EXHIBIT 13
<PAGE>
Corporate Profile and Related Information
-----------------------------------------
Bedford Bancshares, Inc. (the "Company") is the parent company of
Bedford Federal Savings Bank ("Bedford Federal" or the "Bank"). The
Company was organized as a Virginia corporation in March 1994 at the
direction of the Bank to acquire all of the capital stock that
Bedford Federal issued upon its conversion from the mutual to stock
form of ownership (the "Conversion") in connection with a $12.6
million initial public offering completed on August 19, 1994. The
Company is a unitary savings and loan holding company which, under
exisiting laws, generally is not restricted in the types of business
activities in which it may engage, provided that the Bank retains a
specified amount of its assets in housing-related investments. At the
present time, since the Company does not conduct any active business,
the Company does not intend to employ any persons other than
officers, but utilizes the support staff and facilities of the Bank
from time to time.
Bedford Federal, a federally-chartered stock savings bank
headquartered in Bedford, Virginia, was originally chartered in 1935
under the name "Bedford Federal Savings and Loan Association." The
Bank has operated as a federally-chartered stock savings bank since
August 19, 1994. Deposits have been federally insured since 1935 and
are currently insured up to the maximum amount allowable by the
Federal Deposit Insurance Corporation (the "FDIC"). The Bank is a
community oriented savings institution offering a variety of
financial services to meet the needs of the communities that it
serves. Bedford Federal conducts its business from its main office in
Bedford, Virginia, three full service branch offices located in
Bedford County, Virginia, and seven Automated Teller Machines
("ATMs").
Stock Market Information
------------------------
The Company's common stock trades on the Nasdaq National Maket under
the trading symbol of "BFSB". The daily stock quotation for Bedford
Bancshares, Inc., is published in The Wall Street Journal and in
other local newspapers under the trading symbol of "BFSB" or "Bedford
Bc". The following table reflects the stock price published by the
Nasdaq National Market statisical report and other related data.
Dividends Dividends
Per Share Per Share
Quarter Ended High Low Volume Declared Paid
December 1995 $ 9.38 $ 8.75 186,752 $ 0.045 $ 0.075
March 1996 $ 9.13 $ 8.38 241,940 $ 0.045 $ 0.045
June 1996 $ 8.88 $ 7.88 378,812 $ 0.050 $ 0.045
September 1996 $ 8.63 $ 8.25 171,182 $ 0.055 $ 0.050
December 1996 $ 9.25 $ 8.32 192,478 $ 0.060 $ 0.055
March 1997 $10.00 $ 8.75 163,568 $ 0.065 $ 0.060
June 1997 $12.38 $ 9.50 319,064 $ 0.070 $ 0.065
September 1997 $12.75 $ 11.75 186,580 $ 0.070 $ 0.070
December 1997 $17.50 $ 11.50 337,000 $ 0.070 $ 0.070
March 1998 $17.38 $ 14.00 365,200 $ 0.070 $ 0.070
June 1998 $16.25 $ 13.88 198,600 $ 0.080 $ 0.070
September 1998 $15.75 $ 10.25 186,300 $ 0.080 $ 0.080
December 1998 $15.00 $ 10.50 184,500 $ 0.080 $ 0.080
March 1999 $13.75 $ 11.50 109,700 $ 0.080 $ 0.080
June 1999 $13.75 $ 11.50 166,200 $ 0.090 $ 0.080
September 1999 $14.50 $ 12.25 220,800 $ 0.090 $ 0.090
December 1999 $12.25 $ 10.25 116,400 $ 0.090 $ 0.090
March 2000 $10.94 $ 6.25 248,800 $ 0.100 $ 0.090
June 2000 $ 9.25 $ 7.00 88,300 $ 0.100 $ 0.100
September 2000 $10.00 $ 8.38 113,200 $ 0.100 $ 0.100
2
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Financial Condition (Dollars in Thousands)
September 30, 2000 1999 1998 1997 1996
<S> <C> <C> <C> <C> <C>
Total assets $187,541 $165,737 $158,711 $139,089 $127,201
Loans receivable, net 169,592 147,689 129,744 116,093 108,873
Investment securities 9,201 8,129 14,470 9,655 8,006
Marketable equity securities 50 4,575 4,396 4,185 3,879
Mortgage-backed securities 7 10 15 20 482
Foreclosed real estate, net -- -- -- 212 --
Deposits 129,770 114,720 107,086 103,612 95,378
FHLB advances 34,000 28,000 29,000 15,000 12,000
Retained earnings 12,503 11,223 10,900 9,763 8,739
Total stockholders' equity 22,556 21,066 21,248 19,621 18,227
Summary of Operations (Dollars in Thousands)
Years Ended September 30, 2000 1999 1998 1997 1996
Interest income $ 13,368 $ 11,894 $ 11,299 $ 10,280 $ 9,264
Interest expense 7,125 6,031 5,809 5,167 4,492
Net interest income 6,243 5,863 5,490 5,113 4,772
Provision for credit losses 120 90 90 100 22
Noninterest income 1,040 1,069 863 593 735
Noninterest expense 3,484 3,328 3,130 3,041 3,429
Net income before income taxes 3,679 3,514 3,133 2,565 2,056
Net income 2,249 2,191 1,973 1,591 1,302
Other Selected Data
Years Ended September 30, 2000 1999 1998 1997 1996
Return on average assets 1.26% 1.35% 1.33% 1.19% 1.10%
Return on average equity 10.37 10.13 9.68 8.40 6.98
Average equity to average assets 12.11 13.72 14.21 15.69 17.49
Net interest rate spread 2.85 2.96 3.03 3.27 3.34
Nonperforming assets to total assets 0.51 0.66 0.34 0.52 0.54
Nonperforming loans to total loans 0.57 0.74 0.41 0.45 0.63
Allowance for credit losses to total loans 0.50 0.54 0.59 0.58 0.60
Per Share Data
Years Ended September 30, 2000 1999 1998 1997 1996
Basic earnings per share $ 1.08 $ 1.01 $ 0.90 $ 0.74 $ 0.59
Diluted earnings per share 1.04 0.96 0.85 0.70 0.56
Book value per share 10.49 9.69 9.25 8.58 7.97
Cash dividends declared per share 0.39 0.34 0.30 0.27 0.20
</TABLE>
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
Management Strategy
-------------------
Our management strategy is to maintain a strong capital position through
controlled growth and the production of high quality, steadily increasing core
earnings. This has been accomplished by the continued focus upon the origination
of traditional one- to four family, adjustable rate mortgage loans, and more
recently, the emphasis on expanding the commercial and consumer loan portfolios.
This strategy, along with sound underwriting standards designed to minimize the
risk of loss in our loan portfolio, help to lessen the income impact caused by
changing interest rates.
We monitor the interest rate sensitivity of our balance sheet in order to better
match the level and duration of interest earning assets with the level and
duration of interest bearing liabilities. Changes in the interest rates charged
for loans and the interest rate paid on deposits are primary tools used to
influence the level and duration of interest earning assets and interest bearing
liabilities. In addition, short- and intermediate-term investments, as well as
borrowings, can be used to help reduce interest rate risk. The tables on pages
7, 8, and 9 provide details about our interest rate sensitivity and our net
interest income.
In our efforts to manage the interest rates that we pay on deposits, we focus on
maintaining a stable core deposit base while providing competitive products and
services to our customers. We rely primarily on customer deposits and mortgage
payments as our major source of funds, but also borrow from the FHLB to
supplement our funding needs and to help manage our interest rate sensitivity.
--------------------------------------------------------------------------------
General
-------
Net interest income is the primary source of our earnings. Net interest income
is affected by the levels of average earning assets and average interest bearing
liabilities, and the respective interest rates earned and paid. The difference
between average rates of interest earned on interest earning assets and average
rates paid on interest bearing liabilities is the "interest rate spread." Our
"net interest margin," is defined as our net interest income divided by our
average earning assets, which serves as an indication of the effectiveness of
funds allocation and the management of our interest rate risk.
We also receive income from service charges and other fees primarily related to
credit and deposit services and incur expenses in our day-to-day operations
including salaries and benefits, deposit insurance, facilities expense,
marketing and other related business expenses.
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties which could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risk associated with the ability to control costs and
expenses, year 2000 issues and general economic conditions. We undertake no
obligation to publicly release the results of any revisions to those
forward-looking statements which may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
--------------------------------------------------------------------------------
Interest Rate Sensitivity Analysis
----------------------------------
The table that follows sets forth the amounts of interest earning assets and
interest bearing liabilities outstanding at September 30, 2000, which are
expected to reprice or mature in each of the future time periods shown. It is
important to note that certain shortcomings are inherent in the method of
analysis presented in the table. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as adjustable-rate
mortgage loans have features which restrict changes in interest rates on a
short-term basis over the life of the assets. Further, in the event of a change
in interest rates, prepayment levels and decay rates on core deposits may
deviate significantly from those presented in the table.
