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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1997
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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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
205 S.E. Broad Street, P.O. Box 1657
Southern Pines, North Carolina 28388
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(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
--- ---
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.
$57,606,945 common stock, no par value, based on the closing price of such
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common stock on August 29, 1997.
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. 3,679,185 shares of common
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stock, no par value, outstanding at September 22, 1997.
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<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report of First Savings Bancorp, Inc. for the year ended
June 30, 1997, are incorporated by reference into Part I, Part II and Part IV.
Portions of the Proxy Statement for the 1997 Annual Meeting of Shareholders of
First Savings Bancorp, Inc. to be held on October 30, 1997, are incorporated by
reference into Part III.
<PAGE>
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, Firsthealth Moore Regional Hospital,
Ithaca Industries, Inc., Gulstan Carpets, Perdue, Inc. and Stanly Furniture
Company.
Lending Activities
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 98% of First Savings' loan portfolio is secured by
real estate. As of June 30, 1997, over 99% of the net amount of First Savings'
real estate loan portfolio was secured by properties in North Carolina. On June
30, 1997, the largest amount First Savings had outstanding to any one borrower
and its affiliates was approximately
3
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$1,510,283. This loan was performing in accordance with its original terms as of
that date. 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.
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 $145,000, $1,570,000
and $99,000 during the years ended June 30, 1997, 1996 and 1995, respectively.
All such loan participations are secured by real property located in North
Carolina.
First Savings' ratio of loan loss allowances to nonperforming assets at
June 30, 1997, 1996 and 1995, was 241.60%, 454.48% and 223.90%, respectively.
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, 1997, 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, 1997, $7.1 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, 1997, First Savings' investment in stock of the FHLB of
Atlanta was approximately $1.9 million.
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 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 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.
4
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<TABLE>
<CAPTION>
At June 30,
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1997 1996 1995
------------------------ ----------------------- ------------------------
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 .......... $ 6,301 $ 6,301 $ 713 $ 713 $ 1,069 $ 1,069
======= ======= ======= ======= ======= =======
Securities available-for-sale/1/:
U.S. government and agency
securities ..................... $78,881 $79,282 $63,919 $63,889 $73,504 $74,156
Obligations of states and political
subdivisions ................... 950 975 2,150 2,180 2,151 2,218
Federal Home Loan Bank stock ...... 1,929 1,930 1,930 1,930 1,930 1,930
------- ------- ------- ------- ------- -------
Total securities available-for-sale . $81,760 $87,187 $67,999 $67,999 $77,585 $78,304
======= ======= ======= ======= ======= =======
Securities held-to-maturity/1/:
U.S. government and agency
securities ..................... $ $ $ $ $ 1,999 $ 2,003
Obligations of states and political
subdivisions....................
Federal Home Loan Bank stock.......
Mortgage-backed securities ........ 6,572 6,672 2,965 3,016 4,484 4,537
------- ------- ------- ------- ------- -------
Total securities held-to-maturity ... $ 6,572 $ 6,672 $ 2,965 $ 3,016 $ 6,483 $ 6,540
======= ======= ======= ======= ======= =======
</TABLE>
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/1/ 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.
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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, 1997.
<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 .... $ 6,301 5.83% $ % $ %
----------- ------------ ---------- ------------ ----------- ------------
Securities available-for-sale:
U.S. government and agency
securities................. $ 13,601 6.91% $ 45,696 6.55% $ 13,963 7.66%
N.C. State and municipal
obligations(1)............. 975 5.35
Federal Home Loan
Bank stock................. 1,929 7.25
----------- ------------ ---------- ------------ ----------- ------------
Total securities
available-for-sale......... $ 15,530 6.95% $ 45,696 6.55% $ 14,938 7.50%
----------- ------------ ---------- ------------ ----------- ------------
Securities held-to-maturity:
Mortgage-backed securities. $ 142 7.71% $ 397 9.17% $ 322 9.52%
----------- ------------ ---------- ------------ ----------- ------------
Total investments, at
carrying value............. $ 15,592 $ 46,173 $ 15,271
----------- ---------- -----------
Total interest-bearing
deposits and investments... $ 21,893 $ 46,173 $ 15,271
=========== ========== ===========
<CAPTION>
After Ten Years Total
----------------------- -----------------------
Weighted Weighted
Carrying Average Carrying Average
Value Yield Value Yield
---------- ------------ ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
Interest-bearing
deposits in other
financial institutions..... $ % $ 6,301 5.83%
---------- ------------ ----------- -----------
Securities available-for-sale:
U.S. government and
agency securities.......... $ 6,023 8.25% $ 79,283 6.94%
N.C. State and municipal
obligations(1)............. 975 5.35
Federal Home Loan
Bank stock................. 1,929 7.25
---------- ------------ ----------- -----------
Total securities
available-for-sale......... $ 6,023 8.25% $ 82,187 6.93%
---------- ------------ ----------- -----------
Securities held-to-maturity:
Mortgage-backed securities. $ 5,711 7.99% $ 6,572 8.13%
---------- ------------ ----------- -----------
Total investments, at
carrying value............. $ 11,723 $ 88,759
---------- -----------
Total interest-bearing
deposits and investments... $ 11,723 $ 95,060
========== ===========
</TABLE>
(1) Yields on obligations of states and political subdivisions are not
calculated on a tax-equivalent basis.
6
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Deposits and Borrowings
Deposits. Deposits are the primary source of First Savings' funds for
lending and other investment purposes. On June 30, 1997, 1996 and 1995, First
Savings' savings deposits totalled $204.3 million, $187.4 million and $183.1
million, respectively. 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.
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.
As of June 30, 1997, the aggregate amount outstanding of certificates of
deposit in amounts of $100,000 or more was approximately $25.5 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,
1997
-------------
(In Thousands)
<S> <C>
3 months or less......................................... $ 8,722
Over 3 months through 6 months........................... 1,835
Over 6 months through 12 months.......................... 8,014
Over 12 months........................................... 6,894
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Total............................................. $ 25,465
=============
</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 of an institution's net worth or on the FHLB
of Atlanta's assessment of the institution's creditworthiness. As of June 30,
1997, First Savings had $20.0 million in borrowings 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 was assumed by the Holding Company in January 1997. 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 on a straight-line basis over ten years.
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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. 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,
1997, there were at least twelve other financial institutions with offices in
Moore County, North Carolina. Based upon comparative data as of June 30, 1997,
First Savings had the second largest share of deposits in Moore County, totaling
approximately 21% of all deposits in the county.
Employees
As of June 30, 1997, First Savings had 40 full-time employees and two 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, 1997, 1996 and 1995, contributions to this plan were $97,539,
$93,402 and $80,944, 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. The bonus compensation plan was terminated
effective October 1, 1996. Employees are not represented by any union or
collective bargaining group, and First Savings considers its employee relations
to be good.
Federal Income Taxation
Savings institutions such as First Savings are subject to the taxing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), for
corporations, as modified by certain provisions specifically applicable for
financial or thrift institutions. Income is reported using the accrual method of
accounting. The maximum corporate federal income tax rate is 35%.
For fiscal years beginning prior to December 31, 1995, thrift institutions
which qualified under certain definitional tests and other conditions of the
Code were permitted certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. A reserve could
be established for bad debts on qualifying real property loans (generally loans
secured by interests in real property improved or to be improved) under (i) a
method based on a percentage of the institution's taxable income, as adjusted
(the "percentage of taxable income method") or (ii) a method based on actual
loss experience (the "experience method"). The reserve for nonqualifying loans
was computed using the experience method.
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The percentage of taxable income method was limited to 8% of taxable
income. This method could not raise the reserve to exceed 6% of qualifying real
property loans at the end of the year. Moreover, the additions for qualifying
real property loans, when added to nonqualifying loans, could not exceed 12% of
the amount by which total deposits or withdrawable accounts exceed the sum of
surplus, undivided profits and reserves at the beginning of the year. The
experience method was the amount necessary to increase the balance of the
reserve at the close of the year to the greater of (i) the amount which bore the
same ratio to loans outstanding at the close of the year as the total net bad
debts sustained during the current and five preceding years bore to the sum of
the loans outstanding at the close of such six years or (ii) the balance in the
reserve account at the close of the last taxable year beginning before 1988
(assuming that the loans outstanding have not declined since such date).
In order to qualify for the percentage of income method, an institution had
to have at least 60% of its assets as "qualifying assets" which generally
included, cash, obligations of the United States government or an agency or
instrumentality thereof or of a state or political subdivision, residential real
estate-related loans, or loans secured by savings accounts and property used in
the conduct of its business. In addition, it had to meet certain other
supervisory tests and operate principally for the purpose of acquiring savings
and investing in loans.
Institutions which became ineligible to use the percentage of income method
had to change to either the reserve method or the specific charge-off method
that applied to banks. Large thrift institutions, those generally exceeding $500
million in assets, had to convert to the specific charge-off method. In
computing its bad debt reserve for federal income taxes, First Savings elected
to use the experience method in fiscal years 1995, 1996, and 1997.
Bad debt reserve balances in excess of the balance computed under the
experience method or amounts maintained in a supplemental reserve built up prior
to 1962 ("excess bad debt reserve") require inclusion in taxable income upon
certain distributions to shareholders. Distributions in redemption or
liquidation of stock or distributions with respect to its stock in excess of
earnings and profits accumulated in years beginning after December 31, 1951, are
treated as a distribution from the excess bad debt reserve. When such a
distribution takes place and it is treated as from the excess bad debt reserve,
the thrift is required to reduce its reserve by such amount and simultaneously
recognize the amount as an item of taxable income increased by the amount of
income tax imposed on the inclusion. Dividends not in excess of earnings and
profits accumulated since December 31, 1951 will not require inclusion of part
or all of the bad debt reserve in taxable income. First Savings has accumulated
earnings and profits since December 31, 1951 and has an excess in its bad debt
reserve. Distributions in excess of current and accumulated earnings and profits
will increase taxable income. Net retained earnings at June 30, 1997 includes
approximately $5.3 million for which no provision for federal income tax has
been made.
Legislation passed by the U.S. Congress and signed by the President in
August 1996 contains a provision that repeals the percentage of taxable income
method of accounting for thrift bad debt reserves for tax years beginning after
December 31, 1995. The legislation will trigger bad debt reserve recapture for
post-1987 excess reserves over a six-year period. At June 30, 1997, First
Savings' post-1987 excess reserves amounted to approximately $1.3 million. A
special provision suspends recapture of post-1987 excess reserves for up to two
years if, during those years, the institution satisfies a "residential loan
requirement." This requirement will be met if the principal amount of the
institution's residential loans exceeds a base year amount, which is determined
by reference to the average of the institution's residential loans during the
six taxable years ending before January 1, 1996. However, notwithstanding this
special provision, recapture must begin no later than the first taxable year
beginning after December 31, 1997.
