize
this risk by limiting construction loans to qualified borrowers on properties
located in the Savings Bank's market area and by limiting the number of
construction loans for speculative purposes outstanding at any time.
Multi-Family and Commercial Real Estate Loans. The Savings Bank offers
multi-family and commercial real estate loans, however, this type of lending
represents a small portion of the Savings Bank's lending activities. Commercial
real estate loans consist of permanent loans secured by small office buildings,
churches, shopping centers and other non-residential buildings on real estate
located in the west-central Virginia area.
Loans secured by multi-family and commercial real estate generally involve
a greater degree of risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by commercial and
multi-family real estate is typically dependent upon the successful operation or
management of the related real estate project. If the cash flow from the project
is reduced, the borrower's ability to repay the loan may be impaired. The
Savings Bank seeks to minimize these risks in a variety of ways, including
limiting the size of such loans and strictly scrutinizing the financial
condition of the borrower, the quality of the collateral and the management of
the property securing the loan. In certain instances, the Savings Bank will
require personal guarantees. Substantially all of the properties securing the
Savings Bank's commercial and multi-family real estate loans are inspected by
the Savings Bank's lending personnel before the loan is made. The Savings Bank
also obtains appraisals on each property. At September 30, 1996, the largest
commercial or multi-family real estate loan had a balance of $1.6 million and
was performing.
Land Lending. Land loans are made primarily to individuals on developed
residential lots located in the Savings Bank's market area. Land lending
generally involves additional risks to the lender as compared with residential
mortgage lending. These risks are attributable to the fact that loan funds are
advanced upon the security of unimproved and developed lots or land under
development, predicated on the future value of the property upon completion of
development. Loans on undeveloped land may run the risk of adverse zoning
changes, environmental or other restrictions on future use. Because of these
factors, the analysis of land loans requires an expertise that is different in
significant respects from that which is required for residential mortgage
lending.
Consumer and Commercial Business Loans. The Savings Bank views consumer
lending as an important component of its lending operations because consumer
loans generally have shorter terms and higher yields, thus reducing exposure to
changes in interest rates. In addition, the Savings Bank believes that offering
consumer loans helps to expand and create stronger ties to its customer base.
Consequently, the Savings Bank has recently focused on consumer lending by
marketing consumer loans to existing and potential customers. All branches are
now able to originate consumer loans. Regulations permit federally chartered
savings associations to make secured and unsecured consumer loans up to 35% of
the Savings Bank's assets, with no limit for credit cards and educational loans.
In addition, the Savings Bank has lending authority above the 35% limit for
certain consumer loans, such as home improvement loans and loans secured by
savings accounts.
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<PAGE>
Consumer loans consist of automobile loans, savings account loans, home
equity, personal secured and unsecured loans and home improvement loans. As of
September 30, 1996, $1.5 million of such loans consisted of automobile loans.
The underwriting standards employed by the Savings Bank for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. In addition, the stability of the applicant's monthly income from primary
employment is considered during the underwriting process. Creditworthiness of
the applicant is of primary consideration, however, the underwriting process
also includes a comparison of the value of the security, if any, in relation to
the proposed loan amount.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats and
recreational vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. The Savings Bank adds a general provision to its consumer loan loss
allowance, based on general economic conditions, prior loss experience and
management's periodic evaluation. See "--Loan Delinquencies and Non-Performing
Assets and Classified Assets" for information regarding the Savings Bank's loan
loss experience and reserve policy.
Regulations authorize the Savings Bank to make secured and unsecured loans
for commercial, corporate, business and agricultural purposes. The aggregate
amount of such loans outstanding may not exceed 20% of the Savings Bank's
assets. Any loans in excess of 10% of assets must be made to qualifying small
businesses and farms. In addition, another 10% of total assets may be invested
in commercial equipment leasing. The Savings Bank has offered limited commercial
business loans since the early 1980s, primarily to existing customers.
Generally, the Savings Bank's commercial business loans are secured by real
estate or other assets.
It is the policy of Bedford Federal annually to request financial
statements from commercial loan borrowers. The financial statements are reviewed
as received by management to detect any conditions or trends which may affect
the ability of the borrower and/or cash flows of the project to repay the debt.
Loan Solicitation and Processing. The Savings Bank's sources of mortgage
loan applications are referrals from existing or past customers, real estate
brokers, builders, call-in and walk-in customers and also the result of
advertising.
All loans are underwritten and approved by the loan committee. Any loan up
to $300,000 is reviewed and approved by two members of the loan committee. Any
loan over $300,000 is reviewed and approved by three members of the loan
committee. All loan approvals are ratified by the Board of Directors on a
monthly basis.
The Savings Bank uses independent fee appraisers on all real estate related
transactions. Each fee appraiser used must be state licensed or state certified
and approved by Bedford Federal's Board of Directors. It is the Savings Bank's
policy to obtain title insurance or an attorney's opinion and certification of
title and fire and casualty insurance for all mortgage loans. If appropriate,
flood insurance is also required.
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<PAGE>
Loan Originations, Purchases, Sales and Repayments. The following table
sets forth the Savings Bank's loan originations, sales, and principal repayments
for the periods indicated. The Savings Bank did not purchase any loans during
these periods.
For the Year Ended
September 30,
--------------------
1996 1995
------- ------
(In thousands)
Gross loans:
Beginning balance.................... $97,669 $ 89,309
------ -------
Loans originated:
One- to four-family............... 15,473 8,159
Multi-family...................... -- 130
Commercial real estate............ 126 315
Construction...................... 11,559 11,233
Land.............................. 2,393 1,566
Consumer and commercial
business........................ 8,616 7,003
------- --------
Total loans originated......... 38,167 28,406
------- --------
Less:
Transfer to foreclosed real estate. -- --
Principal repayments............... 23,612 16,868
Sales of loans..................... 152 184
Loans-in-process................... 3,199 2,994
------- --------
Net loan activity.................... 11,204 8,360
-------- -------
Ending balance....................... $108,873 $ 97,669
======= =======
Loan Sales. The Savings Bank generally underwrites fixed-rate one- to
four-family mortgage loans pursuant to FHLMC and FNMA guidelines to facilitate
sale in the secondary market. However, all fixed-rate mortgage loans with terms
not exceeding 15 years are retained in the Savings Bank's portfolio. Loans with
maturities exceeding 15 years generally are sold with servicing rights retained
by the Savings Bank unless the loan was originated for community reinvestment
purposes. Prior to 1992, the Savings Bank retained all fixed-rate mortgage loans
originated as management sought to increase its mortgage loan holdings to a
desired level. See also "--One- to Four-Family Residential Loans."
Loan Commitments. The Savings Bank issues written, formal commitments as
to interest rate to prospective borrowers on all real estate loans at the date
of application. The interest rate commitment is good for 60 days from the date
of the application. Upon receipt of loan approval, the borrower has the balance
of the 60 day period to close the loan at the interest rate committed. At
September 30, 1996, the Savings Bank had $1.8 million of commitments to
originate mortgage loans, $2.0 million in unfunded home equity loans and $.4
million in unfunded commercial lines of credit.
Loan Processing and Servicing Fees. In addition to interest earned on
loans, the Savings Bank recognizes fees and service charges which consist
primarily of fees charged for loan originations and loans serviced for others
and late charges. The Savings Bank recognized loan servicing fees of $403,000
and $345,000 for the years ended September 30, 1996 and 1995, respectively. As
of September 30, 1996, loans serviced for others totalled $2.7 million. To the
extent possible, the Savings Bank intends to expand the amount of loans serviced
for others through the continued sale of fixed-rate, long-term loans to others
and through the VHDA.
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<PAGE>
Loans to One Borrower. Current regulations limit loans-to-one borrower to
an amount equal to 15% of unimpaired capital and retained income on an unsecured
basis and an additional amount equal to 10% of unimpaired capital and retained
income if the loan is secured by readily marketable collateral (generally,
financial instruments, not real estate) or $500,000, whichever is greater. Under
such regulations, the Savings Bank's maximum loan-to-one borrower limit was
approximately $2.4 million as of September 30, 1996. See " -- Classified
Assets."
The Savings Bank's largest loan to one borrower is a loan originated
jointly in May 1988 by three financial institutions in the amount of $3.5
million of which Bedford Federal loaned approximately $1.2 million. During
fiscal 1996 the three financial institutions loaned an additional $1.2 million
of which Bedford Federal loaned $400,000, for remodeling to accommodate the
relocation of a national chain grocer within the shopping center. The balance of
the amount due Bedford Federal was $1.6 million at September 30, 1996. This loan
is secured by a shopping center located in the City of Bedford and was
performing at September 30, 1996.
Loan Delinquencies and Non-performing Assets. The Savings Bank's
collection procedures provide that when a mortgage loan is 15 days past due, a
computer printed delinquency notice is sent. If payment is still delinquent at
the end of that month, within five days a telephone call is made to the
borrower. If the delinquency continues, subsequent efforts are made to eliminate
the delinquency. If the loan continues in a delinquent status for 90 days or
more, the Board of Directors of the Savings Bank generally approves the
initiation of foreclosure proceedings unless other repayment arrangements are
made and a specific reserve for 100% of uncollected interest is established,
thus effecting non-accrual status. Collection procedures for non-mortgage loans
generally begin after a loan is 10 days delinquent.
Real estate acquired by the Savings Bank as a result of foreclosure or by
deed in lieu of foreclosure is classified as foreclosed real estate until such
time as it is sold. When foreclosed real estate is acquired, it is recorded at
the lower of fair value or cost. Valuations are periodically performed by
management and subsequent charges to specific loss allowances are taken when it
is determined that the carrying value of the property exceeds the fair value
less estimated costs to sell. See "-- Foreclosed Real Estate."
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<PAGE>
At September 30, 1996 and 1995, delinquencies in the Savings Bank's loan
portfolio were as follows:
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------------------------------------
1996 1995
------------------------------------------ -----------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
------------------ -------------------- ------------------ -------------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
------ --------- ------ --------- ------ --------- ------ ---------
One- to four-
<S> <C> <C> <C> <C> <C> <C> <C> <C>
family....... 9 $651 4 $ 510 5 $465 4 $ 266
Multi-family.... -- -- -- -- -- -- -- --
Commercial
real estate.. -- -- 1 54 -- -- 1 1,042
Land............ -- -- -- -- 1 17 -- --
Consumer and
commercial
business....... 8 83 6 120 4 21 2 4
--- ---- -- ---- --- --- -- ----
Total........ 17 $734 11 $684 10 $503 7 $1,312
== === == === === === == =====
Delinquent loans
to total loans .67% .63% .52% 1.34%
</TABLE>
Uncollectible interest on loans that are contractually past due is charged
off, or an allowance is established based on management's periodic evaluation of
its portfolio. The allowance is established by a charge to interest income equal
to all interest previously accrued, and income is subsequently recognized only
to the extent that cash payments are received until, in management's judgment,
the borrower has the ability to make periodic interest and principal payments or
is no longer delinquent, and the loan is returned to accrual status. The Savings
Bank ceases the accrual of interest on delinquent loans upon foreclosure. At
September 30, 1996, the Bank had no restructured loans within the meaning of
Statement of Financial Accounting Standard ("SFAS") 15. The following table sets
forth information regarding loans which are 90 days or more delinquent.
At September 30,
----------------
1996 1995
------- ------
(In thousands)
Loans 90 days or more delinquent........... $684 $1,312
Foreclosed real estate..................... -- -
--- -----
Total non-performing assets............ $684 $1,312
=== =====
- --------------------------
(1) A 100% reserve is established for interest on loans 90 days or more
delinquent. At September 30, 1996 and 1995, the balance of the reserve for
accrued interest on loans delinquent 90 days or more was $168,000 and
$122,000, respectively. At September 30, 1996, the Savings Bank had no
loans accounted for on a nonaccrual basis which were less than 90 days
past due.
Classified Assets. OTS regulations provide for a classification system for
problem assets of insured institutions. Under this classification system,
problem assets of insured institutions are classified as "substandard,"
"doubtful," or "loss." An asset is considered "substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any.
-10-
<PAGE>
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets designated
"special mention" by management are assets included on the Savings Bank's
internal watchlist because of potential weakness but which do not currently
warrant classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for credit losses
in an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
provision for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which may order the establishment of additional
general or specific loss allowances. A portion of general loss allowances
established to cover possible losses related to assets classified as substandard
or doubtful may be included in determining an institution's regulatory capital,
while specific valuation allowances for credit losses generally do not qualify
as regulatory capital.
At September 30, 1996, the Savings Bank's problem assets were as follows:
$83,000 were designated special mention, $670,000 were classified as substandard
and none were classified as doubtful or loss.
Foreclosed Real Estate. Real estate acquired by the Savings Bank as a
result of foreclosure, judgment or by deed in lieu of foreclosure is classified
as foreclosed real estate until it is sold. When property is acquired it is
recorded at the lower of fair value less estimated selling costs, or the balance
of the loan on the property at the date of foreclosure. The Savings Bank held no
foreclosed real estate at September 30, 1996.
Provision for Credit and Foreclosed Real Estate Losses. It is management's
policy to provide for losses on unidentified loans in its loan portfolio and
foreclosed real estate. A provision for credit losses is charged to operations
based on management's evaluation of the potential losses that may be incurred in
the Savings Bank's loan portfolio. Such evaluation, which includes a review of
all loans of which full collectibility of interest and principal may not be
reasonably assured, considers, among other matters, perceived risks, delinquency
ratios, economic conditions and the estimated net realizable value of the
underlying collateral. During the years ended September 30, 1996 and 1995, the
Savings Bank charged $22,000 and $20,000, respectively, to the provision for
credit losses. There were no charges to the provision for losses on foreclosed
real estate for either fiscal 1996 or 1995.
Management will continue to review the entire loan portfolio to determine
the extent, if any, to which further additional loss provisions may be deemed
necessary. There can be no assurance that the allowance for losses will be
adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
Allowance Analysis. The following table sets forth the Savings Bank's
allowance for credit losses, allowance for losses on foreclosed real estate and
related ratios.
-11-
<PAGE>
At or For the Year Ended
September 30,
------------------------
1996 1995
---------- ----------
(Dollars in thousands)
Allowance for credit losses:
Balance at beginning of period................ $640 $636
--- ---
Charge-offs:
One- to four-family........................ -- --
Multi-family............................... -- --
Commercial real estate..................... -- --
Construction and land...................... -- --
Consumer and commercial business........... 12 18
--- ---
Total charge-offs........................ 12 18
Recoveries.................................. -- 2
Provisions charged to income................ 22 20
--- ---
Balance at end of period(1)................... $ 650 $640
=== ===
Allowance for losses on foreclosed real estate:
Balance at beginning of period................ $ -- $ --
Provision charged to income................. -- --
Charge-offs................................. -- --
Recoveries.................................. -- --
----- ---
Balance at end of period...................... $ -- $ --
===== ===
Ratios of net charge-offs during the period
to average loans outstanding during the
period...................................... .01% .02%
Ratio of allowance for losses to total
loans at the end of the period(2)........... .60% .63%
Ratio of allowance for losses to non-
performing assets at the end of the
period(2)................................... 95.03% 48.78%
- ------------------
(1) Includes reserves attributable to loans classified as "loss," which
totalled $-0- at September 30, 1996 and 1995.
(2) Allowance for losses includes valuation allowances on loans and foreclosed
real estate.
Allowance by Loan Category. The following table sets forth the Savings
Bank's allocation of the allowance for credit losses by loan category and the
percent of loans in each category to total loans receivable at the dates
indicated. The portion of the allowance for credit losses allocated to each loan
category does not represent the total available for future losses which may
occur within the loan category.
-12-
<PAGE>
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------
1996 1995
---------------------- -----------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------- ------------- ------ -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
One- to four-family............... $445 68.46% $469 74.08%
Multi-family...................... 1 .15 1 .22
Commercial real estate............ 50 7.69 44 4.31
Construction...................... 40 6.15 39 9.57
Land.............................. 25 3.85 22 3.52
Consumer and commercial
business......................... 89 13.70 65 8.30
--- ------ --- ------
Total valuation allowances(1)(2) $650 100.00% $640 100.00%
=== ====== === ======
</TABLE>
- ------------------
(1) Includes reserves attributable to loans classified as "loss," which
totalled $-0- at September 30, 1996 and 1995.
(2) Includes $-0- of allowance for losses on foreclosed real estate at both
September 30, 1996 and 1995.
Investment and Mortgage-backed Securities Activities
Investment Securities. The Savings Bank is required under federal
regulations to maintain a minimum amount of liquid assets which may be invested
in specified short-term securities and certain other investments. The Savings
Bank has generally maintained a liquidity portfolio well in excess of regulatory
requirements. Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of future yield levels, as well as management's projections
as to the short-term demand for funds to be used in the Savings Bank's loan
origination and other activities. At September 30, 1996, the Savings Bank had an
investment securities portfolio of approximately $11.5 million, consisting
primarily of U.S. government and agency obligations, Federal Home Loan Bank
("FHLB") stock and marketable equity securities. Marketable equity securities
consist of the Asset Management Fund for Financial Institutions, Inc. ("AMF
Fund"), a mutual fund that invests in securities eligible for direct investment
by savings associations and a $48,000 investment in corporate common stock. The
Savings Bank uses this fund to increase its short-term yield, primarily on
overnight funds. The AMF Fund consists primarily of adjustable-rate
mortgage-related securities. These funds are marked to the lower of cost or
market at the end of each month with all adjustments in value reported to the
Board of Directors monthly. At September 30, 1996, the Savings Bank had $3.8
million or 30.2% of its investment securities portfolio in the AMF Fund. Bedford
Federal will continue to seek high quality investment securities with short to
intermediate maturities and durations from one to five years.
