SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998, OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to to .
------ ------
Commission File Number: 0-24330
BEDFORD BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
Virginia 54-1709924
- --------------------------------------------- ---------------
(State or other jurisdiction of incorporation I.R.S. Employer
or organization) Identification No.
125 West Main Street, Bedford, Virginia 24523
- --------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (540) 586-2590
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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 $12,162,000.
As of December 11, 1998, there were issued and outstanding 2,297,900
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 11, 1998, was
$24,439,000.
Transition Small Business Disclosure Format (check one)
YES NO X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
September 30, 1998. (Part II)
2. Portions of Proxy Statement for the 1999 Annual Meeting of
stockholders. (Part III)
<PAGE>
PART I
Bedford Bancshares, Inc. (the "Company") may from time to time make
written or oral "forward- looking statements", including statements contained in
the company's filings with the Securities and Exchange Commission (including
this annual report on form 10-KSB and the exhibits thereto), in its reports to
stockholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the board of governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and savings habits; and the success of the Company managing the risks involved
in the foregoing.
The Company cautions that the foregoing list of important factors is
not exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Item 1. Business
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General
The Company is a Virginia corporation organized in March of 1994 at the
direction of Bedford Federal Savings Bank ("Bedford Federal" or the "Bank") to
acquire all of the capital stock that the Bank issued in its conversion from the
mutual to stock form of ownership (the "Conversion"). On August 19, 1994, the
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 Bank retains a specified amount of its assets in
housing related investments.
The Bank is a federally chartered stock savings bank headquartered in
Bedford, Virginia and has two other offices in Forest and Moneta, Virginia. The
Bank is subject to examination and comprehensive regulation by the Office of
Thrift Supervision ("OTS") and its deposits are federally insured by the Savings
Association Insurance Fund ("SAIF"). The Bank is a member of and owns capital
stock in the FHLB of Atlanta, which is one of the 12 regional banks in the FHLB
System.
<PAGE>
The Bank operates a traditional savings bank business, attracting
deposit accounts from the general public and using those deposits, together with
other funds, primarily to originate and invest in loans secured by single-family
residential real estate.
Competition
Competition for deposits comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions, and
multi-state regional banks in our market areas. Deposit competition also
includes a number of insurance products sold by local agents and investment
products such as mutual funds and other securities sold by local and regional
brokers. Loan competition varies depending upon market conditions and comes from
commercial banks, thrift institutions, credit unions, mortgage bankers and
finance companies.
Lending Activities
Analysis of Portfolio. The following table sets forth the composition of the
Bank's loan portfolio in dollar amounts and in percent of the respective
portfolios at the dates indicated.
<TABLE>
<CAPTION>
1998 1997
------------------------------- --------------------------
Percent of Percent of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate:
Residential:
One- to four-family........................... $ 95,620 70.46% $ 84,727 70.79%
Multi-family.................................. 854 .63 523 .44
Commercial...................................... 4,181 3.08 3,836 3.20
Construction.................................... 8,450 6.23 8,433 7.05
Land............................................ 11,769 8.67 10,538 8.80
Consumer and commercial business.................. 14,830 10.93 11,630 9.72
-------- ------- ------- -----
Total loans................................. $ 135,704 100.00 $119,687 100.00%
-------- ======= ------- ======
Less:
Unearned discounts, premium,
deferred loan fees, net....................... 290 287
Loans-in-process................................ 4,906 2,629
Allowance for credit losses..................... 764 678
-------- -------
Total loans, net.............................. $ 129,744 $116,093
======== =======
</TABLE>
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<PAGE>
Loan Maturity Tables
The following table sets forth the maturity of the Bank's loan portfolio at
September 30, 1998. The table does not include prepayments or scheduled
principal repayments. Prepayments and scheduled principal repayments on loans
totalled $28.1 million for the year ended September 30, 1998. Adjustable-rate
mortgage loans are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Due Due after
within 1 through Due after
1 year 5 years 5 years Total
------ ------- ------- -----
(In Thousands)
<S> <C> <C> <C> <C>
One- to four-family residential real estate.............. $ 5 $1,573 $89,260 $90,838
Multi-family residential real estate..................... -- -- 853 853
Commercial residential real estate....................... 20 632 3,478 4,130
Construction............................................. 8,018 297 96 8,411
Land..................................................... -- 257 4,998 5,255
Consumer and commercial business......................... 2,113 8,994 10,205 21,312
----- ----- ------ ------
Total $10,156 $11,753 $108,890 $130,799
====== ====== ======= =======
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1999, 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........... $21,897 $68,936 $90,833
Multi-family.................. 66 787 853
Commercial real estate........ 1,806 2,304 4,110
Construction.................. 218 175 393
Land.......................... 3,876 1,379 5,255
Consumer and commercial
business....................... 13,814 5,385 19,199
------ ------ ------
Total.......................... $41,677 $78,966 $120,643
====== ====== =======
</TABLE>
One- to Four-Family Residential Loans. The Bank's primary lending
activity consists of the origination of one- to four-family residential mortgage
loans secured by property located in the Bank's primary market areas. The Bank
generally originates owner-occupied one- to four-family residential mortgage
loans in amounts up to 80% of the lesser of the appraised value or selling price
of the mortgaged property without requiring mortgage insurance. The Bank will
originate a mortgage loan in an amount up to 95% of the lesser of the appraised
value or selling price of a mortgaged property, however, mortgage insurance is
required for the amount in excess of 80% of such value. Adjustable-rate mortgage
loans may be originated at up to 95% of the loan to value ratio.
For all adjustable-rate mortgage loans, the Bank requires the borrower
to qualify at the initial rate and such loans are indexed to the weekly average
of the one year U.S. Treasury bill. The Bank's adjustable-rate mortgage loans
provide for periodic interest rate adjustments of plus or minus 1% to 2% with a
maximum adjustment over the term of the loan as set forth in the loan agreement
and usually
-3-
<PAGE>
ranges from 3% to 6% above the initial interest rate depending on the terms of
the loan. Adjustable-rate mortgage loans reprice 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. Interest rates charged on mortgage loans are
competitively priced based on market conditions and the Bank's cost of funds.
Generally, the Bank's standard underwriting guidelines for mortgage loans
conform to the Federal Home Loan Mortgage Corporation ("FHLMC") guidelines.
Adjustable-rate mortgage loans decrease the risks associated with
changes in interest rates by more closely reflecting these changes, but involve
other risks because as interest rates increase, the underlying payments by the
borrower increase, thus increasing the potential for default. At the same time,
the marketability of the underlying collateral may be adversely affected by
higher interest rates. Upward adjustment of the contractual interest rate is
also limited by the adjustable-rate mortgage loan documents, thereby potentially
limiting their effectiveness during periods of rising interest rates. These
risks have not had an adverse effect on the Bank.
The Bank also offers fixed-rate one- to four-family mortgage loans with
terms from 10 to 30 years. Fixed-rate loans are generally underwritten according
to the FHLMC guidelines, utilizing their approved documents so that the loans
qualify for sale in the secondary mortgage market. The Bank originates and holds
some fixed-rate mortgage loans as deemed appropriate by the Asset Liability
Management Committee ("ALCO Committee").
Construction Lending. The 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 Bank's market area.
Construction lending is generally considered to involve a higher degree
of credit risk than long-term financing of residential properties. The Bank's
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 of construction. If the estimate of
construction cost and the marketability of the property upon completion of the
project prove to be inaccurate, the Bank may be compelled to advance additional
funds to complete construction. Furthermore, if the estimate of value proves to
be inaccurate, the Bank may be confronted at or prior to the maturity of the
loan, with a property with a value that is insufficient to assure full
repayment.
Multi-Family and Commercial Real Estate Loans. The Bank offers
multi-family and commercial real estate loans, however, this type of lending
represents a small portion of the 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. Substantially all of the properties
securing the Bank's commercial and multi-family real estate loans are inspected
by the Bank's lending personnel before the loan is made. The Bank also obtains
appraisals on each property.
Loans secured by multi-family and commercial real estate properties
generally involve a greater degree of risk than 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 real estate
is typically dependent upon the successful operation 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.
-4-
<PAGE>
Land Lending. Land loans are made primarily to individuals on developed
residential lots located in the 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. In response to a perceived need
in the local community and to provide for diversification of its asset portfolio
and improved interest rate risk management, the Bank continues increasing the
amount of consumer and commercial business loans it originates. Consumer loans
consist of automobile loans, savings account loans, home equity, personal
secured and unsecured loans and home improvement loans. The underwriting
standards employed by the Bank for consumer loans include a determination of the
applicant's payment history on other debts and an assessment of the borrower's
ability to make payments on the proposed loan and other indebtedness. In
addition to the creditworthiness of the applicant, the underwriting process also
includes a comparison of the value of the security, if any, in relation to the
proposed loan amount. The Bank's consumer loans tend to have higher interest
rates and shorter maturities than one- to four-family first mortgage loans, but
are considered to entail a greater risk of default than mortgage loans.
Commercial business loans consisting of revolving lines of credit,
short-term working capital loans, and term loans up to seven years are
originated to meet the needs of local small businesses. Some loans are
unsecured, but the majority are secured by inventory, equipment, accounts
receivable, marketable securities, savings deposits, real estate, personal
guaranties, or a combination of these types of collateral. Commercial business
loans generally involve a greater degree of risk than residential mortgage loans
and frequently carry larger loan balances. The Bank offers fixed-rate commercial
business loans and adjustable-rate loans. 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 business
cash flow, and the difficulty of evaluating and monitoring these types of loans.
Loan Solicitation and Processing. The Bank's sources of mortgage loan
applications are referrals from existing or past customers, real estate brokers,
builders, call-in and walk-in customers and also the result of advertising. All
loans are underwritten and approved by the loan committee. Any loan up to
$300,000 is reviewed and approved by two members of the loan committee. Any loan
over $300,000 is reviewed and approved by three members of the loan committee.
All loan approvals are ratified by the Board of Directors on a monthly basis.
The 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 the Bank's board of directors. It is the 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 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, 1998, the Bank had $1.8 million of commitments to originate mortgage loans,
$5.0 million in unfunded home equity loans and $1.4 in unfunded commercial lines
of credit.
-5-
<PAGE>
Loan Processing and Servicing Fees. In addition to interest earned on
loans, the Bank recognizes fees and service charges which consist primarily of
fees charged for loan originations and loans serviced for others and late
charges. The Bank recognized loan servicing fees of $459,000 and $296,000 for
the years ended September 30, 1998 and 1997, respectively.
