BEDFORD BANCSHARES INC, DEF 14A, 1997-12-19

BEDFORD BANCSHARES INC
DEF 14A, 1997-12-19
SAVINGS INSTITUTION, FEDERALLY CHARTERED

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SCHEDULE 14A
(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )

Filed by the registrant [X]
Filed by a party other than the registrant [ ]

Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material pursuant to ss. 240.14a-11(c) or ss. 240.14a-12

BEDFORD BANCSHARES, INC.
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(Name of Registrant as Specified in Its Charter)

BEDFORD BANCSHARES, INC.
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of filing fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.

(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------

(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. (set forth the amount on which the filing
fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------

(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.

(1) Amount previously paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>

BEDFORD BANCSHARES, INC.

December 19, 1997

Dear Fellow Stockholder:

On behalf of the Board of Directors and management of Bedford
Bancshares, Inc., I cordially invite you to attend the Annual Meeting of
Stockholders to be held at the Olde Liberty Station, 515 Bedford, Avenue,
Bedford, Virginia 24523 on January 28, 1998, at 2:00 p.m. The attached Notice of
Annual Meeting and Proxy Statement describe the formal business to be transacted
at the Meeting. During the Meeting, I will also report on the operations of the
Company. As noted in the Proxy Statement, Proposal III is a stockholder
proposal, which has not been adopted by the Board of Directors, and the Board
recommends that stockholders vote AGAINST Proposal III. Directors and officers
of the Company will be present to respond to any questions stockholders may
have.

Whether or not you plan to attend the Meeting, please sign and date the
enclosed Proxy Card and return it in the accompanying postage-paid return
envelope as promptly as possible. This will not prevent you from voting in
person at the Meeting, but will assure that your vote is counted if you are
unable to attend the Meeting. YOUR VOTE IS VERY IMPORTANT.

Sincerely,

Harold K. Neal
President

<PAGE>

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be Held on January 28, 1998
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NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the
"Meeting") of Bedford Bancshares, Inc. ("the Company"), will be held at the Olde
Liberty Station, 515 Bedford Avenue, Bedford, Virginia on January 28, 1998, at
2:00 p.m.

A Proxy Card and a Proxy Statement for the Meeting are enclosed.

The Meeting is for the purpose of considering and acting upon:

1. The election of three directors of the Company for terms of
three years.

2. The ratification of the appointment of B.D.O. Seidman, LLP
as independent auditors of Bedford Bancshares, Inc. for the
fiscal year ending September 30, 1998.

3. The consideration of a stockholder proposal recommending
that the Board of Directors take certain action.

4. The transaction of such other matters as may properly come
before the Meeting or any adjournments thereof. The Board of
Directors is not aware of any other business to come before
the Meeting.

Any action may be taken on the foregoing proposals at the Meeting on
the date specified above or on any date or dates to which, by original or later
adjournment, the Meeting may be adjourned. Stockholders of record at the close
of business on December 10, 1997, are the stockholders entitled to vote at the
Meeting and any adjournments thereof.

You are requested to complete and sign the enclosed Proxy Card which is
solicited by the Board of Directors and to return it promptly in the enclosed
envelope. The proxy will not be used if you attend and vote at the Meeting in
person.

BY ORDER OF THE BOARD OF DIRECTORS

Nancy T. Snyder
Corporate Secretary

Bedford, Virginia
December 19, 1997

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IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES IN ORDER TO INSURE A QUORUM AT THE MEETING. A
SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED
IF MAILED IN THE UNITED STATES.
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<PAGE>
- --------------------------------------------------------------------------------
PROXY STATEMENT
OF
BEDFORD BANCSHARES, INC.
125 W. MAIN STREET
BEDFORD, VIRGINIA 24523
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ANNUAL MEETING OF STOCKHOLDERS
January 28, 1998
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GENERAL
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This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Bedford Bancshares, Inc. (the "Company")
to be used at the Annual Meeting of Stockholders of the Company which will be
held at the Olde Liberty Station, 515 Bedford, Avenue, Bedford, Virginia on
January 28, 1998, at 2:00 p.m. local time. The accompanying Notice of Meeting
and this Proxy Statement are being first mailed to stockholders on or about
December 19, 1997. The Company is the parent company of Bedford Federal Savings
Bank (the "Savings Bank")

At the Meeting, stockholders will consider and vote upon (i) the
election of three directors; and (ii) the ratification of the appointment of
B.D.O. Seidman, LLP as independent auditors of the Company for the fiscal year
ending September 30, 1998; and (iii) a stockholder proposal. The Board of
Directors knows of no additional matters that will be presented for
consideration at the Meeting. Execution of a proxy, however, confers on the
designated proxy holder discretionary authority to vote the shares represented
by such proxy in accordance with their best judgment on such other business, if
any, that may properly come before the Meeting or any adjournment thereof.

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REVOCABILITY OF PROXIES
- --------------------------------------------------------------------------------

Stockholders who execute proxies retain the right to revoke them at any
time. Unless so revoked, the shares represented by such proxies will be voted at
the Meeting and all adjournments thereof. Proxies may be revoked by written
notice to the Secretary of the Company at the address above or by the filing of
a later dated proxy prior to a vote being taken on a particular proposal at the
Meeting. A proxy will not be voted if a stockholder attends the Meeting and
votes in person. Proxies solicited by the Board of Directors of the Company will
be voted in accordance with the directions given therein. Where no instructions
are indicated, signed proxies will be voted "FOR" the nominees for directors set
forth below, "FOR" the Ratification of B.D.O. Seidman, LLP as independent
auditors of the Company and "AGAINST" the enclosed stockholder proposal. The
proxy confers discretionary authority on the persons named therein to vote with
respect to the election of any person as a director where the nominee is unable
to serve, or for good cause will not serve, and matters incident to the conduct
of the Meeting.

-1-

<PAGE>

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VOTING SECURITIES AND CERTAIN PRINCIPAL HOLDERS THEREOF
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Stockholders of record as of the close of business on December 10, 1997
("Voting Record Date"), are entitled to one vote for each share of Common Stock
of the Company then held. As of the Voting Record Date, the Company had
1,142,425 shares of Common Stock issued and outstanding.

The Articles of Incorporation of the Company provide that in no event
shall any record owner of any outstanding Common Stock which is beneficially
owned, directly or indirectly, by a person who beneficially owns in excess of
10% of the then outstanding shares of Common Stock (the "Limit") be entitled or
permitted to any vote with respect to the shares held in excess of the Limit.
Beneficial ownership is determined pursuant to the definition in the Articles of
Incorporation and includes shares beneficially owned by such person or any of
his or her affiliates or associates (as defined in the Articles of
Incorporation), shares which such person or his or her affiliates or associates
have the right to acquire upon the exercise of conversion rights or options and
shares as to which such person and his or her affiliates or associates have or
share investment or voting power, but shall not include shares beneficially
owned by any employee stock ownership or similar plan of the issuer or any
subsidiary.

The presence in person or by proxy of at least a majority of the
outstanding shares of Common Stock entitled to vote (after subtracting any
shares held in excess of the Limit) is necessary to constitute a quorum at the
Meeting. With respect to any matter, any shares for which a broker indicates on
the proxy that it does not have discretionary authority as to such shares to
vote on such matter (the "Broker Non-Votes") will be considered present for
purposes of determining whether a quorum is present. In the event there are not
sufficient votes for a quorum or to act upon any proposals at the time of the
Meeting, the Meeting may be adjourned in order to permit the further
solicitation of proxies.

