SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One):
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended September 30, 1999, OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to .
------ ------
Commission File Number: 0-24330
BEDFORD BANCSHARES, INC.
------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1709924
- ---------------------------------- ----------
(State or other jurisdiction I.R.S. Employer
or organization) of incorporation Identification No.
125 West Main Street, Bedford, Virginia 24523
- --------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (540) 586-2590
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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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 $12,963,000.
As of December 7, 1999, there were issued and outstanding 2,163,050
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 1, 1999, was
$18,580,000.
Transition Small Business Disclosure Format (check one)
YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
September 30, 1999. (Part II)
2. Portions of Proxy Statement for the 1999 Annual Meeting of
stockholders. (Part III)
<PAGE>
PART I
Bedford Bancshares, Inc. (the "Registrant" or "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 holding 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 Company conducts no significant
business or operations other than holding all of the outstanding stock of
Bedford Federal. As a result references to the Registrant or Company generally
refer to the Bank unless the context indicates otherwise.
Bedford Federal 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
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<PAGE>
comprehensive regulation by the Office of Thrift Supervision ("OTS") and its
deposits are federally insured by the Savings Association Insurance Fund
("SAIF"). Bedford Federal 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.
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
Registrant's loan portfolio in dollar amounts and in percent of the respective
portfolios at the dates indicated.
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------
1999 1998
----------------------------- --------------------------
Percent of Percent of
Amount Total Amount Total
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate:
Residential:
One- to four-family $ 97,212 62.19% $95,620 70.46%
Multi-family..................... 2,405 1.54 854 .63
Commercial......................... 7,623 4.88 4,181 3.08
Construction....................... 18,232 11.66 8,450 6.23
Land............................... 5,254 3.36 11,769 8.67
Consumer and commercial business... 25,595 16.37 14,830 10.93
------ ----- ------ -----
Total loans.................. 156,321 100.00% 135,704 100.00%
====== ======
Less:
Unearned discounts, premium,
deferred loan fees, net........ 272 290
Loans-in-process................. 7,556 4,906
Allowance for credit losses...... 804 764
------- --------
Total loans, net............. $147,689 $ 129,744
======= ========
</TABLE>
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<PAGE>
Loan Maturity Tables
The following table sets forth the maturity of the Registrant's loan portfolio
at September 30, 1999. The table does not include prepayments or scheduled
principal repayments. Prepayments and scheduled principal repayments on loans
totaled $53.6 million for the year ended September 30, 1999. Adjustable-rate
mortgage loans are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
Due after
Due 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.. $ 31 $ 1,135 $ 96,046 $ 97,212
Multi-family residential real estate......... -- 57 2,348 2,405
Commercial real estate....................... 12 299 7,312 7,623
Construction................................. 10,282 394 -- 10,676
Land......................................... 40 165 5,049 5,254
Consumer and commercial business............. 3,350 11,143 11,102 25,595
------ ------ ------ ------
Total........................................ $13,715 $13,193 $121,857 $148,765
====== ====== ======= =======
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 2000, which have fixed interest rates and floating or adjustable
interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
<S> <C> <C> <C>
Real estate loans: (In Thousands)
One- to four-family............ $20,452 $76,729 $ 97,181
Multi-family................... 57 2,348 2,405
Commercial real estate......... 1,958 5,653 7,611
Construction................... 91 303 394
Land........................... 3,813 1,401 5,214
Consumer and commercial
business........................ 15,954 6,291 22,245
------ ------ -------
Total........................... $42,325 $92,725 $135,050
====== ====== =======
</TABLE>
One- to Four-Family Residential Loans. The Registrant's primary lending
activity consists of the origination of one- to four-family residential mortgage
loans secured by property located in the Registrant's primary market areas. The
Registrant 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 Registrant 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.
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<PAGE>
For all adjustable-rate mortgage loans, the Registrant 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 Registrant'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 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
Registrant's cost of funds. Generally, the Registrant'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 Registrant.
The Registrant 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 Registrant originates and holds some fixed-rate mortgage loans as deemed
appropriate by the Asset Liability Management Committee.
Construction Lending. The Registrant 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 Registrant's market
area.
Construction lending is generally considered to involve a higher degree
of credit risk than long-term financing of residential properties. The
Registrant'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 Registrant may be
compelled to advance additional funds to complete construction. Furthermore, if
the estimate of value proves to be inaccurate, the Registrant 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 Registrant offers
multi-family and commercial real estate loans, however, this type of lending
represents a small portion of the Registrant'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 Registrant's commercial and multi-family real estate loans are
inspected by the Registrant's lending personnel before the loan is made. The
Registrant also obtains appraisals on each property.
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<PAGE>
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.
Land Loans. Land loans are made primarily to individuals on developed
residential lots located in the Registrant'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 Registrant 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 Registrant 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 Registrant'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 Registrant 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 Registrant's sources of mortgage
loan applications are referrals from existing or past customers, real estate
brokers, builders, call-in and walk-in customers and also the result of
advertising. All loans are underwritten and approved by the loan committee. Any
loan up to $300,000 is reviewed and approved by two members of the loan
committee. Any loan over $300,000 is reviewed and approved by three members of
the loan committee. All loan approvals are ratified by the Board of Directors on
a monthly basis.
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<PAGE>
The Registrant 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 Registrant's board of directors. It is the
Registrant'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 Registrant 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, 1999, the Registrant had $4.6 million of commitments to originate
mortgage loans, $5.9 million in unfunded home equity loans and $2.5 in unfunded
commercial lines of credit.
Loans to One Borrower. Savings institutions are subject to the same
limits as those applicable to national Registrants, 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
Registrant's maximum loan-to-one borrower limit was approximately $3.3 million
as of September 30, 1999.
Non-Performing and Problem Assets
Loan Delinquencies and Non-Performing Assets. The Registrant'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 Registrant 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 Registrant had no loans
categorized as impaired loans and troubled debt restructurings. Additionally,
there were no accruing loans that were delinquent more than 90 days.
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<PAGE>
At September 30,
----------------------
1999 1998
--------- ---------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One- to four-family residential real estate ........ $ 211 $ 281
Land ............................................... 839 214
Consumer and commercial business loans ............. 39 37
------ ------
Total non-accrual loans .............................. $1,089 $ 532
====== ======
Real estate owned .................................... $ -- $ --
====== ======
Total non-performing assets .......................... $1,089 $ 532
====== ======
Total non-accrual loans to total loans ............... .73% .41%
====== ======
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, 1999.
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
Registrant'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, 1999, classified assets consisted of
$597,000 and $492,000, respectively, of special mention and substandard assets.
Such assets were classified as non-accrual loans.
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<PAGE>
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 Registrant'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 Registrant'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.
The following table sets forth the Registrant's allowance for credit
losses, allowance for losses on foreclosed real estate and related ratios.
At or For the Year Ended
------------------------
September 30,
------------------------
1999 1998
--------- --------
(Dollars in thousands)
Allowance balance (at beginning of period) $764 $678
--- ----
Charge-offs:
One- to four-family......................... - -
Multi-family................................ - -
Commercial real estate...................... - -
Construction and land....................... - -
Consumer and commercial business............ 58 8
--- ----
Total charge-offs......................... 58 8
Recoveries................................... (8) (4)
Provision.................................... 90 90
--- ----
Allowance balance (at end of period)........... $804 $764
==== ====
Ratios of net charge-offs during the period
to average loans outstanding during the
period....................................... .04% .01%
=== ===
Ratio of allowance for credit losses to total
loans at the end of the period............... .54% .58%
=== ===
Ratio of allowance for credit losses to non-
performing assets at the end of the
period....................................... .74% 143.80%
=== ======
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<PAGE>
Analyses of the Allowance for Loan Losses. The following table sets
forth the allocation of the allowance by category, which management believes can
be allocated only on an approximate basis. The allocation of the allowance to
each category is not necessarily indicative of future loss and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------
1999 1998
---------------------------- -------------------------
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 ............ $294 62.2% $381 70.5%
Multi-family ................... 10 1.5 1 .6
Commercial real estate ......... 90 4.9 50 3.1
Construction ................... 75 11.7 49 6.2
Land ........................... 50 3.3 39 8.7
Consumer and commercial
business ...................... 285 16.4 244 10.9
---- ----- ---- -----
Total ........................ $804 100.0% $764 100.0%
==== ===== ==== =====
</TABLE>
Investment and Mortgage-backed Securities Activities
Investment Securities. The Registrant 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 Registrant
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 Registrant's loan
origination and other activities.
Current regulatory and accounting guidelines regarding investment
securities require the Company to categorize securities as "held to maturity,"
"available for sale" or "trading." As of September 30, 1999, the Company had
securities classified as "held to maturity" and "available for sale" in the
amount of $2,310,000 and $10,458,000, respectively. At September 30, 1999, the
Company had no securities classified as "trading." Securities classified as
"available for sale" are reported for financial reporting purposes at the fair
market value with net changes in the market value from period to period included
as a separate component of stockholders' equity, net of income taxes. At
September 30, 1999, the Company had securities available for sale with an
amortized cost of $10,706,000 and market value of $10,458,000 (unrealized loss
of $248,000). Changes in the market value of securities available for sale do
not affect the Company's income. In addition, changes in the market value of
securities available for sale do not affect the Bank's regulatory capital
requirements or its loan-to-one borrower limit.
