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 For the fiscal year ended September 30, 1997, OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to .
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Commission File Number: 0-24330
BEDFORD BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
Virginia 54-1709924
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(State or other jurisdiction of incorporation I.R.S. Employer
or organization) Identification No.
125 West Main Street, Bedford, Virginia 24523
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(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
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(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 $10,873,000.
As of December 10, 1997, there were issued and outstanding 1,142,425
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 10, 1997, was
$27,940,427.
Transition Small Business Disclosure Format (check one)
YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
September 30, 1997. (Parts I, II and IV)
2. Portions of Proxy Statement for the 1998 Annual Meeting of
stockholders. (Part III)
<PAGE>
PART I
Item 1. Business
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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
sometimes 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>
1997 1996
------------------------------ ---------------------------
Percent of Percent of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate:
Residential:
One- to four-family................ $ 84,727 70.79% $ 84,235 74.53%
Multi-family....................... 523 .44% 1,000 .88
Commercial........................... 3,836 3.20% 4,998 4.42
Construction......................... 8,433 7.05% 9,783 8.66
Land................................. 10,538 8.80% 4,127 3.65
Consumer and commercial business....... 11,630 9.72% 8,878 7.86
------ ------ ------- -----
Total loans...................... $119,687 100.00% $113,021 100.00%
-------- ------ -------- ------
Less:
Unearned discounts, premium,
deferred loan fees, net............ 287 299
Loans-in-process..................... 2,629 3,199
Allowance for credit losses.......... 678 650
------- --------
Total loans, net................... $116,093 $108,873
======= =======
</TABLE>
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<PAGE>
The following table sets forth the maturity of the Savings Bank's loan
portfolio at September 30, 1997. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totalled $26.5 million for the year ended September 30, 1997.
Adjustable-rate mortgage loans are shown as maturing based on contractual
maturities.
<TABLE>
<CAPTION>
At September 30, 1997
-------------------------------------------------------------------------------
Consumer
One- to and Total
Four- Multi- Commercial Commercial Loans
Family Family Real Estate Construction Land Business Receivable
------ ------ ----------- ------------ ------ -------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
One year or less .................... $ 16 $ -- $ 299 $ 6,477 $ 15 $ 1,496 $ 8,303
-------- -------- -------- -------- -------- -------- --------
After one year:
More than one year to three years . 137 -- 44 1,584 421 3,623 5,809
More than three years to five years 1,007 3 112 -- 2,145 3,670 6,937
More than five years to 10 years .. 6,553 295 537 204 6,677 1,945 16,211
More than 10 years to 20 years .... 24,447 225 2,844 168 1,280 896 29,860
More than 20 years ................ 52,567 -- -- -- -- -- 52,567
-------- -------- -------- -------- -------- -------- --------
Total due after one year ......... 84,711 523 3,537 1,956 10,523 10,134 111,384
-------- -------- -------- -------- -------- -------- --------
Total amounts due ................ 84,727 523 3,836 8,433 10,538 11,630 119,687
Less:
Loans-in-process .................... -- -- -- 2,629 -- -- 2,629
Unearned discounts, premiums and
deferred loan fees, net ............ 222 2 15 30 6 12 287
Allowance for credit losses ......... 379 1 50 50 40 158 678
-------- -------- -------- -------- -------- -------- --------
Loans, net ........................ $ 84,126 $ 520 $ 3,771 $ 5,724 $ 10,492 $ 11,460 $116,093
======== ======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1998, which have fixed interest rates and which have floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One- to four-family
(including construction)..... $14,494 $72,173 $86,667
Multi-family.................. 153 370 523
Commercial real estate........ 1,593 1,944 3,537
Land.......................... 3,394 7,129 10,523
Consumer and commercial
business....................... 5,977 4,157 10,134
----- ----- ------
Total.......................... $25,611 $85,773 $111,384
====== ====== =======
</TABLE>
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<PAGE>
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 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 two years, some have a fixed rate for three,
five or 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 with certain limitations on adjustments per period and over
the life of the loan. Most 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 $16.2 million and $19.0 million of
adjustable-rate, one- to four-family permanent and construction mortgage loans
during the fiscal years ended September 30, 1997 and 1996, respectively. The
Savings Bank's total one- to four-family ARM portfolio amounted to $74.0 million
of the Savings Bank's gross loans receivable at September 30, 1997.
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 according to the Federal Home Loan Mortgage Corporation
("FHLMC") 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 $1.5 million and $3.0 million in
permanent fixed-rate, one- to four-family mortgage loans during the years ended
September 30, 1997 and 1996, respectively. The Savings Bank sold $413,000 and
$152,000 of
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<PAGE>
the loans originated during the fiscal years ended September 30, 1997 and 1996,
respectively. In addition, the Savings Bank originated $0 and $167,000 in
fixed-rate one-to four-family mortgage loans for the Virginia Housing
Development Authority ("VHDA") in fiscal 1997 and 1996, respectively.
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, 1997, the
Savings Bank had $3.1 million in construction loans outstanding secured by
unsold properties, with $727,000 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, 1997, there was $2.6 million outstanding in construction loans to
owner/borrowers with $1.8 million outstanding loans-in-process allocated to
these projects. Construction loans originated on commercial and multi-family
properties amounted to $796,000 and $0 during fiscal 1997 and 1996,
respectively. The Savings Bank originated $9.4 million and $9.9 million in
construction loans on one- to four-family properties during fiscal years 1997
and 1996, 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,
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<PAGE>
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 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, 1997,
the largest commercial or multi-family real estate loan had a balance of
$667,000 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
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<PAGE>
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.
Consumer loans consist of automobile loans, savings account loans, home
equity, personal secured and unsecured loans and home improvement loans. As of
September 30, 1997, $1.6 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.
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<PAGE>
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.
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, 1997, the Savings Bank had $2.8 million of commitments to
originate mortgage loans, $4.1 million in unfunded home equity loans and
$100,000 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 $296,000
and $403,000 for the years ended September 30, 1997 and 1996, respectively. As
of September 30, 1997, loans serviced for others totalled $2.9 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.
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 $2.7 million as of September 30, 1997. See " --
Classified Assets."
The Savings Bank's largest loan to one borrower is comprised of four
loans to an operating dairy farm located in Bedford County. Two of the loans
were originated in October 1996 in the amounts of $305,000 and $300,000,
respectively and the third loan was orginated in April 1997, in the amount of
$90,000. These loans are secured by real estate, cattle and operating equipment.
The fourth loan was originated in July 1997 and represents an $18,000 line of
credit secured by real estate. All of the loans were performing at September 30,
1997, and are personally guaranteed by the individuals and are also 90%
guaranteed by the Farmers Home Administration.
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, 1997 and 1996, delinquencies in the Savings Bank's
loan portfolio were as follows:
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------------------------
1997 1996
--------------------------------------------- --------------------------------------------
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
------ -------- ----- -------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-
family................ 6 $318 5 421 9 $651 4 $510
Multi-family............. -- -- -- -- -- -- -- --
Commercial
real estate........... -- -- -- -- -- -- 1 54
Land..................... -- -- 1 49 -- -- -- --
Consumer and
commercial
business................ 5 53 8 48 8 83 6 120
-- -- -- -- --- ---- -- ----
Total................. 11 $371 14 518 17 $734 11 $684
-- --- == === == === == ===
Delinquent loans
to total net loans..... .32% .45% .67% .63%
</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, 1997, 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,(1)
-------------------
1997 1996
---- ----
(In thousands)
Loans 90 days or more delinquent........ $518 $684
Foreclosed real estate.................. 212 --
--- ----
Total non-performing assets......... $730 $ 684
=== ====
- -------------------
(1) A 100% reserve is established for interest on loans 90 days or more
delinquent. At September 30, 1997 and 1996, the balance of the reserve
for accrued interest on loans delinquent 90 days or more was $35,000
and $168,000, respectively. At September 30, 1997, the Savings Bank had
no loans accounted for on a nonaccrual basis which were less than 90
days past due.
-9-
<PAGE>
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. "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, 1997, the Savings Bank's problem assets were as
follows: $0 were designated special mention, $730,000 were classified as
substandard and $0 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. Foreclosed real estate
totalled $212,000 at September 30, 1997.
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.
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.
-10-
<PAGE>
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.
<TABLE>
<CAPTION>
At or For the Year Ended
September 30,
---------------------
1997 1996
---- ----
(Dollars in thousands)
<S> <C> <C>
Allowance for credit losses:
Balance at beginning of period.................... $650 $640
--- ---
Charge-offs:
One- to four-family............................ -- --
Multi-family................................... -- --
Commercial real estate......................... 58 --
Construction and land.......................... -- --
Consumer and commercial business............... 15 12
--- ---
Total charge-offs............................ 73 12
Recoveries...................................... 1 --
Provisions charged to income.................... 100 22
--- ---
Balance at end of period(1)....................... $678 $650
=== ===
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.......................................... .06% .01%
Ratio of allowance for losses to total
loans at the end of the period(2)............... .58% .60%
Ratio of allowance for losses to non-
performing assets at the end of the
period(2)....................................... 92.88% 95.03%
</TABLE>
- ------------------
(1) Includes reserves attributable to loans classified as "loss," which
totalled $-0- at September 30, 1997 and 1996.
(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.
