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, 2000, 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.
----------------------------------------------------
(Name of Small Business Issuer 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) (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
---------------------------------------
(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 .
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will 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. [ ]
State issuer's revenues for its most recent fiscal year $14,408,000.
As of December 5, 2000, there were issued and outstanding 1,993,292
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 5, 2000, was
$14,000,001.
Transition Small Business Disclosure Format (check one)
YES NO X
--- ---
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended
September 30, 2000. (Part II)
2. Portions of Proxy Statement for the Annual Meeting of Stockholders for
the Fiscal Year Ended September 30, 2000. (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
-----------------
General
The Company is the holding company for Bedford Federal Savings Bank
(the "Bank") and as a unitary savings and loan holding company is generally 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 the Bank. As a result references to
the Registrant or Company generally refer to the Bank unless the context
indicates otherwise.
The Bank is a federally chartered stock savings bank headquartered in
Bedford, Virginia and is subject to examination and comprehensive regulation by
the Office of Thrift Supervision ("OTS") and its deposits are federally insured
by the Savings Association Insurance Fund ("SAIF"). Bedford Federal is a member
of and owns capital stock in the Federal Home Loan Bank ("FHLB") of Atlanta,
which is one of the 12 regional banks in the FHLB System.
-1-
<PAGE>
The Bank operates a traditional savings bank business, attracting
deposit accounts from the general public and using those deposits, together with
other funds, primarily to originate and invest in loans secured by single-family
residential real estate.
Competition
Competition for deposits comes from other insured financial
institutions such as commercial banks, thrift institutions, credit unions, and
multi-state regional banks in our market areas. Deposit competition also
includes a number of insurance products sold by local agents and investment
products such as mutual funds and other securities sold by local and regional
brokers. Loan competition varies depending upon market conditions and comes from
commercial banks, thrift institutions, credit unions, mortgage bankers and
finance companies.
Lending Activities
Analysis of Portfolio. The following table sets forth the composition of the
Registrant's loan portfolio by type of loan and in percent of the respective
portfolios at the dates indicated.
<TABLE>
<CAPTION>
September 30,
-------------------------------------------------------------------
2000 1999
--------------------------------- -------------------------------
Percent of Percent of
Amount Total Amount Total
------ ----- ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate:
Residential:
One- to four-family................ $112,411 62.74% $ 97,212 62.19%
Multi-family....................... 3,083 1.72 2,405 1.54
Commercial........................... 7,891 4.40 7,623 4.88
Construction......................... 19,844 11.08 18,232 11.66
Land................................. 5,755 3.21 5,254 3.36
Consumer and commercial business..... 30,183 16.85 25,595 16.37
------- ----- -------- ------
Total loans.................... 179,167 100.00% 156,321 100.00%
====== ======
Less:
Loans-in-process................... 8,438 7,556
Allowance for credit losses........ 850 804
Unearned discounts, premium,
deferred loan fees, net.......... 287 272
--------- ---------
Total loans, net............... $169,592 $147,689
======= =======
</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, 2000. The table does not include prepayments or scheduled
principal repayments. Prepayments and scheduled principal repayments on loans
totaled $54.3 million for the year ended September 30, 2000. 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..... $ 69 $ 1,896 $110,446 $112,411
Multi-family residential real estate............ - 47 3,036 3,083
Commercial real estate.......................... 22 401 7,468 7,891
Construction, net of loans in process........... 10,198 730 478 11,406
Land............................................ 3 674 5,078 5,755
Consumer and commercial business................ 3,526 12,989 13,668 30,183
------ ------ ------- -------
Total $13,818 $16,737 $140,174 $170,729
====== ====== ======= =======
</TABLE>
The following table sets forth the dollar amount at September 30, 2000
of all loans due after September 30, 2001, which have fixed interest rates and
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
Real estate loans: (In Thousands)
One- to four-family...... $21,212 $ 91,130 $112,342
Multi-family............. 108 2,975 3,083
Commercial real estate... 1,701 6,168 7,869
Construction............. 786 422 1,208
Land..................... 4,122 1,630 5,752
Consumer and commercial
business.................. 20,312 6,345 26,657
------ ------- -------
Total..................... $48,241 $108,670 $156,911
====== ======= =======
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.
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.
-4-
<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.
-5-
<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, 2000, the Registrant had $1.2 million of commitments to originate
mortgage loans, $7.0 million in unfunded home equity loans and $3.7 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 $5.0 million
as of September 30, 2000.
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.
-6-
<PAGE>
At September 30,
----------------------
2000 1999
----------- --------
(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Mortgage loans:
One- to four-family residential real estate......... $517 $ 211
Land................................................ 336 839
Consumer and commercial business loans.............. 107 39
---- ------
Total non-accrual loans............................... $960 $1,089
==== =====
Real estate owned..................................... $ - $ -
==== ======
Total non-performing assets........................... $960 $1,089
==== ======
Total non-accrual loans to total loans................ .56% .73%
==== ======
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, 2000.
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.
-7-
<PAGE>
The following table sets forth the Registrant's classified assets in
accordance with its classification.