Mortgage-backed Securities. The Savings Bank purchased additional
mortgage-backed securities during fiscal 1996. The mortgage-backed securities
are participation certificates issued and guaranteed by the FHLMC and secured by
an interest in pools of conventional mortgages originated by other financial
institutions.
-13-
<PAGE>
Mortgage-backed securities provide for monthly payments of principal and
interest and generally have contractual maturities ranging from five to 30
years. However, due to expected repayment terms being significantly less than
the underlying mortgage loan pool contractual maturities, the estimated lives of
these securities could be significantly shorter.
The Savings Bank did not sell any mortgage-backed securities during the
years ended September 30, 1996 and 1995.
As of September 30, 1996, mortgage-backed securities amounted to $482,000
or .38% of total assets. All mortgage-backed securities were fixed-rate.
Investment Carrying and Market Values. The following table sets forth
certain information regarding the carrying and market values of the Savings
Bank's federal funds sold and other short-term investments, investment
securities, securities held for sale and mortgage-backed securities at the dates
indicated:
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------
1996 1995
------------------ --------------------
Carrying Market Carrying Market
Value Value Value Value
--------- ------ -------- ------
(In thousands)
<S> <C> <C> <C> <C>
Federal funds sold and other short-term investments $ 223 $ 223 $ 725 $ 725
Investment securities:
Held for investment:
FHLB stock................................... 932 932 932 932
U.S. Government and agency obligations....... 5,214 5,161 5,420 5,377
----- ----- ----- -----
Total held for investment.................. 6,369 6,316 7,077 7,034
Held for sale:
U.S. Government and agency obligations....... 1,860 1,860 1,409 1,409
Marketable equity securities................. 3,879 3,879 3,660 3,660
------ ------ ------ ------
Total held for sale........................ 5,739 5,739 5,069 5,069
------ ------ ------ ------
Total ..................................... $12,178 $12,055 $12,146 $12,103
====== ====== ====== ======
Mortgage-backed securities:
Held for investment............................ $ 25 $ 25 31 $ 31
Held for sale.................................. 457 457 -- --
------ ------ ------ ------
Total...................................... $ 482 $ 482 $ 31 $ 31
====== ====== ====== ======
</TABLE>
-14-
<PAGE>
Investment Yields and Maturities. The table below sets forth certain
information regarding the carrying value, weighted average yields and
contractual maturities of the Savings Bank's federal funds sold and other
short-term investments, investment securities, securities held for sale and
mortgage-backed securities as of September 30, 1996.
<TABLE>
<CAPTION>
As of September 30, 1996
--------------------------------------------------------------------------------------------------
More Than Total Investment
One Year or Less One to Five Years Five to Ten Years Ten Years Securities
----------------- ----------------- ----------------- -------------------- ---------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
-------------- ------- ------- ------- ------- ------- ------- ------- ------- ------
Federal funds sold and other
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
short-term investments. $ 223 5.15% $ -- --% $ -- --% $ -- --% $ 223 5.15% $ 223
Held for investment:
Investment securities:
FHLB Stock........... 932 7.19 -- -- -- -- -- -- 932 7.19 932
U.S. government and federal
agency obligations. -- -- 3,481 5.87 1,733 7.80 -- -- 5,214 6.51 5,161
------ ----- ----- ------ ----- -----
Total investment securities
held for investment.... $1,155 6.79 $ 3,481 5.87 $ 1,733 7.80 $ -- -- $6,369 6.56 $6,316
===== ===== ===== ====== ===== =====
Total mortgage-backed securities
held for investment $ -- -- $ 25 8.43 $ -- -- $ -- -- $ 25 8.43 $ 25
===== ===== ===== ====== ===== ======
Held for sale:
U.S. Government and agencies -- -- $ 1,391 6.49 $ 469 5.82 $ -- -- $1,860 6.32 $1,860
Marketable equity securities 3,879 6.05 -- -- -- -- -- -- 3,879 6.05 3,879
----- ----- ----- ------ ----- -----
Total investment securities
held for sale.......... $ 3,879 6.05 $ 1,391 6.49 $ 469 5.82 $ -- -- $5,739 6.14 $5,739
===== ===== ===== ====== ===== =====
Total mortgage-backed securities
held for sale.......... $ -- $ -- -- $ -- -- $ 457 6.50 $ 457 6.50 $ 457
===== ===== ===== ====== ===== =====
</TABLE>
-15-
<PAGE>
Sources of Funds
General. Deposits are the major source of the Savings Bank's funds for
lending and other investment purposes. The Savings Bank also derives funds from
amortization and prepayment of loans, maturities of investment securities and
operations and utilizes advances from the FHLB of Atlanta. Scheduled loan
principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are significantly influenced by
general interest rates and market conditions. The Savings Bank does not have any
brokered deposits.
Deposits. Customer deposits are attracted principally from within the
Savings Bank's primary market area through the offering of a broad selection of
deposit instruments including negotiable order of withdrawal accounts ("NOW")
(including interest-bearing and noninterest-bearing), passbook and statement
savings, money market deposit, term certificate accounts and Individual
Retirement Accounts. Deposit account terms vary according to the minimum balance
required, the time period the funds must remain on deposit and the interest
rate.
The interest rates paid by the Savings Bank on deposits are set at the
direction of the asset/liability committee. The asset/liability committee
consists of senior management. The interest rates on deposit account products
are determined by evaluating the following factors: (i) the interest rates
offered by other local financial institutions and the degree of competition the
Savings Bank wishes to maintain; (ii) the Savings Bank's anticipated need for
cash and the timing of that desired cash flow; (iii) the cost of borrowing from
other sources versus the cost of acquiring funds through customer deposits; and
(iv) the Savings Bank's anticipation of future economic conditions and related
interest rates.
NOW accounts (including noninterest-bearing), money market accounts,
passbook and statement savings accounts constituted $32.9 million, or 34.52% of
the Savings Bank's deposit portfolio at September 30, 1996. Certificates of
deposit constituted $62.5 million or 65.48% of the deposit portfolio, including
certificates of deposit, with principal amounts of $100,000 or more, which
constituted $7.0 million or 7.34% of the deposit portfolio at September 30,
1996. The Savings Bank has no brokered deposits.
-16-
<PAGE>
Deposit Account Composition. The following table sets forth the
distribution of the Savings Bank's deposit accounts for the periods indicated
and the weighted average interest rates on each category presented.
<TABLE>
<CAPTION>
For the Year Ended September 30,
------------------------------------------------------------------
1996 1995
------------------------------- -------------------------------
Percent Percent
of Total Weighted of Total Weighted
Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate
------- --------- -------- ------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Money market deposits....... $ 5,011 5.39% 3.07 $ 5,957 6.91% 3.04%
Passbook and statement deposits 15,400 16.57 2.97 17,045 19.77 3.03
NOW and other demand deposits 7,316 7.87 2.77 5,971 6.92 2.81
Noninterest bearing deposits 5,131 5.52 -- 4,717 5.47 --
------ ----- ------ -----
Total................. 32,858 35.35 2.48 33,690 39.07 2.57
------ ----- ------ -----
Certificate accounts:
Three months or less..... 10,775 11.59 5.37 6,588 7.64 4.31
Over three through six month 8,437 9.08 5.34 7,914 9.18 5.05
Over six through 12 months 13,335 14.35 5.22 17,878 20.74 5.05
Over one to three years.. 25,083 26.99 5.46 16,474 19.11 5.48
Over three to five years. 2,463 2.64 6.34 3,675 4.26 5.63
------- ------ ------- ------
Total certificates.... 60,093 64.65 5.41 52,529 60.93 5.13
------ ----- ------ -----
Total deposits........ $92,951 100.00% $86,219 100.00%
====== ====== ====== ======
</TABLE>
Deposit Account Rate Analysis. The following table presents, by various
rate categories, the amount of certificate accounts outstanding at the dates
indicated and the periods to maturity of the certificate accounts outstanding at
September 30, 1996.
<TABLE>
<CAPTION>
At September 30, Period to Maturity from September 30, 1996
---------------- ------------------------------------------
Over
One To
Within Three Over Three
1996 1995 One Year Years Years Total
---- ---- -------- ------ ---------- -----
(In thousands)
Certificate Accounts:
<S> <C> <C> <C> <C> <C> <C>
3.00% or less...... $ -- $ 19 $ -- $ -- $ -- $ --
3.01% to 4.00%..... 75 572 75 -- -- 75
4.01% to 5.00%..... 16,239 16,808 14,692 1,547 -- 16,239
5.01% to 6.00%..... 36,025 25,667 14,009 21,010 1,006 36,025
6.01% to 7.00%..... 9,486 13,902 5,051 3,511 924 9,486
7.01% to 8.00%..... 627 755 -- -- 627 627
8.01% to 9.00%..... -- 15 -- -- -- --
9.01% to 10.00%.... -- -- -- -- -- --
Over 10.01%........ -- -- -- -- -- --
------ ------ ------ ------ ----- ------
Total........... $62,452 $57,738 $33,827 $26,068 $2,557 $62,452
====== ====== ====== ====== ===== ======
</TABLE>
-17-
<PAGE>
Certificates of Deposit of $100,000 or More. The following table indicates
the amount of the Savings Bank's certificates of deposit and other time deposits
of $100,000 or more by time remaining until maturity as of September 30, 1996.
Amount
------
Maturity Period (In thousands)
- ---------------
Within three months............................ $ 742
Three through six months....................... 757
Six through twelve months...................... 2,005
Over twelve months............................. 3,474
-----
Total...................................... $6,978
=====
Deposit Activity. The following table presents the deposit activity of the
Savings Bank for the periods indicated.
For the Year Ended
September 30,
------------------
1996 1995
------ ------
(Dollars in thousands)
Opening balance.................... $90,063 $84,841
Net deposits (withdrawals)......... 1,210 1,660
Interest credited on deposits...... 4,105 3,562
------- -------
Ending balance..................... $95,378 $90,063
====== ======
Total increase (decrease) deposits $ 5,315 $ 5,222
====== ======
Percentage increase (decrease)... 5.90% 6.16%
Borrowings. While deposits are the primary source of funds for the Savings
Bank's lending and investment activities and for its general business purposes,
the Savings Bank also obtains advances from the FHLB of Atlanta to supplement
its supply of lendable funds. Advances from the FHLB of Atlanta are secured by
the Savings Bank's first mortgage loans. The Savings Bank, if the need arises,
may also access the Federal Reserve Bank discount window to supplement its
supply of lendable funds and to meet deposit withdrawal requirements. At
September 30, 1996 and 1995, the Savings Bank had $12.0 million and $5.0
million, respectively, of advances outstanding from the FHLB of Atlanta.
Personnel
As of September 30, 1996, the Savings Bank had 37 full-time employees.
None of the Savings Bank's employees are represented by a collective bargaining
group. The Savings Bank believes that its relationship with its employees is
good.
Regulation
Set forth below is a summary description of certain laws which relate to
the regulation of the Company and the Savings Bank. The description does not
purport to be complete and is qualified in its entirety by reference to
applicable laws and regulations.
-18-
<PAGE>
Company Regulation
General. The Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS and the SEC. As such, the Company is required
to register and file reports with the OTS and the SEC and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company and its non-savings association subsidiaries, should
such subsidiaries be formed, which also permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally will not be subject to activity restrictions,
provided the Savings Bank satisfies the QTL test. If the Company acquires
control of another savings association as a separate subsidiary, it would become
a multiple savings and loan holding company, and the activities of the Company
and any of its subsidiaries (other than the Savings Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition. See "-- Savings
Bank Regulation -- Qualified Thrift Lender Test."
Savings Bank Regulation
General. As a federally chartered, Savings Association Insurance Fund
("SAIF")-insured savings association, the Savings Bank is subject to extensive
regulation by the OTS and the Federal Deposit Insurance Corporation ("FDIC").
Lending activities and other investments must comply with various federal
statutory and regulatory requirements. The Savings Bank is also subject to
certain reserve requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Savings Bank
and prepares reports for the consideration of the Savings Bank's Board of
Directors on any deficiencies that they find in the Savings Bank's operations.
The Savings Bank's relationship with its depositors and borrowers is also
regulated to a great extent by federal law, especially in such matters as the
ownership of savings accounts and the form and content of the Savings Bank's
mortgage documents.
The Savings Bank must file reports with the OTS and the FDIC concerning
its activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC or the
Congress could have a material adverse impact on the Company, the Savings Bank
and their operations.
Insurance of Deposit Accounts. The Savings Bank's deposit accounts are
insured by the SAIF to a maximum of $100,000 for each insured member (as defined
by law and regulation).
Insurance of deposits may be terminated by the FDIC upon a finding that
the institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the institution's
primary regulator.
-19-
<PAGE>
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the
"Act"), the FDIC imposed a special assessment on SAIF members to capitalize the
SAIF at the designated reserve level of 1.25% as of October 1, 1996. Based on
the Savings Bank's deposits as of March 31, 1995, the date for measuring the
amount of the special assessment pursuant to the Act, the Savings Bank paid a
special assessment of approximately $555,000 on November 27, 1996 to
recapitalize the SAIF. The FDIC is expected to lower the premium for deposit
insurance to a level necessary to maintain the SAIF at its required reserve
level; however, the range of premiums has not been determined at this time.
Pursuant to the Act, the Savings Bank will pay, in addition to its normal
deposit insurance premium as a member of the SAIF, an amount equal to
approximately 6.4 basis points toward the retirement of the Financing
Corporation bonds ("Fico Bonds") issued in the 1980's to assist in the recovery
of the savings and loan industry. Members of the Bank Insurance Fund ("BIF"), by
contrast, will pay, in addition to their normal deposit insurance premium,
approximately 1.3 basis points. Based on total deposits as of September 30,
1996, had the Act been in effect, the Savings Bank's Fico Bond premium would
have been approximately $61,000 in addition to its normal deposit insurance
premium. Beginning no later than January 1, 2000, the rate paid to retire the
Fico Bonds will be equal for members of the BIF and the SAIF. The Act also
provides for the merging of the BIF and the SAIF by January 1, 1999 provided
there are no financial institutions still chartered as savings associations at
that time. Should the insurance funds be merged before January 1, 2000, the rate
paid by all members of this new fund to retire the Fico Bonds would be equal.
Recent Tax Treatment Changes. The Bank computed income tax by application
of Section 593(b)2 of the U.S. Internal Revenue Code which provided a special
deduction for bad debts. The benefits of Section 593(b)2 were repealed by 1996
federal tax legislation. The Bank will now compute its tax bad debt deduction by
use of the "experience method" which is based on a moving five-year average of
actual loss experience. According to the legislation that "applicable excess
reserves" must be recaptured as taxable income over five years beginning in
fiscal 1997. The amount to be recaptured is the excess of the accumulated
reserves since 1987 over the amount allowed by use of the experience method for
those years. The Bank has been computing deferred taxes and therefore does not
believe it will have a material effect on its reportable earnings.
-20-
<PAGE>
Regulatory Capital Requirements. Set forth below is the Savings Bank's
regulatory capital requirements applicable to it as of September 30, 1996:
Percent
of Adjusted
Amount Assets
------ ------------
(Dollars in Thousands)
Tangible Capital:
Regulatory requirement............ $ 1,918 1.5%
Actual capital.................... 15,844 12.4
------ ----
Excess.......................... $13,926 10.9%
====== ====
Core Capital:
Regulatory requirement............ $ 3,835 3.0%
Actual capital.................... 15,844 12.4
------ ----
Excess.......................... $12,009 9.4%
====== ====
Risk-Based Capital:
Regulatory requirement(1)......... $ 5,677 8.0%
Actual capital.................... 16,417 23.1
------ ----
Excess.......................... $10,740 15.1%
====== ====
- --------------------
(1) Based on risk-weighted assets of $70,966.
Net Portfolio Value. In recent years, the Savings Bank has measured its
interest rate sensitivity by computing the "gap" between the assets and
liabilities which were expected to mature or reprice within certain periods,
based on assumptions regarding loan prepayment and deposit decay rates formerly
provided by the OTS. However, the OTS now requires the computation of amounts by
which the net present value of an institution's cash flows from assets,
liabilities and off balance sheet items (the institution's net portfolio value,
or "NPV") would change in the event of a range of assumed changes in market
interest rates. The OTS also requires the computation of estimated changes in
net interest income over a four-quarter period. These computations estimate the
effect of an institution's NPV and net interest income of instantaneous and
permanent 1% to 4% increases and decreases in market interest rates. In the
Savings Bank's interest rate sensitivity policy, the Board of Directors has
established a maximum decrease in net interest income and maximum decreases in
NPV given these instantaneous changes in interest rates.