-11-
<PAGE>
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------
1997 1996
-------------------------------- ---------------------------------
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.................... $379 55.9% $445 68.5%
Multi-family........................... 1 .1 1 .2
Commercial real estate................. 50 7.4 50 7.7
Construction........................... 50 7.4 40 6.1
Land................................... 40 5.9 25 3.8
Consumer and commercial
business.............................. 158 23.3 89 13.7
--- ----- --- -----
Total valuation allowances(1)(2)..... $678 100.0 $650 100.0%
=== ===== === =====
</TABLE>
- ------------------
(1) Includes reserves attributable to loans classified as "loss," which
totalled $-0- at September 30, 1997 and 1996.
(2) Includes $-0- of allowance for losses on foreclosed real estate at both
September 30, 1997 and 1996.
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, 1997, the Savings Bank had an
investment securities portfolio of approximately $14.6 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. 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, 1997, the Savings
Bank had $4.1 million or 28.1% 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. 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. 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.
-12-
<PAGE>
The Savings Bank sold $440,000 of mortgage-backed securities
(designated as available for sale) during fiscal 1997. It did not sell any
mortgage-backed securities during the year ended September 30, 1996.
As of September 30, 1997, mortgage-backed securities amounted to
$20,000 or 1.4% 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 available for sale and mortgage-backed securities at the
dates indicated:
<TABLE>
<CAPTION>
At September 30,
-------------------------------------
1997 1996
------------------ -----------------
Carrying Market Carrying Market
Value Value Value Value
----- ----- ----- -----
(In thousands)
<S> <C> <C> <C> <C>
Federal funds sold and other short-term investments $ 2,791 $ 2,791 $ 223 $ 223
Investment securities:
Held to maturity:
FHLB stock .................................... 932 932 932 932
U.S. Government and agency obligations ........ 4,596 4,581 5,214 5,161
------- ------- ------- -------
Total held to maturity ...................... 8,319 8,304 6,369 6,316
Available for sale:
U.S. Government and agency obligations ........ 5,006 5,006 1,860 1,860
Marketable equity securities .................. 4,238 4,238 3,879 3,879
------- ------- ------- -------
Total available for sale .................... 9,244 9,244 5,739 5,739
------- ------- ------- -------
Total ....................................... $17,563 $17,548 $12,108 $12,055
======= ======= ======= =======
Mortgage-backed securities:
Held to maturity ................................ $ 20 $ 20 $ 25 $ 25
Available for sale .............................. -- -- 457 457
------- ------- ------- -------
Total ....................................... $ 20 $ 20 $ 482 $ 482
======= ======= ======= =======
</TABLE>
-13-
<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, 1997.
<TABLE>
<CAPTION>
As of September 30, 1997
----------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment 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
------- ----- ------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal funds sold and
other short-term
investments............... $2,791 5.47% $ -- --% $ -- --% $ -- --% $2,791 5.47% $2,791
Held for investment:
Investment securities:
FHLB Stock.............. 932 7.19 -- --% -- --% -- --% 932 7.19% 932
U.S. government
federal agency
obligations........... 1,500 4.43 2,596 6.34% 500 7.25% -- --% 4,596 5.82% 4,581
----- ----- --- ---- ----- -----
Total investment
securities
held to maturity.......... $5,223 5.48 $2,596 6.34% $500 7.25% $ -- --% $8,319 5.86% $8,304
===== ===== === ==== ===== =====
Total mortgage-backed
securities held
to maturity............... $ -- -- $ 20 8.43% $ -- --% $ -- --% $ 20 8.43% $ 20
===== ===== === ==== ===== ======
Available for sale:
U.S. Government
and agencies ........... $ -- -- $4,506 6.56% $500 5.82% $ -- --% $5,006 6.49% $5,006
Marketable equity
securities.............. 4,238 6.05 -- --% -- --% -- --% 4,238 6.05% 4,238
----- ----- --- ---- ----- -----
Total investment
securities
available for sale........ $4,238 6.05 $4,506 6.56% $500 5.82% $ -- --% $9,244 6.24% $9,244
===== ===== === ==== ===== =====
Total mortgage-
backed securities
available for sale........ $ -- -- $ -- --% $ -- --% $ -- --% $ -- --% $ --
===== ===== === ==== ===== =====
</TABLE>
-14-
<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 $32.7 million, or 31.6% of
the Savings Bank's deposit portfolio at September 30, 1997. Certificates of
deposit constituted $70.9 million or 68.4% of the deposit portfolio, including
certificates of deposit, with principal amounts of $100,000 or more, which
constituted $8.7 million or 8.7% of the deposit portfolio at September 30, 1997.
The Savings Bank has no brokered deposits.
-15-
<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,
------------------------------------------------------------------------------------
1997 1996
--------------------------------------- ----------------------------------------
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.................... $ 4,603 4.67% 3.11% $5,011 5.39% 3.07%
Passbook and statement deposits.......... 14,675 14.88 3.04 15,400 16.57 2.97
NOW and other demand deposits............ 8,203 8.32 2.40 7,316 7.87 2.77
Noninterest bearing deposits............. 5,307 5.38 -- 5,131 5.52 --
------ ----- ------ -----
Total.............................. $32,788 33.25 2.39 32,858 35.35 2.48
------ ----- ------ -----
Certificate accounts:
Three months or less.................. 11,695 11.86 5.35 10,775 11.59 5.37
Over three through six months......... 9,440 9.57 5.13 8,437 9.08 5.34
Over six through 12 months............ 17,624 17.87 4.98 13,335 14.35 5.22
Over one to three years............... 18,165 18.42 5.53 25,083 26.99 5.46
Over three to five years.............. 8,910 9.03 5.90 2,463 2.64 6.34
------ ------ ------- ------
Total certificates................. 65,834 66.75% 5.34 60,093 64.65 5.41
------ ------ ------ -----
Total deposits..................... $98,622 100.00% $92,951 100.00%
====== ====== ====== ======
</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, 1997.
<TABLE>
<CAPTION>
At September 30, Period to Maturity from September 30, 1997
------------------------- ------------------------------------------------------------
Over One
Within To Three Over Three
1997 1996 One Year Years Years Total
---- ---- -------- ----- ----- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate Accounts:
3.00% or less............... $ -- $ -- $ -- $ -- $ -- --
3.01% to 4.00%.............. 3 75 3 -- -- 3
4.01% to 5.00%.............. 12,254 16,239 11,495 759 -- 12,254
5.01% to 6.00%.............. 52,564 36,025 28,370 15,672 8,522 52,564
6.01% to 7.00%.............. 5,434 9,486 3,899 1,147 388 5,434
7.01% to 8.00%.............. 605 627 -- 605 -- 605
Over 8.01%.................. -- -- -- -- -- --
------ -------- ------ ------ ----- ------
Total.................... $70,860 $62,452 $43,767 $18,183 $8,910 $70,860
====== ====== ====== ====== ===== ======
</TABLE>
-16-
<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, 1997.
Amount
------
Maturity Period (In thousands)
- ---------------
Within three months........................... $ 538
Three through six months...................... 1,161
Six through twelve months..................... 2,926
Over twelve months............................ 4,052
-----
Total..................................... $8,677
=====
Deposit Activity. The following table presents the deposit activity of
the Savings Bank for the periods indicated.
For the Year Ended
September 30,
-----------------------------
1997 1996
--------- --------
(Dollars in thousands)
Opening balance............................ $ 95,378 $90,063
Net deposits (withdrawals)................. 3,968 1,210
Interest credited on deposits.............. 4,266 4,105
-------- -------
Ending balance............................. $103,612 $95,378
======= ======
Total increase (decrease) deposits...... $ 8,234 $ 5,315
======== ======
Percentage increase (decrease)........... 8.63% 5.90%
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.
The following table sets forth certain information regarding the
Savings Bank borrowed funds at or for the years ended on the dates indicated:
-17-
<PAGE>
At or For the Year Ended
September 30,
---------------------------
1997 1996
-------- -------
(Dollars in thousands)
FHLB advances:
Average balance outstanding............... $12,249 $ 6,333
Maximum amount outstanding at any
month-end during the year........... 16,000 12,000
Balance outstanding at end of year........ 15,000 12,000
Weighted average interest rate
during the year..................... 6.07% 5.85%
Weighted average interest rate
at end of year...................... 6.01% 5.77%
Personnel
As of September 30, 1997, 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.
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
-18-
<PAGE>
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.
Because a significant portion of the assessments paid into the SAIF by
savings associations were used to pay the cost of prior thrift failures, the
reserves of the SAIF were below the level required by law. The BIF had, however,
met its required reserve level during the third calendar quarter of 1995. As a
result, deposit insurance premiums for deposits insured by the BIF were
substantially less than premiums for SAIF-insured deposits. Legislation to
capitalize the SAIF and to eliminate the significant premium disparity between
the BIF and the SAIF became effective September 30, 1996. The recapitalization
plan provided for a special assessment equal to $.657 per $100 of SAIF deposits
held at March 31, 1995, in order to increase SAIF reserves to the level required
by law. Certain BIF institutions holding SAIF-insured deposits were required to
pay a lower special assessment. Based on its deposits at March 31, 1995, on
November 27, 1996, the Savings Bank paid a pre-tax special assessment of
$555,000. Such payment was recorded as an expense and accounted for by the
Savings Bank as of September 30, 1996. Earnings and capital were, therefore,
negatively affected for the quarter ended September 30, 1996.
The recapitalization plan also provides that the cost of prior thrift
failures will be shared by both the SAIF and the BIF (Fico Bond payments), which
will increase BIF assessments for healthy banks to approximately $.013 per $100
of deposits in 1997. SAIF assessments for healthy savings institutions in 1997
will be approximately $.064 per $100 in deposits and may never be reduced below
the level set for healthy BIF institutions.