First Savings may also be subject to the corporate alternative minimum tax
("AMT"). This tax is applicable only to the extent it exceeds the regular
corporate income tax. The AMT is imposed at the rate of 20% of the corporation's
alternative minimum taxable income ("AMTI") subject to applicable statutory
exemptions. AMTI is calculated by adding certain tax preference items and making
certain adjustments to the corporation's regular taxable income. Preference
items and adjustments generally applicable to financial institutions include,
but are not limited to, the following: (i) the excess of the bad debt deduction
over the amount that would have been allowable on the basis of actual
experience; (ii) interest on certain tax-exempt bonds issued after August 7,
1986; and (iii) 75% of the excess, if any, of a corporation's adjusted earnings
and profits over its AMTI (as otherwise determined with certain adjustments).
Net operating loss carryovers, subject to certain adjustments, may be utilized
to offset up to 90% of the
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<PAGE>
AMTI. Credit for AMT paid may be available in future years to reduce future
regular federal income tax liability. First Savings has not been subject to the
AMT in recent years.
First Savings' federal income tax returns have not been audited in the last
ten tax years.
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 dropped to 7.50% in 1997, and will
drop to 7.25% in 1998, 7.00% in 1999 and 6.90% thereafter.
SUPERVISION AND REGULATION
Regulation of the Holding Company
Bank holding companies and state savings banks are extensively regulated
under both federal and state law. The following is a brief summary of certain
statutes and rules and regulations that affect or will affect the Company and
the Bank. This summary is qualified in its entirety by reference to the
particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank. Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the 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.
10
<PAGE>
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 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 Savings
Association Insurance Fund (the "SAIF") or the Bank Insurance Fund (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.
In addition, the Company must obtain Federal Reserve approval prior to
repurchasing Common Stock for in excess of 10% of its net worth during any
twelve-month period unless the Company (i) both before and after the redemption
satisfies capital requirements for "well capitalized" state member banks; (ii)
received a one or two rating in its last examination; and (iii) is not the
subject of any unresolved supervisory issues. Although the payment of dividends
and repurchase of stock by the Company are subject to the requirements and
limitations of North Carolina corporate law, except as set forth in this
paragraph, neither the Administrator nor the FDIC have promulgated any
regulations specifically limiting the right of the Company to pay dividends and
repurchase shares. However, the ability of the Company to pay dividends or
repurchase shares may be dependent upon the Company's receipt of dividends from
the Bank. The Bank's ability to pay dividends is limited. See " -- Regulation of
the Bank -- Restrictions on Dividends and Other Capital Distributions."
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 Company has registered its Common Stock with
the SEC pursuant to Section 12(g) of the Exchange Act and will not deregister
the Common Stock for a period of three years following the completion of the
Conversion. As a result of such registration, the proxy and tender offer rules,
insider trading reporting requirements, annual and periodic reporting and other
requirements of the Exchange Act are applicable to the Company.
The registration under the Securities Act of the Offerings of the Common
Stock does not cover the resale of such shares. Shares of the Common Stock
purchased by persons who are not affiliates of the Company may be resold without
registration. Shares purchased by an affiliate of the Company are subject to the
resale provisions of Rule 144 under the Securities Act. So long as the Company
meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) will be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances. There are currently no demand
registration rights outstanding. However, in the event the Company at some
future time determines to issue additional shares from its authorized but
unissued shares, the Company might offer registration rights to certain of its
affiliates who want to sell their shares.
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
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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.
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
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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 Bank's deposit accounts are insured by
the FDIC under the SAIF to the maximum extent permitted by law. The Bank pays
deposit insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital ("well capitalized,"
"adequately capitalized" or "undercapitalized"), which are defined in the same
manner as the regulations establishing the prompt corrective action system
discussed below. The matrix so created results in nine assessment risk
classifications, with rates that, until September 30, 1996, ranged from 0.23%
for well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk to the SAIF unless effective corrective action is taken.
Pursuant to the Deposit Insurance Fund Act (the "DIF Act"), which was
enacted on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable deposits which resulted in the SAIF
achieving its designated reserve ratio. In connection therewith, the FDIC
reduced the assessment schedule for SAIF members, effective January 1, 1997, to
a range of 0% to 0.27%, with most institutions, including the Bank, paying 0%.
This assessment schedule is the same as that for the BIF, which reached its
designated reserve ratio in 1995. In addition, since January 1, 1997, SAIF
members are charged an assessment of 0.065% of SAIF-assessable deposits for the
purpose of paying interest on the obligations issued by the Financing
Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup.
BIF-assessable deposits will be charged an assessment to help pay interest on
the FICO bonds at a rate of approximately .013% until the earlier of December
31, 1999 or the date upon which the last savings association ceases to exist,
after which time the assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into the
Deposit Insurance Fund on January 1, 1999, but only if no insured depository
institution is a savings association on that date. The DIF Act contemplates the
development of a common charter for all federally chartered depository
institutions and the abolition of separate charters for national banks and
federal savings associations. It is not known what form the common charter may
take and what effect, if any, the adoption of a new charter would have on the
operation of the Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend deposit
insurance temporarily during the hearing process for the permanent termination
of insurance, if the institution has no tangible capital. If insurance of
accounts is terminated, the accounts at the institution at the time of
termination, less subsequent withdrawals, shall continue to be insured for a
period of six months to two years, as determined by the FDIC. Management is
aware of no existing circumstances that could result in termination of the
deposit insurance of the Bank.
Community Reinvestment Act. The Bank, like other financial institutions,
is subject to the Community Reinvestment Act, as amended ("CRA"). A purpose of
this Act is to encourage financial institutions to help meet the credit needs of
its entire community, including the needs of low- and moderate-income
neighborhoods. A savings bank is 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 is given a rating of either "outstanding," "high
satisfactory," "low satisfactory," "needs to improve" or "substantial
non-compliance." A set of criteria for each rating 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 quantative measures do not accurately present its actual performance,
or that demographics, competitive conditions or economic or legal limitations
peculiar to the service area should be considered. The ratings received under
the three tests are used to determine the overall composite CRA rating or
"outstanding," "satisfactory," "needs to improve" or "substantial
non-compliance."
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During the Bank's last compliance examination, which was performed by the
FDIC on February 13, 1996, 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 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."
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, 1997, 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, 1997, see Note 10 captioned "Shareholders'
Equity" on pages 31 and 32 of the 1997 Annual Report.
Each federal banking agency was required by law 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.
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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 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, 1997, the largest aggregate amount of loans which the Bank
had to any one borrower was $1.5 million. The Bank had no loans outstanding
which management believes violate the applicable loans-to-one borrower limits.
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, 1997, the Bank was in compliance with this
requirement with an investment in FHLB of Atlanta stock of $1.9 million.
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, 1997, 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
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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
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, 1997, the Bank's liquidity
ratio, calculated in accordance with North Carolina regulations, was
approximately 27.7%.
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").
Prompt Corrective Regulatory Action. Federal law provides the federal
banking agencies with broad powers to take corrective action to resolve problems
of insured depository institutions. The extent of these powers depends 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
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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% in the case of an institution with the highest examination rating and
which is not experiencing or anticipating significant growth); (B)
"significantly undercapitalized" if the institution has (i) a total risk-based
capital ratio of less than 6%, or (ii) a Tier I risk-based capital 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%.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), effective September 29,
1995, permits adequately capitalized bank and savings bank holding companies to
acquire control of banks and savings banks in any state. The states may
specifically permit interstate acquisitions prior to September 29, 1995, by
enacting legislation that provides for 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.
The Interstate Banking Act also provides for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time. Unlike interstate acquisitions, a state may deny
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
branching transactions.
It is anticipated that the Interstate Banking Act will increase
competition within the markets in which the Bank now operates, although the
extent to which such competition will increase in such markets or the timing of
such increase cannot be predicted.
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. Under FDIC regulations, stock repurchases may be made by
the savings bank only upon receipt of FDIC approval.
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.
18
<PAGE>
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 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 savings 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.
Future Requirements. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company and the Bank may be affected by such
statute or regulation.
19
<PAGE>
ITEM 2. PROPERTIES
At June 30, 1997, 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, 1997. 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, 1997.
<TABLE>
<CAPTION>
Net Book
Value of
Address Property
------- --------
<S> <C>
Headquarters Office $589,101
205 S.E. Broad Street
Southern Pines, North Carolina 28387
Pinecrest Plaza Office 930,103
46 Pinecrest Plaza
Southern Pines, North Carolina 28387
Pinehurst Office 9,614
10 Chinquapin Road
Pinehurst, North Carolina 28374
Carthage Office 145,927
109 Monroe Street
Carthage, North Carolina 28327
Seven Lakes Office 128,705
200 Grant Street
Seven Lakes Shopping Center
West End, North Carolina 27376
</TABLE>
The total net book value of First Savings' furniture, fixtures and equipment on
June 30, 1997 was $147,005. The properties are considered by First Savings'
management to be in good condition.
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, 1997.
20
<PAGE>
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 $21.75 and
$20.25, respectively, on August 30, 1997. The remaining information required by
this Item is set forth under the section captioned "Capital Stock" on page 40 of
First Savings' 1997 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' 1997 Annual Report
which is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
See the information set forth under Item 1 above and the information set
forth under the sections captioned "Financial Highlights" on page 1 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" on pages 3 through 14 in First Savings' 1997 Annual Report, which
sections are 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 16 through 37 of First Savings' 1997 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.
21
<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 tables on
pages 4 and 5 under the section captioned "Proposal 1 - Election of Directors"
of the Proxy Statement for the 1997 Annual Meeting of Shareholders of First
Savings Bancorp, Inc. to be held on October 30, 1997 (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,
1997, the following reports were filed late. On December 13, 1996, John F. Burns
sold 1,300 shares of Common Stock, which sale was not reported on a Form 5 until
August 12, 1997. On May 27, 1997, H. David Bruton sold 3,000 shares and gifted
1,000 shares, which was not reported on a Form 5 until August 12, 1997.