At September 30, 2000
---------------------
(In Thousands)
Special Mention $294
Substandard 666
Doubtful -
Loss -
----
$960
====
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.
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<PAGE>
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,
2000 1999
---- ----
(Dollars in thousands)
Allowance balance (at beginning of period)........ $804 $764
---- ----
Charge-offs:
One- to four-family............................ - -
Multi-family................................... - -
Commercial real estate......................... - -
Construction and land.......................... - -
Consumer and commercial business............... 140 58
---- ----
Total charge-offs............................ (140) (58)
Recoveries...................................... 66 8
Provision....................................... 120 90
---- ----
Allowance balance (at end of period).............. $850 $804
==== ====
Ratios of net charge-offs during the period
to average loans outstanding during the
period.......................................... .05% .04%
=== ===
Ratio of allowance for credit losses to total
loans at the end of the period.................. .50% .54%
=== ===
Ratio of allowance for credit losses to non-
performing assets at the end of the
period.......................................... 89% 74%
=== ===
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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,
------------------------------------------------------
2000 1999
-------------------------- ------------------------
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............................. $304 62.7% $294 62.2%
Multi-family.................................... 10 1.7 10 1.5
Commercial real estate.......................... 90 4.4 90 4.9
Construction.................................... 70 11.1 75 11.7
Land............................................ 45 3.2 50 3.3
Consumer and commercial
business....................................... 331 16.9 285 16.4
---- ----- ---- -----
Total......................................... $850 100.0% $804 100.0%
==== ===== ==== =====
</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, 2000, the Company had
securities classified as "held to maturity", including FHLB stock, and
"available for sale" in the amount of $2,407,000 and $6,905,000, respectively.
At September 30, 2000, 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, 2000, the Company had securities available
for sale with an amortized cost of $7,102,000 and market value of $6,905,000
(unrealized loss of $197,000). 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,
-------------------------
2000 1999
------------ -----------
(In thousands)
<S> <C> <C>
Investment securities and mortgage backed securities:
Held to maturity:
Mortgage backed securities.......................... $ 7 $ 10
FHLB stock.......................................... 1,900 1,500
U.S. Government and agency obligations.............. 500 800
------ ------
Total held to maturity............................ 2,407 2,310
----- -----
Available for sale:
U.S. Government and agency obligations.............. 6,802 5,830
Marketable equity securities and other.............. 103 4,628
------ ------
Total available for sale.......................... 6,905 10,458
----- ------
Total ............................................ $9,312 $12,768
===== ======
</TABLE>
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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, 2000.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
------------------ ------------------ ----------------- ------------------- ---------------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
------- ----- ------- ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held to maturity:
Mortgage-backed
securities........ 7 8.31% -- -- -- -- -- -- 7 8.31% 7
FHLB stock.......... 1,900 7.75% -- -- -- -- -- -- 1,900 7.75% 1,900
U.S. government
and agency
obligations....... 500 7.25% -- -- -- -- -- -- 500 7.25% 499
Available for sale:
U.S. Government
and agency
obligations ...... 6,307 6.66% 495 6.53% -- -- -- -- 6,802 6.65% 6,802
Marketable
equity
securities
and other......... 103 3.00% -- -- -- -- -- -- 103 3.00% 103
------ ---- -------- ------- ------ ------
Total................... $8,817 6.87% $495 6.53% $ -- $ -- $ -- $ -- $9,312 6.87% $9,311
====== ==== ==== ==== ======== ======= ======= ====== ====== ==== ======
</TABLE>
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<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, 2000, 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, 2000
Amount
------
Maturity Period (In thousands)
---------------
Within three months.......................................... $ 2,256
Three through six months..................................... 3,915
Six through twelve months.................................... 3,698
Over twelve months........................................... 4,805
-------
Total.................................................... $14,674
=======
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.
The following tables sets forth the maximum month-end balance and the
average balance of short term FHLB advances for the periods indicated.
-13-
<PAGE>
<TABLE>
<CAPTION>
During the Year Ended
September 30,
-------------------------
2000 1999
----------- ----------
(In thousands)
<S> <C> <C>
Maximum amount of short-term borrowings outstanding at any month end:
Advances from Federal Home Loan Bank.............................. $22,000 $19,000
Approximate average short-term borrowings outstanding with
respect to:
Advances from Federal Home Loan Bank.............................. $14,399 $13,042
Approximate weighted average rate paid on:
Advances from Federal Home Loan Bank.............................. 6.33% 5.67%
</TABLE>
Personnel
As of September 30, 2000, the Registrant had 47 full-time employees and
4 part-time employees. None of the Registrant's employees are represented by a
collective bargaining group. The Registrant believes that its relationship with
its employees is good.
Regulation
Set forth below is a brief description of certain laws which related 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.
Recent Regulation
The Gramm-Leach-Bliley Financial Services Modernization Act of 1999
(the "Act") authorized 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. The Company, however, as a grandfathered unitary thrift holding company
under the Act, will retain its authority to engage in nonfinancial activities.