-19-
<PAGE>
The FDIC has lowered the rates on assessments paid to the SAIF and
widened the spread of those rates. The FDIC's action established a base
assessment schedule for the SAIF with rates ranging from 4 to 31 basis points,
and an adjusted assessment schedule that reduces these rates by 4 basis points.
As a result, the effective SAIF rates range from 0 to 27 basis points as of
October 1, 1996. In addition, the FDIC's final rule prescribed a special interim
schedule of rates ranging from 18 to 27 basis points for SAIF-member savings
institutions for the last quarter of calendar 1996, to reflect the assessments
paid to the Financing Corp. (Fico Bonds). Finally, the FDIC's action established
a procedure for making limited adjustments to the base assessment rates by
rulemaking without notice and comment, for both the SAIF and the BIF.
The recapitalization plan also provides for the merger of the SAIF and
BIF effective January 1, 1999, assuming there are no savings associations under
federal law. Under separate proposed legislation, Congress is considering the
elimination of the federal thrift charter and the separate federal regulation of
thrifts. As a result, the Savings Bank would have to convert to a different
financial institution charter and would be regulated under federal law as a
bank, including being subject to the more restrictive activity limitations
imposed on national banks. The Savings Bank cannot predict the impact of the
conversion of the Savings Bank to, or regulation of the Savings Bank as, a bank
until the legislation requiring such change is enacted.
Regulatory Capital Requirements. Set forth below is the Savings Bank's
regulatory capital requirements applicable to it as of September 30, 1997:
<TABLE>
<CAPTION>
Percent
of Adjusted
Amount Assets
------ ------
(Dollars in Thousands)
<S> <C> <C>
Tangible Capital:
Regulatory requirement................... $ 2,094 1.5%
Actual capital........................... 17,301 12.4%
------ ----
Excess................................. $15,207 10.9%
====== ====
Core Capital:
Regulatory requirement................... $ 4,187 3.0%
Actual capital........................... 17,301 12.4%
------ ----
Excess................................. $13,114 9.4%
====== ====
Risk-Based Capital:
Regulatory requirement(1)................ $ 6,296 8.0%
Actual capital........................... 17,887 22.7%
------ ----
Excess................................. $11,591 14.7%
====== ====
</TABLE>
- --------------------
(1) Based on risk-weighted assets of $78,694.
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
-20-
<PAGE>
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.
The following table sets forth the interest rate risk capital component
for the Savings Bank at September 30, 1997 given a hypothetical 200 basis point
rate change in market interest rates. See "-- Regulatory Capital Requirements."
As of September 30, 1997
------------------------
RISK MEASURES: (Dollars in thousands)
200 Basis Point Rate Shock
Pre-Shock NPV Ratio: NPV as %
of Present Value of Assets................. 15.13%
Exposure Measure: Post-Shock
NPV Ratio.................................. 13.87%
Sensitivity Measure: Change in NPV
Ratio...................................... -126bp
CALCULATION OF CAPITAL
COMPONENT:
Change in NPV as % of Present Value
of Assets.................................. 1.68%
Interest Rate Risk Capital Component......... $2,418
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
-21-
<PAGE>
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 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
-22-
<PAGE>
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, 1997, 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 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, 1997, the
Savings Bank was in compliance with its QTL requirement with 81.7% 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, 1997, 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
-23-
<PAGE>
company. As of September 30, 1997, the net book value of the Company's
investment in the Savings Bank amounted to $17.3 million.
The Savings Bank dissolved its one subsidiary, First Financial
Enterprises, Inc. ("FFE") during the first quarter of the year ended September
30, 1997.
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, 1997. The Savings Bank believes that the current facilities are adequate to
meet its present and immediately foreseeable needs.
<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 1997
- -------- --------- --------- ----------- -------------------
(In thousands)
<S> <C> <C> <C> <C>
125-133 W. Main Street Owned 12/70 - Main N/A $538
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 107
Owned
ATM
Route 122 Land
Moneta, VA 24121 Leased 7/95 8/01(1) N/A
Building
Owned 8/95 N/A 27
Forest Village Square including Owned 12/78 N/A 177
ATM
Forest, VA 24551
Longwood Avenue (ATM) Owned 1/85 N/A 26
Bedford, VA 24523
</TABLE>
- -----------
(1) Lease is renewable for one five-year term.
-24-
<PAGE>
At September 30, 1997, the Bank had a total investment in its land,
buildings and improvements, and fixtures, furniture and equipment of $2,418,000,
less accumulated depreciation of $1,204,000, or a net carrying value of
$1,214,000.
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.
(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, 1997 (the "Annual Report") is incorporated herein by
reference. The Annual Report is included as Exhibit 13 to this Form 10-KSB.
-25-
<PAGE>
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.
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 1998 Annual Meeting of Stockholders filed with
the Commission on December 19, 1997 (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 9-11 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 4-5 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 14 of the Proxy Statement.
-26-
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K
- ------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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, 1997
21 Subsidiaries of the Registrant (See Item 1 - Business -- Subsidiary Activity)
23 Independent Auditor's Consent
27 Financial Data Schedule **
</TABLE>
- ----------------
* 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.
-27-
<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 29, 1997 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.
<TABLE>
<CAPTION>
<S> <C> <C>
By:/s/Harold K. Neal By: /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 29, 1997 Date: December 29, 1997
By:/s/James W. Smith By: /s/George N. Cooper
--------------------------------------------------- ---------------------------------------
James W. Smith George N. Cooper
Vice President, Treasurer and Comptroller Director
(Principal Financial and Accounting Officer)
Date: December 29, 1997 Date: December 29, 1997
By:/s/Macon C. Putney By: /s/Harry W. Garrett, Jr.
--------------------------------------------------- ---------------------------------------
Macon C. Putney Harry W. Garrett, Jr.
Director Director
Date: December 29, 1997 Date: December 29, 1997
By:/s/W. Henry Walton, Jr. By: /s/William P. Pickett
--------------------------------------------------- ---------------------------------------
W. Henry Walton, Jr. William P. Pickett
Director Director
Date: December 29, 1997 Date: December 29, 1997
By:/s/William T. Powell
---------------------------------------------------
William T. Powell
Director
Date: December 29, 1997
</TABLE>
EXHIBIT 11
<PAGE>
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
September 30, September 30,
-------------------------------- ---------------------------------
1997 1996 1997 1996
------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net Income............................. $ 413,197 $125,000 $1,591,193 $1,302,000
Primary and Fully Diluted
Average Shares Outstanding Net of
Unallocated ESOP Shares (54,667)....... 1,083,379 1,079,715 1,082,216 1,112,697
Per Share Amount....................... $ .38 $.12 $ 1.47 $1.17
</TABLE>
Earnings per share of common stock for the three months and twelve
months ended September 30, 1997 and 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, 1997
<PAGE>
[LOGO] Bedford
Bancshares, Inc.
o YOUR HOMETOWN BANK OF CHOICE
o HIGH QUALITY EARNINGS
o SOLID DIVIDEND GROWTH
o STRONG COMMITMENT TO SHAREHOLDERS
1997 ANNUAL REPORT
<PAGE>
BEDFORD BANCSHARES, INC. - 1997 ANNUAL REPORT
- --------------------------------------------------------------------------------
Table of Contents
- -----------------
Corporate Profile and Stock Market Information............................ 2
Letters to Stockholders................................................... 3
Selected Financial and Other Data......................................... 4
Managemenet'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.......................................................... 53
1
<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 was organized as a Virginia corporation in March
1994 at the direction of the Savings Bank to acquire all of the
capital stock that Bedford Federal issued upon its conversion from the
mutual to stock form of ownership (the "Conversion") in connection
with a $12.6 million initial public offering completed on August 19,
1994. The Company is a unitary savings and loan holding company which,
under exisiting 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 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").
- --------------------------------------------------------------------------------
Stock Market Information
- ------------------------
The Company's common stock trades on the Nasdaq National Maket 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 published by the Nasdaq
National Market statisical 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 $0.15 --
June 1995 $16.25 $12.25 298,726 -- $0.15
September 1995 $18.75 $15.50 209,914 $0.15 --
December 1995 $18.75 $17.50 93,376 $0.09 $0.15
March 1996 $18.25 $16.75 120,970 $0.09 $0.09
June 1996 $17.75 $15.75 189,406 $0.10 $0.09
September 1996 $17.25 $16.50 85,591 $0.11 $0.10
December 1996 $18.50 $16.63 96,239 $0.12 $0.11
March 1997 $20.00 $17.50 81,784 $0.13 $0.12
June 1997 $24.75 $19.00 159,532 $0.14 $0.13
September 1997 $25.50 $23.50 93,290 $0.14 $0.14
</TABLE>
On September 30, 1997, there were approimately 685 shareholders of
record with approximately 51.3% of the 1,142,425 outstanding shares
held in nominee or "street" name through various brokerage firms.
There were six firms making a market in the Corporation's common stock
during the month of September 1997.
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:
For Bedford Bancshares, Inc., fiscal 1997 proved to be another year
of solid growth and enhanced performance. For the year, net income
amounted to $1.6 million, or $1.47 per share, generating a 1.19%
return on average assets. Our focus continues to be on strong
internal growth and the delivery of consistent, high-quality
earnings. The Company is committed to maintaining excellence in
quality products and services, and a credit culture that balances
opportunity for profits with prudent loan underwriting practices.
Our goal is to carry forward the long tradition of producing high
quality, steadily increasing earnings.
