<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1996
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Commission file number 0-27098
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FIRST SAVINGS BANCORP, INC.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1842701
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
205 S.E. Broad Street, P.O. Box 1657
Southern Pines, North Carolina 28388
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (910) 692-6222
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Securities Registered Pursuant to Section 12(b) of the Act: None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
$56,671,200 common stock, no par value, based on the closing price of such
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common stock on August 30, 1996.
- --------------------------------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
3,744,000 shares of common stock, no par value, outstanding at September 1,
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1996.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report of First Savings Bancorp, Inc. for the year ended
June 30, 1996, are incorporated by reference into Part I, Part II and Part IV.
Portions of the Proxy Statement for the 1996 Annual Meeting of Shareholders of
First Savings Bancorp, Inc. to be held on October 23, 1996, are incorporated by
reference into Part III.
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PART I
ITEM 1. BUSINESS
General
First Savings Bancorp, Inc. (the "Holding Company") is a savings bank
holding company registered with the Board of Governors of the Federal Reserve
System (the "Federal Reserve") under the Bank Holding Company Act of 1956, as
amended (the "BHCA"), and the savings bank holding company laws of North
Carolina. The Holding Company's office is located at 205 S.E. Broad Street,
Southern Pines, North Carolina. The Holding Company's activities consist of
investing the proceeds of its initial public offering which were retained at the
holding company level and owning First Savings Bank of Moore County, Inc., SSB
(the "Bank"). The Holding Company's principal sources of income are earnings on
its investments. In addition, the Holding Company receives any dividends which
are declared and paid by the Bank on its capital stock.
The Bank was originally chartered in 1922. It is a member of the
Federal Home Loan Bank ("FHLB") system and its accounts are federally insured up
to allowable limits. The Bank is primarily engaged in soliciting deposit
accounts from the general public, making loans primarily secured by residential
real estate and making limited types of consumer loans.
The operations of the Bank and depository institutions in general are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of depository institution regulatory agencies, including the
Federal Reserve, the Federal Deposit Insurance Corporation (the "FDIC") and the
North Carolina Administrator, Savings Institutions Division, North Carolina
Department of Commerce (the "Administrator"). Deposit flows and cost of funds
are influenced by interest rates on competing investments and general market
rates of interest. Lending activities are affected by the demand for financing
of real estate and other types of loans, which in turn are affected by the
interest rates at which such financing may be offered and other factors
affecting local demand and availability of funds.
The Bank conducts its business through five offices in Southern Pines,
Pinehurst, Carthage and West End, North Carolina.
The Holding Company and the Bank are collectively referred to herein
as "First Savings."
Market Area
First Savings' primary market area consists of Moore County, North
Carolina. Moore County is home to many retirement communities and, with its many
renowned golf courses in Pinehurst and Southern Pines, has an active tourist and
convention business. As a result, the economy of Moore County is primarily
service oriented. However, there is also employment in manufacturing,
agricultural and governmental activities. Major employers of First Savings'
market area include Resorts of Pinehurst, Moore County Regional Hospital, Ithaca
Industries, Inc., JPS Carpets, Perdue, Inc. and Stanly Furniture Company.
Lending Activities
General. First Savings' primary source of revenue is interest and fee
income from its real estate lending activities, consisting primarily of mortgage
loans for the purchase, refinancing or construction of one-to-four family
residential real property located in its primary market area. First Savings
also makes loans secured by multi-family residential and non-residential real
estate, home equity and home improvement loans, savings account loans,
installment loans and credit card loans. As a result, over 99% of First
Savings' loan portfolio is secured by real estate. As of June 30, 1996, over
99% of the net amount of First Savings' real estate loan portfolio was secured
by properties in North Carolina. On June 30, 1996, the largest amount First
Savings had outstanding to any one borrower and its affiliates was
3
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approximately $1,100,000. In addition to interest earned on loans, First
Savings receives fees in connection with loan originations, loan modifications,
late payments, loan assumptions and other miscellaneous services.
Loan Portfolio Composition. First Savings' consolidated net loan
portfolio totalled approximately $177.4 million at June 30, 1996 representing
69.1% of First Savings' total assets. At June 30, 1996, approximately 73.5% of
First Savings' net loan portfolio was composed of adjustable rate loans, and
approximately 26.5% of First Savings' net loan portfolio was composed of fixed
rate loans. At June 30, 1996, approximately $151.9 million, or 85.6%, of First
Savings' net loan portfolio was composed of one-to-four family residential real
estate loans. On such date, approximately $12.4 million, or 7.0%, of First
Savings' net loan portfolio was composed of multi-family residential and non-
residential real estate loans.
The following table sets forth the composition of First Savings' loan
portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
- --------------------------------------------------------------------------------------------------------------------
1995 1996 1994 1993 1992
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% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Residential 1-4
family............ $151,934 85.63% $141,814 88.76% $127,987 89.64% $120,877 86.34% $117,571 89.07%
Multi-family (5 or
more units)....... 3,070 1.73 2,272 1.42 3,393 2.37 2,573 1.84 2,971 2.25
Construction........ 8,123 4.58 3,992 2.50 2,027 1.42 3,268 2.34 2,258 1.71
Commercial real
estate and other
properties........ 12,028 6.78 11,844 7.41 11,022 7.72 12,227 8.73 7,604 5.76
Home equity and
property
improvement....... 5,607 3.16 4,066 2.55 2,852 2.00 2,863 2.04 2,568 1.95
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate
loans............. 180,762 101.88 163,988 102.64 147,281 103.15 141,808 101.29 132,972 100.74
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Other:
Savings account
loans............. 875 .49 703 .44 604 .42 824 .59 788 .60
Installment loans.... 351 .20 111 .07 -- -- -- -- -- --
Credit card loans.... 520 .29 -- -- -- -- -- -- -- --
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total other loans... 1,746 .98 814 .51 604 .42 824 .59 788 .60
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Less:
Unearned fees and
discounts......... 509 .29 458 .29 369 .26 246 .18 192 .15
Loans in process.... 3,959 2.23 3,958 2.48 4,128 2.89 1,752 1.25 1,500 1.14
Allowance for
loan losses....... 609 .34 609 .38 609 .42 630 .45 66 .05
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total reductions.... 5,077 2.86 5,025 3.15 5,106 3.57 2,628 1.88 1,758 1.34
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans
receivable, net... $177,431 100.00% $159,777 100.00% $142,779 100.00% $140,004 100.00% $132,002 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
4
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The following table sets forth the time to contractual maturity or repricing
of First Savings' loan portfolio at June 30, 1996. Loans which have adjustable
rates are shown as being due in the period during which rates are next subject
to change while fixed rate and other loans are shown as due in the period of
contractual maturity. The table does not include prepayments or scheduled
principal repayments. Prepayments and scheduled principal repayments in the
loan portfolio totalled $35.4 million, $25.7 million and $37.4 million in fiscal
years 1996, 1995 and 1994, respectively. Amounts in the table are net of loans
in process and net of unamortized loan fees.
<TABLE>
<CAPTION>
At June 30, 1996
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Over 1 Over 3 Over 5
One Year Year to Years to Years to Over 10
or Less 3 Years 5 Years 10 Years Years Total
-------- ------- -------- -------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed rate 1-4 family residential....... $ 61 $ 529 $ 919 $10,707 $27,802 $ 40,018
Adjustable rate 1-4 family residential.. 25,953 51,740 7,783 21,777 2,100 110,353
Home equity and property improvement.... 5,606 -- -- -- -- 5,606
Construction............................ 4,164 -- -- -- -- 4,164
Multi-family (5 or more units).......... 1,080 502 270 79 1,117 3,048
Commercial.............................. 3,622 3,901 1,333 659 3,589 13,104
Other loans............................. 565 80 1,098 4 -- 1,747
------- ------- ------- ------- ------- --------
$42,051 $56,752 $11,403 $33,226 $34,608 $178,040
======= ======= ======= ======= ======= ========
</TABLE>
The following table sets forth the dollar amount at June 30, 1996 of all
loans maturing or repricing on or after June 30, 1996 which have fixed or
adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Rates Adjustable Rates
----------- ----------------
(In Thousands)
<S> <C> <C>
Mortgage loans/1/............................... $40,018 $120,123
Other loans..................................... 7,109 10,790
------- --------
$47,127 $130,913
======= ========
</TABLE>
/1/Includes only loans secured by residential 1-4 family properties.
Origination, Purchase and Sale of Loans. First Savings does not originate
its loans with the intention that they will be sold in the secondary market.
Loans generally are not originated in conformity with purchase requirements of
the Federal Home Loan Mortgage Corporation ("FHLMC") or Federal National
Mortgage Association ("FNMA"). First Savings originates loans which satisfy its
underwriting requirements which are tailored for its local community. As a
result, many of such loans do not satisfy various requirements imposed by the
FHLMC or the FNMA. Accordingly, such loans are not readily saleable in the
secondary market. Such loans could be sold only after incurring certain costs,
such as costs for surveys and title insurance and/or discounting the purchase
price.
First Savings purchased loan participations totaling $1,570,000, $99,000
and $50,000 during the years ended June 30, 1996, 1995 and 1994, respectively.
All such loan participations are secured by real property located in North
Carolina.
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The table below sets forth First Savings' total loan origination, purchase
and sale activity and loan portfolio repayment experience during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------
1996 1995 1994
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Loans receivable, net, beginning of period..... $159,777 $142,779 $140,004
Loan Originations:
Residential 1-4 family....................... 32,288 27,312 28,774
Adjustable home equity....................... 6,689 3,472 1,813
Multi-family (5 or more units)............... -- -- 1,628
Commercial real estate and other properties.. 213 1,256 580
Construction................................. 11,266 10,659 7,450
Installment and other loans.................. 1,097 99 --
Total originations........................... 51,553 42,798 40,245
-------- -------- --------
Loans purchased................................ 1,570 29 50
Loan sales..................................... -- -- --
Principal repayments........................... (35,417) (25,741) (37,388)
Other changes, net/1/.......................... (52) (88) (132)
-------- -------- --------
Loans receivable, net, end of period........... $177,431 $159,777 $142,779
======== ======== ========
</TABLE>
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/1/Includes changes in deferred loan fees, allowance for loan losses, unearned
discounts and loans transferred to real estate owned.
One-to-Four Family Residential Real Estate Lending. First Savings' primary
lending activity is the origination of first mortgage loans to enable borrowers
to purchase or refinance one-to-four family residential real property. On June
30, 1996, approximately $151.9 million, or 85.6% of First Savings' total net
loan portfolio consisted of one-to-four family residential mortgage loans.
These include both loans secured by detached single-family residences and
condominiums and loans secured by individually-owned residences in attached
housing containing not more than four separate dwelling units. Consistent with
First Savings' emphasis on being a community-oriented financial institution, it
is and has been First Savings' strategy to focus its lending efforts in Moore
County, North Carolina.
The one-to-four family residential mortgage loans originated by First
Savings generally have loan-to-value ratios of no more than 80%. The fixed rate
loans originated by First Savings have terms of up to 30 years. In addition,
First Savings originates adjustable rate mortgage loans having terms of up to 30
years.
Substantially all of the fixed interest rate loans in First Savings' loan
portfolio contain a due-on-sale clause providing that First Savings may declare
the unpaid amount due and payable upon the sale or transfer of any interest in
the property securing the loan. First Savings could enforce these due-on-sale
clauses to the extent permitted by law.
First Savings has been making adjustable rate mortgage loans since 1984.
Interest rates on most adjustable rate one-to-four family residential mortgage
loans are tied to the Treasury securities index adjusted to a constant maturity
plus a margin. Rates generally adjust every one, three or five years. There
are generally caps which limit the amount
6
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of increases at one time and over the life of the loan. The terms and
conditions of First Savings' adjustable rate loans, including the applicable
index, margin and rate caps, may vary over time. Adjustable rate loans are
generally considered to involve a greater degree of risk than fixed rate loans
because borrowers may have difficulty meeting their payment obligations if
interest rates and required payment amounts increase substantially.
While one-to-four family residential loans are normally originated with 15
to 30 year terms, such loans customarily remain outstanding for substantially
shorter periods because borrowers often prepay their loans in full upon sale of
the property pledged as security or upon refinancing the original loan. Thus,
average loan maturity is a function of, among other factors, the level of
purchase and sale activity in the real estate market, prevailing interest rates,
and the interest rates payable on outstanding loans. The thrift and mortgage
banking industries have generally used twelve-year and seven-year average loan
lives in calculations calling for prepayment assumptions for 30-year residential
loans and 15-year residential loans, respectively. Management believes that
First Savings' recent loan prepayment experience has been shorter than these
assumed average loan lives due to recent periods of low interest rates and
resulting high rates of refinancing.
First Savings generally does not require title insurance for its one-to-
four family residential loans, but instead requires an attorney's title opinion.
First Savings also generally requires that fire and extended coverage casualty
insurance (and, if appropriate, flood insurance) be maintained in an amount at
least equal to the loan amount or replacement cost of the improvements on the
property securing loans, whichever is greater. On loans with loan-to-value
ratios in excess of 85%, First Savings generally requires that private mortgage
insurance be obtained.
Home Equity Lines of Credit and Property Improvement Loans. Home equity
and property improvement loans comprised approximately $5.6 million, or 3% of
First Savings' net loan portfolio, as of June 30, 1996. These loans are
generally secured by subordinate liens against residential dwellings. Most of
the loans which are secured by subordinate liens are secured by properties
against which First Savings holds the first lien. Home equity lines of credit
have terms of up to 15 years and interest rates which are adjustable based upon
prime rates. Because these loans involve lines of credit which can be drawn
over a period of time, First Savings faces additional risks associated with
changes in the borrower's financial condition. Because home equity loans have
adjustable rates with no rate caps (other than usury limitations), increased
delinquencies could occur if interest rates increase and borrowers are unable to
satisfy higher payment requirements. Home equity loans are generally limited so
that the amount of such loans, along with any senior indebtedness, does not
exceed 75% of the value of the real estate security. Property improvement loans
generally have terms of up to 15 years and both fixed and adjustable interest
rates. The loans are generally underwritten applying the same standards as are
applied to one-to-four family residential real estate loans.
Commercial Real Estate Lending. On June 30, 1996, First Savings had
approximately $12.0 million in outstanding loans secured by commercial real
estate, comprising approximately 7% of its net loan portfolio. These loans are
secured by churches, office buildings, retail establishments and other
commercial real estate properties. These loans have both fixed and adjustable
interest rates. The loans generally do not exceed 75% of the appraised value of
the real estate security as determined by recent appraisals. Loans secured by
commercial properties generally are larger than one-to-four family residential
loans and involve a greater degree of risk. Payments on these loans depend to a
large degree on results of operations and management of the properties and may
be affected to a greater extent by adverse conditions in the real estate market
or the economy in general.
Multi-Family Residential Real Estate Lending. On June 30, 1996, First
Savings had approximately $3.0 million in outstanding loans secured by multi-
family residential real estate, comprising approximately 2% of its net loan
portfolio. These loans are secured by apartment complexes and other multi-
family residential properties and have both fixed and adjustable interest rates.
The loans generally do not exceed 75% of the appraised value of the real estate
security as determined by recent appraisals. Loans secured by multi-family
residential properties generally are larger than one-to-four family residential
loans and involve a greater degree of risk. Payments on these loans depend to a
large degree on results of operations and management of the properties and may
be affected to a greater extent by adverse conditions in the real estate market
or the economy in general.
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Construction-Permanent Lending. On June 30, 1996, First Savings had
approximately $8.1 million in outstanding construction loans, representing 5% of
First Savings' net loan portfolio. Most of these loans are for construction of
single-family dwellings. These loans, which are generally made to persons
building residences for their own occupancy, generally provide for the payment
of interest only during a construction period, after which the loans convert to
a permanent loan at fixed or adjustable interest rates having terms similar to
those of other one-to-four family residential loans. First Savings does not
make short-term construction loans solely to provide construction period
financing and generally does not make "spec loans" to contractors developing
property for resale.
Construction-permanent loans are generally considered to involve a higher
degree of risk than long-term financing secured by real estate which is already
occupied. A lender's risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at the
completion of construction and the estimated cost (including interest) of
construction. If the estimate of construction costs proves to be inaccurate,
the lender may be required to advance funds beyond the amount originally
committed in order to permit completion of construction. If the estimate of
anticipated value proves to be inaccurate, the lender may have security which
has value insufficient to assure full repayment. In addition, repayment of
loans made to investors to finance construction of properties is often dependent
upon the builder's ability to sell the property once construction is completed.
Savings Account, Installment Loans and Credit Card Loans. First Savings
also offers savings account loans, which are loans secured by deposit accounts,
and has made some unsecured installment loans. On June 30, 1996, First Savings
had $875,000 in savings accounts loans outstanding, $351 in installment loans
outstanding and $520,000 in credit card loans outstanding. The interest rate on
savings account loans is generally 2% above the interest rate being paid on the
deposit account serving as collateral, and the maximum amount of these loans is
90% of the related deposit account.
Loan Solicitation, Processing and Underwriting. Loan originations are
derived from a number of sources such as referrals from real estate brokers,
direct solicitations by First Savings' loan officers, existing depositors and
borrowers, builders, attorneys, walk-in customers and in some instances, other
lenders.
During its loan approval process, First Savings places significant emphasis
on the value of the collateral which will secure the loan. First Savings also
assesses the applicant's ability to make principal and interest payments on the
loan. First Savings obtains detailed written loan applications to determine the
borrower's ability to repay and verifies responses on the loan application
through the use of credit reports, financial statements and other confirmations.
Under current practice, the responsible officer or loan officer of First Savings
analyzes the loan application and the property involved, and an appraiser
inspects and appraises the property. First Savings requires appraisals on all
real estate loans. Some appraisals are performed by employees of the institution
when permitted by applicable regulations. First Savings also obtains
information concerning the income, financial condition, employment and the
credit history of the applicant. After this review, all loans, other than home
equity line of credit loans, are approved by the Board of Directors. Home
equity line of credit loans may be approved by a loan officer and the Chief
Executive Officer.
Normally, upon approval of a residential loan application, First Savings
gives a commitment to the applicant that it will make the approved loan at a
stipulated rate at any time within a 60-day period from the date the application
is received. The loan is typically funded at a rate of interest and on other
terms which are based on market conditions existing as of the date of the
commitment. First Savings also has outstanding commitments on its home equity
line of credit loans and credit card loans. As of June 30, 1996, First Savings'
outstanding loan commitments, including unused home equity lines of credit and
unused credit card lines of credit, totalled approximately $16.0 million.
First Savings originates loans with the intention that they will be held in
its portfolio. First Savings' underwriting is therefore tailored to meet the
needs of its local community, and there is a strong focus on collateral values.
Loans generally are not originated in conformity with the purchase requirements
of FHLMC or FNMA. See " - Lending Activities - Origination, Purchase and Sale
of Loans."
8
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Interest Rates, Points and Fees. Interest rates and fees charged on First
Savings' loans are affected primarily by the market demand for loans,
competition, the supply of money available for lending purposes and First
Savings' cost of funds. These factors are affected by, among other things,
general economic conditions and the policies of the federal government,
including the Federal Reserve, tax policies and governmental budgetary matters.
In addition to earning interest on loans, First Savings receives fees in
connection with originating loans and making loan commitments. Fees for
prepayments of loans, loan modifications, late payments, loan assumptions and
other miscellaneous services in connection with loans are also charged by First
Savings.
Nonperforming Assets and Asset Classification. When a borrower fails to
make a required payment on a loan and does not cure the delinquency promptly,
the loan is classified as delinquent. In this event, the normal procedure
followed by First Savings is to make contact with the borrower at prescribed
intervals in an effort to bring the loan to a current status. In most cases,
delinquencies are cured promptly. If a delinquency is not cured, First Savings
normally, subject to any required prior notice to the borrower, commences
foreclosure proceedings. If the loan is not reinstated within the time
permitted for reinstatement, or the property is not redeemed prior to sale, the
property may be sold at a foreclosure sale. In foreclosure sales, First Savings
may acquire title to the property through foreclosure, in which case the
property so acquired is offered for sale and may be financed by a loan involving
terms more favorable to the borrower than those normally offered. Any property
acquired as a result of foreclosure or by deed in lieu of foreclosure is
classified as real estate owned until such time as it is sold or otherwise
disposed of by First Savings to recover its investment. As of June 30, 1996,
First Savings did not own any real estate acquired in settlement of loans. Any
real estate acquired in settlement of loans is initially recorded at the lower
of the loan balance plus unpaid accrued interest or the estimated fair value at
the time of acquisition and is subsequently reduced by additional allowances
which are charged to earnings if the estimated fair value of the property
declines below its initial value. Subsequent costs directly relating to
development and improvement of property are capitalized (not to exceed fair
value), whereas costs relating to holding property are expensed.
Since early 1993, First Savings' general policy has been to place a loan on
nonaccrual status when the loan becomes 90 days delinquent. Interest on loans
that are contractually 90 days or more past due is reserved through an allowance
account. The allowance is established by a charge to interest income equal to
all interest previously accrued, and income is subsequently recognized only to
the extent cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is back to
normal, in which case the loan is returned to accrual status.
Additional interest income relating to First Savings' nonaccrual loans for
the year ended June 30, 1996 of approximately $2,300 would have been earned if
the loans had been current in accordance with their terms.
The following table sets forth information with respect to nonperforming
assets identified by First Savings, including nonaccrual loans, real estate
owned and nonperforming investments in real estate, at the dates indicated.
During the periods shown, First Savings had no "restructured loans" as defined
by Statement of Financial Accounting Standards No. 15. As is set forth above,
prior to 1993, First Savings did not place loans in a nonaccrual status simply
because they became 90 days delinquent. This policy was changed in 1993, and
this change in policy is reflected in the table.