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 6 through 7 and 8 through 11, respectively, of
the Proxy Statement, which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Following is certain information, as of the Record Date, regarding all
persons or groups, as defined in the Exchange Act, who held of record or who are
known to the Company to own beneficially more than 5% of the Common Stock.
<TABLE>
<CAPTION>
Amount and Nature Percentage
Name and Address of Beneficial Ownership of Class/(1)/
---------------- ----------------------- -------------
<S> <C> <C>
William E. Samuels, Jr. 190,225/(2)/ 5.07
205 S.E. Broad Street
Southern Pines, NC 28388
</TABLE>
- -----------------------------
(1) Based upon a total of 3,679,185 shares of the Common Stock outstanding at
the Record Date. Assumes the exercise of only those stock options included
with respect to the designated recipient.
(2) Includes 72,000 shares which could be purchased pursuant to the exercise of
stock options granted to Mr. Samuels which are vested and nonforfeitable.
The number stated includes 71,305 allocated and unallocated shares held by
the First Savings Bank of Moore County, Inc., SSB Employee Stock Ownership
Plan. Mr. Samuels is a trustee of such Plan and has certain voting and
investment power over such shares. A total of 4,919 shares have been
allocated to Mr. Samuels under the Employee Stock Ownership Plan.
Set forth below is certain information as of the Record Date regarding
beneficial ownership of the Common Stock by each of the members of the Board of
Directors (including nominees for election at the Meeting), certain executive
officers of the Company, and the nominees, directors and all executive officers
of the Company as a group.
22
<PAGE>
<TABLE>
<CAPTION>
Amount and
Nature of Sole Voting/ Shared Voting/ Percentage
Beneficial Investment Investment of
Name of Beneficial Owner Ownership/(1)/ Power Power Class/(2)/
- ------------------------ -------------- ----- ----- ----------
<S> <C> <C> <C> <C>
Virginia C. Brandt 500 500 0 .01%
H. David Bruton 76,984/(2)/ 73,184/(3)/ 3,800 2.07%
John F. Burns 124,335/(4)/ 52,530 71,805 3.36%
Felton J. Capel 1,500 0 1,500 .04%
J. E. Causey 83,342/(3)/ 68,342/(3)/ 15,000 2.24%
Henry A. Clayton 62,416/(3)/ 62,416/(3)/ 0 1.68%
Frank G. Hardister 56,668/(3)/ 56,668/(3)/ 0 1.52%
W. Harrell Johnson 61,839/(3)/ 59,509/(3)/ 2,330 1.66%
Joe Montesanti, Jr 87,628/(3)/ 77,528/(3)/ 10,100 2.35%
Thomas F. Phillips 59,212/(3)/ 58,061/(3)/ 1,151 1.59%
William E. Samuels, Jr 190,225/(5)/ 118,920 71,305 5.07%
Nominees, directors and all
executive officers of the Company 886,121/(6)/ -- -- 21.41%
as a group (12 persons)
</TABLE>
- ---------------------------------
/(1)/ Unless otherwise noted, all shares are owned directly of record by the
named individuals, by their spouses and minor children, or by other
entities controlled by the named individuals.
/(2)/ Based upon a total of 3,679,185 shares of the Common Stock outstanding at
the Record Date. Assumes the exercise of only those stock options
included with respect to the designated recipients.
/(3)/ Includes 45,000 shares which could be purchased pursuant to the exercise
of stock options granted to the named beneficial owner.
/(4)/ Includes 24,400 shares which could be purchased pursuant to the exercise
of stock options granted to Mr. Burns which are vested and
nonforfeitable. The number stated includes 71,305 allocated and
unallocated shares held by the First Savings Bank of Moore County, Inc.,
SSB Employee Stock Ownership Plan. Mr. Burns is a trustee of such Plan
and has certain voting and investment power over such shares. A total of
3,758 shares have been allocated to Mr. Burns under the Employee Stock
Ownership Plan.
/(5)/ Includes 72,000 shares which could be purchased pursuant to the exercise
of stock options granted to Mr. Samuels which are vested and
nonforfeitable. The number stated includes 71,305 allocated and
unallocated shares held by the First Savings Bank of Moore County, Inc.,
SSB Employee Stock Ownership Plan. Mr. Samuels is a trustee of such Plan
and has certain voting and investment power over such shares. A total of
4,919 shares have been allocated to Mr. Samuels under the Employee Stock
Ownership Plan.
/(6)/ Includes 420,400 shares which could be purchased pursuant to the exercise
of stock options granted to directors and executive officers. This amount
does not include options to purchase 20,600 shares issued in the
aggregate to executive officers which are not yet vested and which will
only become vested upon death, disability, satisfaction of requirements
for retirement and subsequent retirement, or satisfaction of requirements
with respect to length of employment. The number stated includes 71,305
allocated and unallocated shares held by the First Savings Bank of Moore
County, Inc., SSB Employee Stock Ownership Plan. William E. Samuels, Jr.,
a director and an executive officer, and John F. Burns, an executive
officer, are trustees of such Plan and have certain voting and investment
power over such shares.
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 13 of the Proxy
Statement, which section is incorporated herein by reference.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(a)1. Consolidated Financial Statements (contained in First Savings' 1997
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,
1997 and 1996
(c) Consolidated Statements of Income for the Years Ended June 30,
1997, 1996 and 1995
(d) Consolidated Statements of Shareholders' Equity for the Years
Ended June 30, 1997, 1996 and 1995
(e) Consolidated Statements of Cash Flows for the Years Ended June
30, 1997, 1996 and 1995
(f) Notes to Consolidated Financial Statements
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.
14(a)3. Exhibits
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
24
<PAGE>
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
Exhibit (11) Statement Regarding Computation of Per Share
Earnings
Exhibit (12) Statement Regarding Computation of Ratios
Exhibit (13) 1997 Annual Report to Security Holders
Exhibit (16) Deloitte & Touche LLP Letter of Concurrence,
incorporated herein by reference to Exhibit
16 to the Registrant's Form 10-K for the year
ended June 30, 1997
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
14(b) First Savings filed no reports on Form 8-K during the last quarter of
the fiscal year ended June 30, 1997.
25
<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 26, 1997 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 26, 1997
- -------------------------------- Officer and Director
William E. Samuels, Jr.
/s/ John F. Burns Executive Vice President, September 26, 1997
- -------------------------------- Principal Financial Officer
John F. Burns and Director
/s/ Timothy S. Maples Vice President, Controller and September 26, 1997
- -------------------------------- Principal Accounting Officer
Timothy S. Maples
/s/ H. David Bruton Director September 26, 1997
- --------------------------------
H. David Bruton
/s/ J. E. Causey Director September 26, 1997
- --------------------------------
J. E. Causey
/s/ Henry A. Clayton Director September 26, 1997
- --------------------------------
Henry A. Clayton
/s/ Frank G. Hardister Director September 26, 1997
- --------------------------------
Frank G. Hardister
/s/ W. Harrell Johnson Director September 26, 1997
- --------------------------------
W. Harrell Johnson
/s/ Joe Montesanti, Jr. Director September 26, 1997
- --------------------------------
Joe Montesanti, Jr.
/s/ Thomas F. Phillips Director September 26, 1997
- --------------------------------
Thomas F. Phillips
</TABLE>
26
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
(11) Statement Regarding Computation of Per Share Earnings
(12) Statement Regarding Computation of Ratios
(13) 1997 Annual Report to Security Holders
(27) Financial Data Schedule
</TABLE>
27
<PAGE>
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Earnings per common share of $0.98 for the year ended June 30, 1997 was
calculated by dividing net income of $3,908,653 for the year ended June 30, 1997
by the weighted-average number of common and common equivalent shares
outstanding of 3,970,306. Earnings per common share of $0.98 for the year ended
June 30, 1996 was calculated by dividing net income of $3,920,755 by the
weighted-average number of common and common equivalent shares outstanding of
3,993,070. Common stock equivalents consist of stock options.
28
<PAGE>
STATEMENT REGARDING COMPUTATION OF RATIOS
The averages used in computing the performance ratios provided in Item 7
represent average daily balances.
29
<PAGE>
- --------------------------------------------------------------------------------
FIVE YEAR
SUMMARY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At June 30,
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Financial Condition Data:
Balance of:
Assets $ 294,217 $ 256,986 $ 251,787 $ 248,202 $ 222,640
Loans receivable, net 192,238 177,431 159,777 142,779 140,004
Mortgage-backed securities 6,572 2,965 4,484 5,872 12,241
Securities 82,187 67,999 81,372 93,554 64,349
Deposits 204,317 187,424 183,080 182,199 195,174
Borrowed funds 20,000 422 543 648
Shareholders' equity 67,195 66,811 65,511 63,294 26,052
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
For the Years Ended June 30,
1997 1996 1995 1994 1993
-------------------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating Data:
Interest and dividend income $ 20,058 $ 18,550 $ 17,438 $ 16,658 $ 17,159
Interest expense 9,782 9,215 8,140 8,102 9,458
-------------------------------------------------------------------
Net interest income 10,276 9,335 9,298 8,556 7,701
Provision for loan losses 565
-------------------------------------------------------------------
Net interest income after provision for loan losses 10,276 9,335 9,298 8,556 7,136
Noninterest income 425 364 7 379 308
General and administrative expenses 4,637 3,693 3,584 5,693 2,671
-------------------------------------------------------------------
Income before income taxes 6,064 6,006 5,721 3,242 4,773
Income tax expense 2,155 2,085 1,948 1,066 1,771
-------------------------------------------------------------------
Net income $ 3,909 $ 3,921 $ 3,773 $ 2,176 $ 3,002
-------------------------------------------------------------------
Earnings per common share $ 0.98 $ 0.98 $ 0.95 $ 0.10* $ N/A
-------------------------------------------------------------------
Dividends declared per common share $ 0.74 $ 0.64 $ 0.60 $ 0.15 $ N/A
-------------------------------------------------------------------
</TABLE>
*Presented for the period from stock conversion through June 30, 1994.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<S> <C>
Financial Highlights.........................................................1
Chief Executive Officer's Message............................................2
Management's Discussion & Analysis........................................3-14
Report of Independent Auditors..............................................15
Consolidated Statements of Financial Condition..............................16
Consolidated Statements of Income........................................17-18
Consolidated Statements of Shareholders' Equity.............................19
Consolidated Statements of Cash flows....................................20-21
Notes to Consolidated Financial Statements...............................22-37
Directors, Officers and Office Locations.................................38-39
Corporate Information.......................................................40
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
At or for the
Twelve Months Ended
June 30,
---------------------------------------------
SELECTED FINANCIAL DATA 1997 1996 1995
<S> <C> <C> <C>
Net income $ 3,908,653 $ 3,920,755 $ 3,772,733
PER COMMON SHARE
Earnings per common share $ 0.98 $ 0.98 $ 0.95
Book value $ 18.26 $ 17.85 $ 17.50
Tangible book value $ 18.26 $ 17.85 $ 17.50
Number of common shares outstanding 3,679,185 3,744,000 3,744,000
AT YEAR END (THOUSANDS)
Assets $ 294,217 $ 256,986 $ 251,787
Deposits 204,317 187,424 183,080
Loans receivable, net 192,238 177,431 159,777
Shareholders' equity 67,195 66,811 65,511
RATIOS
Return on average assets 1.45% 1.53% 1.52%
Return on average assets* 1.71 N/A N/A
Return on average equity 5.85 5.86 5.94
Return on average equity* 6.90 N/A N/A
Equity to total assets (year end) 22.84 26.00 26.02
Nonperforming assets to total assets 0.08 0.05 0.11
Allowance for loan losses to net loans 0.31 0.34 0.38
Dividends declared/earnings per share 75.51 65.31 63.16
</TABLE>
*Excludes the nonrecurring charge associated with the special SAIF assessment in
1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1
- --------------------------------------------------------------------------------
<PAGE>
-------------------
CHIEF EXECUTIVE
OFFICER'S MESSAGE
-------------------
September 26, 1997
To Our Shareholders
First Savings has been observing a very significant milestone this year. It is
our 75th anniversary and we have promoted commemorative observances at each of
our offices during the year. We have also supported numerous activities in the
communities we serve, including our well-received sponsorship of Seven Brides
For Seven Brothers as performed by the drama students at Pinecrest High School
which is located near our Pinecrest Plaza office.
