SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-QSB
[X]QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ]TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________to____________
Commission File No. 0-24330
Bedford Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Virginia 54-1709924
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S.
Employer incorporation or organization) Identification No.)
125 West Main Street, Bedford, Virginia 24523
---------------------------------------------
(Address of principal executive offices)
(540) 586-2590
--------------
(Registrant's telephone number, including area code)
Check whether issuer (1) filed all reports required to be filed by Sections 13
or 15(d) of the Exchange Act during the past 12 months ( or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No .
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Class: Common Stock, par value $.10 per share
Outstanding at May 7, 1999: 2,269,530
<PAGE>
BEDFORD BANCSHARES, INC. AND SUBSIDIARY
INDEX TO FORM 10-QSB
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
Item 1. Financial Statements
Consolidated Statements of Financial Condition at
March 31, 1999 and September 30, 1998 (unaudited) 1
Consolidated Statements of Income for the three and six months
ended March 31, 1999 and 1998 (unaudited) 2
Consolidated Statements of Comprehensive Income for the three
and six months ended March 31, 1999 and 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the six months ended
March 31, 1999 and 1998 (unaudited) 4
Notes to Unaudited Interim Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
PART II OTHER INFORMATION
Item 1. Legal proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
<PAGE>
BEDFORD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Unaudited)
<TABLE>
<CAPTION>
March 31 September 30
1999 1998
---------- ------------
(In Thousands)
<S> <C> <C>
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,861 $5,666
Investment securities held to maturity (estimated market value of $1,317 and $2,147). . . . 1,312 2,114
Marketable equity securities available for sale, at market value. . . . . . . . . . . . . . 4,495 4,396
Investment securities available for sale, at market value . . . . . . . . . . . . . . . . . 13,250 12,424
Investment in Federal Home Loan Bank stock, at cost . . . . . . . . . . . . . . . . . . . . 1,550 1,550
Loans receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,933 129,744
Foreclosed real estate, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 --
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,103 1,160
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 955 996
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 95
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495 566
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $161,187 $158,711
======== ========
Liabilities and Stockholders' Equity
Liabilities
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $110,461 $107,086
Advances from the Federal Home Loan Bank. . . . . . . . . . . . . . . . . . . . . . . . . . 28,000 29,000
Advances from borrowers for taxes and insurance . . . . . . . . . . . . . . . . . . . . . . 504 528
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 184
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 665
------- -------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,400 137,463
------- -------
Commitments and contingent liabilities
Stockholders' equity
Preferred stock, par value $.10 per share, authorized 250,000; issued and outstanding, none - -
Common stock, par value $.10 per share, authorized 2,750,000 shares; issued and outstanding
2,280,530 at March 31, 1999 and 2,297,900 at September 30, 1998. . . . . . . . . . . . . . 228 230
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,934 10,939
Retained earnings, substantially restricted. . . . . . . . . . . . . . . . . . . . . . . . . 11,401 10,900
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . (28) 60
Less stock acquired by ESOP and RRP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (748) (881)
-------- --------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,787 21,248
-------- --------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . $161,187 $158,711
======== ========
</TABLE>
See notes to consolidated financial statements.