As to the election of directors (Proposal I), the proxy card being
provided by the Board enables a stockholder to vote for the election of the
nominees proposed by the Board, or to withhold authority to vote for one or more
of the nominees being proposed. Under the Company's Bylaws, directors are
elected by a plurality of votes cast, without respect to either (i) Broker
Non-Votes or (ii) proxies as to which authority to vote for one or more of the
nominees being proposed is withheld.

As to the ratification of independent auditors (Proposal II), the
Stockholder Proposal (Proposal III), and all other matters that may properly
come before the Meeting, by checking the appropriate box, a stockholder may: (i)
vote "FOR" the item, (ii) vote "AGAINST" the item, or (iii) "ABSTAIN" with
respect to the item. Under the Company's Articles of Incorporation and Bylaws,
unless otherwise required by law, all other matters (including Proposal III)
shall be determined by a majority of votes cast affirmatively or negatively
without regard to (a) Broker Non-Votes, or (b) proxies marked "ABSTAIN" as to
that matter. An affirmative vote of the holders of a majority of Common Stock
present at the Meeting, in person or by proxy, and entitled to vote, is required
to constitute stockholder approval.

Persons and groups owning in excess of 5% of the Company's Common Stock
are required to file certain reports regarding such ownership pursuant to the
1934 Act. The following table sets forth, as of Voting Record Date, certain
information as to the Common Stock beneficially owned by persons and groups in
excess of 5% of the Company's Common Stock and the ownership of all executive
officers and directors of the Company as a group. Management knows of no person
other than those set forth below who owns more than 5% of the Company's
outstanding shares of Common Stock at the Voting Record Date.

-2-

<PAGE>

Percent of Shares of
Amount and Nature of Common Stock
Name and Address of Beneficial Owner Beneficial Ownership Outstanding
- ------------------------------------ -------------------- -----------

<S> <C> <C>
Bedford Federal Savings Bank(1) 78,854 6.90%
Employee Stock Ownership Plan Trust ("ESOP")
125 W. Main Street
Bedford, Virginia
All Directors and Executive Officers as a Group 169,271 13.97%
(11 persons)(2)
</TABLE>

- ----------------------------------
(1) The ESOP purchased such shares for the exclusive benefit of plan
employee participants with funds borrowed from the Company. These
shares are held in a suspense account and are allocated among ESOP
participants annually on the basis of total gross compensation as the
ESOP debt is repaid. Directors Bond, Cooper, Garrett, Neal and Putney
and Nancy T. Snyder serve as the ESOP administrative committee ("ESOP
Committee") and Directors Bond, Cooper, Garrett and Putney serve as the
ESOP trustees ("ESOP Trustees"). The ESOP Committee or the Board
instructs the ESOP Trustees regarding investment of ESOP plan assets.
The ESOP Trustees must vote all shares allocated to participant
accounts under the ESOP as directed by participants. Unallocated shares
and shares for which no timely voting directive is received are voted
by the ESOP Trustees as directed by the ESOP Committee. As of December
10, 1997, 25,333 shares have been allocated under the ESOP to
participant accounts.
(2) Includes shares of Common Stock held directly as well as by spouses or
minor children, in trust and other indirect ownership, over which
shares the individuals effectively exercise sole or shared voting and
investment power, unless otherwise indicated. Includes options to
purchase an additional 69,163 shares held by executive officers and
directors granted under the 1994 Stock Option Plan which are
exercisable within 60 days of the Voting Record Date. See "Information
with Respect to Nominees for Director; Directors Whose Terms Continue;
and Executive Officers."

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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
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The Common Stock of the Company is registered pursuant to Section 12(g)
of the 1934 Act. The officers and directors of the Company and beneficial owners
of greater than 10% of the Company's Common Stock ("10% beneficial owners") are
required to file reports on Forms 3, 4 and 5 with the Securities and Exchange
Commission ("SEC") disclosing changes in beneficial ownership of the Common
Stock. Based on the Company's review of such ownership reports, except as set
forth below, no officer, director or 10% beneficial owner of the Company failed
to file such ownership reports on a timely basis for the fiscal year ended
September 30, 1997. Russell Millner, Vice President, was late in filing a Form 4
to report the sale of 4,720 shares of common stock on May 12, 1997. The Form 4
was filed on July 2, 1997

-3-

<PAGE>

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I - INFORMATION WITH RESPECT TO NOMINEES FOR DIRECTOR;
DIRECTORS WHOSE TERMS CONTINUE; AND EXECUTIVE OFFICERS
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Election of Directors

The Company's Articles of Incorporation require that directors be
divided into three classes, as nearly equal in number as possible, each class to
serve for a three year period, with approximately one-third of the directors
elected each year. The Board of Directors currently consists of eight members.
Three directors will be elected at the Meeting, to serve for a three-year term
or until his successor has been elected and qualified.

Hugh H. Bond, William T. Powell, and Macon C. Putney have been
nominated by the Board of Directors to serve as directors for three-year terms
to expire in 2001. Messrs. Bond, Powell, and Putney are currently members of the
Board. It is intended that the persons named in the proxies solicited by the
Board will vote for the election of the named nominees. If the nominees are
unable to serve, the shares represented by all valid proxies will be voted for
the election of such substitute as the Board of Directors may recommend or the
size of the Board may be reduced to eliminate the vacancy. At this time, the
Board knows of no reason why the nominees might be unavailable to serve.

The following table sets forth the nominees and the directors
continuing in office, their name, age, the year they first became a director of
the Company or the Savings Bank, the Company's wholly-owned subsidiary, the
expiration date of their current term as a director, and the number and
percentage of shares of the Company's Common Stock beneficially owned. Each
director of the Company is also a member of the Board of Directors of the
Savings Bank.
<TABLE>
<CAPTION>
Shares of
Year First Current Common Stock
Elected or Term to Beneficially Owned Percent
Name Age(1) Appointed(2) Expire (3)(4) of Class
- ---- ------ ------------ ------- -------- --------
<S> <C> <C> <C> <C> <C>
Board Nominee for Term to Expire in 2001

Hugh H. Bond 65 1963 1998 15,384(5)(6)(7) 1.35%

William T. Powell 66 1996 1998 200 0.02

Macon C. Putney 62 1977 1998 20,384(5)(6)(7) 1.78

THE BOARD OF DIRECTORS RECOMMENDS
THAT THE NOMINEES BE ELECTED AS DIRECTORS

Directors Continuing In Office

Harry W. Garrett, Jr. 61 1970 1999 18,312(5)(6)(7) 1.60

Harold K. Neal 60 1972 1999 45,170(5)(8) 3.95

George N. Cooper 69 1988 2000 20,384(5)(6)(7) 1.78

William P. Pickett 64 1986 2000 21,020(6)(7) 1.84

W. Henry Walton, Jr. 72 1955 2000 15,789(6)(7) 1.38
</TABLE>

(Footnotes on next page.)

-4-

<PAGE>

(Footnotes from previous page.)