6
<PAGE>
The following table indicates the time periods in which interest-earning assets
and interest bearing liabilities will mature or reprice in accordance with their
contractual terms. The table assumes prepayments and scheduled principal
amortization of fixed-rate loans and mortgage-backed securities, and assumes
that adjustable rate mortgage loans will reprice at contractual repricing
intervals. There has been no adjustment for the impact of future commitments and
loans in process.
<TABLE>
<CAPTION>
At September 30, 2000
-------------------------------------------------------------------------------------
More than More than More than More than
Three 3 months 6 months 1 year 3 years
months to to to to More than
or less 6 months 1 year 3 years 5 years 5 years Total
------- -------- ------ ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans(1)(2) $15,957 $4,873 $71,066 $30,731 $12,549 $10,882 $146,058
Other loans(1) 4,929 1,090 1,993 5,906 8,776 1,305 23,999
Marketable equity securities(3) 103 - - - - - 103
Federal funds sold and other
short-term investments 1,136 - - - - - 1,136
Investment securities - - 6,807 495 - - 7,302
Mortgage-backed securities(2) - - 7 - - - 7
FHLB stock 1,900 - - - - - 1,900
-------- ------- ------- -------- ------- ------ -------
Total interest-earning assets 24,025 5,963 79,873 37,132 21,325 12,187 180,505
Less:
Loans in process 3,797 2,531 2,110 - - - 8,438
Unearned discount and deferred fees(2) 31 10 140 60 25 21 287
Allowance for credit losses 104 30 365 183 107 61 850
-------- ------- ------- -------- ------- ------ -------
Net interest-earning assets 20,093 3,392 77,258 36,889 21,193 12,105 170,930
-------- ------- ------- -------- ------- ------ -------
Interest-bearing liabilities:
Money market deposits 2,389 1,617 1,836 814 387 353 7,396
Passbook deposits 672 642 1,197 3,814 2,487 5,960 14,772
NOW and other demand deposits 1,169 1,041 1,754 3,628 971 2,150 10,713
Certificate accounts 14,098 9,485 29,704 31,514 743 - 85,544
Borrowed funds 19,000 - - 15,000 - - 34,000
-------- ------- ------- -------- ------- ------ -------
Total interest-bearing liabilities 37,328 12,785 34,491 54,770 4,588 8,463 152,425
-------- ------- ------- -------- ------- ------ -------
Interest sensitivity gap(4) ($17,235) ($9,393) $42,767 ($17,881) $16,605 $3,642 $18,505
======== ======= ======= ======== ======= ====== =======
Cumulative interest sensitivity gap ($17,235) ($26,628) $16,139 ($1,742) $14,863 $18,505
======== ======== ======= ======= ======= =======
Cumulative interest sensitivity gap
as a percent of total assets -9.19% -14.20% 8.61% -0.93% 7.93% 9.87%
Cumulative net interest-bearing
assets as a percent of
interest-bearing liabilities 53.83% 46.86% 119.08% 98.75% 110.32% 112.14%
</TABLE>
----------------
(1) For purposes of the gap analysis, mortgage and other loans are reduced for
nonperforming loans but are not reduced for the allowance for credit
losses.
(2) For purposes of the gap analysis, unearned discount and deferred fees are
pro-rated for mortgage loans and mortgage backed securities.
(3) Includes assets held for sale.
(4) Interest sensitivity gap represents the difference between net
interest-earning assets and interest-bearing liabilities.
7
<PAGE>
--------------------------------------------------------------------------------
Analysis of Net Interest Income
-------------------------------
The following table sets forth certain information relating to our average
balance sheet and reflects |the interest earned on assets and interest expense
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets |or liabilities, respectively, for the periods
presented. Average balances are derived from daily balances.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------
2000 1999
--------------------------------- ----------------------------------
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Mortgage loans(1) $133,380 $9,828 7.37% $113,255 $8,386 7.40%
Other loans(1) 28,519 2,680 9.40 23,379 2,161 9.25
Interest-earning deposits(2) 1,399 79 5.66 4,605 241 5.24
Federal funds sold and other
short-term investments 1,170 130 11.07 2,304 148 6.44
Investment securities 6,958 514 7.39 12,391 844 6.81
FHLB stock 1,695 137 8.04 1,523 114 7.48
-------- ------ ------- ------
Total interest-earning assets 173,121 13,368 7.72 157,457 11,894 7.52
------ ------
Noninterest-earning assets 6,038 4,848
-------- --------
Total assets $179,159 $162,305
======== ========
Liabilities and equity:
Interest-bearing liabilities:
Money market deposits $7,090 252 3.55% $5,769 209 3.62%
Passbook deposits 15,315 388 2.53 16,230 407 2.51
NOW and other demand deposits 10,424 130 1.25 9,987 137 1.37
Certificate accounts 79,415 4,304 5.42 71,435 3,694 5.17
-------- ------ ------- ------
Total deposit accounts 112,244 5,074 4.52 103,421 4,447 4.30
Borrowed funds 34,104 2,051 6.02 28,484 1,584 5.50
-------- ------ ------- ------
Total interest-bearing liabilities 146,348 7,125 4.87 131,905 6,031 4.56
------ ------
Noninterest-bearing liabilities 11,120 8,774
Equity 21,691 21,626
-------- --------
Total liabilities and equity $179,159 $162,305
======== ========
Net interest income $6,243 $5,863
====== ======
Interest rate spread(3) 2.85% 2.96%
Net interest margin(4) 3.61% 3.73%
Interest-earning assets to
interest-bearing liabilities 118.29% 119.37%
====== ======
</TABLE>
-----------
(1) Amount is net of deferred loan fees and discounts, loans in process and
includes accrued interest.
(2) Includes assets held for sale.
(3) Net interest rate spread represents the difference between the yield on
average interest-earning asets and the cost of average interest-bearing
liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
8
<PAGE>
--------------------------------------------------------------------------------
The following table sets forth certain information regarding changes in our
interest income and expense for the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes due to (1) changes in volume (change in average volume times
the old rate); (2) changes in rate (change in rate times the new average
volume): and (3) net change. The change attributable to the combined impact of
volume and rate have been allocated proportionately to the changes due to volume
and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------
2000 vs. 1999 1999 vs. 1998
--------------------------- ------------------------------
Volume Rate Net Volume Rate Net
------ ------ ------ ------ ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans $1,490 ($48) $1,442 $758 ($416) $342
Other loans 475 44 519 406 (106) 300
Interest-earning deposits (168) 6 (162) 21 (22) (1)
Federal funds sold and other short-term
investments (73) 55 (18) (110) (22) (132)
Investment securities, net (370) 40 (330) (4) 66 62
FHLB stock 13 10 23 18 6 24
------ ------ ------ ------ ------ -----
Total interest-earning assets 1,367 107 1,474 1,089 (494) 595
------ ------ ------ ------ ------ -----
Interest-bearing liabilities:
Money market deposits 48 (5) 43 47 13 60
Passbook deposits (23) 4 (19) 30 (77) (47)
NOW and other demand deposits 6 (13) (7) 22 (67) (45)
Certificate accounts 413 197 610 59 (144) (85)
Borrowed funds 313 154 467 332 7 339
------ ------ ------ ------ ------ -----
Total interest-bearing liabilities 757 337 1,094 490 (268) 222
------ ------ ------ ------ ------ -----
Net change in net interest income $610 ($230) $380 $599 ($226) $373
====== ====== ====== ====== ====== =====
</TABLE>
--------------------------------------------------------------------------------
Comparison of Financial Condition for Fiscal Years Ended September 30, 2000 and
1999
--------------------------------------------------------------------------------
The Company's total assets were $187.5 million at September 30, 2000, an
increase of $21.8 million or 13.2%, from $165.7 million at September 30, 1999.
The asset growth was primarily due to growth of net loans receivable.
Net loans receivable increased $21.9 million, or 14.8%, to $169.6 million at
September 30, 2000 from $147.7 million at September 30, 1999. The continuation
of new home construction within the markets Bedford Federal serves combined with
growth of both commercial and consumer loans during fiscal 2000 were the major
factors in the expansion of loans. This increase was funded primarily by
principal repayments of the loan portfolio, increased deposits, maturities and
sales of investment securities available for sale. Because lending is directly
affected by interest rates, a rise in interest rates could cause a slow down in
new loan originations.
Investment securities held to maturity decreased $303,000, or 37.4%, to $507,000
at September 30, 2000 from $810,000 September 30, 1999. Investment securities
available for sale decreased $3.6 million, or 34.0%, to $6.9 million at
September 30, 2000 from $10.5 million at September 30, 1999. The decrease in the
held to maturity portfolio was the result of a maturing investment and the
reduction in the available for sale portfolio was primarily due to the sale of
marketable equity securities.