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<PAGE>
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.
Securities Portfolio. The following table sets forth the carrying value
of the Registrant's securities at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
----------------
1999 1998
------- -------
(In thousands)
<S> <C> <C>
Federal funds sold and other short-term investments ...... $ -- $ 3,650
Investment securities and mortgage backed securities:
Held to maturity:
Mortgage backed securities ........................... 10 15
FHLB stock ........................................... 1,500 1,550
U.S. Government and agency obligations ............... 800 2,099
------- -------
Total held to maturity ............................. 2,310 3,664
------- -------
Available for sale:
U.S. Government and agency obligations ............... 5,830 12,371
Marketable equity securities and other(1) ............ 4,628 4,449
------- -------
Total available for sale ........................... 10,458 16,820
------- -------
Total .............................................. $12,768 $24,134
======= =======
</TABLE>
(1) Marketable equity securities available for sale -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 Company uses this fund to increase its
short-term yield, primarily on overnight funds. The AMF Fund consists
primarily of adjustable-rate mortgage-related securities.
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<PAGE>
Investment Yields and Maturities. The table below sets forth certain
information regarding the carrying value, weighted average yields and
contractual maturities of the Registrant's federal funds sold and other
short-term investments, investment securities, securities held for sale and
mortgage-backed securities as of September 30, 1999.
<TABLE>
<CAPTION>
Total
One Year or Less One to Five Years Five to Ten Years More than Ten Years Investment Years
---------------- ----------------- ----------------- ------------------- ---------------------
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>
Held to maturity:
Mortgage-backed securities.... 10 8.31 -- -- -- -- -- -- 10 8.31 10
FHLB stock ................... 1,500 7.48 -- -- -- -- -- -- 1,500 7.48 1,500
U.S. government and agency
obligations ................ 800 6.97 -- -- -- -- -- -- 800 6.97 800
Available for sale:
U.S. Government and agency
obligations ................ -- -- 4,359 6.32 -- -- 1,471 6.90 5,830 6.47 5,830
Marketable equity securities
and other................... 4,628 -- -- -- -- -- -- -- 4,628 5.39 4,628
------- ------- ---- ------ ------- -------
Total ............................ $ 6,938 5.97 $ 4,359 6.32 $ -- -- $1,471 6.90 $12,768 6.23 $12,768
======= ==== ======= ==== ==== ===== ====== ==== ======= ==== =======
</TABLE>
-11-
<PAGE>
Sources of Funds
General. Deposits are the major source of the Registrant's funds for
lending and other investment purposes. The Registrant 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 Registrant does not have any
brokered deposits.
Deposits. Customer deposits are attracted principally from within the
Registrant'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, 1999, the Registrant had no brokered deposits.
Certificates of Deposit of $100,000 or More. The following table
indicates the amount of the Registrant's certificates of deposit and other time
deposits of $100,000 or more by time remaining until maturity as of September
30, 1999
Amount
------
Maturity Period (In thousands)
- ---------------
Within three months $ 3,503
Three through six months 2,447
Six through twelve months 3,788
Over twelve months 4,047
-------
Total $13,785
=======
Borrowings. While deposits are the primary source of funds for the
Registrant's lending and investment activities and for its general business
purposes, the Registrant 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 Registrant's first mortgage loans. The Registrant, if the need
arises, may also access the Federal Reserve Registrant discount window to
supplement its supply of lendable funds and to meet deposit withdrawal
requirements.
Personnel
As of September 30, 1999, the Registrant had 43 full-time employees and
3 part-time employee. None of the Registrant's employees are represented by a
collective bargaining group. The Registrant believes that its relationship with
its employees is good.
-12-
<PAGE>
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.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "Act") which will, effective March 11, 2000, permit
qualifying bank holding companies to become financial holding companies and
thereby affiliate with securities firms and insurance companies and engage in
other activities that are financial in nature. The Act defines "financial in
nature" to include securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies; insurance underwriting and
agency; merchant banking activities; and activities that the Board has
determined to be closely related to banking. A qualifying national bank also may
engage, subject to limitations on investment, in activities that are financial
in nature, other than insurance underwriting, insurance company portfolio
investment, real estate development, and real estate investment, through a
financial subsidiary of the bank.
The Act also prohibits new unitary thrift holding companies from
engaging in nonfinancial activities or from affiliating with an nonfinancial
entity. As a grandfathered unitary thrift holding company, the Company will
retain its authority to engage in nonfinancial activities.
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.
-13-
<PAGE>
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 policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes.
Insurance of Deposit Accounts. The deposit accounts held by the Bank
are insured by 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.
A member of the SAIF pays an annual insurance premium to the FDIC of at
least 0.064% of total deposits of that member. The FDIC also maintains another
insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures
commercial bank deposits. Most members of BIF pay a lower premium to the FDIC.
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.
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. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including cash dividends.
A savings association that is a subsidiary of a savings and loan
holding company, such as the Bank must file an application or a notice with the
OTS at least 30 days before making a capital distribution. Savings associations
are not required to file an application for permission to make a capital
distribution and need only file a notice if the following conditions are met:
(1) they are eligible for expedited treatment under OTS regulations, (2) they
would remain adequately capitalized after the distribution, (3) the annual
amount of capital distribution does not exceed net income
-14-
<PAGE>
for that year to date added to retained net income for the two preceding years,
and (4) the capital distribution would not violate any agreements between he OTS
and the savings association or any OTS regulations. Any other situation would
require an application to the OTS.
The OTS may disapprove an application or notice if the proposed capital
distribution would: (i) make the savings association undercapitalized,
significantly undercapitalized, or critically undercapitalized; (ii) raise
safety or soundness concerns; or (iii) violate a statute, regulation, or
agreement with the OTS (or with the FDIC), or a condition imposed in an
OTS-approved application or notice. Further, a federal savings association, like
the Bank, cannot distribute regulatory capital that is needed for its
liquidation account.
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 September 30, 1999, the Bank
was in compliance with its QTL requirement.
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, 1999, the Bank's actual
liquid asset ratio was 8.5%, which is in excess of current requirements.
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
-15-
<PAGE>
the liquidity requirements that are imposed by the OTS. At September 30, 1999,
the Bank was in compliance with these Federal Reserve Board requirements.
Item 2. Description of Property.
- ---------------------------------
(a) The Registrant conducts its business through a main office located
in Bedford, Virginia and two branch offices. The Registrant also has six
freestanding ATM's two of which are located in convenience markets. The
Registrant 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 Land Leased 7/95
Moneta Road Building Owned 8/95
Moneta, VA 24121
ATM Owned 12/78
14915 Forest Road
Forest, VA 24551
ATM
Longwood Avenue Owned 1/85
Bedford, VA 24523
ATM Land Leased 10/99
Blue Ridge Avenue
Bedford, VA 24523
(b) Investment Policies. See "Item 1. Business" above for a general
description of the Registrant's investment policies and any regulatory or Board
of Directors' percentage of assets limitations regarding certain investments.
The Registrant'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 Registrant," and "Item
2. Description of Property."
-16-
<PAGE>
(2) Investments in Real Estate Mortgages. See "Item 1. Business -
Lending Activities and - Regulation of the Registrant."
(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 Registrant."
(c) Description of Real Estate and Operating Data. Not Applicable.
Item 3. Legal Proceedings
- --------------------------
Neither the Company nor the Registrant are engaged in any legal
proceedings of a material nature at the present time. From time to time, the
Registrant 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 Company's Annual Report to Stockholders for the Fiscal Year
Ended September 30, 1999 (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 required under this item is incorporated herein by
reference to the Proxy Statement for the 2000 Annual Meeting (the "Proxy
Statement") contained under the sections captioned
-17-
<PAGE>
"Section 16(a) Beneficial Ownership Reporting Compliance," "Proposal I -
Election of Directors," and "- Biographical Information."
Item 10. Executive Compensation
- --------------------------------
The information required by this item is incorporated by reference to
the Proxy Statement contained under the section captioned "Director and
Executive Officer Compensation."
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
(b) Security Ownership of Management
The information required by items (a) and (b) is incorporated
herein by reference to the Proxy Statement contained under the
sections captioned "Principal Holders" and "Proposal I -
Election of Directors."
(c) Management of the Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the Company.
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, 1999 and 1998
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, 1999, 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:
(a) List of Exhibits:
<TABLE>
<CAPTION>
<S> <C>
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 Registrant and Harold K. Neal *
13 Portions of the 1999 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,
1999.
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,
1999.
<TABLE>
<CAPTION>
<S> <C>
By: /s/Harold K. Neal By: /s/Hugh H. Bond
-------------------------------------------- ------------------------------------
Harold K. Neal Hugh H. Bond
President, Chief Executive Chairman of the Board
Officer and Director
(Principal Executive Officer)
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/W. 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
</TABLE>
EXHIBIT 13
<PAGE>
- --------------------------------------------------------------------------------
The Company's common stock trades on the Nasdaq National
Stock Market market under the trading symbol of "BFSB". The daily stock
Information quotation for Bedford Bancshares, Inc., is published in The
Wall Street Journal and in other local newspapers under the
trading symbol of "BFSB" or as "BedfordBc". The following
table reflects stock prices as published in the Nasdaq
National Market statistical report, and other related data.