These events have provided us with many opportunities to remind the residents of
Moore County that your bank has come a long way in seventy-five years. We have
evolved from a state-chartered mutual institution through a series of steps that
culminated in November of 1995 with the formation of First Savings Bancorp,
Inc., a bank holding company, and First Savings Bank of Moore County, Inc., SSB
as its subsidiary. Our history can be characterized as one of consistently high
performance, coupled with steady growth achieved without reliance on mergers or
acquisitions. First Savings is now firmly positioned as Moore County's community
bank, the clear alternative to the local offices of the mega-banks.
As many of you know, the history of First Savings was featured in the
March/April edition of Pinehurst Magazine. A reprint of the article is enclosed
with this report and if you would like additional reprints for friends or
business associates, simply let us know.
As we assess the fiscal year ended June 30, 1997, we're pleased to report a
continuation of the positive trends we have been enjoying. Our net income,
excluding a nonrecurring charge to earnings associated with the special SAIF
assessment, was $4.6 million, a record for us which represented a 17.9% increase
in core earnings. Our total assets increased by $37.2 million to $294.2 million
while deposits rose 9.0% and net loans increased by 8.3%. Excluding the
nonrecurring SAIF assessment, First Savings had a return on average assets for
the year of 1.71%, excellent performance by an industry standard.
We can attribute these results to several initiatives that we have undertaken.
An aggressive consumer lending effort has been a major contributor with our
exclusive MasterCard/VISA rebate offer playing a significant role. We have
become quite active in soliciting merchant accounts. And, in everything we do,
we attempt to sharpen the contrast between First Savings, the high-touch,
fast-response bankers, and our competitors. This ongoing effort will be aided
during the coming years by the guidance we anticipate receiving from a
comprehensive three-year strategic plan that is currently nearing completion.
Undertaken with strong encouragement from our Board, this evaluative process has
probed every facet of our operation generating alternative approaches to present
practices and exposing fresh opportunities for growth that are consistent with
our resolve to remain an independent, community-oriented financial services
provider.
First Savings has been successful for a variety of reasons. We are the
beneficiary of vibrant, growing markets. We have a very dedicated Board and
Staff where teamwork continues as our cornerstone. Our customers are
increasingly appreciating the First Savings difference. And you, our valued
shareholders, have another important role that you can fill - become more active
customers yourselves and refer us to your friends. If we each think of First
Savings whenever any financial need arises, I can assure you that our prospects
for success are greatly increased.
Sincerely,
William E. Samuels
President & Chief Executive Officer
---
2
---
<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, 1997, First Savings had total assets of approximately
$294.2 million, net loans of $192.2 million, deposits of approximately $204.3
million and shareholders' equity of $67.2 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, 1997, approximately 84.6% 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 and administrative expenses such as
salaries, employee benefits, federal deposit insurance premiums and branch
occupancy and related expenses.
-------------------
FINANCIAL CONDITION
-------------------
This annual report to stockholders contains certain forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and other business of the Company that are subject to various factors
which could cause actual results to differ materially from those estimates.
Factors which could influence the estimates include changes in national,
regional and local market conditions, legislative and regulatory conditions, and
the interest rate environment.
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.
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 1997, the Bank originated 629 mortgage loans
totaling $55.4 million, of which $32.2 million were one, three or five-year
adjustable-rate mortgages or home equity loans. At June 30, 1997, $149.3 million
or 77.4% of the Bank's $192.2 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 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
---
3
---
<PAGE>
---------------------
MANAGEMENT'S
DISCUSSION & ANALYSIS
---------------------
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, 1997, 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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Terms to Repricing at June 30, 1997
------------------------------------------------------------------------------
More Than More Than More Than
1 Year 1 Year 3 Years 5 Years More Than
GAP ANALYSIS or Less To 3 Years To 5 Years To 10 Years 10 Years Total
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans:
Adjustable rate residential 1-4 family $ 34,133 $ 49,046 $ 10,182 $ 31,903 $ 3,834 $ 129,098
Fixed rate 1-4 family 44 378 2,268 10,111 24,206 37,007
Adjustable rate non-residential 3,424 5,519 2,254 146 374 11,717
Fixed rate non-residential 21 108 611 797 2,577 4,114
Home equity and property improvement 8,449 8,449
Other loans 1,164 1,094 190 9 2,457
Investments 21,801 38,808 6,567 14,887 5,998 88,061
Mortgage-backed securities 62 88 389 322 5,711 6,572
------------------------------------------------------------------------------
Total interest-earning assets $ 69,098 $ 95,041 $ 22,461 $ 58,175 $ 42,700 $ 287,475
==============================================================================
INTEREST-BEARING LIABILITIES:
Deposits;
Certificates of deposit $ 99,356 $ 27,382 $ 3,053 $ 10 $ $ 129,801
Interest-bearing checking 17,664 17,664
Money market deposit accounts 41,872 41,872
Passbook savings 13,071 13,071
Borrowed funds 15,000 5,000 20,000
------------------------------------------------------------------------------
Total interest-bearing liabilities $ 186,963 $ 32,382 $ 3,053 $ 10 $ $ 222,408
==============================================================================
INTEREST SENSITIVITY GAP PER PERIOD $(117,865) $ 62,659 $ 19,408 $ 58,165 $ 42,700 $ 65,067
CUMULATIVE INTEREST SENSITIVITY GAP $(117,865) $(55,206) $(35,798) $ 22,367 $ 65,067 $ 65,067
CUMULATIVE GAP AS A PERCENTAGE OF
TOTAL INTEREST-EARNINGS ASSETS (41.00%) (19.20%) (12.45%) 7.78% 22.63% 22.63%
CUMULATIVE INTEREST-EARNING ASSETS AS
A PERCENTAGE OF INTEREST-BEARING LIABILITY 36.96% 74.83% 83.90% 110.06% 129.26% 129.26%
- --------------------------------------------------------------------------------------------------------------------------
</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 the Bank's 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, 1997, the Bank's liquid assets (cash and cash equivalents, and
marketable investment securities) were approximately $78.6 million, which
represents 38.5% of deposits. As a North Carolina chartered savings bank, the
Bank 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, 1997,
this liquidity ratio, based on North Carolina regulations, was 27.7%. Management
considers current liquidity levels to be adequate to meet the Bank's foreseeable
needs.
At June 30, 1997, outstanding mortgage loan commitments and available home
equity line of credit balances were $21.2 million, available credit card line of
credit balances were $3.1 million and the undisbursed portion of construction
loans was $7.0 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, 1997 and
1996, First Savings exceeded all such requirements.
First Savings is also subject to limits on dividend payments. The Company is
prohibited, under the North Carolina Business Corporation Act, from paying a
dividend if such payment would (i) cause the Company to be unable to pay its
debts as they become due in the ordinary course of business or (ii) reduce the
Company's total assets below the sum of the Company's total liabilities plus any
amounts which would be needed, if the Company were to be dissolved at the time
of distribution, to satisfy the preferential rights that are superior to holders
of the Common Stock.