9
<PAGE>
Deposits increased $15.1 million to $129.8 million at September 30, 2000 from
$114.7 million at September 30, 1999. The increase was concentrated in
certificates of deposit which rose $12.5 million and NOW accounts were up $3.6
million. Continued consolidation and branch closings by competitors along with
effective marketing were primary factors in the growth.
Total stockholders' equity was $22.6 million on September 30, 2000, up $1.5
million or 7.1% from the $21.1 million at September 30, 1999. The increase was
primarily due to the amount of earnings retained in capital during fiscal 2000.
--------------------------------------------------------------------------------
Comparison of Operating Results for Years Ended September 30, 2000 and 1999
---------------------------------------------------------------------------
Net Income. Net income increased $58,000, to $2.25 million for fiscal 2000 from
fiscal 1999. A 6.5% increase in net interest income, partially offset by a 4.7%
rise in noninterst expense, accounted for the improvement in profitability.
Interest Income. Interest income totaled $13.4 million for the fiscal year ended
September 30, 2000, a 12.4% increase from the $11.9 million recorded for fiscal
1999. The $1.5 million expansion of interest income is due to the 9.9% growth of
average earning assets, including average loan growth of 18.5%, combined with a
20 basis point rise in the rate earned on average earning assets.
Interest Expense. Interest expense increased $1.1 million from $6.0 million for
the year ended September 30, 1999, to $7.1 million for the year ended September
30, 2000. The level of average interest-bearing liabilities rose 10.9% to $146.3
million for fiscal 2000 from $131.9 for fiscal 1999. and the cost of
interest-bearing liabilities rose 31 basis points in fiscal 2000 compared to
fiscal 1999. The increase in cost of funds was primarily due to FHLB advances.
Net Interest Income. Net interst income totaled $6.2 million for the year ended
September 30, 2000, up 6.5% from the $5.9 million realized in fiscal 1999. The
increase is principally due to the higher volume of average earning assets,
primarily loans, offset somewhat by the growth of average interest-bearing
liabilities combined with a 29 basis point rise in the cost of average
interest-bearing liabilities.
Provision for Loan Losses. The provision for loan losses for the year ended
September 30, 2000 was $120,000, up $30,000 from the provision recorded in
fiscal 1999. At September 30, 2000, the allowance for loan losses was $850,000
equal to .50% of loans receivable, net, and 88.6% of non-performing loans. Based
upon the quality of the Bank's loan portfolio, the relatively stable local
economy, and favorable interest rate environment, management believes the Bank's
allowance for credit losses is adequate to absorb any anticipated credit losses.
Management currently expects future provisions for credit losses to be based
primarily upon growth in the loan portfolio and other factors. However,
assessment of the adequacy of the allowance for credit loss involves subjective
judgments regarding future events and thus there can be no assurance that
additional provisions for credit losses will not be required in future periods.
Noninterest Income. For the year ended September 30, 2000, noninterest income
amounted to $1.0 million, a decrease of $29,000 from the $1.1 million earned in
fiscal 1999. Service charges and fees on loans were down $86,000 due to a
decrease in both the number and dollar volume of loan originations. Other
customer service fees and commissions reflected an increase of $67,000, due to
the increased number of transaction accounts.
Noninterest Expense. Noninterest expense totaled $3.5 million for the year ended
September 30, 2000, compared to $3.3 million for fiscal 1999. The increase was
primarily due to an 5.7% rise in the cost of compensation and employee benefits
and a 7.3% increase in data processing expense. The higher 2000 expense for
compensation and employee benefits was primarily due to merit increases and
additional staffing, while the increase in data processing expense was due to a
pricing increase. During the fourth quarter of fiscal 2000, the Bank opened a
full service branch in Eastern Bedford County. Expenses related to the
opeeration of the branch were insignificant on the Company's financial results
for fiscal 2000,
10
<PAGE>
Income Taxes. The provision for income taxes increased $107,000, to $1.4 million
in fiscal 2000 from $1.3 million in fiscal The provision for income taxes
increased $163,000 to $1.3 million in fiscal 1999 from $1.2 million in fiscal
1999 due to the increased level of taxable income.
--------------------------------------------------------------------------------
Liquidity and Capital Resources
-------------------------------
Our liquidity is a measure of our ability to fund loans, pay deposit
withdrawals, and other cash outflows in an efficient, cost effective manner. Our
primary sources of funds are deposits and scheduled amortization and prepayment
of loans. During the past several years, we have used such funds primarily to
fund maturing time deposits, pay savings withdrawals, fund lending commitments,
purchase new investments, and increase liquidity. We also borrow funds from the
Federal Home Loan Bank ("FHLB") of Atlanta. As of September 30, 2000, such
borrowed funds totaled $34.0 million. Loan payments and maturing investments are
greatly influenced by general interest rates, economic conditions and
competition.
We are required under Federal regulations to maintain certain specified levels
of "liquid assets," which include certain United States government obligations
and other approved investments. Current regulations require that our subsidiary,
Bedford Federal Savings Bank ("Bedford Savings") maintain liquid assets of not
less than 4% of net withdrawable accounts plus short-term borrowings. At
September 30, 2000, Bedford Savings' regulatory liquidity was 10.7%.
The amount of certificate accounts which are scheduled to mature within one year
is approximately $53.2 million. We believe that we can replace these funds with
other deposits, excess liquidity, FHLB advances, or other borrowings if these
deposits do not remain with us. It has been our experience that a substantial
portion of such maturing deposits remain with us. In addition, at September 30,
2000, we had commitments to fund loans of $11.9 million, and $8.4 million of
loans in process.
Net cash provided by operating activities for fiscal 2000 totaled $1.4 million
which was primarily due to net income of $2.2 million.
Net cash absorbed by investing activities for fiscal 2000 totaled $19.0 million,
an increase from fiscal 1999 of $8.4 million. The decrease was primarily
attributable to a $4.7 million increase in cash proceeds from sales of available
for sale securities offset by a $22.3 million increase in net loans to
customers.
Net cash provided by financing activities for the year ended September 30, 2000
totaled $20.4 million. This is a result of a net increase in deposits of $15.1
million, and a net increase in FHLB advances of $6.0 million. These increases
were used primarily to fund the increase in loan originations.
Liquidity may be adversely affected by unexpected deposit outflows, excessive
interest rates paid by competitors, adverse publicity relating to the financial
services industry, and similar matters. Management monitors projected liquidity
needs and determines the level desirable, based in part on our commitments to
make loans and management's assessment of our ability to generate funds. Bedford
Savings is also subject to federal regulations that impose certain minimum
capital requirements.
--------------------------------------------------------------------------------
Impact of Inflation and Changing Prices
---------------------------------------
Unlike most industrial companies, substantially all of our assets are monetary
in nature. As a result, interest rates have a greater impact on our performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the price of
goods and services.
11
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Contents
--------------------------------------------------------------------------------
Report of Independent Certified Public Accountants 3
Consolidated Financial Statements
Balance Sheets 4-5
Statements of Operations 6-7
Statements of Stockholders' Equity 8-9
Statements of Cash Flows 10-11
Summary of Accounting Policies 12-17
Notes to Consolidated Financial Statements 18-41
2
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
Bedford Bancshares, Inc.
Bedford, Virginia
We have audited the consolidated balance sheets of Bedford Bancshares, Inc. and
subsidiaries (the "Company") as of September 30, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended September 30, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Bedford
Bancshares, Inc. and subsidiaries as of September 30, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2000 in conformity with generally accepted
accounting principles.
/s/BDO Seidman, LLP
Richmond, Virginia
October 27, 2000
3
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
September 30, 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash (including interest bearing deposits of
approximately $1,136 - 2000) $ 5,512 $ 2,744
Securities (Note 1)
Held-to-maturity 507 810
Available for sale 6,905 10,458
Investment in Federal Home Loan Bank stock,
at cost (Note 6) 1,900 1,500
Loans receivable, net (Notes 2, 6 and 14) 169,592 147,689
Property and equipment, net (Note 4) 1,365 1,105
Accrued interest receivable 1,133 924
Deferred income taxes (Note 8) 270 225
Other assets 357 282
--------------------------------------------------------------------------------------------------------------------
Total assets $187,541 $165,737
====================================================================================================================
</TABLE>
4
<PAGE>
Bedford Bancshares, Inc. and
Subsidiaries
Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
September 30, 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Liabilities
Deposits (Note 5) $129,770 $114,720
Advances from Federal Home Loan Bank (Note 6) 34,000 28,000
Advances from borrowers for taxes and insurance 694 605
Dividends payable 215 196
Other liabilities 306 1,150
--------------------------------------------------------------------------------------------------------------------
Total liabilities 164,985 144,671
--------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 12 and 13)
--------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Preferred stock, par value $.10, authorized 250,000
shares, none outstanding - -
Common stock, par value $.10, authorized 2,750,000
shares, 2,149,270 and 2,173,050 shares,
issued and outstanding 215 217
Additional paid-in capital 10,466 10,497
Retained earnings, substantially restricted (Note 10) 12,503 11,223
Accumulated other comprehensive (loss) income (122) (151)
Stock acquired by ESOP and RRP (Note 11) (506) (720)
--------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 22,556 21,066
--------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $187,541 $165,737
====================================================================================================================
See accompanying summary of accounting policies
and notes to consolidated financial statements.