- -------------------
Dividends Dividends
Per Share Per Share
Quarter 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
December 1998 $15.00 $10.50 184,500 $0.080 $0.080
March 1999 $13.75 $11.50 109,700 $0.080 $0.080
June 1999 $13.75 $11.50 166,200 $0.090 $0.080
September 1999 $14.50 $12.25 220,800 $0.090 $0.090
On September 30, 1999, there were approximately 562
shareholders of record with approximately 59.1% of the
2,173,050 outstanding shares held in nominee or "street"
name through various brokerage firms. There were
approximately eight firms making a market in the Company's
common stock during the month of September 1999.
2
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL AND OTHER DATA
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financial Condition (Dollars in Thousands)
- ------------------------------------------
----------------------------------------------------------------------------------------------
September 30, 1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------
Total assets $165,737 $158,711 $139,089 $127,201 $115,054
Loans receivable, net 147,689 129,744 116,093 108,873 97,669
Investment securities 8,129 14,470 9,655 8,006 7,761
Marketable equity securities 4,575 4,396 4,185 3,879 3,660
Mortgage-backed securities 10 15 20 482 31
Foreclosed real estate, net -- -- 212 -- --
Deposits 114,720 107,086 103,612 95,378 90,063
FHLB advances 28,000 29,000 15,000 12,000 5,000
Retained earnings 11,223 10,900 9,763 8,739 8,263
Total stockholders' equity 21,066 21,248 19,621 18,227 18,685
Summary of Operations (Dollars in Thousands)
- --------------------------------------------
----------------------------------------------------------------------------------------------
Years Ended September 30, 1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------
Interest income $11,894 $11,299 $10,280 $9,264 $8,137
Interest expense 6,031 5,809 5,167 4,492 3,778
Net interest income 5,863 5,490 5,113 4,772 4,359
Provision for credit losses 90 90 100 22 20
Noninterest income 1,069 863 593 735 543
Noninterest expense 3,328 3,130 3,041 3,429 2,620
Net income before income taxes 3,514 3,133 2,565 2,056 2,262
Net income 2,191 1,973 1,591 1,302 1,401
Other Selected Data
- -------------------
----------------------------------------------------------------------------------------------
Years Ended September 30, 1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------
Return on average assets 1.35% 1.33% 1.19% 1.10% 1.28%
Return on average equity 10.13 9.68 8.40 6.98 7.31
Average equity to average assets 13.72 13.72 14.21 15.69 17.49
Net interest rate spread 2.96 3.03 3.27 3.34 3.26
Nonperforming assets to total assets 0.66 0.34 0.52 0.54 1.14
Nonperforming loans to total loans 0.74 0.41 0.45 0.63 1.34
Allowance for credit losses to total loans 0.54 0.59 0.58 0.60 0.63
Per Share Data
- --------------
----------------------------------------------------------------------------------------------
Years Ended September 30, 1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------
Basic earnings per share $1.01 $0.90 $0.74 $0.59 0.60
Diluted earnings per share 0.96 0.85 0.70 0.56 0.59
Book value per share 9.69 9.25 8.58 7.97 7.75
Cash dividends declared per share 0.34 0.30 0.27 0.20 0.15
</TABLE>
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Management Strategy
- -------------------
Our 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 our loan portfolio, help to lessen the income impact caused by
changing interest rates.
We monitor the interest rate sensitivity of our 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 interest 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 our interest rate sensitivity and our net
interest income.
In our efforts to manage the interest rates that we pay on deposits, we focus on
maintaining a stable core deposit base while providing competitive products and
services to our customers. We rely primarily on customer deposits and mortgage
payments as our major source of funds, but also borrow from the FHLB to
supplement our funding needs and to help manage our interest rate sensitivity.
- --------------------------------------------------------------------------------
General
- -------
Net interest income is the primary source of our 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." Our
"net interest margin," is defined as our net interest income divided by our
average earning assets, which serves as an indication of the effectiveness of
funds allocation and the management of our interest rate risk.
We also receive income from service charges and other fees primarily related to
credit and deposit services and incur expenses in our day-to-day operations
including salaries and benefits, deposit insurance, facilities expense,
marketing and other related business expenses.
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risk associated with the ability to control costs and
expenses, year 2000 issues and general economic conditions. We undertake no
obligation to publicly release the results of any revisions to those
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
- --------------------------------------------------------------------------------
Interest Rate Sensitivity Analysis
- ----------------------------------
The table that follows sets forth the amounts of interest earning assets and
interest bearing liabilities outstanding at September 30, 1999, 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 presented in 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, 1999
- ------------------------------------------------------------------------------------------------------------------------
More than More than More than More than
Three 3 months 6 months 1 year 3 years
months to to to 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) $14,737 $8,948 $49,756 $32,365 $16,688 $11,554 $134,048
Other loans(1) 5,908 869 1,586 4,686 3,764 830 17,643
Marketable equity securities(3) 4,628 - - - - - 4,628
Federal funds sold and other
short-term investments - - - - - - -
Investment securities - - 300 985 1,469 3,876 6,630
Mortgage-backed securities(2) - - - 10 - - 10
FHLB stock 1,500 - - - - - 1,500
------ ----- ------ ------ ------ ------ -------
Total interest-earning assets 26,773 9,817 51,642 38,046 21,921 16,260 164,459
Less:
Loans in process 2,833 2,834 1,889 - - - 7,556
Unearned discount and deferred fees(2) 23 17 164 35 33 - 272
Allowance for credit losses 109 52 272 196 108 67 804
------ ----- ------ ------ ------ ------ -------
Net interest-earning assets 23,808 6,914 49,317 37,815 21,780 16,193 155,827
------ ----- ------ ------ ------ ------ -------
Interest-bearing liabilities:
Money market deposits 2,339 1,584 1,798 797 379 345 7,242
Passbook deposits 725 692 1,291 4,112 2,681 6,425 15,926
NOW and other demand deposits 2,208 1,828 3,082 6,407 1,756 4,013 19,294
Certificate accounts 10,439 - 30,765 29,918 1,845 - 72,967
Borrowed funds 12,000 - - 6,000 10,000 - 28,000
------ ----- ------ ------ ------ ------ -------
Total interest-bearing liabilities 27,711 4,104 36,936 47,234 16,661 10,783 143,429
------ ----- ------ ------ ------ ------ -------
Interest sensitivity gap(4) ($3,903) $2,810 $12,381 ($9,419) $5,119 $5,410 $12,398
======= ======= ======= ====== ====== ======= =======
Cumulative interest sensitivity gap ($3,903) ($1,093) $11,288 $1,869 $6,988 $12,398
======= ======= ======= ====== ====== =======
Cumulative interest sensitivity gap
as a percent of total assets -2.35% -0.66% 6.81% 1.13% 4.22% 7.48%
Cumulative net interest-bearing
assets as a percent of
interest-bearing liabilities 85.92% 96.56% 116.42% 101.61% 105.27% 108.64%
</TABLE>
(1) For purposes of the gap analysis, mortgage and other loans are reduced for
nonperforming loans but are not reduced for the allowance for credit
losses.
(2) For purposes of the gap analysis, unearned discount and deferred fees are
pro-rated for mortgage loans and mortgage backed securities.
(3) Includes assets held for sale.
(4) Interest sensitivity gap represents the difference between net
interest-earning assets and interest-bearing liabilities.
