SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-QSB
[X]QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________to____________
Commission File No. 0-24330
Bedford Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Virginia 54-1709924
----------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 West Main Street, Bedford, Virginia 24523
---------------------------------------------
(Address of principal executive offices)
(540) 586-2590
--------------
(Registrant's telephone number, including area code)
Check whether issuer (1) filed all reports required to be filed by Sections 13
or 15(d) of the Exchange Act 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 .
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Class: Common Stock, par value $.10 per share
Outstanding at August 1, 1999: 2,223,230
<PAGE>
BEDFORD BANCSHARES, INC. AND SUBSIDIARY
INDEX TO FORM 10-QSB
PART I FINANCIAL INFORMATION PAGE
------ --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
June 30, 1999 and September 30, 1998 (unaudited) 1
Consolidated Statements of Income for the three and nine months
ended June 30, 1999 and 1998 (unaudited) 2
Consolidated Statements of Comprehensive Income for the three
and nine months ended June 30, 1999 and 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the nine months ended
June 30, 1999 and 1998 (unaudited) 4
Notes to Unaudited Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
PART II OTHER INFORMATION
------- -----------------
Item 1. Legal proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
<PAGE>
BEDFORD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
June 30 September 30
1999 1998
------- ------------
(In Thousands)
Assets
- ------
<S> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,355 $5,666
Investment securities held to maturity (estimated market value of $1,313 and $2,147) . . 1,311 2,114
Marketable equity securities available for sale, at market value . . . . . . . . . . . . 4,539 4,396
Investment securities available for sale, at market value . . . . . . . . . . . . . . . . 8,328 12,424
Investment in Federal Home Loan Bank stock, at cost . . . . . . . . . . . . . . . . . . . 1,500 1,550
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138,916 129,744
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,097 1,160
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 913 996
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 95
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449 566
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $163,618 $158,711
======= =======
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities
- -----------
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $113,178 $107,086
Advances from the Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . . . . . . 28,000 29,000
Advances from borrowers for taxes and insurance . . . . . . . . . . . . . . . . . . . . . 380 528
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 184
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339 665
------- -------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,098 137,463
======= =======
Commitments and contingent liabilities
Stockholders' equity
- --------------------
Preferred stock, par value $.10 per share, authorized 250,000; issued and outstanding, none - -
Common stock, par value $.10 per share, authorized 2,750,000 shares; issued and outstanding
2,234,230 at June 30, 1999 and 2,297,900 at September 30, 1998. . . . . . . . . . . . . 223 230
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,765 10,939
Retained earnings, substantially restricted . . . . . . . . . . . . . . . . . . . . . . 11,406 10,900
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . (126) 60
Less stock acquired by ESOP and RRP . . . . . . . . . . . . . . . . . . . . . . . . . . . (748) (881)
------- -------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,520 21,248
------- -------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . $163,618 $158,711
======= =======
</TABLE>
See notes to consolidated financial statements.