-1-
<PAGE>
BEDFORD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
-------- ------- ------- -------
(Dollars in Thousands, Except Per Share Data)
Interest Income:
<S> <C> <C> <C> <C>
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,594 $2,423 $5,204 $4,827
U.S. Government Obligations including agencies. . . . . . . 315 234 619 451
Other investments, including overnight deposits . . . . . . 37 68 105 115
----- ----- ------ -----
Total interest income. . . . . . . . . . . . . . . . . . . 2,946 2,725 5,928 5,393
----- ----- ------ -----
Interest Expense:
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . 1,093 1,134 2,228 2,301
Borrowed funds. . . . . . . . . . . . . . . . . . . . . . . 395 245 791 449
----- ----- ------ -----
Total interest expense . . . . . . . . . . . . . . . . . . 1,488 1,379 3,019 2,750
----- ----- ------ -----
Net interest income. . . . . . . . . . . . . . . . . . . . 1,458 1,346 2,909 2,643
Provision for credit losses. . . . . . . . . . . . . . . . . 22 30 45 60
----- ----- ------ -----
Net interest income after provision for credit losses. . . 1,436 1,316 2,864 2,583
----- ----- ----- -----
Noninterest income:
Service charges and fees on loans . . . . . . . . . . . . . 153 115 311 210
Other customer service fees and commissions . . . . . . . . 75 77 160 145
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 32 57 56
----- ----- ----- -----
Total noninterest income . . . . . . . . . . . . . . . . . 258 224 528 411
----- ----- ----- -----
Noninterest expense:
Personnel compensation and benefits . . . . . . . . . . . . 454 438 928 902
Occupancy and equipment . . . . . . . . . . . . . . . . . . 75 71 155 151
Data processing . . . . . . . . . . . . . . . . . . . . . . 94 91 190 176
Federal insurance of accounts . . . . . . . . . . . . . . . 16 16 31 32
Advertising . . . . . . . . . . . . . . . . . . . . . . . . 31 28 60 61
Professional fees . . . . . . . . . . . . . . . . . . . . . 64 53 127 125
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 93 198 178
----- ----- ----- -----
Total noninterest expense. . . . . . . . . . . . . . . . . 841 790 1,689 1,625
----- ----- ----- -----
Income before income taxes . . . . . . . . . . . . . . . . 853 750 1,703 1,369
Provision for income taxes . . . . . . . . . . . . . . . . . 323 290 646 525
----- ----- ------ -----
Net income . . . . . . . . . . . . . . . . . . . . . . . . 530 $460 $1,057 $844
===== ===== ====== =====
Basic earnings per share . . . . . . . . . . . . . . . . . $0.24 $0.21 $0.48 $0.39
===== ===== ===== =====
Diluted earnings per share. . . . . . . . . . . . . . . . $0.23 $0.20 $0.46 $0.36
===== ===== ===== =====
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
BEDFORD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
-------- ------- ------- -------
(In Thousands of Dollars)
<S> <C> <C> <C> <C>
Net Income . . . . . . . . . . . . . . . $530 $460 $1,057 $844
Other comprehensive income, net of tax effect:
Unrealized gains (losses) on
securities available for sale . . (44) (1) (88) 5
--- --- --- ---
Comprehensive Income . . . . . . . . . . $486 $459 $969 $849
=== === === ===
</TABLE>
-3-
<PAGE>
BEDFORD BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------ March 31 -------
1999 1998
---- ----
(Dollars in Thousands)
<S> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,057 $844
Adjustments to reconcile net income to net cash provided by operating activities :
Provision for credit losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 60
Provision for depreciation and amortization. . . . . . . . . . . . . . . . . . . . 69 65
Amortization of investment security premiums and accretion of discounts, net . . . 4 (12)
(Increase) decrease in deferred income taxes . . . . . . . . . . . . . . . . . . . (55) --
(Gain) loss on sale of loans, investments and foreclosed real estate . . . . . . . (21) (2)
(Increase) decrease in accrued interest receivable . . . . . . . . . . . . . . . . 41 (42)
(Increase) decrease in other assets. . . . . . . . . . . . . . . . . . . . . . . . 71 (166)
Increase (decrease) in other liabilities . . . . . . . . . . . . . . . . . . . . . (435) (28)
----- ------
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . 776 719
----- ------
Investing activities:
Proceeds from the sale of investments. . . . . . . . . . . . . . . . . . . . . . . -- 992
Proceeds from the maturities of investments. . . . . . . . . . . . . . . . . . . . 6,800 2,500
Purchases of investment securities . . . . . . . . . . . . . . . . . . . . . . . . (7,099) (5,568)
Purchase of Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . -- (368)
Net increase in loans to customers . . . . . . . . . . . . . . . . . . . . . . . . (3,234) (4,891)
Principal collected on mortgage-backed securities. . . . . . . . . . . . . . . . . 1 3
Purchases of premises, equipment and leasehold improvements. . . . . . . . . . . . (12) (8)
Proceeds from the sale of REO. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 212
----- ------