Loans to One Borrower. Savings institutions are subject to the same
limits as those applicable to national banks, which under 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 Bank's maximum
loan-to-one borrower limit was approximately $2.9 million as of September 30,
1998.
At September 30, 1998, the Bank's largest loan customer has performing
loans totaling approximately $1.6 Million, which constituted 17 loans. This
customer is a building contractor in Bedford County. Six of these loans are
construction loans on single family dwellings with funds still in process.
Non-Performing and Problem Assets
Loan Delinquencies and Non-Performing Assets. The 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 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.
The following table sets forth information regarding nonaccrual loans
and real estate owned, as of the dates indicated. The Bank had no loans
categorized as troubled debt restructurings within the meaning of SFAS 15 and no
accruing loans that were delinquent more than 90 days.
<TABLE>
<CAPTION>
At September 30,
1998 1997
---- ----
(In thousands)
<S> <C> <C>
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One- to four-family residential real estate......... $281 $421
Land................................................ 214 49
Consumer and commercial business loans 37 48
--- ---
Total non-accrual loans............................... $532 $518
=== ===
Real estate owned..................................... $ 0 $212
=== ===
Total non-performing assets........................... $532 $730
=== ===
Delinquent loans to total net loans................... .41% .45%
=== ===
</TABLE>
Interest income that would have been recorded on loans accounted for on
a nonaccrual basis under the original terms of such loans was immaterial for the
year ended September 30, 1998. The amount included in the Bank's interest income
for the year ended September 30, 1997 was also immaterial.
-6-
<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 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, 1998, the Bank's problem assets were as follows:
$515,000 were designated special mention, $530,000 were classified as
substandard and $2,000 were classified as doubtful or loss.
Real Estate Owned. Real estate acquired by the 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.
Allowances for Loan Losses. It is management's policy to provide for
losses on unidentified loans in its loan portfolio. A provision for loan losses
is charged to operations based on management's evaluation of the losses that may
be incurred in the 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 the Bank's past loan loss experience, known
and inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral, any
existing guarantees, past performance of the loan, available documentation for
the loan, legal impediments to collection, financial condition of the borrower,
and current economic conditions.
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.
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<PAGE>
The following table sets forth the Bank's allowance for credit losses,
allowance for losses on foreclosed real estate and related ratios.
At or For the Year Ended
September 30,
-------------------------
1998 1997
---- ----
(Dollars in thousands)
Allowance for credit losses:
Balance at beginning of period...................... $678 $650
--- ---
Charge-offs:
One- to four-family.............................. -- --
Multi-family..................................... -- --
Commercial real estate........................... -- 58
Construction and land............................ -- --
Consumer and commercial business................. 8 15
--- ---
Total charge-offs.............................. 8 73
Recoveries........................................ 4 1
Provisions charged to income...................... 90 100
--- ----
Balance at end of period............................ $764 $678
=== ===
Ratios of net charge-offs during the period
to average loans outstanding during the
period............................................ .01% .06%
Ratio of allowance for losses to total
loans at the end of the period.................... .58% .58%
Ratio of allowance for losses to non-
performing assets at the end of the
period............................................ 143.80% 92.88%
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<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth
the 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 since the total loan loss allowance is a
valuation reserve applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------
1998 1997
------------------------------------ ------------------------------
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.......... $ 381 49.8% $379 55.9%
Multi-family................. 1 .1 1 .1
Commercial real estate....... 50 6.5 50 7.4
Construction................. 49 6.4 50 7.4
Land......................... 39 5.1 40 5.9
Consumer and commercial
business.................... 244 32.1 158 23.3
----- ----- ---- -----
Total...................... $ 764 100.0% $678 100.0%
====== ===== === =====
</TABLE>
Investment and Mortgage-backed Securities Activities
Investment Securities. The 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 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 Bank's loan origination and
other activities. 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 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, 1998, the Bank had $4.4 million or 18.3% 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.
-9-
<PAGE>
Securities Portfolio. The following table sets forth the carrying value
of the Savings Bank's securities at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
---------------------------
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
Federal funds sold and other short-term investments.... $ 3,650 $ 2,791
Investment securities and Mortgage backed securities:
Held to maturity:
Mortgage backed securities......................... 15 20
FHLB stock......................................... 1,550 932
U.S. Government and agency obligations............. 2,099 4,596
-------- -----
Total held to maturity........................... 3,664 5,548
Available for sale:
U.S. Government and agency obligations............. 12,371 5,006
Marketable equity securities and other............. 4,449 4,238
-------- ------
Total available for sale......................... 16,820 9,244
-------- ------
Total ........................................... $ 24,134 $17,583
======== ======
</TABLE>
-10-
<PAGE>
Investment Yields and Maturities. The table below sets forth certain
information regarding the carrying value, weighted average yields and
contractual maturities of the Bank's federal funds sold and other short-term
investments, investment securities, securities held for sale and mortgage-backed
securities as of September 30, 1998.
<TABLE>
<CAPTION>
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.......... $ 3,650 7.41% $ -- --% $ -- --% $ -- --% $ 3,650 7.41% $ 3,650
Held to maturity:
Mortgage-backed
securities....... 15 8.31 -- -- -- -- -- -- 15 8.31 15
FHLB stock......... 1,550 7.38 -- -- -- -- -- -- 1,550 7.38 1,550
U.S. government
and agency
obligations...... 300 5.32 1,299 6.02 500 7.25 -- -- 2,099 6.21 2,132
Available for sale:
U.S. Government
and agency
obligations ..... 5,789 5.74 3,037 6.61 3,545 6.47 -- -- 12,371 6.21 12,371
Marketable equity
securities and
other............. 4,449 5.71 -- -- -- -- -- -- 4,449 5.71 4,449
------- ------- ------ ------- ------- -------
Total.................. $15,753 $ 4,336 $4,045 $ -- $ 24,134 $ 24,167
====== ======= ====== ======= ======= =======
</TABLE>
-11-
<PAGE>
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. The 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 Bank does not have any brokered deposits.
Deposits. Customer deposits are attracted principally from within the
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. At September 30,
1998, the Bank had no brokered deposits.
Certificates of Deposit of $100,000 or More. The following table
indicates the amount of the Bank's certificates of deposit and other time
deposits of $100,000 or more by time remaining until maturity as of September
30, 1998.
Amount
------
Maturity Period (In thousands)
- ---------------
Within three months.................... $ 1,296
Three through six months............... 979
Six through twelve months.............. 2,793
Over twelve months..................... 5,348
-----
Total.............................. $10,416
======
Borrowings. While deposits are the primary source of funds for the
Bank's lending and investment activities and for its general business purposes,
the 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 Bank's
first mortgage loans. The 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 Bank
borrowed funds at or for the years ended on the dates indicated:
At or For the Year Ended
---------------------------------
September 30,
---------------------------------
1998 1997
----------- ----------
(Dollars in thousands)
FHLB advances:
Average balance outstanding........... $22,487 $12,249
Maximum amount outstanding at any
month-end during the year....... 31,000 16,000
Balance outstanding at end of year.... 29,000 15,000
Weighted average interest rate
during the year................. 5.54% 6.07%
Weighted average interest rate
at end of year.................. 5.55% 6.01%
-12-
<PAGE>
Personnel
As of September 30, 1998, the Bank had 40 full-time employees and 1
part-time employee. None of the Bank's employees are represented by a collective
bargaining group. The 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 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. As such, the Company is required to
register and file reports with the OTS 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. This
regulation and oversight is intended primarily for the protection of the
depositors of the Bank and not for the benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("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 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 "Regulation
of the Bank Qualified Thrift Lender Test."
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The 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
-13-
<PAGE>
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes.
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 Bank might have to convert to a different financial
institution charter and be regulated under federal law as a bank, including
being subject to the more restrictive activity limitations imposed on national
banks. The Bank cannot predict the impact of its conversion to, or regulation
as, a bank until the legislation requiring such change is enacted.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the Savings Association Insurance Fund (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.
As a member of the SAIF, the Bank paid an insurance premium to the FDIC
equal to a minimum of 0.23% of its total deposits. The FDIC also maintains
another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures
commercial bank deposits. In 1996, the annual insurance premium for most BIF
members was lowered to $2,000. The lower insurance premiums for BIF members
placed SAIF members at a competitive disadvantage to BIF members.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. Beginning January 1, 1997, the deposit
insurance assessment for most SAIF members was reduced to .064% of deposits on
an annual basis through the end of 1999. During this same period, BIF members
will be assessed approximately .013% of deposits. After 1999, assessments for
BIF and SAIF members should be the same. It is expected that these continuing
assessments for both SAIF and BIF members will be used to repay outstanding
Financing Corporation bond obligations. As a result of these changes, beginning
January 1, 1997, the rate of deposit insurance assessed the Bank declined
annually by approximately 70%.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 4% of total adjusted assets, and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the 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.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital
-14-
<PAGE>
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, 1998, the
Bank was a Tier 1 institution. In the event the 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 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.
Qualified Thrift Lender Test. Savings institutions must meet a QTL
test. If the 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 June 30, 1998, the Bank was
in compliance with its QTL requirement with 76% 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 or 5%
of its outstanding borrowings to the FHLB of Atlanta, at the beginning of each
year.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At September 30, 1998, the Bank's actual
liquid asset ratio was 19%.
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, 1998, the Bank was in compliance with these Federal Reserve Board
requirements.
-15-
<PAGE>
Item 2. Description of Property.
- ---------------------------------
(a) The Bank conducts its business through a main office located in
Bedford, Virginia and two branch offices. The Bank installed three freestanding
ATM's during fiscal 1995; all were in operation at September 30, 1998. The Bank
believes that the current facilities are adequate to meet its present and
immediately foreseeable needs.
Original Date
Location Leased or Owned Leased or Acquired
- -------- --------------- ------------------
125-133 W. Main Street Owned 12/70 - Main Office
Bedford, VA 24523
12/84 - Drive thru
3/89 - Annex
1152 Hendricks Store Road Land Leased 8/86
Moneta, VA 24121
Building Owned 1/87
ATM
Moneta Road Land Leased 7/95
Moneta, VA 24121
Building Owned 8/95
14915 Forest Road Owned 12/78
ATM
Forest, VA 24551
Longwood Avenue (ATM) Owned 1/85
Bedford, VA 24523
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's
investment policies and any regulatory or Board of Directors' percentage of
assets limitations regarding certain investments. The Bank'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 - Regulation of the Bank," and "Item 2.