-1-
<PAGE>
BEDFORD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
1999 1998 1999 1998
------ ------ ------ ------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
Interest Income:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,622 $ 2,525 $ 7,826 $ 7,352
U.S. Government Obligations including agencies . . . . . . . . . . 290 282 909 733
Other investments, including overnight deposits . . . . . . . . . 49 128 154 243
----- ----- ----- -----
Total interest income . . . . . . . . . . . . . . . . . . . . . . 2,961 2,935 8,889 8,328
----- ----- ----- -----
Interest Expense:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,098 1,122 3,326 3,423
Borrowed funds . . . . . . . . . . . . . . . . . . . . . . . . . . 396 382 1,187 831
----- ----- ----- -----
Total interest expense . . . . . . . . . . . . . . . . . . . . . 1,494 1,504 4,513 4,254
----- ----- ----- -----
Net interest income . . . . . . . . . . . . . . . . . . . . . . . 1,467 1,431 4,376 4,074
Provision for credit losses . . . . . . . . . . . . . . . . . . . . 22 30 67 90
----- ----- ----- -----
Net interest income after provision for credit losses 1,445 1,401 4,309 3,984
----- ----- ----- -----
Noninterest income:
Service charges and fees on loans . . . . . . . . . . . . . . . . 142 112 453 322
Other customer service fees and commissions . . . . . . . . . . . 83 82 243 227
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 8 73 64
----- ----- ----- -----
Total noninterest income . . . . . . . . . . . . . . . . . . . . 241 202 769 613
----- ----- ----- -----
Noninterest expense:
Personnel compensation and benefits . . . . . . . . . . . . . . . 462 432 1,390 1,334
Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . 79 78 234 229
Data processing . . . . . . . . . . . . . . . . . . . . . . . . . 101 97 291 273
Federal insurance of accounts . . . . . . . . . . . . . . . . . . 16 16 47 48
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 28 86 89
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . 41 32 168 157
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 83 282 261
----- ----- ----- -----
Total noninterest expense . . . . . . . . . . . . . . . . . . . . 809 766 2,498 2,391
----- ----- ----- -----
Income before income taxes . . . . . . . . . . . . . . . . . . . 877 837 2,580 2,206
Provision for income taxes . . . . . . . . . . . . . . . . . . . . 333 325 979 850
----- ----- ----- -----
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 544 $ 512 $ 1,601 $ 1,356
======= ======= ======= =======
Basic earnings per share . . . . . . . . . . . . . . . . . . . . $ 0.25 $ 0.23 $ 0.73 $ 0.62
======= ======= ======= =======
Diluted earnings per share . . . . . . . . . . . . . . . . . . . $ 0.24 $ 0.22 $ 0.69 $ 0.58
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
BEDFORD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
1999 1998 1999 1998
------ ------ ------ ------
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 544 $512 $1,601 $1,356
Other comprehensive income, net of tax effect:
Unrealized gains (losses) on securities available for sale . . (98) (22) (186) (17)
---- --- ---- ---
Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . $ 446 $490 $1,415 $1,339
==== === ===== =====
</TABLE>
-3-
<PAGE>
BEDFORD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
------ June 30 -------
1999 1998
---- ----
(Dollars in Thousands)
<S> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,601 $ 1,356
Adjustments to reconcile net income to net cash provided by operating activities :
Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 90
Provision for depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 112
Amortization of investment security premiums and accretion of discounts, net . . . . . . . . . . . 6 (7)
(Increase) decrease in deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . (114) (5)
(Gain) loss on sale of loans, investments and foreclosed real estate . . . . . . . . . . . . . . . (21) (3)
(Increase) decrease in accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . 83 (111)
(Increase) decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 (67)
Increase (decrease) in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (327) 242
----- ------
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . 1,567 1,607
----- ------
Investing activities:
Proceeds from the sale of investment securities available for sale . . . . . . . . . . . . . . . . -- 992
Proceeds from the maturities of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,555 4,500
Purchases of investment securities available for sale . . . . . . . . . . . . . . . . . . . . . . . (8,975) (13,266)
Purchase (sale) of Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . (50) (618)
Net increase in loans to customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,240) (9,480)
Principal collected on mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . 3 4
Purchases of premises, equipment and leasehold improvements . . . . . . . . . . . . . . . . . . . . 39 (26)
Proceeds from the sale of REO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 212
----- ------
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . (4,668) (17,682)
----- ------
Financing activities:
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 103
Allocation of ESOP and RRP shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 189
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (573) (481)
Net increase (decrease) in customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,093 1,048
Proceeds from (repayments of) advances and other borrowed money . . . . . . . . . . . . . . . . . . (1,000) 15,000
Repurchase of stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (842) --
Purchase of stock by ESOP and RRP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (86)
Net increase (decrease) in advance payments from borrowers for taxes and insurance . . . . . . . . (148) (206)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 (41)
----- ------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,790 15,526
----- ------
Increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . 689 (549)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,666 5,446
----- ------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,355 $ 4,897
====== ======
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
BEDFORD BANCSHARES, INC. AND SUBSIDIARY
Notes to Unaudited Interim Consolidated Financial Statements
June 30, 1999
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
The accompanying unaudited interim consolidated financial statements
include the accounts of Bedford Bancshares, Inc. (the "Corporation") and Bedford
Federal Savings Bank (the "Bank"), a wholly owned subsidiary of the Corporation.