9
<PAGE>
<TABLE>
<CAPTION>
At June 30,
----------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate -
Residential............................. $ 134 $ 139 $ 329 $ 728 $ 79
Commercial.............................. 133 -- 156 --
Commercial business....................... -- -- -- --
Consumer.................................. -- -- -- --
----- ----- ----- ----- -----
Total.................................. 134 272 329 884 79
----- ----- ----- ----- -----
Accruing loans which are contractually past
due 90 days or more:
Real estate -
Residential............................. -- -- -- -- 281
Commercial.............................. -- -- -- -- --
Commercial business....................... -- -- -- -- --
Consumer.................................. -- -- -- -- --
----- ----- ----- ----- -----
Total.................................. -- -- -- -- 281
----- ----- ----- ----- -----
Total of nonaccrual and 90 days past due
loans.................................... 134 272 329 884 360
----- ----- ----- ----- -----
Real estate owned........................... -- -- -- -- --
Other nonperforming assets.................. -- -- -- -- --
----- ----- ----- ----- -----
Total nonperforming assets................ $ 134 $ 272 $ 329 $ 884 $ 360
----- ----- ----- ----- -----
Total loans delinquent 90 days or more to
net loans.................................. .08% .17% .23% .63% .21%
Total loans delinquent 90 days or more to
total assets............................... .05% .11% .13% .40% .17%
Total nonperforming assets to total assets.. .05% .11% .13% .40% .17%
</TABLE>
Applicable regulations require each insured savings institution to
"classify" its own assets on a regular basis. In addition, in connection with
examinations of savings institutions, regulatory examiners have authority to
identify problem assets and, if appropriate, classify them. Problem assets are
classified as "substandard," "doubtful" or "loss," depending on the presence of
certain characteristics as discussed below.
An asset is considered "substandard" if not adequately protected by
the current net worth and paying capacity of the obligor or the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful" have all of
the weaknesses inherent in those classified "substandard" with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a loss reserve is not warranted.
As of June 30, 1996, First Savings had $206,434 of loans classified as
"substandard" and no loans classified as "doubtful" or "loss." Total classified
assets as of June 30, 1996 and 1995 were $133,510 and $271,615, respectively.
10
<PAGE>
In connection with the filing of periodic reports with regulatory
agencies, First Savings reports any assets which possess credit deficiencies or
potential weaknesses deserving close attention by management. These assets may
be considered "special mention" assets and do not yet warrant adverse
classification. At June 30, 1996, First Savings had $873,203 of loans in the
"special mention" category. Prior to July 1993, First Savings did not classify
loans as "special mention."
When an insured institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. These allowances represent
loss allowances which have been established to recognize the inherent risks
associated with lending activities and the risks associated with particular
problem assets. When an insured institution classifies problem assets as
"loss," it charges off the balance of the asset. First Savings' determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the FDIC and the Administrator which can
order the establishment of additional loss allowances.
Allowance for Loan Losses. In originating loans, First Savings
recognizes that credit losses will be experienced and that the risk of loss will
vary with, among other things, the type of loan being made, the creditworthiness
of the borrower over the term of the loan and, in the case of a secured loan,
the quality of the security for the loan as well as general economic conditions.
It is management's policy to maintain an adequate allowance for loan losses
based on, among other things, First Savings' historical loan loss experience,
evaluation of economic conditions and regular review of delinquencies and loan
portfolio quality. Specific allowances are provided for individual loans when
ultimate collection is considered questionable by management after reviewing the
current status of loans which are contractually past due and considering the net
realizable value of the security for the loans.
In fiscal 1993, management significantly increased its allowance for
loan losses after reviewing general economic conditions characterized by the
continuing slow economic recovery, industry standards and allowances of
comparable institutions in its peer group. During the 1994 and 1995 fiscal
years, First Savings did not increase this allowance. Management continues to
actively monitor First Savings' asset quality, to charge off loans against the
allowance for loan losses when appropriate and to provide specific loss reserves
when necessary. Although management believes it uses the best information
available to make determinations with respect to the allowance for loan losses,
future adjustments may be necessary if economic conditions differ substantially
from the economic conditions in the assumptions used in making the initial
determinations.
11
<PAGE>
The following table describes the activity related to First Savings'
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period............. $ 609 $ 609 $ 630 $ 66 $ 3
Provision for loan losses and losses on
foreclosed real estate.................. -- -- -- 564 64
Charge-off:
Residential 1-4 family................. -- 4 21 -- --
Commercial real estate and other....... -- -- -- -- 1
properties
Home equity and property improvements.. -- -- -- -- --
Construction........................... -- -- -- -- --
Savings accounts....................... -- -- -- -- --
Other consumer......................... -- -- -- -- --
Commercial............................. -- -- -- -- --
------ ----- ----- ----- -----
609 605 609 630 66
------ ----- ----- ----- -----
Recoveries:
Residential 1-4 family................. -- 4 -- -- --
Commercial real estate and other
properties............................ -- -- -- -- --
Construction........................... -- -- -- -- --
Savings accounts....................... -- -- -- -- --
Other consumer......................... -- -- -- -- --
Commercial............................. -- -- -- -- --
------ ----- ----- ----- -----
-- 4 -- -- --
------ ----- ----- ----- -----
Net charge-offs.......................... -- -- 21 -- 1
------ ----- ----- ----- -----
Balance at end of period................. $ 609 $ 609 $ 609 $ 630 $ 66
====== ===== ===== ===== =====
Ratio of net charge-offs during the
period to average loans outstanding
during the period....................... .00% .00% .01% .00% .00%
====== ===== ===== ===== =====
</TABLE>
12
<PAGE>
The following table sets forth the composition of the allowance for loan
losses by type of loan at the dates indicated. The allowance for loan losses is
allocated to specific types of loans for statistical purposes only and may be
applied to loan losses incurred in any category.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------
1996 1995 1994
--------------------- -------------------- --------------------
Amount of Amount Amount
Loans to Amount of Loans Amount of Loans
Amount of Gross of to Gross of to Gross
Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family...................... $503 82.59% $449 73.73% $484 79.47%
Commercial real estate and other property... 50 8.21 139 22.82 120 19.70
Home equity and property improvement........ 17 2.79 11 1.81 -- --
Construction................................ 15 2.47 10 1.64 5 .83
---- ------ ---- ------ ---- ------
Total real estate loans....................... 585 96.06 609 100.00 609 100.00
---- ------ ---- ------ ---- ------
Other loans................................... 24 3.94 -- -- -- --
---- ------
Total allowance for loan losses............... $609 100.00% $609 100.00% $609 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
Investments and Mortgage-Backed Securities
Interest income from mortgage-backed securities and investment securities
generally provides the second largest source of income to First Savings after
interest on loans. In addition, First Savings receives interest income from
interest-bearing deposits in other financial institutions.
On June 30, 1996, First Savings' investment securities portfolio consisted
of U.S. government and U.S. agency obligations, North Carolina and municipal
obligations and FHLB of Atlanta stock. There was a significant increase in
First Savings' investment securities portfolio during fiscal 1994 as a result of
First Savings' conversion to stock form on January 6, 1994. As a result of this
conversion, First Savings received net proceeds from the issuance of its common
stock of approximately $36.0 million.
As of June 30, 1996, $8.2 million of investment securities were pledged as
collateral for individual and public deposits.
As a member of the FHLB of Atlanta, First Savings is required to maintain
an investment in stock of the FHLB of Atlanta equal to the greater of 1% of
First Savings' outstanding home loans or 5% of its outstanding advances from the
FHLB of Atlanta. No ready market exists for such stock, which is carried at
cost. As of June 30, 1996, First Savings' investment in stock of the FHLB of
Atlanta was approximately $1.9 million. Under FIRREA, the regional FHLBs,
including the FHLB of Atlanta, are required to assist in raising funds to
resolve problems of insolvent thrift institutions and to finance low income
housing. As a result, the amounts of dividends paid on stock of the FHLB of
Atlanta could be reduced in the future.
North Carolina regulations require First Savings to maintain a minimum
amount of liquid assets which may be invested in specified short-term
securities. See "SUPERVISION AND REGULATION - Liquidity." As is described
above, First Savings is also permitted to make certain other securities
investments. First Savings has adopted an investment policy which is
implemented by First Savings' investment committee, which meets at least
monthly. First Savings' investment strategy is intended, among other things, to
(i) provide and maintain liquidity, (ii) maintain a
13
<PAGE>
balance of high quality, diversified investments to minimize risk, (iii) provide
collateral for pledging requirements, (iv) serve as a countercyclical balance to
earnings from lending operations, (v) maximize returns, and (vi) manage interest
rate risk. In terms of priorities, safety is considered more important than
liquidity or return on investment. First Savings does not engage in hedging
activities.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments
in Debt and Equity Securities" which addresses the accounting and reporting for
investments in equity securities that have readily determinable fair values and
for all investments in debt securities. These investments are to be classified
in three categories and accounted for as follows: (i) debt securities that the
entity has the positive intent and ability to hold to maturity are classified as
held-to-maturity and reported at amortized cost; (ii) debt and equity securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading securities and reported at fair value, with net
unrealized gains and losses included in earnings; and (iii) debt and equity
securities not classified as either held-to-maturity or trading securities are
classified as securities available-for-sale and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of equity. First Savings has no trading securities. First Savings
adopted SFAS 115 on July 1, 1994.
Securities classified as held-to-maturity are reported at cost, adjusted
for amortization of premiums and accretion of discounts which are recognized in
interest income using the interest method over the period to maturity.
Declines in the fair value of individual held-to-maturity and available-
for-sale securities below their costs that are considered to be other than
temporary result in write-downs of the individual securities to their fair
value. The related write-downs are included in earnings as realized losses.
Unrealized holding gains and losses, net of tax, on securities available-for-
sale are reported as a net amount in a separate component of shareholders'
equity until realized. Gains and losses on the sale of securities available-for-
sale are determined using the specific-identification method.
Prior to July 1, 1994, securities held for investment and securities held
for sale were carried at amortized cost and market value, respectively.
Unrealized losses on securities held for sale were included in earnings of the
current period.
14
<PAGE>
The following table sets forth certain information regarding First Savings'
cash investments and the carrying and market values of First Savings' mortgage-
backed securities and investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------------------------
1996 1995 1994
----------------------- ---------------------- ----------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- -------- --------- ------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits in other
financial institutions............. $ 713 $ 713 $ 1,069 $ 1,069 $ 5,832 $ 5,832
======== ======== ======== ======= ======= =======
Securities available-for-sale:
U.S. government and agency
securities........................ $ 63,919 $ 63,889 $ 73,504 $74,156 $ -- $ --
Obligations of states and political
subdivisions...................... 2,150 2,180 2,151 2,218 -- --
Federal Home Loan Bank stock......... 1,930 1,930 1,930 1,930 -- --
-------- -------- -------- ------- -------- -------
Total securities available-for-sale.... $ 67,999 $ 67,999 $ 77,585 $78,304 $ -- $ --
======== ======== ======== ======= ======== =======
Securities held-to-maturity:
U.S. government and agency
securities........................ $ -- $ -- $ 1,999 $ 2,003 $83,591 $81,971
Obligations of states and political
subdivisions...................... -- -- -- -- 2,201 2,238
Federal Home Loan Bank stock......... -- -- -- -- 1,930 1,930
Mortgage-backed securities........... 2,965 3,016 4,484 4,537 5,872 5,961
-------- -------- -------- ------- ------- -------
Total securities held-to-maturity...... $ 2,965 $ 3,016 $ 6,483 $ 6,540 $93,594 $92,100
======== ======== ========= ======= ======= =======
</TABLE>
15
<PAGE>
The following table sets forth certain information regarding First Savings'
cash investments and the carrying value, weighted average yields and contractual
maturities of First Savings' mortgage-backed and investment securities as of
June 30, 1996.
<TABLE>
<CAPTION>
After One Through After Five Through
One Year or Less Five Years Ten Years
-------------------- ------------------- --------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
--------- -------- --------- -------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits
in other financial
institutions............... $ 713 5.22% $ -- -- % $ -- --%
------- ------ ------- ------ ------- ------
Securities
available-for-sale:
U.S. government and
agency securities........ $10,578 5.72% $53,311 6.40% $ -- --%
N.C. State and municipal
obligations(1)........... 710 6.73 -- 7.23 956 5.35
Federal Home Loan Bank
stock.................... 1,930 7.21 514 -- -- --
------- ------ ------- ------ ------- ------
Total securities
available-for-sale......... $13,218 5.99% $53,825 6.34% $ 956 5.35%
------- ------ ------- ------ ------- ------
Securities
held-to-maturity:
Mortgage-backed
securities............... $ 1,128 7.50% $ 581 9.40% $ 650 9.60%
------- ------ ------- ------ ------- ------
Total investments, at
carrying value............. $14,346 $54,406 $ 1,606
------- ------- -------
Total interest-bearing
deposits and investments... $15,059 $54,406 $ 1,606
======= ======= =======
<CAPTION>
After Ten Years Total
---------------------- --------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
--------- --------- ---------- --------
<S> <C> <C> <C> <C>
Interest-bearing deposits
in other financial
institutions............... $ -- --% $ 713 5.22%
------- ------ ------- ------
Securities
available-for-sale:
U.S. government and
agency securities........ $ -- --% $63,889 6.29%
N.C. State and municipal
obligations(1)........... -- -- 2,180 6.24
Federal Home Loan Bank
stock.................... -- -- 1,930 7.21
------- ------ ------- ------
Total securities
available-for-sale......... $ -- --% $67,999 6.31%
------- ------ ------- ------
Securities
held-to-maturity:
Mortgage-backed
securities............... $ 606 10.4% $ 2,965 8.94%
------- ------ ------- ------
Total investments, at
carrying value............. $ 606 $70,964
------- -------
Total interest-bearing
deposits and investments... $ 606 $71,677
======= =======
</TABLE>
(1) Yields on obligations of states and political subdivisions are not
calculated on a tax-equivalent basis.
16
<PAGE>
Deposits and Borrowings
General. Deposits are the primary source of First Savings' funds for
lending and other investment purposes. In addition to deposits, First Savings
derives funds from loan principal repayments, interest payments, interest income
from mortgage-backed securities, investment income, interest from its own
interest-bearing deposits, and otherwise from its operations. Loan repayments
are a relatively stable source of funds while deposit inflows and outflows may
be significantly influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes.
Deposits. On June 30, 1996, 1995 and 1994, First Savings' savings deposits
totalled $187.4 million, $183.1 million and $182.2 million, respectively. The
decrease of approximately $13 million in deposits for the year ended June 30,
1994, was primarily due to the use of these funds by depositors of the Bank for
the purchase of Holding Company common stock in the conversion of the Bank from
mutual to stock ownership on January 6, 1994.
The following table sets forth information relating to First Savings'
deposit flows during the periods shown and total deposits at the end of the
periods shown.
<TABLE>
<CAPTION>
At or For the Year Ended June 30,
-------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Total deposits at beginning of period.... $183,080 $182,199 $195,174 $183,595 $175,694
Net increase (decrease) before interest
credited................................ (3,707) (7,512) (21,086) 2,054 (3,381)
Interest credited........................ 8,051 8,393 8,111 9,525 11,282
-------- -------- -------- -------- --------
Total deposits at end of period.......... $187,424 $183,080 $182,199 $195,174 $183,595
======== ======== ======== ======== ========
</TABLE>
First Savings attracts both short-term and long-term deposits from the
general public by offering a variety of accounts and rates. First Savings
offers passbook savings accounts, checking accounts, money market accounts and
fixed interest rate certificates with varying maturities. All deposit flows are
greatly influenced by economic conditions, the general level of interest rates,
competition and other factors, including the restructuring of the thrift
industry. First Savings' deposits traditionally have been obtained primarily
from its market area. First Savings utilizes traditional marketing methods to
attract new customers and savings deposits, including print media advertising
and direct mailings. First Savings does not advertise for deposits outside of
its local market area and it has no brokered deposits.
17
<PAGE>
The following table sets forth certain information regarding First Savings'
savings deposits at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------ -------------------------
Weighted Weighted Weighted
Average % of Average % of Average % of
Amount Rate Deposits Amount Rate Deposits Amount Rate Deposits
------ --------- --------- -------- --------- --------- -------- --------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand Accounts:
Noninterest-bearing
checking.............. $ 242 -- % .13% $ 887 --% .48% $ 570 --% .31%
Interest-bearing
checking.............. 17,190 1.96 9.17 16,654 2.05 9.10 14,824 2.18 8.14
Money market
accounts.............. 40,639 3.94 21.68 37,706 3.90 20.60 59,301 3.36 32.55
Passbook savings....... 9,999 2.50 5.34 10,482 2.54 5.72 12,282 2.54 6.74
Certificates of
Deposit:
3 months............... 1,398 4.38 .75 1,805 5.08 .99 1,198 3.11 .66
6 months............... 12,891 4.97 6.88 10,232 5.35 5.59 14,296 3.36 7.85
9 months............... 17,305 5.50 9.23 28,089 6.33 15.34 -- -- --
12 months.............. 15,771 5.62 8.42 8,349 5.33 4.56 11,042 3.96 6.06
15 months.............. 26 5.30 .01 -- -- 96 3.65 .05
18 months.............. 29,985 5.69 16.00 25,326 5.58 13.83 24,795 4.64 13.61
24 months.............. 6,619 5.58 3.53 6,800 5.23 3.71 5,064 4.71 2.78
30-96 months........... 35,359 6.26 18.86 36,750 6.36 20.08 38,731 6.41 21.25
------ ------ ------ -------- ---- ------ -------- ---- ------
Total certificates of
deposit............... 119,354 5.77 63.68 117,351 5.94% 64.10 95,222 5.07 52.26
-------- ------- ------ --------- ---- ------ -------- ---- ------
Total Deposits......... $187,424 4.84% 100.00% $183,080 4.97% 100.00% $182,199 4.11% 100.00%
======== ======= ====== ========= ==== ====== ======== ==== ======
</TABLE>
18
<PAGE>
As of June 30, 1996, the aggregate amount outstanding of certificates of
deposit in amounts greater than $100,000 was $20.2 million. Some of these
deposits were deposits of state and local governments which are subject to
rebidding from time to time and to securitization requirements. The following
table presents the maturity of these time certificates of deposit at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
1996
------------------
(In Thousands)
<S> <C>
3 months or less........................................... $ 6,166
Over 3 months through 6 months............................. 2,151
Over 6 months through 12 months............................ 3,713
Over 12 months............................................. 8,146
---------
Total.............................................. $20,176
=========
</TABLE>
The following table sets forth the certificates of deposits in First
Savings classified by rates as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Less than 6% $ 72,756 $ 57,763 $64,452
6% to 7.99% 46,598 59,450 29,269
8% to 9.99% - 138 1,501
-------- -------- -------
Total $119,354 $117,351 $95,222
======== ======== =======
</TABLE>
The following table sets forth the amount and maturities of certificates of
deposit at June 30, 1996.
<TABLE>
<CAPTION>
Amount Due
----------------------------------
Over 1 Over 2
yr. yrs. Percent of Total
1 yr. thru 2 thru 3 Over 3 Certificate
or less yrs. yrs. yrs. Total Accounts
------- ------- ------- ------- ----- ----------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Less than 6% $55,132 $13,864 $ 3,338 $ 422 $ 72,756 60.96 %
6% to 7.99% 21,323 23,745 1,145 385 46,598 39.04
------- ------- ------- ------- -------- -------
Total $76,455 $37,609 $ 4,483 $ 807 $119,354 100.00 %
======= ======= ======= ======= ======== =======
</TABLE>
Borrowings. First Savings is a member of the FHLB of Atlanta, and the
FHLB system functions in a reserve credit capacity for savings institutions. As
a member, First Savings is required to own capital stock in the FHLB of Atlanta
and is authorized to apply for advances from the FHLB of Atlanta on the security
of that stock and a floating lien on certain of its real estate secured loans
and other assets. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage
19
<PAGE>
of an institution's net worth or on the FHLB of Atlanta's assessment of the
institution's creditworthiness. As of June 30, 1996, First Savings had no
obligations outstanding to the FHLB of Atlanta.
Upon First Savings' conversion to the stock form of ownership, the First
Savings Bank of Moore County, Inc., SSB Employee Stock Ownership Plan ("ESOP")
became effective. As part of the conversion, the ESOP borrowed $648,000 from an
independent third party lender and First Savings contributed $72,000 to the
ESOP. This $720,000 was used to purchase 72,000 shares of common stock issued
in the conversion. The note payable to the third party is collateralized by the
common shares purchased by the ESOP with the proceeds. The note will be repaid
principally from First Savings' discretionary contributions to the ESOP over a
period not to exceed ten years. Dividends paid on shares held by the ESOP may
also be used to reduce the note. The note is not guaranteed by First Savings.
Unearned compensation related to the ESOP note payable is amortized on a
straight-line basis over ten years.
Subsidiaries
The Bank has one wholly-owned subsidiary, Moore Service Corporation ("Moore
Service"). Moore Service, a North Carolina corporation, is not active in
producing income, even though it serves as the trustee in deeds of trust
securing loans made by First Savings. At one time Moore Service performed loan
origination and appraisal services for First Savings. During the fiscal years
ended June 30, 1994 and 1995, Moore Service's only income has consisted of
interest income from its deposits in the Bank. The financial statements of
Moore Service are consolidated with those of First Savings. Moore Service has
the same Board of Directors as the Bank, and William E. Samuels, Jr. is its
Chief Executive Officer.
Competition
First Savings faces strong competition both in attracting deposits and
making real estate and other loans. Its most direct competition for deposits
has historically come from other savings institutions, credit unions and
commercial banks located in its primary market area, including large financial
institutions which have greater financial and marketing resources available to
them. First Savings has also faced additional significant competition for
investors' funds from short-term money market securities and other corporate and
government securities. The ability of First Savings to attract and retain
savings deposits depends on its ability to generally provide a rate of return,
liquidity and risk comparable to that offered by competing investment
opportunities. As of June 30, 1996, there were at least 12 other financial
institutions with offices in Moore County, North Carolina. Based upon
comparative data as of June 30, 1995, First Savings had the largest share of
deposits in Moore County, totaling approximately 22% of all deposits in the
county.