(1) At September 30, 1997.
(2) Refers to the year the individual first became a director of the
Savings Bank. All directors of the Savings Bank (except for Mr. Powell)
became directors of the Company when it was incorporated in March 1994.
(3) Beneficial ownership as of the Voting Record Date.
(4) Pursuant to rules promulgated under the 1934 Act, a person or entity is
considered to beneficially own shares of Common Stock if he or she
directly or indirectly has or shares (1) voting power, which includes
the power to vote or to direct the voting of the shares; or (2)
investment power, which includes the power to dispose or direct the
disposition of the shares. Unless otherwise indicated, includes all
shares held directly by the named individuals as well as by spouses,
minor children in trust and other indirect ownership, over which shares
the named individual effectively exercises sole voting and investment
power.
(5) Excludes 78,854 shares of Common Stock (6.90% of the issued and
outstanding shares) held by the ESOP of the Savings Bank for which such
individuals serve as a member of the ESOP Committee or Trustee
Committee and exercise shared voting and investment power. Shares which
are unallocated to participating employees (presently 54,667 shares)
and shares for which no voting directions are received are voted by the
plan trustee. Once allocated to participant accounts, such Common Stock
will be voted by the plan trustee as directed by the plan participant
as the beneficial owner of such Common Stock. The plan trustee acts as
a fiduciary within the meaning of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"). The individuals serving as
plan trustee disclaim beneficial ownership of stock held under the ESOP
for which they serve as plan trustee.
(6) Includes 1,291 restricted shares granted to such individual pursuant to
the Savings Bank's Recognition and Retention Plan ("RRP") which remain
unvested and will continue to vest at a rate of one-fifth of the total
initially granted (2,153 shares) each year beginning January 25, 1996.
Each individual possesses sole voting power of such shares, however,
each recipient does not possess investment power until such shares
vest.
(7) Includes 3,231 shares which may be acquired pursuant to the exercise of
stock options which are exercisable within 60 days of the Voting Record
Date (thereby increasing the number of shares outstanding by an equal
amount).
(8) Includes 7,537 restricted shares granted to such individual pursuant to
the RRP which remain unvested and will continue to vest at a rate of
one-fifth of the total initially granted (12,563 shares) each year
beginning January 25, 1996. Such individual possesses sole voting power
of such shares, however, each recipient does not possess investment
power until such shares vest. Includes 18,846 shares which may be
acquired pursuant to the exercise of stock options which are
exercisable within 60 days of the Voting Record Date (thereby
increasing the number of shares outstanding by an equal amount).

Director Biographical Information

The principal occupation of each director and each nominee for director
of the Company for the last five years is set forth below.

Hugh H. Bond served as President of the Savings Bank from 1970 to 1996.
On October 16, 1996, Mr. Bond was appointed Chairman of the Board to fill the
vacancy created by the death of Mr. T. Glynn Bradley. Mr. Bond has been
associated with Scott and Bond, Inc., an independent insurance and real estate
firm for over forty years and served as the firm's President and CEO until
September 1994, at which time he sold his interest in the corporation. Mr. Bond
currently serves as an Associate Real Estate Broker with Scott & Bond, Inc. He
is a member of the Board of Directors of Piedmont Label Co., Inc.

-5-

<PAGE>

George N. Cooper retired as an insurance agent of State Farm Insurance
Companies in January 1994 after 38 years of service. Currently, Mr. Cooper is
President and owns 25% of Montvale Car Wash, Inc. Mr. Cooper, a Shriner and past
Master of the Bedford Masonic Lodge in Moneta, Virginia, is involved in many
community and civic activities. He is a former Chairman of the Bedford County
Industrial Development Authority and currently serves as Vice Chairman of the
Board of Directors of the Moneta Medical Center.

Harry W. Garrett, Jr. is an attorney with the law firm of Garrett &
Garrett. He was admitted to the Bar in 1961 at which time he began to practice
in Bedford, Virginia. He is currently a member and past President of the Bedford
County Bar Association and a member of the Virginia and American Bar
Associations, Virginia Trial Lawyers Association and American Board of Trial
Advocates. Mr. Garrett served as Commonwealth's Attorney for Bedford County from
1968-1979. He has been active in community and civic organizations and is a past
President of the Bedford Lions Club.

Harold K. Neal was first employed by the Savings Bank in 1971 as
Executive Vice President and Chief Executive Officer. Mr. Neal became President
on October 16, 1996. Prior to joining Bedford Federal, Mr. Neal was employed
with First Federal Savings Bank in Lynchburg, Virginia for 13 years. He is a
past Chairman of the Board of Governors of the Virginia League of Savings
Institutions and has served three terms on the Board of Directors and the
Executive Committee of the America's Community Bankers. He is currently serving
on the Board of Directors and Executive Committee of the Virginia Bankers
Association. Mr. Neal is active in various community and civic affairs. Past
directorships include the Bedford Area YMCA, which he helped organize, Bedford
Memorial Hospital, Bedford Centertown Association, Bedford Country Club and the
Lynchburg Home Builders Association. He currently serves on the Board of the
Bedford Chapter of the American Heart Association, and the Bedford Community
Health Foundation.

William P. Pickett has been the Executive Director of the Elks National
Home since 1985. He retired from Armco, Inc., Butler, Pennsylvania prior to
assuming his position with the Elks National Home. Mr. Pickett is a past
President of the Bedford Chapter of the American Red Cross and a past member of
the Boards of Directors of the Bedford Area Chamber of Commerce, Bedford Main
Street, Inc., the Library Advisory Council and was a member of the Governor's
Task Force regarding Homes for Adults Legislation. He currently serves on the
Board of Directors of the Bedford Life Saving Crew, the Advisory Committee of
the Bedford County School of Practical Nursing and is a member of the City
Industrial Development Authority.

William T. Powell, CPA, retired in 1997 as a CPA and a partner in the
Lynchburg office of Cherry, Bekaert & Holland, L.L.P., a regional firm of public
accountants and consultants, where he had worked principally with financial
institutions. He is a member of various state and national professional
associations, with five years service on the American Institute of CPA's
Committee on Savings and Loan Accounting and Auditing. He is a past president of
the Virginia society for CPA's Committee on Financial Institutions, the
Lynchburg Chapter of the Institute of Management Accountants, and the Lynchburg
Host Lions Club.

Macon C. Putney is an attorney and has been engaged in general practice
with the law firm of Putney & Putney since 1962. He is a member of the Bedford
County and Virginia State Bar Associations. Mr. Putney is active in the Bedford
Baptist Church and is a former member of the Zoning Appeals Board for the City
of Bedford.

-6-

<PAGE>

W. Henry Walton, Jr. is a realtor and real estate appraiser with the
firm of Scott & Bond, Inc. Prior to his real estate business, Mr. Walton
operated a general merchandise store and was an independent farmer. He is a
former member of the Bedford County Board of Supervisors, is a member and past
President of the Bedford Area Chamber of Commerce and currently serves as
Secretary- Treasurer of the Bedford County Industrial Development Corporation
and on the Board of the Bedford Chapter of the American Heart Association.

Meetings and Committees of the Board of Directors

The Board of Directors of the Company conducts its business through
meetings of the Board and through activities of its committees. All committees
act for both the Company and the Savings Bank. During the fiscal year ended
September 30, 1997, the Board of Directors held 12 regular meetings and four
special meetings. No director attended fewer than 75% of the total meetings of
the Board of Directors of the Savings Bank and committees on which such director
served during the fiscal year ended September 30, 1997.

The Audit Committee is comprised of Messrs. Bond, Cooper, Pickett, and
Putney. The Audit Committee annually selects the independent auditors and meets
with the accountants to discuss the annual audit. The Audit Committee is further
responsible for internal controls and financial reporting. The Committee met
once in fiscal 1997.

The Executive Committee consists of Messrs. Bond, Neal, Putney and
Walton. The Executive Committee meets on call. It offers guidance and sets
policy for the Savings Bank's management. When necessary, it performs functions
of the full Board during the intervals between meetings of the Board of
Directors. The Executive Committee met once in fiscal 1997.