All significant intercompany balances and transactions have been eliminated in
consolidation. During the second quarter of fiscal 1999, the Corporation formed
a new service subsidiary Central Virginia Financial Services ("CVFS"). The
formation of CVFS provides the Corporation the opportunity to enter into
financial services not considered to be traditional banking services, in
particular the sale and marketing of insurance related products. As of June 30,
1999, CVFS had not been capitalized.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for the fair presentations have been
included. The results of operations for the interim period ended June 30, 1999
are not necessarily indicative of the results which may be expected for any
future period. For further information, refer to consolidated financial
statements and footnotes thereto included in the Corporation's Annual Report on
Form 10-KSB for the year ended September 30, 1998.
NOTE 2: EARNINGS PER SHARE
Earnings per share calculated in accordance with SFAS 128 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
- ------------------------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 544,000 $ 512,000 $1,601,000 $1,356,000
========== ========== ========== ==========
Average Shares Outstanding, Net of
unallocated ESOP Shares (93,334 and 109,334
at June 30, 1999 and 1998, respectively.) . . . . . . . . . . . . . . 2,164,391 2,180,575 2,187,429 2,188,566
========== ========== ========== ==========
Basic Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . $0.25 $0.23 $0.73 $0.62
===== ===== ===== =====
Diluted Earnings Per Share:
- --------------------------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 544,000 $ 512,000 $1,601,000 $1,356,000
========== ========== ========== ==========
Average Shares Outstanding, Net of
unallocated ESOP Shares (93,334 and 109,334
at June 30, 1999 and 1998, respectively.) . . . . . . . . . . . . . . 2,164,391 2,180,575 2,187,429 2,188,566
Dilutive effect of RRP Plan shares . . . . . . . . . . . . . . . . 23,412 26,008 23,383 25,852
Dilutive effect of Stock Options . . . . . . . . . . . . . . . . . 103,107 121,507 102,870 120,155
---------- ---------- ---------- ----------
Average Shares Outstanding . . . . . . . . . . . . . . . . . . . . . . 2,290,910 2,328,090 2,313,682 2,334,573
========== ========== ========== ==========
Diluted Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . $0.24 $0.22 $0.69 $0.58
===== ===== ===== =====
</TABLE>
-5-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements in this quarterly report on Form 10-QSB are
forward-looking and may be identified by the use of words such as "believe",
"expect", "anticipate", "should", "planned", "estimated", and "potential". These
statements are based on the Corporation's current expectations. A variety of
factors could cause the Corporation's actual results and experience to differ
materially from the anticipated results or other expectations expressed in such
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development, and results of the Corporation's business
include interest rate movements, competition from both financial and
non-financial institutions, the timing and occurrence (or nonoccurrence) of
transactions and events that may be subject to circumstances beyond the
Corporation's control, and general economic conditions.
FINANCIAL CONDITION
- -------------------
The Corporation's assets totaled $163.6 million at June 30, 1999, an
increase of $4.9 million from September 30, 1998. The asset expansion was
reflected in growth of the loan portfolio which increased $9.2. million. Funding
for the asset growth was provided by a $6.1 million increase in deposits and a
$4.8 million reduction in investment securities.
At June 30, 1999, nonperforming assets were $1.4 million, or .83% of total
assets, compared to $.5 million, or .34% of total assets at September 30, 1998.