As a result of the increased profitability experienced in fiscal
1997, Bedford Bancshares, Inc. increased total dividends declared
during the year to $.53 per share, a 36% increase over dividends
declared in fiscal 1996. Since our conversion in Augsut of 1994,
dividends have have risen by almost 77% and grown at a compounded
rate of over 20% per year.
In addition to the very attractive dividend growth rates, the
closing price per share of Bedford Bancshares common stock on
September 30, 1997 was $24.50, a 145% rise from the initial offering
price of $10.00 per share. Stockholders who acquired the stock
during the initial offering at $10.00 per share have realized an
annualized total return (dividends plus stock appreciation) of
almost 37% per year. Bedford Bancshares consistently invests in its
future through a conservative strategic approach to market
expansion, improving service levels for our customers, and expanding
our product offerings. Perhaps most importantly, Bedford Bancshares
employees and directors own over 20% of the Company's common stock,
so our business conduct is parallel to the interests of all other
owners and is guided everyday by the goal of increasing shareholder
value.
Bedford Bancshares has grown with Bedford and the families we have
served since our founding in 1935. The Company is the only bank
headquartered in Bedford, the fastest growing county west of
Richmond. Bedford is home to most of our customers and shareholders.
Our 63 year history in Bedford has allowed us to know and serve the
people and needs of our communities extremely well. Our directors,
officers and employees take great pride in and are dedicated to
improving the quality of service to the families and businesses we
are fortunate to serve. And as we deliver on that commitment, our
stockholders can know that we do so with a continued focus on
maximizing the value of your investment.
Total assets of your company amounted to $139.1 million at September
30, 1997, an $11.9 million, or 9.3% increase over the previous
fiscal year end. Net loans receivable increased 6.6% to $116.1
million and deposits totaled $103.6 million at year end for an 8.6%
increase over year end 1996. Our continued progress is further
detailed in this report.
We owe our success to the loyalty and support of our customers and
stockholders, and the determination, commitment and pride of your
Board of Directors, management and staff. We look forward to
continued success as we serve the needs of our customers and
stockholders, and thank you for your business and support.
Sincerely,
/s/Harld K. Neal
Harold K. Neal
President and Chief Executive Officer
December 15, 1997
3
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Financial Condition (Dollars in Thousands)
September 30, 1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $139,089 $127,201 $115,054 $105,217 $96,933
Loans receivable, net 116,093 108,873 97,669 89,309 80,995
Investment securities 9,655 8,006 7,761 7,651 5,915
Marketable equity securities 4,185 3,879 3,660 3,360 3,289
Mortgage-backed securities 20 482 31 37 47
Foreclosed real estate, net 212 - - - 31
Deposits 103,612 95,378 90,063 84,841 89,187
FHLB advances 15,000 12,000 5,000 1,000 1,000
Retained earnings 9,763 8,739 8,263 7,519 6,144
Total stockholders' equity 19,621 18,227 18,685 18,659 -
Summary of Operations (Dollars in Thousands)
Year Ended September 30, 1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------------------------
Interest income $10,280 $9,264 $8,137 $6,964 $7,095
Interest expense 5,167 4,492 3,778 3,478 3,740
Net interest income 5,113 4,772 4,359 3,486 3,355
Provision for credit losses 100 22 20 51 234
Noninterest income 593 735 543 554 497
Noninterest expense 3,041 3,429 (3 2,620 2,238 2,089
Net income before income taxes and
cumulative effect of change in
accounting principle 2,565 2,056 2,262 1,751 1,529
Net income 1,591 1,302 1,401 1,445 925
Other Selected Data
Year Ended September 30, 1997 1996 1995 1994(1) 1993
--------------------------------------------------------------------------------------------------------
Return on average assets 1.19% 1.10% 1.28% 1.12% 0.97%
Return on average equity 8.40 6.98 7.31 12.89 16.25
Average equity to average assets 14.21 15.69 17.49 8.71 5.98
Net interest rate spread 3.27 3.34 3.26 3.28 3.39
Nonperforming assets to total assets 0.52 0.54 1.14 1.07 0.40
Nonperforming loans to total loans 0.45 0.63 1.34 1.26 0.44
Allowance for credit losses to total loans 0.58 0.60 0.63 0.71 0.73
Per Share Data
Year Ended September 30, 1997 1996 1995 1994(2) 1993
--------------------------------------------------------------------------------------------------------
Net income per share $ 1.47 $ 1.17 $ 1.20 $ 1.23 N/A
Book value per share 17.17 16.95 16.81 15.84 N/A
Cash dividends declared per share .53 .39 .30 - N/A
</TABLE>
-------------
(1) Income and related ratios exclude the cumulative effect of a
change in accounting principle of $323,000 in fiscal year 1994.
(2) Annualized
(3) Includes a one-time, special assessment of approximately $555,000
to recapitalize the "SAIF."
4
<PAGE>
[GRAPHICS OMITTED - INFORMATION AS FOLLOWS]
Total Assets
Dollars in Thousands
1993 $96,933
1994 $105,217
1995 $115,054
1996 $127,201
1997 $139,089
Year Ended September 30
Loan Portfolio Composition Deposit Portolio Composition
At September 30, 1997 At September 30, 1997
1-4 Family Residential 70.8% Certificates 68.4%
Land 8.8% Money Market 5.7%
Construction 7.1% Savings 14.4%
Consumer/Commercial Business 9.7% Checking 11.5%
Commercial & Multi-Family (Real Estate) 3.6%
Net Interest Income Net Income
(Dollars in Thousands) (Dollars in Thousands)
1993 $3,355 1993 $ 925
1994 $3,486 1994 $1,445
1995 $4,359 1995 $1,401
1996 $4,772 1996 $1,302
1997 $5,113 1997 $1,591
Year Ended September 30 Year Ended September 30
Return on Average Assets
1993 0.97%
1994 1.12%
1995 1.28%
1996 1.10%
1997 1.19%
Year Ended September 30
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Management Strategy
- -------------------
The Company's management strategy is to maintain a strong capital
position through controlled growth and enhanced profitability. This
has been accomplished 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 fixed-rate mortgage loans, commercial 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 rate 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,
but, from time to time, also borrows from the FHLB.
- --------------------------------------------------------------------------------
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
- ----------------------------------
The table that follows sets forth the amounts of interest earning
assets and interest bearing liabilities outstanding at September 30,
1997, 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, 1997
- ----------------------------------------------------------------------------------------------------------------------------
Three More than More than More than More than
months 3 Months to 6 Months to 1 Year to 3 Years to More than
or less 6 Months 1 Year 3 Years 5 Years 5 Years Total
------- -------- ------ ------- ------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans(1)(2) $ 6,339 $ 6,092 $ 66,168 $ 9,232 $ 3,831 $ 15,542 $107,204
Other loans(1) 5,116 666 1,347 3,506 1,848 -- 12,483
Marketable equity securities(3) 4,185 -- -- -- -- -- 4,185
Federal funds sold and other
short-term investments 2,791 -- -- -- -- -- 2,791
` Investment securities -- 500 1,000 4,600 2,517 1,038 9,655
Mortgage-backed securities(2) -- -- -- 20 -- -- 20
FHLB stock 932 -- -- -- -- -- 932
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets 19,363 7,258 68,515 17,358 8,196 16,580 137,270
-------- -------- -------- -------- -------- -------- --------
Less:
Loans in process 1,314 1,315 -- -- -- -- 2,629
Unearned discount and deferred fees(2) 26 20 167 38 36 -- 287
Allowance for credit losses 56 43 410 82 24 63 678
-------- -------- -------- -------- -------- -------- --------
Net interest-earning assets 17,967 5,880 67,938 17,238 8,136 16,517 133,676
-------- -------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Money market deposits 1,893 1,282 1,456 645 306 280 5,862
Passbook deposits 857 643 1,199 3,821 2,491 5,969 14,980
NOW and other demand deposits 917 817 1,376 2,847 762 1,687 8,406
Certificate accounts 11,511 -- 32,274 18,165 8,910 -- 70,860
Borrowed funds 3,000 1,000 2,000 9,000 -- -- 15,000
-------- -------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 18,178 3,742 38,305 34,478 12,469 7,936 115,108
-------- -------- -------- -------- -------- -------- --------
Interest sensitivity gap(4) ($ 211) $ 2,138 $ 29,633 $(17,240) $ (4,333) $ 8,581 $ 18,568
======== ======== ======== ======== ======== ======== ========
Cumulative interest sensitivity gap ($ 211) $ 1,927 $ 31,560 $ 14,320 $ 9,987 $ 18,568
======== ======== ======== ======== ======== ========
Cumulative interest sensitivity gap
as a percent of total assets (-0.15)% 1.39% 22.69% 10.30% 7.18% 13.35%
Cumulative net interest-bearing
assets as a percent of
interest-bearing liabilities 98.84% 108.79% 152.40% 115.12% 109.32% 116.13%
</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.
(4) Interest sensitivity gap represents the difference between net
interest-earning assets and interest-bearing liabilities.