The Strategic Planning Committee is comprised of Messrs. Bond, Neal,
Powell and Putney. The Committee was formed in October 1997 to review quarterly
the Company's progress in achieving pre-determined corporate goals and
objectives. In addition, the committee will meet as needed to review any
strategic planning issues, including, but not limited to, potential acquisition
or expansion activities, proposed mergers, and other strategic profit and/or
growth opportunities.

The Personnel Committee consists of Messrs. Bond, Garrett, Putney and
Cooper. The Personnel Committee meets annually to review and recommend salary
adjustments for the Bank's senior management. The Personnel Committee met once
in fiscal 1997.

The Company's Board of Directors act as a nominating committee for
selecting the nominees for election as directors in accordance with the
Company's Bylaws. In its deliberations, the Nominating Committee considers the
candidate's knowledge of the banking business and involvement in community,
business and civic affairs, and also considers whether the candidate would allow
the Board to continue its geographic diversity that provides for adequate
representation of each of its market areas. While the Board of Directors will
consider nominees recommended by stockholders, it has not actively solicited
recommendations from the Company's stockholders for nominees nor, subject to the
procedural requirements set forth in the Company's Bylaws, established any
procedures for this purpose. During fiscal year 1997, the Board of Directors met
once as the Nominating Committee.

-7-

<PAGE>

Stockholder Nominations

Article 7, Section D of the Company's Articles of Incorporation
provides that stockholders entitled to vote for the election of directors may
name nominees for election to the Board of Directors. Any such nominations must
be submitted to the Secretary of the Company in writing, in a form as set forth
in the Articles, not less than 14 days nor more than 60 days prior to the
anniversary date of the immediately preceding annual meeting; provided, however,
if fewer than 21 days notice of the meeting is given to stockholders, such
written notice shall be received no later than the close of the tenth day
following the day on which notice of the meeting was mailed. The Company is not
required to include such nominations in its Proxy Statement. However, if such a
nomination is properly made, ballots will be provided for use by stockholders at
the Meeting bearing the name of such nominee or nominees.

Directors' Compensation

The Company does not presently compensate its directors. However,
Chairman Bond is paid $800 per meeting of the Board of Directors of the Savings
Bank attended and all other directors are paid $600 per meeting attended.
Non-salaried committee members are paid $100 per meeting attended. Director fees
paid during fiscal 1997 by the Savings Bank totalled $79,700.

In addition, non-employee Directors of the Company received awards of
restricted stock under the RRP. Each such Director then in office received 2,153
shares of restricted Common Stock as of January 25, 1995, which shall be
non-forfeitable at the rate of 20% annually on and after January 25, 1996.
Further, each non-employee Director then in office received stock options to
purchase 5,384 shares of Common Stock at $11.00 per share. Such options were
first exercisable at the rate of 20% annually on and after January 25, 1996. See
"Management Remuneration and Other Information -- Executive Compensation," for
information regarding stock awards to the chief executive officer, who is also a
member of the Board of Directors.

Executive Officers

The following table sets forth information with respect to the
executive officers of the Company.

Name Age (1) Position
- ---- ------- --------

Harold K. Neal 60 President and Chief Executive Officer

Russell E. Millner 55 Vice President

James W. Smith 52 Vice President, Treasurer and Comptroller

Nancy T. Snyder 35 Corporate Secretary

- ---------------------
(1) At September 30, 1997.

Since the formation of the Company, none of its executive officers,
directors or other personnel received remuneration from the Company. Executive
officers receive compensation from the Savings Bank. See "-- Executive
Compensation." The principal occupation of each non-director executive officer

-8-

<PAGE>

of the Savings Bank is set forth below. All executive officers have held their
present positions for five years unless otherwise stated.

Russell E. Millner was first employed by the Savings Bank in 1977 as
Vice President. Prior to joining the Savings Bank, Mr. Millner was Vice
President of Liberty Bank of Bedford. His current responsibilities include
overseeing the Savings Bank's lending departments and branch operations.

James W. Smith was first employed by the Savings Bank in 1979 as
Comptroller. Prior to joining the Savings Bank, Mr. Smith was Regional
Accounting Manager for Macke Company and served as a staff accountant with two
regional CPA firms. He received his Public Accounting Certification in 1975. He
was elected Treasurer of Bedford Federal in 1987 and Vice President/Treasurer in
1992 and is currently the Savings Bank's Chief Financial Officer.

Nancy T. Snyder was employed by the Savings Bank in 1987 as Executive
Secretary, was promoted to Administrative Assistant in 1993 and named Corporate
Secretary effective January 1, 1995. Her current responsibilities include human
resources, investor relations and various other duties related to the Savings
Bank's administration. Ms. Snyder is a past President and current Treasurer of
the Bedford Junior Women's Club, past president of the local chapter of the
Institute for Financial Education, and is active in the Bedford Area Chamber of
Commerce.

- --------------------------------------------------------------------------------
MANAGEMENT REMUNERATION AND OTHER INFORMATION
- --------------------------------------------------------------------------------

Executive Compensation

Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by the Chief Executive Officer of the
Savings Bank for the years ended September 30, 1997, 1996 and 1995. No other
executive officer of the Savings Bank had a salary and bonus during such periods
that exceeded $100,000 for services rendered in all capacities to the Savings
Bank or the Company in the aggregate.
<TABLE>
<CAPTION>
Long Term Compensation
Annual Compensation Awards
-------------------------------------------------- -------------------------------

Securities
Restricted Underlying
Name and Other Annual Stock Options/ All Other
Principal Position Year Salary Bonus Compensation(1) Awards($)(2) SARs(#)(3) Compensation(4)(5)(6)
- ------------------- ------ ------ ----- --------------- ------------ ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Harold K. Neal
President and 1997 $ 107,200 $ 500 $ 9,600 $ -- $ -- $32,509
Chief Executive 1996 100,000 500 7,600 -- -- 23,843
Officer 1995 90,000 500 5,850 141,334 31,409 25,127
</TABLE>

(Footnotes on next page.)

-9-

<PAGE>
(Footnotes from previous page.)

- ------------------------
(1) Includes fees for service on the board of directors of the Savings Bank
and FFE. Except as otherwise disclosed, there were no (a) perquisites
over the lessor of $50,000 or 10% of the named executive officer's
total salary and bonus for the year; (b) payments of above market or
preferential earnings on deferred compensation; (c) payments of
earnings with respect to long term incentive plans prior to settlement
or maturation; (d) tax payment reimbursements; or (e) preferential
discounts on stock.
(2) 12,563 shares of Common Stock were awarded on January 25, 1995. The
closing market price of the Common Stock on the date of grant was
$11.25 per share. Awards are earned by participants at a rate of 20%
per year for five years (beginning January 25, 1996). Dividends
received by the RRP are paid to the participants. At September 30,
1997, 7,537 shares with a market value of $184,657 at such date (based
on the closing price of the Common Stock at September 30, 1997) remain
unvested.
(3) Effective January 25, 1994, options to purchase 31,409 shares of Common
Stock were granted under the 1994 Stock Option Plan and 18,846 of the
options are exercisable within 60 days of the Voting Record Date. Such
options by their term are exercisable at the rate of 20% per year
beginning on the anniversary date of the date that the option plan was
approved by stockholders (January 25, 1995).
(4) Represents employer contributions of $2,154, $2,010 and $1,810 to the
Savings Bank's 401(k) Savings Plan for fiscal years 1997, 1996, and
1995, respectively. See "--401(k) Savings Plan."
(5) Includes employer contributions to the Savings Bank's Money Purchase
Plan of $5,385, $5,025 and $4,525 in fiscal years 1997, 1996 and 1995,
respectively.
(6) Includes 1,003.80, 995, and 914 shares of Common Stock allocated to Mr.
Neal's account pursuant to the ESOP during fiscal 1997, 1996 and 1995,
respectively. Such allocated stock had a fair market value of $24,970,
$16,791 and $16,224 at September 30, 1997, 1996 and 1995, respectively.