Description of Property."
(2) Investments in Real Estate Mortgages. See "Item 1. Business -
Lending Activities and - Regulation of the Bank."
-16-
<PAGE>
(3) Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities
and - Regulation of the Bank."
(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
- ------------------------------------------------------------
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.
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, 1998 (the "Annual Report") is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- ------------------------------
The Registrant's financial statements listed under Item 13 are
incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants On Accounting and
Financial Disclosure.
- --------------------------------------------------------------------------------
Not Applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
with Section 16(a) of the Exchange Act.
- --------------------------------------------------------------------------------
The information contained under the sections captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" and "I - Information with Respect to
Nominees for Director, Directors Continuing in Office, and Executive Officers
Election of Directors" and " - Biographical Information" in the "Proxy
Statement" is incorporated herein by reference.
-17-
<PAGE>
Item 10. Executive Compensation
- --------------------------------
The information contained in the section captioned "Director and
Executive Officer Compensation" 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 first chart in the section captioned "I
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the first chart in the section captioned "I
Information with Respect to Nominees for Director, Directors
Continuing in Office, and Executive Officers" in the Proxy
Statement.
(c) Management of the Registrant knows of no arrangements,
including any pledge by any person of securities of the
Registrant, 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 Relationships and Related
Transactions" in the Proxy Statement.
Item 13. Exhibits, List, and Reports on Form 8-K
- ------------------------------------------------
(a) Listed below are all financial statements and exhibits filed as
part of this report.
1. The consolidated balance sheets of Bedford Bancshares, Inc. as of
September 30, 1998 and 1997 and the related consolidated
statements of income, changes in stockholders' equity and cash
flows for each of the years in the three year period ended
September 30, 1998, together with the related notes and the
independent auditors' report of BDO Seidman, LLP independent
certified public accountants.
2. Schedules omitted as they are not applicable.
-18-
<PAGE>
3. The following exhibits are included in this Report or
incorporated herein by reference:
<TABLE>
<CAPTION>
<S> <C>
(a) List of Exhibits:
3(i) Restated Articles of Incorporation of Bedford Bancshares, Inc. *
3(ii) 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 between the Bank and Harold K. Neal *
13 1998 Annual Report to Stockholders
21 Subsidiaries of the Registrant (See "Item 1- Description of Business)
23 Consent of BDO Seidman, LLP
27 Financial Data Schedule (electronic filing only)
</TABLE>
- ---------------------
* Incorporated by reference to the Registrant's Form 10KSB filed with the SEC
on December 9, 1994.
-19-
<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 as of December 21,
1998.
BEDFORD BANCSHARES, INC.
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 as of December 21,
1998.
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)
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)
By: /s/Macon C. Putney By: /s/Harry W. Garrett, Jr.
-------------------------------------------- -------------------------
Macon C. Putney Harry W. Garrett, Jr.
Director Director
By: /s/Henry Walton,Jr. By: /s/William P. Pickett
-------------------------------------------- -------------------------
W. Henry Walton, Jr. William P. Pickett
Director Director
By: /s/William T. Powell
--------------------------------------------
William T. Powell
Director
EXHIBIT 13
<PAGE>
[LOGO] Bedford Bancshares, Inc.
1998 Annual Report
<PAGE>
BEDFORD BANCSHARES, INC. - 1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
Table of Contents
Corporate Profile and Stock Market Information............................... 2
Letter to Stockholders ...................................................... 3
Selected Financial and Other Data............................................ 4
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................. 6
Report of Independent Certified Public Accountants...........................14
Consolidated Financial Statements............................................15
Notes to Consolidated Financial Statements...................................30
Office Locations.............................................................53
Glossary of Financial Terms..................................................54
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 four 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 and other
related data.
Dividends Dividends
Quarter Per Share Per Share
Ended High Low Volume Declared Paid
December 1995 $9.38 $8.75 186,752 $0.045 $0.075
March 1996 $9.13 $8.38 241,940 $0.045 $0.045
June 1996 $8.88 $7.88 378,812 $0.050 $0.045
September 1996 $8.63 $8.25 171,182 $0.055 $0.050
December 1996 $9.25 $8.32 192,478 $0.060 $0.055
March 1997 $10.00 $8.75 163,568 $0.065 $0.060
June 1997 $12.38 $9.50 319,064 $0.070 $0.065
September 1997 $12.75 $11.75 186,580 $0.070 $0.070
December 1997 $17.50 $11.50 337,000 $0.070 $0.070
March 1998 $17.38 $14.00 365,200 $0.070 $0.070
June 1998 $16.25 $13.88 198,600 $0.080 $0.070
September 1998 $15.75 $10.25 186,300 $0.080 $0.080
On September 30, 1998, there were approimately 580 shareholders of record with
approximately 60.6% of the 2,297,900 outstanding shares held in nominee or
"street" name through various brokerage firms. There were eight firms making a
market in the Company's common stock during the month of September 1998.
2
<PAGE>
- --------------------------------------------------------------------------------
Letter from the Chief Executive Officer
- ---------------------------------------
To Our Stockholders:
I am very pleased to report that fiscal 1998 proved to be a most successful year
for Bedford Bancshares. Your company achieved record earnings, experienced solid
asset growth, increased the per share amount of dividends paid for the third
consecutive year and distributed a 100% stock dividend in the form of a two for
one stock split.
Net income for the year ended September 30, 1998 amounted to $1,973,000, up 24%
from the $1,591,000 for fiscal 1997. On a per share basis, diluted earnings for
fiscal 1998 were $.85, up 21.4% from the $.70 earned in 1997. The return on
average assets was 1.33% for the year ended September 30, 1998 compared to 1.19%
for fiscal 1997. The returns on average equity were 9.68% and 8.40% for fiscal
1998 and 1997, respectively.
Early in fiscal 1998, the management of your company began updating its business
plan and developed a detailed strategic plan designed to build on and enhance
the success Bedford Bancshares had enjoyed in the past. The financial services
industry had changed dramatically and our role as a traditional thrift had to be
altered to effectively compete in the future. In addition, interest rates were
dropping at a rapid pace, negatively impacting both our net interest margin and
spread. As a result, we intensified our efforts to incease noninterest income
and examined strategies that would expand our commercial and consumer loan
portfolios. Our efforts were rewarded with a 46% increase in noninterest income
in fiscal 1998 over fiscal 1997, and a 33% increase in the level of commercial
and consumer loans from September 30, 1997 to September 30, 1998.
Mortgage lending has always been, and will continue to be, the foundation of our
operations. At September 30, 1998, mortgage loans, including construction and
home equity loans, totaled $118.3 million, up 11.3% from the level one year
earlier. This growth combined with the increase in the securities portfolio,
resulted in a 14.1% increase in assets to $158.7 million at September 30, 1998
from $139.1 million on September 30, 1997. Total deposits were $107.1 million at
September 30, 1998 and stockholders' equity was $21.2 million. A more detailed
review of our progress in 1998 is contained in this report.
Although fiscal 1998 was highly successful and provides good momentum as we
enter 1999, we cannot allow ourselves to grow complacent. Our business plan
calls for us to build on the successes of this past year and to constantly
review our operations for opportunities to enhance profitability and to control
expenses. We intend to deliver the products and services that will allow Bedford
Federal to serve the needs of our customers better than our competitors. By so
doing we expect to continue to provide an attractive return to our shareholders.
While Bedford Bancshares must constantly compete with larger banks, we are
mindful of the role we play as a community oriented financial institution. Our
business plan recognizes this fact and our directors, management, and staff
recognize this fact. The employees and directors of Bedford Bancshares devote a
tremendous amount of personal time and talent to many community activities. And
as a corporation, Bedford Bancshares is keenly aware of the important role it
plays in the quality of life that we all enjoy in our communities.
The continued loyalty and support of our customers and stockholders, and the
commitment of our directors, management and staff are key reasons for our
success. On behalf of the Corporation, I thank each one of you.
Sincerely,
/s/Harold K. Neal
- -------------------------------------
Harold K. Neal
President and Chief Executive Officer
December 11, 1998
3
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OTHER DATA
- --------------------------------------------------------------------------------------------------------------------
Financial Condition (Dollars in Thousands)
- --------------------------------------------------------------------------------------------------------------------
September 30, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $158,711 $139,089 $127,201 $115,054 $105,217
Loans receivable, net 129,744 116,093 108,873 97,669 89,309
Investment securities 14,470 9,655 8,006 7,761 7,651
Marketable equity securities 4,396 4,185 3,879 3,660 3,360
Mortgage-backed securities 15 20 482 31 37
Foreclosed real estate, net - 212 - - -
Deposits 107,086 103,612 95,378 90,063 84,841
FHLB advances 29,000 15,000 12,000 5,000 1,000
Retained earnings 10,900 9,763 8,739 8,263 7,519
Total stockholders' equity 21,248 19,621 18,227 18,685 18,659
</TABLE>
<TABLE>
<CAPTION>
Summary of Operations (Dollars in Thousands)
- --------------------------------------------------------------------------------------------------------------------
Years Ended September 30, 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $11,299 $10,280 $9,264 $8,137 $6,964
Interest expense 5,809 5,167 4,492 3,778 3,478
Net interest income 5,490 5,113 4,772 4,359 3,486
Provision for credit losses 90 100 22 20 51
Noninterest income 863 593 735 543 554
Noninterest expense 3,130 3,041 3,429 (3) 2,620 2,238
Net income before income taxes and
cumulative effect of change in
accounting principle 3,133 2,565 2,056 2,262 1,751
Net income 1,973 1,591 1,302 1,401 1,445
</TABLE>
<TABLE>
<CAPTION>
Other Selected Data
- --------------------------------------------------------------------------------------------------------------------
Years Ended September 30, 1998 1997 1996 1995 1994(1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 1.33 % 1.19 % 1.10 % 1.28 % 1.12 %
Return on average equity 9.68 8.40 6.98 7.31 12.89
Average equity to average assets 13.72 14.21 15.69 17.49 8.71
Net interest rate spread 3.03 3.27 3.34 3.26 3.28
Nonperforming assets to total assets 0.34 0.52 0.54 1.14 1.07
Nonperforming loans to total loans 0.41 0.45 0.63 1.34 1.26
Allowance for credit losses to total loans 0.59 0.58 0.60 0.63 0.71
</TABLE>
<TABLE>
<CAPTION>
Per Share Data
- --------------------------------------------------------------------------------------------------------------------
Years Ended September 30, 1998 1997 1996 1995 1994(2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Basic earnings per share $0.90 $0.74 $0.59 $0.60 $0.62
Diluted earnings per share 0.85 0.70 0.56 0.59 0.62
Book value per share 9.25 8.58 7.97 7.75 7.43
Cash dividends declared per share 0.30 0.27 0.20 0.15 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>
Total Assets [Graphics Omitted - Plotting Points Below]
Bar graph showing Total Assets in thousands of dollars for the year
ended September 30. The horizontal axis shows the years 1994 to 1998 and the
vertical axis shows amounts from $0 to $160,000. Graph values are $105,217,
$115,054, $127,201, $139,039, $158,711, for 1994, 1995, 1996, 1997, and
1998, respectively.