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,
---------------------------------------------------------------------------------
1997 1996
------------------------------------- --------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans(1) $98,666 $7,816 7.92% $91,605 $7,408 8.09%
Other loans(1) 14,600 1,481 10.15 9,305 972 10.45
Interest-earning deposits(2) 3,966 217 5.47 3,718 225 6.05
Federal funds sold and other
short-term investments 1,231 119 9.69 1,050 93 8.86
Investment securities 7,643 549 7.18 7,112 479 6.74
Mortgage-backed securities, net 431 30 6.85 287 20 6.97
FHLB stock 932 68 7.19 932 67 7.19
--- -- --- --
Total interest-earning assets 127,469 10,280 8.07 114,009 9,264 8.13
------ -----
Noninterest-earning assets 5,667 4,807
----- -----
Total assets $133,136 $118,816
======== ========
Liabilities and equity:
Interest-bearing liabilities:
Money market deposits $4,603 143 3.11% $5,011 $154 3.07%
Passbook deposits 14,675 446 3.04 15,400 458 2.97
NOW and other demand deposits 8,203 196 2.40 7,316 203 2.77
Certificate accounts 65,834 3,517 5.34 60,093 3,313 5.51
------ ----- ------ -----
Total deposit accounts 93,315 4,302 4.61 87,820 4,128 4.70
Borrowed funds 14,249 865 6.07 6,018 364 6.05
------ --- ----- ---
Total interest-bearing liabilities 107,564 5,167 4.80 93,838 4,492 4.79
----- -----
Noninterest-bearing liabilities 6,610 6,336
Equity 18,962 18,642
------ ------
Total liabilities and equity $133,136 $118,816
======== ========
Net interest income $5,113 $4,772
====== ======
Interest rate spread(3) 3.27% 3.34%
Net interest margin(4) 4.02% 4.19%
Interest-earning asset to
interest-bearing liabilities 118.51% 121.50%
</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 asets 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 new 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,
---------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
-------------------------------- --------------------------------
Volume Rate Net Volume Rate Net
-------------------------------- --------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $567 ($159) $408 $432 $344 $776
Other loans 545 (36) 509 195 41 236
Interest-earning deposits 15 (23) (8) 15 (1) 14
Federal funds sold and other short-term
investments 16 10 26 9 26 35
Investment securities, net 36 34 70 24 25 49
Mortgage-backed securities, net 10 - 10 18 (1) 17
FHLB stock 1 - 1 - - -
- - - - - -
----- ----- ----- ---- --- -----
Total interest-earning assets 1,190 (174) 1,016 693 434 1,127
----- ----- ----- ---- --- -----
Interest-bearing liabilities:
Money market deposits (12) 1 (11) (29) 2 (27)
Passbook deposits (22) 10 (12) (49) (9) (58)
NOW and other demand deposits 22 (29) (7) 38 (3) 35
Certificate accounts 316 (112) 204 406 210 616
Borrowed funds 498 3 501 146 2 148
--- ---- --- --- --- ---
Total interest-bearing liabilities 802 (127) 675 512 202 714
--- ----- --- --- --- ---
Net change in net interest income $388 ($47) $341 $181 $232 $413
==== ===== ==== ==== ==== ====
</TABLE>
- --------------------------------------------------------------------------------
Comparison of Financial Condition for Fiscal Years Ended September 30, 1997 and
1996
- --------------------------------------------------------------------------------
The Corporation's total assets were $139.1 million at September 30,
1997, an increase of $11.9 million or 9.35%, from $127.2 million at
September 30, 1996. The asset growth was primarily due to a 6.63% rise
in net loans receivable and a 20.60% increase in investment securities
from the end of fiscal 1996.
The continuaton of new home construction within the markets Bedford
Federal serves combined with growth of both commercial and consumer
loans during fiscal 1997 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 $1,649,000, marketable equity securities rose
$306,000 , while mortgage-backed securities declined $433,000 in
fiscal 1997 compared to fiscal 1996.
Deposits totaled $103.6 million at September 30, 1997, an increase of
$8.2 million from $95.4 million on September 30, 1996. The increase
was partially attributable to the success of the Bank's "Freedom CD"
promtion (discussed later) combined with the healthy economic
environment in the areas served by Bedford Federal. Advances from the
FHLB increased $3 million as the Savings Bank utilized additional
borrowings to meet funding needs.
9
<PAGE>
Total stockholders' equity was $19.6 million on September 30, 1997, an
increase of $1.4 million from the $18.2 million one year previous.
This increase reflects the continued profitability of the Corporation
which allowed Bedford Bancshares to increase the level of dividends
declared from $.39 in fiscal 1996 to $.53 in 1997, a 35.9% increase.
Comparison of Operating Results for Years Ended September 30, 1997 and 1996
- --------------------------------------------------------------------------------
Net Income. Net income increased $289,000, to $1.6 million for fiscal
1997 from fiscal 1996. An increase in net income combined with a
reduction in noninterest expense, offset somewhat by a lower level of
noninterest income and an increase in the provision for loan losses,
accounted for the improvement in profitability. During the fourth
quarter of 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).
Interest Income. Interest income totaled $10.3 million for the fiscal
year ended September 30, 1997, a 11.0% increase from the $9.3 million
recorded for fiscal 1996. The $1.0 million expansion of interest
income is due to the 11.6% growth of average earning assets, primarily
loans, slightly offset by a 6 basis point decline in the rate earned
on average earning assets. The table on page 8 provides a detailed
analysis of the changes in interest income due to volume and rate.
Interest Expense. Interest expense increase $675,000 from $4.5 million
for the year ended September 30, 1996 to $5.2 million for the fiscal
year ended September 30, 1997. The level of average interest-bearing
liabilities rose 14.6% to $107.6 million for fiscal 1997 from $93.8
for fiscal 1996. There was virtually no change in the overall cost of
interest bearing liabilities in fiscal 1997 over fiscal 1996. The
table on page 8 provides a detailed analysis of the changes in
interest expense due to the changes in volume and rate.
Net Interest Income. Net interest income totaled $5.1 million for the
year ended September 30, 1997, up 7.1% from the $4.8 million realized
in fiscal 1996. The increase is primarily due to the growth of and
improvement in mix of earning assets. The growth of net interest
income was restrained somewhat by the increases in average certificate
accounts and borrowed funds. A detailed analysis of net interest
income is presented on pages 8 and 9 of this report.
Provisions for Credit Losses. Provisions for credit losses for the
year ended September 30, 1997 increased $78,000 to $100,000 compared
to the provisions recorded in fiscal 1996. The increase in fiscal 1997
was attributable to the loan growth of both commercial and consumer
loans. At September 30, 1997, the allowance for credit losses was
$678,000, representing .58% of loans receivable,net, and 92.81% 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 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, 1997, noninterest
income amounted to $593,000, down $142,000 from the $735,000 earned in
fiscal 1996. Service charges and fees on loans were down $107,000 due
to a moderation in the number and dollar volume of loan originations,
and a change in pricing. All other categories of noninterest income
reflceted a net decrease of $35,000 primarily due to a gain of $28,000
on the sale of foreclosed during fiscal 1996 compared to a gain of
$4,000 in fiscal 1997.
10
<PAGE>
Noninterest Expense. Noninterest expense totaled $3.0 million for the
year ended September 30, 1997 compared to $3.4 million for fiscal
1996. The decrease was primarily due to the imposition, during fiscal
1996, by the FDIC on SAIF members of the one-time assesment to
recapitalize the SAIF. In the fourth quarter of fiscal 1996, The Bank
recorded the charge of approximately $555,000. Compensation and
employee benefits were up $217,000 in fiscal 1997 compared to the
prior year due to staff increases, merit increases and higher benefits
costs. Increases in benefits costs were primarily due to benefit plans
which have expenses tied to the market price of the Company's common
stock. The Federal insurance of accounts decreased $119,000 from
fiscal 1996 to fiscal 1997 due to the special assessment discussed and
the ensuing reduction in the annual assessment rate. Advertising
expense increased 60.9%, or $53,000, in fiscal 1997over the prior year
due to large promotions for the introduction of the Bank's voice
response system , to increase equity line commitments and to market a
new certificate of deposit, the "Freedom CD," which helped raise funds
for the National D-Day Foundation. All three of these promtions proved
very successful.
A great deal of information has been disseminated about the global
computer year 2000. Many computer programs that can only distinguish
the final two digits of the year entered ( a common programming
practice in earlier years) are expected to read entries for the year
2000 as the year 1900 and compute payment, interest or delinquency
based on the wrong date or are expected to be unable to compute
payment, interest or delinquency. Rapid and accurate data processing
is essential to the operation of the Savings Bank. Data processing is
also essential to most other financial institutions and many other
companies. All of the material data processing of the Savings Bank
that could be affected by this problem is provided by a third party
service bureau. This service bureau has advised the Savings Bank that
it expects to resolve this potential problem before the year 2000.
However, if the service bureau is unable to resolve this potential
problem in time, the Savings Bank would likely experience significant
data processing delays, mistakes or failures. These delays, mistakes
or failures could have a significant adverse impact on the financial
condition and results of operations of the Savings Bank.
Income Taxes. The provision for income taxes increased $220,000 to
$974,000 in fiscal 1997 from $754,000 in fiscal 1996 due to the
increased 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, 1997, the
Savings Bank's liquidity, as measured for regulatory purposes, was
12.28% which was $8.4 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, 1997, cash and cash equivalents totaled $5.4 million.
11
<PAGE>
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, 1997, the Savings Bank had $15.0
million in advances outstanding from the FHLB of Atlanta. Bedford
Federal anticipates that it will have sufficient funds available to
meet its current commitments. At September 30, 1997, the Savings Bank
had commitments to fund loans of $7.0 million and $2.6 million of
loans in process.
Certificates of deposit scheduled to mature within one year totaled
$43.8 million September 30, 1997. 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 a result no
adverse liquidity effects are expected.
Net cash provided by operating activities for fiscal 1997 totaled $1.4
million.
Net cash absorbed by investing activities for fiscal 1997 totaled
$10.0 million, a decrease from fiscal 1996 of $2.2 million. The
decrease was primarily attributable to a decrease in cash used for net
loan originations of $3.7 million, offset by cash used for net
purchase of investments of $1.5 million.