</TABLE>
5
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Consolidated Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans $12,508 $10,547 $ 9,905
U.S. government obligations, including agencies 687 1,141 1,055
Other investments 173 206 339
--------------------------------------------------------------------------------------------------------------------
Total interest income 13,368 11,894 11,299
--------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits (Note 5) 5,074 4,447 4,564
Borrowed money 2,051 1,584 1,245
--------------------------------------------------------------------------------------------------------------------
Total interest expense 7,125 6,031 5,809
--------------------------------------------------------------------------------------------------------------------
Net interest income 6,243 5,863 5,490
Provision for loan losses (Note 2) 120 90 90
--------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 6,123 5,773 5,400
--------------------------------------------------------------------------------------------------------------------
Noninterest income
Service charges and fees on loans 562 648 459
Other customer service fees and commissions 403 336 320
Gain on sale of loans, investments and
foreclosed real estate 8 30 10
Other 67 55 74
--------------------------------------------------------------------------------------------------------------------
Total noninterest income 1,040 1,069 863
--------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
6
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Consolidated Statements of Operations
(in thousands)
(continued)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest expense
Compensation and employee benefits $ 1,966 $ 1,860 $ 1,712
Occupancy and equipment 340 319 321
Data processing 426 397 354
Federal insurance of accounts 38 63 64
Advertising 129 115 111
Professional fees 167 200 201
Other 418 374 367
--------------------------------------------------------------------------------------------------------------------
Total noninterest expense 3,484 3,328 3,130
--------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,679 3,514 3,133
Provision for income taxes (Note 8) 1,430 1,323 1,160
--------------------------------------------------------------------------------------------------------------------
Net income $ 2,249 $ 2,191 $ 1,973
====================================================================================================================
Basic earnings per share (Note 16) $ 1.08 $ 1.01 $ .90
Diluted earnings per share (Note 16) $ 1.04 $ .96 $ .85
====================================================================================================================
See accompanying summary of accounting policies
and notes to consolidated financial statements.
</TABLE>
7
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Acquired
Common Paid-in Retained Comprehensive By ESOP
Stock Capital Earnings Income and RRP Total
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997 $114 $10,836 $9,763 $ 22 $(1,114) $19,621
Comprehensive income
Net income - - 1,973 - - 1,973
Change in unrealized loss
on securities available for
sale (Note 9) - - - 38 - 38
------------
Total comprehensive income - - - - - 2,011
------------
Allocated/earned ESOP
shares (Note 11) - 96 16 - 69 181
Purchase of RRP shares
(Note 11) - (29) (57) - - (86)
Effect of 2 to 1 stock split 115 - (115) - - -
Dividends declared ($.30
per share) - - (689) - - (689)
Exercise of options (Note 11) 1 93 9 - - 103
RRP vesting (Note 11) - (57) - - 164 107
----------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 230 10,939 10,900 60 (881) 21,248
Comprehensive income
Net income - - 2,191 - - 2,191
Change in unrealized loss
on securities available for
sale (Note 9) - - - (211) - (211)
------------
Total comprehensive income - - - - - 1,980
------------
Allocated/earned ESOP
shares (Note 11) - 195 17 - 40 252
Repurchase of stock (132,200
shares) (13) (648) (1,103) - - (1,764)
Dividends declared ($.34
per share) - - (786) - - (786)
Exercise of options (Note 11) - 36 4 - - 40
RRP vesting (Note 11) - (25) - - 121 96
----------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
8
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in thousands)
(continued)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Acquired
Common Paid-in Retained Comprehensive By ESOP
Stock Capital Earnings Income and RRP Total
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1999 $217 $10,497 $11,223 $(151) $(720) $21,066
Comprehensive income
Net income - - 2,249 - - 2,249
Change in unrealized loss
on securities available for
sale (Note 9) - - - 29 - 29
------------
Total comprehensive income - - - - - 2,278
------------
Allocated/earned ESOP
shares (Note 11) - 124 14 - 214 352
Repurchase of stock (23,809
shares) (2) (117) (146) - - (264)
Dividends declared ($.39
per share) - - (838) - - (838)
RRP vesting (Note 11) - (38) - - - (38)
----------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 $215 $10,466 $12,503 $(122) $(506) $22,556
====================================================================================================================
See accompanying summary of accounting policies
and notes to consolidated financial statements.
</TABLE>
9
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 2,249 $ 2,191 $ 1,973
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses 120 90 90
Provision for depreciation and amortization 149 147 150
(Increase) decrease in deferred income taxes (45) (130) (37)
Gain on sale of loans, investments, and
foreclosed real estate (9) (30) (11)
Loans originated for sale - (1,464) (304)
Proceeds from sale of loans originated for sale - 1,464 304
(Increase) decrease in interest receivable (209) 72 (149)
(Increase) decrease in other assets (75) 285 (139)
Increase (decrease) in other liabilities (844) 485 471
--------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,336 3,110 2,348
--------------------------------------------------------------------------------------------------------------------
Investing activities
Proceeds from maturities of securities 1,300 17,055 7,500
Proceeds from sales of available for sale securities 4,664 - 1,004
Purchase of available for sale securities (2,021) (9,658) (13,542)
Principal collected on mortgage-backed securities 3 4 5
Net increase in loans to customers (22,337) (18,036) (13,741)
Net proceeds from sales of foreclosed real estate 293 83 220
Purchases of premises, equipment and leasehold
improvements (439) (92) (96)
Sale (purchase) of FHLB stock (400) 50 (618)
--------------------------------------------------------------------------------------------------------------------
Net cash absorbed by investing activities (18,937) (10,594) (19,268)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
continued...
10
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(continued)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financing activities
Net increase in deposits $15,050 $7,635 $ 3,474
Net increase (decrease) in advance payments
from borrowers 89 77 26
Proceeds from FHLB advances 80,000 11,000 22,000
Principal payments of FHLB advances (74,000) (12,000) (8,000)
Purchase of stock by ESOP and RRP - - (86)
Allocation of ESOP and RRP shares 314 348 288
Repurchase of stock (264) (1,764) -
Dividends paid (820) (774) (665)
Issuance of common stock - 40 103
--------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 20,369 4,562 17,140
--------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 2,768 (2,922) 220
Cash and cash equivalents - beginning of year 2,744 5,666 5,446
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - end of year $ 5,512 $2,744 $ 5,666
====================================================================================================================
Cash payments of interest expense $ 7,508 $6,015 $ 5,880
====================================================================================================================
Cash payments of income taxes $ 1,246 $1,282 $ 570
====================================================================================================================
Transfer of loans to foreclosed real estate $ 316 $ 88 $ 110
====================================================================================================================
See accompanying summary of accounting policies
and notes to consolidated financial statements.
</TABLE>
11
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Summary of Accounting Policies
--------------------------------------------------------------------------------
Nature of Business and Regulatory Environment
Bedford Bancshares, Inc. (the "Parent Company") is a unitary thrift holding
company whose principal asset is its wholly-owned subsidiary, Bedford Federal
Savings Bank (the "Savings Bank"). The Savings Bank is a federally chartered
stock savings bank that provides a full range of banking services to individual
and corporate customers. In these financial statements the consolidated group is
referred to collectively as "the Company".
The Office of Thrift Supervision ("OTS") is the primary regulator for federally
chartered savings associations, as well as savings and loan holding companies.
The Federal Deposit Insurance Corporation ("FDIC") is the federal deposit
insurance administrator for both banks and savings associations. The FDIC has
specified authority to prescribe and enforce such regulations and issue such
orders as it deems necessary to prevent actions or practices by savings
associations that pose a serious threat to the Savings Association Insurance
Fund ("SAIF").
Principles of Consolidation
The consolidated financial statements include the accounts of Bedford
Bancshares, Inc., Bedford Federal Savings Bank and CVFS, its wholly-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in the consolidation. Prior year accounts are reclassified when
necessary to conform to current year classifications.
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Investment Securities
Investment in debt securities classified as held-to-maturity are stated at cost,
adjusted for amortization of premiums and accretion of discounts using the level
yield method. Management has a positive intent and ability to hold these
securities to maturity and, accordingly, adjustments are not made for temporary
declines in their market value below amortized cost. Investment in Federal Home
Loan Bank stock is stated at cost.