Loan Portfolio Composition [Graphics Omitted - Plotting Points Below]
Pie Chart showing Loan Portfolio Composition identifying the type of
loan and in percentages At September 30, 1998. 1-4 Family Residential (69.5%),
Commercial & Multi-Family Real Estate (3.8%), Consumer/Commercial Business
(16.3%), Construction (6.4%), and Land (4.0%).
Deposit Portfolio Composition [Graphics Omitted - Plotting Points Below]
Pie Chart showing Deposit Portfolio Composition identifying the type of
deposit and in percentages At September 30, 1998. Certificates (66.05%),
Checking (14.89%), Savings (14.58%), Money Market (4.48%).
Net Interest Income [Graphics Omitted - Plotting Points Below]
Bar graph showing Net Interest Income in thousands of dollars for the
year ended September 30. The horizontal axis shows the years 1994 to 1998 and
the vertical axis shows amounts from $0 to $6,000. Graph values are $3,486,
$4,359, $4,772, $5,113, $5,490 for 1994, 1995, 1996, 1997, and 1998,
respectively.
Net Income [Graphics Omitted - Plotting Points Below]
Bar graph showing Net Income in thousands of dollars for the year ended
September 30. The horizontal axis shows the years 1994 to 1998 and the vertical
axis shows amounts from $0 to $2,100. Graph values are $1,445, $1,401, $1,302,
$1,591, $1,973 for 1994, 1995, 1996, 1997, and 1998, respectively.
Return on Average Assets [Graphics Omitted - Plotting Points Below]
Bar graph showing Return on Average Assets stated in percentages for
the year ended September 30. The horizontal axis shows the years 1994 to 1998
and the vertical axis shows amounts from $0.00% to 1.50%. Graph values are
1.12%, 1.28%, 1.10%, 1.19%, 1.33% for 1994, 1995, 1996, 1997, and 1998,
respectively.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Management Strategy
- -------------------
The Company's management strategy is to maintain a strong capital
position through controlled growth and the production of high
quality, steadily increasing core earnings. This has been
accomplished by the continued focus upon the origination of
traditional one- to four family, adjustable rate mortgage loans, and
more recently, the emphasis on expanding the commercial and consumer
loan portfolios. This strategy, along with sound underwriting
standards designed to reduce the risk of loss in the Bank's loan
portfolio, help to lessen the income impact caused by declining
interest rates.
Management monitors the interest rate sensitivity of Bedford
Federal's balance sheet in order to better match the level and
duration of interest earning assets with the level and duration of
interest bearing liabilities. Changes in the interest rates charged
for loans and the interest rate paid on deposits are primary tools
used to influence the level and duration of earning earning assets
and interest bearing liabilities. In addition, short- and
intermediate-term investments, as well as borrowings, can be used to
help reduce interest rate risk. the tables on pages 7, 8, and 9
provide details about the Company's interest rate sensitivity and net
interest income.
In its efforts to manage the interest rates it pays on deposits, the
Bank focuses on maintaining a stable core deposit base while
providing competitive products and services to its customers. Bedford
Federal relies primarily on customer deposits and mortgage payments
as its major sources of funds, but also borrows from the FHLB to
supplement its funding needs and to help manage interest rate
sensitivity.
- --------------------------------------------------------------------------------
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 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,
1998, 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, 1998
- --------------------------------------------------------------------------------------------------------------------------------
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) $5,047 $4,791 $62,159 $21,854 $8,480 $12,576 $114,907
Other loans(1) 5,108 820 1,492 4,375 2,510 860 15,165
Marketable equity securities(3) 4,346 - - - - - 4,346
Federal funds sold and other
short-term investments 3,649 - - - - - 3,649
Investment securities 300 - 5,789 1,300 3,037 4,044 14,470
Mortgage-backed securities(2) - - - 15 - - 15
FHLB stock 1,550 - - - - - 1,550
------ ----- ------ ------ ------ ------ -------
Total interest-earning assets 20,000 5,611 69,440 27,544 14,027 17,480 154,102
------ ----- ------ ------ ------ ------ -------
Less:
Loans in process 1,640 1,633 1,633 - - - 4,906
Unearned discount and deferred fees(2) 13 12 157 55 22 32 291
Allowance for credit losses 60 34 373 154 64 79 764
------ ----- ------ ------ ------ ------ -------
Net interest-earning assets 18,287 3,932 67,277 27,335 13,941 17,369 148,141
------ ----- ------ ------ ------ ------ -------
Interest-bearing liabilities:
Money market deposits 1,545 1,046 1,187 526 250 228 4,782
Passbook deposits 704 671 1,251 3,987 2,599 6,230 15,442
NOW and other demand deposits 970 864 1,456 3,011 806 1,784 8,891
Certificate accounts 9,183 - 29,089 30,832 1,800 - 70,904
Borrowed funds 1,000 - - 18,000 - 10,000 29,000
------ ----- ------ ------ ------ ------ -------
Total interest-bearing liabilities 13,402 2,581 32,983 56,356 5,455 18,242 129,019
------ ----- ------ ------ ----- ------ -------
Interest sensitivity gap(4) $4,885 $1,351 $34,294 ($29,021) $8,486 ($873) $19,122
====== ====== ======= ========= ====== ====== =======
Cumulative interest sensitivity gap $4,885 $6,236 $40,530 $11,509 $19,995 $19,122
====== ====== ======= ======= ======= =======
Cumulative interest sensitivity gap
as a percent of total assets 3.08% 3.93% 25.54% 7.25% 12.60% 12.05%
Cumulative net interest-bearing
assets as a percent of
interest-bearing liabilities 136.45% 139.02% 182.77% 110.93% 118.05% 114.82%
</TABLE>
- ------------------------
(1) For purposes of the gap analysis, mortgage and other loans are reduced for
nonperforming loans but are not reduced for the allowace 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>
-------------------------------------------------------------------------------
1998 1997
------------------------------------- -------------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans(1) $103,502 $8,044 7.77 % $98,666 $7,816 7.92 %
Other loans(1) 19,188 1,861 9.70 14,600 1,481 10.15
Interest-earning deposits(2) 4,239 242 5.72 3,966 217 5.47
Federal funds sold and other
short-term investments 3,785 280 7.41 1,231 119 9.69
Investment securities 12,437 781 6.27 7,643 549 7.18
Mortgage-backed securities, net 17 1 6.98 431 30 6.85
FHLB stock 1,264 90 7.11 932 68 7.19
----- ------ ------- ------
Total interest-earning assets 144,432 11,299 7.82 127,469 10,280 8.07
------ ------
Noninterest-earning assets 4,041 5,667
----- -----
Total assets $148,473 $133,136
======== ========
Liabilities and equity:
Interest-bearing liabilities:
Money market deposits $4,378 149 3.40 % 4,603 143 3.11 %
Passbook deposits 15,217 454 2.98 14,675 446 3.04
NOW and other demand deposits 8,908 182 2.04 8,203 196 2.40
Certificate accounts 70,337 3,779 5.37 65,834 3,517 5.34
------ ----- ------ -----
Total deposit accounts 98,840 4,564 4.62 93,315 4,302 4.61
Borrowed funds 22,487 1,245 5.54 14,249 865 6.07
------ ----- ------ ---
Total interest-bearing liabilities 121,327 5,809 4.79 107,564 5,167 4.80
----- -----
Noninterest-bearing liabilities 6,769 6,610
Equity 20,377 18,962
------ ------
Total liabilities and equity $148,473 $133,136
======== ========
Net interest income $5,490 $5,113
====== ======
Interest rate spread(3) 3.03 % 3.27 %
Net interest margin(4) 3.80 % 4.02 %
Interest-earning asset to
interest-bearing liabilities 119.04% 118.51%
</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,
--------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
------------------------------- -------------------------------
Volume Rate Net Volume Rate Net
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $383 ($155) $228 $567 ($159) $408
Other loans 466 (86) 380 545 (36) 509
Interest-earning deposits 15 10 25 15 (23) (8)
Federal funds sold and other short-term
investments 247 (86) 161 16 10 26
Investment securities, net 345 (113) 232 36 34 70
Mortgage-backed securities, net (29) 0 (29) 10 - 10
FHLB stock 23 (1) 22 1 - 1
----- ---- ----- ---- ---- -----
Total interest-earning assets 1,450 (431) 1,019 1190 (174) 1,016
----- ----- ----- ---- ----- -----
Interest-bearing liabilities:
Money market deposits (7) 13 6 (12) 1 (11)
Passbook deposits 17 (9) 8 (22) 10 (12)
NOW and other demand deposits 17 (31) (14) 22 (29) (7)
Certificate accounts 241 21 262 316 (112) 204
Borrowed funds 500 (120) 380 498 3 501
--- ----- --- --- - ---
Total interest-bearing liabilities 768 (126) 642 802 (127) 675
--- ----- --- --- ----- ---
Net change in net interest income $682 ($305) $377 $388 ($47) $341
==== ====== ==== ==== ===== ====
</TABLE>
- --------------------------------------------------------------------------------
Comparison of Financial Condition for Fiscal Years Ended September 30, 1998 and
1997
- --------------------------------------------------------------------------------
The Company's total assets were $158.7 million at September 30, 1998, an
increase of $19.6 million or 14.1%, from $139.1 million at September 30, 1997.
The asset growth was primarily due to an 11.8% rise in net loans receivable and
a 50.7% increase in investment securities from the end of fiscal 1997.
The continuaton of new home construction within the markets Bedford Federal
serves combined with growth of both commercial and consumer loans during fiscal
1998 were the major factors in the expansion of loans. This increase was funded
primarily by principal repayments of the loan portfolio, FHLB advances and
increased deposits. 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 $4,868,000, marketable equity securities rose
$158,000 , while mortgage-backed securities declined $5,000 in fiscal 1998
compared to fiscal 1997.