In order to encourage associations to reduce their interest rate risk, the
OTS adopted a final rule in August 1993 incorporating an interest rate risk
("IRR") component into the risk-based capital rules. The new rule was effective
January 1, 1994, with institutions first required to meet the new standards at
September 30, 1995. The IRR component is a dollar amount that will be deducted
from total capital for the purpose of calculating an institution's risk-based
capital requirement and is measured in terms of the sensitivity of its NPV to
changes in interest rates. NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet contracts.
An institution's IRR is measured as the change to its NPV as a result of a
hypothetical 200 basis point change in market interest rates. A resulting change
in NPV of more than 2% of the estimated market value of its assets will require
the institution to maintain additional capital. The rules provide that the OTS
will calculate the IRR component quarterly for each institution.
-21-
<PAGE>
The following table sets forth the interest rate risk capital component
for the Savings Bank at September 30, 1996 given a hypothetical 200 basis point
rate change in market interest rates. See "-- Regulatory Capital Requirements."
As of September 30, 1996
------------------------
(Dollars in thousands)
RISK MEASURES:
200 Basis Point Rate Shock
Pre-Shock NPV Ratio: NPV as %
of Present Value of Assets............ 15.21%
Exposure Measure: Post-Shock
NPV Ratio............................. 13.38%
Sensitivity Measure: Change in NPV
Ratio................................. -183 bp
CALCULATION OF CAPITAL
COMPONENT:
Change in NPV as % of Present Value
of Assets............................. 2.26%
Interest Rate Risk Capital Component.... $2,988
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit run-offs, and should not be relied upon as
indicative of actual results. Further, the computations do not contemplate any
actions the Savings Bank may undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in
both the computation of NPV and in the analysis presented in prior tables
setting forth the maturing and repricing of interest-earning assets and
interest-bearing liabilities. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in differing degrees to changes in market interest rates. The interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as adjustable rate
loans, which represent the Savings Bank's primary loan product, have features
which restrict changes in interest rates on a short-term basis and over the life
of the asset. In addition, the proportion of adjustable rate loans in the
Savings Bank's portfolios could decrease in future periods if market interest
rates remain at or decrease below current levels due to refinance activity.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels would likely deviate significantly from those assumed in the
tables. Finally, the ability of many borrowers to service their adjustable-rate
debt may decrease in the event of an interest rate increase.
Pursuant to the Financial Institutions Reform, Recovery and Enforcement
Act of 1991 ("FIRREA"), the OTS must revise the risk-based capital regulations
to include a credit risk component and a nontraditional activities component,
the purpose of which will be to increase the minimum capital requirements for
savings associations with higher credit risks.
Prompt Corrective Action. The FDICIA established a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
Under this system, the banking regulators are required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of capitalization. Under the OTS final
rule implementing the
-22-
<PAGE>
prompt corrective action provisions, an institution shall be deemed to be (i)
"well capitalized" if it has total risk-based capital of 10.0% or more, has a
Tier I risk-based capital ratio (core or leverage capital to risk-weighted
assets) of 6.0% or more, has a leverage capital of 5.0% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure, (ii) "adequately capitalized" if it has a
total risk-based capital ratio of 8.0% or more, a Tier I risked-based ratio of
4.0% or more and a leverage capital ratio of 4.0% or more (3.0% under certain
circumstances) and does not meet the definition of "well capitalized," (iii)
"undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 4.0% or a leverage
capital ratio that is less than 4.0% (3.0% in certain circumstances), (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage capital ratio that is less than 3.0% and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0% In addition, under certain circumstances, a federal
banking agency may reclassify a well capitalized institution as adequately
capitalized and may require an adequately capitalized institution or an
undercapitalized institution to comply with supervisory actions as if it were in
the next lower category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized).
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Savings Bank to give the OTS 30 days' advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company. In
addition, the Savings Bank may not declare or pay a cash dividend on its capital
stock if the effect thereof would be to reduce the regulatory capital of the
Savings Bank below the amount required for the liquidation account to be
established pursuant to the Savings Bank's Plan of Conversion.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. As of
September 30, 1996, the Savings Bank was a Tier 1 institution. In the event the
Savings Bank's capital fell below its fully phased-in requirement or the OTS
notified it that it was in need of more than normal supervision, the Savings
Bank's ability to make capital distributions could be restricted. In addition,
the OTS could prohibit a proposed capital distribution by any institution, which
would otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Finally, a savings association is prohibited from making a capital
distribution if, after making the distribution, the savings association would be
"undercapitalized" (not meet any one of its minimum regulatory capital
requirements).
Qualified Thrift Lender Test. Savings institutions must meet a QTL test.
If the Savings Bank maintains an appropriate level of Qualified Thrift
Investments (primarily residential mortgages and related investments, including
certain mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL,
it will continue to enjoy full borrowing privileges from the FHLB of Atlanta.
The required percentage
-23-
<PAGE>
of QTIs is 65% of portfolio assets (defined as all assets minus intangible
assets, property used by the institution in conducting its business and liquid
assets equal to 10% of total assets). Certain assets are subject to a percentage
limitation of 20% of portfolio assets. In addition, savings associations may
include shares of stock of the FHLBs, FNMA and FHLMC as qualifying QTIs. An
association must be in compliance with the QTL test on a monthly basis in nine
out of every 12 months. As of September 30, 1996, the Savings Bank was in
compliance with its QTL requirement with 81.15% of its assets invested in QTIs.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Atlanta in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. At September
30, 1996, the Bank was in compliance with these Federal Reserve Board
requirements.
Subsidiary Activity
In August 1994, the Company acquired all of the capital stock of the
Savings Bank. The officers of the Company consist of the officers of the Savings
Bank. The Company is organized as a holding company. As of September 30, 1996,
the net book value of the Company's investment in the Savings Bank amounted to
$15.9 million.
The Savings Bank has one subsidiary, First Financial Enterprises, Inc.
("FFE") which was incorporated in the State of Virginia and is engaged in the
sale of mortgage life insurance.
Item 2. Description of Property.
(a) The Savings Bank conducts its business through a main office located in
Bedford, Virginia and two branch offices. The Savings Bank installed three
freestanding ATM's during fiscal 1995; all were in operation at September 30,
1996. The Savings Bank believes that the current facilities are adequate to meet
its present and immediately foreseeable needs.
-24-
<PAGE>
<TABLE>
<CAPTION>
Net Book Value
of Property or
Original Leasehold
Date Date of Improvements at
Leased or Leased or Lease September 30,
Location Owned Acquired Expiration 1996
- -------- --------- --------- ---------- --------------
(In thousands)
<S> <C> <C> <C> <C>
125-133 W. Main Street Owned 12/70 - Main N/A $557,000
Bedford, VA 24523 Office
12/84 -Drive
thru
3/89 - Annex
655 at 122 Land 8/86 8/01(1) N/A
Moneta, VA 24121 Leased
Building 1/87 N/A 133,000
Owned
ATM
Route 122 Land
Moneta, VA 24121 Leased 7/95 8/01(1)
Building
Owned 8/95 29,000
Forest Village Square Owned 12/78 N/A 215,000
including ATM
Forest, VA 24551
Longwood Avenue (ATM) Owned 1/85 N/A 80,000
Bedford, VA 24523
</TABLE>
- -------------------------------
(1) Lease is renewable for one five-year term.
At September 30, 1996, the Bank had a total investment in its land,
buildings and improvements, and fixtures, furniture and equipment of $2,283,000,
less accumulated depreciation of $1,045,000, or a net carrying value of
$1,238,000.
The Bank owns various bookkeeping and accounting equipment and is on-line
with an outside data processing company, BISYS, Inc.
(b) Investment Policies. See "Item 1. Business" for a general description
of the Company's investment policies and any regulatory or Board of Directors'
percentage of assets limitations regarding certain investments. All of the
Company's investment policies are reviewed and approved by the Board of
Directors of the Company or the Savings Bank, and such policies, subject to
regulatory restrictions (if any), can be changed without a vote of stockholders.
The Company's investments are primarily acquired to produce income, and to a
lesser extent, possible capital gain.
-25-
<PAGE>
(1) Investments in Real Estate or Interests in Real Estate. See "Item
1. Business -- Lending Activities" and "Item 2. Properties."
(2) Investments in Real Estate Mortgages. See "Item 1. Business --
Lending Activities" and "Item 1. Business -- Regulation."
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business -- Lending Activities,"
"Item 1. Business -- Regulation" and "Item 1. Business -- Subsidiary Activity."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings
Neither the Corporation nor the Bank are engaged in any legal proceedings
of a material nature at the present time. From time to time, the Bank is a party
to legal proceedings in the ordinary course of business wherein it enforces its
security interest in mortgage loans made by it.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The information contained under the sections captioned "Stock Market
Information" in the Corporation's Annual Report to Stockholders for the Fiscal
Year Ended September 30, 1996 (the "Annual Report") is incorporated herein by
reference. The Annual Report is included as Exhibit 13 to this Form 10-KSB.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The required information is contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report and is incorporated herein by reference.
Item 7. Financial Statements
The Corporation's consolidated financial statements required herein are
incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
-26-
<PAGE>
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(b) of the Exchange Act
The required information is on pages 3-9 of the Registrant's definitive
proxy statement for Registrant's 1997 Annual Meeting of Stockholders filed with
the Commission on December 17, 1996 (the "Proxy Statement") is incorporated
herein by reference.
Item 10. Executive Compensation
The required information is contained under the section captioned
"Management Remuneration and Other Information - Executive Compensation" on
pages 10-12 in the Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the Section captioned "Voting Securities and Principal
Holders Thereof" on pages 2-3 of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Information with Respect to
Nominees for Director; Directors Whose Term Continues; and Executive
Officers -- Election of Directors" on pages 4-6 of the Proxy
Statement.
(c) Management of the Corporation knows of no arrangements, including
any pledge by any person of securities of the Corporation, the
operation of which may at a subsequent date result in a change in
control of the registrant.
Item 12. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference
to the section captioned "-- Certain Transactions with Management and Others" on
page 15 of the Proxy Statement.
-27-
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K
a. Exhibits
3.1 Restated Articles of Incorporation of Bedford Bancshares, Inc.*
3.2 Bylaws of Bedford Bancshares, Inc.*
4 Specimen Stock Certificate*
10.1 1994 Stock Option Plan*
10.2 Recognition and Retention Plan and Trust Agreement*
10.3 Employment Agreement with Harold K. Neal*
11 Computation of Earnings Per Share
13 Annual Report to Stockholders for Fiscal Year Ended September 30,
1996
21 Subsidiaries of the Registrant (See Item 1 - Business --
Subsidiary Activity)
23 Independent Auditors' Consents
27 Financial Data Schedule **
99 Prior Accountant's Independent Auditor's Report
* Included as an exhibit to the Registrant's Form 10-KSB filed with the
SEC on December 19, 1994, and is incorporated by reference herein.
** Only included in electronic filing.
b. Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the last
quarter of the period covered by this report.
-28-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BEDFORD BANCSHARES, INC.
Date: December 30, 1996 By /s/ Harold K. Neal
------------------------------
Harold K. Neal, President and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Harold K. Neal /s/ Hugh H. Bond
----------------------------- ----------------------------
Harold K. Neal Hugh H. Bond
President, Chief Executive Chairman of the Board
Officer and Director
(Principal Executive Officer)
Date: December 30, 1996 Date: December 30, 1996
By: /s/ James W. Smith /s/ George N. Cooper
----------------------------- ----------------------------
James W. Smith George N. Cooper
Vice President, Treasurer and Director
Comptroller
(Principal Financial and Accounting
Officer)
Date: December 30, 1996 Date: December 30, 1996
By: /s/ Macon C. Putney /s/ Harry W. Garrett, Jr.
---------------------------- -----------------------------
Macon C. Putney Harry W. Garrett, Jr.
Director Director
Date: December 30, 1996 Date: December 30, 1996
By: /s/ W. Henry Walton, Jr. /s/ William P. Pickett
---------------------------- -----------------------------
W. Henry Walton, Jr. William P. Pickett
Director Director
Date: December 30, 1996 Date: December 30, 1996
By: /s/ William T.Powell
----------------------------
William T. Powell
Director
Date: December 30, 1996
EXHIBIT 11
Computation of Earnings Per Share
<PAGE>
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Twelve Months Ended
September 30, 1996 September 30, 1996
------------------ -------------------
Net Income........................... $ 125,000 $1,302,000
Primary and Fully Diluted
Average Shares Outstanding Net of
Unallocated ESOP Shares (70,667)..... 1,079,715 1,112,697
Per Share Amount..................... $ .12 $ 1.17
Earnings per share of common stock for the three months and twelve months
ended September 30, 1996 have been determined by dividing net income for the
periods by the weighted average number of shares of common stock outstanding net
of unallocated ESOP shares.
EXHIBIT 13
Annual Report to Stockholders for Fiscal Year
Ended September 30, 1996
<PAGE>
[CORPORATE LOGO]
BEDFORD BANCSHARES, INC.
1996 ANNUAL REPORT
------------------------------------------------
<PAGE>
BEDFORD BANCSHARES, INC. - 1996 ANNUAL REPORT
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
Corporate Profile and Stock Market Information............................ 2
Letter to Stockholders.................................................... 3
Selected Financial and Other Data......................................... 4
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 6
Report of Independent Certified Public Accountants........................ 14
Consolidated Financial Statements......................................... 15
Notes to Consolidated Financial Statements................................ 30
Office Locations.......................................................... 51
<PAGE>
Corporate Profile and Related Information
Bedford Bancshares, Inc. (the "Company") is the parent company of Bedford
Federal Savings Bank ("Bedford Federal" or the "Savings Bank"). The Company is a
unitary savings and loan holding company which, under existing laws, generally
is not restricted in the types of business activities in which it may engage,
provided that the Savings Bank retains a specified amount of its assets in
housing-related investments. At the present time, since the Company does not
conduct any active business, the Company does not intend to employ any persons
other than officers, but utilizes the support staff and facilities of the
Savings Bank from time to time.
Bedford Federal, a federally-chartered stock savings bank headquartered in
Bedford, Virginia, was originally chartered in 1935 under the name "Bedford
Federal Savings and Loan Association." The Savings Bank has operated as a
federally-chartered stock savings bank since its mutual-to-stock conversion on
August 19, 1994. Deposits have been federally insured since 1935 and are
currently insured up to the maximum amount allowable by the Federal Deposit
Insurance Corporation (the "FDIC"). The Savings Bank is a community oriented
savings institution offering a variety of financial services to meet the needs
of the communities that it serves. Bedford Federal conducts its business from
its main office in Bedford, Virginia, two full service branch offices located in
Bedford County, Virginia, and three Automated Teller Machines ("ATMs").
The Savings Bank attracts deposits from the general public and uses such
deposits, together with borrowings and other funds, primarily to originate loans
secured by first mortgages on owner-occupied, one-to-four family residences in
its market area and to invest in mortgage-backed and investment securities. To a
lesser extent, Bedford Federal also originates construction loans, commercial
real estate and consumer loans.
Stock Market Information
The Company's common stock trades on the Nasdaq National Market under the
trading symbol of "BFSB". The daily stock quotation for Bedford Bancshares,
Inc., is published in The Wall Street Journal and in other local newspapers
under the trading symbol of "BFSB" or "Bedford Bc". The following table reflects
the stock price as published by the Nasdaq National Market statistical report.
<TABLE>
<CAPTION>
Dividends Dividends
Per Share Per Share
Quarter Ended High Low Volume Declared Paid
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 1994 $11.75 $10.25 153,965 -- --
March 1995 $13.00 $10.75 90,995 $.15 --
June 1995 $16.25 $12.25 298,726 -- $.15
September 1995 $18.75 $15.50 209,914 $.15 --
December 1995 $18.75 $17.50 93,376 $.09 $.15
March 1996 $18.25 $16.75 120,970 $.09 $.09
June 1996 $17.75 $15.75 189,406 $.10 $.09
September 1996 $17.25 $16.50 85,591 $.11 $.10
</TABLE>
On September 30, 1996, there were approximately 651 shareholders of record
with approximately 51.6% of the 1,143,669 outstanding shares held in nominee or
"street" name through various brokerage firms. There were seven firms making a
market in the Company's common stock during the month of September 1996.
The Savings Bank may not declare or pay a cash dividend on its stock if
the effect thereof would cause the regulatory capital of the Savings Bank to be
reduced below (1) the amount required for the liquidation account established in
connection with the Savings Bank's conversion from mutual to stock form, or (2)
the regulatory capital requirements imposed by the Office of Thrift Supervision
("OTS").
2
<PAGE>
Letter from the Chief Executive Officer
To Our Stockholders:
I am pleased to report that Bedford Bancshares, Inc. experienced solid
performance and growth during fiscal 1996. The year was highlighted by a record
level of loan closings, strong growth of core earnings, a 30% increase in
dividends declared and the resolution of the deposit insurance premium disparity
between the Savings Association Insurance Fund ("SAIF") and the Bank Insurance
Fund ("BIF").