12
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Summary of Accounting Policies
(continued)
--------------------------------------------------------------------------------
Investment Securities (continued)
Investments in debt and equity securities classified as available-for-sale are
stated at market value with unrealized holding gains and losses excluded from
earnings and reported as a separate component of stockholders' equity, net of
tax effect, until realized.
Investments in debt and equity securities classified as trading are stated at
market value. Unrealized holding gains and losses for trading securities are
included in the statement of income.
Gains and losses on the sale of securities are determined using the specific
identification method.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
Loans Receivable
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balance adjusted for any charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
Loans receivable consists primarily of long-term real estate loans secured by
first deeds of trust on single family residences, other residential property,
commercial property and land located primarily in the state of Virginia.
Interest income on mortgage loans is recorded when earned and is recognized
based on the level yield method. The Company provides an allowance for accrued
interest deemed to be uncollectible, which is netted against accrued interest
receivable in the consolidated balance sheets.
The Company defers loan origination and commitment fees, net of certain direct
loan origination costs, and the net deferred fees are amortized into interest
income over the lives of the related loans as yield adjustments. Any unamortized
net fees on loans fully repaid or sold are recognized as income in the year of
repayment or sale.
The Company places loans on non-accrual status after being delinquent greater
than 90 days or earlier if the Company becomes aware that the borrower has
entered bankruptcy proceedings, or in situations in which the loans have
developed inherent problems prior to being 90 days delinquent that indicate
payments of principal or interest will not be made in full. Whenever the accrual
of interest is stopped, previously accrued but uncollected interest income is
reversed. Thereafter, interest is recognized only as cash is received until the
loan is reinstated.
13
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Summary of Accounting Policies
(continued)
--------------------------------------------------------------------------------
Loans Receivable (continued)
The allowance for loan losses is maintained at a level considered by management
to be adequate to absorb future loan losses currently inherent in the loan
portfolio. Management's assessment of the adequacy of the allowance is based
upon type and volume of the loan portfolio, past loan loss experience, existing
and anticipated economic conditions, and other factors which deserve current
recognition in estimating future loan losses. Additions to the allowance are
charged to operations. Loans are charged-off partially or wholly at the time
management determines collectability is not probable. Management's assessment of
the adequacy of the allowance is subject to evaluation and adjustment by the
Company's regulators.
During its assessment of the allowance for loan losses, management evaluates
loans for impairment. A loan is considered to be impaired when it is probable
that the Company will be unable to collect all principal and interest amounts
according to the contractual terms of the loan agreement. The allowance for loan
losses related to loans identified as impaired is primarily based on the excess
of the loan's current outstanding principal balance over the estimated fair
market value of the related collateral. For a loan that is not
collateral-dependent, the allowance is recorded at the amount by which the
outstanding principal balance exceeds the current best estimate of the future
cash flows on the loan discounted at the loan's original effective interest
rate.
For impaired loans that are on non-accrual status, cash payments received are
generally applied to reduce the outstanding principal balance. However, all or a
portion of a cash payment received on a non-accrual loan may be recognized as
interest income to the extent allowed by the loan contract, assuming management
expects to fully collect the remaining principal balance on the loan.
As of September 30, 2000, the Company had no loans that were considered as
impaired.
Real Estate Owned
Real estate acquired through foreclosure is initially recorded at the lower of
fair value, less estimated selling costs, or the balance of the loan on the
property at date of foreclosure. Costs relating to the development and
improvement of property are capitalized, whereas those relating to holding the
property are charged to expense.
Valuations are periodically performed by management, and an allowance for losses
is established by a charge to operations if the carrying value of a property
exceeds its estimated fair value.
Sale of Loans, Participations in Loans
The Company is able to generate funds by selling loans and participations in
loans to the Federal Home Loan Mortgage Corporation ("FHLMC") and other
investors. Under participation service agreements, the Company continues to
service the loans and the participant is paid its share of principal and
interest collections.
14
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Summary of Accounting Policies
(continued)
--------------------------------------------------------------------------------
Sale of Loans, Participations in Loans (continued)
The Company allocates the cost of acquiring or originating mortgage loans
between the mortgage servicing rights and the loans, based on their relative
fair values, if the bank sells or securitizes the loans and retains the mortgage
servicing rights. The Company assesses its capitalized mortgage servicing rights
for impairment based on the fair value of those rights.
The cost of mortgage servicing rights is amortized in proportion to, and over
the period of, estimated net servicing revenues. Impairment of mortgage
servicing rights is assessed based on the fair value of those rights. Fair
values are estimated using discounted cash flows based on a current market
interest rate. For purposes of measuring impairment, the rights are stratified
based on the predominant risk characteristics of the underlying loans. The
amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value.
Property, Equipment and Depreciation
The various classes of property are stated at cost and are depreciated by
accelerated and straight-line methods over their estimated useful lives of 30 to
40 years for office buildings, 15 to 20 years for land improvements, 15 years
for ATM facilities, 5 to 10 years for furniture and equipment and 5 years for
automobiles. Additions and improvements are capitalized, while repairs are
expensed as incurred. The cost and accumulated depreciation on property are
eliminated from the accounts upon disposal, and any resulting gain or loss is
included in the determination of net income.
Income Taxes
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities.
For tax years beginning prior to January 1, 1996, savings banks that met certain
definitional tests and other conditions prescribed by the Internal Revenue Code
were allowed, within limitations, to deduct from taxable income an allowance for
bad debts using the "percentage of taxable income" method.
15
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Summary of Accounting Policies
(continued)
--------------------------------------------------------------------------------
Income Taxes (continued)
Section 1616 of the Small Business Job Protection Act of 1996 (the "Act")
repealed the percentage of taxable income method of computing bad debt reserves
and required the recapture into taxable income of "excess reserves," on a
ratable basis over the next six years. Excess reserves are defined in general,
as the excess of the balance of the tax bad debt reserve (using the percentage
of taxable income method) as of the close of the last tax year beginning before
January 1, 1996 over the balance of the reserve as of the close of the last tax
year beginning before January 1, 1988. The recapture of the reserves is deferred
if the Company meets the "residential loan requirement" exception, during either
or both of the first two years beginning after December 31, 1995. The
residential loan requirement is met, in general, if the principal amount of
residential loans made by the Company during the year is not less than the
Company's base "amount." The base amount is defined as the average of the
principal amounts of residential loans made during the six most recent tax years
beginning before January 1, 1996.
As a result of the Act, the Company must recapture into taxable income
approximately $424,821 ratably over six years, beginning with the year ended
September 30, 1999.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS 133 requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain requirements are met, a derivative may be specifically designated as a
hedge and an entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for assessing the
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000 and
requires application prospectively.
In March 2000, the FASB issued interpretation No. 44 ("FIN 44"), Accounting for
Certain Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25. FIN 44 clarifies the application of APB No. 25 for (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 2, 2000 but certain
conclusions cover specific events that occur after either December 15, 1998 or
January 12, 2000. The Company believes that adoption of FIN 44 will not have a
material effect on the Company's financial statements but may impact the
accounting for grants or awards in future periods.
16
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Summary of Accounting Policies
(continued)
--------------------------------------------------------------------------------
Earnings Per Share
Basic earnings per share include no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of stock options that could share in the earnings of the Company. The
computation of basic and diluted earnings per share is presented in Note 16.
Comprehensive Income
For the year ended September 30, 1999, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). This statement establishes rules for the reporting of comprehensive income
and its components. Comprehensive income consists of net income and unrealized
gains (losses) on available for sale securities and is presented in the
Consolidated Statements of Stockholders' Equity. The adoption of SFAS 130 had no
impact on total shareholders' equity. Prior year financial statements have been
reclassified to conform to SFAS 130 requirements.
Statement of Cash Flows
For purposes of the statements of cash flows the Company considers all highly
liquid debt instruments with maturities, when purchased, of three months or
less, to be cash equivalents. Cash and cash equivalents include cash on hand,
funds due from banks, and federal funds sold.
17
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
1. Securities
A summary of the amortized cost and estimated market values of investment
securities, in thousands, is as follows:
<TABLE>
<CAPTION>
September 30, 2000
-------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
United States government
and agency obligations $ 500 $ - $ 1 $ 499
Mortgage-backed securities 7 - - 7
-------------------------------------------------------------------------------------------------------------------------------
507 - 1 506
-------------------------------------------------------------------------------------------------------------------------------
Available for Sale
United States government
and agency obligations 7,000 - 198 6,802
Marketable Equity securities 48 2 - 50
Other 53 - - 53
-------------------------------------------------------------------------------------------------------------------------------
7,101 2 198 6,905
-------------------------------------------------------------------------------------------------------------------------------
$7,608 $ 2 $199 $7,411
===============================================================================================================================
</TABLE>
Gross gains of approximately $0, $0 and $3,000 and gross losses of approximately
$0, $0 and $1,000 were realized on sales of securities available for sale during
the years ended September 30, 2000, 1999 and 1998, respectively.