During the quarter ended June 30, 1999, four mortgage loans, totaling $296,000,
were classified as nonperforming. These loans are secured by residential
property with appraised values exceeding the respective loan balances, and as
such no material loss is anticipated. In addition, $22,000 of consumer loans
were added to the nonperforming category. At June 30, 1999, the allowance for
credit losses was $828,000, up $64,000 from the level at September 30, 1998.
During the third quarter of fiscal 1999, the Corporation repurchased 46,300
shares of its common stock in open market transactions. These shares were
purchased at an average price of $12.30 per share and will be used for general
corporate and other purposes.
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1999 AND 1998
- -------------------------------------------------------
General. For the three months ended June 30, 1999 net income increased
$32,000, or 6.3%, to $544,000 from $512,000 earned in the comparable 1998
period.
Interest Income. Total interest income was $3.0 million for the three
months ended June 30, 1999, compared to $2.9 million earned in the comparable
quarter of fiscal 1998. Although the average balance of loans receivable
increased $13.7 million from the third quarter of 1998 to the third quarter of
1999, a decline of 55 basis points in the yield on mortgage loans offset the
impact of the higher average volume.
-6-
<PAGE>
Interest Expense. For the three months ended June 30, 1999, total interest
expense was $1.5 million, the same as the level for the three months ended June
30, 1998. The average balance of interest bearing liabilities rose to $132.9
million for the third quarter of fiscal 1999 from $125.3 million for the same
quarter of fiscal 1998. The increase was primarily in interest bearing deposits
which averaged $104.2 million for the three months ended June 30, 1999, compared
to $98.6 million for the third quarter of fiscal 1998. Lower rates paid on
average interest bearing deposits offset the impact of the higher average
volume.
Net Interest Income. For the three months ended June 30, 1999, net interest
income was $1.5 million, up slightly from the net interest income earned in the
same period of 1998. During the three months ended June 30, 1999, the
Corporation's interest rate spread and net interest margin decreased to 2.96%
and 3.70%, respectively, compared to 3.09% and 3.85%, respectively, for the same
period of 1998. A 41 basis point decline in the yield on earning assets,
partially offset by a 31 basis point decline in the cost of funds, was the
primary reason for the declines. The lower yield on earning assets, as well as
the decline in the cost of funds, was reflective of the general trend in market
rates.
Provision for Credit Losses. The provision for credit losses decreased
$8,000, to $22,000 for the three months ended June 30, 1999 from $30,000 for the
comparable 1998 period. Although nonperforming assets increased $190,000 from
March 31, 1999, management believes the allowance for credit losses is
sufficient since these loans are adequately secured. Management of the Bank
performs regular assessments of the credit risk in the loan portfolio based on
information available at such times, including the levels of the Bank's
nonperforming loans and assets, trends in the local real estate market, and
current and potential charge-offs. The assessment of the adequacy of the
allowance for credit losses involves subjective judgment regarding future
events, and there can be no assurance that additional provisions for credit
losses will not be required in future periods.
Total Noninterest Income. Noninterest income totaled $241,000 for the third
quarter of fiscal 1999, compared to $202,000 for the same quarter of fiscal
1998. The $39,000 increase was primarily due to service charges and fees on
loans which were up $30,000 due primarily to the large dollar amount of loans
closed during the third quarter of 1999. Such increase in non-interest income is
not indicative of future periods.
Total Noninterest Expense. Total noninterest expense was $809,000 for the
three months ended June 30, 1999, up 5.6% from the level in the comparable
quarter of fiscal 1998. Increases of $30,000 in personnel compensation and
benefits and $9,000 in professional fees were the primary reasons for the
increase.
Provision for Income Taxes. The provision for income taxes was $333,000 for
the three months ended June 30, 1999, up slightly from the $325,000 provision
recorded in the three months ended June 30, 1998. The increase reflects the
higher profitability of the Corporation in the quarter ended June 30, 1999, as
the effective tax rate for both periods was 38%.
-7-
<PAGE>
COMPARISON OF NINE MONTHS ENDED JUNE 30, 1999 AND 1998
- ------------------------------------------------------
General. For the nine months ended June 30, 1999 net income increased
$200,000, or 18.1%, to $1.6 million from $1.4 million earned in the comparable
1998 period.