During the fourth quarter of fiscal 1996, federal legislation was passed
imposing a one-time assessment on all members of the SAIF, including Bedford
Federal, in order to recapitalize the SAIF to the congressionally mandated ratio
of 1.25%. The assessment, based on the level of an institution's domestic
deposits at March 31, 1995, amounted to approximately $555,000 ($344,000 on an
after-tax basis) for Bedford Federal. As a result of the one-time assessment, we
anticipate a reduction in future SAIF premiums.
Reflecting the impact of the one-time assessment, net income for fiscal 1996
amounted to $1.3 million compared to $1.4 million for fiscal 1995. On a per
share basis, earnings for fiscal 1996 and 1995 were $1.17 and $1.20,
respectively. The return on average assets for the year ended September 30,
1996, was 1.10% compared to a return of 1.28% for the previous year. The returns
on average equity were 6.98% and 7.31% for fiscal 1996 and 1995, respectively.
Without the one-time assessment, net income for fiscal 1996 would have exceeded
$1.6 million, or $1.48 per share.
Total assets were $127.2 million on September 30, 1996, up 10.5% from the level
one year earlier. The asset growth was focused in net loans receivable, which
increased 11.5% in fiscal 1996 over fiscal 1995. During fiscal 1996, a record
$29.6 million of mortgage loans were closed representing a 38.1% increase over
fiscal 1995. As a result, total mortgage loans at September 30, 1996, were 9.40%
above the level at the end of fiscal 1995. In addition, home equity loans were
up 46.4% and installment loans were up 23.6% from fiscal year end 1995 to fiscal
year end 1996. These increases reflect the fairly stable interest rate
environment experienced during fiscal 1996, as well as the continuing growth in
the markets served by Bedford Federal.
Stockholders' equity ended fiscal 1996 at $18.2 million, down 2.5% from the
$18.6 million on September 30, 1995. The modest decrease primarily reflects the
repurchase of 65,390 shares of the Corporation's common stock at an aggregate
price of $1.1 million and dividend declarations of $457,000 (.$39 per share),
mostly offset by net income of $1.3 million.
We were deeply saddened by the death of T. Glenn Bradley on September 23, 1996.
Mr. Bradley had served as a director for 30 years and as Chairman of the Board
since 1983. Mr. Bradley was a valuable asset to Bedford Bancshares, Inc., and we
will all miss his keen insight, wisdom and kindness. Mr. Hugh Bond was elected
Chairman of the Board to fill the vacancy left by Mr. Bradley's death. Mr. Bond
has been a director for 33 years and had served as president since 1970.
This report provides details of our progress in fiscal 1996. The successes we
enjoyed reflect the loyalty and support of our customers and stockholders, and
the dedication, commitment and pride of your Board of Directors, management and
staff. We thank you and look forward to continued success in the future.
Sincerely,
/s/ Harold K. Neal
Harold K. Neal
President and Chief Executive Officer
December 16, 1996
3
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OTHER DATA
- ---------------------------------------------------------------------------------------------
Financial Condition (Dollars in Thousands)
- ---------------------------------------------------------------------------------------------
At September 30, 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets....................... $127,201 115,054 $105,217 $96,933 $94,723
Loans receivable, net.............. 108,873 97,669 89,309 80,995 77,211
Investment securities.............. 8,006 7,761 7,651 5,915 5,867
Marketable equity securities....... 3,879 3,660 3,360 3,289 3,091
Mortgage-backed securities......... 482 31 37 47 59
Foreclosed real estate, net........ -- -- -- 31 329
Deposits........................... 95,378 90,063 84,841 89,187 88,745
FHLB advances...................... 12,000 5,000 1,000 1,000 --
Retained earnings.................. 8,739 8,263 7,519 6,144 5,219
Total stockholders equity.......... 18,227 18,685 18,659 -- --
Summary of Operations (Dollars in Thousands)
- ---------------------------------------------------------------------------------------------
Year Ended September 30, 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------
Interest income.................... $9,264 $8,137 $6,964 $7,095 $7,905
Interest expense................... 4,492 3,778 3,478 3,740 4,929
Net interest income................ 4,772 4,359 3,486 3,355 2,976
Provision for credit losses........ 22 20 51 234 182
Non-interest income................ 735 543 554 497 508
Non-interest expense............... 3,429(1) 2,620 2,238 2,089 2,081
Net income before income taxes and
cumulative effect of change in
accounting principle............. 2,056 2,262 1,751 1,529 1,221
Net income......................... 1,302 1,401 1,445 925 677
Other Selected Data
- ---------------------------------------------------------------------------------------------
Year Ended September 30, 1996 1995 1994(2) 1993 1992
- ---------------------------------------------------------------------------------------------
Return on average assets........... 1.10% 1.28% 1.12% .97% .72%
Return on average equity........... 6.98 7.31 12.89 16.25 13.82
Average equity to average assets... 15.69 17.49 8.71 5.98 5.25
Net interest rate spread........... 3.34 3.26 3.28 3.39 3.07
Non-performing assets to total assets .54 1.14 1.07 .40 .88
Non-performing loans to total loans .63 1.34 1.26 .44 .66
Allowance for loan losses to total loans .60 .63 .71 .73 1.02
Per Share Data
- ---------------------------------------------------------------------------------------------
Year Ended September 30, 1996 1995 1994(2) 1993 1992
- ---------------------------------------------------------------------------------------------
Net income per share............... $ 1.17 $ 1.20 $ 1.23 N/A N/A
Book value per share............... 16.95 16.81 15.84 N/A N/A
Cash dividends declared per share.. .39 .30 -- N/A N/A
</TABLE>
- -------------
(1) Includes a one-time, special assessment of $555,000 to recapitalize the
SAIF.
(2) Income and related ratios exclude the cumulative effect of a change in
accounting principle of $323,000 in fiscal year 1994.
4
<PAGE>
Total Assets [Graphics Omitted - Plotting Points Below]
Bar graph showing Total Assets in thousands of dollars for the year ended
September 30. The horizontal axis shows the years 1992 to 1996 and the vertical
axis shows amounts from $0 to $140,000. Graph values are $94,723, $96,933,
$105,217, $115,054, $127,201 for 1992, 1993, 1994, 1995, and 1996, respectively.
Loan Portfolio Composition [Graphics Omitted - Plotting Points Below]
Pie Chart showing Loan Portfolio Composition identifying the type of loan
and in percentages At September 30, 1996. 1-4 Family Residential (76.7%),
Commercial & Multi-Family Real Estate (5.4%), Consumer/Commercial Business
(8.1%), Construction (6.0%), Land (3.8%).
Deposit Portfolio Composition [Graphics Omitted - Plotting Points Below]
Pie Chart showing Deposit Portfolio Composition identifying the type of
deposit and in percentages At September 30, 1996. Certificates (65.5%), Checking
(13.7%), Savings (16.0%), Money Market (4.8%).
Net Interest Incom [Graphics Omitted - Plotting Points Below]
Bar graph showing Net Interest Income in thousands of dollars for the year
ended September 30. The horizontal axis shows the years 1992 to 1996 and the
vertical axis shows amounts from $0 to $5000. Graph values are $2,976, $3,355,
$3,486, $4,359, $4,772 for 1992, 1993, 1994, 1995, and 1996, respectively.
Net Income [Graphics Omitted - Plotting Points Below]
Bar graph showing Net Income in thousands of dollars for the year ended
September 30. The horizontal axis shows the years 1992 to 1996 and the vertical
axis shows amounts from $0 to $1500. Graph values are $677, $925, $1,445,
$1,401, $1,302 for 1992, 1993, 1994, 1995, and 1996, respectively.
Return on Average Assets [Graphics Omitted - Plotting Points Below]
Bar graph showing Return On Average Assets stated in percentages for the
year ended September 30. The horizontal axis shows the years 1992 to 1996 and
the vertical axis shows amounts from 0.00% to 1.50%. Graph values are 0.72%,
0.97%, 1.12%, 1.28%, 1.10% for 1992, 1993, 1994, 1995, and 1996, respectively.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management Strategy
The Company's management strategy is to maintain profitability and a
strong capital position through controlled growth. This has been
accomplished in the past by the Savings Bank's focus upon the
origination of traditional one- to four-family, adjustable rate
mortgage loans which are retained in its loan portfolio. To a lesser
extent, the Savings Bank originates 10 to 15 year, fixed-rate mortgage
loans, and consumer loans, including home equity, automobile and
personal loans. This strategy, along with prudent underwriting
standards, is designed to reduce the risk of loss in the Savings
Bank's loan portfolio as well as to reduce the interest risk exposure.
Management has increased the interest rate sensitivity of Bedford
Federal's earning assets to better match the sensitivity of its
interest bearing liabilities, while maintaining high asset quality.
This has been accomplished by: (1) originating adjustable-rate
mortgage loans and shorter term consumer loans for its portfolio, (2)
emphasizing the solicitation and retention of core deposits from
within the Savings Bank's market area, (3) investing in short- and
intermediate-term investments, (4) adhering to sound underwriting and
investment standards, and (5) effectively managing interest rates paid
on deposits.
In its efforts to manage the interest rates it pays on deposits, the
Savings Bank focuses on maintaining a stable deposit base while
providing efficient and quality service to its customers.
Historically, Bedford Federal has relied primarily upon the cash flows
from its deposits and mortgage payments as its major sources of funds,
however, in recent years the bank has utilized borrowings from the
Federal Home Loan Bank ("FHLB") to meet increased lending
requirements.
General
Net interest income is the primary source of the Company's earnings.
Net interest income is affected by the levels of average earning
assets and average interest bearing liabilities, and the respective
interest rates earned and paid. The difference between average rates
of interest earned on interest earning assets and average rates paid
on interest bearing liabilities is the "interest rate spread." The
"net interest margin" relates net interest income to average earning
assets and serves as an indication of the effectiveness of funds
allocation.
The Savings Bank also receives income from service charges and other
fees primarily related to credit and deposit services. Bedford Federal
incurs expenses in its day-to-day operations including salaries and
benefits, deposit insurance, facilities expense, marketing and other
related business expenses.
Interest Rate Sensitivity Analysis
As rates on sources of funds have become deregulated and subject to
competitive pressures, financial institutions have become increasingly
concerned with the extent to which they are able to match maturities
of interest-earning assets and interest-bearing liabilities. Such
matching is facilitated by examining the extent to which such assets
and liabilities are "interest rate sensitive" and by monitoring the
interest rate sensitivity "gap." The "gap" represents the difference
between interest-earning assets and interest-bearing liabilities
maturing or repricing within a specific time period. The following
table sets forth the amounts of interest earning assets and interest
bearing liabilities outstanding at September 30, 1996, which are
expected to reprice or mature in each of the future time periods
shown. It is important to note that certain shortcomings are inherent
in the method of analysis presented in the table. For example,
although certain assets and liabilities may have similar maturities or
periods of repricing, they may react in different degrees to changes
in market interest rates. Also, the interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in market
rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate
mortgage loans have features which restrict changes in interest rates
on a short-term basis over the life of the assets. Further in the
event of a change in interest rates, prepayment levels and decay rates
on core deposits may deviate significantly from those assumed in
calculating the table.
6
<PAGE>
The following table indicates the time periods in which interest-earning assets
and interest bearing liabilities will mature or reprice in accordance with their
contractual terms. The table assumes prepayments and scheduled principal
amortization of fixed-rate loans and mortgage-backed securities, and assumes
that adjustable rate mortgage loans will reprice at contractual repricing
intervals. There has been no adjustment for the impact of future commitments and
loans in process.
<TABLE>
<CAPTION>
At September 30, 1996
----------------------------------------------------------------------------------
Three More than 3 More than 6 More than More than
Months Months to Months 1 Year to 3 Years to More Than
or Less 6 Months to 1 Year 3 Years 5 Years 5 Years Total
------- ----------- ----------- --------- ---------- ---------- -----
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans(1)(2) ................. $ 7,409 $ 8,506 $ 64,760 $ 8,541 $ 3,152 $ 9,259 $101,627
Other loans(1) ....................... 3,830 526 957 5,238 843 -- 11,394
Marketable equity securities(3) ...... 3,879 -- -- -- -- -- 3,879
Federal funds sold and other short- ..
term investments ................... 223 -- -- -- -- -- 223
Investment securities ................ -- -- -- 2,708 1,883 2,483 7,074
Mortgage-backed securities(2) ........ -- -- -- 25 -- 457 482
FHLB stock ........................... 932 -- -- -- -- -- 932
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets 16,273 9,032 65,717 16,512 5,878 12,199 125,611
-------- -------- -------- -------- -------- -------- --------
Less:
Loans in process ..................... 1,600 1,599 -- -- -- -- 3,199
Unearned discount and deferred fees(2) 26 20 179 38 11 25 299
Allowance for credit losses .......... 56 43 390 82 24 55 650
-------- -------- -------- -------- -------- -------- --------
Net interest-earning assets ........ 14,591 7,370 65,148 16,392 5,843 12,119 121,463
-------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Money market deposits ................ 1,479 1,001 1,137 504 240 218 4,579
Passbook deposits .................... 679 648 1,209 4,225 2,511 6,018 15,290
NOW and other demand deposits ........ 829 738 1,244 2,573 689 1,525 7,598
Certificate accounts ................. 11,197 -- 22,624 26,071 2,560 -- 62,452
Borrowed funds ....................... 2,000 -- 10,000 -- -- -- 12,000
-------- -------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 16,184 2,387 36,214 33,373 6,000 7,761 101,919
-------- -------- -------- -------- -------- -------- --------
Interest sensitivity gap(4) ............ $ (1,593) $ 4,983 $ 28,934 $(16,981) $ (157) $ 4,358 $ 19,544
======== ======== ======== ======== ======== ======== ========
Cumulative interest sensitivity $ (1,593) $ 3,390 $ 32,324 $ 15,343 $ 15,186 $ 19,544
======== ======== ======== ======== ======== ========
Cumulative interest sensitivity gap as
a percent of total assets ............ (1.25)% 2.67% 25.41% 12.06% 11.94% 15.36%
Cumulative net interest-bearing assets
as a percent of interest-bearing
liabilities .......................... 90.16 % 118.25% 159.00% 117.40% 116.13% 119.18%
</TABLE>
- ----------------------------------
(1) For purposes of the gap analysis, mortgage and other loans are reduced for
nonperforming loans but are not reduced for the allowance for credit
losses.
(2) For purposes of the gap analysis, unearned discount and deferred fees are
pro rated for mortgage loans and mortgage backed securities.
(3) Includes assets held for sale.
7
<PAGE>
Analysis of Net Interest Income
The following table sets forth certain information relating to the
Savings Bank's average balance sheet and reflects the interest earned
on assets and interest expense of liabilities for the periods
indicated and the average yields earned and rates paid. Such yields
and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from daily balances.
<TABLE>
<CAPTION>
For the Year Ended September 30,
----------------------------------------------------------------------
1996 1995
---------------------------------- --------------------------------
Yield/ Yield/
Average Average Average Average
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- --------
(Dollars in Thousands)
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans(1) ..................... $ 91,605 $ 7,408 8.09% $ 86,126 $ 6,632 7.70%
Other loans(1) ........................ 9,305 972 10.45 7,413 736 9.93
Interest-earning deposits(2) .......... 3,718 225 6.05 3,472 211 6.08
Federal funds sold and
other short-term investments ........ 1,050 93 8.86 924 58 6.28
Investment securities ................. 7,112 479 6.74 6,743 430 6.38
Mortgage-backed securities, net ....... 287 20 6.97 35 3 8.57
FHLB stock ............................ 932 67 7.19 932 67 7.19
------- ------ ------- -----
Total interest-earning assets 114,009 9,264 8.13 105,645 8,137 7.70
------ -----
Noninterest earning assets .............. 4,807 3,886
------- -------
Total assets ........................ $118,816 $109,531
======= =======
Liabilities and equity:
Interest-bearing liabilities:
Money market deposits ................. $ 5,011 $ 154 3.07% $ 5,957 $ 181 3.04%
Passbook deposits ..................... 15,400 458 2.97 17,045 516 3.03
NOW and other demand deposits ......... 7,316 203 2.77 5,971 168 2.81
Certificate accounts .................. 60,093 3,313 5.51 52,529 2,697 5.13
------- ------ ------- -----
Total savings accounts .................. 87,820 4,128 4.70 81,502 3,562 4.37
Borrowed funds ........................ 6,018 364 6.05 3,596 216 6.01
------- ------ ------- -----
Total interest-bearing liabiliies 93,838 4,492 4.79 85,098 3,778 4.44
------ -----
Noninterest-bearing liabilities ........... 6,336 5,278
Equity .................................... 18,642 19,155
------- -------
Total liabilities and equity $118,816 $109,531
======= =======
Net interest income ....................... $ 4,772 $ 4,359
====== =====
Interest rate spread(3) ................... 3.34% 3.26%
Net interest margin(4) .................... 4.19% 4.13%
Ratio of interest-earning assets
interest-bearing liabilities ............ 121.50% 124.15%
</TABLE>
- ---------------------
(1) Amount is net of deferred loan fees and discounts, loans in process and
allowance for credit losses and includes accrued interest.