18
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
1. Securities (continued)
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to Maturity
United States government
and agency obligations $ 800 $ 2 $ 2 $ 800
Mortgage-backed securities 10 - - 10
-------------------------------------------------------------------------------------------------------------------------------
810 2 2 810
-------------------------------------------------------------------------------------------------------------------------------
Available for Sale
United States government
and agency obligations 6,005 - 175 5,830
Marketable Equity securities 4,648 - 73 4,575
Other 53 - - 53
-------------------------------------------------------------------------------------------------------------------------------
10,706 - 248 10,458
-------------------------------------------------------------------------------------------------------------------------------
$11,516 $ 2 $250 $11,268
===============================================================================================================================
</TABLE>
19
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
1. Securities (continued)
The amortized cost and estimated market value of debt securities, in thousands,
at September 30, 2000, by contractual maturity, were as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Held to Maturity
Due in one year or less $ - $ -
Due in one through five years 500 499
Due after five years - -
-------------------------------------------------------------------------------------------------------------------------------
500 499
Mortgage-backed securities 7 7
-------------------------------------------------------------------------------------------------------------------------------
507 506
-------------------------------------------------------------------------------------------------------------------------------
Available for Sale
Due in one year or less 6,500 6,307
Due in one through five years 500 495
Due after five years - -
-------------------------------------------------------------------------------------------------------------------------------
7,000 6,802
Marketable equity securities 48 50
Other 53 53
-------------------------------------------------------------------------------------------------------------------------------
7,101 6,905
-------------------------------------------------------------------------------------------------------------------------------
$7,608 $7,411
===============================================================================================================================
</TABLE>
Expected maturities can differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
20
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
2. Loans Receivable
Loans receivable, in thousands, are summarized as follows
<TABLE>
<CAPTION>
September 30, 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
First mortgage loans $129,140 $112,219
Construction loans 19,844 18,506
Home equity loans 6,345 4,692
Loans to depositors, secured by savings 448 452
Installment loans 13,851 11,512
Term notes 9,539 8,940
-------------------------------------------------------------------------------------------------------------------------------
179,167 156,321
Less
Undistributed loans in process 8,438 7,556
Deferred loan fees and costs, net 287 272
Allowance for credit losses 850 804
-------------------------------------------------------------------------------------------------------------------------------
$169,592 $147,689
===============================================================================================================================
</TABLE>
Activity in the allowance for credit losses, in thousands, is summarized as
follows:
<TABLE>
<CAPTION>
Year ended September 30, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $804 $764 $678
Provision charged to operations 120 90 90
Charge offs net of recoveries (74) (50) (4)
-------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $850 $804 $764
===============================================================================================================================
</TABLE>
21
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
3. Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of those loans,
in thousands, are summarized as follows:
<TABLE>
<CAPTION>
September 30, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Home Loan Mortgage Corporation (FHLMC) $1,538 $1,698 $1,361
Virginia Housing Development Authority (VHDA) - 803 1,097
-------------------------------------------------------------------------------------------------------------------------------
$1,538 $2,501 $2,458
===============================================================================================================================
</TABLE>
4. Property and Equipment
Property and equipment, in thousands, are summarized as follows:
<TABLE>
<CAPTION>
September 30, 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 251 $ 251
Office buildings 1,222 1,203
Rental buildings 48 68
Furniture, fixtures and equipment 1,206 1,019
Automobile 25 25
Leasehold improvements 251 25
-------------------------------------------------------------------------------------------------------------------------------
3,003 2,591
Less accumulated depreciation 1,638 1,486
-------------------------------------------------------------------------------------------------------------------------------
$1,365 $1,105
===============================================================================================================================
</TABLE>
22
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
5. Deposits
Deposits, in thousands, are summarized as follows:
<TABLE>
<CAPTION>
September 30, 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NOW accounts $ 22,043 16.99% $ 18,440 16.07%
Money market accounts 7,396 5.70 7,241 6.31
Savings accounts 14,899 11.48 16,072 14.01
Time deposits 85,432 65.83 72,967 63.61
-------------------------------------------------------------------------------------------------------------------------------
$129,770 100.00% $114,720 100.00%
===============================================================================================================================
</TABLE>
The aggregate amount of certificates of deposit of $100,000 or more was
approximately $14,674,000 and $13,785,000 at September 30, 2000 and 1999,
respectively.
At September 30, 2000, the scheduled maturities of time deposits, in thousands,
are as follows:
Year ending September 30,
-------------------------------------------------
2001 $53,175
2002 25,964
2003 5,550
2004 550
Thereafter 193
-------------------------------------------------
$85,432
-------------------------------------------------
Interest expense on deposits, in thousands, is summarized as follows:
<TABLE>
<CAPTION>
Year ended September 30, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOW accounts $ 130 $ 137 $ 182
Money market account 252 209 149
Savings account 388 407 454
Time deposits 4,304 3,694 3,779
-------------------------------------------------------------------------------------------------------------------------------
$5,074 $4,447 $4,564
===============================================================================================================================
</TABLE>
23
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
6. Advances from Federal Home Loan Bank
Borrowings ("advances") from the Federal Home Loan Bank ("FHLB"), in thousands,
are scheduled to mature as follows:
<TABLE>
<CAPTION>
September 30, 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Within one year $19,000 $ 4,000
One to two years 5,000 -
Two years or more 10,000 24,000
-------------------------------------------------------------------------------------------------------------------------------
$34,000 $28,000
===============================================================================================================================
</TABLE>
The weighted average interest rate on advances at September 30, 2000 and 1999
was 6.19% and 5.53%, respectively. These advances are collateralized by the
Company's investment in FHLB stock and qualifying real estate loans under a
blanket collateral agreement. Certain advances are subject to call dates which
result in earlier maturities.
Information related to borrowing activity from the Federal Home Loan Bank, in
thousands, is as follows:
<TABLE>
<CAPTION>
Year ended September 30, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum amount outstanding during the year $38,000 $31,000 $31,000
===============================================================================================================================
Average amount outstanding during the year 34,104 28,483 22,487
===============================================================================================================================
Average interest rate during the year 6.02% 5.56% 5.54%
===============================================================================================================================
</TABLE>
24
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
7. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments, in thousands,
are as follows:
<TABLE>
<CAPTION>
September 30, 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and short-term investments $ 5,512 $ 5,512 $ 2,744 $ 2,744
Securities 7,412 7,412 11,268 11,268
Loans, net of allowance for loan losses 169,592 165,939 147,689 148,157
Financial liabilities
Deposits 129,770 129,765 114,720 115,034
Advances from Federal Home Loan Bank 34,000 34,000 28,000 28,000
Notional Fair Notional Fair
Amount Value Amount Value
-------------------------------------------------------------------------------------------------------------------------------
Unrecognized financial instruments
Commitments to extend credit $ 11,922 $ 11,922 $12,916 $12,916
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Cash and short-term investments
-------------------------------
For these short-term investments, the carrying amount is a reasonable estimate
of fair value.
Securities
----------
Fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
25
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
7. Fair Value of Financial Instruments (continued)
Loan receivable
---------------
The fair value of loans is estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
remaining maturities. This calculation ignores loan fees and certain factors
affecting the interest rates charged on various loans such as the borrower's
creditworthiness and compensating balances and dissimilar types of real estate
held as collateral.
Deposit liabilities
-------------------
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the balance sheet date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank
------------------------------------
For advances that mature within one year of the balance sheet date, carrying
value is considered a reasonable estimate of fair value.
The fair values of all other advances are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for similar
types of advances.
Commitments to extend credit
----------------------------
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the borrowers. For fixed-rate
loan commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. Because of the competitive
nature of the marketplace loan fees vary greatly with no fees charged in many
cases.
