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