Net cash provided by (used in) investing activities. . . . . . . . . . . . . . . (3,544) (7,128)
----- ------
Financing activities:
Exercise of stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 103
Allocation of ESOP and RRP shares . . . . . . . . . . . . . . . . . . . . . . . . 201 189
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (368) (288)
Net increase (decrease) in customer deposits . . . . . . . . . . . . . . . . . . . 3,375 2,415
Proceeds from (repayments of) advances and other borrowed money. . . . . . . . . . (1,000) 11,000
Repurchase of stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (272) --
Purchase of stock by ESOP and RRP. . . . . . . . . . . . . . . . . . . . . . . . . -- (86)
Net increase (decrease) in advance payments from borrowers for taxes and insurance (24) (58)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 (29)
----- ------
Net cash provided by financing activities. . . . . . . . . . . . . . . . . . . . . . . 1,963 13,246
----- ------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . (805) 6,837
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . 5,666 5,446
----- ------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . $4,861 $12,283
===== ======
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
BEDFORD BANCSHARES, INC. AND SUBSIDIARY
Notes to Unaudited Interim Consolidated Financial Statements
March 31, 1999
NOTE 1: BASIS OF PRESENTATION
- -----------------------------
The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
The accompanying unaudited interim consolidated financial statements
include the accounts of Bedford Bancshares, Inc. (the "Corporation") and Bedford
Federal Savings Bank (the "Bank"), a wholly owned subsidiary of the Corporation.
All significant intercompany balances and transactions have been eliminated in
consolidation. During the second quarter of fiscal 1999, the Corporation formed
a new service subsidiary Central Virginia Financial Services ("CVFS"). The
formation of CVFS provides the Corporation the opportunity to enter into
financial services not considered to be traditional banking services, in
particular the sale and marketing of insurance related products. As of March 31,
1999, CVFS had not been capitalized.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for the fair presentations have been
included. The results of operations for the interim period ended March 31, 1999
are not necessarily indicative of the results which may be expected for any
future period. For further information, refer to consolidated financial
statements and footnotes thereto included in the Corporation's Annual Report on
Form 10-KSB for the year ended September 30, 1998.
NOTE 2: EARNINGS PER SHARE
- --------------------------
Earnings per share calculated in accordance with SFAS 128 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
----------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
Net Income . . . . . . . . . . . . . . . . . . . $530,000 $460,000 $1,057,000 $844,000
========= ========= ========= =========
Average Shares Outstanding, Net of
unallocated ESOP Shares (93,334 and 109,334
at March 31, 1999 and 1998, respectively.) . .2,193,205 2,178,112 2,198,948 2,176,580
========= ========= ========= =========
Basic Earnings Per Share . . . . . . . . . . . . $0.24 $0.21 $0.48 $0.39
========= ========= ========= =========
Diluted Earnings Per Share:
Net Income . . . . . . . . . . . . . . . . . . . $530,000 $460,000 $1,057,000 $844,000
========= ========= ========= =========
Average Shares Outstanding, Net of
unallocated ESOP Shares (93,334 and 109,334
at March 31, 1999 and 1998, respectively.) . .2,193,205 2,178,112 2,198,948 2,176,580
Dilutive effect of RRP Plan shares . . . . . 21,464 24,012 21,464 24,012
Dilutive effect of Stock Options . . . . . . 103,186 118,798 103,186 118,798
--------- --------- --------- ---------
Average Shares Outstanding . . . . . . . . . . .2,317,855 2,320,922 2,323,598 2,319,390
========= ========= ========= =========
Diluted Earnings Per Share . . . . . . . . . . . $0.23 $0.20 $0.46 $0.36
========= ========= ========= =========
</TABLE>
-5-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements in this quarterly report on Form 10-QSB are
forward-looking and may be identified by the use of words such as "believe",
"expect", "anticipate", "should", "planned", "estimated", and "potential". These
statements are based on the Corporation's current expectations. A variety of
factors could cause the Corporation's actual results and experience to differ
materially from the anticipated results or other expectations expressed in such
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development, and results of the Corporation's business
include interest rate movements, competition from both financial and
non-financial institutions, the timing and occurrence (or nonoccurrence) of
transactions and events that may be subject to circumstances beyond the
Corporation's control, and general economic conditions.