26
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
8. Income Taxes
The provision for income taxes, in thousands, is summarized as follows:
<TABLE>
<CAPTION>
Year ended September 30, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $1,254 $1,195 $1,066
State 221 211 186
-------------------------------------------------------------------------------------------------------------------------------
1,475 1,406 1,252
Deferred tax expense (benefit) (45) (83) (92)
-------------------------------------------------------------------------------------------------------------------------------
Total provision for income taxes $1,430 $1,323 $1,160
===============================================================================================================================
</TABLE>
Differences between the statutory and effective tax rates are summarized as
follows:
<TABLE>
<CAPTION>
Percent of Pre-tax Income
-------------------------
Year ended September 30, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate 34.0% 34.0% 34.0%
Increases (decreases) in taxes resulting from
State income taxes, net of federal benefit 6.0 5.4 5.6
Other (1.0) (1.4) (2.6)
-------------------------------------------------------------------------------------------------------------------------------
39.0% 38.0% 37.0%
===============================================================================================================================
</TABLE>
27
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
8. Income Taxes (continued)
The components of the net deferred tax asset, in thousands, were as follows:
<TABLE>
<CAPTION>
September 30, 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax asset
Bad debts $215 $171
Loan fees 21 37
Unrealized loss on securities available for sale 75 90
Other 12 -
-------------------------------------------------------------------------------------------------------------------------------
Total deferred tax asset 323 298
-------------------------------------------------------------------------------------------------------------------------------
Deferred tax liability
Accelerated depreciation (39) (5)
Distributive share of income from partnership (14) (17)
Other - (51)
-------------------------------------------------------------------------------------------------------------------------------
Total deferred tax liability (53) (73)
-------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $270 $225
===============================================================================================================================
</TABLE>
28
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
9. Comprehensive Income
The components of other comprehensive income (loss) are summarized as follows:
<TABLE>
<CAPTION>
Year ended September 30, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unrealized gains (losses) on securities: $43 $(269) $61
Less: reclassification adjustment for gains (losses)
included in net income (4) 71 -
-------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) before tax 47 (340) 61
Income tax (expense) benefit related to items of other
comprehensive income (18) 129 (23)
-------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax $29 $(211) $38
===============================================================================================================================
</TABLE>
10. Restricted Retained Earnings
In accordance with the current regulations concerning conversion from a mutual
to a stock organization, the Savings Bank was required to establish a
liquidation account equal to its net worth as of the latest balance sheet
contained in the final offering circular. Such liquidation account is to be
maintained for the benefit of depositors, as of the eligibility record date
(September 30, 1993) who continue to maintain their deposits in the Savings Bank
after the conversion, in the event of a complete liquidation of the Savings
Bank. If, however, on any annual closing date of the Savings Bank subsequent to
September 30, 1993, the amount in any deposit account is less than the amount in
such deposit account on September 30, 1993, then the interest in the liquidation
account relating to such deposit account would be reduced by the amount of such
reduction, and such interest will cease to exist if such deposit account is
closed. The Savings Bank may not declare or pay a cash dividend or repurchase
any of its capital stock if the effect thereof would cause the net worth of the
Savings Bank to be reduced below either the amount required for the liquidation
account or the minimum regulatory capital requirements. At September 30, 2000,
the liquidation account, adjusted for customer withdrawals, totaled $1,880,000.
29
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
11. Retirement Plan and Employee Benefit Programs
The Savings Bank has a retirement plan under Internal Revenue Code Section
401(k) covering all full-time employees who have completed one or more years of
continuous service and have reached age 21. Each employee has an option to
voluntarily contribute to this plan up to 10% of their salary. The Savings Bank
matched $.50 for every $1 up to 4% of salary for years prior to fiscal 1999.
Beginning in fiscal 1999, the Savings Bank, for each $1 up to 4% of salary, will
match $.50 for employees with less than ten years of service, $.75 for employees
with between ten and twenty years of service and $1 for employees with over
twenty years of service. Effective October 1, 1993, a money purchase plan was
adopted which provides for a fixed percentage contribution for each employee's
salary. This percentage was 5% for the years ended September 30, 2000, 1999 and
1998, respectively. The total expense for the plan was $89,000, $78,000 and
$61,000 for the years ended September 30, 2000, 1999 and 1998, respectively.
Employee Stock Ownership Plan
At the time of the stock conversion, the Savings Bank established an Employee
Stock Ownership Plan (ESOP) covering all full-time employees, over the age of
21, with at least one year of service. The ESOP borrowed funds from the Parent
Company to purchase a total of 160,000 shares of the Parent Company's Common
Stock, the loan being collateralized by the Common Stock. Contributions by the
Savings Bank, along with dividends received on unallocated shares, are used to
repay the loan with shares being released from the Parent Company's lien
proportional to the loan repayments. Annually on September 30, the released
shares are allocated to the participants in the same proportion that their wages
bear to the total compensation of all of the participants. The Company has
released and allocated 98,666 and 82,666 shares of Common Stock as of September
30, 2000 and 1999, respectively. The Company recognized $104,000 and $149,000 of
compensation cost for the years ended September 30, 2000 and 1999, respectively.
The fair value of unearned ESOP shares totaled $613,000 at September 30, 2000.
There were no commitments to repurchase ESOP shares.
Shares pledged as collateral are reported as a reduction of stockholders' equity
in the consolidated balance sheets. As shares are released from collateral, the
Company reports compensation expense equal to the current market price of the
shares, and the shares become outstanding for earnings per share computations.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings, and dividends on unallocated ESOP shares are recorded as a reduction
of debt.
30
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
11. Retirement Plan and Employee Benefit Programs (continued)
Recognition and Retention Plan (continued)
The Board of Directors approved the establishment of a Recognition and Retention
Plan ("RRP") on January 25, 1995. The plan states that the Trust, established
under the plan, shall not purchase more than 4% of the aggregate shares of
Common Stock issued by the Parent Company in the mutual-to-stock conversion of
the Savings Bank (100,510 shares). The costs of the shares awarded under these
plans are recorded as unearned compensation, a contra equity account, and are
recognized as an expense in accordance with the vesting requirements under the
various plans. For the years ended September 30, 2000 and 1999, the amount
included in compensation expense was $44,000 and $96,000, respectively. The
status of the shares in this plan is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Share Unawarded Awarded
Price Shares Shares
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at September 30, 1998 $6.18 8,394 35,420
Granted - - -
Vested 5.92 - (16,210)
-------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 5.81 8,394 19,210
Granted - - -
Vested 5.92 - (16,210)
-------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 $9.04 8,394 3,000
===============================================================================================================================
</TABLE>
31
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
11. Retirement Plan and Employee Benefit Programs (continued)
Stock Option Plans
The Company established two stock option plans during 1995, for directors,
officers and employees. The exercise price under both plans is the fair market
price on the date of the grant. One is a non-incentive stock option plan and the
other is an incentive stock option plan. Rights to exercise options granted vest
at the rate of 20% per year, beginning on the first anniversary of the grant. A
summary of the stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Available Options Vested and
Price for Grant Outstanding Exercisable
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 30, 1998 $6.18 20,994 88,599 114,515
Granted - - - -
Vested - - (40,550) 40,550
Exercised 5.50 - - (7,350)
-------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1999 6.40 20,994 48,049 147,715
-------------------------------------------------------------------------------------------------------------------------------
Granted - - - -
Vested - - (40,549) 40,549
Exercised - - - -
-------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2000 $6.40 20,994 7,500 188,264
===============================================================================================================================
</TABLE>
The remaining contractual lives of the options granted in 1999 and 1998 are 5.3
years and 4.3 years, respectively at September 30, 2000. The weighted average
remaining contractual life of total options is 4.5 years at September 30, 2000.
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
12. Commitments and Contingencies
The Savings Bank is lessee under a five-year operating lease expiring August 18,
2001 for the land at its Moneta branch at an annual rental of $4,800 for five
years and a five year operating lease expiring August 31, 2005 for the New
London Branch at an annual rental of $35,700. The Savings Bank also leases ATM
space in Moneta, under a five year lease expiring in August 2001 at an annual
rental of $2,400 and in Bedford, under a five year lease expiring in September
2004 at an annual rental of $3,300.
The current minimum annual rental commitments under non-cancelable operating
leases in effect at September 30, 2000 are as follows:
Year Ending September 30, Amount
----------------------------------------------------------
2001 $ 45,600
2002 39,000
2003 39,000
2004 39,000
2005 and thereafter 35,700
----------------------------------------------------------
$198,300
==========================================================
Rent expense was approximately $18,600, $7,200 and $7,000 for the years ended
September 30, 2000, 1999, and 1998, respectively.
The Savings Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments consist of commitments to extend credit. These
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the statements of financial position. The contract or
notional amounts of those instruments reflect the extent of involvement the
Savings Bank has in a particular class of financial instruments.
33
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
12. Commitments and Contingencies (continued)
The Savings Bank's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount (in thousands) of those
instruments at September 30, 2000 and 1999. The Savings Bank uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
<TABLE>
<CAPTION>
September 30, 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial instruments, in thousands, whose contract amounts represent credit risk
Unfunded commercial credit line $ 3,746 $ 2,486
Unfunded home equity lines of credit 6,967 5,866
Commitments to finance real estate acquisitions and construction 1,209 4,564
-------------------------------------------------------------------------------------------------------------------------------
$11,922 $12,916
===============================================================================================================================
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to be drawn
upon, the total commitment amounts generally represent future cash requirements.
The Savings Bank evaluates each customer's credit-worthiness on a case-by-case
basis. The amount of collateral, if deemed necessary by the Savings Bank upon
extension of credit, is based on management's credit evaluation of the credit
applicant. Collateral normally consists of real property.