Employment Agreement. The Savings Bank has entered into an employment
agreement with Harold K. Neal, President and Chief Executive Officer. The
employment agreement has a term of three years. Mr. Neal's base compensation
under the agreement for fiscal 1997 was $107,200 and is reviewed at least
annually by the Board of Directors. The agreement may be terminable by the
Savings Bank for "just cause" as defined in the agreement. If the Savings Bank
terminates Mr. Neal without just cause, Mr. Neal will be entitled to a
continuation of his salary from the date of termination through the remaining
term of the agreement. In the event of involuntary termination of employment in
connection with, or within one year after, any change in control of the Savings
Bank, Mr. Neal will be paid in a lump sum an amount equal to 2.99 times Mr.
Neal's salary. In the event of a change in control at September 30, 1997, Mr.
Neal would have been entitled to a lump sum payment of approximately $321,600.
The aggregate payments that would be made would be an expense to the Savings
Bank, thereby reducing net income and the Savings Bank's capital by that amount.
The agreements may be renewed annually by the Board of Directors upon a
determination of satisfactory performance within the Board's sole discretion.

Stock Option Plan. In connection with the Savings Bank's conversion
from mutual to stock form in August 1994 (the "Conversion") and acquisition of
the outstanding stock of the Savings Bank by the Company, (the
"Reorganization"), the Company's Board of Directors adopted the 1994 Stock
Option Plan (the "Option Plan"), which was ratified by stockholders of the
Company at the January 25, 1995, special meeting of stockholders. Pursuant to
the Option Plan, 125,637 shares of Common Stock are reserved for issuance upon
exercise of stock options granted or to be granted to officers, directors and
key employees of the Company from time to time. Options vest over a five year
period. The purpose of the Option Plan is to provide additional incentive to
certain officers, directors and key employees by facilitating their purchase of
a stock interest in the Company. The Option Plan, which became effective upon
the Reorganization, provides for a term of ten years, after which no awards may
be made, unless earlier terminated by the Board of Directors pursuant to the
Option Plan. Options become immediately

-10-

<PAGE>

vested in the event of death, disability or a "change-in-control" of the Company
or the Savings Bank. Options to purchase 6,250 shares of Common Stock were
granted in fiscal 1997.

The following table sets forth additional information concerning
options granted under the 1994 Stock Option Plan.
<TABLE>
<CAPTION>

Option/SAR Exercises and Fiscal Year End Value Table

Number of Securities
Underlying Value of Unexercised
Unexercised In-The-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($) (1)
------------- -----------------
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) (1) Unexercisable Unexercisable
- ---- --------------- ---------------------- ------------- -------------
<S> <C> <C> <C> <C>
Harold K. Neal 0 0 18,846/12,563 $461,727/$307,794

</TABLE>

- ------------------------------
(1) Based upon the closing price of the Common Stock as of September 30, 1997
of $24.50 per share.

Recognition and Retention Plan. The Savings Bank maintains a
recognition and retention plan (the "RRP") as a method of providing directors,
officers, and key employees of the Savings Bank with a proprietary interest in
the Company in a manner designed to encourage such persons to remain in the
employment or service with the Savings Bank. The RRP was ratified by
stockholders of the Company at the January 25, 1995 special meeting of
stockholders. The Savings Bank contributed sufficient funds to the RRP Trusts
which enabled the RRP Trusts to purchase Common Stock representing 4% of the
aggregate number of shares issued in the Conversion (i.e., 50,250 shares of
Common Stock). Awards under the RRPs vest over a five-year period and were made
in recognition of prior and expected future services to the Bank of its
directors and officers responsible for implementation of the policies adopted by
the Board of Directors, the profitable operation of the Savings Bank, and as a
means of providing a further retention incentive and direct link between
compensation and the profitability of the Savings Bank. Awards under the RRP
become immediately vested in the event of death, disability or a "change-in-
control" of the Company or the Savings Bank.

Long-Term Incentive Plans

The Corporation does not presently sponsor any long-term incentive
plans nor did it make any payouts to Harold K. Neal under such plans during the
fiscal year ended September 30, 1997.

Performance Graph

The Company completed its initial stock offering of the Common Stock at
a price of $10.00 per share on August 19, 1994. The closing price of the Common
Stock as reported on the Nasdaq National Market on September 30, 1997 was
$24.50.

The following graph compares the cumulative total shareholder return of
the Common Stock of the Company with that of (a) the total return index for
domestic companies listed on the Nasdaq Stock Market and (b) the total return
index for banks listed on the Nasdaq Stock Market. These total return indices of
the Nasdaq Stock Market are computed by the Center for Research in Securities
Prices

-11-

<PAGE>

("CRSP") at the University of Chicago. All three investment comparisons assume
the investment of $100 at the market close on August 19, 1994 and the
reinvestment of dividends when paid. The graph provides comparisons at the end
of the fiscal years of the Company.

There can be no assurance that the Company's stock performance will
continue with the same or similar trends depicted in the following graph. The
Company will not make or endorse any predictions as to future stock performance.

[GRAPHIC OMITTED]

- --------------------------------------------------------------------------------
8/19/94 9/30/94 9/30/95 9/30/96 9/30/97
- --------------------------------------------------------------------------------
CRSP Nasdaq U.S. Index $100.00 $102.91 $142.14 $168.67 $231.51
- --------------------------------------------------------------------------------
CRSP Nasdaq Bank Index 100.00 98.45 124.13 158.40 263.87
- --------------------------------------------------------------------------------
Bedford Bancshares,Inc. 100.00 120.00 180.00 175.00 260.73
- --------------------------------------------------------------------------------

-12-

<PAGE>

Other Benefits

Money Purchase Plan. The Savings Bank established a money purchase
plan, a form of tax-qualified retirement plan effective October 1, 1993. Such
plan initially provided a benefit allocation annually equal to 10% of a
participant's compensation. This annual allocation was reduced to 5% effective
October 1, 1994. Contributions are 100% vested following the completion of six
years of service, with new employees becoming vested at 20% per year beginning
the second year of service. Benefits are payable upon termination of employment,
retirement, death, disability or plan termination.

Total contributions to the Money Purchase Plan by the Savings Bank for
the fiscal year ended September 30, 1997 were $43,644.

401(k) Savings Plan. The Savings Bank sponsors a tax-qualified defined
contribution savings plan, ("401(k) Plan"), for the benefit of its employees.
Employees become eligible to participate under the Plan after age 21 and
completing one year of service. Under the 401(k) Plan, employees may voluntarily
elect to defer up to 10% of compensation, not to exceed applicable limits under
the Code (i.e., $10,200 in 1997). The first 4% of employee compensation shall be
matched by a Savings Bank contribution of $.50 for each $1.00 of employee
contribution. Such matching contributions shall be 100% vested following
completion of six years of service.

Total contributions to the 401(k) Plan by the Savings Bank for all
employees for the fiscal year ended September 30, 1997 were $16,436.