(2) Includes assets held for sale.
(3) Net interest rate spread represents the difference between the yield on
average interest-earning assets and the cost of average interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
8
<PAGE>
The following table sets forth certain information regarding changes in interest
income and expense of the Savings Bank for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes due to (1) changes in volume (change in
average volume times the old rate); (2) changes in rate (changes in rate times
the old average volume); and (3) net change. The change attributable to the
combined impact of volume and rate have been allocated proportionately to the
changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------
1995 vs. 1996 1994 vs. 1995
----------------------------- -----------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------- -----------------------------
Volume Rate Net Volume Rate Net
---------- -------- ------- --------- ------ --------
(Dollars In Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans ......................... $ 432 $ 344 $ 776 $ 501 $ 324 $ 825
Other loans ............................ 195 41 236 190 16 206
Interest-earning deposits .............. 15 (1) 14 6 60 66
Federal funds sold and other short-term
investments .......................... 9 26 35 11 (13) (2)
Investment securities, net ............. 24 25 49 73 (8) 65
Mortgage-backed securities, net ........ 18 (1) 17 (1) -- (1)
FHLB stock ............................. -- -- -- -- 14 14
------- ------- ------- ------- ------- -------
Total interest-earning assets ...... 693 434 1,127 780 393 1,173
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Money market deposits .................. (29) 2 (27) -- 4 4
Passbook deposits ...................... (49) (9) (58) (119) -- (119)
NOW and other demand deposits .......... 38 (3) 35 9 (7) 2
Certificate accounts ................... 406 210 616 (35) 273 238
Borrowed funds ......................... 146 2 148 140 35 175
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities.. 512 202 714 (5) 305 300
------- ------- ------- ------- ------- -------
Net change in interest income ............ $ 181 $ 232 $ 413 $ 785 $ 88 $ 873
======= ======= ======= ======= ======= =======
</TABLE>
Comparison of Financial Condition for Fiscal Years Ended September 30, 1996 and
1995.
The Corporation's total assets were $127.2 million at September 30,
1996, an increase of 10.5% from the $115.1 million on September 30,
1995. The asset growth was primarily due to a 11.47% rise in loans
receivable, net, from $97.7 million at fiscal year-end 1995 to $108.9
at fiscal year-end 1996.
An increase in new home construction within the markets Bedford
Federal serves combined with the stable interest rate environment that
continued during fiscal 1996 were the major factors in the expansion
of loans. This increase was funded primarily by principal repayments
of the loan portfolio, increased deposits, and FHLB advances. Because
lending is directly affected by interest rates, a rise in interest
rates could cause a slow down in new loan originations. Investment
securities increased $245,000, marketable equity securities rose
$219,000 and mortgage-backed securities were up $451,000 in 1996 over
1995.
At September 30, 1995 and 1996, the Corporation's total investments in
loans receivable, net, and securities equalled 94.8% and 95.3% of
total assets, respectively. Effective October 1, 1994, the Corporation
adopted SFAS 115, "Accounting for Certain Investments in Debt 3 and
Equity Securities." SFAS 115 requires that all investments in debt
securities and all investments in equity securities that have readily
determinable fair values be classified into three categories.
Securities that management has positive intent and ability to hold
until maturity will be classified as held to maturity. Securities that
are purchased and held specifically for the purpose of selling in the
near future will be classified as trading securities. All other
securities will be classified as available for sale. Securities
9
<PAGE>
classified as trading and available for sale will be carried at market
value. Unrealized holding gains and losses for trading securities will
be included in current income. Unrealized holding gains and losses for
available for sale securities will be reported as a net amount in a
separate component of stockholders' equity until realized. At
September 30, 1996, Bedford Bancshares had $5.2 million of securities
held to maturity and $6.2 million of securities available for sale. In
addition, at September 30, 1996, the Bank had $932,000 invested in
Federal Home Loan Bank ("FHLB") stock.
Deposits totaled $95.4 million at September 30, 1996, an increase of
$5.3 million from $90.1 million at September 30, 1995. The increase
was partially attributable to the higher rates paid on deposits during
fiscal 1996 combined with the healthy economic environment in the
areas served by Bedford Federal. Advances from the FHLB totaled $12
million at September 30, 1996, an increase of $7 million from $5
million at September 30, 1995. The increase was primarily used to fund
the increase in the loan portfolio.
Total stockholders' equity was $18.2 million on September 30, 1996,
down $458,000 from the $18.7 million one year previous. This planned
reduction reflects the acquisition of 65,390 shares of the
Corporation's common stock at an aggregate cost of $1.1 million under
the stock buy back program conducted during 1996. In addition, the
Corporation declared $457,000 of dividends during fiscal 1996 and
realized net income of $1.3 million. The equity-to-asset ratio at
September 30, 1996 stood at 14.3% down from 16.2% one year earlier.
Comparison of Operating Results for Years Ended September 30, 1996 and 1995
Net Income. Net income decreased $99,000 in fiscal 1996 from fiscal
1995. During the fourth quarter of fiscal 1996, the FDIC imposed a
one-time assessment on all members of the SAIF in order to
recapitalize the SAIF to the federally mandated level of 1.25%. The
assessment amounted to approximately $555,000 for Bedford Federal
($344,000 on an after tax basis). Excluding the impact of the
assessment, net income would have been $1.6 million, or 14.2% higher
than fiscal 1995.
Interest Income. Interest income totaled $9.3 million for the fiscal
year ended September 30, 1996, a 13.9% increase from the $8.1 million
recorded for fiscal 1995. The $1.2 million expansion of interest
income is due to the 7.9% growth of average earning assets, primarily
loans, coupled with the overall improvement in the rate earned on
average earning assets. The table on page 9 provides a detailed
analysis of the changes in interest income due to volume and rate.
Interest Expense. Interest expense increased $714,000 from $3.8
million for the year ended September 30, 1995 to $4.5 million for the
fiscal year ended September 30, 1996. Both the level and cost of
average interest-bearing liabilities rose in fiscal 1996 over fiscal
1995. Average interest-bearing liabilities rose 10.2% and the cost
increased 35 basis points in fiscal 1996 over fiscal 1995, primarily
due to a 38 basis point increase in certificate accounts due to more
aggressive pricing and a larger balance of FHLB advances which tend to
have higher costs than deposit accounts. The table on the previous
page provides a detailed analysis of the change in interest expense
due the changes in volume and rate.
Net Interest Income. Net interest income totaled $4.8 million for the
year ended September 30, 1996, up 9.5% from the $4.4 million realized
in fiscal 1995. An 8 basis point improvement in the interest rate
spread and a more favorable mix of earning assets contributed to the
improved level of net interest income. The growth of net interest
income was somewhat restrained by the increase in average borrowed
funds and the rise in the cost of interest-bearing liabilities. A
detailed analysis of net interest income is presented earlier in this
report.
Provisions for Credit Losses. Provisions for credit losses for the
year ended September 30, 1996 increased $2,000 to $22,000 compared to
the provisions recorded in fiscal 1995. The amount of the
10
<PAGE>
provisions reflects management's assessment of loan loss reserves on
non-classified loans. At September 30, 1996, the allowance for credit
losses was $650,000, representing .60% of loans receivable,net, and
95.03% of non-performing loans. Based upon the quality of the Savings
Bank's loan portfolio, the relatively stable local economy, and
favorable interest rate environment, management presently believes the
Savings Bank's allowance for credit losses is adequate to absorb any
anticipated credit losses. Management currently expects future
provisions for credit losses to be based primarily upon growth in the
loan portfolio and other factors. However, assessment of the adequacy
of the allowance for credit loss involves subjective judgments
regarding future events and thus there can be no assurance that
additional provisions for credit losses will not be required in future
periods.
Noninterest Income. For the year ended September 30, 1996, noninterest
income amounted to $735,000, up 35.4% from the $543,000 earned in
fiscal 1995. Service charges and fees on loans were up $58,000 due to
an increase in the number and dollar volume of loan originations.
Other customer service fees and commissions reflected a $77,000 rise
primarily due to an increase in customer deposit activity. In
addition, the Savings Bank realized a gain of $27,000 on the sale of
foreclosed property during fiscal 1996 compared to a loss of $4,000 in
fiscal 1995.
Noninterest Expense. Noninterest expense totaled $3.4 million for the
year ended September 30, 1996 compared to $2.6 million for fiscal
1995. This change was primarily due to the imposition by the FDIC on
members of the SAIF of the one-time assessment designed to
recapitalize the SAIF. The charge to Bedford Federal was approximately
$555,000. Compensation and employee benefits were up $87,000 due
primarily to merit increases and higher benefits costs. In addition,
occupancy and equipment expense increased $77,000 due primarily to
expenses related to the installation and operation of three ATMs.
Income Taxes. The provision for income taxes decreased $107,000 to
$754,000 in fiscal 1996 from $861,000 in fiscal 1995 due to the lower
level of taxable income.
Liquidity and Capital Resources
Under applicable federal regulations, Bedford Federal is required to
maintain specified levels of "liquid investments" in qualifying types
of U.S. Government, federal agency and other investments, having
maturities of five years or less. Current OTS regulations require that
a savings association maintain liquid assets of not less than 5% of
its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less, of which short-term liquid
assets must consist of not less than 1%. At September 30, 1996, the
Savings Bank's liquidity, as measured for regulatory purposes, was
8.55% which was $3.3 million in excess of the minimum OTS requirement.
The Savings Bank adjusts its liquidity as appropriate to meet its
asset/liability objectives.
Primary funding sources for the Savings Bank are deposits,
amortization and prepayments of loans, FHLB advances, maturities of
investment securities and funds provided from operations. While
scheduled loan repayments are a relative predictable source of funds,
deposit flows and loan prepayments are significantly influenced by
general interest rates, economic conditions and competition. In
addition, Bedford Federal invests excess funds in overnight deposits
which provide liquidity to meet funding requirements.
The Savings Bank's most liquid assets are cash and cash equivalents,
which include investments in highly liquid short-term investments. The
level of these assets is dependent on the Savings Bank's operating,
financing and investing activities during any given period. At
September 30, 1996, cash and cash equivalents totaled $3.1 million.
Bedford Federal has other sources of liquidity if the need for funds
exceeds the level generated from normal operations. Included in these
other sources are additional FHLB advances and the ability to borrow
against securities. At September 30, 1996, the Savings Bank had $12.0
million in advances outstanding from the FHLB of Atlanta. At September
30, 1996, the Savings Bank had commitments to fund loans of $1.8
million, $3.2 million of loans in process, and $2.0 million and
$362,000 of unfunded home equity lines of credit and commercial credit
loans, respectively.
11
<PAGE>
Certificates of deposit scheduled to mature within one year totaled
$33.8 million September 30, 1996. Based on historical deposit
withdrawals and outflows, and on internal monthly deposit reports
monitored by management, management believes that a majority of such
maturing deposits will remain in the Savings Bank.
As of September 30, 1996, Bedford Federal exceeded its tangible, core
and risk-based capital requirements by 10.9%, 9.4% and 15.1%,
respectively. See Note 14 to the Company's Consolidated Financial
Statements included in this Annual Report.
Impact of Inflation and Changing Prices
The financial statements and related data in this report have been
prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating
results in terms of historical dollars, without consideration for
changes in the relative purchasing power of money over time caused by
inflation.
Unlike industrial companies, nearly all of the assets and liabilities
of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial
institution's performance than general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same
magnitude as the price of goods and services, since such goods and
services are affected by inflation. In the current interest rate
environment, liquidity and the maturity structure of the Savings
Bank's assets and liabilities are critical to the maintenance of
acceptable performance levels.
Recent Developments
The Savings Bank's deposits are insured up to the legal maximum by the
SAIF as administered by the FDIC. In the past, Bedford Federal and
most other SAIF members have paid an annual insurance premium between
.23% and .31% of total deposits held. On the other hand, a vast
majority of members of the BIF, primarily commercial banks, paid
insurance premiums on deposits at or near the legal minimum of $2,000
per year. Recent federal legislation required the FDIC to impose a
one-time assessment on all members of SAIF in order to recapitalize
the SAIF to the federally mandated level of 1.25%. The assessment
equalled .65% of an institution's domestic deposits as of March 31,
1995 and was approximately $555,000 for Bedford Federal. It is
anticipated that future SAIF premiums will be lowered which will
reduce somewhat the competitive advantage commercial banks have had
regarding deposit insurance premiums.
On August 20, 1996, The Small Business Job Protection Act of 1996 was
signed into law. Under this law the tax bad debt reserve method that
had been available to thrift institutions was repealed for tax years
beginning after 1995. Upon repeal, a small thrift (under $500 million
in assets) is required to recapture into income the portion of its bad
debt reserves that exceeds the greater of (1) the experience method
reserve computed as if the thrift had always been a small bank, or (2)
the lesser of the base year reserve or the contracted base year
reserve. The impact of this change was immaterial on Bedford Federal.
12
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
-----------------------------------------
Consolidated Financial Statements
As of September 30, 1996 and 1995 and
For the Years Ended September 30, 1996, 1995 and 1994
Bedford Bancshares, Inc. and Subsidiaries
13
<PAGE>
[BDO SEIDMAN LETTERHEAD]
[LOGO] BDO Seidman LLP 300 Arboretum Place, Suite 520
Accountants and Consultants Richmond, Virginia 23236
Telephone: (804) 330-3092
Fax: (804) 330-7753
Report of Independent Certified Public Accountants
The Board of Directors and Stockholders
Bedford Bancshares, Inc.
Bedford, Virginia
We have audited the consolidated balance sheet of Bedford Bancshares, Inc. and
subsidiaries (the "Company") as of September 30, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The consolidated financial statements
of Bedford Bancshares, Inc. and subsidiaries as of September 30, 1995 and 1994,
were audited by other auditors whose report dated October 27, 1995, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Bedford Bancshares, Inc. and subsidiaries as of September 30, 1996, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
As discussed in the Summary of Accounting Policies to the consolidated financial
statements, the Company changed its method of accounting for income taxes by
adopting Statement of Financial Accounting Standards No. 109, effective October
1, 1993. The Company also changed its method of accounting for debt and equity
securities by adopting Statement of Financial Accounting Standards No. 115,
effective October 1, 1994.
/s/ BDO Seidman, LLP
October 29, 1996
14
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
- ------------------------------------------------------------------------------
September 30, 1996 1995
- ------------------------------------------------------------------------------
Assets
Cash (including interest bearing deposits of
approximately $223 and $725) $ 3,075 $ 3,337
Securities (Notes 1 and 6) 11,435 10,520
Investment in Federal Home Loan Bank stock,
at cost (Note 6) 932 932
Loans receivable, net (Notes 2, 6 and 14) 108,873 97,669
Property and equipment, net (Note 4) 1,238 1,313
Accrued interest receivable 662 713
Deferred income taxes (Note 9) 438 214
Refundable income taxes - 103
Other assets 548 253
- -------------------------------------------------------------------------------
$127,201 $115,054
- ------------------------------------------------------------------------------
15
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
- --------------------------------------------------------------------------------
September 30, 1996 1995
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 5) $ 95,378 $ 90,063
Advances from Federal Home Loan Bank (Note 6) 12,000 5,000
Advances from borrowers for taxes and insurance 539 545
Dividends payable 126 186
Other liabilities (Note 8) 931 575
- --------------------------------------------------------------------------------
Total liabilities 108,974 96,369
- --------------------------------------------------------------------------------
Commitments and contingencies (Notes 11 and 12)
- --------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, par value $.10, authorized 250,000
shares, none outstanding - -
Common stock, par value $.10, authorized 2,750,000
shares, 1,143,669 and 1,204,875 shares, issued and
outstanding 114 121
Additional paid-in capital 10,773 11,366
Retained earnings, substantially restricted (Note 10) 8,739 8,263
Unrealized loss on securities available for sale (Note 1) (33) (9)
Less stock acquired by ESOP and RRP (Note 11) (1,366) (1,056)
- --------------------------------------------------------------------------------
Total stockholders' equity 18,227 18,685
- --------------------------------------------------------------------------------
$127,201 $115,054
- --------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes
to consolidated financial statements.
16
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands)
- ------------------------------------------------------------------------------
Year Ended September 30, 1996 1995 1994
- ------------------------------------------------------------------------------
Interest income
Loans $8,380 $7,368 $6,337
U.S. government obligations, including agencies 748 708 563
Other investments 136 61 64
- ------------------------------------------------------------------------------
Total interest income 9,264 8,137 6,964
- ------------------------------------------------------------------------------
Interest expense
Deposits (Note 5) 4,128 3,562 3,437
Borrowed money 364 216 41
- ------------------------------------------------------------------------------
Total interest expense 4,492 3,778 3,478
- ------------------------------------------------------------------------------
Net interest income 4,772 4,359 3,486
Provision for loan losses (Note 2) 22 20 51
- ------------------------------------------------------------------------------
Net interest income after provision for
loan losses 4,750 4,339 3,435
- ------------------------------------------------------------------------------
Noninterest income
Service charges and fees on loans 403 345 362
Other customer service fees and commissions 257 180 169
Gain (loss) on sale of loans, investments
and foreclosed real estate 30 (4) 8
Other 45 22 15
- ------------------------------------------------------------------------------
Total noninterest income 735 543 554
- ------------------------------------------------------------------------------
Noninterest expense
Compensation and employee benefits 1,467 1,380 1,197
Occupancy and equipment 336 259 254
Data processing 311 302 260
Federal insurance of accounts 207 197 202
Advertising 87 85 73
Professional fees 115 149 84
BIF/SAIF premium disparity assessment (Note 8) 555 - -
Other 351 248 168
- ------------------------------------------------------------------------------
Total noninterest expense 3,429 2,620 2,238
- ------------------------------------------------------------------------------
continued...