7
<PAGE>
Analysis of Net Interest Income
- -------------------------------
The following table sets forth certain information relating to our 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>
Year Ended September 30,
---------------------------------------------------------------
1999 1998
----------------------------- --------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans(1) $113,255 $8,386 7.40% $103,502 $8,044 7.77%
Other loans(1) 23,379 2,161 9.25 19,188 1,861 9.70
Interest-earning deposits(2) 4,605 241 5.24 4,239 242 5.72
Federal funds sold and other
short-term investments 2,304 148 6.44 3,785 280 7.41
Investment securities 12,391 844 6.81 12,454 782 6.28
FHLB stock 1,523 114 7.48 1,264 90 7.11
------- ------ ------- ------
Total interest-earning assets 157,457 11,894 7.52 144,432 11,299 7.82
------ ------
Noninterest-earning assets 4,848 4,041
-------- --------
Total assets $162,305 $148,473
======== ========
Liabilities and equity:
Interest-bearing liabilities:
Money market deposits $5,769 209 3.62% $4,378 149 3.40%
Passbook deposits 16,230 407 2.51 15,217 454 2.98
NOW and other demand deposits 9,987 137 1.37 8,908 182 2.04
Certificate accounts 71,435 3,694 5.17 70,337 3,779 5.37
------ ----- ------ -----
Total deposit accounts 103,421 4,447 4.30 98,840 4,564 4.62
Borrowed funds 28,484 1,584 5.50 22,487 1,245 5.54
------ ----- -------- -----
Total interest-bearing liabilities 131,905 6,031 4.56 121,327 5,809 4.79
----- -----
Noninterest-bearing liabilities 8,774 6,769
Equity 21,626 20,377
-------- --------
Total liabilities and equity $162,305 $148,473
======== ========
Net interest income $5,863 $5,490
====== ======
Interest rate spread(3) 2.96% 3.03%
Net interest margin(4) 3.73% 3.80%
Interest-earning asset to
interest-bearing liabilities 119.37% 119.04%
====== ======
</TABLE>
------------------
(1) Amount is net of deferred loan fees and discounts, loans in process 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 our
interest income and expense 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 (change 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,
----------------------------------------------
1999 vs. 1998 1998 vs. 1997
---------------------- ---------------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $758 ($416) $342 $383 ($155) $228
Other loans 406 (106) 300 466 (86) 380
Interest-earning deposits 21 (22) (1) 15 10 25
Federal funds sold and other short-term
investments (110) (22) (132) 247 (86) 161
Investment securities, net (4) 66 62 345 (113) 232
FHLB stock 18 6 24 23 (1) 22
----- ----- --- ----- ----- -----
Total interest-earning assets 1,089 (494) 595 1,479 (431) 1,048
----- ----- --- ----- ----- -----
Interest-bearing liabilities:
Money market deposits 47 13 60 (7) 13 6
Passbook deposits 30 (77) (47) 17 (9) 8
NOW and other demand deposits 22 (67) (45) 17 (31) (14)
Certificate accounts 59 (144) (85) 241 21 262
Borrowed funds 332 7 339 500 (120) 380
---- ------ ---- ---- ------ ----
Total interest-bearing liabilities 490 (268) 222 768 (126) 642
---- ------ ---- ---- ------ ----
Net change in net interest income $599 ($226) $373 $711 ($305) $406
==== ===== ==== ==== ===== ====
</TABLE>
Comparison of Financial Condition for Fiscal Years Ended
September 30, 1999 and 1998
- --------------------------------------------------------------------------------
The Company's total assets were $165.7 million at September 30, 1999, an
increase of $7.0 million or 4.43%, from $158.7 million at September 30, 1998.
The asset growth was primarily due to growth of net loans receivable.
Net loans receivable increased $17.9 million, or 13.8%, to $147.7 million at
September 30, 1999 from $129.8 million at September 30, 1998. The continuation
of new home construction within the markets Bedford Federal serves combined with
growth of both commercial and consumer loans during fiscal 1999 were the major
factors in the expansion of loans. This increase was funded primarily by
principal repayments of the loan portfolio, increased deposits, maturities of
investment securities available for sale and a reduction in our cash position.
Because lending is directly affected by interest rates, a rise in interest rates
could cause a slow down in new loan originations.
Investment securities held to maturity decreased $1.3 million, or 61.7%, to
$810,000 at September 30, 1999 from $2.1 million at September 30, 1998.
Investment securities available for sale decreased $6.4 million, or 37.8%, to
$10.5 million at September 30, 1999 from $16.8 million at September 30, 1998.
The decrease in both of these portfolios were the result of maturing investments
and were primarily used to supplement the growth of the loan portfolio.
9
<PAGE>
Deposits increased $7.6 million to $114.7 million at September 30, 1999 from
$107.1 million at September 30, 1998. The increase was primarily the result of
special certificate nof deposit promotions during fiscal 1999, as well as the
closing of branches by our competitors which resulted in new deposit inflows.
Total stockholders' equity was $21.1 million on September 30, 1999, relatively
unchanged from the $21.2 million at September 30, 1998. During fiscal 1999. we
repurchased 132,200 shares of its common stock in open market transactions at an
average price of $13.36 per share. The aggregate price of the repurchased shares
was $1.8 million which offset the amount of retained income.
Comparison of Operating Results for Years Ended September 30, 1999 and 1998
- --------------------------------------------------------------------------------
Net Income. Net income increased $218,000, to $2.2 million for fiscal
Net9incomefincreased8$218,000, toc$2.2emillion for fiscal 1999 from fiscal 1998.
A 6.8% increase in net interest income, combined with a 23.9% rise in
noninterest income, accounted for the improvement in profitability.
Interest Income. Interest income totaled $11.9 million for the fiscal
yeaInterestSincomeetotaled9$11.9 millioncforsthe fiscal year ended September 30,
1999, a 5.3% increase from the $11.3 million recorded for fiscal 1998. The
$595,000 expansion of interest income is due to the 9.0% growth of average
earning assets, including average loan growth of 10.7%, offset by a 30 basis
point decline in the rate earned on average earning assets.
Interest Expense. Intereeest expense increased $222,000 from $5.8 million for
the year ended September 30, 1998, to $6.0 Interest expense increased $222,000
from $5.8 million for the year ended September 30, 1998 to $6.0 million for the
fiscal year ended September 30, 1999. The level of average interest-bearing
liabilities rose 8.7% to $131.9 million for fiscal 1999 from $121.3 for fiscal
1998. Offsetting this increase was a 23 basis point decline in the cost of
interest- bearing liabilities in fiscal 1999 compared to fiscal 1998.
Net Interest Income. Net interst income totaled $5.9 million for the year ended
September 30, 1999, up 6.8% from Net interest income totaled $5.9 million for
the year ended September 30, 1999, up 6.8% from the $5.5 million realized in
fiscal 1998. The increase is primarily due to the higher volume of average
earning assets, primarily loans, and to an improved mix within the loan
portfolio. Restraining the expansion of net interest income was a 30 basis point
decline in the yield on earning assets.
Provision for Loan Losses. The provision for loan losses for the year ended
September 30, 1999 was $90,000, The provision for loan losses for the year ended
September 30, 1999 was $90,000, unchanged from the provisions recorded in fiscal
1998. At September 30, 1999, the allowance for loan losses was $804,000 equal to
.54% of loans receivable, net, and 73.9% of non-performing loans. Based upon the
quality of the Bank's loan portfolio, the relatively stable local economy, and
favorable interest rate environment, management believes the Bank's allowance
for credit losses is adequate to absorb any anticipated credit losses.
Management currently expects future provisions for credit losses to be based
primarily upon growth in the loan portfolio and other factors. However,
assessment of the adequacy of the allowance for credit loss involves subjective
judgments regarding future events and thus there can be no assurance that
additional provisions for credit losses will not be required in future periods.
Noninterest Income. For the year ended September 30, 1999, noninterest income
amounted to $1.1 million, an For the year ended September 30, 1999, noninterest
income amounted to $1.1 million, an increase of $206,000 from the $863,000
earned in fiscal 1998. Service charges and fees on loans were up $189,000 due to
an increase in both the number and dollar volume of loan originations. Other
customer service fees and commissions reflected an increase of $16,000, while
gains on the sales of loans, investments and foreclosed real estate were up
$20,000.
Noninterest Expense. Noninterest expense totaled $3.3 million for the year ended
September 30, 1999, compared to Noninterest expense totaled $3.3 million for the
year ended September 30, 1999 compared to $3.1 million for fiscal 1998. The
increase was primarily due to an 8.6% rise in the cost of compensation and
employee benefits and a 12.1% increase in data processing expense. The higher
1999 expense for compensation and employee benefits was primarily due to merit
increases and additional staffing, while the increase in data processing expense
was due to a pricing increase.
10
<PAGE>
Income Taxes. The provision for income taxes increased $163,000, to $1.3 million
in fiscal 1999 from $1.2 million in fiscal The provision for income taxes
increased $163,000 to $1.3 million in fiscal 1999 from $1.2 million in fiscal
1998 due to the increased level of taxable income.
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Our liquidity is a measure of our ability to fund loans, pay deposit
withdrawals, and other cash outflows in an efficient, cost effective manner. Our
primary sources of funds are deposits and scheduled amortization and prepayment
of loans. During the past several years, we have used such funds primarily to
fund maturing time deposits, pay savings withdrawals, fund lending commitments,
purchase new investments, and increase liquidity. We also borrow funds from the
Federal Home Loan Bank ("FHLB") of Atlanta. As of September 30, 1999, such
borrowed funds totaled $28.0 million. Loan payments and maturing investments are
greatly influenced by general interest rates, economic conditions and
competition.
We are 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 that our subsidiary,
Bedford Federal Savings Bank ("Bedford Savings") maintain liquid assets of not
less than 4% of net withdrawable accounts plus short-term borrowings. At
September 30, 1999, Bedford Savings' regulatory liquidity was 8.5%.
The amount of certificate accounts which are scheduled to mature within one year
is approximately $41.0 million. We believe that we can replace these funds with
other deposits, excess liquidity, FHLB advances, or other borrowings if these
deposits do not remain with us. It has been our experience that a substantial
portion of such maturing deposits remain with us. In addition, at September 30,
1999, we had commitments to fund loans of $12.9 million, and $7.6 million of
loans in process.
Net cash provided by operating activities for fiscal 1999 totaled $3.1 million
which was primarily due to net income of $2.2 million.
Net cash absorbed by investing activities for fiscal 1999 totaled $10.6 million,
a decrease from fiscal 1998 of $8.7 million. The decrease was primarily
attributable to a $9.6 million increase in cash proceeds from maturities of
investments and a $3.9 million decrease in purchases of available for sale
securities, offset by a $18.0 million increase in net loans to customers.