In addition, the GLB Act imposes significant new financial privacy
obligations and reporting requirements on all financial institutions, including
federal savings associations. Specifically, the statute, among other things,
will require financial institutions (a) to establish privacy policies and
disclose them to customers both at the commencement of a customer relationship
and on an annual basis and (b) to permit customers to opt out of a financial
institution's disclosure of financial information to nonaffiliated third
parties. The federal financial regulators have promulgated final regulations
implementing these provisions, which will become effective July 1, 2001.
-14-
<PAGE>
Regulation of the Company
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.
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. The Act terminated the "unitary thrift holding
company exemption" for all companies that applied to acquire savings
associations after May 4, 1999. Since the Company is grandfathered under this
provision of the Act, its unitary holding company powers and authorities were
not affected. However, if the Company were to acquire control of an additional
savings association, its business activities would be subject to restriction
under the Home Owners' Loan Act. Furthermore, if the Company were in the future
to sell control of the Bank to any other company, such company would not succeed
to the Company's grandfathered status under the Act and would be subject to the
same business activity restrictions. See "- Regulation of the Bank - Qualified
Thrift Lender Test."
Regulation of the Bank
General. Set forth below is a brief description of certain laws that
relate to the regulation of the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and the FDIC. Lending
activities and other investments must comply with various federal statutory and
regulatory requirements. The Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.
The OTS 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 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.
-15-
<PAGE>
Insurance of Deposit Accounts. The deposit accounts held by the Bank
are insured by the SAIF to a maximum of $100,000 for each insured member (as
defined by law and regulation). Insurance of deposits may be terminated by the
FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the institution's primary regulator.
The Bank is required to pay insurance premiums based on a percentage of
its insured deposits to the FDIC for insurance of its deposits by the SAIF. The
FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"),
which primarily insures commercial bank deposits. The FDIC has set the deposit
insurance assessment rates for SAIF-member institutions for 2000 at 0% to .027%
of insured deposits on an annualized basis, with the assessment rate for most
savings institutions set at 0%.
In addition, all FDIC-insured institutions are required to pay
assessments to the FDIC at an annual rate of approximately .0212% of insured
deposits to fund interest payments on bonds issued by the Financing Corporation
("FICO"), an agency of the Federal government established to recapitalize the
predecessor to the SAIF. These assessments will continue until the FICO bonds
mature in 2017.
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) "Tier 1" or "core" capital equal to at
least 4% (3% if the institution has received the highest rating, "composite 1
CAMELS," on its most recent examination) of total adjusted assets, and (3)
risk-based capital equal to 8% 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 aggregate
annual amount of capital distributions does not exceed net income 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 the 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 statue, 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. Federal savings institutions must meet
one of two Qualified Thrift Lender ("QTL") tests. To qualify as a QTL, a savings
institution must either (i) be deemed a "domestic building and loan association"
under the Internal Revenue Code by maintaining at least 60% of its total
-16-
<PAGE>
assets in specified types of assets, including cash, certain government
securities, loans secured by and other assets related to residential real
property, educational loans and investments in premises of the institution or
(ii) satisfy the statutory QTL test set forth in the Home Owner's Loan Act by
maintaining at least 65% of its "portfolio assets" in certain"Qualified Thrift
Investments" (defined to include residential mortgages and related equity
investments, certain mortgage-related securities, small business loans, student
loans and credit card loans, and 50% of certain community development loans).
For purposes of the statutory QTL test, portfolio assets are defined as total
assets minus intangible assets, property used by the institution in conducting
its business, and liquid assets equal to 10% of total assets. A savings
institution must maintain its status as a QTL on a monthly basis in at least
nine out of every 12 months. A failure to qualify as a QTL results in a number
of sanctions, including the imposition of certain operating restrictions and a
restriction on obtaining additional advances from its FHLB. At September 30,
2000, 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 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.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. At
September 30, 2000, 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 three branch offices. The Registrant also has seven
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.
-17-
<PAGE>
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
14915 Forest Road Owned 12/78
Forest, VA 24551
Including ATM
ATM
Longwood Avenue Owned 1/85
Bedford, VA 24523
ATM Land Leased 10/99
Blue Ridge Avenue
Bedford, VA 24523
12130 East Lynchburg Turnpike Leased 8/00
Forest, VA 24551
Including ATM
(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."
(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."
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<PAGE>
(c) Description of Real Estate and Operating Data. Not Applicable.
Item 3. Legal Proceedings
--------------------------
There are various claims and lawsuits in which the Registrant are
periodically involved, such as claims to enforce liens, condemnation proceedings
on properties in which the Registrant holds security interests, claims involving
the making and servicing of real property loans, and other issues incident to
the Registrant's business. In the opinion of management, no material loss is
expected from any of such pending claims or lawsuits.
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, 2000 (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 2001 Annual Meeting (the "Proxy
Statement") contained under the sections captioned "Section 16(a) Beneficial
Ownership Reporting Compliance," "Proposal I - Election of Directors," and "-
Biographical Information."
-19-
<PAGE>
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, 2000 and 1999
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, 2000, 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.
-20-
<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 2000 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 10-KSB filed with
the SEC on December 9, 1994.
-21-
<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 15,
2000.
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 15,
2000.
<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>