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's 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. A significant source of
First Savings' funds are dividends received from the Bank. In fiscal 1998, the
amount of dividends that can be paid without prior approval from regulators is
approximately $1.8 million. 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,
---------------------------------------------------------------------------
1997 1996
---------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
---------------------------------- --------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits $ 7,623 $ 449 5.89% $ 2,170 $ 161 7.42%
Investments, net, at cost 67,269 4,317 6.42% 75,155 4,690 6.24%
Mortgage-backed securities 4,537 338 7.45% 3,842 293 7.63%
Loans receivable, net 185,120 14,954 8.08% 168,579 13,406 7.95%
------------------------ -----------------------
Total interest-earning assets 264,549 20,058 7.58% 249,746 18,550 7.43%
Non-interest-earning assets 5,734 5,963
----------- ----------
Total assets $ 270,283 $ 255,709
=========== ===========
Interest-bearing liabilities:
Passbooks savings $ 10,994 $ 297 2.70% $ 10,093 $ 252 2.50%
NOW and money market accounts 63,199 2,108 3.34% 57,130 1,956 3.42%
Certificates of deposit 122,761 7,091 5.78% 117,436 6,957 5.92%
Borrowed funds 4,694 286 6.09% 845 50 5.92%
------------------------ ------------------------
Total interest-bearing liabilities 201,648 9,782 4.85% 185,504 9,215 4.97%
Non-interest bearing liabilities 1,789 3,272
----------- -----------
Total liabilities 203,437 188,776
Shareholders' equity 66,846 66,933
----------- -----------
Total liabilities and shareholders' equity $ 270,283 $ 255,709
=========== ===========
Net interest income and
interest rate spread $ 10,276 2.73% $ 9,335 2.46%
Net interest-earning assets and
net interest margin $ 62,901 3.88% $ 64,242 3.74%
Percentage of average
interest-earning assets to
average interest-bearing liabilities 131.19% 134.63%
<CAPTION>
-------------------------------------
1995
-------------------------------------
Average
Average Yield/
Balance Interest Cost
-----------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits $ 2,192 $ 145 6.61%
Investments, net, at cost 83,563 5,188 6.21%
Mortgage-backed securities 5,042 389 7.72%
Loans receivable, net 150,809 11,716 7.77%
-------------------------
Total interest-earning assets 241,606 17,438 7.16%
Non-interest-earning assets 6,525
------------
Total assets $ 248,131
============
Interest-bearing liabilities:
Passbooks savings $ 11,485 $ 288 2.51%
NOW and money market accounts 66,183 2,117 3.20%
Certificates of deposit 102,690 5,595 5.45%
Borrowed funds 2,260 140 6.19%
-------------------------
Total interest-bearing liabilities 182,618 8,140 4.46%
Non-interest bearing liabilities 2,045
------------
Total liabilities 184,663
Shareholders' equity 63,468
------------
Total liabilities and shareholders' equity $ 248,131
============
Net interest income and
interest rate spread $ 9,298 2.70%
Net interest-earning assets and
net interest margin $ 60,818 3.82%
Percentage of average
interest-earning assets to
average interest-bearing liabilities 133.30%
</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,
---------------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
Increase (Decrease) Increase (Decrease)
Due to Due to
Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
-------------------------------------------- ----------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Interest-earning deposits $ 405 $ (33) $ (84) $ 288 $ (1) $ 18 $ - $ 17
Investments (1) (492) 133 (14) (373) (522) 27 (3) (498)
Mortgage-backed securities 53 (7) (1) 45 (93) (5) 1 (97)
Loan portfolio 1,315 212 21 1,548 1,380 277 33 1,690
-------------------------------------------- ----------------------------------------------
Total interest income 1,281 305 (78) 1,508 764 317 31 1,112
-------------------------------------------- ----------------------------------------------
Interest expense:
Passbooks savings 22 21 2 45 (35) (1) (36)
NOW and money market accounts 208 (51) (5) 152 (290) 149 (20) (161)
Certificates of deposit 315 (173) (8) 134 804 488 70 1,362
Borrowed funds 228 1 7 236 (88) (6) 4 (90)
-------------------------------------------- ----------------------------------------------
Total interest expense 773 (202) (4) 567 391 630 54 1,075
-------------------------------------------- ----------------------------------------------
Net interest income (expense) $ 508 $ 507 $ (74) $ 941 $ 373 $ (313) $ (23) $ 37
============================================ ==============================================
</TABLE>
(1) Includes investment securities and FHLB stock.
- --------------------------------------------------------------------------------
Loan Portfolio Composition
First Savings' consolidated net loan portfolio totaled approximately $192.2
million at June 30, 1997, representing 65.3% of First Savings' total assets. At
June 30, 1997, approximately 77.4% of First Savings' net loan portfolio was
composed of adjustable rate loans, and approximately 22.6% of First Savings' net
loan portfolio was composed of fixed rate loans. At June 30, 1997, approximately
$162.6 million, or 84.6%, of First Savings' net loan portfolio was composed of
one-to-four family residential real estate loans. On such date, approximately
$15.9 million, or 8.3%, of First Savings' net loan portfolio was composed of
multi-family residential, commercial and other 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,
----------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------
% of % of % of
Amount Total Amount Total Amount Total
-------------------------- ----------------------------- -----------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $ 162,620 84.59% $ 151,934 85.63% $ 137,855 86.28%
Multi-family
(5 or more units) 2,601 1.35% 3,070 1.73% 2,272 1.42%
Construction 10,969 5.71% 8,123 4.58% 7,951 4.98%
Commercial real estate
and other properties 13,285 6.91% 12,028 6.78% 11,844 7.41%
Home equity and property
improvement 8,449 4.40% 5,607 3.16% 4,066 2.55%
------------------------- ----------------------------- -----------------------------
Total real estate loans 197,924 102.96% 180,762 101.88% 163,988 102.64%
------------------------- ----------------------------- -----------------------------
Other:
Savings account loans 909 0.47% 875 0.49% 703 0.44%
Installment loans 621 0.32% 351 0.20% 111 0.07%
Credit card loans 951 0.50% 520 0.29%
------------------------- ----------------------------- -----------------------------
Total other loans 2,481 1.29% 1,746 0.98% 814 0.51%
------------------------- ----------------------------- -----------------------------
Less:
Unearned fees and
discounts 555 0.29% 509 0.29% 458 0.29%
Loans in process 7,008 3.65% 3,959 2.23% 3,958 2.48%
Allowance for loan losses 604 0.31% 609 0.34% 609 0.38%
------------------------- ----------------------------- -----------------------------
Total reductions 8,167 4.25% 5,077 2.86% 5,025 3.15%
------------------------- ----------------------------- -----------------------------
Total loans receivable, net $ 192,238 100.00% $ 177,431 100.00% $ 159,777 100.00%
========================= ============================= =============================
<CAPTION>
----------------------------------------------------
1994 1993
----------------------------------------------------
% of % of
Amount Total Amount Total
------------------------- ----------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $ 124,751 87.37% $ 120,877 86.34%
Multi-family
(5 or more units) 3,393 2.37% 2,573 1.84%
Construction 5,263 3.69% 3,268 2.34%
Commercial real estate
and other properties 11,022 7.72% 12,227 8.73%
Home equity and property
improvement 2,852 2.00% 2,863 2.04%
------------------------ ---------------------
Total real estate loans 147,281 103.15% 141,808 101.29%
------------------------ ---------------------
Other:
Savings account loans 604 0.42% 824 0.59%
Installment loans
Credit card loans
------------------------ ---------------------
Total other loans 604 0.42% 824 0.59%
------------------------ ---------------------
Less:
Unearned fees and
discounts 369 0.26% 246 0.18%
Loans in process 4,128 2.89% 1,752 1.25%
Allowance for loan losses 609 0.42% 630 0.45%
------------------------ ---------------------
Total reductions 5,106 3.57% 2,628 1.88%
------------------------ ---------------------
Total loans receivable, net $ 142,779 100.00% $ 140,004 100.00%
======================== =====================
</TABLE>
- --------------------------------------------------------------------------------
Nonperforming Assets
The Bank's general policy is 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, 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.
- --------------------------------------------------------------------------------
8
- --------------------------------------------------------------------------------
<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,
-------------------------------------------------------------
1997 1996 1995 1994 1993
-------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate:
Residential $ 250 $ 134 $ 139 $ 329 $ 728
Commercial 133 156
Consumer
-------------------------------------------------------------
Total 250 134 272 329 884
-------------------------------------------------------------
Accruing loans which are contractually past due
90 days or more:
Real estate:
Residential
Commercial
Consumer
-------------------------------------------------------------
Total
-------------------------------------------------------------
Total of nonaccrual and 90 days past due loans 250 134 272 329 884
Foreclosed real estate
Other nonperforming assets
-------------------------------------------------------------
Total nonperforming assets $ 250 $ 134 $ 272 $ 329 $ 884
-------------------------------------------------------------
Total loans delinquent 90 days or more to net loan 0.13% 0.08% 0.17% 0.23% 0.63%
Total loans delinquent 90 days or more to total assets 0.08% 0.05% 0.11% 0.13% 0.40%
Total nonperforming assets to total assets 0.08% 0.05% 0.11% 0.13% 0.40%
- ---------------------------------------------------------------------------------------------------------------------------
</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 it's 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 1997, 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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
June 30,
--------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance beginning of period $ 609 $ 609 $ 609 $ 630 $ 66
Provision for loan losses and losses on foreclosed real estate 564
Charge-offs:
Residential 1-4 family (4) (21)
Commercial real estate and other properties
Home equity and property improvements
Construction
Savings accounts
Other consumer (5)
Commercial
--------------------------------------------------------------
(4) (21)
Recoveries:
Residential 1-4 family 4
Commercial real estate and other properties
Construction
Savings accounts
Other consumer
Commercial
--------------------------------------------------------------
4
--------------------------------------------------------------
Balance at end of period $ 604 $ 609 $ 609 $ 609 $ 630
==============================================================
Ratio of net charge-offs during the period to average
loans outstanding during the period 0.00% 0.00% 0.00% 0.01% 0.00%
==============================================================
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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,
1997 1996 1995
--------------------------------------------------------------------------------
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 $ 400 66.23% $ 503 82.59% $ 449 73.73%
Commercial real estate and other property 73 12.08% 50 8.21% 139 22.82%
Home equity and property improvement 21 3.48% 17 2.79% 11 1.81%
Construction 7 1.16% 15 2.47% 10 1.64%
--------------------------------------------------------------------------------
Total real estate loans 501 82.95% 585 96.06% 609 100.00%
--------------------------------------------------------------------------------
Savings account loans
Other consumer loans 103 17.05% 24 3.94%
--------------------------------------------------------------------------------
Total allowance for loan losses $ 604 100.00% $ 609 100.00% $ 609 100.00%
================================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
10
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S
DISCUSSION & ANALYSIS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS FOR
THE FISCAL YEARS ENDED
JUNE 30, 1997
AND
JUNE 30, 1996
General
First Savings recorded net income of $3.9 million for the years ended June 30,
1997 and 1996. During fiscal 1997, First Savings paid a nonrecurring deposit
insurance assessment to the Savings Association Insurance Fund ("SAIF") of
approximately $1.2 million. Net of income taxes, this special assessment had the
effect of reducing net income for the year by approximately $700,000. Net income
excluding this nonrecurring charge was $4.6 million, representing an increase of
17.9% compared to the prior year. Earnings per share for fiscal years 1997 and
1996 were $0.98. Earnings per share for fiscal year 1997, excluding the
nonrecurring SAIF assessment, were $1.16. The primary factor contributing to
First Savings core earnings growth was an increase in the Bank's net interest
margin. Non-interest income was higher in 1997 primarily due to increases in
fees and service charges.
Nonperforming assets (loans 90 days or more delinquent and foreclosed real
estate owned) were $250,000 or .08% of total assets at June 30, 1997, compared
to $134,000 or .05% at June 30, 1996. First Savings did not have any real estate
owned at June 30, 1997 or June 30, 1996.