FINANCIAL CONDITION
- -------------------
The Corporation's assets totaled $161.2 million at March 31, 1999, an
increase of $2.5 million from September 30, 1998. The asset expansion was
reflected in growth of the loan portfolio which increased $3.2 million. Funding
for the asset growth was provided by a $3.4 million increase in deposits, as
FHLB borrowings were reduced by $1.0 million.
At March 31, 1999, nonperforming assets were $1.1 million, or .67% of
total assets, compared to $.5 million, or .34% of total assets at September 30,
1998. During the quarter ended March 31, 1999, four commercial loans to the same
borrower were classified as nonperforming. These loans, totaling $663,000, are
90% guaranteed by the Farmers Home Administration, with the Bank's 10% exposure
collateralized by equipment and livestock. As such, management anticipates no
material loss. Offsetting this increase were net decreases of $560,000 in
non-performing mortgage and $15,000 in consumer loans. The decrease in
nonperforming mortgage loans was due to the reclassification to current status
of $580,000 of these loans. At March 31, 1999, the allowance for credit losses
was $804,000, up $40,000 from the level at September 30, 1998.
During the second quarter of fiscal 1999, the Corporation repurchased
20,720 shares of its common stock in open market transactions. These shares were
purchased at an average price of $12.84 per share and will be used for general
corporate and other purposes.
RESULTS OF OPERATIONS
- ---------------------
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1999 AND 1998
- --------------------------------------------------------
General. For the three months ended March 31, 1999 net income was
$530,000, up 15.2% from the $460,000 earned in the comparable period of fiscal
1998. Net interest income for the second quarter of fiscal 1999 was $1.5
million, compared to $1.3 million for the same quarter of fiscal 1998. In
addition, $22,000 was added to the allowance for credit losses during the second
quarter of fiscal 1999, compared to $30,000 for the comparable period of fiscal
1998.
-6-
<PAGE>
Interest Income. Total interest income was $2.9 million for the three
months ended March 31, 1999, compared to $2.7 million earned in the comparable
quarter of fiscal 1998. The $221,000 increase was primarily due to a $14.6
million rise in the average balance of loans receivable and a $3.4 million
increase in average investment securities from the averages for the three months
ended March 31, 1998.
Interest Expense. For the three months ended March 31, 1999, total
interest expense rose to $1.5 million from the $1.4 million for the three months
ended March 31, 1998, primarily due to an increase in the average balance of
interest bearing liabilities to $130.9 million for the second quarter of fiscal
1999 from $114.4 million for the same quarter of fiscal 1998. The increase was
primarily in FHLB advances which averaged $28.8 million for the three months
ended March 31, 1999, compared to $15.9 million for the second quarter of fiscal
1998.
Net Interest Income. For the three months ended March 31, 1999, net
interest income was $1.5 million, up $112,000 from the net interest income
earned in the same period of 1998. During the three months ended March 31, 1999,
the Corporation's interest rate spread and net interest margin decreased to
3.04% and 3.75%, respectively, compared to 3.12% and 3.87%, respectively, for
the same period of 1998. A 33 basis point decline in the yield on earning
assets, partially offset by a 25 basis point decline in the cost of funds, was
the primary reason for the declines.