Net cash provided by financing activities for the year ended September 30, 1999
totaled $4.6 million. This is a result of a net increase in deposits of $7.6
million, which was partially offset by a decrease in FHLB advances of $1.0
million, stock repurchases of $1.8 million and dividend payments of $774,000.
The increase in deposits was used primarily to fund the increase in loan
originations.
Liquidity may be adversely affected by unexpected deposit outflows, excessive
interest rates paid by competitors, adverse publicity relating to the financial
services industry, and similar matters. Management monitors projected liquidity
needs and determines the level desirable, based in part on our commitments to
make loans and management's assessment of our ability to generate funds. Bedford
Savings is also subject to federal regulations that impose certain minimum
capital requirements.
Impact of Inflation and Changing Prices
- --------------------------------------------------------------------------------
Unlike most industrial companies, substantially all of our assets are monetary
in nature. As a result, interest rates have a greater impact on our 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.
11
<PAGE>
The Year 2000 Issue
- -------------------------------------------------------------------------------
The Year 2000 ("Y2K") issues relate 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. We are heavily dependent on computer systems in the conduct of
substantially all of our business activities.
During fiscal 1998, we established a Y2K Committee (the "Committee") and adopted
a Y2K Compliance Plan (the "Plan"). The purpose of the Committee and Plan was to
identify the systems that could be affected by the Y2K issues 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 required that the plan include five phases:
Awareness, Assessment, Renovation, Validation and Implementation. As of
September 30, 1999, we have completed all five phases of testing.
We currently estimate that our total cost for the Y2K issue will be $125,000 to
$150,000. Through September 30, 1999, we have incurred charges of $66,000
related to Y2K issues, including $28,000 during the year ended September
30,1999. These charges include costs necessary to modify our computer
information systems, both internal and vendor maintained, to enable proper
processing of transactions relative to the year 2000 and beyond, Additionally,
we have incurred costs in connection with training of employees and customer
communications necessary to adequately explain our Y2K requirements and
readiness. During the third quarter of fiscal 1999, we ordered two electric
generators to be used in the event of an electrical disruption. These generators
were delivered in October of 1999. The cost of these generators was
approximately $31,000.
A Contingency and Business Resumption Plan was approved by the Board in July,
1999. This plan addresses perceived risks associated with the year 2000 problem.
These activities include contingency planning intended to mitigate any risks
associated with unforeseen system glitches, system failure, increased demands
for cash, or processes outside of our control. The remainder of 1999 will be
used to further validate the plan.
We continue to focus on the awareness phase with its efforts on providing
customers, our shareholders and employees with up-to-date information on our
state of preparedness for the year 2000. For the remainder of 1999, we will
focus on employee training to insure continued, uninterrupted customer service
in the new year.
Despite our best efforts to address this issue, the vast number of external
entities that have direct and indirect business relationships with us, such as
customers, vendors, payment systems providers, utility companies, and other
financial institutions, makes it impossible to assure that a failure to achieve
compliance by one or more of these entities would not have a material impact on
our financial statements. Additionally, Y2K issues could effect our liquidity if
customer withdrawals in anticipation of the year 2000 are greater than expected
or if lenders are unable to provide us with funds when needed.
12
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
----------------------------
Consolidated Financial Statements
As of September 30, 1999 and 1998 and
For the Years Ended September 30, 1999, 1998 and 1997
Bedford Bancshares Inc. and Subsidiaries
13
<PAGE>
[LOGO] BDO Seidman, LLP 300 Arboretum Place, Suite 520
Accountants and Consultants Richmond, Virginia 23236
Telephone (804) 330-3092
FAX (804) 330-7753
Report of Independent Certified Public Accountants
The Board of Directors
Bedford Bancshares, Inc.
Bedford, Virginia
We have audited the consolidated balance sheets of Bedford Bancshares, Inc. and
subsidiaries (the "Company") as of September 30, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years ended September 30, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years
ended September 30, 1999 in conformity with generally accepted accounting
principles.
/s/ BDO Seidman, LLP
October 28, 1999
15
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Consolidated Balance Sheets
(in thousands)
=========================================================================
September 30, 1999 1998
- -------------------------------------------------------------------------
Assets
Cash (including interest bearing deposits of
approximately $3,650 - 1998) $ 2,744 $ 5,666
Securities (Note 1)
Held-to-maturity 810 2,114
Available for sale 10,458 16,820
Investment in Federal Home Loan Bank stock,
at cost (Note 6) 1,500 1,550
Loans receivable, net (Notes 2, 6 and 14) 147,689 129,744
Property and equipment, net (Note 4) 1,105 1,160
Accrued interest receivable 924 996
Deferred income taxes (Note 8) 225 95
Other assets 282 566
- -------------------------------------------------------------------------
Total assets $165,737 $158,711
=========================================================================
16
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Consolidated Balance Sheets
(in thousands)
================================================================================
September 30, 1999 1998
- --------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 5) $114,720 $107,086
Advances from Federal Home Loan Bank (Note 6) 28,000 29,000
Advances from borrowers for taxes and insurance 605 528
Dividends payable 196 184
Other liabilities 1,150 665
- --------------------------------------------------------------------------------
Total liabilities 144,671 137,463
- --------------------------------------------------------------------------------
Commitments and contingencies (Notes 12 and 13)
- --------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, par value $.10, authorized 250,000
shares, none outstanding - -
Common stock, par value $.10, authorized 2,750,000
shares, 2,173,050 and 2,297,900 shares,
issued and outstanding 217 230
Additional paid-in capital 10,497 10,939
Retained earnings, substantially restricted (Note 10) 11,223 10,900
Accumulated other comprehensive (loss) income (151) 60
Stock required by ESOP and RRP (Note 11) (720) (881)
- --------------------------------------------------------------------------------
Total stockholders' equity 21,066 21,248
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $165,737 $158,711
================================================================================
See accompanying summary of accounting policies
and notes to consolidated financial statements.
17
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Consolidated Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
=========================================================================================
Year Ended September 30, 1999 1998 1997
- -----------------------------------------------------------------------------------------
Interest income
<S> <C> <C> <C>
Loans $10,547 $ 9,905 $ 9,297
U.S. government obligations, including agencies 1,141 1,055 796
Other investments 206 339 187
- -----------------------------------------------------------------------------------------
Total interest income 11,894 11,299 10,280
- -----------------------------------------------------------------------------------------
Interest expense
Deposits (Note 5) 4,447 4,564 4,302
Borrowed money 1,584 1,245 865
- -----------------------------------------------------------------------------------------
Total interest expense 6,031 5,809 5,167
- -----------------------------------------------------------------------------------------
Net interest income 5,863 5,490 5,113
Provision for loan losses (Note 2) 90 90 100
- -----------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 5,773 5,400 5,013
- -----------------------------------------------------------------------------------------
Noninterest income
Service charges and fees on loans 648 459 296
Other customer service fees and commissions 336 320 242
Gain on sale of loans, investments and
foreclosed real estate 30 10 16
Other 55 74 39
- -----------------------------------------------------------------------------------------
Total noninterest income 1,069 863 593
- -----------------------------------------------------------------------------------------
</TABLE>
continued...
18
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Consolidated Statements of Operations
(in thousands)
(continued)
================================================================================
Year Ended September 30, 1999 1998 1997
- --------------------------------------------------------------------------------
Noninterest expense
Compensation and employee benefits $ 1,860 $ 1,712 $ 1,684
Occupancy and equipment 319 321 318
Data processing 397 354 341
Federal insurance of accounts 63 64 88
Advertising 115 111 140
Professional fees 200 201 120
Other 374 367 350
- --------------------------------------------------------------------------------
Total noninterest expense 3,328 3,130 3,041
- --------------------------------------------------------------------------------
Income before income taxes 3,514 3,133 2,565
Provision for income taxes (Note 8) 1,323 1,160 974
- --------------------------------------------------------------------------------
Net income $ 2,191 $ 1,973 $ 1,591
================================================================================
Basic earnings per share (Note 16) $ 1.01 $ .90 $ .74
Diluted earnings per share (Note 16) $ .96 $ .85 $ .70
================================================================================
See accompanying summary of accounting policies
and notes to consolidated financial statements.