Employee Stock Ownership Plan. The Savings Bank has established an
employee stock ownership plan, the ESOP, for the exclusive benefit of
participating employees. Participating employees are employees who have
completed one year of service with the Savings Bank or its subsidiary and
attained age 21. On October 26, 1995, the Savings Bank submitted an application
to the Internal Revenue Service (the "IRS") for a letter of determination as to
the tax-qualified status of the ESOP. The Savings Bank subsequently received a
favorable letter of determination from the IRS concerning the tax-qualified
status of the ESOP.

The ESOP is funded by contributions made by the Savings Bank in cash or
Common Stock. Benefits may be paid either in shares of Common Stock or in cash.
The ESOP borrowed funds from the Company to acquire 80,000 shares of the Common
Stock issued in the Conversion, representing 6.37% of shares outstanding. This
loan is secured by the shares purchased and earnings of ESOP assets. The Company
financed the ESOP debt directly. Shares purchased with such loan proceeds will
be held in a suspense account for allocation among participants as the loan is
repaid. This loan is expected to be fully repaid in approximately 10 years. The
Savings Bank accrued $196,000 to the ESOP for the fiscal year ended September
30, 1997. Benefits under the ESOP are allocated pro rata based upon participant
compensation paid during a plan year.

The Board of Directors has appointed Directors Bond, Cooper, Garrett,
Neal and Putney and Nancy T. Snyder to a committee (the "ESOP Committee") to
administer the ESOP. Directors Bond, Cooper, Garrett and Putney serve as the
ESOP Trustees (the "ESOP Trustees"). The Board of Directors or the ESOP
Committee may instruct the ESOP Trustees regarding investments of funds
contributed to the ESOP. The ESOP Trustees must vote all allocated shares held
in the ESOP in accordance with the instructions of the participating employees.
Unallocated shares and allocated shares for which no timely direction is
received will be voted by the ESOP Trustees as directed by the Board of
Directors or the

-13-

<PAGE>

ESOP Committee, subject to the Trustees' fiduciary duties. As of the Voting
Record Date, 25,333 shares had been allocated to participants.

- --------------------------------------------------------------------------------
CERTAIN TRANSACTIONS WITH MANAGEMENT AND OTHERS
- --------------------------------------------------------------------------------

Director Garrett is a partner of Garrett & Garrett, a law firm that
serves as the Savings Bank's general counsel in connection with all matters of
law. For the fiscal year ended September 30, 1997, fees paid to Mr. Garrett's
firm by the Savings Bank were $15,000. The Savings Bank believes that
transactions with Mr. Garrett's firm are on terms substantially the same, or at
least as favorable to the Savings Bank, as those that would be provided by a
non-affiliate.

Director Walton is an independent real estate appraiser who works on a
fee basis for Bedford Federal and other financial institutions through the firm
of Scott & Bond Insurance and Real Estate. The amount of appraisal fees earned
by Mr. Walton for appraisal work for the Bank in fiscal 1997 was $5,018. See
also "--Director Biographical Information."

No directors, executive officers or immediate family members of such
individuals were engaged in transactions with the Savings Bank or any subsidiary
involving more than $60,000 during the year ended September 30, 1997 except
those detailed above. Furthermore, the Savings Bank had no "interlocking"
relationships existing on or after September 30, 1997 in which (i) any executive
officer is a member of the Board of Directors/Trustees of another entity, one of
whose executive officers is a member of the Savings Bank's Board of Directors,
or where (ii) any executive officer is a member of the compensation committee of
another entity, one of whose executive officers is a member of the Savings
Bank's Board of Directors.

The Savings Bank, like many financial institutions, has followed a
policy of granting various types of loans to officers and directors. The loans
have been made in the ordinary course of business and on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with the Savings Bank's other customers, and do not
involve more than the normal risk of collectibility, nor present other
unfavorable features. All loans by the Savings Bank to its directors and
executive officers are subject to OTS regulations restricting loans and other
transactions with affiliated persons of the Savings Bank. Loans to executive
officers and directors of the Savings Bank, and their affiliates, amounted to
$386,287, or 2.23% of the Savings Bank's retained earnings at September 30,
1997.

- --------------------------------------------------------------------------------
PROPOSAL II - RATIFICATION OF APPOINTMENT OF AUDITORS
- --------------------------------------------------------------------------------

B.D.O. Seidman, LLP, Richmond, Virginia, was the Company's independent
public accountant for the 1997 fiscal year. The Board of Directors of the
Company presently intends to renew the Company's arrangement with B.D.O.
Seidman, LLP to be its auditors for the fiscal year ending September 30, 1998. A
representative of B.D.O. Seidman, LLP is expected to be present at the Meeting
to respond to stockholders' questions and will have the opportunity to make a
statement if the representative so desires.

-14-

<PAGE>

Ratification of the appointment of the auditors requires the
affirmative vote of a majority of the votes cast by the stockholders of the
Company at the Meeting. The Board of Directors recommends that stockholders vote
"FOR" the ratification of the appointment of B.D.O. Seidman as the Company's
auditors for the 1998 fiscal year.

- --------------------------------------------------------------------------------
PROPOSAL III - A STOCKHOLDER
PROPOSAL, OPPOSED BY THE BOARD OF DIRECTORS,
TO RECOMMEND THAT THE COMPANY TAKE ACTION TO
APPOINT A COMMITTEE TO ACTIVELY SOLICIT A
MERGER OR ACQUISITION OF THE COMPANY WITH A
LARGER FINANCIAL INSTITUTION FOR STOCK
- --------------------------------------------------------------------------------

A stockholder of the Company has informed management of his intention
to present at the annual Meeting, the proposed resolution as set forth below
(the "Proposal"). The rules of the SEC require that the proposal and the
accompanying statement be included herein. The resolution set forth below was
submitted by Robert M. Workman, Sr., 805 Ivy Lake Drive, Forest, Virginia,
24551, who is the beneficial owner of 15,000 shares of the Company's Common
Stock.

Approval of the stockholder proposal requires the affirmative vote of a
majority of the votes cast at the Annual Meeting by the holders of the Common
Stock entitled to vote thereon. The Board of Directors believes that the
Proposal is not in the best interest of the Company and its Stockholders, and
your Board of Directors unanimously recommends a vote AGAINST the Proposal. (See
the statement in opposition by the Board of Directors of the Company which
follows).

The proposed resolution and supporting statement, as submitted to the
Company by Mr. Workman, is as follows:

RESOLVED, that the Shareholders request the Chairman of the Board of
Bedford Bankshares, Inc. (sic) to appoint a committee of at least 3
outside directors, to actively solicit a merger or acquisition of
Bedford Bankshares, with a larger financial organization, for a stock
exchange, that would be favorable to the shareholders of both
institutions.

- --------------------------------------------------------------------------------
SUPPORTING STATEMENT - SUBMITTED BY ROBERT M. WORKMAN
- --------------------------------------------------------------------------------

1. Bedford Bankshares stock price already has merger speculation built
into its stock price. At $25.00 per share the stock is selling for more than 20
times earnings and over 1 & 1/2 times book value. We now have an opportunity to
be acquired at a premium to this price.

2. Current earnings and growth will not continue to support the current
price levels and without an affiliation or major increases in growth, earnings,
and dividends, the price of our shares will fall from current levels.

3. In our limited market, with our current resources, we will not be
able to earn or grow to these levels in the immediate future. Acquisitions for
growth by us are not feasible without dilution.

-15-

<PAGE>

4. There is currently a wave of Bank merger activities in the Virginia
market. I am told of interest in acquisition of Bedford Bankshares, by at least
3 banks in our market. The time is ripe for this action and delays by management
could cause lost opportunity. Initiative on our part could uncover numerous
potential partners, and enhance shareholder value considerably.