Provision for Credit Losses. The provision for credit losses
decreased $8,000, to $22,000 for the three months ended March 31, 1999 from
$30,000 for the comparable 1998 period. Although nonperforming assets increased
$166,000 from December 31, 1998, management believes the allowance for credit
losses is sufficient since these loans are adequately secured. Management of the
Bank performs regular assessments of the credit risk in the loan portfolio based
on information available at such times, including the levels of the Bank's
nonperforming loans and assets, trends in the local real estate market, and
current and potential charge-offs. The assessmentof the adequacy of the
allowance for credit losses involves subjective judgment regarding future
events, and there can be no assurance that additional provisions for credit
losses will not be required in future periods.
Total Noninterest Income. Noninterest income totaled $258,000 for the
second quarter of fiscal 1999, compared to $224,000 for the same quarter of
fiscal 1998. The $34,000 increase was primarily due to fees on mortgage loans
introduced in the third quarter of fiscal 1998 and enhancements to the fee
structure applicable to consumer loans. Such increase in noninterest income is
not indicative of future periods.
Total Noninterest Expense. Total noninterest expense was $841,000 for
the three months ended March 31, 1999, up 6.5% from the level in the comparable
quarter of fiscal 1998. Increases of $16,000 in personnel compensation and
benefits, $11,000 in professional fees and $14,000 in other expenses were the
primary reasons for the increase.
Provision for Income Taxes. The provision for income taxes was
$323,000 for the three months ended March 31, 1999, up from the $290,000
provision recorded in the three months ended March 31, 1998. The increase
reflects the higher profitability of the Corporation in the quarter ended March
31, 1999, as the effective tax rate for both periods was 38%.
-7-
<PAGE>
COMPARISON OF SIX MONTHS ENDED MARCH 31, 1999 AND 1998
- ------------------------------------------------------
General. For the six months ended March 31, 1999 net income was $1.1
million, up 25.2% from the $844,000 earned in the comparable period of fiscal
1998. Net interest income for the first six months of fiscal 1999 was $2.9
million, compared to net interest income for the six months ended March 31, 1998
of $2.6 million. For the first six months of fiscal 1999, noninterest income was
$528,000 compared to $411,000 for the same period of 1998. Noninterest expense
totaled $1.7 million for the six months ended March 31, 1999, up slightly from
the $1.6 million for the comparable period of fiscal 1998.
Interest Income. Total interest income amounted to $5.9 million for
the six months ended March 31, 1999, up 9.9% from the $5.4 million earned in the
comparable period of fiscal 1998. The increase was attributable to expansion of
average loans receivable to $132.7 million for the six months ended March 31,
1999 from $118.4 million for the same period of 1998. In addition, investment
securities averaged $13.7 million for the first half of fiscal 1999, compared to
$9.6 million for the comparable period of fiscal 1998. These increases relect
the Bank's continued success in originating mortgage loans and expansion of the
consumer and commercial loan portfolios, as well as effective asset/liability
management strategies.
Interest Expense. For the six months ended March 31, 1999, total
interest expense rose to $3.0 million from the $2.8 million for the six months
ended March 31, 1998, primarily due to an increase in the average balance of
interest bearing liabilities to $130.3 million for the first six months of
fiscal 1999 from $113.3 million for the comparable period of fiscal 1998. FHLB
advances averaged $28.4 million for the first half of fiscal 1999, up $13.8
million from the $14.6 million average for the comparable period of 1998. In
addition, average interest bearing deposits for the first half of fiscal 1999
were $101.8 million compared to an average of $98.7 million for the comparable
period of fiscal 1998.