19
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
======================================================================================================================
Accumulated
Additional Other Acquired
Common Paid-in Retained Comprehensive By ESOP
Stock Capital Earnings Income and RRP Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996 $114 $10,773 $8,739 $(33) $(1,366) $18,227
Comprehensive income
Net income - - 1,591 - - 1,591
Change in unrealized loss
on securities available for
sale (Note 9) - - - 55 - 55
------------
Total comprehensive income - - - - - 1,646
------------
Allocated/earned ESOP
shares (Note 11) - 147 49 - 80 276
Purchase of RRP shares
(Note 11) - (12) (11) - - (23)
Dividends declared ($.27
per share) - - (605) - - (605)
RRP vesting (Note 11) - (72) - - 172 100
- ----------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 114 10,836 9,763 22 (1,114) 19,621
Comprehensive income
Net income - - 1,973 - - 1,973
Change in unrealized loss
on securities available for
sale (Note 9) - - - 38 - 38
------------
Total comprehensive income - - - - - 2,011
------------
Allocated/earned ESOP
shares (Note 11) - 96 16 - 69 181
Purchase of RRP shares
(Note 11) - (29) (57) - - (86)
Effect of 2 to 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
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
20
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
(continued)
<TABLE>
<CAPTION>
======================================================================================================================
Accumulated
Additional Other Acquired
Common Paid-in Retained Comprehensive By ESOP
Stock Capital Earnings Income and RRP Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1998 $230 $10,939 $10,900 $ 60 $(881) $21,248
Comprehensive income
Net income - - 2,191 - - 2,191
Change in unrealized loss
on securities available for
sale (Note 9) - - - (211) - (211)
------------
Total comprehensive income - - - - - 1,980
------------
Allocated/earned ESOP
shares (Note 11) - 195 17 - 40 252
Repurchase of stock (132,200
shares) (13) (648) (1,103) - - (1,764)
Dividends declared ($.34
per share) - - (786) - - (786)
Exercise of options (Note 11) - 36 4 - - 40
RRP vesting (Note 11) - (25) - - 121 96
- ----------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 $217 $10,497 $11,223 $(151) $(720) $21,066
======================================================================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to consolidated financial statements.
21
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
===============================================================================================
Year Ended September 30, 1999 1998 1997
- -----------------------------------------------------------------------------------------------
Operating activities
<S> <C> <C> <C>
Net income $ 2,191 $ 1,973 $ 1,591
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses 90 90 100
Provision for depreciation and amortization 147 150 159
(Increase) decrease in deferred income taxes (130) (37) 380
Gain on sale of loans, investments, and
foreclosed real estate (30) (11) (15)
Loans originated for sale (1,464) (304) (185)
Proceeds from sale of loans originated for sale 1,464 304 185
(Increase) decrease in interest receivable 72 (149) (185)
(Increase) decrease in other assets 285 (139) 121
Increase (decrease) in other liabilities 485 471 (745)
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,110 2,348 1,406
- -----------------------------------------------------------------------------------------------
Investing activities
Proceeds from maturities of securities 17,055 7,500 2,090
Proceeds from sales of available for sale securities - 1,004 1,000
Purchase of available for sale securities (9,658) (13,542) (5,500)
Principal collected on mortgage-backed securities 4 5 55
Net increase in loans to customers (18,036) (13,741) (7,575)
Net proceeds from sales of foreclosed real estate 83 220 47
Purchases of premises, equipment and leasehold
improvements (92) (96) (131)
Sale (purchase) of FHLB stock 50 (618) -
- -----------------------------------------------------------------------------------------------
Net cash absorbed by investing activities (10,594) (19,268) (10,014)
- -----------------------------------------------------------------------------------------------
</TABLE>
continued...
22
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
Year Ended September 30, 1999 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financing activities
Net increase in deposits $ 7,635 $ 3,474 $ 8,234
Net increase (decrease) in advance payments
from borrowers 77 26 (37)
Proceeds from FHLB advances 11,000 22,000 23,500
Principal payments of FHLB advances (12,000) (8,000) (20,500)
Purchase of stock by ESOP and RRP - (86) (23)
Allocation of ESOP and RRP shares 348 288 376
Repurchase of stock (1,764) - -
Dividends paid (774) (665) (571)
Issuance of common stock 40 103 -
- ------------------------------------------------------------------------------------
Net cash provided by financing activities 4,562 17,140 10,979
- ------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (2,922) 220 2,371
Cash and cash equivalents - beginning of year 5,666 5,446 3,075
- ------------------------------------------------------------------------------------
Cash and cash equivalents - end of year $ 2,744 $ 5,666 $ 5,446
====================================================================================
Supplemental Disclosures of Cash Flow Information
- ------------------------------------------------------------------------------------
Cash payments of interest expense $ 6,015 $ 5,880 $ 5,387
====================================================================================
Cash payments of income taxes $ 1,282 $ 570 $ 823
====================================================================================
Transfer of loans to foreclosed real estate $ 88 $ 110 $ 255
====================================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to consolidated financial statements.
23
<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., Bedford Federal Savings Bank and CVFS, its wholly-owned
subsidiaries, and First Financial Enterprises, Inc., a 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
Investment in debt securities classified as held-to-maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts using the level
yield method. Management has a positive intent and ability to hold these
securities to maturity and, accordingly, adjustments are not made for temporary
declines in their market value below amortized cost. Investment in Federal Home
Loan Bank stock is stated at cost.
24
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Summary of Accounting Policies
(continued)
================================================================================
Investment Securities (continued)
Investments in debt and equity securities classified as available-for-sale are
stated at market value with unrealized holding gains and losses excluded from
earnings and reported as a separate component of stockholders' equity, net of
tax effect, until realized.
Investments in debt and equity securities classified as trading are stated at
market value. Unrealized holding gains and losses for trading securities are
included in the statement of income.
Gains and losses on the sale of securities are determined using 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.
25
<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, 1999, 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.
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.
26
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Summary of Accounting Policies
(continued)
================================================================================
Sale of Loans, Participations in Loans (continued)
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 bank 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.
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.
27
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Summary of Accounting Policies
(continued)
================================================================================
Income Taxes (continued)
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 $424,821 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.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133 requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain requirements are met, a derivative may be specifically designated as a
hedge and an entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000 and
requires application prospectively.
28
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Summary of Accounting Policies
(continued)
================================================================================
Earnings Per Share
Basic earnings per share include 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 stock options that could share in the earnings of the Company. The
computation of basic and diluted earnings per share is presented in Note 16.
Comprehensive Income
For the year ended September 30, 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). This statement establishes rules for the reporting of comprehensive income
and its components. Comprehensive income consists of net income and unrealized
gains on available for sale securities and is presented in the Consolidated
Statements of Stockholders' Equity. The adoption of SFAS 130 had no impact on
total shareholders' equity. Prior year financial statements have been
reclassified to conform to SFAS 130 requirements.
Statement of Cash Flows
For purposes of the statements of cash flows the Company considers all highly
liquid debt instruments with maturities, when purchased, of three months or
less, to be cash equivalents. Cash and cash equivalents include cash on hand,
funds due from banks, and federal funds sold.
29
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. Securities
A summary of the amortized cost and estimated market values of investment
securities, in thousands, is as follows:
<TABLE>
<CAPTION>
September 30, 1999
- -----------------------------------------------------------------------------------------
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 $ 800 $ 2 $ 2 $ 800
Mortgage-backed securities 10 - - 10
- -----------------------------------------------------------------------------------------
810 2 2 810
- -----------------------------------------------------------------------------------------
Available for Sale
United States government
and agency obligations 6,005 - 175 5,830
Marketable Equity securities 4,648 - 73 4,575
Other 53 - - 53
- -----------------------------------------------------------------------------------------
10,706 - 248 10,458
- -----------------------------------------------------------------------------------------
$11,516 $ 2 $250 $11,268
=========================================================================================
</TABLE>
Gross gains of approximately $0, $3,000 and $4,000 and gross losses of
approximately $0, $1,000 and $0 were realized on sales of securities available
for sale during the years ended September 30, 1999, 1998 and 1997, respectively.