Deposits totaled $107.1 million at September 30, 1998, an increase of $3.5
million from $103.6 million on September 30, 1997, while advances from the FHLB
increased $14 million as the Savings Bank utilized additional borrowings to meet
funding needs.
9
<PAGE>
Total stockholders' equity was $21.2 million on September 30, 1998, an increase
of $1.6 million from the $19.6 million one year previous. This increase reflects
the continued profitability of the Corporation and allowed Bedford Bancshares to
increase the level of dividends declared to $.30 per share in fiscal 1998 from
$.265 per share in 1997.
- --------------------------------------------------------------------------------
Comparison of Operating Results for Years Ended September 30, 1998 and 1997
- --------------------------------------------------------------------------------
Net Income. Net income increased $382,000, to $1,973,000 for fiscal 1998 from
fiscal 1997. A 7.4% increase in net interest income, combined with a 45.5%
increase in noninterest income and a 10% reduction in the provision for loan
losses accounted for the improvement in profitability.
Interest Income. Interest income totaled $11.3 million for the fiscal year ended
September 30, 1998, a 9.9% increase from the $10.3 million recorded for fiscal
1997. The interest income growth is due to the 13.3% expansion of average
earning assets, offset by a 25 basis point decline in the rate earned on average
earning assets. The decline in the rate earned was primarily reflective of the
decline in general market rates of interest. A detailed analysis of the changes
in interest income due to changes in volume and rate is presented in the table
on page 8.
Interest Expense. Interest expense increased $642,000 from $5.2 million for the
year ended September 30, 1997 to $5.8 million for the fiscal year ended
September 30, 1998. The level of average interest-bearing liabilities rose 12.9%
to $121.3 million for fiscal 1998 from $107.6 for fiscal 1997. There was
virtually no change in the overall cost of interest bearing liabilities in
fiscal 1998 over fiscal 1997. 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 $5.5 million for the year ended
September 30, 1998, up 7.4% from the $5.1 million realized in fiscal 1997. The
increase is primarily due to the higher volume of earning assets which equalled
119.0% of average interest bearing liabilities in fiscal 1998, compared to
118.5% in fiscal 1997. A detailed analysis of the components of net interest
income is presented on pages 8 and 9 of this report.
Provision for Loan Losses. The provision for loan losses for the year ended
September 30, 1998 decreased $10,000 to $90,000 compared to the provision
recorded in fiscal 1997. The decrease in fiscal 1998 was attributable to the
lower level of nonperforming loans and the lower level of charge-offs
experienced during the year. At September 30, 1998, the allowance for credit
losses was $764,000, or .59% of net loans receivable and 143.55% of
nonperforming assets. Based upon the quality of the Savings Bank's loan
portfolio, the level of nonperforming assets, the relatively stable local
economy, and current 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 loan losses to be
based primarily upon growth in the loan portfolio, the level of nonperforming
assets, the interest rate environment 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, 1998, noninterest income
amounted to $863,000, up $270,000 from the $593,000 earned in fiscal 1997. The
increase reflects management's focus and commitment on improving fee based
income. Service charges and fees on loans increased 55.1% primarily due to the
introduction of loan processing fees during fiscal 1998. Other customer service
fees and commissions rose 32.2% due primarily to a change in the way overdrafts
are processed. Other noninterest income rose 89.7% due to a higher level of
income from the sale of mortgage insurance and higher ATM usage charges for
noncustomers.
10
<PAGE>
Noninterest Expense. Noninterest expense totaled $3.1 million for the year ended
September 30, 1998 compared to $3.0 million for fiscal 1997. The increase was
primarily due to $201,000 in professional fees incurred during 1998, compared to
$120,000 in fiscal 1997. The increase in professional fess was primarily due to
charges incurred during the development of the Bank's three year stategic plan
and increased expenses related to the Company's 1998 proxy solicitation process.
Income Taxes. The provision for income taxes increased $186,000 to $1,160,000 in
fiscal 1998 from $974,000 in fiscal 1997 due to the increased level of taxable
income.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
The Bank's liquidity is a measure of its abilility to fund loans, pay deposit
withdrawals, and other cash outflows in an efficient, cost effective manner. The
Bank's primary sources of funds are scheduled amortization and prepayment of
loans, deposits and FHLB advances. The Bank uses these sources to fund lending
commitments and maturing time deposits, pay deposit withdrawals, purchase new
investments, increase liquidity and for capital expenditures. Generally the Bank
funds its operations internally, but also borrows from the Federal Home Loan
Bank ("FHLB") of Atlanta. As of September 30, 1998, FHLB advances totaled $29
million. Loan payments and maturing investments are greatly influenced by
general interest rates, economic conditions and competition.
The OTS adopted a new liquidity rule effective November 24, 1997. The new rule
lowered liquidity requirements for savings associations from 5 to 4 percent of
the association's liquidity base. In addition, the liquidity base was reduced by
modifying the definition of net withdrawable accounts to exclude accounts with
maturities exceeding one year. Another change removed the requirement that
certain obligations must mature in five years of less in order to qualify as a
liquid asset. The new rule also eliminated a separate limit that required
savings associations to hold assets equal to 1 percent of a thrift's liquidity
base in cash or short-term liquid assets. At September 30, 1998, the Bank's
regulatory liquidity as measured by the new requirement was 19%.
The amount of certificate of deposit scheduled to mature within one year is
approximately $5.1 million. To the extent that these deposits do not remain at
the Bank upon maturity, management of the Bank believes that it can replace
these funds with other deposits, excess liquidity, FHLB advances, or other
borrowings. It has been the Bank's experience that a substantial portion of such
maturing deposits remain at the Bank. In addition, at September 30, 1998, the
Bank had commitments to fund loans of $8.2 million, and $4.9 million of loans in
process.
Net cash provided by operating activities for fiscal 1998 totaled $2.3 million.
Net cash absorbed by investing activities for fiscal 1998 totaled $19.2 million,
an increase from fiscal 1997 of $9.2 million. The increase was primarily
attributable to a rise in cash used for net loan originations of $6.2 million
and cash used for net purchases of investments of $8.0 million.
Net cash provided by financing activities for the year ended September 30, 1998
totaled $17.1 million. This is a result of a net increase in deposits of $3.5
million, an increase in net FHLB advances of $14.0 million and dividends paid of
$665,000. 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.
11
<PAGE>
- --------------------------------------------------------------------------------
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.
The Year 2000 Issue
- --------------------------------------------------------------------------------
The Year 2000 ("Y2K") Issue relates to whether computer systems will properly
recognize and process date sensitive information on and after January 1, 2000.
Systems that do not properly interpret such information could generate erroneous
data or fail. The Bank is heavily dependent on computer systems in the conduct
of substantially all of its business activities.
During fiscal 1998, the Company established a Y2K Committee (the "Committee")
and adopted a Y2K Compliance Plan (the "Plan"). The purpose of the Committee and
Plan are to identify the systems that could be affected by the Y2K issue and to
determine the actions required to prepare for the proper recognition and
processing of date sensitive information on and after January 1, 2000. The
Federal Financial Institutions Examination Council has recommended that the Plan
include five phases: Awareness, Assessment, Renovation, Validation and
Implementation. The phases are intended to help the Company identify risks,
develop an action plan, perform adequate testing and complete certification that
its processing systems will be Y2K compliant.
The Bank has conducted a comprehensive review of its computer systems, including
its core processing systems maintained by a third party service bureau, to
identify the systems that could be affected by the Y2K issue. The Company has
maintained ongoing contact with this vendor throughout the Renovation phase,
which included program changes and other modifications necessary for Y2K
readiness. The Company is currently in Phase 4, Validation, which involves
testing of changes to hardware and software, including all vendor maintained
software and hardware. The Validation phase is scheduled for completion by June
30, 1999. The Implementation phase is targeted for completion by September 30,
1999. In addition, the Bank is required by Federal regulators to develop
contingency plans in the event that any of its mission critical computer systems
fail to meet the Y2K requirements. These detailed contingency plans will also be
tested and reviewed by both the Bank's management and regulators to ensure their
readiness and reliability.
Based on preliminary estimates, the Bank expects to spend approximately $125,000
to $150,000 to modify its computer information systems, both internal and vendor
maintained, enabling proper processing of transactions relative to the year 2000
and beyond. The Bank continues to evaluate appropriate courses of corrective
action, including replacement of certain systems whose associated costs would be
recorded as assets and amortized. Accordingly, the Bank does not expect the
amounts to be expensed to have a material impact on its financial position or
results of its operations. For the twelve months ended September 30, 1998, the
Bank had recorded $21,000 of expense related to the Y2K issue and had not
replaced any assets.
Successful and timely completion of the Y2K project is based on management's
best estimates derived from various assumptions of future events, which are
inherently uncertain, including the testing results of the core processing
system maintained by a third party service bureau, and readiness of all vendors,
suppliers and customers. No assurance can be given that the Plan will be
successfully completed by the Year 2000, in which case the Company could incur
data processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on the financial statements of the
Company.
12
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Consolidated Financial Statements
(with supplemental material)
As of September 30, 1998 and 1997 and
For the Years Ended September 30, 1998, 1997 and 1996
13
<PAGE>
300 ARBORETUM PLACE, SUITE 520
RICHMOND, VIRGINIA 23236
Telephone (804) 330-3092
FAX: (804) 330-7753
[LOGO] BDO SEIDMAN LLP
ACCOUNTANTS AND CONSULTANTS
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, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years ended September 30, 1998. 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.
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 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years
ended September 30, 1998 in conformity with generally accepted accounting
principles.