Employees
As of June 30, 1996, First Savings had 38 full-time employees and 2 part-
time employees. First Savings provides its employees with a comprehensive
benefits program, including basic and major medical insurance, life and
disability insurance, sick leave, education cost sharing, and payment of certain
civic club dues. In addition, First Savings maintains an employee profit
sharing plan covering all eligible employees. Under this plan, First Savings
annually contributes an amount equal to at least 5% of participants' salaries
and in recent years has contributed 15% of employees' salaries. During the
fiscal years ended June 30, 1996, 1995 and 1994, contributions to this plan were
$93,402, $80,944 and $103,395, respectively. In addition, First Savings pays
discretionary bonuses to all of its employees based upon its after-tax earnings.
In recent years, these bonuses have equalled 4% of after-tax earnings. In
addition, in connection with the conversion of First Savings from mutual to
stock ownership, First Savings adopted the ESOP, a stock based management
recognition plan, stock option plans and a bonus compensation plan which provide
benefits to employees and directors of First Savings. Employees are not
represented by any union or collective bargaining group, and First Savings
considers its employee relations to be good.
20
<PAGE>
Federal Income Taxation
First Savings is subject to the provisions of the Internal Revenue Code of
1986, as amended (the "Code") in the same general manner as other corporations.
However, savings banks which meet certain definitional tests and other
conditions prescribed by the Code may benefit from certain favorable provisions
regarding their deductions from taxable income for annual additions to their bad
debt reserve. A savings bank qualifying under these rules is permitted to
deduct (i) an addition to a reserve for losses on "qualifying real property
loans," (in general, loans secured by interests in real property improved or to
be improved with the proceeds of the loan) (the "qualifying real property
reserve") and (ii) an addition to a reserve for losses on nonqualifying loans.
A savings bank that satisfies certain requirements may compute its addition to
the qualifying real property reserve under (i) a method based on the savings
bank's actual loss experience (the "experience method") or (ii) a method based
on a percentage of the savings bank's taxable income, as adjusted (the
"percentage of taxable income method"). The addition to the nonqualifying real
property reserve must be computed under the experience method. Under the
percentage of taxable income method, the bad debt deduction for qualifying real
property loans is limited to 8% of taxable income before the bad debt deduction,
subject to certain adjustments.
A savings bank may not use the percentage of taxable income method in any
year in which less than 60% of its total assets are "qualifying assets," which
include U.S. Government securities, loans secured by an interest in residential
real property, cash, and certain other assets. The addition to the reserve for
losses on qualifying real property loans under the percentage of taxable income
method cannot exceed the amount necessary to increase the balance of the
qualifying real property reserve at the close of the taxable year to 6% of the
balance of the qualifying real property loans outstanding at the end of the
taxable year. In addition, the annual addition to the qualifying real property
reserve under the percentage of taxable income method cannot, when added to the
addition to the reserve for losses on nonqualifying loans, exceed the amount by
which (i) 12% of the total deposits or withdrawable accounts of depositors of
the qualifying institution at the close of the taxable year exceeds (ii) the sum
of the institution's surplus, undivided profits, and reserves at the beginning
of such year. In fiscal years 1996, 1995 and 1994, the Bank elected to use the
percentage of taxable income method in computing its bad debt reserve for
federal income tax purposes.
If a savings bank has a reserve for losses on qualifying real property
loans that exceeds the reserve it would have under the experience method
("excess bad debt reserve"), or maintains a supplemental reserve that represents
certain reserves built up from 1952 through 1962, it may be subject to tax when
it makes distributions with respect to its stock, including distributions in
redemption of stock or in liquidation. Under these circumstances, the
institution's taxable income would be increased by an amount not to exceed the
amount of its excess bad debt reserve and supplemental reserve, equal to the sum
of (i) any nonstock distributions paid in excess of earnings and profits
accumulated in taxable years beginning after December 31, 1951, (ii) any
distributions made in redemption of stock or made in partial or complete
liquidation, and (iii) the amount of federal income tax payable (determined on a
grossed-up basis) on the sum of (i) and (ii). The Bank currently has earnings
and profits accumulated since December 31, 1951, and has an excess bad debt
reserve of approximately $6.8 million. Thus, any distribution with respect to
its stock in excess of current and accumulated earnings and profits would
increase its taxable income as described above.
Institutions which become ineligible to use the percentage of income method
must change to either the reserve method or the specific charge-off method that
applies to commercial banks. Large institutions, those generally exceeding $500
million in assets, must convert to the specific charge-off method. Legislation
recently adopted by the United States Congress requires ratable inclusion in
income of excess reserves over a six-year period in the event of ineligibility.
First Savings may also be subject to the corporate alternative minimum tax
("AMT"). Generally, a corporation's AMT is the excess of its "tentative minimum
tax" (i.e., 20% of the amount by which the corporation's alternative minimum
taxable income ("AMTI") exceeds an applicable statutory exemption amount) over
its regular income tax. The amount of the corporation's AMT, if any, is added
to the corporation's regular tax for a taxable year and the total is the
corporation's federal income tax for the year. AMTI is calculated by adding
certain tax preference items and making certain adjustments to the corporation's
regular taxable income. Such items and adjustments include, but are not limited
to, the following: (i) 75% of the excess, if any, of a corporation's adjusted
current earnings and profits over its AMTI (as otherwise determined with certain
adjustments); (ii) interest on certain tax-exempt bonds
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issued after August 7, 1986; and (iii) the amount by which a financial
institution's allowable deduction for the taxable year for additions to its
reserve for bad debts exceeds the deduction that would have been allowable if
the financial institution had made additions to its bad debt reserve for all
taxable years on the basis of actual experience. Net operating loss carryovers
may be utilized, subject to certain adjustments, to offset up to 90% of the
AMTI, as otherwise determined. Thus, despite any available net operating loss
carryovers, a corporation generally will be subject to an effective minimum tax
liability of at least 2% of the excess of its AMTI over the exemption amount. A
portion of the AMT paid by a corporation may be credited against future regular
federal income tax liability, subject to certain limitations. In recent years,
First Savings has not been subject to the AMT.
State Taxation
Under North Carolina law, the corporate income tax is 7.75% of federal
taxable income as computed under the Code, subject to certain prescribed
adjustments. In addition, for tax years beginning in 1994, 1993, 1992 and 1991,
corporate taxpayers were required to pay a surtax equal to 1%, 2%, 3% and 4%,
respectively, of the state income tax otherwise payable by it. An annual state
franchise tax is imposed at a rate of 0.15% applied to the greatest of the
institution's (i) capital stock, surplus and undivided profits, (ii) investment
in tangible property in North Carolina or (iii) appraised valuation of property
in North Carolina.
The North Carolina corporate tax rate will drop to 7.50% in 1997, 7.25% in
1998, 7.00% in 1999 and 6.90% thereafter.
SUPERVISION AND REGULATION
Regulation of the Holding Company
General. The Holding Company was organized for the purpose of acquiring
and holding all of the capital stock of the Bank. As a savings bank holding
company subject to the Bank Holding Company Act of 1956, as amended ("BHCA"),
the Holding Company is subject to certain regulations of the Federal Reserve.
Under the BHCA, the Holding Company's activities and those of its subsidiaries
are limited to banking, managing or controlling banks, furnishing services to or
performing services for its subsidiaries or engaging in any other activity which
the Federal Reserve determines to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. The BHCA prohibits the
Holding Company from acquiring direct or indirect control of more than 5% of the
outstanding voting stock or substantially all of the assets of any bank or
savings bank or merging or consolidating with another bank holding company or
savings bank holding company without prior approval of the Federal Reserve.
Additionally, the BHCA prohibits the Holding Company from engaging in, or
acquiring ownership or control of, more than 5% of the outstanding voting stock
of any company engaged in a nonbanking business unless such business is
determined by the Federal Reserve to be so closely related to banking as to be
properly incident thereto. The BHCA generally does not place territorial
restrictions on the activities of such nonbanking related activities.
Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of the Holding Company.
Control is conclusively presumed to exist if, among other things, a person
acquires more than 25% of any class of voting stock of the Holding Company or
controls in any manner the election of a majority of the directors of the
Holding Company. Control is presumed to exist if a person acquires more than
10% of any class of voting stock and the stock is registered under Section 12 of
the Exchange Act or the acquiror will be the largest shareholder after the
acquisition.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger
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of default or in default. For example, under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("1991 Banking Law"), to avoid receivership
of an insured depository institution subsidiary, a bank holding company is
required to guarantee the compliance of any insured depository institution
subsidiary that may become "undercapitalized" with the terms of any capital
restoration plan filed by such subsidiary with its appropriate federal banking
agency up to the lesser of (i) an amount equal to 5% of the institution's total
assets at the time the institution became undercapitalized or (ii) the amount
which is necessary (or would have been necessary) to bring the institution into
compliance with all acceptable capital standards as of the time the institution
fails to comply with such capital restoration plan. Under a policy of the
Federal Reserve with respect to bank holding company operations, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. The Federal Reserve
under the BHCA also has the authority to require a bank holding company to
terminate any activity or to relinquish control of a nonbank subsidiary (other
than a nonbank subsidiary of a bank) upon the Federal Reserve's determination
that such activity or control constitutes a serious risk to the financial
soundness and stability of any bank subsidiary of the bank holding company.
In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended ("FDIA") require insured depository institutions under
common control to reimburse the FDIC for any loss suffered by either the SAIF or
the BIF as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
The Holding Company must notify the Federal Reserve prior to repurchasing
Common Stock in excess of 10% of its net worth during any twelve-month period.
The Holding Company is also registered under the savings bank holding
company laws of North Carolina. Accordingly, the Holding Company is also subject
to regulation and supervision by the Administrator.
Capital Adequacy Guidelines for Holding Companies. The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies and banks that
are members of the Federal Reserve system and have consolidated assets of $150
million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.
Bank holding companies subject to the Federal Reserve's capital adequacy
guidelines are required to comply with the Federal Reserve's risk-based capital
regulations. Under these regulations, the minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) is 8%. At least half of the total capital is
required to be "Tier I capital," principally consisting of common stockholders'
equity, noncumulative perpetual preferred stock, and a limited amount of
cumulative perpetual preferred stock, less certain goodwill items. The
remainder ("Tier II capital") may consist of a limited amount of subordinated
debt, certain hybrid capital instruments and other debt securities, perpetual
preferred stock, and a limited amount of the general loan loss allowance. In
addition to the risk-based capital guidelines, the Federal Reserve has adopted a
minimum Tier I (leverage) capital ratio, under which a bank holding company must
maintain a minimum level of Tier I capital to average total consolidated assets
of at least 3% in the case of a bank holding company which has the highest
regulatory examination rating and is not contemplating significant growth or
expansion. All other bank holding companies are expected to maintain a Tier I
(leverage) capital ratio of at least 1% to 2% above the stated minimum.
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Dividend Limitations. In connection with the Conversion, the FDIC has
required the Holding Company and the Bank to agree that, during the first year
after consummation of the Conversion, the Holding Company will not pay any
dividend or make any other distribution to its stockholders which represents, is
characterized as or is treated for federal tax purposes as, a return of capital.
Capital Maintenance Agreement. In connection with the Administrator's
approval of the Holding Company's application to acquire control of the Bank,
the Holding Company was required to execute a Capital Maintenance Agreement
whereby it has agreed to maintain the Bank's capital in an amount sufficient to
enable the Bank to satisfy all regulatory capital requirements.
Federal Securities Law. The Holding Company has filed with the SEC a
Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"), for the registration of the Common Stock to be issued in the
Conversion. The Holding Company intends to register the Common Stock with the
SEC pursuant to Section 12 of the Exchange Act. Upon such registration, the
proxy and tender offer rules, insider trading reporting requirements and
restrictions, annual and periodic reporting and other requirements of the
Exchange Act will be applicable to the Holding Company.
Regulation of the Bank
General. Federal and state legislation and regulation have significantly
affected the operations of federally insured savings institutions and other
federally regulated financial institutions in the past several years and have
increased competition among savings institutions, commercial banks and other
providers of financial services. In addition, federal legislation has imposed
new limitations on investment authority, and higher insurance and examination
assessments on savings institutions and has made other changes that may
adversely affect the future operations and competitiveness of savings
institutions with other financial institutions, including commercial banks and
their holding companies. The operations of regulated depository institutions,
including the Bank, will continue to be subject to changes in applicable
statutes and regulations from time to time.
The Bank is a North Carolina-chartered savings bank, is a member of the
Federal Home Loan Bank ("FHLB") system, and its deposits are insured by the FDIC
through the Savings Association Insurance Fund ("SAIF"). It is subject to
examination and regulation by the FDIC and the Administrator and to regulations
governing such matters as capital standards, mergers, establishment of branch
offices, subsidiary investments and activities, and general investment
authority. Generally, North Carolina-chartered savings banks whose deposits are
insured by the SAIF are subject to restrictions with respect to activities and
investments, transactions with affiliates and loans-to-one borrower similar to
those applicable to SAIF-insured savings associations. Such examination and
regulation is intended primarily for the protection of depositors and the
federal deposit insurance funds.
The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As holders of loans secured by real property and as owners
of real property, financial institutions, including the Bank, may be subject to
potential liability under various statutes and regulations applicable to
property owners generally, including statutes and regulations relating to the
environmental condition of real property.
The FDIC has extensive enforcement authority over North Carolina-chartered
savings banks, including the Bank. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.
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The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
Transactions with Affiliates. Under current federal law, transactions
between savings institutions and any affiliate are governed by Sections 23A and
23B of the Federal Reserve Act. An affiliate of a savings institution is any
company or entity that controls, is controlled by or is under common control
with the savings institution. In a holding company context, the parent holding
company of a savings institution and any companies which are controlled by such
parent holding company are affiliates of the savings institution. Generally,
Sections 23A and 23 B (i) establish certain collateral requirements for loans to
affiliates; (ii) limit the extent to which the savings institution or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such savings institution's capital stock and surplus, and
contain an aggregate limit on all such transactions with all affiliates to an
amount equal to 20% of such capital stock and surplus and (iii) require that all
such transactions be on terms substantially the same, or at least as favorable
to the savings institution or the subsidiary, as those provided to a
nonaffiliate. The term "covered transaction" includes the making of loans or
other extensions of credit to an affiliate, the purchase of assets from an
affiliate, the purchase of, or an investment in, the securities of an affiliate,
the acceptance of securities of an affiliate as collateral for a loan or
extension of credit to any person, or issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate.
Further, current federal law has extended to savings institutions the
restrictions contained in Section 22(h) of the Federal Reserve Act with respect
to loans to directors, executive officers and principal stockholders. Under
Section 22(h), loans to directors, executive officers and stockholders who own
more than 10% of a savings institution and certain affiliated entities of any of
the foregoing, may not exceed, together with all other outstanding loans to such
person and affiliated entities, the savings institution's loans-to-one borrower
limit as established by federal law (generally equal to 15% of the institution's
unimpaired capital and surplus). Section 22(h) also prohibits loans above
amounts prescribed by the appropriate federal banking agency to directors,
executive officers and stockholders who own more than 10% of a savings
institution, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the savings institution. Any
"interested" director may not participate in the voting. The Federal Reserve
has prescribed the loan amount (which includes all other outstanding loans to
such person), as to which such prior board of director approval is required, as
being the greater of $25,000 or 5% of unimpaired capital and unimpaired surplus
(up to $500,000). Further, pursuant to Section 22(h) the Federal Reserve
requires that loans to directors, executive officers, and principal stockholders
be made on terms substantially the same as offered in comparable transactions to
other persons and not involve more than the normal risk of repayment or present
other unfavorable features.
Insurance of Deposit Accounts. The FDIC administers two separate deposit
insurance funds. The SAIF maintains a fund to insure the deposits of
institutions the deposits of which were insured by the Federal Savings and Loan
Insurance Corporation (the "FSLIC") prior to the enactment of FIRREA, and the
Bank Insurance Fund ("BIF") maintains a fund to insure the deposits of
institutions the deposits of which were insured by the FDIC prior to the
enactment of FIRREA. The Bank is a member of the SAIF of the FDIC.
As a SAIF-insured institution, the Bank is subject to insurance assessments
imposed by the FDIC. Effective January 1, 1993, the FDIC replaced its uniform
assessment rate with a transitional risk-based assessment schedule issued by the
FDIC pursuant to the 1991 Banking Law, which imposes assessments ranging from 23
cents to 31 cents per $100 of domestic deposits. The actual assessment to be
paid by each SAIF member is based on the institution's assessment risk
classification, which is based on whether the institution is considered "well
capitalized," "adequately capitalized" or "undercapitalized" (as such terms have
been defined in federal regulations), and whether such institution is considered
by its supervisory agency to be financially sound or to have supervisory
concerns. Under the 1991 Banking Law, the FDIC also may impose special
assessments on SAIF members to repay amounts borrowed from the
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U.S. Treasury or for any other reason deemed necessary by the FDIC. As a result
of the 1991 Banking Law, the assessment rate on deposits could further increase
over a 15 year period.
Financial institutions such as the Bank which are members of the SAIF, are
required to pay higher deposit insurance premiums than financial institutions
which are members of the BIF, primarily commercial banks, because the BIF has
higher reserves than the SAIF and has been responsible for fewer troubled
institutions. The FDIC Board of Directors has recently approved a new risk-
based premium schedule that will reduce assessment rates for commercial banks,
will leave assessment rates for financial institutions such as the Bank at
current levels, and will increase the disparity between SAIF and BIF
assessments. Assessments for BIF members range from 4 cents to 31 cents per
$100 of domestic deposits. In announcing this proposed rule, the FDIC noted
that the premium differential may have adverse consequences for SAIF members,
including reduced earnings and an impaired ability to raise funds in the capital
markets. In addition, SAIF members, such as the Bank, could be placed at a
substantial competitive disadvantage to BIF members with respect to pricing of
loans and deposits and the ability to achieve lower operating costs. Several
alternatives to mitigate the effect of the BIF/SAIF premium disparity have been
suggested by the federal banking regulators, by members of the United States
Congress and by industry groups.
The Balanced Budget Act of 1995, which was passed by the United States
Congress but vetoed by the President for reasons unrelated to the SAIF
recapitalization, provided for a one-time assessment that would fully capitalize
the SAIF, currently estimated to be 85 cents per $100 of an institution's
assessment base. It is unknown whether similar legislation will be enacted or
whether premiums for either BIF or SAIF members will be adjusted in the future
by the FDIC or by legislative action. If a special assessment as described
above were to be required, it would result in a one-time charge to the Bank
estimated at $1.6 million, assuming the special assessment is based on deposits
held at June 30, 1996. Management cannot predict whether such legislation will
be enacted, or, if enacted, the amount of any one-time assessment or whether
ongoing SAIF premiums will be reduced to a level equal to that of BIF premiums.
The Bank's federal deposit insurance premium expense for the year ended
June 30, 1996 was $416,491. A significant increase in SAIF insurance premiums
or a significant one-time fee to recapitalize the SAIF would likely have an
adverse effect on the operating expenses and results of operations of the Bank.
Community Reinvestment Act. The Bank, like other financial institutions,
is subject to the Community Reinvestment Act ("CRA"). A purpose of the CRA is to
encourage financial institutions to help meet the credit needs of its entire
community, including the needs of low- and moderate-income neighborhoods. During
the Bank's last compliance examination, the Bank received a "satisfactory"
rating with respect to CRA compliance. The Bank's rating with respect to CRA
compliance would be a factor to be considered by the Federal Reserve and FDIC in
considering applications submitted by the Bank to acquire branches or to acquire
or combine with other financial institutions and take other actions and, if such
rating was less than "satisfactory," could result in the denial of such
applications.
The federal banking regulatory agencies have issued a revision of the CRA
regulations, which became effective on January 1, 1996, to implement a new
evaluation system that rates institutions based on their actual performance in
meeting community credit needs. Under the regulations, a savings bank will
first be evaluated and rated under three categories: a lending test, an
investment test and a service test. For each of these three tests, the savings
bank will be given a rating of either "outstanding," "high satisfactory," "low
satisfactory," "needs to improve" or "substantial non-compliance." A set of
criteria for each rating has been developed and is included in the regulation.
If an institution disagrees with a particular rating, the institution has the
burden of rebutting the presumption by clearly establishing that the
quantitative measures do not accurately present its actual performance, or that
demographics, competitive conditions or economic or legal limitations peculiar
to its service area should be considered. The ratings received under the three
tests will be used to determine the overall composite CRA rating. The composite
ratings will be the same as those that are currently given: "outstanding,"
"satisfactory," "needs to improve" or "substantial non-compliance."
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Capital Requirements. The FDIC requires the Bank to have a minimum
leverage ratio of Tier I capital (principally consisting of common stockholders'
equity, noncumulative perpetual preferred stock and minority interests in
consolidated subsidiaries, less certain intangible and goodwill items), to total
assets of at least 3%; provided, however that all institutions, other than those
(i) receiving the highest rating during the examination process and (ii) not
anticipating or experiencing any significant growth, are required to maintain a
ratio of 1% or 2% above the stated minimum, with an absolute minimum leverage
ratio of not less than 4%. The FDIC also requires the Bank to have a ratio of
total capital to risk-weighted assets, including certain off-balance sheet
activities, such as standby letters of credit, of at least 8%. At least half of
the total capital is required to be Tier I capital. The remainder (Tier II
capital) may consist of a limited amount of subordinated debt, certain hybrid
capital instruments, other debt securities, certain types of preferred stock and
a limited amount of general loan loss allowance.