30
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
1. Securities (continued)
<TABLE>
<CAPTION>
September 30, 1998
- -------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
- -------------------------------------------------------------------------------------
Held to Maturity
<S> <C> <C> <C> <C>
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>
31
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
1. Securities (continued)
The amortized cost and estimated market value of debt securities, in thousands,
at September 30, 1999, by contractual maturity, were as follows:
Estimated
Market
Value
Amortized
Cost
- ------------------------------------------------------------------------
Held to Maturity
Due in one year or less $ 300 $ 302
Due in one through five years - -
Due after five years 500 498
- ------------------------------------------------------------------------
800 800
Mortgage-backed securities 10 10
- ------------------------------------------------------------------------
810 810
- ------------------------------------------------------------------------
Available for Sale
Due in one year or less - -
Due in one through five years 4,499 4,359
Due after five years 1,506 1,471
- ------------------------------------------------------------------------
6,005 5,830
Marketable equity securities 4,648 4,575
Other 53 53
- ------------------------------------------------------------------------
10,706 10,458
- ------------------------------------------------------------------------
$11,516 $11,268
========================================================================
Expected maturities can differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
32
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
2. Loans Receivable
Loans receivable, in thousands, are summarized as follows
<TABLE>
<CAPTION>
September 30, 1999 1998
- --------------------------------------------------------------------
<S> <C> <C>
First mortgage loans $112,219 $100,863
Construction loans 18,506 13,530
Home equity loans 4,692 3,944
Loans to depositors, secured by savings 452 451
Installment loans 11,512 10,129
Term notes 8,940 6,788
- --------------------------------------------------------------------
156,321 135,705
Less
Undistributed loans in process 7,556 4,906
Deferred loan fees and costs, net 272 291
Allowance for credit losses 804 764
- --------------------------------------------------------------------
$147,689 $129,744
====================================================================
</TABLE>
Activity in the allowance for credit losses, in thousands, is
summarized as follows:
Year ended September 30, 1999 1998 1997
- ------------------------------------------------------------------
Balance at beginning of year $764 $678 $650
Provision charged to operations 90 90 100
Charge offs net of recoveries (50) (4) (72)
- ------------------------------------------------------------------
Balance at end of year $804 $764 $678
==================================================================
33
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
3. Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of those loans,
in thousands, are summarized as follows:
September 30, 1999 1998 1997
- ---------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation (FHLMC) $1,698 $1,361 $1,719
Virginia Housing Development Authority (VHDA) 803 1,097 1,184
- ---------------------------------------------------------------------------
$2,501 $2,458 $2,903
================================================================================
4. Property and Equipment
Property and equipment, in thousands, are summarized as follows:
September 30, 1999 1998
- -----------------------------------------------------------------
Land $ 251 $ 251
Office buildings 1,203 1,203
Rental buildings 68 48
Furniture, fixtures and equipment 1,019 953
Automobile 25 25
Leasehold improvements 25 20
- -----------------------------------------------------------------
2,591 2,500
Less accumulated depreciation 1,486 1,340
- -----------------------------------------------------------------
$1,105 $1,160
=================================================================
34
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
5. Deposits
Deposits, in thousands, are summarized as follows:
September 30, 1999 1998
- ------------------------------------------------------------------------
Amount Percent Amount Percent
- ------------------------------------------------------------------------
NOW accounts $ 18,440 16.07% $ 15,941 14.89%
Money market accounts 7,241 6.31 4,799 4.48
Savings accounts 16,072 14.01 15,611 14.58
Time deposits 72,967 63.61 70,735 66.05
- ------------------------------------------------------------------------
$114,720 100.00% $107,086 100.00%
========================================================================
The aggregate amount of certificates of deposit of $100,000 or more was
approximately $13,785,000 and $10,416,000 at September 30, 1999 and 1998,
respectively.
At September 30, 1999, the scheduled maturities of time deposits, in thousands,
are as follows:
Year ending September 30,
----------------------------------------------
2000 $41,057
2001 28,301
2002 1,760
2003 1,201
Thereafter 648
----------------------------------------------
$72,967
==============================================
Interest expense on deposits, in thousands, is summarized as follows:
Year ended September 30, 1999 1998 1997
- -------------------------------------------------------------
NOW accounts $ 137 $ 182 $ 194
Money market account 209 149 145
Savings account 407 454 445
Time deposits 3,694 3,779 3,518
- -------------------------------------------------------------
$ 4,447 $ 4,564 $ 4,302
=============================================================
35
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
6. Advances from Federal Home Loan Bank
Borrowings ("advances") from the Federal Home Loan Bank ("FHLB"), in thousands,
are scheduled to mature as follows:
September 30, 1999 1998
- ----------------------------------------------
Within one year $ 4,000 $ 1,000
One to two years - 4,000
Two years or more 24,000 24,000
- ----------------------------------------------
$28,000 $29,000
- ----------------------------------------------
The weighted average interest rate on advances at September 30, 1999 and 1998
was 5.53% and 5.55%, 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:
Year ended September 30, 1999 1998 1997
- -----------------------------------------------------------------------------
Maximum amount outstanding during the year $31,000 $31,000 $16,000
================================================================================
Average amount outstanding during the year 28,483 22,487 12,249
================================================================================
Average interest rate during the year 5.56% 5.54% 6.07%
================================================================================
36
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
7. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments, in thousands,
are as follows:
<TABLE>
<CAPTION>
September 30, 1999 1998
- --------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------------------------
Financial assets
<S> <C> <C> <C> <C>
Cash and short-term investments $ 2,744 $ 2,744 $ 5,666 $ 5,666
Securities 11,268 11,268 18,934 18,967
Loans, net of allowance for loan losses 147,689 148,157 129,744 130,667
Financial liabilities
Deposits 114,720 115,034 107,086 107,530
Advances from Federal Home Loan Bank 28,000 28,000 29,000 29,000
Notional Fair Notional Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------------------------
Unrecognized financial instruments
Commitments to extend credit $ 12,916 $ 12,916 $ 8,173 $ 8,173
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and short-term investments
For these short-term investments, the carrying amount is a reasonable estimate
of fair value.
Securities
Fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
37
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
7. Fair Value of Financial Instruments (continued)
Loan receivable
- ---------------
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
remaining maturities. This calculation ignores loan fees and certain factors
affecting the interest rates charged on various loans such as the borrower's
creditworthiness and compensating balances and dissimilar types of real estate
held as collateral.
Deposit liabilities
- -------------------
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the balance sheet date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank
- ------------------------------------
For advances that mature within one year of the balance sheet date, carrying
value is considered a reasonable estimate of fair value.
The fair values of all other advances are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for similar
types of advances.
Commitments to extend credit
- ----------------------------
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the borrowers. For fixed-rate
loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. Because of the competitive
nature of the marketplace loan fees vary greatly with no fees charged in many
cases.
38
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
8. Income Taxes
The provision for income taxes, in thousands, is summarized as follows:
Year ended September 30, 1999 1998 1997
- ----------------------------------------------------------------
Current
Federal $1,195 $1,066 $517
State 211 186 152
- ----------------------------------------------------------------
1,406 1,252 669
Deferred tax expense (benefit) (83) (92) 305
- ----------------------------------------------------------------
Total provision for income taxes $1,323 $1,160 $974
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Differences between the statutory and effective tax rates are summarized as
follows:
Percent of Pre-tax Income
-------------------------
Year ended September 30, 1999 1998 1997
- ---------------------------------------------------------------------------
Tax at statutory rate 34.0% 34.0% 34.0%
Increases (decreases) in taxes resulting from
State income taxes, net of federal benefit 5.4 5.6 4.5
Other (1.4) (2.6) (.5)
- ---------------------------------------------------------------------------
38.0% 37.0% 38.0%
===========================================================================
39
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
8. Income Taxes (continued)
The components of the net deferred tax asset, in thousands, were as follows:
September 30, 1999 1998
- ------------------------------------------------------------------------------
Deferred tax asset
Bad debts $171 $130
Loan fees 37 46
Unrealized loss on securities available for sale 90 -
- ------------------------------------------------------------------------------
Total deferred tax asset 298 176
- ------------------------------------------------------------------------------
Deferred tax liability
Accelerated depreciation (5) (13)
Unrealized gain on securities available for sale - (35)
Distributive share of income from partnership (17) (18)
Other (51) (15)
- ------------------------------------------------------------------------------
Total deferred tax liability (73) (81)
- ------------------------------------------------------------------------------
Net deferred tax asset $225 $ 95
==============================================================================
40
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
9. Comprehensive Income
The components of other comprehensive income (loss) are summarized as follows:
Year ended September 30, 1999 1998 1997
- --------------------------------------------------------------------------------
Unrealized gains (losses) on securities: $(269) $61 $89
Less: reclassification adjustment for gains (losses)
included in net income 71 - -
- --------------------------------------------------------------------------------
Other comprehensive income (loss) before tax (340) 61 89
Income tax (expense) benefit related to items of other
comprehensive income 129 (23) (34)
- --------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax $(211) $38 $55
================================================================================
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, 1999,
the liquidation account, adjusted for customer withdrawals, totaled $2,235,000.
41
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
11. Retirement Plan 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. The Savings Bank
matched $.50 for every $1 up to 4% of salary for years prior to fiscal 1999.
Beginning in fiscal 1999, the Savings Bank, for $1 up to 4% of salary, will
match $.50 for employees with less than ten years of service, $.75 for employees
with between ten and twenty years of service and $1 for employees with over
twenty years of service. Effective October 1, 1993, a 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, 1999, 1998 and
1997, respectively. The total expense for the plan was $78,000, $61,000, and
$60,000 for the years ended September 30, 1999, 1998 and 1997, 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 82,666 and 66,666 shares of Common Stock as of September
30, 1999 and 1998, respectively. The Company recognized $149,000 and $138,000 of
compensation cost for the years ended September 30, 1999 and 1998, respectively.
The fair value of unearned ESOP shares totaled $967,000 at September 30, 1999.
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.
42
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
11. Retirement Plan and Employee Benefit Programs (continued)
Recognition and Retention Plan (continued)
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, 1999 and 1998, the amount
included in compensation expense was $96,000 and $104,000, 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, 1997 $6.10 8,394 51,644
Granted - - -
Vested 5.92 - (16,224)
- --------------------------------------------------------------------------
Balance at September 30, 1998 6.18 8,394 35,420
Granted - - -
Vested 5.92 - (16,210)
- --------------------------------------------------------------------------
Balance at September 30, 1999 $5.81 8,394 19,210
==========================================================================
43
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
11. Retirement Plan 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, 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
Granted - - - -
Vested - - (40,550) 40,550
Exercised 5.50 - - (7,350)
- -------------------------------------------------------------------------------
Balance at September 30, 1999 $6.40 20,994 48,049 147,715
===============================================================================
The remaining contractual lives of the options granted in 1999, 1998 and 1997
are 5.3 years, 6.3 years and 7.3 years, respectively at September 30, 1999. The
weighted average remaining contractual life of total options is 5.5 years at
September 30, 1999.