Net Interest Income. Net interest income was $2.9 million for the six
months ended March 31, 1999, up 10.1% from the $2.7 million earned in the same
period of fiscal 1998. The Corporation's interest rate spread and net interest
margin were 3.01% and 3.76% for the first six months of fiscal 1999, down from
the 3.13% and 3.90%, respectively, for the same period of fiscal 1998. A 33
basis point decline in the yield on earning assets partially offset by a 21
basis point decline in the cost of funds was the primary reason for the
declines.
Provision for Credit Losses. For the six months ended March 31, 1999,
the Bank's provision for credit losses was $45,000, compared to $60,000 for the
same period of fiscal 1998. Although nonperforming assets increased $166,000
from December 31, 1998, management believes the allowance for credit losses is
sufficient since these loans are adequately secured. Management of the Bank
performs regular assessments of the credit risk in the loan portfolio based on
information available at such times, including the levels of the Bank's
nonperforming loans and assets, trends in the local real estate market, and
current and potential charge-offs. The assessment of the adequacy of the
allowance for credit losses involves subjective judgment regarding future
events, and there can be no assurance that additional provisions for credit
losses will not be required in future periods.
Total Noninterest Income. For the first six months of fiscal 1999,
noninterest income totaled $528,000, compared to $411,000 for the same period of
1998. Service charges and fees on
-8-
<PAGE>
loans were up $101,000 primarily due to fees introduced in the second quarter of
fiscal 1998. Other customer service fees and commissions rose $15,000 due to
higher income on checking. Such increase in noninterest income is not indicative
of future periods.
Total Noninterest Expense. Total noninterest expense was $1.7 million
for the six months ended March 31, 1999, up $64,000, or 3.9%, from the $1.6
million total for the comparable period of fiscal 1998. Personnel compensation
and benefits totaled $928,000 for the six months ended March 31, 1999, up
$26,000 from the first half of fiscal 1998, primarily due to merit increases.
Other expenses were up $20,000, or 11.2%, due to costs associated with year 2000
expenditures. (please refer to "THE YEAR 2000 ISSUE" herein).
Provision for Income Taxes. The provision for income taxes was
$646,000 for the six months ended March 31, 1999, compared to $525,000 for the
same period of fiscal 1998. The increase was due to the increase in taxable
income as the effective tax rate for both periods was 38%.
CAPITAL COMPLIANCE
- ------------------
The following table presents the Bank's compliance with its regulatory capital
requirements of March 31, 1999. (Dollar amounts in thousands).
March 31, 1999
--------------------------------
Percentage
of assets
---------
GAAP Capital . . . . . . . . . . . . . . . . $20,208 11.90 %
======= ======
Tangible capital . . . . . . . . . . . . . . $20,235 12.54 %
Tangible capital requirement . . . . . . . . 2,420 1.50
------- ------
Excess . . . . . . . . . . . . . . . . . . . $17,815 11.04 %
======= ======
Core capital . . . . . . . . . . . . . . . . $20,235 12.54 %
Core capital requirement . . . . . . . . . . 6,454 4.00
------- ------
Excess . . . . . . . . . . . . . . . . . . . $13,781 8.54 %
======= ======
Total risk-based capital (1) . . . . . . . . $20,932 22.13 %
Total risk-based capital requirement (1) . . 7,566 8.00
------- ------
Excess . . . . . . . . . . . . . . . . . . . $13,366 14.13 %
======= ======
- ----------------------------------------------------------
(1) Based on risk-weighted assets of $94,576
Management believes that under current regulations, the Bank will continue
to meet its minimum capital requirements in the foreseeable future. Events
beyond the control of the Bank, such as increased interest rates or a downturn
in the economy in areas in which the Bank operates could adversely affect future
earnings and as a result, the ability of the Bank to meet its future minimum
capital requirements.