17
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands)
(continued)
- -----------------------------------------------------------------------------
Year Ended September 30, 1996 1995 1994
- -----------------------------------------------------------------------------
Income before income taxes and cumulative
effect of change in accounting principle $2,056 $2,262 $1,751
Provision for income taxes (Note 9) 754 861 629
- -----------------------------------------------------------------------------
Net income before cumulative effect of
change in accounting principle 1,302 1,401 1,122
Cumulative effect at October 1, 1993, of
change in accounting for income taxes - - 323
- -----------------------------------------------------------------------------
Net income $1,302 $1,401 $1,445
- -----------------------------------------------------------------------------
Primary and fully diluted earnings per common
share
Income before cumulative effect $1.17 $ 1.20 $ .95
Cumulative effect of change in accounting
principle - - .28
- -----------------------------------------------------------------------------
Net income $1.17 $ 1.20 $ 1.23
- -----------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to
consolidated financial statements.
18
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Additional Unrealized Acquired
Common Paid-in Retained Gain/(Loss) By ESOP
Stock Capital Earnings on Securities and RRP Total
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1993 $ -- $ -- $ 6,144 $ -- $ -- $ 6,144
Net income -- -- 1,445 -- -- 1,445
Change in unrealized loss
on marketable equity
securities -- -- -- (70) -- (70)
Sale of stock (1,256,375
shares) 126 11,814 -- -- (800) 11,140
- -----------------------------------------------------------------------------------------------------------
Balance, September 30, 1994 126 11,814 7,589 (70) (800) 18,659
Net income -- -- 1,401 -- -- 1,401
Cumulative effect of change
in accounting principle -- -- -- 35 -- 35
Change in unrealized loss
on securities available
for sale (Note 1) -- -- -- 26 -- 26
Allocated/earned ESOP
shares (Note 10) -- 62 -- -- 93 155
Purchase of RRP shares
(Note 10) -- -- -- -- (349) (349)
Repurchase of stock
(51,500 shares) (5) (510) (370) -- -- (885)
Dividends declared ($.30
per share) -- -- (357) -- -- (357)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
continued...
19
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
(continued)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Additional Unrealized Acquired
Common Paid-in Retained Gain/(Loss) By ESOP
Stock Capital Earnings on Securities and RRP Total
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995 $121 $ 11,366 $ 8,263 $ (9) $(1,056) $18,685
Net income -- -- 1,302 -- -- 1,302
Change in unrealized loss
on securities available
for sale (Note 1) -- -- -- (24) -- (24)
Allocated/earned ESOP
shares (Note 11) -- 55 88 -- 26 169
Purchase of RRP shares
(Note 11) -- -- -- -- (483) (483)
Repurchase of stock
(65,390 shares) (7) (647) (461) -- -- (1,115)
Dividends declared ($.39
per share) -- -- (457) -- -- (457)
Exercise of options (Note 11) -- 41 4 -- -- 45
RRP vesting (Note 11) -- (42) -- -- 147 105
- ---------------------------------------------------------------------------------------------------------
Balance, September 30, 1996 $114 $ 10,773 $ 8,739 $ (33) $(1,366) $18,227
=========================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
20
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Year Ended September 30, 1996 1995 1994
- ---------------------------------------------------------------------------------------------
Operating activities
<S> <C> <C> <C>
Net income $ 1,302 $ 1,401 $ 1,445
Adjustments to reconcile net income to
net cash provided by operating activities
Cumulative effect of change in accounting
for income taxes -- -- (323)
Provision for loan losses 22 20 51
Provision for depreciation and amortization 163 120 97
(Increase) decrease in deferred income taxes (121) 116 67
(Gain) loss on sale of loans and securities (2) 4 (8)
(Gain) loss on sale of foreclosed real estate (28) -- (4)
Loans originated for sale (152) (184) (301)
Proceeds from sale of loans originated for sale 153 188 309
(Increase) decrease in interest receivable 51 (128) (50)
(Increase) decrease in other assets (295) (84) 46
Increase (decrease) in other liabilities 356 331 92
- ---------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,449 1,784 1,421
- ---------------------------------------------------------------------------------------------
Investing activities
Proceeds from maturities of investments 2,200 1,200 1,700
Proceeds from sales of investments 872 394 --
Principal collected on mortgage-backed securities 26 7 10
Purchases of investment securities (4,035) (1,955) (3,579)
Net increase in loans to customers (11,311) (8,380) (8,365)
Net proceeds from sales of foreclosed real estate 113 -- 113
Purchases of foreclosed real estate -- -- (78)
Purchases of premises, equipment and leasehold
improvements (88) (298) (69)
- ---------------------------------------------------------------------------------------------
Net cash absorbed by investing activities (12,223) (9,032) (10,268)
- ---------------------------------------------------------------------------------------------
</TABLE>
continued...
21
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Year Ended September 30, 1996 1995 1994
- --------------------------------------------------------------------------------------------
Financing activities
<S> <C> <C> <C>
Net increase (decrease) in customer deposits $ 5,315 $ 5,222 $ (4,346)
Net increase (decrease) in advance payments
from borrowers (6) 72 23
Proceeds from advances and other borrowed money 11,000 5,000 --
Principal payments of advances (4,000) (1,000) --
Proceeds from sale of stock -- -- 11,940
Purchase of stock by ESOP and RRP (483) (349) (800)
Allocation of ESOP and RRP shares 274 155 --
Repurchase of stock (1,115) (885) --
Dividends paid (518) (183) --
Issuance of common stock 45 -- --
- --------------------------------------------------------------------------------------------
Net cash provided by financing activities 10,512 8,032 6,817
- --------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (262) 784 (2,030)
Cash and cash equivalents - beginning of year 3,337 2,553 4,583
- --------------------------------------------------------------------------------------------
Cash and cash equivalents - end of year $ 3,075 $ 3,337 $ 2,553
============================================================================================
Supplemental Disclosures of Cash Flow Information
- --------------------------------------------------------------------------------------------
Cash payments of interest expense $ 4,503 $ 3,777 $ 3,480
============================================================================================
Cash payments of income taxes $ 817 $ 718 $ 616
============================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to
consolidated financial statements.
22
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Summary of Accounting Policies
- --------------------------------------------------------------------------------
Nature of Business and Regulatory Environment
Bedford Bancshares, Inc. (the "Parent Company") is a unitary thrift holding
company whose principal asset is its wholly-owned subsidiary, Bedford Federal
Savings Bank (the "Savings Bank"). The Savings Bank is a federally chartered
stock savings bank that provides a full range of banking services to individual
and corporate customers. In these financial statements the consolidated group is
referred to collectively as "the Company".
The Office of Thrift Supervision ("OTS") is the primary regulator for federally
chartered savings associations, as well as savings and loan holding companies.
The Federal Deposit Insurance Corporation ("FDIC") is the federal deposit
insurance administrator for both banks and savings associations. The FDIC has
specified authority to prescribe and enforce such regulations and issue such
orders as it deems necessary to prevent actions or practices by savings
associations that pose a serious threat to the Savings Association Insurance
Fund ("SAIF").
Principles of Consolidation
The consolidated financial statements include the accounts of Bedford
Bancshares, Inc. and Bedford Federal Savings Bank, its wholly-owned subsidiary,
and First Financial Enterprises, Inc., the wholly-owned subsidiary of the
Savings Bank. All material intercompany accounts and transactions have been
eliminated in the consolidation. Prior year accounts are reclassified when
necessary to conform to current year classifications.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Investment Securities
The Company adopted Statement of Financial Accounting Standards No. 115 (SFAS
115), "Accounting for Certain Investments in Debt and Equity Securities", as of
October 1, 1994. This statement requires certain securities to be classified as
"held to maturity", "trading" or "available for sale", according to management's
intent and ability.
Debt securities for which the Bank has the positive intent and ability to hold
to maturity are reported at cost, adjusted for premiums and discounts that are
recognized in interest income using the interest method over the period to
maturity.
23
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Summary of Accounting Policies
(continued)
- -------------------------------------------------------------------------------
Investment Securities (continued)
Trading securities, if any, are carried at fair value. Realized gains and losses
on sales and unrealized changes in fair values are included in noninterest
income.
Investments classified as "available for sale" are carried at fair value with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity. Realized gains and losses on these sales are
included in noninterest income and are computed under the specific
identification method.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
Loans Receivable
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
Loans receivable consists primarily of long-term real estate loans secured by
first deeds of trust on single family residences, other residential property,
commercial property and land located primarily in the state of Virginia.
Interest income on mortgage loans is recorded when earned and is recognized
based on the level yield method. The Company provides an allowance for accrued
interest deemed to be uncollectible, which is netted against accrued interest
receivable in the consolidated balance sheets.
The Company defers loan origination and commitment fees, net of certain direct
loan origination costs, and the net deferred fees are amortized into interest
income over the lives of the related loans as yield adjustments. Any unamortized
net fees on loans fully repaid or sold are recognized as income in the year of
repayment or sale.
The Company places loans on nonaccrual status after being delinquent greater
than 90 days or earlier if the Company becomes aware that the borrower has
entered bankruptcy proceedings, or in situations in which the loans have
developed inherent problems prior to being 90 days delinquent that indicate
payments of principal or interest will not be made in full. Whenever the accrual
of interest is stopped, previously accrued but uncollected interest income is
reversed. Thereafter, interest is recognized only as cash is received until the
loan is reinstated.
24
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Summary of Accounting Policies
(continued)
- -------------------------------------------------------------------------------
Loans Receivable (continued)
The allowance for loan losses is maintained at a level considered by management
to be adequate to absorb future loan losses currently inherent in the loan
portfolio. Management's assessment of the adequacy of the allowance is based
upon type and volume of the loan portfolio, past loan loss experience, existing
and anticipated economic conditions, and other factors which deserve current
recognition in estimating future loan losses. Additions to the allowance are
charged to operations. Loans are charged-off partially or wholly at the time
management determines collectibility is not probable. Management's assessment of
the adequacy of the allowance is subject to evaluation and adjustment by the
Company's regulators.
Effective October 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment of a Loan"
(as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures"). The effect of adopting these new
accounting standards was immaterial to the operating results of the Company for
the year ended September 30, 1996.
Under the new accounting standard, a loan is considered to be impaired when it
is probable that the Company will be unable to collect all principal and
interest amounts according to the contractual terms of the loan agreement. The
allowance for loan losses related to loans identified as impaired is primarily
based on the excess of the loan's current outstanding principal balance over the
estimated fair market value of the related collateral. For a loan that is not
collateral-dependent, the allowance is recorded at the amount by which the
outstanding principal balance exceeds the current best estimate of the future
cash flows on the loan discounted at the loan's original effective interest
rate. Prior to October 1, 1995, the allowance for loan losses for all loans
which would have qualified as impaired under the new accounting standards was
primarily based upon the estimated fair market value of the related collateral.
For impaired loans that are on nonaccrual status, cash payments received are
generally applied to reduce the outstanding principal balance. However, all or a
portion of a cash payment received on a nonaccrual loan may be recognized as
interest income to the extent allowed by the loan contract, assuming management
expects to fully collect the remaining principal balance on the loan.
As of September 30, 1996, the Company had no loans that were considered as
impaired.
Real Estate Owned
Real estate acquired through foreclosure is initially recorded at the lower of
fair value, less estimated selling costs, or the balance of the loan on the
property at date of foreclosure. Costs relating to the development and
improvement of property are capitalized, whereas those relating to holding the
property are charged to expense.
25
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Summary of Accounting Policies
(continued)
- -------------------------------------------------------------------------------
Real Estate Owned (continued)
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its estimated fair value.
Sale of Loans, Participations in Loans
The Company is able to generate funds by selling loans and participations in
loans to the Federal Home Loan Mortgage Corporation and other investors. Under
participation service agreements, the Company continues to service the loans and
the participant is paid its share of principal and interest collections.
Gain or loss on loan participations is recognized at the time of the sale. The
gain or loss recorded is equal to the present value of the estimated future
interest receipts, net of allowance for estimated servicing costs and a normal
servicing profit on the portion sold less the present value of interest payments
to be remitted to the buyers. The resulting deferred premium or discount is
amortized or accreted to income using the level yield method. Loan servicing
income is recorded when earned. Loan servicing costs are charged to expense as
incurred.
Property, Equipment and Depreciation
The various classes of property are stated at cost and are depreciated by
accelerated and straight-line methods over their estimated useful lives of 30 to
40 years for office buildings, 15 to 20 years for land improvements, 15 years
for ATM facilities, 5 to 10 years for furniture and equipment and 5 years for
automobiles. Additions and improvements are capitalized, while repairs are
expensed as incurred. The cost and accumulated depreciation on property are
eliminated from the accounts upon disposal, and any resulting gain or loss is
included in the determination of net income.
Income Taxes
During the year ended September 30, 1994, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", which
required a change from the deferred method to the asset and liabilities method
of accounting for income taxes.
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
26
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Summary of Accounting Policies
(continued)
- -------------------------------------------------------------------------------
Income Taxes (continued)
In computing Federal income taxes, savings banks that meet certain definitional
tests and other conditions prescribed by the Internal Revenue Code are allowed,
within limitations, to deduct from taxable income an allowance for bad debts
based on actual loss experience, a percentage of taxable income (8%) before such
deduction or an amount based on a percentage of eligible loans. The cumulative
bad debt reserve, upon which no taxes have been paid, was approximately $212,000
as of September 30, 1996.
As a result of 1996 tax legislation, the Company will compute its tax bad debt
deduction by use of the "experience method", which is based on a moving
five-year average of actual charge-offs, for tax years beginning with fiscal
year 1997. According to the legislation, "applicable excess reserves" must be
recaptured as taxable income over five years beginning with fiscal year 1997.
The amount to be recaptured is the excess of the accumulated reserves since
fiscal year 1987 over the amount allowed by use of the experience method for
those years. Management does not believe that the legislation will have a
material effect on the Company's financial statements.
The Company has reported the cumulative effect of change in the method of
accounting for income taxes as of the beginning of the 1994 fiscal year in the
consolidated statement of operations.
Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and For Long-Lived Assets to Be Disposed Of".
SFAS 121 requires that long-lived assets and certain intangibles to be held and
used by an entity be reviewed for impairment when events or changes in
circumstances indicate that the carrying amount may not be recoverable. In
addition, SFAS 121 requires long-lived assets and certain intangibles to be
disposed of to be reported at the lower of carrying amount or fair value less
costs to sell. SFAS 121 is effective for fiscal years beginning after December
15, 1995. Management does not expect the application of this pronouncement to
have a material effect on the Company's financial statements.
In May 1995, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 122 (SFAS 122), "Accounting for Mortgage
Servicing Rights an Amendment of FASB Statement No. 65". SFAS 122 requires
entities to allocate the cost of acquiring or originating mortgage loans between
the mortgage servicing rights and the loans, based on their relative fair
values, if the bank sells or securitizes the loans and retains the mortgage
servicing rights. In addition, SFAS 122 requires entities to assess its
capitalized mortgage servicing rights for impairment based on the fair value of
those rights. SFAS 122 is effective for fiscal years beginning after December
15, 1995. Management does not expect the application of this pronouncement to
have a material effect on the Company's financial statements.
27
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Summary of Accounting Policies
(continued)
- -------------------------------------------------------------------------------
Accounting Pronouncements (continued)
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation." SFAS No. 123 allows companies to continue to account for their
stock option plans in accordance with APB Opinion 25 but encourages the adoption
of a new accounting method based on the estimated fair value of employee stock
options. Companies electing not to follow the new fair value based method are
required to provide expanded footnote disclosures, including pro forma net
income and earnings per share, determined as if the company had applied the new
method. SFAS No. 123 is required to be adopted by the Company prospectively
beginning October 1, 1996. Management does not expect the application of this
pronouncement to have a material effect on the Company's financial statements.
In June 1996, the Financial Accounting Standards Board issued its Statement of
Financial Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. After a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. In addition, a transfer of financial assets in which the
transferor surrenders control over those assets is accounted for as a sale to
the extent that consideration other than beneficial interests in the transferred
assets is received in exchange. SFAS 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 31, 1996, and is to be applied prospectively. Management does not
expect the application of this pronouncement to have a material effect on the
financial statements of the Company.