An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC. If the leverage ratio falls to 2% or less, the
institution may be deemed to be operating in an unsafe or unsound condition,
allowing the FDIC to take various enforcement actions, including possible
termination of insurance or placement of the institution in receivership.
The Administrator requires that net worth equal at least 5% of total
assets. Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement.
At June 30, 1996, the Bank complied with each of the capital requirements
of the FDIC and the Administrator. For a description of the Bank's required and
actual capital levels on June 30, 1996, see Note 10 captioned "Regulatory
Capital Requirements" on page 29 of the 1996 Annual Report.
The 1991 Banking Law required each federal banking agency to revise its
risk-based capital standards to ensure that those standards take adequate
account of interest rate risk, concentration of credit risk, and the risk of
nontraditional activities, as well as reflect the actual performance and
expected risk of loss on multi-family mortgages. On August 2, 1995, the federal
banking agencies issued a joint notice of adoption of final risk-based capital
rules to take account of interest rate risk. The final regulation required an
assessment of the need for additional capital on a case-by-case basis,
considering both the level of measured exposure and qualitative risk factors.
The final rule also stated an intent to, in the future, establish an explicit
minimum capital charge for interest rate risk based on the level of a bank's
measured interest rate risk exposure. The final regulation has not had a
material impact on the Bank's capital requirements.
Effective June 26, 1996, the federal banking agencies issued a joint policy
statement announcing the agencies' election not to adopt a standardized measure
and explicit capital charge for interest rate risk at that time. Rather, the
policy statement (i) identifies the main elements of sound interest rate risk
management, (ii) describes prudent principles and practices for each of those
elements, and (iii) describes the critical factors affecting the agencies'
evaluation of a bank's interest rate risk when making a determination of capital
adequacy. The joint policy statement is not expected to have a material impact
on the Bank's management of interest rate risk.
In December 1994, the FDIC adopted a final rule changing its risk-based
capital rules to recognize the effect of bilateral netting agreements in
reducing the credit risk of two types of financial derivatives - interest and
exchange rate contracts. Under the rule, savings banks are permitted to net
positive and negative mark-to-market values of rate contracts with the same
counterparty, subject to legally enforceable bilateral netting contracts that
meet certain criteria. This represents a change from the prior rules which
recognized only a very limited form of netting. The Bank does not anticipate
that this rule will have a material effect upon its financial condition or
results of operations.
Loans to One Borrower. The Bank is subject to the Administrator's loans-
to-one-borrower limits. Under these limits, no loans and extensions of credit
to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the net worth of the savings bank.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth. These limits also authorize
savings banks to make loans to one borrower, for any purpose, in an amount not
to exceed $500,000. A savings institution also is authorized to make loans to
one borrower to develop domestic residential housing units, not to exceed
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the lesser of $30 million, or 30% of the savings institution's net worth,
provided that (i) the purchase price of each single-family dwelling in the
development does not exceed $500,000; (ii) the savings institution is in
compliance with its fully phased-in capital requirements; (iii) the loans comply
with applicable loan-to-value requirements; (iv) the aggregate amount of loans
made under this authority does not exceed 150% of net worth; and (v) the
institution's regulator issues an order permitting the savings institution to
use this higher limit. These limits also authorize a savings bank to make
loans-to-one borrower to finance the sale of real property acquired in
satisfaction of debts in an amount up to 50% of net worth.
As of June 30, 1996, the largest aggregate amount of loans which the Bank
had to any one borrower was $1.1 million. The Bank had no loans outstanding
which management believes violate the applicable loans-to-one borrower limits.
Limitations on Rates Paid for Deposits. Regulations promulgated by the
FDIC pursuant to the 1991 Banking Law place limitations on the ability of
insured depository institutions to accept, renew or roll over deposits by
offering rates of interest which are significantly higher than the prevailing
rates of interest on deposits offered by other insured depository institutions
having the same type of charter in such depository institution's normal market
area. Under these regulations, "well capitalized" depository institutions may
accept, renew or roll such deposits over without restriction, "adequately
capitalized" depository institutions may accept, renew or roll such deposits
over with a waiver from the FDIC (subject to certain restrictions on payments of
rates) and "undercapitalized" depository institutions may not accept, renew or
roll such deposits over. The definitions of "well capitalized," "adequately
capitalized" and "undercapitalized" are the same as the definitions adopted by
the FDIC to implement the corrective action provisions of the 1991 Banking Law.
See "-- Impact of the 1991 Banking Law."
Federal Home Loan Bank System. The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB of Atlanta, the Bank
is required to own capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On June 30, 1996, the Bank was in compliance with this
requirement with an investment in FHLB of Atlanta stock of $1,929,600.
Federal Reserve System. Federal Reserve regulations require savings banks,
not otherwise exempt from the regulations, to maintain reserves against their
transaction accounts (primarily negotiable order of withdrawal accounts) and
certain nonpersonal time deposits. The reserve requirements are subject to
adjustment by the Federal Reserve. As of June 30, 1996, the Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.
Restrictions on Acquisitions. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of a state savings bank without giving at least 60 days' written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition. Pursuant to regulations governing acquisitions of
control, control of an insured institution is conclusively deemed to have been
acquired, among other things, upon the acquisition of more than 25% of any
class of voting stock. In addition, control is presumed to have been acquired,
subject to rebuttal, upon the acquisition of more than 10% of any class of
voting stock, and the issuer's securities are registered under Section 12 of the
Exchange Act or the person would be the single largest shareholder. Such
acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings bank or prejudice the interests of its depositors; or
(iii) the competency, experience or integrity of the acquiring person or the
proposed management personnel indicates that it would not be in the interest of
the depositors or the public to permit the acquisition of control by such
person.
For three years following the Bank's conversion from mutual to stock form,
North Carolina conversion regulations require the prior written approval of the
Administrator before any person may directly or indirectly offer to acquire or
acquire the beneficial ownership of more than 10% of any class of an equity
security of the Bank. If any person were to so acquire the beneficial ownership
of more than 10% of any class of any equity security without prior
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written approval, the securities beneficially owned in excess of 10% would not
be counted as shares entitled to vote and would not be voted or counted as
voting shares in connection with any matter submitted to stockholders for a
vote. Approval is not required for (i) any offer with a view toward public
resale made exclusively to the Bank or its underwriters or the selling group
acting on its behalf or (ii) any offer to acquire or acquisition of beneficial
ownership of more than 10% of the common stock of the Bank by a corporation
whose ownership is or will be substantially the same as the ownership of the
Bank, provided that the offer or acquisition is made more than one year
following the consummation of the conversion. During the second and third years
after the conversion, the Administrator may approve such an acquisition of more
than 10% of beneficial ownership upon a finding that (i) the acquisition is
necessary to protect the safety and soundness of the Holding Company and the
Bank or the Boards of Directors of the Holding Company and the Bank support the
acquisition and (iii) the acquiror is of good character and integrity and
possesses satisfactory managerial skills, the acquiror will be a source of
financial strength to the Holding Company and the Bank and the public interests
will not be adversely affected.
Liquidity. The Bank is subject to the Administrator's requirement that the
ratio of liquid assets to total assets equal at least 10%. The computation of
liquidity under North Carolina regulation allows the inclusion of mortgage-
backed securities and investments which, in the judgment of the Administrator,
have a readily marketable value, including investments with maturities in excess
of five years. At June 30, 1996, the Bank's liquidity ratio, calculated in
accordance with North Carolina regulations, was approximately 26%.
Additional Limitations on Activities. Recent FDIC law and regulations
generally provide that the Bank may not engage as principal in any type of
activity, or in any activity in an amount, not permitted for national banks, or
directly acquire or retain any equity investment of a type or in an amount not
permitted for national banks. The FDIC has authority to grant exceptions from
these prohibitions (other than with respect to non-service corporation equity
investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the activity to be engaged in and if the Bank
is and continues to be in compliance with fully phased-in capital standards.
National banks are generally not permitted to hold equity investments other than
shares of service corporations and certain federal agency securities. Moreover,
the activities in which service corporations for savings banks are permitted to
engage are limited to those of service corporations for national banks.
Savings banks are also required to notify the FDIC at least 30 days prior
to the establishment or acquisition of any subsidiary, or at least 30 days prior
to conducting any such new activity. Any such activities must be conducted in
accordance with the regulations and orders of the FDIC and the Administrator.
Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not of investment
grade (generally referred to as "junk bonds").
1991 Banking Law. The 1991 Banking Law became effective on December 19,
1991. Among other things, the 1991 Banking Law provided increased funding for
the BIF and provided for expanded regulation of depository institutions and
their affiliates, including bank holding companies.
The 1991 Banking Law provided the federal banking agencies with broad
powers to take corrective action to resolve problems of insured depository
institutions. The extent of these powers will depend upon whether the
institutions in question are "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," or "critically
undercapitalized." Under the FDIC regulations applicable to the Bank, an
institution is considered "well capitalized" if it has (i) a total risk-based
capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or
greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any
order or written directive to meet and maintain a specific capital level for any
capital measure. An "adequately capitalized" institution is defined as one that
has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I risk-
based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater
(or 3% or greater in the case of an institution with the highest examination
rating and which is not experiencing or anticipating significant growth). An
institution is considered (A) "undercapitalized" if it has (i) a total risk-
based capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio of
less than 4% or (iii) a leverage ratio of less than 4% (or 3% or anticipating
significant growth); (B) "significantly undercapitalized" if the institution has
(i) a total risk-based capital ratio of less than 6%, (ii) a Tier I risk-based
capital
29
<PAGE>
ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%.
To facilitate the early identification of problems, the 1991 Banking Law
required the federal banking agencies to review and, under certain
circumstances, prescribe more stringent accounting and reporting requirements
than those required by generally accepted accounting principles. The FDIC issued
a final rule, effective July 2, 1993, implementing those provisions.
The 1991 Banking Law further requires the federal banking agencies to
develop regulations requiring disclosure of contingent assets and liabilities
and, to the extent feasible and practicable, supplemental disclosure of the
estimated fair market value of assets and liabilities. The 1991 Banking Law also
requires annual examinations of all insured depository institutions by the
appropriate federal banking agency, with some exceptions for small, well-
capitalized institutions and state chartered institutions examined by state
regulators. Moreover, the 1991 Banking Law, as modified by the Federal Housing
Enterprises Financial Security and Soundness Act, requires the federal banking
agencies to set operational and managerial, asset quality, earnings and stock
valuation standards for insured depository institutions and depository
institution holding companies, as well as compensation standards (but not dollar
levels of compensation) for insured depository institutions that prohibit
excessive compensation, fees or benefits to officers, directors, employees, and
principal stockholders. In July 1992, the federal banking agencies issued a
joint advance notice of proposed rulemaking soliciting comments on all aspects
of the implementation of these standards in accordance with the 1991 Banking
Law, including whether the compensation standards should apply to depository
institution holding companies. An interagency notice of proposed rulemaking was
issued in November 1993. However, sections of the Riegle Community Development
and Regulatory Improvement Act of 1994 will affect the nature and scope of the
proposed regulations, and eliminates the requirement that the regulations apply
to depository institution holding companies.
The foregoing necessarily is a general description of certain provisions of
the 1991 Banking Law and does not purport to be complete.
Interstate Banking. A bank or savings bank holding company and its
subsidiaries are currently prohibited from acquiring any voting shares of, or
interest in, any banks or savings banks located outside of the state in which
the operations of the savings bank holding company's subsidiaries are located,
unless the acquisition is specifically authorized by the statutes of the state
in which the target bank is located. However, in September 1994, Congress
passed the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking Act"). The Interstate Banking Act permits adequately
capitalized bank and savings bank holding companies to acquire control of banks
and savings banks in any state beginning on September 29, 1995, one year after
the effectiveness of the Interstate Banking Act. In addition, states may
specifically permit interstate acquisitions prior to September 29, 1995 by
enacting legislation that allows such transactions. North Carolina adopted
nationwide reciprocal interstate acquisition legislation in 1994.
Such interstate acquisitions are subject to certain restrictions. States
may require the Bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years. In addition, no
bank or saving bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state, unless
the state has specifically legislated a higher deposit cap. States are free to
legislate stricter deposit caps and, at present, 18 states have deposit caps
lower than 30%.
The Interstate Banking Act also provides for interstate branching. The
McFadden Act of 1927 established state lines as the ultimate barrier to
geographic expansion of a banking network by branching. The Interstate Banking
Act withdraws these barriers, effective June 1, 1997, allowing interstate
branching in all states, provided that a particular state has not specifically
prohibited interstate branching by legislation prior to such time. Unlike
interstate acquisitions, a state may prohibit interstate branching if it
specifically elects to do so by June 1, 1997. States may choose to allow
interstate branching prior to June 1, 1997 by opting-in to a group of states
that permits these transactions. These states generally allow interstate
branching via a merger of an out-of-state bank with an in-state bank, or on a de
novo basis. North Carolina has enacted legislation permitting interstate
branching transactions.
30
<PAGE>
It is anticipated that the Interstate Banking Act will increase competition
within the market in which the Bank now operates, although the extent to which
such competition will increase in such market or the timing of such increase
cannot be predicted. In addition, there can be no assurance as to whether, or
in what form, legislation may be enacted in North Carolina in reaction to the
Interstate Banking Act or what impact such legislation or the Interstate Banking
Act might have upon the Company or the Bank.
The Interstate Banking Act also modifies the controversial safety and
soundness provisions contained in Section 39 of the 1991 Banking Law which
required the banking regulatory agencies to promulgate regulations governing
such topics as internal controls, loan documentation, credit underwriting,
interest rate exposure, asset growth, compensation and fees and other matters
those agencies determine to be appropriate. The legislation exempts bank
holding companies from these provisions and requires the agencies to prepare
guidelines, as opposed to regulations, dealing with these areas. It also gives
more discretion to the banking regulatory agencies in prescribing standards for
banks' asset quality, earnings and stock valuation.
The Interstate Banking Act also expands current exemptions from the
requirement that banks be examined on a 12-month cycle. Exempted banks will be
inspected every 18 months. Other provisions address paperwork reduction and
regulatory improvements, small business and commercial real estate loan
securitization, truth-in-lending amendments regarding high cost mortgages,
strengthening of the independence of certain financial regulatory agencies,
money laundering, flood insurance reform and extension of certain statutes of
limitations.
Restrictions on Dividends and Other Capital Distributions. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. In
addition, a North Carolina-chartered stock savings bank, for a period of five
years after its conversion from mutual to stock form, must obtain the written
approval from the Administrator before declaring or paying a cash dividend on
its capital stock in an amount in excess of one-half of the greater of (i) the
institution's net income for the most recent fiscal year end, or (ii) the
average of the institution's net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends, if applicable.
Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution.
In addition, the Bank is not permitted to declare or pay a cash dividend or
repurchase any of its capital stock if the effect thereof would be to cause its
net worth to be reduced below the amount required for the liquidation account
established in connection with the Bank's conversion from mutual to stock
ownership.
Other North Carolina Regulation. As a North Carolina-chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
includes, but is not limited to: the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest. North Carolina law
requires that the Bank maintain federal deposit insurance as a condition of
doing business.
The Administrator conducts regular examinations of North Carolina-chartered
savings banks. The purpose of such examinations is to assure that institutions
are being operated in compliance with applicable North Carolina law and
regulations and in a safe and sound manner. These examinations are usually
conducted on a joint basis with the
31
<PAGE>
FDIC. In addition, the Administrator is required to conduct an examination of
any institution when he has good reason to believe that the standing and
responsibility of the institution is of doubtful character or when he otherwise
deems it prudent. The Administrator is empowered to order the revocation of the
license of an institution if he finds that it has violated or is in violation of
any North Carolina law or regulation and that revocation is necessary in order
to preserve the assets of the institution and protect the interests of its
depositors. The Administrator has the power to issue cease and desist orders if
any person or institution is engaging in, or has engaged in, any unsafe or
unsound practice or unfair and discriminatory practice in the conduct of its
business or in violation of any other law, rule or regulation.
A North Carolina-chartered saving bank must maintain net worth, computed
in accordance with the Administrator's requirements, of 5% of total assets and
liquidity of 10% of total assets, as discussed above. Additionally, a North
Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.
Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North Carolina-
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.
North Carolina law provides a procedure by which savings institutions may
consolidate or merge, subject to approval of the Administrator. The approval is
conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.
New Accounting Standards
Effective July 1, 1995, the Bank adopted Statement of Financial Accounting
Standards No. 114, Accounting by Creditors for Impairment of a Loan ("SFAS
114"), and Statement of Financial Accounting Standards No. 118, Accounting by
Creditors for Impairment of a Loan -Income Recognition and Disclosures ("SFAS
118"), SFAS 114 requires that the carrying value of an impaired loan be based on
the present value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral, if the loan is collateral
dependent. Under SFAS 114, a loan is considered impaired when, based on current
information, it is probable that the borrower will be unable to pay contractual
interest or principal payments as scheduled in the loan agreement. SFAS 114
applies to all loans except one-to-four family residential mortgage loans and
small balance homogeneous consumer loans that are collectively evaluated for
impairment.
Adoption of the new standard had no impact on the level of the overall
allowance for loan losses or on operating results and does not affect the
Bank's policies regarding write-offs, recoveries, or income recognition.
ITEM 2. PROPERTIES
At June 30, 1996, First Savings conducted its business from the
headquarters office in Southern Pines, North Carolina, and its four branch
offices in Southern Pines, Pinehurst, Carthage and West End, North Carolina.
The following table sets forth certain information regarding First Savings'
properties as of June 30, 1996. All properties are owned by First Savings, with
the exception of the Pinehurst Office which has been leased for a term of 15
years with an expiration date of 2003. Rentals paid by First Savings under that
lease totalled $9,000 for the fiscal year ended June 30, 1996.
32
<PAGE>
<TABLE>
<CAPTION>
Net Book
Address Value of
- ------- Property
--------
<S> <C>
Headquarters Office $924,342
205 S.E. Broad Street
Southern Pines, North Carolina 28387
Pinecrest Plaza Office 693,144
46 Pinecrest Plaza
Southern Pines, North Carolina 28387
Pinehurst Office 11,486
10 Chinquapin Road
Pinehurst, North Carolina 28374
Carthage Office 117,865
109 Monroe Street
Carthage, North Carolina 28327
Seven Lakes Office 124,511
200 Grant Street
Seven Lakes Shopping Center
West End, North Carolina 27376
The total net book value of First Savings' furniture, fixtures and
equipment on June 30, 1996 was $138,344.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, First Savings is not involved in any pending
legal proceedings other than routine, non-material proceedings occurring in the
ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Holding Company's stockholders
during the quarter ended June 30, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The high and low stock price for the Company's common stock was $17.00 and
$17.00, respectively, on August 30, 1996. The remaining information required
by this Item is set forth under the section captioned "Capital Stock" on page 36
of First Savings' 1996 Annual Report which is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in the table captioned
"Five Year Summary" on the inside cover of First Savings' 1996 Annual Report
which is incorporated herein by reference.
33
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The table below sets forth certain performance ratios for First Savings for
the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Return on Average Assets (Net income divided by
average total assets) 1.53% 1.52% 0.91%
Return on Average Equity (Net income divided by
average shareholders' equity 5.86% 5.94% 4.93%
Average Equity to Average Assets Ratio (Average
shareholders' equity divided by average total assets) 26.00% 25.58% 18.39%
Interest Rate Spread for the Period 2.46% 2.70% 2.95%
Average Interest-Earning Assets to Average
Interest-Bearing Liabilities 1.35% 133.30% 120.49%
Net Interest Margin 3.74% 3.82% 3.66%
Loan Loss Allowance to Nonperforming Assets at Period End 454.48% 223.90% 185.11%
</TABLE>
See also the information set forth under Item 1 above and the information
set forth under the section captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operation" on pages 3 through 13 in First
Savings' 1996 Annual Report which section is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of First Savings and supplementary
data set forth on pages 14 through 34 of First Savings' 1996 Annual Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Deloitte & Touche LLP was the Company's independent auditor for the year
ended June 30, 1996. As of August 29, 1996, Dixon, Odom & Co., L.L.P. has been
engaged as the Company's new independent auditor, for the year ending June 30,
1997. The Company's decision to change independent auditors was recommended by
the Audit Committee and approved by the Executive Committee. Deloitte & Touche
LLP's report on the Company's financial statements for the fiscal years ended
June 30, 1996 and 1995 did not contain an adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles. During such years and the subsequent interim period
through August 29, 1996, there were no disagreements between the Company and
Deloitte & Touche LLP on any matter of accounting principles or practice,
financial statement disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of such auditor, would have caused it to make
reference to the subject of such disagreement in connection with its reports.
During its two most recent fiscal years and the subsequent interim period ended
August 29, 1996, the Company has not consulted Dixon, Odom & Co., L.L.P. with
regard to either: (i) the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit opinion that
might be rendered on the Company's financial statements, or (ii) any matter that
was either the subject of a disagreement or a reportable event.
A letter from Deloitte & Touche LLP regarding its concurrence with the
statements made by the Company in this report on Form 10-K is attached as
Exhibit (16) hereto and incorporated herein by reference.