/s/BDO Seidman, LLP
Richmond, Virginia
October 23, 1998
14
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
- --------------------------------------------------------------------------------
September 30, 1998 1997
- --------------------------------------------------------------------------------
Assets
Cash (including interest bearing deposits of
approximately $3,650 and $2,791) $ 5,666 $ 5,446
Securities (Notes 1 and 6)
Held-to-maturity 2,114 4,616
Available for sale 16,820 9,244
Investment in Federal Home Loan Bank stock,
at cost (Note 6) 1,550 932
Loans receivable, net (Notes 2, 6 and 14) 129,744 116,093
Foreclosed real estate, net - 212
Property and equipment, net (Note 4) 1,160 1,214
Accrued interest receivable 996 847
Deferred income taxes (Note 9) 95 58
Other assets 566 427
- --------------------------------------------------------------------------------
Total assets $158,711 $139,089
- --------------------------------------------------------------------------------
15
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands)
- --------------------------------------------------------------------------------
September 30, 1998 1997
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 5) $107,086 $103,612
Advances from Federal Home Loan Bank (Note 6) 29,000 15,000
Advances from borrowers for taxes and insurance 528 502
Dividends payable 184 160
Other liabilities (Note 8) 665 194
- --------------------------------------------------------------------------------
Total liabilities 137,463 119,468
- --------------------------------------------------------------------------------
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, 2,297,900 and 1,142,425 shares, issued and
outstanding 230 114
Additional paid-in capital 10,939 10,836
Retained earnings, substantially restricted (Note 10) 10,900 9,763
Unrealized gain on securities available for sale (Note 1) 60 22
Stock acquired by ESOP and RRP (Note 11) (881) (1,114)
- --------------------------------------------------------------------------------
Total stockholders' equity 21,248 19,621
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $158,711 $139,089
- --------------------------------------------------------------------------------
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, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans $ 9,905 $ 9,297 $8,380
U.S. government obligations, including agencies 1,055 796 748
Other investments 339 187 136
- -------------------------------------------------------------------------------------------------------------------
Total interest income 11,299 10,280 9,264
- -------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits (Note 5) 4,564 4,302 4,128
Borrowed money 1,245 865 364
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 5,809 5,167 4,492
- -------------------------------------------------------------------------------------------------------------------
Net interest income 5,490 5,113 4,772
Provision for loan losses (Note 2) 90 100 22
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 5,400 5,013 4,750
- -------------------------------------------------------------------------------------------------------------------
Noninterest income
Service charges and fees on loans 459 296 403
Other customer service fees and commissions 320 242 257
Gain on sale of loans, investments
and foreclosed real estate 10 16 30
Other 74 39 45
- -------------------------------------------------------------------------------------------------------------------
Total noninterest income 863 593 735
- -------------------------------------------------------------------------------------------------------------------
Noninterest expense
Compensation and employee benefits 1,712 1,684 1,467
Occupancy and equipment 321 318 336
Data processing 354 341 311
Federal insurance of accounts 64 88 207
Advertising 111 140 87
Professional fees 201 120 115
BIF/SAIF premium disparity assessment (Note 8) - - 555
Other 367 350 351
- -------------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,130 3,041 3,429
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
17
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands) (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income before income taxes $3,133 $2,565 $2,056
Provision for income taxes (Note 9) 1,160 974 754
- -------------------------------------------------------------------------------------------------------------------
Net income $1,973 $1,591 $1,302
- -------------------------------------------------------------------------------------------------------------------
Basic earnings per share (Note 16) $ .90 $ .74 $ .59
Diluted earnings per share (Note 16) $ .85 $ .70 $ .56
- -------------------------------------------------------------------------------------------------------------------
</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, 1995 $121 $11,366 $8,263 $ (9) $(1,056) $18,685
Net income - - 1,302 - - 1,302
Change in unrealized loss
on securities available
for sale (Note 1) - - - (24) - (24)
Allocated/earned ESOP
shares (Note 11) - 55 88 - 26 169
Purchase of RRP shares
(Note 11) - - - - (483) (483)
Repurchase of stock
(130,180 shares) (7) (647) (461) - - (1,115)
Dividends declared ($.20
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
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 ($.27
per share) - - (605) - - (605)
RRP vesting (Note 11) - (72) - - 172 100
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
19
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands) (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Additional Unrealized Acquired
Common Paid-in Retained Gain/(Loss) By ESOP
Stock Capital Earnings on Securities and RRP Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997 $114 $10,836 $9,763 $22 $(1,114) $19,621
Net income - - 1,973 - - 1,973
Change in unrealized loss
on securities available
for sale (Note 1) - - - 38 - 38
Allocated/earned ESOP
shares (Note 11) - 96 16 - 69 181
Purchase of RRP shares
(Note 11) - (29) (57) - - (86)
Effect of 2 for 1 stock split 115 - (115) - - -
Dividends declared ($.30
per share) - - (689) - - (689)
Exercise of options (Note 11) 1 93 9 - - 103
RRP vesting (Note 11) - (57) - - 164 107
- -------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 $230 $10,939 $10,900 $60 $(881) $21,248
- -------------------------------------------------------------------------------------------------------------------
</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, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 1,973 $ 1,591 $ 1,302
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses 90 100 22
Provision for depreciation and amortization 150 159 163
(Increase) decrease in deferred income taxes (37) 380 (121)
(Gain) loss on sale of loans and securities (4) (11) (2)
(Gain) loss on sale of foreclosed real estate (7) (4) (28)
Loans originated for sale (304) (185) (152)
Proceeds from sale of loans originated for sale 304 185 153
(Increase) decrease in interest receivable (149) (185) 51
(Increase) decrease in other assets (139) 121 (295)
Increase (decrease) in other liabilities 471 (745) 356
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,348 1,406 1,449
- -------------------------------------------------------------------------------------------------------------------
Investing activities
Proceeds from maturities of investments 7,500 2,090 2,200
Proceeds from sales of available for sale securities 1,004 1,000 872
Purchase of available for sale securities (13,542) (5,500) (4,035)
Principal collected on mortgage-backed securities 5 55 26
Net increase in loans to customers (13,741) (7,575) (11,311)
Net proceeds from sales of foreclosed real estate 220 47 113
Purchases of premises, equipment and leasehold
improvements (96) (131) (88)
Purchase of FHLB stock (618) - -
- -------------------------------------------------------------------------------------------------------------------
Net cash absorbed by investing activities (19,268) (10,014) (12,223)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
21
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands) (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financing activities
Net increase in deposits $ 3,474 $ 8,234 $ 5,315
Net increase (decrease) in advance payments
from borrowers 26 (37) (6)
Proceeds from FHLB advances 22,000 23,500 11,000
Principal payments of FHLB advances (8,000) (20,500) (4,000)
Purchase of stock by ESOP and RRP (86) (23) (483)
Allocation of ESOP and RRP shares 288 376 274
Repurchase of stock - - (1,115)
Dividends paid (665) (571) (518)
Issuance of common stock 103 - 45
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 17,140 10,979 10,512
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 220 2,371 (262)
Cash and cash equivalents - beginning of year $ 5,446 3,075 3,337
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - end of year 5,666 $ 5,446 $ 3,075
- -------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
- -------------------------------------------------------------------------------------------------------------------
Cash payments of interest expense $ 5,880 $ 5,387 $ 4,503
- -------------------------------------------------------------------------------------------------------------------
Cash payments of income taxes $ 570 $ 823 $ 817
- -------------------------------------------------------------------------------------------------------------------
Transfer of loans to foreclosed real estate $ 110 $ 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.
During its assessment of the allowance for loan losses, management evaluates
loans for impairment. 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.
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, 1998, 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.
The Company allocates 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. The Company assesses 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, 1998.
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 six years, beginning with the year ending
September 30, 1999. 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, 1998.
27
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Summary of Accounting Policies
(continued)
- --------------------------------------------------------------------------------
Accounting Pronouncements
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
The Corporation adopted Statement of Financial Accounting Standards No. 128
"Earnings Per Share" (SFAS 128), as of December 31, 1997. SFAS 128 is effective
for financial statement, including interim reports, issued for periods ending
after December 15, 1997. SFAS 128 provides a different method for calculating
earnings per share than was 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. The computation of basic and
diluted earnings per share is presented in Note 16.
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.
28
<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, 1998
- ---------------------------------------------------------------------------------------------------------------------------
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 $ 2,099 $ 33 $ - $ 2,132
Mortgage-backed securities 15 - - 15
- ---------------------------------------------------------------------------------------------------------------------------
2,114 33 - 2,147
- ---------------------------------------------------------------------------------------------------------------------------
Available for Sale
United States government
and agency obligations 12,262 109 - 12,371
Marketable Equity securities 4,411 - 15 4,396
Other 53 - - 53
- ---------------------------------------------------------------------------------------------------------------------------
16,726 109 15 16,820
- ---------------------------------------------------------------------------------------------------------------------------
$18,840 $142 $15 $18,967
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross gains of approximately $3,000, $4,000 and $2,000 and gross losses of
approximately $1,000, $0 and $0 were realized on sales of securities available
for sale during the years ended September 30, 1998, 1997 and 1996, respectively.
29
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1. Securities (continued)
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>
30
<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, 1998, 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 $ 300 $ 300
Due in one through five years 1,299 1,317
Due after five years 500 515
- ---------------------------------------------------------------------------------------------------------------------------
2,099 2,132
Mortgage-backed securities 15 15
- ---------------------------------------------------------------------------------------------------------------------------
2,114 2,147
- ---------------------------------------------------------------------------------------------------------------------------
Available for Sale
Due in one year or less 5,757 5,790
Due in one through five years 3,004 3,037
Due after five years 3,501 3,544
- ---------------------------------------------------------------------------------------------------------------------------
12,262 12,371
Marketable equity securities 4,411 4,396
Other 53 53
- ---------------------------------------------------------------------------------------------------------------------------
16,726 16,820
- ---------------------------------------------------------------------------------------------------------------------------
$18,840 $18,967
- ---------------------------------------------------------------------------------------------------------------------------
</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.
31
<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, 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans $100,863 $ 93,791
Construction loans 13,530 8,597
Home equity loans 3,944 3,972
Loans to depositors, secured by savings 451 581
Installment loans 10,129 9,041
Term notes 6,788 3,705
- ---------------------------------------------------------------------------------------------------------------------------
135,705 119,687
Less
Undisbursed loans in process 4,906 2,629
Unearned discount resulting from add-on interest - 4
Deferred loan fees and costs, net 291 283
Allowance for credit losses 764 678
- ---------------------------------------------------------------------------------------------------------------------------
$129,744 $116,093
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Activity in the allowance for credit losses, in thousands, is summarized as
follows:
<TABLE>
<CAPTION>
Year Ended September 30, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $678 $650 $640
Provision charged to operations 90 100 22
Charge offs net of recoveries (4) (72) (12)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of year $764 $678 $650
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<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, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Home Loan Mortgage Corporation (FHLMC) $1,361 $1,719 $1,472
Virginia Housing Development Authority (VHDA) 1,097 1,184 1,245
- ---------------------------------------------------------------------------------------------------------------------------
$2,458 $2,903 $2,717
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
4. Property and Equipment
Property and equipment, in thousands, are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 251 $ 251
Office buildings 1,203 1,195
Rental buildings 48 48
Furniture, fixtures and equipment 953 886
Automobile 25 16
Leasehold improvements 20 22
- ---------------------------------------------------------------------------------------------------------------------------
2,500 2,418
Less accumulated depreciation 1,340 1,204
- ---------------------------------------------------------------------------------------------------------------------------
$1,160 $1,214
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
33
<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, 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NOW accounts $ 15,941 14.89% $ 11,910 11.49%
Money market accounts 4,799 4.48 5,862 5.66
Savings accounts 15,611 14.58 14,980 14.46
Time deposits 70,735 66.05 70,860 68.39
- -------------------------------------------------------------------------------------------------------------------
$107,086 100.00% $103,612 100.00%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The aggregate amount of certificates of deposit of $100,000 or more was
approximately $10,416,000 and $8,677,000 at September 30, 1998 and 1997,
respectively.