-9-
<PAGE>
LIQUIDITY
- ---------
The Bank's liquidity is a measure of its ability to fund loans, pay deposit
withdrawals, and other cash outflows in an efficient, cost effective manner. The
Bank's primary sources of funds are deposits and scheduled amortization and
prepayment of loans. During the past several years, the Bank has used such funds
primarily to fund maturing time deposits, pay savings withdrawals, fund lending
commitments, purchase new investments, and increase liquidity. The Bank funds
its operations internally but also borrows funds from the Federal Home Loan Bank
("FHLB") of Atlanta. As of March 31, 1999, such borrowed funds totaled $28.0
million. Loan payments and maturing investments are greatly influenced by
general interest rates, economic conditions and competition.
The Bank is required under Federal regulations to maintain certain
specified levels of "liquid assets," which include certain United States
government obligations and other approved investments. Current regulations
require the Bank to maintain liquid assets of not less than 4% of net with-
drawable accounts plus short-term borrowings. At March 31, 1999, the Bank's
regulatory liquidity was 21%.
The amount of certificate accounts which are scheduled to mature during the
next twelve months ending March 31, 2000, is approximately $39.2 million. To the
extent that these deposits do not remain at the Bank upon maturity, the Bank
believes that it can replace these funds with other deposits, excess liquidity,
FHLB advances, or other borrowings. It has been the Bank's experience that a
substantial portion of such maturing deposits remain at the Bank.
At March 31, 1999, the Bank had loan commitments outstanding of $14.9
million. These commitments are funded primarily from current excess liquidity,
deposit inflows, borrowings or loan and investment repayments.
THE YEAR 2000 ISSUE
- -------------------
The Year 2000("Y2K") issue relates to whether computer systems will
properly recognize and process date sensitive information on and after January
1, 2000. Systems that do not properly recognize such information could generate
erroneous data or fail. The Bank is heavily dependent on computer systems in the
conduct of substantially all of its business activities.
The Corportion has both a Y2K Committee and a Y2K Plan that were
established and adopted in 1998. The Plan , as recommended by the Federal
Financial Institutions Examination Council, is based on five phases: Awareness,
Assessment, Renovation, Validation and Implementation. The Company continues in
the Validation phase, or testing phase, which is scheduled for completion by
June 30, 1999 and is proceeding on time. The Implementation Phase is targeted
for completion by September 30, 1999. The Bank is required by Federal regulators
to develop and test a comprehensive contingency plan that would be used in the
event that any of its mission critical computer systems fail to meet the Y2K
requirements, or if other systems that the Bank depends upon for automated
processing of its ongoing transactions, such as electrical or data transmission,
should fail. The contingency plan is currently being developed and should be
completed by by September 30, 1999.
For the six months ended March 31, 1999, the Corporation has expensed
$17,000 of Y2K related costs. As part of the contingency plan, the Corporation
is evaluating the purchase of
-10-
<PAGE>
electric generators. The cost of such equipment would be capitalized and
depreciated over the useful life of the equipment. The Corporation has projected
that the total cost of the Y2K project will range between $125,000 and $150,000.
To date the total expense of the Y2K project has been $38,000.
Successful and timely completion of the Y2K project is based on
management's best estimates derived from various assumptions of future events,
which are inherently uncertain, including the testing results of the core
processing system maintained by a third party service bureau, and readiness of
all vendors, suppliers and customers. No assurance can be given that the Plan
will be sucessfully completed by the Year 2000, in which case the Company could
incur data processing delays, mistakes or failures. These delays, mistakes or
failures could have a significant adverse impact on the financial statements of
the Company.