34
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Some of the information required by this Item is set forth in the table on
pages 5 and 6 and the table on page 9 under the section captioned "Proposal 1 -
Election of Directors" of the Proxy Statement for the 1996 Annual Meeting of
Shareholders of First Savings Bancorp, Inc. to be held on October 23, 1996 (the
"Proxy Statement"). Section 16(a) of the Exchange Act requires First Savings'
executive officers and directors, and persons who own more than ten percent of
First Savings' common stock, to file reports of ownership and changes in
ownership with the SEC. Executive officers, directors and greater than ten
percent beneficial owners are required by SEC regulations to furnish First
Savings with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to First
Savings and written representations from First Savings' executive officers and
directors, First Savings believes that during the fiscal year ended June 30,
1996, the Initial Statements of Beneficial Ownership on SEC Form 3 for H. David
Bruton, John F. Burns, Henry A. Clayton, J. E. Causey, W. Harry Fullenwider,
Frank G. Hardister, W. Harrel Johnson, Timothy Sean Maples, Joe Montesanti, Jr.,
Thomas F. Phillips and William E. Samuels, Jr. were inadvertantly filed, on
November 9, 1995, with the FDIC instead of the SEC. Upon discovery of this
error, these Form 3's were filed with the SEC. Also, Mr. Samuels' and Mr. Burns'
Initial Statement of Beneficial Ownership on SEC Form 3 omitted disclosure
regarding 71,819 allocated and unallocated shares of the Common Stock which are
held by Mr. Samuels and Mr. Burns as trustees and over which they have shared
voting and investment power. Upon discovery of this omission, Mr. Samuels and
Mr. Burns filed an amended Form 3 with the SEC.
ITEM 11. EXECUTIVE COMPENSATION AND TRANSACTIONS
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Directors' Compensation" and " -
Management Compensation" on pages 7 through 8 and 9 through 14, respectively, of
the Proxy Statement, which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
from the section captioned "Security Ownership of Certain Beneficial Owners" on
pages 3 and 4 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no reportable transactions during the two most recent
fiscal years nor are any reportable transactions proposed as of the date of this
Form 10-K. See also the section captioned "Proposal 1 - Election of Directors -
Certain Indebtedness and Transactions of Management" on page 15 of the Proxy
Statement, which section is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(a)1. Consolidated Financial Statements (contained in First Savings' 1996
Annual Report attached hereto as Exhibit (13) and incorporated herein
by reference)
(a) Independent Auditors' Report
(b) Consolidated Statements of Financial Condition as of June 30, 1996 and 1995
(c) Consolidated Statements of Income for the Years Ended June 30, 1996, 1995
and 1994
(d) Consolidated Statements of Shareholders' Equity for the Years Ended June
30, 1996, 1995 and 1994
(e) Consolidated Statements of Cash Flows for the Years Ended June 30, 1996,
1995 and 1994
(f) Notes to Consolidated Financial Statements
35
<PAGE>
14(a)2. Financial Statement Schedules
All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial
Statements.
<TABLE>
<CAPTION>
14(a)3. Exhibits
<S> <C>
Exhibit (3)(i) Certificate of Incorporation, incorporated
herein by reference to Exhibit (2),
Appendix C, to the Registration Statement
on Form 8-A, Registration No. 0-27-098,
dated October 26, 1995
Exhibit (3)(ii) Bylaws, incorporated herein by reference
to Exhibit (2), Appendix D, to the
Registration Statement on Form 8-A,
Registration No. 0-27-098, dated October
26, 1995
Exhibit (4) Specimen Stock Certificate, incorporated
herein by reference to Exhibit (5) to the
Registration Statement on Form 8-A,
Registration No. 0-27-098, dated October
26, 1995
Exhibit (10)(i) First Savings Bank of Moore County, Inc.,
SSB Pinehurst Office Lease, incorporated
herein by reference to Exhibit (10)(i) to
the Registration Statement on Form 8-A,
Registration No. 0-27-098, dated October
26, 1995
Exhibit (10)(ii)(a) Employee Stock Option Plan of First
Savings Bank of Moore County, Inc., SSB,
incorporated herein by reference to
Exhibit (10)(ii)(a) to the Registration
Statement on Form 8-A, Registration No. 0-
27-098, dated October 26, 1995
Exhibit (10)(ii)(b) Director Stock Option Plan of First
Savings Bank of Moore County, Inc., SSB,
incorporated herein by reference to
Exhibit (10)(ii)(b) to the Registration
Statement on Form 8-A, Registration No. 0-
27-098, dated October 26, 1995
Exhibit (10)(ii)(c) Management Recognition Plan of First
Savings Bank of Moore County, Inc., SSB,
incorporated herein by reference to
Exhibit (10)(ii)(c) to the Registration
Statement on Form 8-A, Registration No. 0-
27-098, dated October 26, 1995
Exhibit (10)(ii)(d) Bonus Compensation Plan of First Savings
Bank of Moore County, Inc., SSB,
incorporated herein by reference to
Exhibit (10)(ii)(d) to the Registration
Statement on Form 8-A, Registration No. 0-
27-098, dated October 26, 1995
Exhibit (10)(ii)(e) Employment Agreement between First Savings
Bank of Moore County, Inc., SSB and
William E. Samuels, Jr., incorporated
herein by reference to Exhibit (10)(ii)(e)
to the Registration Statement on Form 8-A,
Registration No. 0-27-098, dated October
26, 1995
Exhibit (10)(ii)(f) Employment Agreement between First Savings
Bank of Moore County, Inc., SSB and John
F. Burns, incorporated herein by reference
to Exhibit (10)(ii)(f) to the Registration
Statement on Form 8-A, Registration No. 0-
27-098, dated October 26, 1995
</TABLE>
36
<PAGE>
<TABLE>
<S> <C>
Exhibit (11) Statement Regarding Computation of Per
Share Earnings
Exhibit (12) Statement Regarding Computation of Ratios
Exhibit (13) 1996 Annual Report to Security Holders
Exhibit (21) Subsidiaries of the Registrant,
incorporated herein by reference to
Exhibit (21) to the Registration Statement
on Form 8-A, Registration No. 0-27-098,
dated October 26, 1995
Exhibit (27) Financial Data Schedule
</TABLE>
14(b) First Savings filed no reports on Form 8-K during the last quarter of
the fiscal year ended June 30, 1996.
37
<PAGE>
SIGNATURES
==========
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST SAVINGS BANCORP, INC.
Date: September 27 , 1996 By: /s/ William E. Samuels, Jr.
---- --------------------------------------
William E. Samuels, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ William E. Samuels, Jr. President, Chief Executive September 27, 1996
- ---------------------------- Officer and Director --
William E. Samuels, Jr.
/s/ John F. Burns Executive Vice President, September 27, 1996
- ---------------------------- Principal Financial Officer --
John F. Burns and Director
/s/ Timothy S. Maples Vice President, Controller and September 27, 1996
- ---------------------------- Principal Accounting Officer --
Timothy S. Maples
/s/ H. David Bruton Director September 27, 1996
- ---------------------------- --
H. David Bruton
/s/ J. E. Causey Director September 27, 1996
- ---------------------------- --
J. E. Causey
/s/ Henry A. Clayton Director September 27, 1996
- ---------------------------- --
Henry A. Clayton
/s/ W. Harry Fullenwider Director September 27, 1996
- ---------------------------- --
W. Harry Fullenwider
/s/ Frank G. Hardister Director September 27, 1996
- ---------------------------- --
Frank G. Hardister
/s/ W. Harrell Johnson Director September 27, 1996
- ---------------------------- --
W. Harrell Johnson
/s/ Joe Montesanti, Jr. Director September 27, 1996
- ---------------------------- --
Joe Montesanti, Jr.
/s/ Thomas F. Phillips Director September 27, 1996
- ---------------------------- --
Thomas F. Phillips
</TABLE>
38
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequential
Exhibit No. Description Page No.
- ----------- ----------- ----------
<S> <C>
(11) Statement Regarding Computation of Per Share Earnings.....
(12) Statement Regarding Computation of Ratios.................
(13) 1996 Annual Report to Security Holders....................
(27) Financial Data Schedule...................................
</TABLE>
39
<PAGE>
Exhibit 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Earnings per common share of $0.98 for the year ended June 30, 1996
was calculated by dividing net income of $3,920,755 for the year ended June 30,
1996 by the average common and common equivalent shares outstanding of
3,993,070. Earnings per common share of $.95 for the year ended June 30, 1995
was calculated by dividing net income of $3,772,733 by the weighted-average
number of common and common equivalent shares outstanding of 3,954,047. Common
stock equivalents consist of stock options.
<PAGE>
Exhibit 12
STATEMENT REGARDING COMPUTATION OF RATIOS
The averages used in computing the performance ratios provided in Item 7
represent average daily balances.
<PAGE>
EXHIBIT 13
FIVE YEAR
SUMMARY
<TABLE>
<CAPTION>
At June 30,
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Balance of:
Assets $ 256,986 $ 251,787 $ 248,202 $ 222,640 $ 208,102
Loans receivable, net 177,431 159,777 142,779 140,004 132,002
Mortgage - backed securities 2,965 4,484 5,872 12,241 17,861
Securities 67,999 81,372 93,554 64,349 52,775
Deposits 187,424 183,080 182,199 195,174 183,595
Borrowed funds 422 543 648
Shareholders' equity $ 66,811 $ 65,511 $ 63,294 $ 26,052 $ 23,050
- --------------------------------------------------------------------------------------------------
For the Years Ended June 30,
1996 1995 1994 1993 1992
-----------------------------------------------------
(Dollars in thousands)
Operating Data:
Interest and dividend income $ 18,550 $ 17,438 $ 16,658 $ 17,159 $ 17,979
Interest expense 9,215 8,140 8,102 9,458 11,237
-----------------------------------------------------
Net interest income 9,335 9,298 8,556 7,701 6,742
Provision for loan losses 565 64
-----------------------------------------------------
Net interest income after provision for
loan losses 9,335 9,298 8,556 7,136 6,678
Non interest income 364 7 379 308 226
General and administrative expenses 2,683 3,584 5,693 2,671 2,523
-----------------------------------------------------
Income before income taxes 6,006 5,721 3,242 4,773 4,381
Income tax expense 2,085 1,948 1,066 1,771 1,524
-----------------------------------------------------
Net income $ 3,921 $ 3,773 $ 2,176 $ 3,002 $ 2,857
-----------------------------------------------------
Earnings per common share $ .98 $ .95 $ .10 $ N/A $ N/A
-----------------------------------------------------
Dividends declared per common share $ .64 $ .60 $ .15 $ N/A $ N/A
-----------------------------------------------------
</TABLE>
* Presented for the period from stock conversion through June 30, 1994.
<PAGE>
=======================
MANAGEMENT'S
- ---------------------------- DISCUSSION & ANALYSIS -----------------------------
=======================
INTRODUCTION
First Savings Bancorp, Inc. (First Savings Bancorp, Inc., and its
subsidiary, First Savings Bank of Moore County, Inc., SSB are collectively
referred to as "First Savings") is a bank holding company organized under the
laws of the state of North Carolina. First Savings Bank of Moore County, Inc.,
SSB (the "Bank"), is a North Carolina chartered savings bank and its deposits
are insured by the Savings Association Insurance Fund ("SAIF") administered by
the Federal Deposit Insurance Corporation ("FDIC"). First Savings converted from
a federally chartered savings bank to a North Carolina chartered savings bank on
June 22, 1993, and effective January 6, 1994 converted to a capital stock
institution.
First Savings' primary market area is Moore County, North Carolina. Moore
County is home to several nationally recognized golf courses and is a popular
tourist and convention destination. The famed Pinehurst Resort is located
approximately three miles from Southern Pines. The Pinehurst Resort, founded in
1895, boasts eight championship golf courses, including Pinehurst No. 2 which is
to be host of the 1999 U.S. Open. In addition, Moore County is a popular
retirement community. As a result, the economy of Moore County is primarily
service oriented. On June 30, 1996, First Savings had total assets of
approximately $257.0 million, net loans of $177.4 million, deposits of
approximately $187.4 million and shareholders' equity of $66.8 million.
First Savings is principally engaged in the business of attracting deposits
from the general public and using such deposits and other funds to make real
estate loans. On June 30, 1996, approximately 85.6% of First Savings' net loan
portfolio was composed of one-to-four family residential real estate loans.
Revenues of First Savings are derived primarily from interest on loans. First
Savings also receives interest income from its securities, mortgage-backed
securities and interest-bearing deposit balances. The major expenses of First
Savings are interest on deposits and general administrative expenses such as
salaries, employee benefits, federal deposit insurance premiums and branch
occupancy and related expenses.
The following management's discussion and analysis is presented to assist
in understanding the financial condition and results of operations. This
discussion should be read in conjunction with the audited consolidated financial
statements and related footnotes presented in this report.
FINANCIAL CONDITION
Asset/Liability Management
A principal operating strategy of First Savings has been the development of
a better match between the repricing of interest-earning assets and interest-
bearing liabilities in order to reduce the Bank's exposure to adverse changes in
interest rates.
Principal among First Savings' asset/liability management strategies has
been (1) the origination of adjustable-rate, single-family mortgage loans; (2)
the origination of adjustable-rate home equity line of credit loans; (3)
maintaining a short-term investment portfolio; and (4) attempting to lengthen
deposit maturities. During fiscal year 1996, the Bank originated 673 mortgage
loans totaling $52.0 million, of which $22.2 million were one, three or five-
year adjustable-rate mortgages or home equity loans. At June 30, 1996, $130.4
million or 73.5% of the Bank's $177.4 million in total net loans had adjustable
interest rates. Although earnings could still be affected negatively by a rapid
and sustained increase in the level of interest rates, management believes
assets and liabilities are structured to preserve net income during interest
rate changes.
Gap Analysis
First Savings' asset/liability management may be analyzed by examining the
extent to which its assets and liabilities are "interest rate sensitive" and by
monitoring
- ---------------------------------------3----------------------------------------
<PAGE>
=======================
MANAGEMENT'S
- ---------------------------- DISCUSSION & ANALYSIS -----------------------------
=======================
its interest rate sensitivity "gap." An asset or liability is said to be
interest rate sensitive within a specific time period if it matures or reprices
during that period. The interest rate sensitivity gap is defined as the excess
of interest-earning assets maturing or repricing within a specific time period
over interest-bearing liabilities maturing or repricing within that same time
period. Gap is considered positive when the amount of interest rate sensitive
assets repricing or maturing within a period exceeds the amount of interest rate
sensitive liabilities repricing or maturing during that same period. Gap is
considered negative when the amount of interest rate sensitive liabilities
repricing or maturing within a period exceeds the amount of interest rate
sensitive assets repricing or maturing during that same period. During a period
of rising interest rates, a negative gap would tend to adversely affect net
interest income while a positive gap would tend to result in an increase in net
interest income. During a period of falling interest rates, a negative gap would
tend to result in an increase in net interest income while a positive gap would
tend to adversely affect net interest income.
The following Gap Analysis table sets forth the amounts of interest-earning
assets and interest-bearing liabilities outstanding at June 30, 1996, which are
expected to reprice or mature in each of the future time periods shown. The
assets or liabilities shown, which reprice or mature during a particular period,
were determined in accordance with the contractual terms of the asset or
liability. Adjustable-rate loans are assumed to reprice at contractual repricing
intervals.
- -------------------------------------------------------------------------------
Terms to Repricing at June 30,1996
---------------------------------------------------------
<TABLE>
<CAPTION>
GAP ANALYSIS 1 Year More Than More Than More Than
or Less 1 Year 3 Years 5 Years More Than
To 3 Years To 5 Years To 10 Years 10 Years Total
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans:
Adjustable rate residential 1-4 family $ 31,117 $ 51,740 $7,783 $ 21,777 $ 2,100 $ 114,517
Fixed rate 1-4 family 61 529 919 10,707 27,802 40,018
Adjustable rate non-residential 4,700 4,233 1,056 271 10,260
Fixed rate non-residential 2 170 547 738 4,435 5,892
Home equity and property improvement 5,606 5,606
Other loans 565 80 1,098 4 1,747
Investments 13,891 37,632 16,238 950 68,711
Mortgage-backed securities 1,128 319 262 650 606 2,965
--------------------------------------------------------------------------------
Total interest-earning assets $ 57,070 $ 94,703 $ 27,903 $ 34,826 $ 35,214 $ 249,716
-------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits:
Certificates of deposit $ 73,509 $ 42,074 $ 3,736 $ 35 $ $ 119,354
Interest-bearing checking 15,935 15,935
Money market deposit accounts 40,639 40,639
Passbook savings 9,999 9,999
Borrowed funds 422 422
------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 140,504 $ 42,074 $ 3,736 $ 35 $ $ 186,349
-----------------------------------------------------------------------------------
INTEREST SENSITIVITY GAP PER PERIOD $ (83,434) $ 52,629 $ 24,167 $ 34,791 $ 35,214 $ 63,367
CUMULATIVE INTEREST SENSITIVITY GAP $ (83,434) $ (30,805) $ ( 6,638) $ 28,153 $ 63,367 $ 63,367
CUMULATIVE GAP AS A PERCENTAGE OF
TOTAL INTEREST-EARNING ASSETS (33.41)% (12.34)% (2.66)% 11.27% 25.38% 25.38%
CUMULATIVE INTEREST-EARNING ASSETS
AS A PERCENTAGE OF INTEREST-BEARING
LIABILITIES 40.62 % 83.13 % 96.44 % 115.11% 134.00% 134.00%
</TABLE>
- -------------------------------------------4------------------------------------
<PAGE>
=======================
MANAGEMENT'S
- ---------------------------- DISCUSSION & ANALYSIS -----------------------------
=======================
Passbook accounts, money market deposit accounts and negotiable order of
withdrawal or other transaction accounts are assumed to be subject to immediate
repricing and depositor availability and have been placed in the shortest
period. No prepayment assumptions have been made for any interest-earning assets
or interest-bearing liabilities. In addition, the table does not reflect
scheduled principal payments which will be received throughout the lives of the
loans. The interest sensitivity of First Savings' assets and liabilities
illustrated in the table would vary substantially if different assumptions were
used or if actual experience differs from that indicated by such assumptions.
The Gap Analysis table does not necessarily indicate the impact of general
interest rate movements on the Bank's net interest yield because the repricing
of various categories of assets and liabilities is discretionary and is subject
to competitive and other pressures. As a result, various assets and liabilities
indicated as repricing within the same period may in fact reprice at different
times and at different rate levels.
LIQUIDITY
Maintaining adequate liquidity while managing interest rate risk is the
primary goal of First Savings' asset and liability management strategy.
Liquidity is the ability to fund the needs of the Bank's borrowers and
depositors, pay operating expenses, and meet regulatory liquidity requirements.
Maturing investments, loan and mortgage-backed security principal repayments,
deposits and income from operations are the main sources of liquidity. The
Bank's primary uses of liquidity are to fund loans and to make investments.
As of June 30, 1996, liquid assets (cash and cash equivalents, and
marketable investment securities) were approximately $75.7 million, which
represents 40.4% of deposits. As a North Carolina chartered savings bank, First
Savings is required to maintain liquid assets equal to at least 10.0% of its
total assets. For purposes of this requirement, liquid assets consist of cash
and readily marketable investments and mortgage-backed securities. At June 30,
1996, this liquidity ratio, based on North Carolina regulations, was 29.5%.
Management considers current liquidity levels to be adequate to meet First
Savings' foreseeable needs.
At June 30, 1996, outstanding mortgage loan commitments and available home
equity line of credit balances were $13.6 million, available credit card line of
credit balances were $2.4 million and the undisbursed portion of construction
loans was $5.2 million. Funding for these commitments is expected to be provided
from deposits, loan and mortgage-backed securities principal repayments,
maturing investments and income generated from operations.
CAPITAL RESOURCES
Under Federal capital regulations, First Savings must satisfy certain
minimum leverage ratio requirements and risk-based capital requirements. Failure
to meet such requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on First Savings' financial statements. At June 30, 1996
and 1995, First Savings exceeded all such requirements.
The Bank is restricted in its ability to pay dividends and to make
distributions. A significant source of First Savings' funds are dividends
received from the Bank. In fiscal 1997, the amount of dividends that can be paid
without prior approval from regulators is approximately $1,960,000. These funds
should be adequate to cover First Savings' needs.
- ---------------------------------------5----------------------------------------
<PAGE>
=======================
MANAGEMENT'S
- ---------------------------- DISCUSSION & ANALYSIS -----------------------------
=======================
Average Yield/Cost Analysis
The following table contains information relating to First Savings' average
balance sheet and reflects the average yields on assets and average costs of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average balances of assets or liabilities,
respectively, for the periods presented.
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------------------------------------------
1996 1995 1994
------------------------- ----------------------------- ----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------------------------- ---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits $ 2,170 $ 161 7.42% $ 2,192 $ 145 6.61% $ 11,519 $ 383 3.32%
Investments, net, at cost 75,155 4,690 6.24% 83,563 5,188 6.21% 73,504 4,508 6.13%
Mortgage-backed securities 3,842 293 7.63% 5,042 389 7.72% 8,636 568 6.58%
Loans receivable, net 168,579 13,406 7.95% 150,809 11,716 7.77% 140,386 11,199 7.98%
------------------ -------------------- ---------------------
Total interest-earning assets $ 249,746 18,550 7.43% 241,606 17,438 7.16% 234,045 16,658 7.12%
Non-interest-earning assets 5,963 6,525 5,838
---------- ---------- -----------
Total assets $ 255,709 $ 248,131 $ 239,983
========== ========== ===========
Interest-bearing liabilities:
Passbooks savings $ 10,093 $ 252 2.50% $ 11,485 $ 288 2.51% $ 14,913 $ 391 2.62%
NOW and money market accounts 57,130 1,956 3.42% 66,183 2,117 3.20% 78,794 2,431 3.09%
Certificates of deposit 117,436 6,957 5.92% 102,690 5,595 5.45% 100,225 5,261 5.25%
Borrowed funds 845 50 5.92% 2,260 140 6.19% 312 19 6.09%
------------------ -------------------- --------------------
Total interest-bearing
liabilities 185,504 9,215 4.97% 182,618 8,140 4.46% 194,244 8,102 4.17%
Non-interest bearing liabilities 3,272 2,045 1,595
---------- ---------- -----------
Total liabilities 188,776 184,663 195,839
---------- ---------- -----------
Shareholders' equity 66,933 63,468 44,144
---------- ---------- -----------
Total liabilities and $ 255,709 $ 248,131 $ 239,983
shareholders' equity ========== ========== ===========
Net interest income and
interest rate spread $ 9,335 2.46% $ 9,298 2.70% $ 8,556 2.95%
Net interest-earning assets
and net interest margin $ 64,242 3.74% $ 60,818 3.82% $ 39,801 3.66%
Percentage of average
Interest-earning assets to
average interest-bearing
liabilities 134.63% 133.30% 120.49%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------------------------6----------------------------------------
<PAGE>
=======================
MANAGEMENT'S
- ---------------------------- DISCUSSION & ANALYSIS -----------------------------
=======================
RATE/VOLUME ANALYSIS
The table below provides information regarding changes in interest income and
interest expense for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is provided
on changes attributable to (i) changes in volume (changes in volume multiplied
by the prior period's rate); (ii) changes in rates (change in rate multiplied by
the prior period's volume); (iii) changes in rate-volume (changes in rate
multiplied by changes in volume), and (iv) net change (the sum of previous
columns).