Earnings Per Share
Earnings per share of Common Stock for the years ended September 30, 1996 and
1995 have been determined by dividing the net income for the twelve month period
by the calculated weighted average number of shares of Common Stock and common
stock equivalents. The September 30, 1994 calculation was computed as if the
conversion from mutual ownership to stock ownership had occurred on the first
day of the fiscal year rather than on August 19, 1994. Shares acquired by the
employee stock benefit plans are accounted for in accordance with AICPA
Statement of Position 93-6 and are not considered in the weighted average shares
outstanding until the shares have been earned by the employees and/or committed
to be released. The weighted average number of shares of Common Stock
outstanding for the years ending September 30, 1996, 1995 and 1994, including
common stock equivalents, were 1,112,697, 1,165,381 and 1,176,375, respectively.
28
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Summary of Accounting Policies
(continued)
- -------------------------------------------------------------------------------
Statement of Cash Flows
For purposes of the statements of cash flows the Company considers all highly
liquid debt instruments with maturities, when purchased, of three months or
less, to be cash equivalents. Cash and cash equivalents include cash on hand,
funds due from banks, and federal funds sold.
Conversion to Stock Ownership
At a special meeting on August 2, 1994, the members of the Savings Bank approved
management's plan to convert the Savings Bank from a Federal Mutual to a Federal
Stock Savings Bank. The plan called for the formation of Bedford Bancshares,
Inc. which would own the stock of the Savings Bank upon its conversion to a
stock form of ownership. The stock of the Parent Company would then be offered
through a Subscription and Community Offering to the Savings Bank's
tax-qualified employee stock plans, eligible account holders and others. The
transaction was accounted for as a pooling of interests.
On August 19, 1994, the Parent Company issued 1,256,375 shares of $.10 par value
Common Stock at $10 per share and became the parent company of the Savings Bank.
Net proceeds, after deducting conversion expenses and underwriters' discounts of
$624,000, were $11,940,000 and are reflected as Common Stock and additional
paid-in capital in the accompanying consolidated financial statements.
29
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
1. Investment Securities
A summary of the amortized cost and estimated market values of investment
securities, in thousands, is as follows:
<TABLE>
<CAPTION>
September 30, 1996
- -------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -------------------------------------------------------------------------------------
Held to Maturity
United States government
<S> <C> <C> <C> <C>
and agency obligations $5,214 $24 $ 77 $ 5,161
Mortgage-backed securities 25 - - 25
- -------------------------------------------------------------------------------------
5,239 24 77 5,186
- -------------------------------------------------------------------------------------
Available for Sale
United States government
and agency obligations 1,900 8 48 1,860
Mortgage-backed securities 490 - 33 457
Marketable Equity securities 3,909 - 30 3,879
- -------------------------------------------------------------------------------------
6,299 8 111 6,196
- -------------------------------------------------------------------------------------
$11,538 $32 $188 $11,382
=====================================================================================
</TABLE>
30
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
1. Investment Securities (continued)
<TABLE>
<CAPTION>
September 30, 1995
- -------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -------------------------------------------------------------------------------------
Held to Maturity
United States government
<S> <C> <C> <C> <C>
and agency obligations $ 5,420 $64 $107 $ 5,377
Mortgage-backed securities 31 - - 31
- -------------------------------------------------------------------------------------
5,451 64 107 5,408
- -------------------------------------------------------------------------------------
Available for Sale
United States government
and agency obligations 1,400 9 - 1,409
Marketable equity securities 3,684 - 24 3,660
- -------------------------------------------------------------------------------------
5,084 9 24 5,069
- -------------------------------------------------------------------------------------
$10,535 $73 $131 $10,477
=====================================================================================
</TABLE>
Proceeds from the sale of securities available for sale during the years ended
September 30, 1996 and 1995 were $802,000 and $394,000, respectively. A gain of
$2,000 was realized on the 1996 sale while a loss of $8,000 was realized on the
1995 sale.
31
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- -------------------------------------------------------------------------------
1. Securities (continued)
The amortized cost and estimated market value of debt securities, in thousands,
at September 30, 1996, by contractual maturity, were as follows:
<TABLE>
<CAPTION>
September 30, 1996
- --------------------------------------------------------------------------------------
Estimated
Amortized Market
Cost Value
- --------------------------------------------------------------------------------------
Held to Maturity
<S> <C> <C>
Due in one year or less $ - $ -
Due in one through five years 3,481 3,407
Due after five years 1,733 1,754
- --------------------------------------------------------------------------------------
5,214 5,161
Mortgage-backed securities 25 25
- --------------------------------------------------------------------------------------
5,239 5,186
- --------------------------------------------------------------------------------------
Available for Sale
Due in one year or less - -
Due in one through five years 1,400 1,391
Due after five years 500 469
- --------------------------------------------------------------------------------------
1,900 1,860
Mortgage-backed securities 490 457
- --------------------------------------------------------------------------------------
2,390 2,317
- --------------------------------------------------------------------------------------
$7,629 $7,503
======================================================================================
</TABLE>
Expected maturities can differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
32
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
2. Loans Receivable
Loans receivable, in thousands, are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans $ 91,386 $ 83,532
Construction loans 10,121 9,732
Home equity loans 2,636 1,800
Loans to depositors, secured by savings 551 799
Installment loans 5,169 4,183
Term notes 3,158 1,653
- ------------------------------------------------------------------------------------
113,021 101,699
Less
Undisbursed loans in process 3,199 2,994
Unearned discount resulting from add-on interest 15 60
Deferred loan fees and costs, net 284 336
Allowance for credit losses 650 640
- ------------------------------------------------------------------------------------
$108,873 $ 97,669
====================================================================================
</TABLE>
Activity in the allowance for credit losses, in thousands, is summarized as
follows:
<TABLE>
<CAPTION>
Year Ended September 30, 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $640 $636 $595
Provision charged to operations 22 20 51
Charge offs net of recoveries (12) (16) (10)
- ------------------------------------------------------------------------------------
Balance at end of year $650 $640 $636
====================================================================================
</TABLE>
33
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- -------------------------------------------------------------------------------
3. Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of those loans,
in thousands, are summarized as follows:
<TABLE>
<CAPTION>
Year Ended September 30, 1996 1995 1994
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Home Loan Mortgage Corporation (FHLMC) $1,472 $1,511 $1,387
Virginia Housing Development Authority (VHDA) 1,245 1,197 1,016
- ------------------------------------------------------------------------------------
$2,717 $2,708 $2,403
====================================================================================
</TABLE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing at September 30, 1996, 1995 and 1994 were approximately $18,000,
$24,000 and $17,000, respectively.
4. Property and Equipment
Property and equipment, in thousands, are summarized as follows:
September 30, 1996 1995
- ----------------------------------------------------------------------
Land $ 251 $ 251
Office buildings 1,190 1,161
Rental buildings 48 48
Furniture, fixtures and equipment 755 841
Automobile 16 16
Leasehold improvements 23 25
- ----------------------------------------------------------------------
2,283 2,342
Less accumulated depreciation 1,045 1,029
- ----------------------------------------------------------------------
$1,238 $1,313
======================================================================
34
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
5. Deposits
Deposits, in thousands, are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1996 1995
- -------------------------------------------------------------------------------------
Amount Percent Amount Percent
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NOW accounts $13,057 13.69% $10,967 12.18%
Money market accounts 4,579 4.80 5,630 6.25
Savings accounts 15,290 16.03 15,728 17.46
Time deposits 62,452 65.48 57,738 64.11
- -------------------------------------------------------------------------------------
$95,378 100.00% $90,063 100.00%
=====================================================================================
</TABLE>
The aggregate amount of certificates of deposit of $100,000 or more was
approximately $6,978,000 and $4,563,000 at September 30, 1996 and 1995,
respectively.
At September 30, 1996, the scheduled maturities of time deposits, in thousands,
are as follows:
Year ending September 30,
-------------------------
1997 $33,827
1998 21,669
1999 4,399
2000 1,944
2001 and thereafter 613
--------------------------------------------
$62,452
============================================
Interest expense on deposits, in thousands, is summarized as follows:
September 30, 1996 1995 1994
- -----------------------------------------------------------------------
NOW accounts $ 197 $ 185 $ 166
Money market account 160 182 177
Savings account 458 517 635
Time deposits 3,313 2,678 2,459
- -----------------------------------------------------------------------
$4,128 $3,562 $3,437
=======================================================================
35
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
6. Advances from Federal Home Loan Bank
Borrowings ("advances") from the Federal Home Loan Bank ("FHLB"), in thousands,
are scheduled to mature as follows:
September 30, 1996 1995
- ------------------------------------------------------------------
Within one year $12,000 $4,000
One to two years - 1,000
- ------------------------------------------------------------------
$12,000 $5,000
==================================================================
The weighted average interest rate on advances at September 30, 1996 and 1995
was 5.77% and $6.40%, respectively. These advances are collateralized by the
Company's investment in FHLB stock and qualifying real estate loans under a
blanket collateral agreement.
7. Fair value of Financial Instruments
The estimated fair values of the Company's financial instruments, in thousands,
as of September 30, 1996, are as follows:
Carrying Fair
Amount Value
- ---------------------------------------------------------------------
Financial assets
Cash and short-term investments $ 3,075 $ 3,075
Securities 11,435 11,382
Loans, net of allowance for loan losses 108,873 109,601
Financial liabilities
Deposits 95,378 95,388
Advances from Federal Home Loan Bank 12,000 12,000
Notional Fair
Amount Value
- ---------------------------------------------------------------------
Unrecognized financial instruments
Commitments to extend credit $4,187 $4,187
36
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- -------------------------------------------------------------------------------
7. Fair Value of Financial Instruments (continued)
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and short-term investments
For those short-term investments, the carrying amount is a reasonable estimate
of fair value.
Securities
Fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
Loan receivables
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
remaining maturities. This calculation ignores loan fees and certain factors
affecting the interest rates charged on various loans such as the borrower's
creditworthiness and compensating balances and dissimilar types of real estate
held as collateral.
Deposit liabilities
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the balance sheet date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank
For advances that mature within one year of the balance sheet date, carrying
value is considered a reasonable estimate of fair value.
The fair values of all other advances are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for similar
types of advances.
Commitments to extend credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the borrowers. For fixed-rate
loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. Because of the competitive
nature of the marketplace loan fees vary greatly with no fees charged in many
cases.
37
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- -------------------------------------------------------------------------------
8. BIF/SAIF Premium Disparity Assessment
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"),
the FDIC imposed a special assessment on SAIF members to capitalize the SAIF at
the designated reserve level of 1.25% as of September 30, 1996. Based on the
Company's deposits as of March 31, 1995, the date for measuring the amount of
the special assessment pursuant to the Act, the Company will pay of special
assessment of $555,000 on November 27, 1996 to capitalize the SAIF. The FDIC is
expected to lower the premium for deposit insurance to a level necessary to
maintain the SAIF at its required reserve level; however, the range of premiums
has not been determined.
9. Income Taxes
The provision for income taxes, in thousands, is summarized as follows:
Year Ended September 30, 1996 1995 1994
- ---------------------------------------------------------------------
Current
Federal $816 $656 $495
State 97 89 67
- ---------------------------------------------------------------------
913 745 562
Deferred tax expense (benefit) (159) 116 67
- ---------------------------------------------------------------------
Total provision for income taxes $754 $861 $629
=====================================================================
Differences between the statutory and effective tax rates are summarized as
follows:
Percent of Pretax Income
--------------------------
Year Ended September 30, 1996 1995 1994
- ----------------------------------------------------------------------------
Tax at statutory rate 34.0% 34.0% 34.0%
Increases (decreases) in taxes resulting from:
State income taxes, net of federal benefit 3.6 2.6 2.5
Other (.9) 1.5 (.6)
- ----------------------------------------------------------------------------
36.7% 38.1% 35.9%
============================================================================
38
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
9. Income Taxes (continued)
The components of the net deferred tax asset, in thousands, were as follows:
September 30, 1996 1995
- ---------------------------------------------------------------------------
Deferred tax asset
Bad debts $ 81 $141
Loan fees 66 117
Pension expense - 15
Unrealized loss on securities, available for sale 61 5
BIF/SAIF assessment 211 -
Other 21 -
- ---------------------------------------------------------------------------
Total deferred tax asset 440 278
- ---------------------------------------------------------------------------
Deferred tax liability
Accelerated depreciation (2) (64)
- ---------------------------------------------------------------------------
Net deferred tax asset $438 $214
===========================================================================
10. Restricted Retained Earnings
In accordance with the current regulations concerning conversion from a mutual
to a stock organization, the Savings Bank was required to establish a
liquidation account equal to its net worth as of the latest balance sheet
contained in the final offering circular. Such liquidation account is to be
maintained for the benefit of depositors, as of the eligibility record date
(September 30, 1993) who continue to maintain their deposits in the Savings Bank
after the conversion, in the event of a complete liquidation of the Savings
Bank. If, however, on any annual closing date of the Savings Bank subsequent to
September 30, 1993, the amount in any deposit account is less than the amount in
such deposit account on September 30, 1993, then the interest in the liquidation
account relating to such deposit account would be reduced by the amount of such
reduction, and such interest will cease to exist if such deposit account is
closed. The Savings Bank may not declare or pay a cash dividend or repurchase
any of its capital stock if the effect thereof would cause the net worth of the
Savings Bank to be reduced below either the amount required for the liquidation
account or the minimum regulatory capital requirements. At September 30, 1996,
the liquidation account, unadjusted for customer withdrawals, totaled
$6,144,000.
39
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
11. Retirement Plans and Employee Benefit Programs
The Savings Bank has a retirement plan under Internal Revenue Code Section
401(k) covering all full-time employees who have completed one or more years of
continuous service and have reached age 21. Each employee has an option to
voluntarily contribute to this plan up to 10% of their salary and the Savings
Bank will match $.50 for every $1 up to 4% of salary. During fiscal 1993, the
plan also provided for the Savings Bank to pay into the plan an amount equal to
10% of each employee's salary, subject to Department of Labor and income tax
limitations. Effective October 1, 1993, this 10% contribution was eliminated and
a new money purchase plan was adopted which provides for a fixed percentage
contribution for each employee's salary. This percentage was 5%, 5% and 10% for
the years ended September 30, 1996, 1995 and 1994, respectively. The total
expense for the plan was $54,000, $59,000 and $118,000 for the years ended
September 30, 1996, 1995 and 1994, respectively.
Employee Stock Ownership Plan
At the time of the stock conversion, the Savings Bank established an Employee
Stock Ownership Plan (ESOP) covering all full-time employees, over the age of
21, with at least one year of service. The ESOP borrowed funds from the Parent
Company to purchase a total of 80,000 shares of the Parent Company's Common
Stock, the loan being collateralized by the Common Stock. Contributions by the
Savings Bank, along with dividends received on unallocated shares, are used to
repay the loan with shares being released from the Parent Company's lien
proportional to the loan repayments. Annually on September 30, the released
shares are allocated to the participants in the same proportion that their wages
bear to the total compensation of all of the participants. The Company has
released and allocated 17,333 and 9,333 shares of Common Stock as of September
30, 1996 and 1995, respectively. The Company recognized $135,000 and $146,000 of
compensation cost for the years ended September 30, 1996 and 1995. The fair
value of unearned ESOP shares totaled $1,042,000 at September 30, 1996. There
were no commitments to repurchase ESOP shares.
Shares pledged as collateral are reported as a reduction of stockholders' equity
in the consolidated balance sheets. As shares are released from collateral, the
Company reports compensation expense equal to the current market price of the
shares, and the shares become outstanding for earnings per share computations.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings, and dividends on unallocated ESOP shares are recorded as a reduction
of debt.
40
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
11. Retirement Plans and Employee Benefit Programs (continued)
Recognition and Retention Plan
The Board of Directors approved the establishment of a Recognition and Retention
Plan ("RRP") on January 25, 1995. The plan states that the Trust, established
under the plan, shall not purchase more than 4% of the aggregate shares of
Common Stock issued by the Parent Company in the mutual-to-stock conversion of
the Savings Bank (50,255 shares). During 1996 and 1995, the Company purchased
27,650 and 22,600 shares, respectively, of the Company's Common Stock at an
average price of $17.50 and $15.50 per share, respectively, to be awarded to
directors, officers and employees in accordance with the provisions of the RRP.