At September 30, 1998, the scheduled maturities of time deposits, in thousands,
are as follows:
Year ending September 30,
--------------------------------------------------------------
1999 $38,107
2000 16,291
2001 14,539
2002 518
Thereafter 1,280
--------------------------------------------------------------
$70,735
--------------------------------------------------------------
Interest expense on deposits, in thousands, is summarized as follows:
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW accounts $ 182 $ 194 $ 197
Money market account 149 145 160
Savings account 454 445 458
Time deposits 3,779 3,518 3,313
- -------------------------------------------------------------------------------------------------------------------
$4,564 $4,302 $4,128
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<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, 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $ 1,000 $ 6,000
One to two years 4,000 1,000
Two years or more 24,000 8,000
- ---------------------------------------------------------------------------------------------------------------------------
$29,000 $15,000
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average interest rate on advances at September 30, 1998 and 1997
was 5.55% and 6.01%, respectively. These advances are collateralized by the
Company's investment in FHLB stock and qualifying real estate loans under a
blanket collateral agreement. Certain advances are subject to call dates which
result in earlier maturities.
Information related to borrowing activity from the Federal Home Loan Bank in
thousands is as follows:
<TABLE>
<CAPTION>
Year Ended September 30, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum amount outstanding during the year $31,000 $16,000 $12,000
- ---------------------------------------------------------------------------------------------------------------------------
Average amount outstanding during the year 22,487 12,249 6,333
- ---------------------------------------------------------------------------------------------------------------------------
Average interest rate during the year 5.54% 6.07% 5.85%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<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, 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term investments $ 5,666 $ 5,666 $ 5,446 $ 5,446
Securities 18,934 18,967 13,860 13,845
Loans, net of allowance for loan losses 129,744 130,667 116,093 117,402
Financial liabilities
Deposits 107,086 107,530 103,612 103,937
Advances from Federal Home Loan Bank 29,000 29,000 15,000 15,000
Notional Fair Notional Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------------------------------------------------------
Unrecognized financial instruments
Commitments to extend credit $8,173 $8,173 $7,020 $7,020
</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.
36
<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.
37
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
8. BIF/SAIF Premium Disparity Assessment
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"),
the FDIC imposed a special assessment on SAIF members to capitalize the SAIF at
the designated reserve level of 1.25% as of September 30, 1996. Based on the
Company's deposits as of March 31, 1995, the date for measuring the amount of
the special assessment pursuant to the Act, the Company 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, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $1,066 $517 $816
State 186 152 97
- ---------------------------------------------------------------------------------------------------------------------------
1,252 669 913
Deferred tax expense (benefit) (92) 305 (159)
- ---------------------------------------------------------------------------------------------------------------------------
Total provision for income taxes $1,160 $974 $754
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Differences between the statutory and effective tax rates are summarized as
follows:
<TABLE>
<CAPTION>
Percent of Pre-tax Income
Year Ended September 30, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<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 5.6 4.5 3.6
Other (2.6) (.5) (.9)
- ---------------------------------------------------------------------------------------------------------------------------
Tax at effective rate 37.0% 38.0% 36.7%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
9. Income Taxes (continued)
The components of the net deferred tax asset, in thousands, were as follows:
September 30, 1998 1997
- --------------------------------------------------------------------------------
Deferred tax asset
Bad debts $130 $ 91
Loan fees 46 5
- --------------------------------------------------------------------------------
Total deferred tax asset 176 96
- --------------------------------------------------------------------------------
Deferred tax liability
Accelerated depreciation (13) (8)
Unrealized gain on securities, available for sale (35) (6)
Distributive share of income from partnership (18) -
Other (15) (24)
- --------------------------------------------------------------------------------
Total deferred tax liability (81) (38)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 95 $ 58
- --------------------------------------------------------------------------------
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, 1998,
the liquidation account, unadjusted for customer withdrawals, totaled
$6,144,000.
39
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
11. Retirement Plans and Employee Benefit Programs
The Savings Bank has a retirement plan under Internal Revenue Code Section
401(k) covering all full-time employees who have completed one or more years of
continuous service and have reached age 21. Each employee has an option to
voluntarily contribute to this plan up to 10% of their salary and the Savings
Bank will match $.50 for every $1 up to 4% of salary. During fiscal 1993, the
plan also provided for the Savings Bank to pay into the plan an amount equal to
10% of each employee's salary, subject to Department of Labor and Income Tax
Limitationa. 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, 1998, 1997 and 1996, respectively. The total expense for the
plan was $61,000, $60,000, and $54,000 for the years ended September 30, 1998,
1997 and 1996, 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 160,000 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 66,666 and 50,666 shares of Common Stock as of September
30, 1998 and 1997, respectively. The Company recognized $138,000 and $196,000 of
compensation cost for the years ended September 30, 1998 and 1997, respectively.
The fair value of unearned ESOP shares totaled $1,027,000 at September 30, 1998.
There were no commitments to repurchase ESOP shares.
Shares pledged as collateral are reported as a reduction of stockholders' equity
in the consolidated balance sheets. As shares are released from collateral, the
Company reports compensation expense equal to the current market price of the
shares, and the shares become outstanding for earnings per share computations.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings, and dividends on unallocated ESOP shares are recorded as a reduction
of debt.
40
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
11. Retirement Plans and Employee Benefit Programs (continued)
Recognition and Retention Plan
The Board of Directors approved the establishment of a Recognition and Retention
Plan ("RRP") on January 25, 1995. The plan states that the Trust, established
under the plan, shall not purchase more than 4% of the aggregate shares of
Common Stock issued by the Parent Company in the mutual-to-stock conversion of
the Savings Bank (100,510 shares). 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, 1998 and 1997, the amount
included in compensation expense was $104,000 and $87,000, respectively. The
status of the shares in this plan is summarized as follows:
Weighted
Average
Share Unawarded Awarded
Price Shares Shares
- --------------------------------------------------------------------------------
Balance at September 30, 1996 $8.38 13,394 64,552
Granted 9.38 (5,000) 5,000
Vested 5.65 - (17,908)
- --------------------------------------------------------------------------------
Balance at September 30, 1997 6.10 8,394 51,644
Granted - - -
Vested 5.92 - (16,224)
- --------------------------------------------------------------------------------
Balance at September 30, 1998 $6.18 8,394 35,420
- --------------------------------------------------------------------------------
41
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
11. Retirement Plans and Employee Benefit Programs (continued)
Stock Option Plans
The Company established two stock option plans during 1995, 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:
Weighted
Average
Exercise Available Options Vested and
Price for Grant Outstanding Exercisable
- --------------------------------------------------------------------------------
Balance at September 30, 1996 $5.72 33,494 161,408 47,998
Granted 9.38 (12,500) 12,500 -
Vested 5.65 - (44,754) 44,754
- --------------------------------------------------------------------------------
Balance at September 30, 1997 5.87 20,994 129,154 92,752
Granted - - - -
Vested - - (40,555) 40,555
Exercised 5.50 - - (18,792)
- --------------------------------------------------------------------------------
Balance at September 30, 1998 $6.18 20,994 88,599 114,515
- --------------------------------------------------------------------------------
The remaining contractual lives of the options granted in 1998, 1997 and 1996
are 6.3 years, 7.3 years and 8.3 years, respectively at September 30, 1998. The
weighted average remaining contractual life of total options is 6.5 years at
September 30, 1998.
42
<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.
Year Ended September 30, 1998 1997 1996
- --------------------------------------------------------------------------------
Net income
As reported $1,973 $1,591 $1,302
Pro forma 1,973 1,310 1,020
Year Ended September 30, 1998 1997 1996
- --------------------------------------------------------------------------------
Net income per share Basic Diluted Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------
As reported .90 .85 .70 .70 .59 .56
Pro forma .90 .85 .61 .57 .46 .43
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.
43
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
12. Commitments and Contingencies (continued)
The current minimum annual rental commitments under non-cancelable operating
leases in effect at September 30, 1998 are as follows:
Year Ending September 30, Amount
--------------------------------------------------------------
1999 $ 7,200
2000 7,200
2001 6,600
-------------------------------------------------------------
$21,000
-------------------------------------------------------------
Rent expense was approximately $7,000, $7,400 and $6,100 for the years ended
September 30, 1998, 1997, and 1996 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, 1998 and 1997. The Savings Bank uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
September 30, 1998 1997
- --------------------------------------------------------------------------------
Financial instruments, in thousands,
whose contract amounts represent credit risk
Unfunded commercial credit line $1,403 $ 66
Unfunded home equity lines of credit 4,978 4,071
Commitments to finance real estate
acquisitions and construction 1,792 2,883
- --------------------------------------------------------------------------------
$8,173 $7,020
- --------------------------------------------------------------------------------
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.
44
<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, 1998, 1997 and 1996 are approximately $826,000,
$819,000 and $641,000, respectively.
45
<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 as follows as of September 30, 1998 and 1997. 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>
Amount Percent Actual Actual Excess
September 30, 1998 Required Required Amount Percent Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tangible Capital $2,383,000 1.50% $19,192,000 12.1% $16,809,000
Core Capital 6,355,000 4.00 19,192,000 12.1 12,837,000
Risk-based Capital 7,353,000 8.00 19,857,000 21.6 12,504,000
</TABLE>
<TABLE>
<CAPTION>
Amount Percent Actual Actual Excess
September 30, 1997 Required Required Amount Percent Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tangible Capital $2,094,000 1.50% $17,301,000 12.4% $15,207,000
Core Capital 4,187,000 3.00 17,301,000 12.4 13,114,000
Risk-based Capital 6,296,000 8.00 17,887,000 22.7 11,591,000
</TABLE>
The 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 Bank to be reduced
below certain requirements imposed by Federal regulations.