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended June 30,
----------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs 1994
Increase (Decrease) Increase (Decrease)
Due to Due to
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
------------------------------------------ ----------------------------------------
(Dollars in thousand)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Interest-earning deposits $ (1) $ 18 $ $ 17 $ (310) $ 379 $ (307) $(238)
Investments (1) (522) 27 (3) (498) 617 55 8 680
Mortgage-backed securities (93) (5) 1 (97) (236) 98 (41) (179)
Loan portfolio 1,380 277 33 1,690 832 (293) (22) 517
---------------------------------------- ---------------------------------------
Total interest income 764 317 31 1,112 903 239 (362) 780
---------------------------------------- ---------------------------------------
Interest expense:
Passbooks savings (35) (1) (36) (90) (17) 4 (103)
NOW and money market accounts (290) 149 (20) (161) (389) 89 (14) 314
Certificates of deposit 804 488 70 1,362 129 200 5 334
Borrowed funds (88) (6) 4 (90) 119 2 121
---------------------------------------- ---------------------------------------
Total interest expense 391 630 54 1,075 (231) 272 (3) 38
---------------------------------------- ---------------------------------------
Net interest income (expense) $ 373 $(313) $(23) $ 37 $1,134 $ (33) $ (359) $ 742
======================================== =======================================
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------
1994 vs. 1993
Increase (Decrease)
Due to
Rate/
Volume Rate Volume Total
------------------------------------------
<S> <C> <C> <C> <C>
Interest Income
Interest-earning deposits $ 4 $ 53 $ 1 $ 58
Investments (1) 1,750 (516) (256) 978
Mortgage-backed securities (847) (684) 327 (1,204)
Loan portfolio 385 (695) (23) (333)
-----------------------------------------
Total interest income 1,292 (1,842) 49 (501)
-----------------------------------------
Interest expense:
Passbooks savings 131 (68) (25) 38
NOW and money market accounts (212) (450) (35) (273)
Certificates of deposit (530) (665) 55 (1,140)
Borrowed funds 19 19
-----------------------------------------
Total interest expense (187) (1,183) 14 (1,356)
-----------------------------------------
Net interest income (expense) $1,479 $ (659) $ 35 $ 855
=========================================
- ----------------------------------------------------------------------------------
</TABLE>
(1) Includes investment securities and FHLB stock.
LOAN PORTFOLIO COMPOSITION
First Savings' consolidated net loan portfolio totaled approximately $177.4
million at June 30, 1996, representing 69.1% of First Savings' total assets. At
June 30, 1996, approximately 73.5% of First Savings' net loan portfolio was
composed of adjustable rate loans, and approximately 26.5% of First Savings' net
loan portfolio was composed of fixed rate loans. At June 30, 1996, approximately
$151.9 million, or 85.6%, of First Savings' net loan portfolio was composed of
one-to-four family residential real estate loans. On such date, approximately
$12.4 million, or 7.0%, of First Savings' net loan portfolio was composed of
multi-family residential and non-residential real estate loans.
- ---------------------------------------7----------------------------------------
<PAGE>
=======================
MANAGEMENT'S
- ---------------------------- DISCUSSION & ANALYSIS -----------------------------
=======================
The following table sets forth the composition of First Savings' loan portfolio
by type of loan at the dates indicated.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
June 30,
------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------------------------------------------------------------------------------------------
(Dollars in thousands)
% of % of % of % of % of
Amount Total Amount Total Amount Total Amount Total Amount Total
----------------- ------------------ ------------------ ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $151,934 85.63% $137,855 86.28% $124,751 87.37% $120,877 86.34% $117,571 89.07
Multi-family
(5 or more units) 3,070 1.73 2,272 1.42 3,393 2.37 2,573 1.84 2,971 2.25
Construction 8,123 4.58 7,951 4.98 5,263 3.69 3,268 2.34 2,258 1.71
Commercial real estate
and other properties 12,028 6.78 11,844 7.41 11,022 7.72 12,227 8.73 7,604 5.76
Home equity and property
improvement 5,607 3.16 4,066 2.55 2,852 2.00 2,863 2.04 2,568 1.95
----------------------------------------------------------------------------------------------------
Total real estate loans 180,762 101.88 163,988 102.64 147,281 103.15 141,808 101.29 132,972 100.74
----------------------------------------------------------------------------------------------------
Other:
Savings account loans 875 .49 703 .44 604 .42 824 .59 788 .60
Installment loans 351 .20 111 .07 - - - - - -
Credit card loans 520 .29 - - - - - - - -
----------------------------------------------------------------------------------------------------
Total other loans 1,746 .98 814 .51 604 .42 824 .59 788 .60
----------------------------------------------------------------------------------------------------
Less:
Unearned fees and
discounts 509 .29 458 .29 369 .26 246 .18 192 .15
Loans in process 3,959 2.23 3,958 2.48 4,128 2.89 1,752 1.25 1,500 1.14
Allowance for loan losses 609 .34 609 .38 609 .42 630 .45 66 .05
----------------------------------------------------------------------------------------------------
Total reductions 5,077 2.86 5,025 3.15 5,106 3.57 2,628 1.88 1,758 1.34
----------------------------------------------------------------------------------------------------
Total loans receivable, net $177,431 100.00% $159,777 100.00% $142,779 100.00% $140,004 100.00% $132,002 100.00%
====================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Nonperforming Assets
Since early 1993, the Bank's general policy has been to place a loan on
nonaccrual status when the loan becomes 90 days delinquent. Prior to that time,
it was the Bank's policy to place a loan in nonaccrual status when it became 90
days or more past due and when collateral pledged was determined to be
insufficient. Interest on loans that are contractually 90 days or more past due
is reserved through an allowance account. The allowance is established by a
charge to interest income equal to all interest previously accrued, and income
is subsequently recognized only to the extent cash payments are received, and in
management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal, in which case the loan is returned to
accrual status.
- ---------------------------------------9----------------------------------------
<PAGE>
=======================
MANAGEMENT'S
- ---------------------------- DISCUSSION & ANALYSIS -----------------------------
=======================
The following table sets forth information with respect to nonperforming assets
identified by the Bank, including nonaccrual loans and foreclosed real estate,
at the dates indicated. During the periods shown, First Savings had no
"restructured loans" as defined by Statement of Financial Accounting Standards
No. 15. Prior to 1993, First Savings did not place loans in a nonaccrual status
simply because they became 90 days delinquent. This policy was changed in 1993,
and this change in policy is reflected in the table.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
June 30,
1996 1995 1994 1993 1992
-----------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate:
Residential $ 134 $ 139 $ 329 $ 728 $ 79
Commercial 133 156
Consumer
-----------------------------------------------------------
Total 134 272 329 884 79
-----------------------------------------------------------
Accruing loans which are contractually past due
90 days or more:
Real estate:
Residential 281
Commercial
-----------------------------------------------------------
Total 281
------------------------------------------------------------
Total of nonaccrual and 90 days past due loans 134 272 329 884 360
------------------------------------------------------------
Foreclosed real estate
Other nonperforming assets
------------------------------------------------------------
Total nonperforming assets $ 134 $ 272 $ 329 $ 884 $ 360
------------------------------------------------------------
Total loans delinquent 90 days or more to net loans .08 % .17 % .23 % .63 % .21 %
Total loans delinquent 90 days or more to total assets .05 % .11 % .13 % .40 % .17 %
Total nonperforming assets to total assets .05 % .11 % .13 % .40 % .17 %
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
ALLOWANCE FOR lOAN lOSSES
In originating loans, the Bank recognizes that credit losses will be
experienced and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term of
the loan and, in the case of a secured loan, the quality of the security for the
loan, as well as general economic conditions. It is management's policy to
maintain an adequate allowance for loan losses based on, among other things, the
Bank's historical loan loss experience, evaluation of economic conditions and
regular review of delinquencies and loan portfolio quality. Specific allowances
are provided for individual loans when ultimate collection is considered
questionable by management after reviewing the current status of loans which are
contractually past due and considering the net realizable value of the security
for the loans.
- ------------------------------------9-------------------------------------------
<PAGE>
=====================
MANAGEMENT'S
- ---------------------------- DISCUSSION & ANALYSIS -----------------------------
=====================
In fiscal 1993, management significantly increased its allowance for loan
losses after reviewing general economic conditions characterized by the
continuing slow economic recovery, industry standards and allowances of
comparable institutions in its peer group. During fiscal year 1996 and based
upon a similar review, the Bank did not increase this allowance. Management
continues to actively monitor First Savings' asset quality, to charge-off loans
against the allowance for loan losses when appropriate and to provide specific
loss reserves when necessary. Although management believes it uses the best
information available to make determinations with respect to the allowance for
loan losses, future adjustments may be necessary if economic conditions differ
substantially from the economic conditions in the assumptions used in making the
initial determinations.
THE FOLLOWING TABLE DESCRIBES THE ACTIVITY RELATED TO THE BANK'S ALLOWANCE
FOR LOAN LOSSES FOR THE DATES INDICATED. THE FOLLOWING TABLE SETS FORTH THE
COMPOSITION OF THE ALLOWANCE FOR LOAN LOSSES BY TYPE OF LOAN AT THE DATES
INDICATED.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
JUNE 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $609 $609 $630 $ 66 $ 3
Provision for loan losses and losses on foreclosed real estate 564 64
Charge-offs:
Residential 1-4 family (4) (21)
Commercial real estate and other properties (1)
Home equity and property improvements
Construction
Savings accounts
Other consumer
Commercial
------------------------------------------------------------
(4) (21) (1)
Recoveries:
Residential 1-4 family 4
Commercial real estate and other properties
Construction
Savings accounts
Other consumer
Commercial
------------------------------------------------------------
4
------------------------------------------------------------
Balance at end of period $609 609 $609 $630 $ 66
============================================================
Ratio of net charge-offs during the period to average
loans outstanding during the period .00 % .00 % .01 % .00 % .00 %
============================================================
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
THE FOLLOWING TABLE SET FORTH THE COMPOSITION OF THE ALLOWANCE FOR LOAN
LOSSES BY TYPE OF LOAN AT THE DATES INDICATED.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
JUNE 30,
------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------------
Amount of Amount of Amount of
Amount of Loans to Amount of Loans to Amount of Loans to
Allowance Gross Loans Allowance Gross Loans Allowance Gross Loans
------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $503 82.59% $449 73.73% $484 79.47%
Commercial real estate and other property 50 8.21 139 22.82 120 19.70
Home equity and property improvement 17 2.79 11 1.81
Construction 15 2.47 10 1.64 5 .83
------------------------------------------------------------------------------------
Total real estate loans 585 96.06 609 100.00 609 100.00
------------------------------------------------------------------------------------
Savings account loans
Other consumer loans 24 3.94
------------------------------------------------------------------------------------
Total allowance for loan losses $609 100.00% $609 100.00% $609 100.00%
====================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------------------- 10 ---------------------------------------
<PAGE>
=====================
MANAGEMENT'S
- ---------------------------- DISCUSSION & ANALYSIS -----------------------------
=====================
RESULTS OF OPERATIONS FOR
THE FISCAL YEARS ENDED
JUNE 30, 1996
AND
JUNE 30, 1995
GENERAL
First Savings recorded net income of $3.9 million for the year ended June
30, 1996, an increase of 3.0% over the $3.8 million earned for the year ended
June 30, 1995. Earnings per share for fiscal year 1996 were $0.98 versus $0.95
for fiscal year 1995. The primary factor contributing to First Savings earnings
growth was an increase in non-interest income. Non-interest income was higher in
1996 primarily due to realized losses on sale of investments in 1995.
Nonperforming assets (loans 90 days or more delinquent and foreclosed real
estate owned) were $134,000 or .05% of total assets at June 30, 1996, compared
to $272,000 or .11% at June 30, 1995. First Savings did not have any real estate
owned at June 30, 1996 or June 30, 1995.
NET INTEREST INCOME
Net interest income for the years ended June 30, 1996 and 1995, was $9.3
million. The average yield on interest-earning assets increased by 27 basis
points, and the average cost of interest-bearing liabilities increased by 51
basis points for the year ended June 30, 1996, decreasing the Bank's interest
rate spread to 2.46% compared to 2.70% for the year ended June 30, 1995. The
primary reason for the increase in net interest income during the fiscal year
ended June 30, 1996 was that average interest-earning assets increased at a
higher rate than average interest-bearing liabilities. The average balance of
interest-earning assets and interest-bearing liabilities during the fiscal year
ended June 30, 1996 was $249.7 million and $185.5 million, respectively,
compared to $241.6 million and $182.6 million, respectively, during the fiscal
year ended June 30, 1995. The Average Yield/Cost Analysis table reflects the
average yields on assets and average cost of liabilities for the years ended
June 30, 1996, 1995, and 1994. Such average yields and costs are derived by
dividing income or expense by the average balance of interest-earning assets or
interest-bearing liabilities, respectively, for the period presented.
INTEREST AND DIVIDEND INCOME
First Savings' total interest and dividend income for the fiscal year ended
June 30, 1996 was $18.6 million as compared to $17.4 million for fiscal year
1995, an increase of $1.2 million or 6.9%. This increase was due primarily to an
increase in average interest-earning assets.
INTEREST EXPENSE
Total interest expense for the year ended June 30, 1996 increased by $1.1
million or 13.6% when compared to the prior year. The Bank's cost of funds
increased from 4.46% in 1995 to 4.97% in 1996, average interest-bearing
liabilities increased 1.6% from $182.6 million at June 30, 1995 to $185.5
million at June 30, 1996. There was no borrowed money outstanding at June 30,
1996, or June 30, 1995 except for the ESOP-note payable.
ALLOWANCE FOR LOAN LOSSES
At June 30, 1995, the allowance for loan losses was $609,000. During fiscal
year 1996, First Savings did not add to this reserve. With no net charge-offs
during the current year, the allowance for loan losses at June 30, 1996 remains
unchanged at $609,000. Management considers this level to be appropriate based
on lending volume, the current level of delinquencies, other nonperforming
assets and the overall economic conditions.
NONINTEREST INCOME
Total noninterest income for the fiscal year ended June 30, 1996 was
$364,000 as compared to $7,000 for fiscal year ended June 30, 1995. The increase
is primarily attributable to loss on sale of securities of $319,000 during the
year ended June 30, 1995. By selling lower yielding investments, and reinvesting
the proceeds into higher yielding U.S. agency securities, First Savings
repositioned its investment portfolio to maximize future earnings.
- ------------------------------------- 11 ---------------------------------------
<PAGE>
=====================
MANAGEMENT'S
- ---------------------------- DISCUSSION & ANALYSIS -----------------------------
=====================
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for fiscal year ended June 30, 1996
were $3.7 million compared to $3.6 million for the fiscal year ended June 30,
1995. The increase was attributed to normal salary increases for existing
employees and other operating expenses.
INCOME TAXES
Income tax expense increased for the fiscal year ended June 30, 1996 to
$2.1 million, as compared to $1.9 million for the same period in 1995. The
increase in income taxes was attributed to higher income because of the loss on
sale of securities in 1995.
* * * * * * * * * * * * * * * * *
RESULTS OF OPERATIONS FOR
THE FISCAL YEARS ENDED
JUNE 30, 1995
AND
JUNE 30, 1994
GENERAL
First Savings recorded net income of $3.8 million for the year ended June
30, 1995, an increase of 73% over the $2.2 million earned for the year ended
June 30, 1994. Earnings per share for 1995 were $0.95 versus $0.10 for 1994.
Earnings per share for 1994 are presented for the period from conversion,
January 6, 1994, through June 30, 1994. Primary factors contributing to First
Savings earnings growth were a decrease in general and administrative expenses
and an increased net interest margin. General and administrative expenses for
the fiscal year ended June 30, 1994 were significantly increased by nonrecurring
charges related to the Bank's conversion to stock form.
Nonperforming assets (loans 90 days or more delinquent and foreclosed real
estate owned) were $272,000 or .11% of total assets at June 30, 1995, compared
to $329,000 or .13% at June 30, 1994. First Savings did not have any real estate
owned at June 30, 1995 or June 30, 1994.
NET INTEREST INCOME
Net interest income for the year ended June 30, 1995, was $9.3 million as
compared to $8.6 million for the same period in 1994. This represents an 8.14%
increase. The average yield on interest-earning assets increased by 4 basis
points, and the average cost of interest-bearing liabilities increased by 29
basis points for the year ended June 30, 1995, allowing the Bank to maintain an
interest rate spread of 2.70% compared to 2.95% for the year ended June 30,
1994. The primary reason for the increase in net interest income during the
fiscal year ended June 30, 1995 was an increase in the average balance of
interest-earning assets and a decrease in the average balance of
interest-bearing liabilities as compared to the prior year. The average balance
of interest-earning assets and interest-bearing liabilities during the fiscal
year ended June 30, 1995 was $241.6 million and $182.6 million, respectively,
compared to $234.0 million and $194.2
- ------------------------------------- 12 ---------------------------------------
<PAGE>
=====================
MANAGEMENT'S
- ---------------------------- DISCUSSION & ANALYSIS -----------------------------
=====================
million, respectively, during the fiscal year ended June 30, 1994. The primary
reason for the increase in average interest-earning assets and decrease in
average interest-bearing liabilities was the Bank's receipt of proceeds from its
initial public offering in January 1994. The proceeds received by the Bank
consisted of new funds as well as funds from existing deposit accounts. The
Average Yield/Cost Analysis table reflects the average yields on assets and
average cost of liabilities for the years ended June 30, 1996, 1995 and 1994.
Such average yields and costs are derived by dividing income or expense by the
average balance of interest-earning assets or interest-bearing liabilities,
respectively, for the period presented.
INTEREST AND DIVIDEND INCOME
The Bank's total interest and dividend income for the fiscal year ended
June 30, 1995 was $17.4 million as compared to $16.7 million for fiscal year
1994, an increase of $.7 million or 4.2%. This increase was due primarily to an
increase in average interest-earning assets.
INTEREST EXPENSE
Total interest expense for the year ended June 30, 1995 remained relatively
unchanged when compared to the prior year. Although the Bank's cost of funds
increased from 4.17% in 1994 to 4.46% in 1995, average interest-bearing
liabilities decreased 5.97% from $194.2 million at June 30, 1994 to $182.6
million at June 30, 1995. There was no borrowed money outstanding at June 30,
1995, or June 30, 1994 except for the ESOP-note payable.
ALLOWANCE FOR LOAN LOSSES
At June 30, 1994, the allowance for loan losses was $609,000. During fiscal
year 1995, First Savings did not add to this reserve.
NONINTEREST INCOME
Total noninterest income for the fiscal year ended June 30, 1995 was $7,000
as compared to $379,000 for fiscal year ended June 30, 1994. The decrease is
primarily attributable to loss on sale of securities of $319,000 during the year
ended June 30, 1995. By selling lower yielding investments, and reinvesting the
proceeds into higher yielding U.S. agency securities, First Savings repositioned
its investment portfolio to maximize future earnings.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the fiscal year ended June 30, 1995
were $3.6 million compared to $3.0 million for the fiscal year ended June 30,
1994, excluding the effect of a nonrecurring charge to earnings associated with
the Bank's stock conversion. The increase was attributable to the increased cost
of operating as a stock company, normal salary increases for existing employees
and other operating expenses. The actual general and administrative expenses
including the nonrecurring charge to earnings for the year ended June 30, 1994,
were $5.7 million compared to $3.6 million for the same period in 1995.
INCOME TAXES
Income tax expense increased for the fiscal year ended June 30, 1995 to
$1.9 million, as compared to $1.1 million for the same period in 1994. The
increase in income taxes was attributed to higher income because of the
nonrecurring charge to earnings in 1994 from the stock conversion.
* * * * * * * * * * * * * * * * *
- ------------------------------------- 13 ---------------------------------------
<PAGE>
================
REPORT OF
- -------------------------------- INDEPENDENT ----------------------------------
AUDITORS
================
Board of Directors and Shareholders
First Savings Bancorp, Inc.
Southern Pines, North Carolina
We have audited the consolidated statements of financial condition of First
Savings Bancorp, Inc. and subsidiary ("First Savings") as of June 30, 1996 and
1995, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended June 30, 1996.
These financial statements are the responsibility of First Savings' management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
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, such consolidated financial statements present fairly, in all
material respects, the financial position of First Savings Bancorp, Inc. and
subsidiary at June 30, 1996 and 1995, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1996,
in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, First Savings
changed its method of accounting for securities effective July 1, 1994 to
conform with Statement of Financial Accounting Standards No. 115.