34
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
13. Concentrations of Credit Risk
The Savings Bank grants residential, commercial, and installment loans to
customers in the Central Southwest region of Virginia, principally Bedford
County. The Savings Bank has a loan portfolio consisting principally of
residential mortgage loans, and is not dependent upon any particular economic
sector, although the portfolio as a whole may be affected by general economic
factors in its lending area.
14. Related Party Transactions
The Company has made loans in the ordinary course of business to various
officers and directors generally collateralized by the individual's personal
residences or by savings accounts in the Savings Bank. These loans are made on
substantially the same terms as those prevailing at the time for comparable
transactions with other borrowers. The aggregate balances of such loans which
exceed $60,000 in aggregate outstanding amount to any executive officer or
director, at September 30, 2000, 1999 and 1998 are approximately $714,000,
$910,000 and $826,000, respectively.
15. Regulatory Capital of the Savings Bank
The Office of Thrift Supervision's capital regulations require thrift
institutions to maintain capital at least sufficient to meet three requirements:
tangible capital, core capital, and risk-based capital. Management has
determined that the Savings Bank's capital meets and exceeds all three capital
requirements as follows as of September 30, 2000 and 1999. Tangible and core
capital levels are shown as a percentage of adjusted total assets, and
risk-based capital levels are shown as a percentage of risk-weighted assets.
<TABLE>
<CAPTION>
Amount Percent Actual Actual Excess
September 30, 2000 Required Required Amount Percent Amount
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Tangible Capital $2,813,000 1.50% $21,318,000 11.37% $18,505,000
Core Capital 7,503,000 4.00 21,318,000 11.37 13,815,000
Risk-based Capital 9,384,000 8.00 22,086,000 18.83 12,702,000
Amount Percent Actual Actual Excess
September 30, 1999 Required Required Amount Percent Amount
-------------------------------------------------------------------------------------------------------------------------------
Tangible Capital $2,491,000 1.50% $19,040,000 11.46% $16,549,000
Core Capital 6,643,000 4.00 19,040,000 11.46 12,397,000
Risk-based Capital 8,270,000 8.00 19,770,000 19.12 11,500,000
</TABLE>
The Bank may not declare or pay a cash dividend or repurchase any of its capital
stock, if the effect thereof would cause the net worth of the Bank to be reduced
below certain requirements imposed by Federal regulations.
35
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
16. Earnings Per Share
On May 20, 1998, the Board of Directors declared a 100% stock dividend in the
form of a two-for-one stock split to be distributed June 15, 1998 to all
shareholders of record as of June 1, 1998. All applicable share and per share
data have been adjusted for the stock dividend.
During the year ended September 30, 1999, the Board of Directors authorized a
stock repurchase program under which up to 10%, or 229,790 shares, of the then
outstanding shares of the Company's stock may be repurchased. During 2000,
23,800 shares were repurchased for an aggregate amount of approximately
$265,000.
Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
Year ended September 30, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings
Income available to common shareholders $2,249,000 $2,191,000 $1,973,000
===============================================================================================================================
Weighted average share outstandings 2,076,902 2,167,256 2,182,617
===============================================================================================================================
Basic earnings per share $ 1.08 $ 1.01 $ .90
===============================================================================================================================
Diluted earnings per share
Income available to common shareholders $2,249,000 $2,191,000 $1,973,000
===============================================================================================================================
Weighted average shares outstanding 2,076,902 2,167,256 2,182,617
Dilutive effect of RRP plan shares 1,619 17,073 43,238
Dilutive effect of stock options 79,656 100,672 93,887
-------------------------------------------------------------------------------------------------------------------------------
Total weighted average shares outstanding 2,158,177 2,285,001 2,319,742
===============================================================================================================================
Diluted earnings per share $ 1.04 $ .96 $ .85
===============================================================================================================================
</TABLE>
36
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
17. Condensed Parent Company Information
Condensed financial information is shown for the Parent Company as follows:
Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
September 30, 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 1,363 $ 99
Securities 103 90
Investment in Savings Bank subsidiary 21,194 18,896
Loan to Savings Bank subsidiary - 100
Dividend receivable from Savings Bank subsidiary - 2,307
Other assets 342 475
-------------------------------------------------------------------------------------------------------------------------------
Total assets $ 23,002 $ 21,967
===============================================================================================================================
Liabilities and stockholders' equity
Other liabilities $ 231 $ 705
Dividends payable 215 196
Stockholders' equity 22,556 21,066
-------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $23,002 $21,967
===============================================================================================================================
</TABLE>
37
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
17. Condensed Parent Company Information (continued)
Condensed Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
Year Ended September 30, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Interest
Savings Bank's ESOP loan $ 24 $ 29 $ 34
Loan to Savings Bank subsidiary 1 108 170
Other 42 55 57
-------------------------------------------------------------------------------------------------------------------------------
Total income 67 192 261
-------------------------------------------------------------------------------------------------------------------------------
Expenses
Compensation and employee benefits 4 6 -
Professional fees 57 89 108
Other operating expenses 37 34 25
-------------------------------------------------------------------------------------------------------------------------------
Total expenses 98 129 133
-------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before income taxes and equity in
undistributed net income of Savings Bank subsidiary (31) 63 128
Provision for income taxes (3) 27 48
Equity in undistributed net income of Savings Bank subsidiary 2,277 2,155 1,893
-------------------------------------------------------------------------------------------------------------------------------
Net income $2,249 $2,191 $1,973
===============================================================================================================================
</TABLE>
38
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
17. Condensed Parent Company Information (continued)
Condensed Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended September 30, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $2,249 $2,191 $1,973
Adjustments
Equity in undistributed net income of Savings Bank subsidiary (2,277) (2,155) (1,893)
(Increase) decrease in other assets 133 (371) 50
Increase (decrease) in other liabilities (486) 281 (76)
Subsidiary dividend payment 2,307 - -
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by operating activities 1,926 (54) 54
-------------------------------------------------------------------------------------------------------------------------------
Investing activities
Loans originated, net of principal repayments 180 1,980 80
Purchase of Central Virginia Financial Services stock - 1 -
-------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 180 1,981 80
-------------------------------------------------------------------------------------------------------------------------------
Financing activities
Purchase of stock, by RRP - - (86)
Dividends paid (820) (774) (665)
Repurchase of stock (264) (1,764) -
RRP vesting 38 96 (57)
ESOP note payment 204 195 235
Exercise of options - 40 103
-------------------------------------------------------------------------------------------------------------------------------
Net cash absorbed by financing activities (842) (2,207) (470)
-------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,264 (280) (336)
Cash and cash equivalents, beginning of year 99 379 715
-------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $1,363 $ 99 $ 379
===============================================================================================================================
</TABLE>
39
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
18. Selected Quarterly Financial Data (Unaudited)
Condensed quarterly consolidated financial data, in thousands (except per share
data), is shown as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Year ended September 30, 2000 Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 3,108 $ 3,218 $ 3,429 $ 3,613
Total interest expense 1,613 1,700 1,828 1,984
-------------------------------------------------------------------------------------------------------------------------------
Net interest income 1,495 1,518 1,601 1,629
Provision for credit losses 30 30 30 30
-------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for credit losses 1,465 1,488 1,571 1,599
Noninterest income 285 250 254 251
Noninterest expense 886 864 826 908
-------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 864 874 999 942
Provision for income taxes 353 329 381 367
-------------------------------------------------------------------------------------------------------------------------------
Net income $ 511 $ 545 $ 618 $ 575
===============================================================================================================================
Cash dividends declared per share $ .09 $ .10 $ .10 $ .10
===============================================================================================================================
Basic earnings per share $ .24 $ .27 $ .30 $ .27
Diluted earnings per share $ .23 $ .26 $ .29 $ .26
===============================================================================================================================
</TABLE>
40
<PAGE>
Bedford Bancshares, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
(continued)
--------------------------------------------------------------------------------
18. Selected Quarterly Financial Data (Unaudited) (continued)
<TABLE>
<CAPTION>
First Second Third Fourth
Year ended September 30, 1999 Quarter Quarter Quarter Quarter
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 2,982 $ 2,946 $ 2,961 $ 3,005
Total interest expense 1,531 1,488 1,494 1,518
-------------------------------------------------------------------------------------------------------------------------------
Net interest income 1,451 1,458 1,467 1,487
Provision for credit losses 23 22 22 23
-------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for credit losses 1,428 1,436 1,445 1,464
Noninterest income 270 258 241 300
Noninterest expense 848 841 809 830
-------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 850 853 877 934
Provision for income taxes 323 323 333 344
-------------------------------------------------------------------------------------------------------------------------------
Net income $ 527 $ 530 $ 544 $ 590
===============================================================================================================================
Cash dividends declared per share $ .08 $ .09 $ .09 $ .09
===============================================================================================================================
Basic earnings per share $ .24 $ .24 $ .25 $ .28
Diluted earnings per share $ .23 $ .23 $ .24 $ .26
===============================================================================================================================
</TABLE>
41