Interest Income. Total interest income amounted to $8.9 million for the
nine months ended June 30, 1999, up 6.7% from the $8.3 million earned in the
comparable period of fiscal 1998. The increase was attributable to expansion of
average loans receivable to $134.3 million for the nine months ended June 30,
1999 from $120.2 million for the same period of 1998. In addition, investment
securities averaged $13.4 million for the first nine months of fiscal 1999,
compared to $10.7 million for the comparable period of fiscal 1998. These
increases reflect the Bank's continued success in originating mortgage loans and
expansion of the consumer and commercial loan portfolios, as well as effective
asset/liability management strategies.
Interest Expense. For the nine months ended June 30, 1999, total interest
expense rose to $4.5 million from the $4.3 million for the nine months ended
June 30, 1998, primarily due to an increase in the average balance of interest
bearing liabilities to $131.1 million for the first nine months of fiscal 1999
from $117.3 million for the comparable period of fiscal 1998. FHLB advances
averaged $28.5 million for the nine months ended June 30, 1999, up $9.9 million
from the $18.6 million average for the comparable period of 1998. In addition,
average interest bearing deposits for the first nine months of fiscal 1999 were
$102.6 million compared to an average of $98.7 million for the comparable period
of fiscal 1998.
Net Interest Income. Net interest income was $4.4 million for the nine
months ended June 30, 1999, up 7.4% from the $4.1 million earned in the same
period of fiscal 1998. The Corporation's interest rate spread and net interest
margin were 2.99% and 3.73% for the first nine months of fiscal 1999, down from
the 3.11% and 3.88%, respectively, for the same period of fiscal 1998. A 34
basis point decline in the yield on earning assets partially offset by a 25
basis point decline in the cost of funds was the primary reason for the
declines. Both the lower yield on earning assets and cost of funds are
indicative of general market trends.
Provision for Credit Losses. For the nine months ended June 30, 1999, the
Bank's provision for credit losses was $67,000, compared to $90,000 for the same
period of fiscal 1998. Although nonperforming assets increased $190,000 from
March 31, 1998, management believes the allowance for credit losses is
sufficient since these loans are adequately secured. Management of the Bank
performs regular assessments of the credit risk in the loan portfolio based on
information available at such times, including the levels of the Bank's
nonperforming loans and assets, trends in the local real estate market, and
current and potential charge-offs. The assessment of the adequacy of the
allowance for credit losses involves subjective judgment regarding future
events, and there can be no assurance that additional provisions for credit
losses will not be required in future periods.
Total Noninterest Income. For the nine months ended June 30, 1999,
noninterest income totaled $769,000, compared to $613,000 for the same period of
1998. Service charges and fees on loans were up $131,000 primarily due to the
large increase in the dollar volume of loans closed during the nine months ended
June 30, 1999, compared to the same nine months of 1998. Such increase in
noninterest income is not indicative of future periods.
Total Noninterest Expense. Total noninterest expense was $2.5 million for
the nine
-8-
<PAGE>
months ended June 30, 1999, up $107,000, or 4.5%, from the $2.4 million total
for the comparable period of fiscal 1998.
Provision for Income Taxes. The provision for income taxes was $979,000 for
the nine months ended June 30, 1999, compared to $850,000 for the same period of
fiscal 1998. The increase was due to the increase in taxable income as the
effective tax rate for both periods was 38%.
CAPITAL COMPLIANCE
- ------------------
The following table presents the Bank's compliance with its regulatory capital
requirements of June 30, 1999. (Dollar amounts in thousands).