/s/ Deloitte & Touche LLP
August 16, 1996
Raleigh, North Carolina
- ---------------------------------------14---------------------------------------
<PAGE>
=====================
CONSOLIDATED
- ------------------------------- STATEMENTS OF --------------------------------
FINANCIAL CONDITION
=====================
<TABLE>
<CAPTION>
June 30,
ASSETS 1996 1995
---------------------------------------
<S> <C> <C>
Cash and cash equivalents (including interest-bearing
deposits of $712,975 in 1996; $1,069,351 in 1995) $ 4,718,222 $ 3,209,502
Securities at market value (Note 2) 67,998,548 78,303,877
Securities at amortized cost (market values -
$3,015,945 in 1996; $6,540,263 in 1995) (Note 2) 2,965,356 6,483,516
Loans receivable (net of allowance for loan losses of
$608,739 at June 30, 1996 and 1995) (Note 3) 177,430,728 159,777,211
Premises and equipment, net (Note 5) 2,018,711 2,064,818
Accrued interest receivable (Note 4) 1,622,039 1,761,315
Prepaid expenses and other assets 232,744 186,615
---------------------------------------
TOTAL $ 256,986,348 $ 251,786,854
=======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 6) $ 187,424,224 $ 183,080,342
Borrowed funds (Note 7) 421,952 542,880
Advances from borrowers for taxes and insurance 84,556 68,250
Accrued interest payable on deposits 113,151 104,537
Accrued expenses and other liabilities 1,371,044 1,586,268
Federal and state income taxes:
Currently payable 129,578
Deferred, net (Note 9) 630,457 893,460
---------------------------------------
Total liabilities 190,174,962 186,275,737
---------------------------------------
COMMITMENTS (Notes 3 and 12)
SHAREHOLDERS' EQUITY (Notes 9 and 10):
Preferred stock, no par value,
5,000,000 shares authorized,
none issued and outstanding
Common stock, no par value
20,000,000 shares authorized,
3,744,000 shares issued and outstanding 36,451,561 36,351,616
Unearned compensation related to
ESOP note payable (Note 11) (421,952) (542,880)
Net unrealized gain (loss) on securities available for sale (76) 474,352
Retained earnings 30,781,853 29,228,029
---------------------------------------
Total shareholders' equity 66,811,386 65,511,117
---------------------------------------
TOTAL $ 256,986,348 $ 251,786,854
=======================================
</TABLE>
See notes to consolidated financial statements.
- ---------------------------------------15---------------------------------------
<PAGE>
====================
CONSOLIDATED
- -------------------------------- STATEMENTS OF -------------------------------
INCOME
====================
<TABLE>
<CAPTION>
Years ended June 30,
INTEREST AND DIVIDEND INCOME: 1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Interest on loans receivable $ 13,406,157 $11,716,430 $11,199,115
Interest on mortgage-backed securities 293,452 388,863 568,026
Interest on securities 4,549,718 5,053,142 4,406,805
Dividends on securities 140,089 134,424 101,570
Other 160,551 145,512 382,671
---------------------------------------
Total interest and dividend income 18,549,967 17,438,371 16,658,187
---------------------------------------
INTEREST EXPENSE:
Deposits (Note 6) 9,165,030 7,999,800 8,082,559
Borrowed funds (Note 7) 50,324 140,403 19,440
---------------------------------------
Total interest expense 9,215,354 8,140,203 8,101,999
---------------------------------------
Net interest income 9,334,613 9,298,168 8,556,188
Provision for loan losses (Note 3) ---------------------------------------
Net interest income after provision
for loan losses 9,334,613 9,298,168 8,556,188
---------------------------------------
NONINTEREST INCOME:
Fees and service charges 311,462 286,772 330,323
Realized loss on sale of securities (318,948)
Income from real estate operations 7,230 1,679 10,535
Rent on safe deposit boxes 32,801 32,253 30,472
Other, net 12,429 5,487 7,700
---------------------------------------
Total noninterest income, net 363,922 7,243 379,030
---------------------------------------
</TABLE>
- ---------------------------------------16---------------------------------------
<PAGE>
=====================
CONSOLIDATED
- -------------------------------- STATEMENTS OF -------------------------------
INCOME
======================
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and fringe benefits (Note 11) $ 2,038,817 $ 1,984,902 $ 4,219,910
Occupancy and building (Note 12) 227,831 221,199 242,328
Premiums and assessments 416,491 440,967 502,731
Computer services 281,394 255,762 255,149
Other 728,247 681,848 472,820
---------------------------------------------------
Total general and administrative expenses 3,692,780 3,584,678 5,692,938
---------------------------------------------------
INCOME BEFORE INCOME TAXES $ 6,005,755 $ 5,720,733 $ 3,242,280
INCOME TAX EXPENSE (Note 9) 2,085,000 1,948,000 1,066,000
---------------------------------------------------
NET INCOME $ 3,920,755 $ 3,772,733 $ 2,176,280
===================================================
EARNINGS PER COMMON SHARE:
Net income $ 0.98 $ 0.95 $ 0.10
===================================================
Average common and common
equivalent shares outstanding 3,993,070 3,954,047 3,885,671
===================================================
</TABLE>
See notes to consolidated financial statements.
- ---------------------------------------17---------------------------------------
<PAGE>
=======================
CONSOLIDATED
- ----------------------------- STATEMENTS OF ----------------------------
SHAREHOLDERS' EQUITY
=======================
<TABLE>
<CAPTION>
Years Ended June 30, 1996, 1995, and 1994
Net Unrealized
Gain (Loss) on
Securities
Common Unearned Available for Retained Shareholders'
Stock Compensation Sale Earnings Equity
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1993 $ $ $ $ 26,051,994 $ 26,051,994
Issuance of shares of
common stock 36,275,418 (648,000) 35,627,418
Net income for year 2,176,280 2,176,280
Cash dividends declared
($.15 per share) (561,600) (561,600)
------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1994 36,275,418 (648,000) 27,666,674 63,294,092
Unrealized loss on securities
available for sale, net of tax
effect of $538,437 (1,045,201) (1,045,201)
Earned ESOP compensation 76,198 105,120 181,318
Change in net unrealized gain
(loss) on available for sale
securities, net of tax effect 1,519,553 1,519,553
Net income for year 3,772,733
Cash dividends declared
($.60 per share) (2,211,378)
------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1995 36,351,616 (542,880) 474,352 29,228,029 65,511,117
Earned ESOP compensation 99,945 120,928 220,873
Changes in net unrealized gain
(loss) on available for sale
accounts, net of tax effect (474,428) (474,428)
Net income for year 3,920,755 3,920,755
Cash dividends declared
($.64 per share) (2,366,931) (2,366,931)
------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 $ 36,451,561 $ (421,952) $ (76) $ 30,781,853 $ 66,811,386
====================================================================================
</TABLE>
See notes to consolidated financial statements.
- ---------------------------------------18---------------------------------------
<PAGE>
================
CONSOLIDATED
- ------------------------------- STATEMENTS OF ---------------------------------
CASH FLOWS
================
<TABLE>
<CAPTION>
Years Ended June 30,
1996, 1995, 1994
-------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,920,755 $ 3,772,733 $ 2,176,280
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of premises and equipment 120,433 120,738 140,649
Issuance of ESOP shares 220,873 181,318
Net change in premiums and discounts on
securities and mortgage-backed securities 617,085 883,662 (708,599)
Stock dividends on securities (75,400)
Deferred income taxes (18,600) (34,000) (20,000)
Loan origination fees and costs deferred,
net of current amortization 51,455 88,252 122,796
Loss on sale of real estate 17,510
Changes in:
Accrued interest receivable 139,276 67,529 (275,836)
Prepaid expenses and other assets (46,129) (122,701) 4,545
Accrued interest payable on deposits 8,614 (23,630) (28,602)
Advances by borrowers for taxes and
insurance 16,306 (44,356) (12,117)
Accrued expenses and other liabilities (81,382) 186,868 84,077
Taxes payable 129,578 (246,136) 61,285
-------------------------------------------------------------
Net cash provided by operating activities 5,078,264 4,830,277 1,486,588
-------------------------------------------------------------
INVESTING ACTIVITIES:
Proceeds from maturities of certificates
of deposit 2,200,000 2,000,000
Purchases of certificates of deposit (2,200,000)
Proceeds from maturities of securities 11,000,000 6,050,000 5,070,000
Proceeds from sales of securities 13,933,984
Loss on sale of securities 318,948
Purchases of securities (13,000,000) (35,000,000)
Principal payments on mortgage-backed
securities 1,487,573 1,339,074 6,265,132
Loan originations, net of principal repayments (17,704,972) (17,086,307) (2,907,220)
Purchases of premises and equipment (74,326) (49,486) (49,950)
Improvement costs on real estate (30,279)
-------------------------------------------------------------
Net cash used in investing activities (5,291,725) (6,293,787) (26,830,580)
-------------------------------------------------------------
</TABLE>
- ---------------------------------------19---------------------------------------
<PAGE>
=================
CONSOLIDATED
- ------------------------------- STATEMENTS OF --------------------------------
CASH FLOWS
=================
<TABLE>
<CAPTION>
Years ended June 30,
1996 1995 1994
---------------------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in deposits $ 4,343,882 $ 881,400 $ (12,974,571)
Net increase (decrease) in borrowed funds (120,928) (105,120) 648,000
Net proceeds from issuance of common stock 35,627,418
Cash dividends paid (2,500,773) (1,703,136)
---------------------------------------------------------------------
Net cash provided by (used in) financing
activities 1,722,181 (926,856) 23,300,847
---------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,508,720 (2,390,366) (2,043,145)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 3,209,502 5,599,868 7,643,013
---------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 4,718,222 $ 3,209,502 $ 5,599,868
=====================================================================
SUPPLEMENTAL DISCLOSURES:
- -------------------------
Cash paid for:
Interest on deposits $ 9,173,644 $ 8,023,430 $ 8,111,161
Interest on borrowed funds 51,952 142,423 9,720
Income taxes 1,971,500 2,228,136 1,005,716
Noncash transactions:
Transfers from loans to foreclosed real estate 131,968
Loans to facilitate the sale of foreclosed
real estate 123,000
</TABLE>
See notes to consolidated financial statements
- ---------------------------------------20---------------------------------------
<PAGE>
==========================
- --------------------------- NOTES TO CONSOLIDATED ----------------------------
FINANCIAL STATEMENTS
===========================
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Basis of Presentation - The accompanying consolidated financial statements
include the accounts of First Savings Bancorp, Inc. ("First Savings") and
its wholly-owned subsidiary, First Savings Bank of Moore County, Inc., SSB
(the "Bank"). All significant intercompany balances and transactions have
been eliminated in consolidation.
Significant Accounting Policies - The significant accounting policies of
First Savings are summarized below:
a. Cash and Cash Equivalents - First Savings considers all highly
liquid investments with an original maturity of three months or less
to be cash equivalents.
b. Investments in Securities - First Savings adopted Statement of
Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115") on July 1,
1994. In accordance with SFAS 115, First Savings' investments in
securities are classified in two categories and accounted for as
follows:
. Securities to be Held to Maturity. Bonds, notes and debentures
for which First Savings has the positive intent and ability to
hold to maturity are reported at cost, adjusted for premiums
and discounts that are recognized in interest income using the
interest method over the period to maturity.
. Securities Available for Sale. Securities available for sale
consist of bonds, notes, debentures, and certain equity
securities not classified as trading securities or as
securities to be held to maturity.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are considered
to be other than temporary have resulted in write-downs of the
individual securities to their fair value. The related write-downs
have been included in earnings as realized losses.
Unrealized holding gains and losses, net of tax, on securities
available for sale are reported as a net amount in a separate
component of stockholders' equity until realized.
Prior to July 1, 1994, securities held for investment and securities
held for sale were carried at amortized cost and market,
respectively. Unrealized losses on securities held for sale were
included in earnings of the current period.
Gains and losses on the sale of securities available for sale are
determined using the specific-identification method.
c. Loans Receivable - Loans receivable that management has the intent
and ability to hold for the foreseeable future or until maturity or
payoff are reported at their outstanding principal balances, less
the allowance for loan losses, and net deferred loan-origination
fees and discounts.
Interest on loans is recorded as borrowers' monthly payments become
due. Accrual of interest on past due loans is discontinued after 90
days.
The Bank defers loan origination fees net of certain direct loan
origination costs. Such net fees and costs are recognized as an
adjustment to yield over the lives of the related loans.
- ---------------------------------------21---------------------------------------
<PAGE>
==========================
- --------------------------- NOTES TO CONSOLIDATED ----------------------------
FINANCIAL STATEMENTS
===========================
Allowances for loan losses are established by charges to operations
to reduce the recorded balances of mortgage loans receivable, loans
foreclosed in-substance, and real estate to their estimated net
realizable value or fair value, as applicable. Such allowances are
based on management's estimate of net realizable value or fair value
of the collateral, as applicable, considering the current and
currently anticipated future operating or sales conditions, thereby
causing these estimates to be particularly susceptible to changes
that could result in a material adjustment to results of operations.
Recovery of the carrying value of such loans and real estate is
dependent to a great extent on economic, operating, and other
conditions that may be beyond the Bank's control.
Effective July 1, 1995, the Bank adopted Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment
of a Loan ("SFAS 114"), and Statement of Financial Accounting
Standards No. 118, Accounting by Creditors for Impairment of a Loan
- Income Recognition and Disclosures ("SFAS 118"). SFAS 114 requires
that the carrying value of an impaired loan be based on the present
value of expected future cash flows discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral, if the
loan is collateral dependent. Under SFAS 114, a loan is considered
impaired when, based on current information, it is probable that the
borrower will be unable to pay contractual interest or principal
payments as scheduled in the loan agreement. SFAS 114 applies to all
loans except one-to-four family residential mortgage loans and small
balance homogeneous consumer loans that are collectively evaluated
for impairment.
Adoption of the new standard had no impact on the level of the
overall allowance for loan losses or on operating results and does
not affect the Bank's policies regarding write-offs, recoveries, or
income recognition.
d. Foreclosed Real Estate - Foreclosed real estate is recorded
initially at the lower of the loan balance plus unpaid accrued
interest or the estimated fair value of the property at the date of
foreclosure, and subsequently reduced by additional allowances which
are charged to earnings if the estimated fair value of the property
declines below its initial value. Costs related to the improvement
of the property are capitalized, whereas those related to holding
the property are expensed. Such properties are held for sale and,
accordingly, no depreciation or amortization expense is recognized.
e. Premises and Equipment - Premises and equipment are stated at cost.
Depreciation is computed by the straight-line method over the
estimated useful lives of the various classes of assets. The cost of
leasehold improvements is amortized by the straight-line method over
the lesser of the lives of the improvements or the terms of the
lease. Estimated useful lives are as follows:
Office buildings and improvements 8 to 50 years
Furniture, fixtures and equipment 3 to 10 years
Motor vehicles 4 years
f. Deferred Income Taxes - Deferred income taxes (benefits) are
provided on temporary differences between the financial statement
carrying values and the tax bases of assets and liabilities.
- ---------------------------------------22---------------------------------------
<PAGE>
==========================
- --------------------------- NOTES TO CONSOLIDATED ----------------------------
FINANCIAL STATEMENTS
===========================
g. Insurance of Accounts - Eligible savings accounts are insured up to
$100,000 by the Savings Association Insurance Fund ("SAIF"), which
is administered by the Federal Deposit Insurance Corporation
("FDIC").
h. Earnings Per Common Share - Effective January 6, 1994, the Bank
converted from a mutual association to a capital stock institution
with the issuance of 3,744,000 shares of common stock, no par value,
at a price of $10.00 per share. Earnings per common share of $.10
for the year ended June 30, 1994 is calculated by dividing net
income for the period January 6, 1994 to June 30, 1994 ($398,524) by
the weighted-average number of common and common equivalent shares
outstanding of 3,885,671.
Earnings per common share of $.95 and $.98, for the years ended June
30, 1995 and 1996 is calculated by dividing net income ($3,772,733
and $3,920,755, respectively), by the weighted-average number of
common and common equivalent shares outstanding (3,954,047 and
3,993,070, respectively). Common stock equivalents consist of stock
options. In determining the number of common stock equivalent shares
outstanding, the number of shares issuable upon exercise of stock
options has been reduced by the number of common shares assumed
purchased with a portion of the proceeds from the assumed exercise
of the common stock equivalents.
i. Cash Dividends - On June 17, 1996, First Savings declared a $0.25
per share cash dividend to shareholders of record on June 30, 1996,
payable on July 19, 1996.
j. Use of Estimates - The preparation of the consolidated financial
statements in conformity with generally accepted accounting
principle requires management to make estimates and assumptions that
affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
k. Reclassifications - Certain consolidated financial statement amounts
for 1995 and 1994 have been reclassified to conform to the 1996
presentation.
- ---------------------------------------23---------------------------------------
<PAGE>
===========================
- -------------------------- NOTES TO CONSOLIDATED --------------------------
FINANCIAL STATEMENTS
===========================
2. SECURITIES
The carrying amounts and fair values of First Savings' securities at June
30 are summarized as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
June 30, 1996:
U.S. government and agency securities $ 63,919,361 $ 511,634 $ 541,788 $ 63,889,207
N.C. state and municipal obligations 2,149,700 30,041 2,179,741
Federal Home Loan Bank stock 1,929,600 1,929,600
---------------------------------------------------------------
Total $ 67,998,661 $ 541,675 $ 541,788 $ 67,998,548
===============================================================
To be held to maturity:
June 30, 1996:
Mortgage-backed pass-through securties $ 2,965,356 $ 59,450 $ 8,861 $ 3,015,945
===============================================================
Avallable for sale:
June 30, 1995:
U.S. government and agency securities $ 73,504,959 $ 1,207,995 $ 556,565 $ 74,156,389
N.C. state and municipal obligations $ 2,150,602 67,286 2,217,888
Federal Home Loan Bank stock 1,929,600 1,929,600
---------------------------------------------------------------
Total $ 77,585,161 $ 1,275,281 $ 556,565 $ 78,303,877
===============================================================
To be held to maturity:
June 30, 1995:
U.S. government and agency securities $ 1,999,118 $ 4,382 $ $ 2,003,500
Morgage-backed pass-through securities 4,484,398 82,844 30,479 4,563,763
---------------------------------------------------------------
Total $ 6,483,516 $ 87,226 $ 30,479 $ 4,540,263
===============================================================
</TABLE>
For the year ended June 30, 1995, First Savings had gross realized losses
on sales of U.S. government securities of $318,948. There were no sales of
securities for the years ended June 30, 1996 and 1994.
The scheduled maturities of securities at June 30, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
Securities Securities to be
Available for Sale Held to Maturity
-------------------------------- ---------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 13,179,124 $ 13,217,935 $ $
Due after one year
through five years 53,869,537 53,824,913
Due after five years
through ten years 950,000 955,700
--------------------------------------------------------------------------------
67,998,661 67,998,548
Mortgage-backed
pass-through securities 2,965,356 3,015,945
--------------------------------------------------------------------------------
Total $ 67,998,661 $ 67,998,548 $ 2,965,356 $ 3,015,945
===============================================================================
</TABLE>
- -------------------------------------24-----------------------------------------
<PAGE>
===========================
- -------------------------- NOTES TO CONSOLIDATED --------------------------
FINANCIAL STATEMENTS
===========================
Expected maturities of mortgage-backed securities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
At June 30, 1996 securities available for sale totaling $475,000 and
$7,675,000 were pledged to secure public and private deposits,
respectively.
3. LOANS RECEIVABLE
The loan portfolio at June 30 consists of the various types of loans made
principally to borrowers located in Moore County, North Carolina and are
classified by major type as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------
<S> <C> <C>
Mortgage loans:
First mortgage loans $ 170,689,607 $ 156,511,647
First mortgage loan participations 4,465,056 3,410,170
Property improvement loans 4,218 9,095
Equity line loans 5,602,399 4,057,079
------------------------------------------------
180,761,280 163,987,991
------------------------------------------------
Less:
Loans in process 3,959,237 3,958,165
Net deferred loan fees 509,009 457,554
------------------------------------------------
Total mortgage loans 176,293,034 159,572,272
------------------------------------------------
Savings account loans 874,669 702,965
Installment loans 351,463 110,713
Credit card loans 520,301
------------------------------------------------
Total mortgage and other loans 178,039,467 160,385,950
Less allowance for loan losses 608,739 608,739
------------------------------------------------
Loans receivable, net $ 177,430,728 $ 159,777,211
================================================
</TABLE>
In the normal course of business, the Bank has made mortgage loan
commitments of approximately $5,242,000 and $6,729,000 and equity line
loans of approximately $8,336,000 and $4,632,000, at June 30, 1996 and
1995, respectively, and credit card loans of approximately $2,380,000 at
June 30, 1996. There were no credit card loans at June 30, 1995. Such loan
commitments are not reflected in the financial statements and are divided
between variable and fixed rates by approximately 73% and 27%,
respectively. All unused equity line loans and credit card loans are
variable rate loans. Bank management does not anticipate any material loss
as a result of these transactions. The Bank originates and purchases both
adjustable and fixed interest rate loans.
At June 30, 1996, the composition of these loans was as follows:
<TABLE>
<CAPTION>
Fixed Rate Adjustable Rate
------------------------------------------------------------------------------
Term to Book Value Term to Book Value
Maturity (in 000's) Adjustment (in 000's)
<S> <C> <C> <C>
1 mo. - 1 yr. $ 628 1 mo. - 1 yr. $ 41,422
1 yr. - 3 yr. 779 1 yr. - 3 yr. 55,973
3 yr. - 5 yr. 2,564 3 yr. - 5 yr. 8,839
5 yr. - 10 yr. 11,449 5 yr. - 10 yr. 21,777
10 yr. - 20 yr. 32,237 10 yr. - 20 yr. 2,371
------------- ---------------
Total $ 47,657 Total $ 130,382
============= ===============
</TABLE>
- -------------------------------------25-----------------------------------------
<PAGE>
===========================
- -------------------------- NOTES TO CONSOLIDATED --------------------------
FINANCIAL STATEMENTS
===========================
The adjustable rate mortgage loans have interest rate adjustment
limitations and are generally indexed to the weekly average yield on United
States Treasury securities adjusted to a constant maturity one-year, three-
year, or five-year as made available by the Federal Reserve Board. Future
market factors may affect the correlation of the interest rate adjustment
with the rates the Bank pays on the short-term deposits that have been
primarily utilized to fund these loans.