Net Interest Income
Net interest income for the years ended June 30, 1997 and 1996, was $10.3
million and $9.3 million, respectively. The primary reason for the increase in
net interest income during the fiscal year ended June 30, 1997 was due to a
higher interest rate spread. The average yield on interest-earning assets
increased by 15 basis points, and the average cost of interest-bearing
liabilities decreased by 12 basis points for the year ended June 30, 1997,
increasing the Bank's interest rate spread to 2.73% compared to 2.46% for the
year ended June 30, 1996. The average balance of interest-earning assets and
interest-bearing liabilities during the fiscal year ended June 30, 1997 was
$264.5 million and $201.6 million, respectively, compared to $249.7 million and
$185.5 million, respectively, during the fiscal year ended June 30, 1996. The
Average Yield/Cost Analysis table reflects the average yields on assets and
average cost of liabilities for the years ended June 30, 1997, 1996, and 1995.
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, 1997 was $20.1 million as compared to $18.5 million for fiscal year 1996, an
increase of $1.6 million or 8.6%. This increase was due primarily to increases
in average interest-earning assets and their related yields.
Interest Expense
Total interest expense for the year ended June 30, 1997 increased by $567,000 or
6.2% when compared to the prior year. The Bank's cost of funds decreased from
4.97% in 1996 to 4.85% in 1997; however, average interest-bearing liabilities
increased 8.7% from $185.5 million at June 30, 1996 to $201.6 million at June
30, 1997.
Interest expense on borrowed funds increased $236,000 from $50,000 in 1996 to
$286,000 in 1997. This increase is the result of advances from the Federal Home
Loan Bank (FHLB) in 1997. Borrowings comprised of an ESOP note payable at June
30, 1996, increased from $422,000 to $20.0 million at June 30, 1997 which
consisted of FHLB advances. The increase in borrowings was a result of
investment strategies implemented during the fourth quarter of fiscal 1997.
Average borrowings for the years ended June 30, 1997 and 1996 were $4.7 million
and $845,000, respectively.
Allowance for Loan Losses
At June 30, 1996, the allowance for loan losses was $609,000. During fiscal year
1997, First Savings did not add to this reserve. With only $5,000 in charge-offs
during the current year, the allowance for loan losses at June 30, 1997
decreased slightly to $604,000. 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, 1997 was $425,000 as
compared to $364,000 for fiscal year ended June 30, 1996. The increase is
primarily attributable to increases in fees and service charges of $59,000
during the year ended June 30, 1997.
- --------------------------------------------------------------------------------
11
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S
DISCUSSION & ANALYSIS
- --------------------------------------------------------------------------------
General and Administrative Expenses
General and administrative expenses for fiscal year ended June 30, 1997 were
$4.6 million compared to $3.7 million for the fiscal year ended June 30, 1996.
The increase was attributed to the nonrecurring charge of $1.2 million
associated with the SAIF assessment.
Income Taxes
Income tax expense increased slightly for the fiscal year ended June 30, 1997 to
$2.2 million, as compared to $2.1 million for the same period in 1996. The
increase in income taxes was attributed to the higher level of pre-tax income
and to increased state income taxes as a larger portion of the Bank's income was
subject to such taxes.
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
the 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 than in 1995 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, 1997, 1996, and 1995. 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.
- --------------------------------------------------------------------------------
12
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S
DISCUSSION & ANALYSIS
- --------------------------------------------------------------------------------
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.
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.
Impact of Inflation and Changing Prices
The financial statements and notes thereto presented herein have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
nearly all the Company's assets and liabilities are monetary in nature. As a
result, interest rates have a greater impact on the Company's performance than
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.
Impact of New Accounting Standards
FASB Statement on Earnings Per Share. In March 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128. The Statement establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. This Statement simplifies the standards for
computing earnings per share previously found in Accounting Principles Board
("APB") Opinion No. 15, "Earnings per Share ("EPS"), and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
the presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and the
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15. This Statement
supersedes Opinion 15 and AICPA Accounting Interpretation 1-102 of Opinion 15.
This Statement will be effective for the Company's fiscal year ending June 30,
1998. Management does not believe the impact of adopting SFAS No. 128 will be
significant.
FASB Statement on Accounting for Stock-Based Compensation. In October 1995, the
FASB issued SFAS No. 123. SFAS No. 123 defines a "fair value based method" of
accounting for an employee stock option whereby compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period. FASB has encouraged all entities to adopt the fair value based
method; however, it will allow entities to continue the use of the "intrinsic
value based method" prescribed by APB Opinion No. 25. Under the intrinsic value
based method, compensation cost is the excess of the market price of the stock
at the grant date over the amount an employee must pay to acquire the stock.
However, most stock option plans have no intrinsic value at the grant date and,
as such, no compensation cost is recognized under APB Opinion No. 25. Entities
electing to continue use of the accounting treatment of APB Opinion No. 25 must
make certain pro forma disclosures as if the fair value based method had been
applied. The accounting requirements of SFAS No. 123 are effective for
transactions entered into in fiscal years beginning after December 15, 1995. Pro
forma disclosures must include the effects of all awards granted in fiscal years
beginning after December 15, 1994. The
- --------------------------------------------------------------------------------
13
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT'S
DISCUSSION & ANALYSIS
- --------------------------------------------------------------------------------
Company expects to use the "intrinsic value based method" as prescribed by APB
Opinion No. 25. Accordingly, management does not believe the impact of adopting
SFAS No. 123 will be material to the Company's financial statements.
FASB Statement on Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996, the FASB issued SFAS No. 125. This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of financial-components approach that focuses on control.
It distinguishes transfers of financial assets that are sales from transfers
that are secured borrowings. Under the financial-components approach, after a
transfer of financial assets, an entity recognizes all financial and servicing
assets it controls and liabilities it has incurred and derecognizes financial
assets it no longer controls and liabilities that have been extinguished. The
financial-components approach focuses on the assets and liabilities that exist
after the transfer. If a transfer does not meet the criteria for a sale, the
transfer is accounted for as a secured borrowing with pledge of collateral. This
Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to be
applied prospectively. The effective date for certain provisions of the
Statement have been postponed for one year. Management anticipates that the
adoption of the Statement should have no material impact on its consolidated
financial statements.
FASB Statement on Reporting Comprehensive Income. In June 1997, the FASB issued
SFAS No. 130. This Statement establishes standards of reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. In addition to net income as has been historically
determined, comprehensive income for the Company would include net unrealized
holding gains and losses on investment securities available for sale. This
Statement will be effective for the Company's fiscal year ending June 30, 1999,
and the Company does not intend to early adopt. Had the Company early adopted
this Statement, it would have reported comprehensive income of $4,190,087,
$3,446,327 and $4,247,085 for the years ended June 30, 1997, 1996 and 1995,
respectively.
- --------------------------------------------------------------------------------
14
- --------------------------------------------------------------------------------
<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, 1997, and
the related consolidated statements of income, shareholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of First Savings' management. Our responsibility is to express an opinion on
these financial statements based on our audit. The consolidated financial
statements of First Savings Bancorp, Inc. and subsidiary as of and for each of
the years in the two year period ended June 30, 1996 were audited by other
auditors whose report dated August 16, 1996 expressed an unqualified opinion.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1997 consolidated financial statements present fairly, in
all material respects, the financial position of First Savings Bancorp, Inc. and
subsidiary at June 30, 1997, and the results of their operations and their cash
flows for the year then ended in conformity with generally accepted accounting
principles.