June 30, 1999
----------------------
Percentage
of assets
---------
GAAP Capital . . . . . . . . . . . . . . . . . . . . . . . $20,641 11.90%
======= ======
Tangible capital . . . . . . . . . . . . . . . . . . . . . $20,766 12.67%
Tangible capital requirement . . . . . . . . . . . . . . . 2,459 1.50
------- ------
Excess . . . . . . . . . . . . . . . . . . . . . . . . . . $18,307 11.17%
======= ======
Core capital . . . . . . . . . . . . . . . . . . . . . . . $20,766 12.67%
Core capital requirement . . . . . . . . . . . . . . . . . 6,558 4.00
------- ------
Excess . . . . . . . . . . . . . . . . . . . . . . . . . . $14,208 8.67%
======= ======
Total risk-based capital (1). . . . . . . . . . . . . . . . $21,520 22.06%
Total risk-based capital requirement (1). . . . . . . . . . 7,803 8.00
------- ------
Excess . . . . . . . . . . . . . . . . . . . . . . . . . . $13,717 14.06%
======= ======
- ------------------------------------------------
(1) Based on risk-weighted assets of $97,532
Management believes that under current regulations, the Bank will continue
to meet its minimum capital requirements in the foreseeable future. Events
beyond the control of the Bank, such as increased interest rates or a downturn
in the economy in areas in which the Bank operates could adversely affect future
earnings and as a result, the ability of the Bank to meet its future minimum
capital requirements.
LIQUIDITY
- ---------
The Bank's liquidity is a measure of its ability to fund loans, pay deposit
withdrawals, and other cash outflows in an efficient, cost effective manner. The
Bank's primary sources of funds are deposits and scheduled amortization and
prepayment of loans. During the past several years, the Bank has used such funds
primarily to fund maturing time deposits, pay savings withdrawals, fund lending
commitments, purchase new investments, and increase liquidity. The Bank funds
its operations internally but also borrows funds from the Federal Home Loan Bank
("FHLB") of Atlanta. As of June 30, 1999, such borrowed funds totaled $28.0
million. Loan payments and maturing
-9-
<PAGE>
investments are greatly influenced by general interest rates, economic
conditions and competition.
The Bank is required under Federal regulations to maintain certain
specified levels of "liquid assets," which include certain United States
government obligations and other approved investments. Current regulations
require the Bank to maintain liquid assets of not less than 4% of net with-
drawable accounts plus short-term borrowings. At June 30, 1999, the Bank's
regulatory liquidity was 15.8%.
The amount of certificate accounts which are scheduled to mature during the
next twelve months ending June 30, 2000, is approximately $42.0 million. To the
extent that these deposits do not remain at the Bank upon maturity, 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.
At June 30, 1999, the Bank had loan commitments outstanding of $10.7
million. These commitments are funded primarily from current excess liquidity,
deposit inflows, borrowings or loan and investment repayments.
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 recognize 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 Corporation 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 activity required to prepare for the proper
recognition and processing of date sensitive information on or 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 Corporation 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
Corporation has maintained ongoing contact with its third party service bureau
throughout the Renovation phase, which included program changes and other
modifications necessary for Y2K readiness. The Corporation is currently in Phase
five, Implementation, the point at which the Corporation begins to process its
transactions and other data on systems and software that have been deemed Y2K
compliant. This phase is targeted for completion by September 30, 1999. In
addition, the bank is required by their Federal regulators to develop
contingency plans in the event that any of its mission critical computer systems
fail to meet the Y2K requirements, or if other systems that the bank depends
upon for automated processing of its ongoing transactions, such as electrical or
data transmission, should fail. These detailed contingency plans are in the
process of being tested and reviewed by both the bank's management and
regulators to ensure their readiness and reliability. As part of the contingency
plan, the Corporation has contracted to purchase two electric generators at a
cost of approximately $30,000. The cost of such equipment will be capitalized
and depreciated over
-10-
<PAGE>
the life of the equipment.
Based on current estimates, the bank expects to spend approximately
$125,000 to $150,000 in preparing for the century date change. Included in that
amount are costs necessary to modify its computer information systems, both
internal and vendor maintained, to enable proper processing of transactions
relative to the year 2000 and beyond. Also included is the cost of equipment,
training and customer communications necessary to adequately address the bank's
Y2K requirements and readiness. 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 nine months ended June 30, 1999, the bank had recorded
$27,000 of expense related to the Y2K issue.