44
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 2001 at an annual rental of $2,400 and in Bedford, under a
five year lease expiring in September 2004 at an annual rental of $3,300.
The current minimum annual rental commitments under non-cancelable operating
leases in effect at September 30, 1999 are as follows:
Year Ending September 30, Amount
----------------------------------------------
2000 $10,500
2001 9,900
2002 3,300
2003 3,300
2004 and thereafter 22,800
----------------------------------------------
$49,800
==============================================
Rent expense was approximately $7,200, $7,000 and $7,400 for the years ended
September 30, 1999, 1998, and 1997, 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.
45
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
12. Commitments and Contingencies (continued)
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, 1999 and 1998. The Savings Bank uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
<TABLE>
<CAPTION>
September 30, 1999 1998
- ----------------------------------------------------------------------------------------------------------
Financial instruments, in thousands, whose contract amounts represent credit risk
<S> <C> <C>
Unfunded commercial credit line $ 2,486 $1,403
Unfunded home equity lines of credit 5,866 4,978
Commitments to finance real estate acquisitions and construction 4,564 1,792
- ----------------------------------------------------------------------------------------------------------
$12,916 $8,173
==========================================================================================================
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to be drawn
upon, the total commitment amounts generally represent future cash requirements.
The Savings Bank evaluates each customer's credit-worthiness on a case-by-case
basis. The amount of collateral, if deemed necessary by the Savings Bank upon
extension of credit, is based on management's credit evaluation of the credit
applicant. Collateral normally consists of real property.
46
<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, 1999, 1998 and 1997 are approximately $910,000,
$826,000 and $819,000, respectively.
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, 1999 and 1998. 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.
Amount Percent Actual Actual Excess
September 30, 1999 Required Required Amount Percent Amount
- --------------------------------------------------------------------------------
Tangible Capital $2,491,000 1.50% $19,040,000 11.46% $16,549,000
Core Capital 6,643,000 4.00 19,040,000 11.46 12,397,000
Risk-based Capital 8,270,000 8.00 19,770,000 19.12 11,500,000
Amount Percent Actual Actual Excess
September 30, 1998 Required Required Amount Percent Amount
- --------------------------------------------------------------------------------
Tangible Capital $2,383,000 1.50% $19,192,000 12.10% $16,809,000
Core Capital 6,355,000 4.00 19,192,000 12.10 12,837,000
Risk-based Capital 7,353,000 8.00 19,857,000 21.60 12,504,000
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.
47
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
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.
During the year ended September 30, 1999, the Board of Directors authorized a
stock repurchase program under which up to 10%, or 229,790 shares, of the then
outstanding shares of the Company's stock may be repurchased. During 1999,
132,220 shares were repurchased for an aggregate amount of approximately
$1,764,000.
Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
Year ended September 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings
Income available to common shareholders $2,191,000 $1,973,000 $1,591,000
========================================================================================
Weighted average share outstandings 2,167,256 2,182,617 2,164,432
========================================================================================
Basic earnings per share $ 1.01 $ .90 $ .74
========================================================================================
Diluted earnings per share
Income available to common shareholders $2,191,000 $1,973,000 $1,591,000
========================================================================================
Weighted average shares outstanding 2,167,256 2,182,617 2,164,432
Dilutive effect of RRP plan shares 17,073 43,238 41,082
Dilutive effect of stock options 100,672 93,887 93,601
- ----------------------------------------------------------------------------------------
Total weighted average shares outstanding 2,285,001 2,319,742 2,299,115
========================================================================================
Diluted earnings per share $ .96 $ .85 $ .70
========================================================================================
</TABLE>
48
<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, 1999 1998
- -------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 99 $ 379
Securities 90 103
Investment in Savings Bank subsidiary 18,896 19,251
Loan to Savings Bank subsidiary 100 2,000
Dividend receivable from Savings Bank subsidiary 2,307 -
Other assets 475 123
- -------------------------------------------------------------------------------
Total assets $21,967 $21,856
===============================================================================
Liabilities and stockholders' equity
Other liabilities $ 705 $ 424
Dividends payable 196 184
Stockholders' equity 21,066 21,248
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $21,967 $21,856
===============================================================================
49
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
================================================================================
17. Condensed Parent Company Information (continued)
Condensed Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
Year Ended September 30, 1999 1998 1997
- ----------------------------------------------------------------------------------------------
Income
Interest
<S> <C> <C> <C>
Savings Bank's ESOP loan $ 29 $ 34 $ 40
Loan to Savings Bank subsidiary 108 170 218
Other 55 57 41
- ----------------------------------------------------------------------------------------------
Total income 192 261 299
- ----------------------------------------------------------------------------------------------
Expenses
Compensation and employee benefits 6 - -
Professional fees 89 108 42
Other operating expenses 34 25 36
- ----------------------------------------------------------------------------------------------
Total expenses 129 133 78
- ----------------------------------------------------------------------------------------------
Net income before income taxes and equity in
undistributed net income of Savings Bank subsidiary 63 128 221
Provision for income taxes 27 48 84
Equity in undistributed net income of Savings Bank subsidiary 2,155 1,893 1,454
- ----------------------------------------------------------------------------------------------
Net income $2,191 $1,973 $1,591
==============================================================================================
</TABLE>
50
<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)
<TABLE>
<CAPTION>
Year Ended September 30, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $2,191 $1,973 $1,591
Adjustments
Equity in undistributed net income of Savings Bank subsidiary (2,155) (1,893) (1,454)
(Increase) decrease in other assets (371) 50 (79)
Increase (decrease) in other liabilities 281 (76) 189
- -----------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by operating activities (54) 54 247
- -----------------------------------------------------------------------------------------------------
Investing activities
Loans originated, net of principal repayments 1,980 80 1,080
Purchase of Central Virginia Financial Services stock 1 - -
Purchase of investment securities - - (72)
- -----------------------------------------------------------------------------------------------------
Net cash provided by investing activities 1,981 80 1,008
- -----------------------------------------------------------------------------------------------------
Financing activities
Purchase of stock, by RRP - (86) (23)
Dividends paid (774) (665) (571)
Repurchase of stock (1,764) - -
RRP vesting 96 (57) (95)
ESOP note payment 195 235 -
Exercise of options 40 103 -
- -----------------------------------------------------------------------------------------------------
Net cash absorbed by financing activities (2,207) (470) (689)
- -----------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (280) (336) 566
Cash and cash equivalents, beginning of year 379 715 149
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 99 $ 379 $ 715
=====================================================================================================
</TABLE>
51
<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:
<TABLE>
<CAPTION>
First Second Third Fourth
Year ended September 30, 1999 Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 2,982 $ 2,946 $ 2,961 $ 3,005
Total interest expense 1,531 1,488 1,494 1,518
- -------------------------------------------------------------------------------------------
Net interest income 1,451 1,458 1,467 1,487
Provision for credit losses 23 22 22 23
- -------------------------------------------------------------------------------------------
Net interest income after provision
for credit losses 1,428 1,436 1,445 1,464
Noninterest income 270 258 241 300
Noninterest expense 848 841 809 830
- -------------------------------------------------------------------------------------------
Income before income taxes 850 853 877 934
Provision for income taxes 323 323 333 344
- -------------------------------------------------------------------------------------------
Net income $ 527 $ 530 $ 544 $ 590
===========================================================================================
Cash dividends declared per share $ .08 $ .09 $ .09 $ .09
===========================================================================================
Basic earnings per share $ .24 $ .24 $ .25 $ .28
Diluted earnings per share $ .23 $ .23 $ .24 $ .26
===========================================================================================
</TABLE>
52
<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, 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
================================================================================
53
EXHIBIT 23
<PAGE>
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 Related to the Bedford Bancshares, Inc. 1994 Stock Option
Plan of our report dated October 28, 1999, 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, 1999.
/s/ BDO Seidman, LLP
--------------------
BDO Seidman, LLP
Richmond, Virginia
December 21, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED 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> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,744
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,458
<INVESTMENTS-CARRYING> 810
<INVESTMENTS-MARKET> 11,268
<LOANS> 148,493
<ALLOWANCE> 804
<TOTAL-ASSETS> 165,737
<DEPOSITS> 114,720
<SHORT-TERM> 4,000
<LIABILITIES-OTHER> 1,951
<LONG-TERM> 24,000
0
0
<COMMON> 217
<OTHER-SE> 20,849
<TOTAL-LIABILITIES-AND-EQUITY> 165,737
<INTEREST-LOAN> 10,547
<INTEREST-INVEST> 1,347
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,894
<INTEREST-DEPOSIT> 4,447
<INTEREST-EXPENSE> 6,031
<INTEREST-INCOME-NET> 5,863
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,328
<INCOME-PRETAX> 3,514
<INCOME-PRE-EXTRAORDINARY> 2,191
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,191
<EPS-BASIC> 1.01
<EPS-DILUTED> .96
<YIELD-ACTUAL> 3.73
<LOANS-NON> 1,089
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 764
<CHARGE-OFFS> 58
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 804
<ALLOWANCE-DOMESTIC> 804
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 804
</TABLE>