August 6, 1997
Southern Pines, North Carolina
- --------------------------------------------------------------------------------
15
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS
OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30,
1997 1996
-------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,801,422 $ 4,005,247
Interest bearing deposits with banks 6,300,797 712,975
Securities at market value (Note 2) 82,186,644 67,998,548
Securities at amortized cost (market values -
$6,672,096 at June 30, 1997; $3,015,945 at June 30, 1996) (Note 2) 6,572,162 2,965,356
Loans receivable, net 192,237,609 177,430,728
Premises and equipment, net (Note 5) 1,967,690 2,018,711
Accrued interest receivable (Note 4) 1,836,469 1,622,039
Prepaid expenses and other assets 313,955 232,744
-------------------------------------
TOTAL $294,216,748 $ 256,986,348
=====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 6) $204,316,774 $ 187,424,224
Borrowed funds (Note 7) 20,000,000 421,952
Advances from borrowers for taxes and insurance 101,766 84,556
Accrued interest payable on deposits 103,597 113,151
Accrued expenses and other liabilities 1,359,623 1,371,044
Federal and state income taxes:
Currently payable 371,618 129,578
Deferred, net (Note 9) 768,438 630,457
-------------------------------------
Total liabilities 227,021,816 190,174,962
-------------------------------------
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,
3,679,185 shares issued and outstanding in 1997;
3,744,000 in 1996 35,236,973 36,451,561
Unearned compensation related to
ESOP note payable (Note 11) (293,502) (421,952)
Net unrealized gain (loss) on securities available for sale 281,358 (76)
Retained earnings 31,970,103 30,781,853
-------------------------------------
Total shareholders' equity 67,194,932 66,811,386
-------------------------------------
TOTAL $294,216,748 $ 256,986,348
=====================================
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
16
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS
OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest on loans receivable $ 14,954,452 $ 13,406,157 $ 11,716,430
Interest on mortgage-backed securities 337,717 293,452 388,863
Interest on securities 4,177,307 4,549,718 5,053,142
Dividends on securities 139,703 140,089 134,424
Other 449,184 160,551 145,512
-----------------------------------------------------------
Total interest and dividend income 20,058,363 18,549,967 17,438,371
-----------------------------------------------------------
INTEREST EXPENSE:
Deposits (Note 6) 9,496,129 9,165,030 7,999,800
Borrowed funds (Note 7) 286,280 50,324 140,403
-----------------------------------------------------------
Total interest expense 9,782,409 9,215,354 8,140,203
-----------------------------------------------------------
Net interest income 10,275,954 9,334,613 9,298,168
Provision for loan losses (Note 3)
-----------------------------------------------------------
Net interest income after provision
for loan losses 10,275,954 9,334,613 9,298,168
-----------------------------------------------------------
NONINTEREST INCOME:
Fees and service charges 370,795 311,462 286,772
Realized loss on sale of securities (318,948)
Income from real estate operations 7,964 7,230 1,679
Rent on safe deposit boxes 33,450 32,801 32,253
Other, net 12,949 12,429 5,487
-----------------------------------------------------------
Total noninterest income, net 425,158 363,922 7,243
-----------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
17
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS
OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C>
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and fringe benefits (Note 11) $ 2,002,924 $ 2,038,817 $ 1,984,902
Occupancy and building (Note 12) 207,089 227,831 221,199
Premiums and assessments 1,326,809 416,491 440,967
Computer services 300,905 281,394 255,762
Other 799,732 728,247 681,848
----------------------------------------------------------
Total general and administrative expenses 4,637,459 3,692,780 3,584,678
----------------------------------------------------------
INCOME BEFORE INCOME TAXES 6,063,653 6,005,755 5,720,733
INCOME TAX EXPENSE (Note 9) 2,155,000 2,085,000 1,948,000
----------------------------------------------------------
NET INCOME $ 3,908,653 $ 3,920,755 $ 3,772,733
==========================================================
EARNINGS PER COMMON SHARE:
Net income $ 0.98 $ 0.98 $ 0.95
==========================================================
Average common and common
equivalent shares outstanding 3,970,306 3,993,070 3,954,047
==========================================================
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
18
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended June 30, 1997, 1996 and 1995
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, 1994 $ 36,275,418 $ (648,000) $ $ 27,666,674 $ 63,294,092
Unrealized loss on securities
available for sale, net of tax
effect of $538,437 (1,045,201) (1,045,201)
Earned ESOP compensation 76,198 105,120 181,318
Change in net unrealized gain
(loss) on available for sale
securities, net of tax effect 1,519,553 1,519,553
Net income for year 3,772,733 3,772,733
Cash dividends declared
($.60 per share) (2,211,378) (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
Change in net unrealized gain
(loss) on available for sale
securities, net of tax effect (474,428) (474,428)
Net income for year 3,920,755 3,920,755
Cash dividends declared
($.64 per share) (2,366,931) (2,366,931)
---------------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 36,451,561 (421,952) (76) 30,781,853 66,811,386
Stock repurchase (1,395,532) (1,395,532)
Proceeds from exercise of
stock options 65,019 65,019
Earned ESOP compensation 115,925 128,450 244,375
Change in net unrealized gain
(loss) on available for sale
securities, net of tax effect 281,434 281,434
Net income for year 3,908,653 3,908,653
Cash dividends declared
($.74 per share) (2,720,403) (2,720,403)
---------------------------------------------------------------------------------
BALANCE, JUNE 30, 1997 $ 35,236,973 $ (293,502) $ 281,358 $ 31,970,103 $ 67,194,932
=================================================================================
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
19
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS
OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
1997 1996 1995
-------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,908,653 $ 3,920,755 $ 3,772,733
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of premises and equipment 94,055 120,433 120,738
Issuance of ESOP shares 244,375 220,873 181,318
Net amortization on investments 512,067 617,085 883,662
Deferred income taxes (7,000) (18,600) (34,000)
Loan origination fees and costs deferred,
net of current amortization 46,139 51,455 88,252
Gain on sale of real estate (8,531)
Changes in:
Accrued interest receivable (214,430) 139,276 67,529
Prepaid expenses and other assets (81,231) (46,129) (122,701)
Accrued interest payable on deposits (9,554) 8,614 (23,630)
Advances by borrowers for taxes and
insurance 17,210 16,306 (44,356)
Accrued expenses and other liabilities 194,613 (81,382) 186,868
Taxes payable 242,040 129,578 (246,136)
-------------------------------------------------------
Net cash provided by operating activities 4,938,406 5,078,264 4,830,277
-------------------------------------------------------
INVESTING ACTIVITIES:
Net (increase) decrease in interest-bearing
deposits with banks (5,587,822) 356,376 2,562,236
Proceeds from maturities of certificates
of deposit 7,000,000 2,200,000
Purchases of certificates of deposit (7,000,000)
Proceeds from maturities of securities 11,700,000 11,000,000 6,050,000
Proceeds from sales of securities 13,933,984
Loss on sale of securities 318,948
Purchases of securities (31,251,432) (13,000,000)
Principal repayments on mortgage-backed
securities 1,670,878 1,487,573 1,339,074
Proceeds from sale of real estate 102,000
Loan originations, net of repayments and net fees (14,940,293) (17,704,972) (17,086,307)
Purchases of premises and equipment (43,014) (74,326) (49,486)
Improvement costs on real estate (6,196)
-------------------------------------------------------
Net cash used in investing activities (38,355,879) (4,935,349) (3,731,551)
-------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
20
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS
OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended June 30,
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase in deposits $16,892,550 $ 4,343,882 $ 881,400
Net increase (decrease) in borrowed funds 19,578,048 (120,928) (105,120)
Net proceeds from exercise of stock options 65,019
Repurchases of common stock (1,395,532)
Cash dividends paid (2,926,437) (2,500,773) (1,703,136)
------------------------------------------------------
Net cash provided by (used in) financing activities 32,213,648 1,722,181 (926,856)
------------------------------------------------------
INCREASE (DECREASE) IN CASH
AND DUE FROM BANKS (1,203,825) 1,865,096 171,870
CASH AND DUE FROM BANKS,
BEGINNING OF YEAR 4,005,247 2,140,151 1,968,281
------------------------------------------------------
CASH AND DUE FROM BANKS,
END OF YEAR $ 2,801,422 $ 4,005,247 $ 2,140,151
------------------------------------------------------
SUPPLEMENTAL DISCLOSURES:
- -------------------------
Cash paid for:
Interest on deposits $ 9,505,683 $ 9,173,644 $ 8,023,430
Interest on borrowed funds 208,888 51,952 142,423
Income taxes 1,963,036 1,971,500 2,228,136
Noncash transactions:
Transfers from loans to foreclosed real estate 87,273
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
21
- --------------------------------------------------------------------------------
<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 Equivalents - For the purpose of presentation in the
consolidated statements of cash flows, cash and cash equivalents
are defined as those amounts included in the balance-sheet caption
"cash and due from banks."
b. Investments in Securities - 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 would result in write-downs of the individual
securities to their fair value. The related write-downs would be
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.
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.
The allowance for loan losses is established through a provision for
loan losses charged to operations. Loans are charged off against the
allowance when management believes that collectibility is unlikely.
The allowance is an amount that management believes will be adequate
to absorb losses on existing loans that may become uncollectible based
on evaluations of the collectibility of loans and prior loan loss
experience. The evaluations take into account such factors as changes
in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans and current economic
conditions that may affect the borrowers' ability to pay. While
management uses the best information available to make evaluations,
future adjustments may be necessary if economic or other conditions
differ substantially from the assumptions used.
- --------------------------------------------------------------------------------
22
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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. The Bank does not currently have any loans which are
considered to be impaired.
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' 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.
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 - Earnings per common share is calculated by
dividing net income by the weighted-average number of common and
common equivalent shares outstanding. 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 the proceeds from the assumed exercise of the options.
i. Cash Dividends - On June 13, 1997, First Savings declared a $0.20 per
share cash dividend to shareholders of record on June 30, 1997,
payable on July 18, 1997.
j. Use of Estimates - The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles
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 1996 and 1995 have been reclassified to conform to the 1997
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, 1997:
U.S. government and agency securities $78,880,744 $ 565,687 $ 164,068 $79,282,363
N.C. state and municipal obligations 950,000 24,681 974,681
Federal Home Loan Bank stock 1,929,600 1,929,600
-----------------------------------------------------------------
Total $81,760,344 $ 590,368 $ 164,068 $82,186,644
=================================================================
To be held to maturity:
June 30, 1997:
Mortgage-backed pass-through securities $ 6,572,162 $ 99,934 $ 6,672,096
=================================================================
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 securities $ 2,965,356 $ 59,450 $ 8,861 $ 3,015,945
=================================================================
</TABLE>
There were no sales of securities for the years ended June 30, 1997 and 1996.
During the year ended June 30, 1995, proceeds from sales of available for sale
securities aggregated $13,934,000, with resultant gross losses of $319,000
realized.
- --------------------------------------------------------------------------------
24
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The scheduled maturities of securities at June 30, 1997 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 $ 15,499,731 $ 15,530,070 $ $
Due after one year
through five years 45,375,256 45,696,060
Due after five years
through ten years 14,887,088 14,938,014
Due after ten years 5,998,269 6,022,500
------------------------------------------------------------------
81,760,344 82,186,644
Mortgage-backed
pass-through securities $ 6,572,162 $ 6,672,096
------------------------------------------------------------------
Total $ 81,760,344 $ 82,186,644 $ 6,572,162 $ 6,672,096
==================================================================
</TABLE>
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, 1997, securities available for sale totaling $725,000 and
$6,350,000 were pledged to secure public and private deposits,
respectively.
- --------------------------------------------------------------------------------
25
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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>
1997 1996
----------------------------------------
<S> <C> <C>
Mortgage loans:
First mortgage loans $ 187,293,870 $ 170,689,607
First mortgage loan participations 2,268,368 4,465,056
Property improvement loans 2,239 4,218
Equity line loans 8,360,529 5,602,399
----------------------------------------
197,925,006 180,761,280
----------------------------------------
Less:
Loans in process 7,007,956 3,959,237
Net deferred loan fees 555,148 509,009
----------------------------------------
Total mortgage loans 190,361,902 176,293,034
----------------------------------------
Savings account loans 908,515 874,669
Installment loans 620,742 351,463
Credit card loans 950,637 520,301
----------------------------------------
Total mortgage and other loans 192,841,796 178,039,467
Less allowance for loan losses 604,187 608,739
----------------------------------------
Loans receivable, net $ 192,237,609 $ 177,430,728
========================================
</TABLE>
In the normal course of business, the Bank has made mortgage loan
commitments of approximately $10,175,000 and $5,242,000 and equity line
loans of approximately $11,069,000 and $8,336,000, at June 30, 1997 and
1996, respectively, and credit card loans of approximately $3,077,000 and
$2,380,000 at June 30, 1997 and 1996, respectively. Such loan commitments
are not reflected in the financial statements and are divided between
variable and fixed rates by approximately 77% and 23%, 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.