The Bank, through its normal lending activity, originates and maintains
loans which are substantially concentrated in Moore County, North Carolina.
At June 30, 1996 and 1995, loans to directors and officers were
approximately $701,000 and $709,000, respectively. Such loans are made on
the same terms as those offered to other customers.
The Bank's lending policy calls for collateral or other forms of repayment
assurance to be received from the borrower at the time of loan origination.
Such collateral or other form of repayment assurance is subject to changes
in economic value due to various factors beyond the control of the Bank and
such changes could be significant.
The Bank is subject to numerous lending-related regulations. For example,
the Bank may not make real estate loans to one borrower in excess of 15% of
its unimpaired capital and surplus except for loans not to exceed $500,000.
This 15% limitation results in a dollar limitation of approximately
$10,022,000 at June 30, 1996.
Changes in the allowance for loan losses for the years ended June 30 are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 608,739 $ 608,924 $ 630,134
Provision for loan losses
Charge-offs (4,185) (21,510)
Recoveries 4,000 300
--------------------------------------------------------
Balance at end of year $ 608,739 $ 608,739 $ 608,924
=======================================================
</TABLE>
In conformity with SFAS 114, as amended by SFAS 118, none of the Bank's
loans are considered to be impaired.
4. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------
<S> <C> <C>
Loans receivable $ 64,911 $ 62,408
Mortgage-backed securities 69,078 81,523
Securities 1,453,267 1,582,506
Other 34,783 34,878
------------------------------
Total $ 1,622,039 $ 1,761,315
==============================
</TABLE>
- ---------------------------------------26---------------------------------------
<PAGE>
===========================
- -------------------------- NOTES TO CONSOLIDATED --------------------------
FINANCIAL STATEMENTS
===========================
5. PREMISES AND EQUIPMENT
Premises and equipment at June 30, which are stated at cost, are summarized
as follows:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------
<S> <C> <C>
Land $ 379,306 $ 379,306
Office buildings and improvements 2,219,991 2,192,428
Furniture, fixtures and equipment 646,013 599,250
-----------------------------------
Motor vehicles 39,838 39,838
Total 3,285,148 3,210,822
Less allowance for depreciation 1,266,437 1,146,004
-----------------------------------
Premises and equipment, net $ 2,018,711 $ 2,064,818
===================================
</TABLE>
6. DEPOSITS
Deposits at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------
<S> <C> <C> <C>
NOW accounts $ 17,432,528 $ 17,540,876 $ 15,394,253
Money market deposits 40,638,693 37,706,234 59,300,695
Passbook savings 9,998,601 10,482,413 12,281,940
Certificates of deposit 119,354,402 117,350,819 95,222,054
---------------------------------------------------------------
Total $ 187,424,224 $ 183,080,342 $ 182,198,942
===============================================================
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit, each with
a minimum denomination of $100,000, was approximately $22,176,000 and
$19,627,000 in 1996 and 1995, respectively.
At June 30, 1996, the scheduled maturities of certificates of deposit are
as follows:
<TABLE>
<S> <C>
1997 $ 76,455,493
1998 37,609,166
1999 4,483,410
2000 806,333
---------------
$ 119,354,402
===============
</TABLE>
Included in deposits are non interest-bearing balances totalling $242,446,
$886,984, and $569,902 as of June 30, 1996, 1995 and 1994, respectively.
- ---------------------------------------27---------------------------------------
<PAGE>
===========================
- -------------------------- NOTES TO CONSOLIDATED --------------------------
FINANCIAL STATEMENTS
===========================
7. BORROWED FUNDS
Borrowed funds of $421,952 and $542,880 at June 30, 1996 and 1995,
respectively, are related to the ESOP note payable (See Note 11).
The note payable is collateralized by the common shares purchased by the
ESOP with the proceeds. The note will be repaid principally from First
Savings' discretionary contributions to the ESOP over a period not to
exceed ten years. Dividends paid on shares held by the ESOP may also be
used to reduce the note. The note is not guaranteed by First Savings.
Unearned compensation related to the ESOP note payable is amortized as
principal payments are made. The interest rate on the note is fixed at 6%
until February 7, 1997, at which time the rate will change to a variable
rate for the duration of the note.
8. INTEREST RATE RISK
First Savings is engaged principally in providing first mortgage loans to
individuals and commercial enterprises. At June 30, 1996, First Savings'
interest-earning assets consisted of assets that earn interest at both
fixed and adjustable rates. Those assets were funded primarily with short-
term liabilities that have interest rates that vary with market rates over
time.
At June 30, 1996, First Savings had interest-earning assets of $249,716,459
having a weighted-average effective yield of 7.39% and interest-bearing
liabilities of $186,349,268 having a weighted-average effective interest
rate of 4.83%.
9. INCOME TAXES
First Savings uses the asset and liability method to account for income
taxes. Under the asset and liability method, 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.
The components of income tax expense for the years ended June 30 are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------------
<S> <C> <C> <C>
Current tax provision $ 2,103,600 $ 1,914,000 $ 1,086,000
Deferred tax provision (18,600) 34,000 (20,000)
----------------------------------------------------
Total $ 2,085,000 $ 1,948,000 $ 1,066,000
====================================================
</TABLE>
A reconciliation of income taxes computed for the years ended June 30, at
the statutory federal income tax rate (34%) to the provision for income
taxes is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
Income taxes at the statutory
federal rate $ 2,041,957 $ 1,945,049 $ 1,102,376
Increases (decreases)
resulting from:
Tax exempt interest - net (29,091) (31,172) (29,163)
State income taxes - net of federal benefit 70,150 30,492
Other, net 1,984 3,631 (7,213)
----------------------------------------------------
Income tax expense $ 2,085,000 $ 1,948,000 $ 1,066,000
====================================================
</TABLE>
- ---------------------------------------28---------------------------------------
<PAGE>
===========================
- -------------------------- NOTES TO CONSOLIDATED --------------------------
FINANCIAL STATEMENTS
===========================
The approximate tax effects on each type of temporary difference at June
30, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------
<S> <C> <C>
Deferred tax assets relating to loan fees and costs $ 198,913 $ 176,474
Unrealized loss on securities available for sale 39
-----------------------------------------
Total 198,952 176,474
=========================================
Deferred tax liabilities:
Federal Home Loan Bank stock dividends 329,029 332,578
Depreciation 210,400 207,218
Bad debt reserve 289,980 285,774
Unrealized gain on securities available for sale 244,364
-----------------------------------------
Total 829,409 1,069,934
-----------------------------------------
Net deferred tax liability $ 630,457 $ 893,460
=========================================
</TABLE>
Under the Internal Revenue Code, First Savings is permitted an annual bad
debt deduction (not related to amount of loan losses actually anticipated
and charged to operations) in computing taxable income. The bad debt
deduction is generally based on a percentage of taxable income before the
bad debt deduction or on actual bad debt experience. Bad debt deductions in
excess of actual losses are deemed tax preference items and are subject to
a minimum tax.
The bad debt reserves created from income tax deductions are used to absorb
losses on loans. If the reserves are used for any other purpose, such
amounts are subject to tax. Since First Savings does not intend to use the
reserves for purposes other than to absorb loan losses, deferred income
taxes have not been provided on such reserves. Through June 30, 1996, the
accumulated amount of bad debt deductions on which income taxes have not
been provided amounted to approximately $6,800,000.
10. REGULATORY CAPITAL REQUIREMENTS
Federal banking regulations require that bank holding companies and their
bank subsidiaries meet various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on First Savings' financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, First Savings must meet specific capital guidelines that
involve quantitative measures of First Savings assets, liabilities, and
certain off- balance-sheet items as calculated under regulatory accounting
practices. First Savings' capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
- ---------------------------------------29---------------------------------------
<PAGE>
===========================
- -------------------------- NOTES TO CONSOLIDATED --------------------------
FINANCIAL STATEMENTS
===========================
Quantitative measures established by regulation to ensure capital adequacy
require First Savings to maintain minimum amounts and ratios of total and
Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average
assets.
As of May 10, 1996, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based, Tier 1 leverage
ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed the category.
Actual capital amounts and ratios for First Savings and the Bank are
presented in the table below:
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
Amount Ratio Amount Ratio
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
AS OF JUNE 30, 1996
Total Capital (to Risk Weighted Assets):
Consolidated $ 66,811,477 60.57% $ 8,904,800 more than/equal to 8.0%
First Savings Bank of Moore Co., Inc., SSB $ 55,931,035 50.88% $ 8,889,760 more than/equal to 8.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $ 66,811,553 60.02% $ 4,452,400 more than/equal to 4.0%
First Savings Bank of Moore Co., Inc., SSB $ 55,926,428 50.33% $ 4,444,880 more than/equal to 4.0%
Tier 1 Capital (to Average Assets):
Consolidated $ 66,811,553 26.13% $10,228,360 more than/equal to 4.0%
First Savings Bank of Moore Co., Inc., SSB $ 55,926,428 22.66% $ 9,870,360 more than/equal to 4.0%
AS OF JUNE 30, 1995
Total Capital :
(to Risk Weighted Assets) $ 65,645,504 72.80% $ 7,213,520 more than/equal to 8.0%
Tier 1 Capital :
(to Risk Weighted Assets) $ 65,036,765 72.13% $ 3,606,760 more than/equal to 4.0%
Tier 1 Capital :
(to Average Assets) $ 65,036,765 26.21% $ 9,925,240 more than/equal to 4.0%
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount Ratio
----------------------------------------
<S> <C> <C>
AS OF JUNE 30, 1996
Total Capital (to Risk Weighted Assets):
Consolidated N/A N/A
First Savings Bank of Moore Co., Inc., SSB $ 11,112,200 more than/equal to 10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated N/A N/A
First Savings Bank of Moore Co., Inc., SSB $ 6,667,320 more than/equal to 6.0%
Tier 1 Capital (to Average Assets):
Consolidated N/A N/A
First Savings Bank of Moore Co., Inc., SSB $ 2,337,950 more than/equal to 5.0%
AS OF JUNE 30, 1995
Total Capital :
(to Risk Weighted Assets) $ 9,016,900 more than/equal to 10.0%
Tier 1 Capital :
(to Risk Weighted Assets) $ 5,410,140 more than/equal to 6.0%
Tier 1 Capital :
(to Average Assets) $ 12,406,550 more than/equal to 5.0%
</TABLE>
In addition to federal regulatory requirements, the Bank is subject to a
North Carolina savings bank capital requirement of at least 5% of total
assets. At June 30, 1996 and 1995, the Bank's capital ratio under the North
Carolina requirement was 22.70% and 26.15%, respectively.
At June 30, 1996 and 1995, First Savings and the Bank exceeded all capital
requirements.
The Bank is also subject to restrictions on dividends. For the year ended
June 30, 1996 the Bank could not declare cash dividends payable to the
parent company in excess of one-half of its prior year's net income
($1,886,366) without prior approval from the Administrator of the Savings
Institution Division, North Carolina Department of Commerce.
11. COMPENSATION PLANS
First Savings maintains an employee profit sharing plan covering all
eligible employees. Contributions to the plan for the years ended June 30,
1996, 1995 and 1994 were $93,402, $80,944 and $103,395, respectively.
- ---------------------------------------30---------------------------------------
<PAGE>
===========================
- -------------------------- NOTES TO CONSOLIDATED --------------------------
FINANCIAL STATEMENTS
===========================
Upon the Bank's conversion to stock form, the First Savings Bank of Moore
County, Inc., SSB Employee Stock Ownership Plan ("ESOP") became effective.
As part of the conversion, the ESOP borrowed $648,000 from an independent
third party lender and the Bank contributed $72,000 in order to purchase
72,000 shares at $10 per share of common stock issued in the conversion.
(See Note 7).
First Savings has adopted a Management Recognition Plan ("MRP"), the
objective of which is to enable First Savings to retain personnel of
experience and ability. The Bank contributed sufficient funds to enable the
MRP to purchase 4% of the shares of common stock issued in the conversion.
Pursuant to the terms of the MRP, the Bank distributed the shares and paid
cash bonuses to recipients of stock awards to compensate those individuals
for a portion of the tax liability associated with the awards granted.
During the year ended June 30, 1994, the Bank recorded $2,687,938 of
compensation expense related to the distribution and cash bonuses.
First Savings has also adopted an Employee Stock Option Plan ("Employee
Plan") for officers and a Nonqualified Stock Option Plan for Directors (the
"Directors Plan") for nonemployee directors. The options have an original
term of ten years. The option exercise price is the market price of the
common stock on the date the option is granted. During the year ended June
30, 1994, 270,000 and 360,000 options were granted under the Employee Plan
and Directors Plan, respectively, at an exercise price of $10 per share. At
June 30, 1996, 90,000 shares of common stock were reserved for future
issuance for the Employee Plan. No options had been exercised under either
Plan as of June 30, 1996.
12. LEASES
Rentals under a long-term operating lease for First Savings' branch office
building in Pinehurst totaled $9,000, $9,000 and $7,800 for the years ended
June 30, 1996, 1995 and 1994, respectively. The lease, which has a term of
15 years, contains an escalation provision for a $100 per month increase at
the end of five and ten years.
At June 30, 1996, the minimum rental commitments required under this
noncancelable lease are as follows:
<TABLE>
<CAPTION>
Year Ending
<S> <C>
1997 $ 9,000
1998 9,300
1999 10,200
2000 10,200
2001 10,200
Thereafter 17,850
----------
Total $ 66,750
==========
</TABLE>
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by First Savings using available market
information and appropriate valuation methodologies. However, considerable
judgment is required to interpret market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts First Savings could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value
amounts.
- ---------------------------------------31---------------------------------------
<PAGE>
===========================
- -------------------------- NOTES TO CONSOLIDATED --------------------------
FINANCIAL STATEMENTS
===========================
The following methods and assumptions are used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents and Certificates of Deposit
-----------------------------------------------------
The carrying amount is a reasonable estimate of fair value.
Securities and Mortgage-Backed Securities
-----------------------------------------
For securities held as investments, fair value equals quoted market price,
if available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
Loans Receivable
----------------
For mortgage loans receivable, fair value is estimated using the quoted
market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types 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 credit
ratings and for the same remaining maturities.
Deposits
--------
The fair value of NOW accounts, savings accounts, and money market deposits
is the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Note Payable - ESOP
-------------------
The carrying amount is a reasonable estimate of fair value.
The estimated fair values of the Bank's financial instruments at June 30
are as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,718,222 $ 4,718,222 $ 3,209,502 $ 3,209,502
Securities 70,963,904 71,014,493 84,787,393 84,844,140
Loans receivable 177,430,728 172,874,050 159,777,211 161,183,055
---------------------------------------------------------------------------
$ 253,112,854 $ 248,606,765 $ 247,774,106 $ 249,236,697
===========================================================================
Financial liabilities:
Deposits 187,424,224 $ 185,002,489 $ 183,080,342 $ 182,698,441
Borrowed funds 421,952 421,952 542,880 542,880
---------------------------------------------------------------------------
$ 187,846,176 $ 185,424,441 $ 183,623,222 $ 183,241,321
===========================================================================
</TABLE>
- ---------------------------------------32---------------------------------------
<PAGE>
===========================
- -------------------------- NOTES TO CONSOLIDATED --------------------------
FINANCIAL STATEMENTS
===========================
The fair value estimates presented herein are based on pertinent information
available to management at June 30, 1996 and 1995, respectively. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been significantly revalued
for purposes of these financial statements since that date and, therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating data for the years ended June 30, is summarized as
follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------
(In thousands, except per share)
<S> <C> <C> <C> <C>
1996
Total interest and dividend income $ 4,588 $ 4,645 $ 4,643 $ $4,674
Total interest expense 2,330 2,343 2,283 2,259
-----------------------------------------------------------------------
Net interest income 2,258 2,302 2,360 2,415
Provision for loan losses
-----------------------------------------------------------------------
Net interest income after
provision for loan losses 2,258 2,302 2,360 2,415
Other expense, net 818 809 858 844
-----------------------------------------------------------------------
Income before income taxes 1,440 1,493 1,502 1,571
Income tax expense 493 518 522 552
-----------------------------------------------------------------------
Net income $ 947 $ 975 $ 980 $ 1,019
=======================================================================
Net earnings per share $ 0.24 $ 0.24 $ 0.25 $ 0.26
=======================================================================
Weighted average shares outstanding 3,984,527 3,991,870 3,978,248 3,993,834
=======================================================================
1995
Total interest and dividend income $ 4,250 $ 4,291 $ 4,388 $ 4,509
Total interest expense 1,903 1,945 2,040 2,252
-----------------------------------------------------------------------
Net interest income 2,347 2,346 2,348 2,257
Provision for loan losses
-----------------------------------------------------------------------
Net interest income after
provision for loan losses 2,347 2,346 2,348 2,257
Other expense, net (779) (878) (988) (932)
-----------------------------------------------------------------------
Income before income taxes 1,568 1,468 1,360 1,325
Income tax expense 536 500 446 466
-----------------------------------------------------------------------
Net income $ 1,032 $ 968 $ 914 $ 859
=======================================================================
Net earnings per share $ 0.26 $ 0.25 $ 0.23 $ 0.22
=======================================================================
Weighted average shares outstanding 3,971,023 3,948,027 3,928,751 3,944,318
=======================================================================
</TABLE>
- ---------------------------------------33---------------------------------------
<PAGE>
===========================
- -------------------------- NOTES TO CONSOLIDATED --------------------------
FINANCIAL STATEMENTS
===========================
15. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information of First Savings Bancorp, Inc., the parent
company, at June 30, 1996 and for the period November 1, 1995 to June 30,
1996 is presented below:
<TABLE>
<S> <C>
ASSETS
Cash $ 1,320,670
Securities at market value 10,274,500
Investment in subsidiary 55,931,035
Other assets 342,769
------------
Total assets $ 67,868,974
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 1,057,588
Shareholders' Equity 66,811,386
------------
Total liabilities and shareholders' equity $ 67,868,974
============
CONDENSED STATEMENT OF INCOME
Interest on securities $ 383,227
Earnings of subsidiary 2,419,456
------------
2,802,683
Other expenses 16,310
------------
Income before income tax 2,786,373
Income tax expense 124,000
------------
Net Income $ 2,662,373
============
</TABLE>
On December 19, 1995, the Bank contributed securities and accrued interest
receivable totalling $10,592,117 to the parent company. In addition, the
Bank subsidiary paid cash dividends of $1,996,880 to the parent during the
year.
- ---------------------------------------34---------------------------------------
<PAGE>
===========================
- -------------------------- CAPITAL STOCK ---------------------------
===========================
First Savings' common stock is traded on the NASDAQ National Market System
under the symbol "SOPN." As of June 30, 1996, there were 3,744,000 shares
outstanding and 1,185 shareholders of record, not including the number of
persons or entities whose stock is held in nominee or street name through
various brokerage firms or banks. Payment of dividends by the Bank subsidiary to
the holding company is subject to various restrictions. Under applicable banking
regulations, the Bank may not declare a cash dividend if the effect thereof
would be to reduce its net worth to an amount less than the minimum required by
federal and state banking regulations. In addition, for a period of five years
after the consummation of the Bank' stock conversion, which occurred on January
6, 1994, the Bank will be required to obtain prior written approval from the
Administrator of the Savings Institutions Division, North Carolina Department of
Commerce, before it can declare a cash dividend in an amount in excess of
one-half the greater of (i) its net income for the most recent fiscal year or
(ii) the average of its net income after dividends for the most recent fiscal
year and not more than two of the immediately preceding fiscal years, as
applicable.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Quarterly Common Stock Performance and Dividends Declared
For the Year Ended June 30, 1996
Stock Price Dividends Declared, Per Share
----------- -----------------------------
High Low Regular Special
<S> <C> <C> <C> <C>
First Quarter Ending September 30 $19.75 $17.50 $0.12 N/A
Second Quarter Ending December 31 $20.25 $17.25 $0.12 N/A
Third Quarter Ending March 31 $19.25 $17.50 $0.15 N/A
Fourth Quarter Ending June 30 $19.25 $17.50 $0.15 $0.10
For the Year Ended June 30, 1995
First Quarter Ending September 30 $21.00 $16.75 $0.10 N/A
Second Quarter Ending December 31 $19.50 $15.75 $0.10 N/A
Third Quarter Ending March 31 $16.75 $14.75 $0.11 N/A
Fourth Quarter Ending June 30 $18.50 $15.75 $0.11 $0.18
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------------------------------35---------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 4,005
<INT-BEARING-DEPOSITS> 713
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 67,999
<INVESTMENTS-CARRYING> 2,965
<INVESTMENTS-MARKET> 3,016
<LOANS> 178,548
<ALLOWANCE> 609
<TOTAL-ASSETS> 256,986
<DEPOSITS> 187,424
<SHORT-TERM> 422
<LIABILITIES-OTHER> 2,329
<LONG-TERM> 0
0
0
<COMMON> 36,452
<OTHER-SE> 30,359
<TOTAL-LIABILITIES-AND-EQUITY> 256,986
<INTEREST-LOAN> 13,406
<INTEREST-INVEST> 13,245
<INTEREST-OTHER> 161
<INTEREST-TOTAL> 18,550
<INTEREST-DEPOSIT> 9,165
<INTEREST-EXPENSE> 9,215
<INTEREST-INCOME-NET> 9,335
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,329
<INCOME-PRETAX> 6,006
<INCOME-PRE-EXTRAORDINARY> 6,006
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,921
<EPS-PRIMARY> 0.98
<EPS-DILUTED> 0.98
<YIELD-ACTUAL> 7.43
<LOANS-NON> 134
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 206
<ALLOWANCE-OPEN> 609
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 609
<ALLOWANCE-DOMESTIC> 157
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 452
</TABLE>