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 Corporation
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 Corporation.
-11-
<PAGE>
BEDFORD BANCSHARES, INC. AND SUBSIDIARY
Key Operating Ratios
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
------- -------
1999(1) 1998(1) 1999(1) 1998(1)
------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C>
Basic earnings per share . . . . . . . . . $0.25 $0.23 $0.73 $0.62
Diluted earnings per share . . . . . . . . . $0.24 $0.22 $0.69 $0.58
Return on average assets . . . . . . . . . . 1.31% 1.33% 1.32% 1.25%
Return on average equity . . . . . . . . . . 9.88% 9.95% 9.81% 8.96%
Interest rate spread . . . . . . . . . . . . 2.96% 3.09% 2.99% 3.11%
Net interest margin . . . . . . . . . . . . 3.70% 3.85% 3.73% 3.88%
Noninterest expense to average assets. . . . 1.96% 1.99% 2.06% 2.20%
</TABLE>
<TABLE>
<CAPTION>
June 30 September 30
1999 1998
---- ----
(DOLLARS IN THOUSANDS)
(Unaudited)
<S> <C> <C>
Nonaccrual loans . . . . . . . . . . . . . . . . . . . $1,358 $ 532
Foreclosed real estate . . . . . . . . . . . . . . . . -- --
------ ------
Total nonperforming assets . . . . . . . . . . . . . . $1,358 $ 532
====== ======
Allowance for credit losses to nonperforming assets. . 61.00% 143.8%
Nonperforming loans to total loans . . . . . . . . . . 0.98% 0.41%
Nonperforming assets to total assets . . . . . . . . . 0.83% 0.34%
Book value per share (2). . . . . . . . . . . . . . . . $ 9.63 $ 9.25
</TABLE>
- --------------
(1) The ratios for the three- and six-month periods are annualized.
-12-
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceeedings
------------------
Neither the Corporation nor the Bank was engaged in any legal
proceedings of a material nature at June 30, 1999. From time to time,
the Corporation is a party to legal proceedings in the ordinary course
of business wherein it enforces its security interest in loans.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Not applicable.
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit
Exhibit 27: Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
Not applicable.
-13-
<PAGE>
BEDFORD BANCSHARES, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BEDFORD BANCSHARES, INC.
Date: August 5, 1999 By: /s/ Harold K. Neal
------------------------------
Harold K. Neal
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 5, 1999 By: /s/ James W. Smith
------------------------------
James W. Smith
Vice President and Treasurer
(Principal Accounting and
Financial officer)
-14-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITSENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 6,355
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,876
<INVESTMENTS-CARRYING> 2,811
<INVESTMENTS-MARKET> 15,680
<LOANS> 139,744
<ALLOWANCE> 828
<TOTAL-ASSETS> 161,187
<DEPOSITS> 110,461
<SHORT-TERM> 16,000
<LIABILITIES-OTHER> 920
<LONG-TERM> 12,000
0
0
<COMMON> 223
<OTHER-SE> 21,297
<TOTAL-LIABILITIES-AND-EQUITY> 163,618
<INTEREST-LOAN> 7,826
<INTEREST-INVEST> 1,063
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,889
<INTEREST-DEPOSIT> 3,326
<INTEREST-EXPENSE> 4,513
<INTEREST-INCOME-NET> 4,376
<LOAN-LOSSES> 67
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,498
<INCOME-PRETAX> 2,580
<INCOME-PRE-EXTRAORDINARY> 1,601
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,601
<EPS-BASIC> .73
<EPS-DILUTED> .69
<YIELD-ACTUAL> 3.73
<LOANS-NON> 1,358
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 764
<CHARGE-OFFS> 11
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 828
<ALLOWANCE-DOMESTIC> 828
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