5. Continued efforts to grow Bedford Bankshares will require large
outlays of capital for buildings, equipment, personnel, and technology which
under the best scenario, will produce results in the future and dilute current
earnings.

6. The ESOP plan of the company will continue to erode the book value
of our stock as more shares are issued to participants. This will reduce the
value of our stock in an exchange and in market value price of our stock unless
earnings grow at a faster pace.

7. Management has a stated policy of not discussing merger plans with
shareholders and would not discuss the subject at the last stockholder meeting.
It was apparent from the little discussion held that a merger is desired by
numerous shareholders. They deserve a chance to vote on it as a group and if the
majority prevail, then the Board can follow their wishes in private, as deemed
appropriate.

- --------------------------------------------------------------------------------
RESPONSE OF THE BOARD OF DIRECTORS OF
THE COMPANY AGAINST THE PROPOSAL
- --------------------------------------------------------------------------------

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS YOU VOTE AGAINST
THE STOCKHOLDER PROPOSAL.

The following sets forth the reasons why the Board of Directors is
unanimously recommending that the Company's stockholders vote against the
Proposal. All members of the Board are stockholders and will vote AGAINST the
Proposal. The Board believes that implementing the Proposal is not in the best
interests of stockholders for the following reasons:

* In furtherance of its fiduciary duties, the Board is required
to consider any bona fide offers to purchase the Company
regardless of the Proposal; and has a standing committee that
is charged with the responsibility of conducting an initial
review of any such bona fide offers. To help insure
impartiality, three of the four members of this committee are
outside/non-management directors.

* The Proposal may cause concern among long-time loyal customers
who know, like and want to deal at their local, hometown bank.
This could disrupt the business operations of the Company and
the Savings Bank, causing the loss of business and adversely
affecting the price of the common stock.

* The Proposal could result in the pursuit of a transaction
which fails. This would be very time consuming, disruptive and
expensive to the Company.

* The Proposal includes speculative conclusions and inaccurate
information.

* There can be no assurance that an acquisition of the Company
would result in stockholders receiving a "premium to this
price".

-16-

<PAGE>

* Original stockholders of the Company have received returns
above the historical rate of return on stocks, through both
price appreciation and cash dividends, on the stock of the
Company.

* If the Company were to be acquired, there can be no assurance
that a stock-for-stock transaction would necessarily be in the
best interest of stockholders.

* In negotiating a potential acquisition of the Company, the
Board will not be in a position to make sure the transaction
is favorable to the stockholders of both companies.

Fiduciary Duty of the Board

The Board of Directors has a fiduciary duty to act, in good faith and
after reasonable investigation, in the best interests of all stockholders of the
Company. This is a fiduciary duty required by law. In connection with its
fiduciary duties, the Board is required to carefully consider any bona fide
offer to acquire the Company. Furthermore, the Board currently has a Strategic
Planning Committee that is to meet periodically to address such issues, should
they be presented. See "I - Information with Respect to Nominees for Director;
Directors Whose Terms Continue; and Executive Officers - Meetings and Committees
of the Board of Directors." While the Board is aware of the current market
conditions, including the takeover market, it does not believe that decisions
regarding a sale of the Company should be made in haste merely because Mr.
Workman believes that a merger with a larger financial institution through a
stock exchange is the only way to enhance stockholder value. The Board has an
ongoing responsibility to examine various strategies designed to enhance
stockholder value, including, but not limited to, ways to enhance earnings,
stock repurchases, stock and cash dividends, as well as possible acquisitions.
As the Board seeks to maximize long-term stockholder value, it believes that the
Company's business strategy of operating a profitable and growth oriented
company will result in increased worth and value for the stockholders in the
future whether or not an offer to acquire the Company is submitted.

It is important to note that directors, officers and other employees
beneficially own or have the right to acquire pursuant to the Company's various
stock plans (but excluding options), approximately 21.56% of the Company's
outstanding shares. While it could be argued that such individuals have goals
other than maximizing stockholder value (e.g., retain jobs, positions),
management believes the interests of all employees are closely aligned with
fellow stockholders in seeking to maximize value.

Disruptive to Business

The Savings Bank was originally incorporated in 1934. As of September
30, 1997, the Company had grown to total assets, deposits and stockholders
equity of $139.1 million, $103.6 million and $19.6 million, respectively. The
Company and the Savings Bank conduct business from three offices located in the
City and County of Bedford, Virginia. The Board of Directors believes that the
Company and its subsidiary, Bedford Federal Savings Bank, can continue to
compete effectively as a local community financial institution, which is
primarily owned by stockholders residing in its market area and Virginia.

The Company believes that approval of the Proposal could disrupt the
operations of the Company and the Savings Bank. The Savings Bank is a community
oriented financial institution that has developed long-term relationships with
many of its customers. Approval of the proposal may confuse the Savings Bank's
current and future customers as to future ownership and control of the Savings
Bank and adversely affect the Savings Bank's ability to conduct its business in
the normal manner. In addition, approval of

-17-

<PAGE>

the proposal may confuse and substantially undermine employee confidence
regarding their future status with the Company. Such confusion could adversely
affect the Company's effectiveness and ability to perform its services. Further,
adoption of the Proposal could cause the Board to initiate in haste a
transaction that after much time, effort and diversion, might not be workable
and could be very costly especially to earnings and ultimately, share price.

May Confuse the Market Place

Approval of the Proposal may confuse investors, causing volatility in
the market price of the Company's common stock. Adoption of the Proposal could
force the Company to actively solicit a merger or acquisition and could be
interpreted by some investors as a signal that the Company has some underlying
performance issues, thereby causing such investors to lose confidence in the
Company. Conversely, such actions could unnecessarily cause a run-up in the
price of the Company's common stock as investors determine that the Company is
for sale. Directors are elected by stockholders to oversee the business affairs
of the Company and to evaluate and consider all of the various strategic options
which may be available from time to time. In seeking to maximize long-term
stockholder value, the Board does not believe that it is in the best interests
of stockholders to take action that could disrupt the price of the common stock
in the short-term due to market confusion regarding a potential acquisition of
the Company. The Board believes that those stockholders with short-term goals
are always free to adjust their positions in the Company's stock through market
transactions.

Inaccurate Statements

The statements made by Mr. Workman regarding the Savings Bank's ESOP
are inaccurate. For the purposes of book value per share, all ESOP shares are
already considered outstanding, therefore there is no further dilution for book
value calculations. While the exercise of options under the stock option plan
would dilute existing stockholders, the Company believes any such dilution is
outweighed by the incentive to grantees to maximize stockholder value. (The
higher the Company's stock price, the greater the value of the option).

Furthermore, while Mr. Workman states that a majority of the
stockholders should prevail, it is important to note that Article 10.A. of the
Company's Articles of Incorporation provides that for a period of five years
from the date of the Savings Bank's mutual-to-stock conversion, no person can
acquire more than 10% of the stock of the Company. This provision can only be
amended by 80% of the outstanding shares of the Company's stock. The Company's
Articles also have other anti-takeover provisions requiring supermajority votes.