46
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
Note 16. Earnings Per Share
On May 20, 1998, the Board of Directors declared a 100% stock dividend in the
form of a two-for-one stock split to be distributed June 15, 1998 to all
shareholders of record as of June 1, 1998. All applicable share and per share
data have been adjusted for the stock dividend.
Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
Year Ended September 30, 1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings
Income available to common shareholders $1,973,000 $1,591,000 $1,302,000
- ----------------------------------------------------------------------------------------------------
Weighted average share outstandings 2,182,617 2,164,432 2,225,394
- ----------------------------------------------------------------------------------------------------
Basic earnings per share $ .90 $ .74 $ .59
- ----------------------------------------------------------------------------------------------------
Diluted earnings per share
Income available to common shareholders $1,973,000 $1,591,000 $1,302,000
- ----------------------------------------------------------------------------------------------------
Weighted average shares outstanding 2,182,617 2,164,432 2,225,394
Diluted effect of RRP plan shares 43,238 41,082 35,317
Diluted effect on stock options 93,887 93,601 92,624
- ----------------------------------------------------------------------------------------------------
Total weighted average shares outstanding 2,319,742 2,299,115 2,353,335
- ----------------------------------------------------------------------------------------------------
Diluted earnings per share $ .85 $ .70 $ .56
- ----------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
17. Condensed Parent Company Information
Condensed financial information is shown for the Parent Company as follows:
Balance Sheets
(in thousands)
September 30, 1998 1997
- --------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 379 $ 715
Securities 103 114
Investment in Savings Bank subsidiary 19,251 17,300
Loan to Savings Bank subsidiary 2,000 2,000
Other assets 123 162
- --------------------------------------------------------------------------------
Total assets $21,856 $20,291
- --------------------------------------------------------------------------------
Liabilities and stockholders' equity
Other liabilities $ 424 $ 524
Dividends payable 184 160
Stockholders' equity 21,248 19,607
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $21,856 $20,291
- --------------------------------------------------------------------------------
48
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
17. Condensed Parent Company Information (continued)
Condensed Statements of Operations
(in thousands)
Year Ended September 30, 1998 1997 1996
- -------------------------------------------------------------------------------
Income
Interest
Savings Bank's ESOP loan $ 34 $ 40 $ 44
Loan to Savings Bank subsidiary 170 218 292
Other 57 41 23
- -------------------------------------------------------------------------------
Total income 261 299 359
- -------------------------------------------------------------------------------
Expenses
Professional fees 108 42 44
Other operating expenses 25 36 40
- -------------------------------------------------------------------------------
Total expenses 133 78 84
- -------------------------------------------------------------------------------
Net income before income taxes and equity in
undistributed net income of Savings Bank
subsidiary 128 221 275
Provision for income taxes 48 84 104
Equity in undistributed net income of Savings
Bank subsidiary 1,893 1,454 1,131
- -------------------------------------------------------------------------------
Net income $1,973 $1,591 $1,302
- -------------------------------------------------------------------------------
49
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
17. Condensed Parent Company Information (continued)
Condensed Statements of Cash Flows
(in thousands)
Year Ended September 30, 1998 1997 1996
- --------------------------------------------------------------------------------
Operating activities
Net income $1,973 $1,591 $1,302
Adjustments
Equity in undistributed net income of Savings
Bank subsidiary (1,893) (1,454) (1,131)
(Increase) decrease in other assets 50 (79) (3)
Increase (decrease) in other liabilities (76) 189 (130)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 54 247 38
- --------------------------------------------------------------------------------
Investing activities
Loans originated, net of principal repayments 80 1,080 1,080
Purchase of Savings Bank subsidiary stock - - -
Purchase of investment securities - (72) -
- --------------------------------------------------------------------------------
Net cash provided by investing activities 80 1,008 1,080
- --------------------------------------------------------------------------------
Financing activities
Proceeds from sale of stock - - -
Purchase of stock, by RRP (86) (23) -
Dividends paid (665) (571) (518)
Repurchase of stock - - (1,115)
RRP vesting (57) (95) (42)
ESOP note payment 235 - 135
Exercise of option 103 - 45
- --------------------------------------------------------------------------------
Net cash absorbed by financing activities (470) (689) (1,495)
- --------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (336) 566 (377)
Cash and cash equivalents, beginning of year 715 149 526
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 379 $ 715 $ 149
- --------------------------------------------------------------------------------
50
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
18. Selected Quarterly Financial Data (Unaudited)
Condensed quarterly consolidated financial data, in thousands (except per share
data), is shown as follows:
First Second Third Fourth
Year Ended September 30, 1998 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Total interest income $2,668 $2,725 $2,935 $2,971
Total interest expense 1,371 1,379 1,504 1,555
- --------------------------------------------------------------------------------
Net interest income 1,297 1,346 1,431 1,416
Provision for credit losses 30 30 30 -
- --------------------------------------------------------------------------------
Net interest income after provision
for credit losses 1,267 1,316 1,401 1,416
Noninterest income 187 224 202 250
Noninterest expense 835 790 766 739
- --------------------------------------------------------------------------------
Income before income taxes 619 750 837 927
Provision for income taxes 235 290 325 310
- --------------------------------------------------------------------------------
Net income $ 384 $ 460 $ 512 $ 617
- --------------------------------------------------------------------------------
Cash dividends declared per share $ .07 $ .07 $ .08 $ .08
- --------------------------------------------------------------------------------
Basic earnings per share $ .18 $ .21 $ .23 $ .28
Diluted earnings per share $ .16 $ .20 $ .23 $ .26
- --------------------------------------------------------------------------------
51
<PAGE>
Bedford Bancshares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
18. Selected Quarterly Financial Data (Unaudited) (continued)
First Second Third Fourth
Year Ended September 30, 1997 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
Cash dividends declared per share $ .06 $ .07 $ .07 $ .07
- --------------------------------------------------------------------------------
Basic earnings per share $ .17 $ .19 $ .19 $ .19
Diluted earnings per share $ .16 $ .18 $ .18 $ .18
- --------------------------------------------------------------------------------
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 OFFICES - BEDFORD FEDERAL SAVINGS BANK
Moneta Office Forest Office
1152 Hendricks Store Rd. 14915 Forest Rd.
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
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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. 10 Commerce Drive
1301 K Street, N.W., Suite 700 East Cranford, NJ 07016
Washington, D.C. 20005 (908) 272-8511
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Bedford Bancshares, Inc., Annual Report for the year ended September 30, 1998,
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 27, 1999 at
2:00 p.m. at the Olde Liberty Station, 515 Bedford Avenue, Virginia.
53
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<CAPTION>
GLOSSARY OF FINANCIAL TERMS
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<S> <C>
Basic Earnings Per Share Net Interest Margin
- ------------------------ -------------------
Basic earnings per share is computed by dividing income Net interest income divided by average earning assets.
available to common shareholders by the weighted average
number of common shares outstanding.
Basis Point ("BP") Nonperforming Assets
- ------------------ --------------------
The equivalent of one hundredth of one percent (0.01%). Loans on which interest income is not being accrued,
This unit is generally used to measure movements in including loans past due 90 days or more and real
interest rates. properties acquired through foreclosure.
Book Value Per Share Provision For Credit Losses
- -------------------- ---------------------------
The book value of a share of common stock is determined The amount charged against current earnings in order to
by dividing shareholders' equity by the number of common maintain an adequate allowance for credit losses, which is
shares outstanding. used to absorb credit charge-offs.
Diluted Earnings Per Share Return On Average Assets
- -------------------------- ------------------------
Diluted earnings per share is calculated by dividing net A measure that indicates how efficiently an entity uses its
income by the weighted average number of common and total resources. It is calculated by dividing annualized net
common equivalent shares outstanding. income by average assets.
Efficiency Ratio Return On Average Equity
- ---------------- ------------------------
The ratio of noninterest expense to the sum of noninterest A measure of how effectively an entity's equity has been
income plus net interest income. It is a measure of employed. It is calculated by dividing annualized net
productivity based on how well non interest expense is income by average stockholders' equity.
managed.
GAAP Risk-Based Capital Ratios
- ---- -------------------------
Generally Accepted Accounting Principles. Regulatory ratios of capital to assets, including off-balance
sheet items, which have been weighted according to the
risk profile of the asset. Tier 1 capital consists of
Interest-Bearing Liabilities stockholders' equity, while total capital is Tier 1 plus the
- ---------------------------- allowable portion of the allowance for credit losses.
Deposits and borrowed funds on which interest is paid.
Interest Earning Assets
- -----------------------
Interest-bearing financial instruments consisting primarily
of loans, investment securities and short-term investments
that generate interest and yield related fee income.
Interest Rate Spread
- --------------------
The difference between the average yield on interest-
earning assets and the average rate paid on interest-bearing
liabilities.
Liquidity
- ---------
The ability of an entity to meet its cash flow requirements.
For a bank it is measured by the ability to quickly convert
assets into cash with minimal exposure to interest rate risk,
by the size and stability of the core funding base and by
additional borrowing capacity within the money markets.
Net Charge-Offs
- ---------------
The amount of loans written off as losses net of recoveries
on loans previously written off.
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EXHIBIT 23
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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 23, 1998, 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, 1998.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Richmond, Virginia
December 18, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE ANNUAL
REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,016
<INT-BEARING-DEPOSITS> 3,650
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,820
<INVESTMENTS-CARRYING> 2,114
<INVESTMENTS-MARKET> 2,147
<LOANS> 130,508
<ALLOWANCE> 764
<TOTAL-ASSETS> 158,711
<DEPOSITS> 107,086
<SHORT-TERM> 1,000
<LIABILITIES-OTHER> 1,377
<LONG-TERM> 28,000
0
0
<COMMON> 230
<OTHER-SE> 21,018
<TOTAL-LIABILITIES-AND-EQUITY> 158,711
<INTEREST-LOAN> 9,905
<INTEREST-INVEST> 1,055
<INTEREST-OTHER> 339
<INTEREST-TOTAL> 11,299
<INTEREST-DEPOSIT> 4,564
<INTEREST-EXPENSE> 5,809
<INTEREST-INCOME-NET> 5,490
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 10
<EXPENSE-OTHER> 3,130
<INCOME-PRETAX> 3,133
<INCOME-PRE-EXTRAORDINARY> 3,133
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,973
<EPS-PRIMARY> .90
<EPS-DILUTED> .85
<YIELD-ACTUAL> 3.80
<LOANS-NON> 532
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 678
<CHARGE-OFFS> 8
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 764
<ALLOWANCE-DOMESTIC> 764
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 764
</TABLE>