-11-
<PAGE>
BEDFORD BANCSHARES, INC. AND SUBSIDIARY
Key Operating Ratios
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Basic earnings per share (2). . . . . . . . $0.24 $0.21 $0.48 $0.39
Diluted earnings per share (2) . . . . . . . $0.23 $0.20 $0.46 $0.36
Return on average assets . . . . . . . . . . 1.32 % 1.28 % 1.32 % 1.20 %
Return on average equity . . . . . . . . . . 9.75 % 9.13 % 9.78 % 8.45 %
Interest rate spread . . . . . . . . . . . . 3.04 % 3.12 % 3.01 % 3.13 %
Net interest margin. . . . . . . . . . . . . 3.75 % 3.87 % 3.75 % 3.90 %
Noninterest expense to average assets. . . . 2.10 % 2.26 % 2.11 % 2.28 %
Net charge-offs to average outstanding loans -- % 0.06 % -- % 0.06 %
</TABLE>
March 31 September 30
1999 1998
--------- ------------
(DOLLARS IN THOUSANDS)
(Unaudited)
Nonaccrual loans . . . . . . . . $1,085 $532
Repossessed real estate. . . . . 83 --
----- -----
Total nonperforming assets . . . $1,168 $532
===== =====
Allowance for credit losses to nonperforming assets. . 68.8 % 143.8 %
Nonperforming loans to total loans . . . . . . . . . . 0.82 % 0.41 %
Nonperforming assets to total assets . . . . . . . . . 0.67 % 0.34 %
Book value per share (2) . . . . . . . . . . . . . . . $9.55 $9.25
- --------------
(1) The ratios for the three- and six-month periods are annualized
(2) All per share data has been adjusted to reflect the 2-for-1 stock dividend
paid June 15, 1998.
-12-
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceeedings
------------------
Neither the Corporation nor the Bank was engaged in any legal proceedings
of a material nature at March 31, 1999. From time to time, the Corporation is a
party to legal proceedings in the ordinary course of business wherein it
enforces its security interest in loans.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The annual meeting of shareholders of the Corporation was held on January
27,1999 and the following items were acted upon:
Election of Directors Harry W. Garrett, Jr., and Harold K. Neal for terms
of three years ending in 2002. All were elected as indicated below:
Votes Votes
For Withheld
--- --------
Harry W. Garrett, Jr. 1,939,785 9,580
Harold K. Neal 1,943,423 5,943
Ratification of the appointment of BDO Seidman, LLP, as the Corporation's
auditors for the 1998 fiscal year. BDO SEIDMAN, LLP, was ratified as
follows:
Votes Votes
For Against Abstain
--- ------- -------
1,910,301 33,200 5,864
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit
Exhibit 27: Financial Data Schedule (electronic filing only)
(b) Reports on Form 8-K
Not applicable.
-13-
<PAGE>
BEDFORD BANCSHARES, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BEDFORD BANCSHARES, INC.
Date: May 7, 1999 By: /s/ Harold K. Neal
--------------------------------
Harold K. Neal
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 7, 1999 By: /s/ James W. Smith
--------------------------------
James W. Smith
Vice President and Treasurer
(Principal Accounting and
Financial officer)
-14-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Sep-30-1999
<PERIOD-END> Mar-31-1999
<CASH> 4,861
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,745
<INVESTMENTS-CARRYING> 2,862
<INVESTMENTS-MARKET> 20,612
<LOANS> 133,737
<ALLOWANCE> 804
<TOTAL-ASSETS> 161,187
<DEPOSITS> 110,461
<SHORT-TERM> 9,000
<LIABILITIES-OTHER> 939
<LONG-TERM> 19,000
0
0
<COMMON> 228
<OTHER-SE> 21,559
<TOTAL-LIABILITIES-AND-EQUITY> 161,187
<INTEREST-LOAN> 5,204
<INTEREST-INVEST> 724
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,928
<INTEREST-DEPOSIT> 2,228
<INTEREST-EXPENSE> 3,019
<INTEREST-INCOME-NET> 2,909
<LOAN-LOSSES> 45
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,689
<INCOME-PRETAX> 1,703
<INCOME-PRE-EXTRAORDINARY> 1,057
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,057
<EPS-PRIMARY> .48
<EPS-DILUTED> .46
<YIELD-ACTUAL> 3.75
<LOANS-NON> 1,085
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 764
<CHARGE-OFFS> 6
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 804
<ALLOWANCE-DOMESTIC> 804
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