No Assurance of a Premium

There can be no assurance that an acquisition of the Company would
result in stockholders receiving a price at a premium to the Company's current
stock price. The Board believes that, under current circumstances, the Company
is best able to serve the long-term interests of its stockholders if it is able
to focus on continually improving the performance of the Company and increasing
stockholder value over time, while examining all strategic alternatives. The
Board is well aware of the increase in merger activity in the Virginia market
area, however, many of these acquisitions have involved larger banks with
significant market share and relatively lower capital positions. We believe it
is misleading to assume or infer that all financial institutions (especially
institutions with excess capital such as ours) could be sold for the substantial
premiums which have been reported in certain other recent bank

-18-

<PAGE>

acquisitions. Furthermore, in considering any stock-for-stock transaction that
may appear to have a large premium relative to the value of the Company's
shares, the acquiror's stock could transfer significant risks to you as a
stockholder in the event the stock received is over-inflated and the growth or
maintenance of value is unsustainable. In addition, the Directors do not feel
that it would be prudent to restrict potential offers solely to a stock exchange
transaction.

Historic Returns

The stockholders of the Company have received a return on their
investment above the historical rate of return for many other stocks. Bedford
Federal Savings Bank converted from the mutual to stock form of organization in
August, 1994. The Company originally issued 1,256,375 shares of Common Stock at
a price of $10.00 per share. The Savings Bank has continuously paid a cash
dividend since April 20, 1995. As of November 17, 1997, the Common Stock of the
Company closed on the Nasdaq National Market at a price of $27.25 per share.
Therefore, if a stockholder originally purchased stock at the time of the
conversion at $10.00 per share, he has realized an appreciation (excluding
dividends) of approximately $17.25 per share or 172.5%. A person who purchased
stock in the conversion at $10.00 per share has received, through November 17,
1997, total cash dividends of $1.22 per share. The Board of Directors believes
that the price appreciation and dividend yield on the Company's stock have
provided its stockholders with returns above the historical rate of return on
stocks, and accordingly, the Board of Directors believes that the investment of
stockholders will continue to be served best by controlling the Company's own
destiny by carefully analyzing all options that may become available as opposed
to a quick sale of the Company.

Conclusion

The Board, in the exercise of its fiduciary duties, will as always
carefully consider any appropriate action, including the evaluation of any bona
fide offer for the sale of the Company that would serve the best interest of the
stockholders and the community. Therefore, the Board believes the Proposal is
redundant, unnecessary, and imprudent for stockholders to adopt.

FOR ALL OF THE ABOVE REASONS, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
YOU VOTE AGAINST PROPOSAL III.
-------

-19-

<PAGE>

- --------------------------------------------------------------------------------
FINANCIAL INFORMATION
- --------------------------------------------------------------------------------

The Company's 1997 Annual Report to Stockholders, including financial
statements, will be mailed to all stockholders as of the Voting Record Date. Any
stockholder who has not received a copy of such Annual Report by December 30,
1997 may obtain a copy by writing to the Secretary of the Company. Such Annual
Report is not to be treated as a part of the proxy solicitation material or as
having been incorporated herein by reference. Stockholders may receive a copy of
the Company's Annual Report on Form 10-KSB by writing to the Secretary of the
Company.

- --------------------------------------------------------------------------------
STOCKHOLDER PROPOSALS
- --------------------------------------------------------------------------------

In order to be eligible for inclusion in the Company's proxy materials
for next year's Annual Meeting of Stockholders, any stockholder proposal to take
action at such meeting must be received at the Company's executive offices at
125 W. Main Street, Bedford, Virginia 24523, no later than August 21, 1998. Any
such proposals shall be subject to the requirements of the proxy rules adopted
under the Securities Exchange Act of 1934, as amended.

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OTHER MATTERS
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The Board of Directors is not aware of any business to come before the
Meeting other than those matters described above in this Proxy Statement.
However, if any other matters should properly come before the Meeting, it is
intended that proxies in the accompanying form will be voted in respect thereof
in accordance with the judgment of the person or persons voting such proxies.

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MISCELLANEOUS
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The cost of soliciting proxies will be borne by the Company. The
Company will reimburse brokerage firms and other custodians, nominees and
fiduciaries for reasonable expenses incurred by them in sending proxy materials
to the beneficial owners of Common Stock. The Company has retained Kissel-Blake,
Inc., New York, New York, to assist in the solicitation of proxies at a cost of
$2,500 plus expenses. In addition to solicitations by Kissel-Blake, directors,
officers and regular employees of the Company may solicit proxies without
additional compensation.

BY ORDER OF THE BOARD OF DIRECTORS

Nancy T. Snyder
Corporate Secretary

Bedford, Virginia
December 19, 1997

-20-

<PAGE>
APPENDIX A

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BEDFORD BANCSHARES, INC.
125 W. MAIN STREET
BEDFORD, VIRGINIA 24523
(540) 586-2590
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ANNUAL MEETING OF STOCKHOLDERS
January 28, 1998
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The undersigned hereby appoints the Board of Directors of Bedford
Bancshares, Inc. ("Corporation"), or its designee, with full powers of
substitution, to act as attorneys and proxies for the undersigned, to vote all
shares of Common Stock of the Corporation which the undersigned is entitled to
vote at the Annual Meeting of Stockholders ("Meeting"), to be held at the Olde
Liberty Station, 515 Bedford, Avenue, Bedford, Virginia 24523 on Wednesday,
January 28, 1998, at 2:00 p.m. and at any and all adjournments thereof, as
follows:

FOR WITHHELD
--- --------

1. The election as director of all nominees,
each for a 3 year term: |_| |_|

Hugh H. Bond
William T. Powell
Macon C. Putney

The Board of Directors recommends a vote "FOR" the nominees.

INSTRUCTIONS: To withhold your vote for any individual nominee, insert the
nominee's name on the line provided below.

FOR AGAINST ABSTAIN
--- ------- -------
2. PROPOSAL TO RATIFY THE APPOINTMENT
OF B.D.O. SEIDMAN, LLP as independent
auditors of Bedford Bancshares, Inc.
for the fiscal year ending September 30, 1998. |_| |_| |_|

The Board of Directors recommends a vote "FOR" the ratification of
auditors.

3. PROPOSAL OF STOCKHOLDER recommending |_| |_| |_|
the Board to take steps necessary to have
Bedford Bancshares, Inc. merge with or
sold to another institution for stock.

The Board of Directors recommends a vote "AGAINST" the stockholder
proposal. -------

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THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR PROPOSALS 1 AND 2 STATED ABOVE AND AGAINST PROPOSAL 3 AS
STATED ABOVE. IF ANY OTHER BUSINESS IS PRESENTED AT SUCH MEETING, THIS PROXY
WILL BE VOTED BY THOSE NAMED IN THIS PROXY IN THEIR BEST JUDGMENT. AT THE
PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED
AT THE MEETING.
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<PAGE>

THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS

Should the undersigned be present and elects to vote at the Meeting,
or at any adjournments thereof, and after notification to the Secretary of the
Corporation at the Meeting of the stockholder's decision to terminate this
proxy, the power of said attorneys and proxies shall be deemed terminated and of
no further force and effect. The undersigned may also revoke this proxy by
filing a subsequently dated proxy or by notifying the Secretary of the
Corporation of his or her decision to terminate this proxy.

Prior to the execution of this proxy, the undersigned acknowledges
receipt from the Corporation of a Notice of the Meeting, a Proxy Statement dated
December 19, 1997, and a 1997 Annual Report.

Dated: , 199 |_| Please check here if you plan to attend the
--------------- -- Meeting.

- ------------------------------- -------------------------------------------
PRINT NAME OF STOCKHOLDER PRINT NAME OF STOCKHOLDER

- ------------------------------- -------------------------------------------
SIGNATURE OF STOCKHOLDER SIGNATURE OF STOCKHOLDER

Please sign exactly as your name appears on this Proxy card. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder should sign.

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PLEASE COMPLETE, DATE, SIGN AND MAIL THIS PROXY PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
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