Net cash provided by financing activities for the year ended September
30, 1997 totaled $11.0 million. This is a result of a net increase in
deposits of $8.2 million, an increase in FHLB advances of $3.0 million
and dividends paid of $571,000. The increase in deposits and net
borrowings were used primarily to fund the increase in loan
originations and investment securities.
Liquidity may be adversely affected by unexpected deposit outflows,
excessive interest rates paid by competitors, adverse publicity
relating to the savings and loan industry, and similar matters.
Management monitors projected liquidity needs and determines the level
desirable, based in part on the Savings Bank's commitment to make
loans and management's assessment of the Savings Bank's ability to
generate funds. The Savings Bank is also subject to federal
regulations that impose certain minimum capital requirements.
- --------------------------------------------------------------------------------
Impact of Inflation and Changing Prices
- ---------------------------------------
Unlike most industrial companies, substantially all assets of the
Corporation are monetary in nature. As a result, interest rates have a
greater impact on the Corporation's performance than do the effects of
general levels of inflation. Interest rates do not necessarily move in
the same direction or to the same extent as the price of goods and
services.
12
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Financial Statements
As of September 30, 1997 and 1996 and
For the Years Ended September 30, 1997, 1996 and 1995
Bedford Bancshaes, Inc. and Subsidiaries
13
<PAGE>
{LOGO] BDO Seidman 300 Arboretun 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 sheets of Bedford Bancshares, Inc. and
subsidiaries (the "Company") as of September 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years 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, were
audited by other auditors whose report dated October 27, 1995, expressed an
unqualified opinion on those statements.
We conducted our audits 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 audits provide a reasonable basis for our opinion.
In our opinion, the 1997 and 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, 1997
and 1996, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/BDO Seidman, LLP
October 29, 1997
14
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
==============================================================================================================================
September 30, 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash (including interest bearing deposits of
approximately $2,791 and $223) $ 5,446 $ 3,075
Securities (Notes 1 and 6)
Held-to-maturity 4,616 5,239
Available for sale 9,244 6,196
Investment in Federal Home Loan Bank stock,
at cost (Note 6) 932 932
Loans receivable, net (Notes 2, 6 and 14) 116,093 108,873
Foreclosed real estate, net 212 -
Property and equipment, net (Note 4) 1,214 1,238
Accrued interest receivable 847 662
Deferred income taxes (Note 9) 58 438
Other assets 427 548
- ------------------------------------------------------------------------------------------------------------------------------
$139,089 $127,201
==============================================================================================================================
</TABLE>
15
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
===================================================================================================================
September 30, 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 5) $103,612 $ 95,378
Advances from Federal Home Loan Bank (Note 6) 15,000 12,000
Advances from borrowers for taxes and insurance 502 539
Dividends payable 160 126
Other liabilities (Note 8) 194 931
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 119,468 108,974
- -------------------------------------------------------------------------------------------------------------------
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, 1,142,425 and 1,143,669 shares, issued and
outstanding 114 114
Additional paid-in capital 10,836 10,773
Retained earnings, substantially restricted (Note 10) 9,763 8,739
Unrealized gain (loss) on securities available for sale (Note 1) 22 (33)
Stock acquired by ESOP and RRP (Note 11) (1,114) (1,366)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 19,621 18,227
- -------------------------------------------------------------------------------------------------------------------
$139,089 $127,201
===================================================================================================================
</TABLE>
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)
<TABLE>
<CAPTION>
===================================================================================================================
Year Ended September 30, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans $ 9,297 $8,380 $7,368
U.S. government obligations, including agencies 796 748 708
Other investments 187 136 61
- -------------------------------------------------------------------------------------------------------------------
Total interest income 10,280 9,264 8,137
- -------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits (Note 5) 4,302 4,128 3,562
Borrowed money 865 364 216
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 5,167 4,492 3,778
- -------------------------------------------------------------------------------------------------------------------
Net interest income 5,113 4,772 4,359
Provision for loan losses (Note 2) 100 22 20
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 5,013 4,750 4,339
- -------------------------------------------------------------------------------------------------------------------
Noninterest income
Service charges and fees on loans 296 403 345
Other customer service fees and commissions 242 257 180
Gain (loss) on sale of loans, investments
and foreclosed real estate 16 30 (4)
Other 39 45 22
- -------------------------------------------------------------------------------------------------------------------
Total noninterest income 593 735 543
- -------------------------------------------------------------------------------------------------------------------
Noninterest expense
Compensation and employee benefits 1,684 1,467 1,380
Occupancy and equipment 318 336 259
Data processing 341 311 302
Federal insurance of accounts 88 207 197
Advertising 140 87 85
Professional fees 120 115 149
BIF/SAIF premium disparity assessment (Note 8) - 555 -
Other 350 351 248
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,041 3,429 2,620
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
17
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands)
(continued)
<TABLE>
<CAPTION>
=====================================================================================================================
Year Ended September 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $2,565 $2,056 $2,262
Provision for income taxes (Note 9) 974 754 861
- -------------------------------------------------------------------------------------------------------------------
Net income $1,591 $1,302 $1,401
- -------------------------------------------------------------------------------------------------------------------
Primary and fully diluted earnings
per common share $1.47 $ 1.17 $ 1.20
===================================================================================================================
</TABLE>
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, 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)
- -------------------------------------------------------------------------------------------------------------------
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>
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>
Net income $ - $ - $1,591 $ - $ - $ 1,591
Change in unrealized loss
on securities available
for sale (Note 1) - - - 55 - 55
Allocated/earned ESOP
shares (Note 11) - 147 49 - 80 276
Purchase of RRP shares
(Note 11) - (12) (11) - - (23)
Dividends declared ($.53
per share) - - (605) - - (605)
RRP vesting (Note 11) - (72) - - 172 100
- -------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 $114 $10,836 $9,763 $22 $(1,114) $19,621
===================================================================================================================
</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, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 1,591 $ 1,302 $1,401
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses 100 22 20
Provision for depreciation and amortization 159 163 120
(Increase) decrease in deferred income taxes 380 (121) 116
(Gain) loss on sale of loans and securities (11) (2) 4
(Gain) loss on sale of foreclosed real estate (4) (28) -
Loans originated for sale (185) (152) (184)
Proceeds from sale of loans originated for sale 185 153 188
(Increase) decrease in interest receivable (185) 51 (128)
(Increase) decrease in other assets 121 (295) (84)
Increase (decrease) in other liabilities (745) 356 331
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,406 1,449 1,784
- -------------------------------------------------------------------------------------------------------------------
Investing activities
Proceeds from maturities of investments 2,090 2,200 1,200
Proceeds from sales of investments 1,000 872 394
Principal collected on mortgage-backed securities 55 26 7
Purchases of investment securities (5,500) (4,035) (1,955)
Net increase in loans to customers (7,575) (11,311) (8,380)
Net proceeds from sales of foreclosed real estate 47 113 -
Purchases of premises, equipment and leasehold
improvements (131) (88) (298)
- -------------------------------------------------------------------------------------------------------------------
Net cash absorbed by investing activities (10,014) (12,223) (9,032)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
21
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(continued)
<TABLE>
<CAPTION>
===================================================================================================================
Year Ended September 30, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financing activities
Net increase in deposits $ 8,234 $ 5,315 $5,222
Net increase (decrease) in advance payments
from borrowers (37) (6) 72
Proceeds from advances 23,500 11,000 5,000
Principal payments of advances (20,500) (4,000) (1,000)
Purchase of stock by ESOP and RRP (23) (483) (349)
Allocation of ESOP and RRP shares 376 274 155
Repurchase of stock - (1,115) (885)
Dividends paid (571) (518) (183)
Issuance of common stock - 45 -
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 10,979 10,512 8,032
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 2,371 (262) 784
Cash and cash equivalents - beginning of year 3,075 3,337 2,553
===================================================================================================================
Cash and cash equivalents - end of year $ 5,446 $ 3,075 $3,337
===================================================================================================================
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------------------------------------------------------------------------
Cash payments of interest expense $5,387 $4,503 $3,777
===================================================================================================================
Cash payments of income taxes $823 $817 $718
===================================================================================================================
Transfer of loans to foreclosed real estate $255 $ - $ -
===================================================================================================================
</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. During the first quarter of fiscal year 1997, First Financial
Enterprises, Inc. was dissolved. The assets and liabilities of First Financial
were transferred to the 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 non-accrual 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 collectability 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 non-accrual 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 non-accrual 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, 1997, 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 ("FHLMC") 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.
Effective July 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 122 (SFAS 122), "Accounting for Mortgage Servicing Rights an
Amendment of FASB Statement No. 65." SFAS 122 requries 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 banks 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.
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the predominant risk characteristics of the underlying loans. The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value.
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
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities.
26
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Summary of Accounting Policies
(continued)
================================================================================
Income Taxes (continued)
For tax years beginning prior to January 1, 1996, savings banks that met certain
definitional tests and other conditions prescribed by the Internal Revenue Code
were allowed, within limitations, to deduct from taxable income an allowance for
bad debts using the "percentage of taxable income" method. The cumulative bad
debt reserve, upon which no taxes have been paid, was approximately $1,206,207
at September 30, 1997.