The costs of the shares awarded under these plans are recorded as unearned
compensation, a contra equity account, and are recognized as an expense in
accordance with the vesting requirements under the various plans. For the years
ended September 30, 1996 and 1995, the amount included in compensation expense
was $72,000 and $122,000, respectively. The status of the shares in this plan is
summarized as follows:
Per Share Unawarded Awarded
Price Shares Shares
- -----------------------------------------------------------------------------
Total established by plan $ - 50,255 -
Granted 11.00 (41,058) 41,058
Vested - - -
- -----------------------------------------------------------------------------
Balance at September 30, 1995 11.00 9,197 41,058
Granted 16.75 (2,600) 2,600
Vested 11.00 - 16.75 - (11,277)
- -----------------------------------------------------------------------------
Balance at September 30, 1996 $11.00 - 16.75 6,597 32,381
=============================================================================
41
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
11. Retirement Plans and Employee Benefit Programs (continued)
Stock Option Plans
The Company established two stock option plans during 1995, as part of the stock
conversion, for directors, officers and employees. The exercise price under both
plans is the fair market price on the date of the grant. One is a non-incentive
stock option plan and the other is an incentive stock option plan. Rights to
exercise options granted vest at the rate of 20% per year, beginning on the
first anniversary of the grant. A summary of the stock option activity is as
follows:
<TABLE>
<CAPTION>
Option Available Options Vested and
Price for Grant Outstanding Exercisable
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At inception $ - 125,637 - -
Granted 11.00 (102,640) 102,640 -
Vested - - - -
- -----------------------------------------------------------------------------------------
Balance at September 30, 1995 $ 11.00 22,997 102,640 -
- -----------------------------------------------------------------------------------------
Granted $ 16.75 (6,250) 6,250 -
Vested 11.00 - 16.75 - (28,185) 28,185
Exercised 11.00 - - (4,187)
- -----------------------------------------------------------------------------------------
Balance at September 30, 1996 $11.00 - 16.75 16,747 80,705 23,998
=========================================================================================
</TABLE>
12. Commitments and Contingencies
The Savings Bank is lessee under a five-year operating lease expiring August 18,
2001 for the land at its Moneta branch at an annual rental of $4,800 for five
years. The Savings Bank also leases ATM space in Moneta, under a five year lease
expiring in August 18, 2001 at an annual rental of $2,400.
42
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
12. Commitments and Contingencies (continued)
The current minimum annual rental commitments under non-cancelable operating
leases in effect at September 30, 1996 are as follows:
Year Ending September 30, Amount
-------------------------------------------
1997 $7,200
1998 7,200
1999 7,200
2000 7,200
Thereafter 6,600
-------------------------------------------
$35,400
===========================================
Rent expense was approximately $6,100, $4,400 and $3,600 for the years ended
September 30, 1996, 1995 and 1994, respectively.
The Savings Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments consist of commitments to extend credit. These
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the statements of financial position. The contract or
notional amounts of those instruments reflect the extent of involvement the
Savings Bank has in a particular class of financial instruments.
The Savings Bank's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount (in thousands) of those
instruments at September 30, 1996 and 1995. The Savings Bank uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
<TABLE>
<CAPTION>
September 30, 1996 1995
- ----------------------------------------------------------------------------------------------------
Financial instruments, in thousands, whose contract amounts represent credit risk
<S> <C> <C>
Unfunded commercial credit line $ 362 $ 274
Unfunded home equity lines of credit 2,027 1,443
Commitments to finance real estate acquisitions and construction 1,798 1,704
- ----------------------------------------------------------------------------------------------------
$4,187 $3,421
====================================================================================================
</TABLE>
43
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
12. Commitments and Contingencies (continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to be drawn
upon, the total commitment amounts generally represent future cash requirements.
The Savings Bank evaluates each customer's credit-worthiness on a case-by-case
basis. The amount of collateral, if deemed necessary by the Savings Bank upon
extension of credit, is based on management's credit evaluation of the credit
applicant. Collateral normally consists of real property.
13. Concentrations of Credit Risk
The Savings Bank grants residential, commercial, and installment loans to
customers in the Central Southwest region of Virginia, principally Bedford
County. The Savings Bank has a loan portfolio consisting principally of
residential mortgage loans, and is not dependent upon any particular economic
sector, although the portfolio as a whole may be affected by general economic
factors in its lending area.
14. Related Party Transactions
The Company has made loans in the ordinary course of business to various
officers and directors generally collateralized by the individual's personal
residences or by savings accounts in the Savings Bank. The aggregate balances of
such loans which exceed $60,000 in aggregate outstanding amount to any executive
officer or director, in thousands, is summarized as follows:
Year Ended September 30, 1996 1995 1994
- -----------------------------------------------------------------
Beginning balance $457 $410 $395
Additions 205 127 128
Repayments (21) (80) (113)
- -----------------------------------------------------------------
Ending balance $641 $457 $410
=================================================================
44
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
15. Regulatory Capital of the Savings Bank
The Office of Thrift Supervision's capital regulations require thrift
institutions to maintain capital at least sufficient to meet three requirements:
tangible capital, core capital, and risk-based capital. Management has
determined that the Savings Bank's capital meets and exceeds all three capital
requirements (in thousands) as follows as of September 30, 1996 and 1995, in
thousands. Tangible and core capital levels are shown as a percentage of
adjusted total assets, and risk-based capital levels are shown as a percentage
of risk-weighted assets.
<TABLE>
<CAPTION>
September 30, 1996
--------------------------------------------------------------------------
GAAP Tangible Core Risk-Based
Capital Capital Capital Capital
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GAAP capital before adjustments $15,815
Adjustments
Other 29
------
GAAP capital as adjusted $ 15,844 $ 15,844 $ 15,844 $ 15,844
======
General credit loss allowance -- -- 650
Land loans greater than 80% -- -- (77)
-------- ------- -------
Regulatory capital computed 15,844 12.4% 15,844 12.4% 16,417 23.1%
Minimum capital requirement 1,918 1.5 3,835 3.0 5,677 8.0
-------- ----- ------ ---- ------ ----
Regulatory capital excess $ 13,926 10.9 $ 12,009 9.4% $ 10,740 15.1%
======== ===== ====== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
September 30, 1995
-------------------------------------------------------------------
GAAP Tangible Core Risk-Based
Capital Capital Capital Capital
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GAAP capital before adjustments $13,648
Adjustments
Unpaid ESOP debt and
unrealized securities loss 1,065
------
GAAP capital as adjusted $14,713 $14,713 $14,713 $14,713
======
General credit loss allowance - - 640
Land loans greater than 80% - - (687)
------ ------ ------
Regulatory capital computed 14,713 12.8% 14,713 12.8% 14,666 23.7%
Minimum capital requirement 1,729 1.5 3,458 3.0 4,942 8.0
------ ---- ------ ---- ------ ----
Regulatory capital excess $12,984 11.3% $11,255 9.8% $ 9,724 15.7%
====== ==== ====== ==== ====== ====
</TABLE>
45
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
16. Condensed Parent Company Information
Condensed financial information is shown for the Parent Company as follows:
Balance Sheets
(in thousands)
Year Ended September 30, 1996 1995
- -----------------------------------------------------------------------
Assets
Cash and cash equivalents $ 149 $ 526
Securities 42 48
Investment in Savings Bank subsidiary 15,855 13,648
Loan to Savings Bank ESOP 627 707
Loan to Savings Bank subsidiary 3,000 4,000
Other assets 83 80
- -----------------------------------------------------------------------
Total assets $19,756 $ 19,009
=======================================================================
Liabilities and stockholders' equity
Accounts payable $ 8 $ 138
Dividends payable 126 186
Stockholders' equity 19,622 18,685
- -----------------------------------------------------------------------
Total liabilities and stockholders' equity $19,756 $ 19,009
=======================================================================
46
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- -------------------------------------------------------------------------------
16. Condensed Parent Company Information (continued)
Condensed Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
Year Ended September 30, 1996 1995 1994
- ----------------------------------------------------------------------------------------------
Income
<S> <C> <C> <C>
Interest from
Savings Bank's ESOP loan $ 44 $ 51 $ 8
Loan to Savings Bank subsidiary 292 416 23
Other 23 -- --
- ----------------------------------------------------------------------------------------------
Total income 359 467 31
- ----------------------------------------------------------------------------------------------
Expenses
Professional fees 44 66 --
Other operating expenses 40 33 --
- ----------------------------------------------------------------------------------------------
Total expenses 84 99 --
- ----------------------------------------------------------------------------------------------
Net income before income taxes and equity in
undistributed net income of Savings Bank subsidiary 275 368 31
Provision for income taxes 104 140 13
Equity in undistributed net income of Savings Bank subsidiary 1,131 1,173 1,427
- ----------------------------------------------------------------------------------------------
Net income $1,302 $1,401 $1,445
==============================================================================================
</TABLE>
47
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
16. Condensed Parent Company Information (continued)
Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended September 30, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------
Operating activities
<S> <C> <C> <C>
Net income $ 1,302 $ 1,401 $ 1,445
Adjustments
Equity in undistributed net income of Savings Bank subsidiary (1,131) (1,173) (1,427)
(Increase) decrease in other assets (3) 37 (41)
Increase (decrease) in other liabilities (130) 102 35
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 38 367 12
- --------------------------------------------------------------------------------------------------------------
Investing activities
Loans originated, net of principal repayments 1,080 1,093 (5,000)
Purchase of Savings Bank subsidiary stock -- -- (5,970)
Purchase of investment securities -- (48) --
- --------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by investing activities 1,080 1,045 (10,970)
- --------------------------------------------------------------------------------------------------------------
Financing activities
Proceeds from sale of stock -- -- 11,940
Purchase of stock, by ESOP -- -- (800)
Dividends paid (518) (183) --
Repurchase of stock (1,115) (885) --
RRP vesting (42) -- --
ESOP note payment 135 -- --
Exercise of option 45 -- --
- --------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by financing activities (1,495) (1,068) 11,140
- --------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (377) 344 182
Cash and cash equivalents, beginning of year 526 182 --
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 149 $ 526 $ 182
==============================================================================================================
</TABLE>
48
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
17. Selected Quarterly Financial Data (Unaudited)
Condensed quarterly consolidated financial data, in thousands (except per share
data), is shown as follows:
First Second Third Fourth
Year Ended September 30, 1996 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------
Total interest income $2,252 $2,283 $2,323 $2,406
Total interest expense 1,106 1,083 1,115 1,188
- -------------------------------------------------------------------------------
Net interest income 1,146 1,200 1,208 1,218
Provision for credit losses - - - 22
- -------------------------------------------------------------------------------
Net interest income after provision
for credit losses 1,146 1,200 1,208 1,196
Noninterest income 155 162 191 227
Noninterest expense 728 721 715 1,265
- -------------------------------------------------------------------------------
Income before income taxes 573 641 684 158
Provision for income taxes 218 243 260 33
- -------------------------------------------------------------------------------
Net income $ 355 $ 398 $ 424 $ 125
===============================================================================
Net income per share $ .32 $ .35 $ .38 $ .12
===============================================================================
Cash dividends declared per share $ .09 $ .09 $ .10 $ .11
===============================================================================
49
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- -------------------------------------------------------------------------------
17. Selected Quarterly Financial Data (Unaudited) (continued)
First Second Third Fourth
Year Ended September 30, 1995 Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------
Total interest income $1,885 $1,977 $2,105 $2,170
Total interest expense 832 884 984 1,078
- -----------------------------------------------------------------------------
Net interest income 1,053 1,093 1,121 1,092
Provision for credit losses - 7 8 5
- -----------------------------------------------------------------------------
Net interest income after provision
for credit losses 1,053 1,086 1,113 1,087
Other noninterest income 147 131 137 128
Noninterest expense 624 631 657 708
- -----------------------------------------------------------------------------
Income before income taxes 576 586 593 507
Provision for income taxes 219 223 233 186
- -----------------------------------------------------------------------------
Net income $ 357 $ 363 $ 360 $ 321
=============================================================================
Net income per share $ .30 $ .31 $ .31 $ .28
=============================================================================
Cash dividends declared per share $ - $ .15 $ - $ .15
=============================================================================
50
<PAGE>
OFFICE LOCATIONS
CORPORATE OFFICE
Bedford Bancshares, Inc. and Bedford Federal Savings Bank
125 W. Main Street
Bedford, VA 24523
(540) 586-2590
BRANCH OFFICES - BEDFORD FEDERAL SAVINGS BANK
Moneta Office Forest Office
Rt 655 at Rt 122 Forest Village Square
Moneta, VA 24121 Forest, VA 24551
(540) 297-1233 (804) 525-2000
Board of Directors of Bedford Bancshares, Inc. and Bedford Federal Savings Bank
Hugh H. Bond
Chairman of the Board
George N. Cooper William T. Powell
Harry W. Garrett, Jr. Macon C. Putney
Harold K. Neal W. Henry Walton, Jr.
William P. Pickett
Executive Officers of Bedford Bancshares, Inc. and Bedford Federal Savings Bank
Harold K. Neal James W. Smith
President and Chief Executive Officer Vice President, Treasurer and
Chief Financial Officer
Russell E. Millner Nancy T. Snyder
Vice President Secretary
____________________________________________
Corporate Counsel Independent Auditors
Garrett and Garrett B.D.O. Seidman LLP
116 East Main Street 300 Arboretum Place
Bedford, VA 24523 Suite 520
Richmond, VA 23236
Special Counsel Transfer Agent and Registrar
Malizia, Spidi, Sloane & Fisch, P.C. Registrar & Transfer Company
One Franklin Square 10 Commerce Drive
1301 K Street, N.W., Suite 700 East Cranford, NJ 07016
Washington, D.C. 20005 (908) 272-8511
__________________________________________
Bedford Bancshares, Inc.'s Annual Report for the year ended September 30, 1996,
filed with the Securities and Exchange Commission on Form 10-KSB without
exhibits is available without charge upon written request. For a copy of the
Form 10-KSB or any other investor information, please write or call Harold K.
Neal, Chief Executive Officer at the Company's Corporate Office in Bedford,
Virginia. The Annual Meeting of Stockholders will be held on January 22, 1997 at
2:00 p.m. at the Olde Liberty Station, 515 Bedford Avenue, Bedford, Virginia.
51
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EXHIBIT 23
Independent Auditor's Consent
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[Cherry,Bekaert & Holland Letterhead]
[Logo]
INDEPENDENT ACCOUNTANTS' CONSENT
Board of Directors
Bedford Bancshares, Inc.
125 West Main Street
Bedford, Virginia 24523
We consent to incorporation by reference in this Registration Statement on
Form S-8 related to the Bedford Bancshares, Inc. 1994 Stock Option Plan of our
report dated October 27, 1995 on the consolidated financial statements of
Bedford Bancshares, Inc. for the fiscal years ended September 30, 1995 and 1994,
included in the Form 10-KSB of Bedford Bancshares, Inc. for the fiscal year
ended September 30, 1996.
/s/Cherry, Bekaert & Holland, L.L.P.
Cherry, Bekaert & Holland, L.L.P.
Lynchburg, Virginia
December 27, 1996
Cherry, Bekaert & Holland, L.L.P.
1700 Central Fidelity Bank Building o 828 Main Street (24504) o
P.O. Box 1119 o Lynchburg, VA 24505 o (804) 847-6643 o Fax (804) 528-3605
Offices Throughout The Southeast o Represented Internationally Through Summit
International Associates, Inc.
<PAGE>
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 related to the Bedford Bancshares, Inc. 1994 Stock Option
Plan of our report dated October 29, 1996, relating to the consolidated
financial statements of Bedford Bancshares, Inc. appearing in the Company's
Annual Report on Form 10-KSB for the year ended September 30, 1996.
/s/BDO Seidman,LLP
BDO Seidman, LLP
Richmond, Virginia
December 30, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,852
<INT-BEARING-DEPOSITS> 223
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,196
<INVESTMENTS-CARRYING> 5,239
<INVESTMENTS-MARKET> 11,435
<LOANS> 108,873
<ALLOWANCE> 650
<TOTAL-ASSETS> 127,201
<DEPOSITS> 95,378
<SHORT-TERM> 12,000
<LIABILITIES-OTHER> 1,596
<LONG-TERM> 0
0
0
<COMMON> 114
<OTHER-SE> 18,113
<TOTAL-LIABILITIES-AND-EQUITY> 127,201
<INTEREST-LOAN> 8,380
<INTEREST-INVEST> 748
<INTEREST-OTHER> 136
<INTEREST-TOTAL> 9,264
<INTEREST-DEPOSIT> 4,128
<INTEREST-EXPENSE> 4,492
<INTEREST-INCOME-NET> 4,772
<LOAN-LOSSES> 22
<SECURITIES-GAINS> 30
<EXPENSE-OTHER> 3,429
<INCOME-PRETAX> 2,056
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,302
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.17
<YIELD-ACTUAL> 4.19
<LOANS-NON> 684
<LOANS-PAST> 1,418
<LOANS-TROUBLED> 684
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 640
<CHARGE-OFFS> 12
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 650
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 650
</TABLE>
Exhibit 99
Prior Accountant's Auditor's Report
<PAGE>
[Cherry,Bekaert & Holland Letterhead]
[Logo]
Report of Independent Auditors
The Board of Directors and Stockholders
Bedford Bancshares, Inc.
Bedford, Virginia
We have audited the accompanying consolidated statements of financial condition
of Bedford Bancshares, Inc. and Subsidiaries (the "Company") as of September 30,
1994 and 1995, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bedford Bancshares,
Inc. and Subsidiaries as of September 30, 1994 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 1995 in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 10 to the consolidated financial statements, the
Company changes its method of accounting for income taxes by adopting Statement
of Financial Accounting Standards No. 109, effective October 1, 1993. The
Company also changed its method of accounting for debt and equity securititites
by adopting Statement of Financial Accounting Standards No. 115, effective
October 1, 1994.
/s/Cherry, Bekaert & Holland, L.L.P.
Lynchburg, Virginia
October 27, 1995