Section 1616 of the Small Business Job Protection Act of 1996 (the "Act")
repealed the percentage of taxable income method of computing bad debt reserves
and required the recapture into taxable income of "excess reserves," on a
ratable basis over the next six years. Excess reserves are defined in general,
as the excess of the balance of the tax bad debt reserve (using the percentage
of taxable income method) as of the close of the last tax year beginning before
January 1, 1996 over the balance of the reserve as of the close of the last tax
year beginning before January 1, 1988. The recapture of the reserves is deferred
if the Company meets the "residential loan requirement" exception, during either
or both of the first two years beginning after December 31, 1995. The
residential loan requirement is met, in general, if the principal amount of
residential loans made by the Company during the year is not less than the
Company's base "amount." The base amount is defined as the average of the
principal amounts of residential loans made during the six most recent tax years
beginning before January 1, 1996.
As a result of the Act, the Company must recapture into taxable income
approximately $421,440 ratably over the next six years, beginning with the year
ending September 30, 1997. If the residential loan requirement exception is met,
as discussed above, the income will be includable over the third through eighth
years following the year ended September 30, 1997.
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. The application of this pronouncement did not 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 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. The application of this pronouncement did not have a material
effect on the Company's financial statements.
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 was adopted by the Company prospectively beginning October
1, 1996. Disclosures required by SFAS No. 123 are presented in Note 11.
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. The application of this pronouncement did not
have a material effect on the financial statements of the Company.
In February 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share" (SFAS 128). SFAS 128 is effective for financial
statements, including interim periods issued for periods ending after December
15, 1997. SFAS 128 provides a different method for calculating earnings per
share than is currently used in accordance with APB 15, "Earnings per Share."
SFAS 128 provides for the calculation of basic and diluted earnings per share.
Basic earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in earnings of an entity, similar to
fully diluted earnings per share.
28
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Summary of Accounting Policies
(continued)
================================================================================
Accounting Pronouncements (continued)
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. SFAS 130 is effective for financial statements for periods beginning
after December 15, 1997 and requires comparative information for earlier years
to be restated. 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, 1997, 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. Shares acquired by the employee stock benefit plans
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, 1997, 1996 and 1995, including common stock equivalents, were
1,082,216, 1,112,697 and 1,165,381 respectively.
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.
29
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
1. Securities
A summary of the amortized cost and estimated market values of investment
securities, in thousands, is as follows:
<TABLE>
<CAPTION>
September 30, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
United States government
and agency obligations $ 4,596 $10 $25 $ 4,581
Mortgage-backed securities 20 - - 20
- ---------------------------------------------------------------------------------------------------------------------------
4,616 10 25 4,601
- ---------------------------------------------------------------------------------------------------------------------------
Available for Sale
United States government
and agency obligations 4,991 25 10 5,006
Marketable Equity securities 4,169 16 - 4,185
Other 53 - - 53
- ---------------------------------------------------------------------------------------------------------------------------
9,213 41 10 9,244
- ---------------------------------------------------------------------------------------------------------------------------
$13,829 $51 $35 $13,845
===========================================================================================================================
</TABLE>
Proceeds from the sale of securities available for sale during the years ended
September 30, 1997 and 1996 were $1,000,000 and $802,000 respectively. A net
gain of $4,000 was realized on the 1997 sale while a net gain of $2,000 was
realized on the 1996 sale, and a net loss of $8,000 was realized on the 1995
sale.
30
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
1. Securities (continued)
<TABLE>
<CAPTION>
September 30, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
United States government
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>
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, 1997, by contractual maturity, were as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Held to Maturity
Due in one year or less $1,500 $1,487
Due in one through five years 2,596 2,593
Due after five years 500 501
- ---------------------------------------------------------------------------------------------------------------------------
4,596 4,581
Mortgage-backed securities 20 20
- ---------------------------------------------------------------------------------------------------------------------------
4,616 4,601
- ---------------------------------------------------------------------------------------------------------------------------
Available for Sale
Due in one year or less - -
Due in one through five years 4,497 4,521
Due after five years 494 485
- ---------------------------------------------------------------------------------------------------------------------------
4,991 5,006
Other 53 53
- ---------------------------------------------------------------------------------------------------------------------------
5,044 5,059
- ---------------------------------------------------------------------------------------------------------------------------
$9,660 $9,660
===========================================================================================================================
</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, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans $ 93,791 $ 91,386
Construction loans 8,597 10,121
Home equity loans 3,972 2,636
Loans to depositors, secured by savings 581 551
Installment loans 9,041 5,169
Term notes 3,705 3,158
- ---------------------------------------------------------------------------------------------------------------------------
119,687 113,021
Less
Undisbursed loans in process 2,629 3,199
Unearned discount resulting from add-on interest 4 15
Deferred loan fees and costs, net 283 284
Allowance for credit losses 678 650
- ---------------------------------------------------------------------------------------------------------------------------
$116,093 $108,873
===========================================================================================================================
</TABLE>
Activity in the allowance for credit losses, in thousands, is summarized as
follows:
<TABLE>
<CAPTION>
Year Ended September 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $650 $640 $636
Provision charged to operations 100 22 20
Charge offs net of recoveries (72) (12) (16)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year $678 $650 $640
===========================================================================================================================
</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>
September 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Home Loan Mortgage Corporation (FHLMC) $1,719 $1,472 $1,511
Virginia Housing Development Authority (VHDA) 1,184 1,245 1,197
- ---------------------------------------------------------------------------------------------------------------------------
$2,903 $2,717 $2,708
===========================================================================================================================
</TABLE>
4. Property and Equipment
Property and equipment, in thousands, are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 251 $ 251
Office buildings 1,195 1,190
Rental buildings 48 48
Furniture, fixtures and equipment 886 755
Automobile 16 16
Leasehold improvements 22 23
- ---------------------------------------------------------------------------------------------------------------------------
2,418 2,283
Less accumulated depreciation 1,204 1,045
- ---------------------------------------------------------------------------------------------------------------------------
$1,214 $1,238
===========================================================================================================================
</TABLE>
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, 1997 1996
Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NOW accounts $ 11,910 11.49% $13,057 13.69%
Money market accounts 5,862 5.66 4,579 4.80
Savings accounts 14,980 14.46 15,290 16.03
Time deposits 70,860 68.39 62,452 65.48
- -----------------------------------------------------------------------------------------------------------
$103,612 100.00% $95,378 100.00%
===========================================================================================================
</TABLE>
The aggregate amount of certificates of deposit of $100,000 or more was
approximately $8,677,000 and $6,978,000 at September 30, 1997 and 1996,
respectively.
At September 30, 1997, the scheduled maturities of time deposits, in thousands,
are as follows:
Year ending September 30,
--------------------------------------------------------------
1998 $43,787
1999 14,318
2000 3,846
2001 8,502
2002 and thereafter 407
--------------------------------------------------------------
$70,860
==============================================================
Interest expense on deposits, in thousands, is summarized as follows:
<TABLE>
<CAPTION>
Year ended September 30, 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW accounts $ 194 $ 197 $185
Money market account 145 160 182
Savings account 445 458 517
Time deposits 3,518 3,313 2,678
- -------------------------------------------------------------------------------------------------------------------
$4,302 $4,128 $3,562
===================================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
September 30, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 6,000 $12,000
One to two years 1,000 -
Two years or more 8,000 -
- ---------------------------------------------------------------------------------------------------------------------------
$15,000 $12,000
===========================================================================================================================
</TABLE>
The weighted average interest rate on advances at September 30, 1997 and 1996
was 6.01% and 5.77%, respectively. These advances are collateralized by the
Company's investment in FHLB stock and qualifying real estate loans under a
blanket collateral agreement.
Information related to borrowing activity from the Federal Home Loan Bank is as
follows:
<TABLE>
<CAPTION>
Year Ended September 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum amount outstanding during the year $16,000 $12,000 $6,000
- ---------------------------------------------------------------------------------------------------------------------------
Average amount outstanding during the year 12,249 6,333 2,817
- ---------------------------------------------------------------------------------------------------------------------------
Average interest rate during the year 6.07% 5.85% 6.15%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
7. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments, in thousands,
are as follows:
<TABLE>
<CAPTION>
September 30, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term investments $ 5,446 $ 5,446 $ 3,075 $ 3,075
Securities 13,860 13,845 11,435 11,382
Loans, net of allowance for loan losses 116,093 117,402 108,873 109,601
Financial liabilities
Deposits 103,612 103,937 95,378 95,388
Advances from Federal Home Loan Bank 15,000 15,000 12,000 12,000
Notional Fair Notional Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
Unrecognized financial instruments
Commitments to extend credit $7,020 $7,020 $4,187 $4,187
</TABLE>
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 these 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.
37
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
7. Fair Value of Financial Instruments (continued)
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.
38
<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 paid a special
assessment of $555,000 on November 27, 1996 to capitalize the SAIF.
9. Income Taxes
The provision for income taxes, in thousands, is summarized as follows:
<TABLE>
<CAPTION>
Year Ended September 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $517 $816 $656
State 152 97 89
- ---------------------------------------------------------------------------------------------------------------------------
669 913 745
Deferred tax expense (benefit) 305 (159) 116
- ---------------------------------------------------------------------------------------------------------------------------
Total provision for income taxes $974 $754 $861
===========================================================================================================================
</TABLE>
Differences between the statutory and effective tax rates are summarized as
follows:
<TABLE>
<CAPTION>
Percent of Pre-tax Income
Year Ended September 30, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate 34.0% 34.0% 34.0%
Increases (decreases) in taxes resulting from:
State income taxes, net of federal benefit 4.5 3.6 2.6
Other (.5) (.9) 1.5
- ---------------------------------------------------------------------------------------------------------------------------
38.0% 36.7% 38.1%
==============================================================================================================================
</TABLE>
39
<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:
<TABLE>
<CAPTION>
September 30, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax asset
Bad debts $ 91 $ 81
Loan fees 5 66
Unrealized loss on securities, available for sale - 61
BIF/SAIF assessment - 211
Other - 21
- ---------------------------------------------------------------------------------------------------------------------------
Total deferred tax asset 96 440
Deferred tax liability
Accelerated depreciation (8) (2)
Unrealized gain on securities, available for sale (6) -
Other (24) -
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 58 $438
===========================================================================================================================
</TABLE>
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, 1997,
the liquidation account, unadjusted for customer withdrawals, totaled
$6,144,000.
40
<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% for the years
ended September 30, 1997, 1996 and 1995, respectively. The total expense for the
plan was $60,000, $54,000, and $59,000 for the years ended September 30, 1997,
1996 and 1995, 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 25,333 and 17,333 shares of Common Stock as of September
30, 1997 and 1996, respectively. The Company recognized $196,000 and $135,000 of
compensation cost for the years ended September 30, 1997 and 1996. The fair
value of unearned ESOP shares totaled $1,339,000 at September 30, 1997. 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.
41
<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 1997 and 1996, 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, 1997 and 1996, the amount included in compensation expense
was $87,000 and $72,000, respectively. The status of the shares in this plan is
summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Share Unawarded Awarded
Price Shares Shares
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at September 30, 1995 $11.00 9,197 41,058
Granted 16.75 (2,600) 2,600
Vested 11.34 - (11,277)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 16.75 6,597 32,381
Granted 18.75 (2,500) 2,500
Vested 11.30 - (9,668)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $24.50 4,097 25,213
===========================================================================================================================
</TABLE>
42
<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>
Weighted
Average
Exercise Available Options Vested and
Price for Grant Outstanding Exercisable
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1995 $11.00 22,997 102,640 -
Granted 16.75 (6,250) 6,250 -
Vested 11.00 - (28,185) 28,185
Exercised 16.75 - - (4,187)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 11.33 16,747 80,705 23,998
- ---------------------------------------------------------------------------------------------------------------------------
Granted 18.75 (6,250) 6,250 -
Vested 11.30 - (24,171) 24,171
- ---------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $11.73 10,497 62,784 48,169
===========================================================================================================================
</TABLE>
The remaining contractual lives of the options granted in 1997, 1996 and 1995
are 7.3 years, 8.3 years and 9.3 years, respectively at September 30, 1997. The
weighted average remaining contractual life of total options is 7.5 years at
September 30, 1997.
43
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
11. Retirement Plans and Employee Benefit Programs (continued)
The Company applies APB Opinion 25 and related interpretations in accounting for
its plan. Accordingly, no compensation cost has been recognized. Had
compensation cost for the Company's stock option plan been determined based on
the fair value at the grant date consistent with the methods of SFAS 123, the
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below. In accordance with the transition provision of
SFAS 123, the pro forma amounts reflect options with grant dates subsequent to
April 1, 1996.
<TABLE>
<CAPTION>
Year Ended March 31, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income
As reported $1,591 $1,302
Pro forma 1,310 1,020
Net income per share
As reported 1.47 1.17
Pro forma 1.21 .92
</TABLE>
For purposes of computing the pro forma amounts indicated above, the fair value
of each option on the date of grant is estimated using the Black-Scholes options
pricing model with the following assumptions for the grant in 1997: dividend
yield of 2%, expected volatility of 15%, risk-free interest rate of 8% and an
expected option life of 5 years.
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.
The current minimum annual rental commitments under non-cancelable operating
leases in effect at September 30, 1997 are as follows:
Year Ending September 30, Amount
-------------------------------------------------------------
1998 $ 7,200
1999 7,200
2000 7,200
2001 6,600
-------------------------------------------------------------
$28,200
=============================================================
44
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
12. Commitments and Contingencies (continued)
Rent expense was approximately $7,400, $6,100 and $4,400 for the years ended
September 30, 1997, 1996, and 1995 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, 1997 and 1996. 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, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments, in thousands, whose contract amounts represent credit risk
Unfunded commercial credit line $ 66 $ 362
Unfunded home equity lines of credit 4,071 2,027
Commitments to finance real estate acquisitions and construction 2,883 1,798
- ---------------------------------------------------------------------------------------------------------------------------
$7,020 $4,187
===========================================================================================================================
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to 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.
45
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
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. These loans are made on
substantially the same terms as those prevailing at the time for comparable
transactions with other borrowers. The aggregate balances of such loans which
exceed $60,000 in aggregate outstanding amount to any executive officer or
director, at September 30, 1997, 1996 and 1995 are approximately $819,000,
$641,000 and $457,000, respectively.
46
<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, 1997 and 1996, 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, 1997
--------------------------------------------------------------------------------
GAAP Tangible Core Risk-Based
Capital Capital Capital Capital
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
GAAP capital before adjustments $17,313
Adjustments
Other (12)
------
GAAP capital as adjusted $17,301 $17,301 $17,301 $17,301
=======
General credit loss allowance - - 678
Land loans greater than 80% - - (92)
-------- -------- -------
Regulatory capital computed 17,301 12.4 17,301 12.4 17,887 22.7
Minimum capital requirement 2,094 1.5 4,187 3.0 6,296 8.0
------ ---- ------ ---- ------ ----
Regulatory capital excess $15,207 10.9% $13,114 9.4% $11,591 14.7%
======= ==== ======= === ======= ====
</TABLE>
<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>
47
<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)
<TABLE>
<CAPTION>
September 30, 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 715 $ 149
Securities 114 42
Investment in Savings Bank subsidiary 17,300 15,855
Loan to Savings Bank subsidiary 2,000 3,000
Other assets 162 83
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $20,291 $19,129
===========================================================================================================================
Liabilities and stockholders' equity
Other liabilities $ 524 $ 747
Dividends payable 160 126
Stockholders' equity 19,607 18,256
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $20,291 $19,129
===========================================================================================================================
</TABLE>
48
<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, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Interest from
Savings Bank's ESOP loan $ 40 $ 44 $ 51
Loan to Savings Bank subsidiary 218 292 416
Other 41 23 -
- ---------------------------------------------------------------------------------------------------------------------------
Total income 299 359 467
- ---------------------------------------------------------------------------------------------------------------------------
Expenses
Professional fees 42 44 66
Other operating expenses 36 40 33
- ---------------------------------------------------------------------------------------------------------------------------
Total expenses 78 84 99
- ---------------------------------------------------------------------------------------------------------------------------
Net income before income taxes and equity in
undistributed net income of Savings Bank subsidiary 221 275 368
Provision for income taxes 84 104 140
Equity in undistributed net income of Savings Bank subsidiary 1,454 1,131 1,173
- ---------------------------------------------------------------------------------------------------------------------------
Net income $1,591 $1,302 $1,401
===========================================================================================================================
</TABLE>
49
<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, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $1,591 $1,302 $1,401
Adjustments
Equity in undistributed net income of Savings Bank subsidiary (1,454) (1,131) (1,173)
(Increase) decrease in other assets (79) (3) 37
Increase (decrease) in other liabilities 189 (130) 102
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 247 38 367
- ---------------------------------------------------------------------------------------------------------------------------
Investing activities
Loans originated, net of principal repayments 1,080 1,080 1,093
Purchase of Savings Bank subsidiary stock - - -
Purchase of investment securities (72) - (48)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 1,008 1,080 1,045
- ---------------------------------------------------------------------------------------------------------------------------
Financing activities
Proceeds from sale of stock - - -
Purchase of stock, by RRP (23) - -
Dividends paid (571) (518) (183)
Repurchase of stock - (1,115) (885)
RRP vesting (95) (42) -
ESOP note payment - 135 -
Exercise of option - 45 -
- ---------------------------------------------------------------------------------------------------------------------------
Net cash absorbed by financing activities (689) (1,495) (1,068)
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 566 (377) 344
Cash and cash equivalents, beginning of year 149 526 182
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 715 $ 149 $ 526
===========================================================================================================================
</TABLE>
50
<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:
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended September 30, 1997 Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $2,462 $2,539 $2,586 $2,693
Total interest expense 1,268 1,252 1,292 1,355
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 1,194 1,287 1,294 1,338
Provision for credit losses 25 25 25 25
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for credit losses 1,169 1,262 1,269 1,313
Noninterest income 155 145 154 139
Noninterest expense 749 740 766 786
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 575 667 657 666
Provision for income taxes 218 253 250 253
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 357 $ 414 $ 407 $ 413
===========================================================================================================================
Net income per share $.33 $.38 $.38 $.38
===========================================================================================================================
Cash dividends declared per share $.12 $.13 $.14 $.14
===========================================================================================================================
</TABLE>
51
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
17. Selected Quarterly Financial Data (Unaudited) (continued)
<TABLE>
<CAPTION>
First Second Third Fourth
Year Ended September 30, 1996 Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Other 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
===========================================================================================================================
</TABLE>
52
<PAGE>
OFFICE LOCATIONS
CORPORATE OFFICE
Bedford Bancshares, Inc. and Bedford Federal Savings Bank
125 W. Main Street
Bedford, VA 24523
(540) 586-2590
BRANCH OFFICE - 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 Vice President, Treasurer and
and Chief Executive Officer 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, Suite 520
Bedford, VA 24523 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, 1997,
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 28, 1998 at
2:00 p.m. at the Olde Liberty Station, 515 Bedford Avenue, Bedford, Virginia.
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EXHIBIT 23
Independent Auditor's Consent
<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, 1997, 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, 1997.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Richmond, Virginia
December 26, 1997
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