- --------------------------------------------------------------------------------
26
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
At June 30, 1997, the composition of loans by fixed and adjustable rates
was as follows:
<TABLE>
<CAPTION>
Fixed Rate Adjustable Rate
------------------------------------ -------------------------------------
Term to Book Value Term to Book Value
Maturity (in thousand's) Adjustment (in thousand's)
------------------------------------ -------------------------------------
<S> <C> <C> <C>
1 mo. - 1 yr. $ 1,229 1 mo. - 1 yr. $ 46,006
1 yr. - 3 yr. 1,580 1 yr. - 3 yr. 54,565
3 yr. - 5 yr. 3,069 3 yr. - 5 yr. 12,436
5 yr. - 10 yr. 10,917 5 yr. - 10 yr. 32,049
10 yr. - 20 yr. 26,783 10 yr. - 20 yr. 4,208
--------------- -----------------
Total $43,578 Total $ 149,264
=============== =================
</TABLE>
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 primarily have been 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, 1997 and 1996, loans to directors and officers were approximately
$776,000 and $701,000, 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 $10,079,000 at June
30, 1997. The Bank was in compliance with the limitation as of June 30, 1997.
Changes in the allowance for loan losses for the years ended June 30 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 608,739 $ 608,739 $ 608,924
Provision for loan losses
Charge-offs (4,552) (4,185)
Recoveries 4,000
-------------------------------------------------
Balance at end of year $ 604,187 $ 608,739 $ 608,739
=================================================
</TABLE>
In conformity with SFAS 114, as amended by SFAS 118, none of the Bank's loans
are considered to be impaired.
- --------------------------------------------------------------------------------
27
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------
<S> <C> <C>
Loans receivable $ 145,185 $ 64,911
Mortgage-backed securities 80,503 69,078
Securities 1,575,903 1,453,267
Other 34,878 34,783
-------------------------------
Total $ 1,836,469 $ 1,622,039
===============================
</TABLE>
5. PREMISES AND EQUIPMENT
Premises and equipment at June 30, which are stated at cost, are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------
<S> <C> <C>
Land $ 379,306 $ 379,306
Office buildings and improvements 2,233,113 2,219,991
Furniture, fixtures and equipment 645,140 646,013
Motor vehicles 39,838 39,838
--------------------------------
Total 3,297,397 3,285,148
Less allowance for depreciation 1,329,707 1,266,437
--------------------------------
Premises and equipment, net $ 1,967,690 $ 2,018,711
================================
</TABLE>
6. DEPOSITS
Deposits at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------
<S> <C> <C>
NOW accounts $ 19,776,505 $ 17,432,528
Money market deposits 41,668,099 40,638,693
Passbook savings 13,070,907 9,998,601
Certificates of deposit 129,801,263 119,354,402
----------------------------------
Total $204,316,774 $ 187,424,224
==================================
</TABLE>
- --------------------------------------------------------------------------------
28
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The aggregate amount of short-term jumbo certificates of deposit, each with a
minimum denomination of $100,000, was approximately $25,465,000 and $22,176,000
in 1997 and 1996, respectively.
At June 30, 1997, the scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<CAPTION>
(In thousand's)
<S> <C>
1998 $ 99,365
1999 24,970
2000 2,412
2001 and thereafter 3,054
----------
$ 129,801
----------
</TABLE>
Included in deposits are noninterest-bearing balances totaling $1,556,535
and $242,446 as of June 30, 1997 and 1996, respectively.
7. BORROWED FUNDS
Borrowed funds at June 30, 1997 consist of advances from the Federal Home
Loan Bank (FHLB). These advances, with weighted average rates, are as
follows:
<TABLE>
<S> <C>
6.08% due on or before June 30, 1998 $15,000,000
6.74% due on or before June 30, 1998 5,000,000
-----------
$20,000,000
===========
</TABLE>
The above advances have been made against a $30.0 million line of credit
secured by a blanket floating lien on the Bank's one-to-four family
residential mortgage loans.
Borrowed funds at June 30, 1996 consist of a note payable to a third
party lender for purchase of shares by the Bank's Employee Stock
Ownership Plan (ESOP). In January of 1997, First Savings purchased the
ESOP note payable from the third party lender with the terms remaining
substantially unchanged. The note is not guaranteed by the Bank.
8. INTEREST RATE RISK
First Savings is engaged principally in providing first mortgage loans to
individuals and commercial enterprises. At June 30, 1997, 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, 1997, First Savings had interest-earning assets of
$287,475,099 having a weighted-average effective yield of 7.64% and
interest-bearing liabilities of $222,760,239 having a weighted-average
effective interest rate of 4.82%.
- --------------------------------------------------------------------------------
29
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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>
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
Current tax provision $ 2,162,000 $ 2,103,600 $ 1,914,000
Deferred tax provision (7,000) (18,600) 34,000
------------------------------------------------------
Total $ 2,155,000 $ 2,085,000 $ 1,948,000
------------------------------------------------------
</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>
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
Income taxes at the statutory $ 2,061,642 $ 2,041,957 $ 1,945,049
federal rate
Increases (decreases) resulting from:
Tax exempt interest - net (10,833) (29,091) (31,172)
State income taxes - net of federal benefit 101,319 70,150 30,492
Other, net 2,872 1,984 3,631
------------------------------------------------------
Income tax expense $ 2,155,000 $ 2,085,000 $ 1,948,000
======================================================
</TABLE>
- --------------------------------------------------------------------------------
30
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Deferred taxes arising from each type of temporary difference at June 30 are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred tax assets relating to loan fees and costs $ 218,176 $ 198,913
Unrealized loss on securities available for sale 39
-------------------------------
Total 218,176 198,952
-------------------------------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends 329,029 329,029
Depreciation 222,663 210,400
Bad debt reserve 289,980 289,980
Unrealized gain on securities available for sale 144,942
-------------------------------
Total 986,614 829,409
-------------------------------
Net deferred tax liability $ 768,438 $ 630,457
===============================
</TABLE>
Retained earnings at June 30, 1997 includes approximately $5,300,000 for
which no deferred income tax liability has been recognized. This amount
represents an allocation of income to bad debt deductions for income tax
purposes only. Reductions of the amount so allocated for purposes other
than tax bad debt losses or adjustments arising from carryback of net
operating losses would create income for tax purposes only, which would
be subject to the then current corporate income tax rate.
During 1996, Congress enacted certain tax legislation that exempted
thrift institutions from being taxed on these pre-1987 bad debt reserves.
Further, the use of the reserve method is now required for all thrifts.
The Bank will be recapturing $1,300,000 of its tax bad debt reserve
created subsequent to 1986 by using the percentage of taxable income
method, requiring payment of additional income taxes of approximately
$500,000. Deferred income taxes have been previously established for the
taxes arising from the reserve recapture, and thus the ultimate payment
of the taxes will not result in a charge to earnings.
10. SHAREHOLDERS' EQUITY
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.
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, and 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.
- --------------------------------------------------------------------------------
31
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Actual capital amounts and ratios for First Savings and the Bank are
presented in the table below:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997
Total Capital (to Risk Weighted Assets):
greater than
or equal to
Consolidated $ 67,517,761 52.15% $ 10,358,080 8.0% N/A N/A
greater than greater than
or equal to or equal to
First Savings Bank of Moore Co., Inc., SSB $ 49,692,461 38.38% $ 10,356,880 8.0% $ 12,946,100 10.0%
Tier 1 Capital (to Risk Weighted Assets):
greater than
or equal to
Consolidated $ 66,913,574 51.68% $ 5,179,040 4.0% N/A N/A
greater than greater than
or equal to or equal to
First Savings Bank of Moore Co., Inc., SSB $ 49,088,274 37.92% $ 5,178,440 4.0% $ 7,767,660 6.0%
Tier 1 Capital (to Average Assets):
greater than
or equal to
Consolidated $ 66,913,574 24.71% $ 10,927,600 4.0% N/A N/A
greater than greater than
or equal to or equal to
First Savings Bank of Moore Co., Inc., SSB $ 49,088,274 19.08% $ 10,290,120 4.0% $ 12,862,650 5.0%
As of June 30, 1996
Total Capital (to Risk Weighted Assets):
greater than
or equal to
Consolidated $ 66,811,477 60.57% $ 8,904,800 8.0% N/A N/A
greater than greater than
or equal to or equal to
First Savings Bank of Moore Co., Inc., SSB $ 55,931,035 50.88% $ 8,889,760 8.0% $ 11,112,200 10.0%
Tier 1 Capital (to Risk Weighted Assets):
greater than
or equal to
Consolidated $ 66,811,553 60.02% $ 4,452,400 4.0% N/A N/A
greater than greater than
or equal to or equal to
First Savings Bank of Moore Co., Inc., SSB $ 55,926,428 50.33% $ 4,444,880 4.0% $ 6,667,320 6.0%
Tier 1 Capital (to Average Assets):
greater than
or equal to
Consolidated $ 66,811,553 26.13% $ 10,228,360 4.0% N/A N/A
greater than greater than
or equal to or equal to
First Savings Bank of Moore Co., Inc., SSB $ 55,926,428 22.66% $ 9,870,360 4.0% $ 12,337,950 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, 1997 and 1996, the Bank's capital ratio under the
North Carolina requirement was 17.54% and 22.70%, respectively.
At June 30, 1997 and 1996, First Savings and the Bank exceeded all
capital requirements.
The Bank is also subject to restrictions on dividends. For the year ended
June 30, 1997, the Bank could not declare cash dividends payable to the
parent company in excess of one-half of its prior year's net income
($1,838,919) without prior approval from the Administrator of the Savings
Institution Division, North Carolina Department of Commerce.
During the year ended June 30, 1997, First Savings repurchased and
retired 76,500 shares of its common stock in accordance with a stock
repurchase plan. At June 30, 1997, First Savings is authorized to
purchase 297,900 additional shares under the plan.
- --------------------------------------------------------------------------------
32
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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, 1997, 1996 and 1995 were $97,539, $93,402 and $80,944, respectively.
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 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). The ESOP
note payable is to be paid over a period not to exceed ten years,
principally from the Bank's discretionary contributions to the ESOP.
Dividends paid on shares held by the ESOP may also be used to reduce the
note. ESOP expense of $244,375, $220,873 and $181,318, has been incurred
during the years ended June 30, 1997, 1996 and 1995, respectively,
including $115,925, $99,945 and $76,198, respectively, which represents
the difference between the fair market value of the shares which have
been released or committed to be released to participants, and the cost
of these shares to the ESOP. These amounts have been credited to common
stock and charged to compensation expense in accordance with the
provisions of AICPA Statement of Position 93-6.
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. Under the Employee Plan, participants may exercise options
by exchanging, at fair value, shares of common stock which they already
own. At June 30, 1996, options for 90,000 shares of common stock were
reserved for future issuance for the Employee Plan. As of June 30, 1997,
16,811 options have been exercised under the Employee Plan. No options
had been exercised under the Directors' Plan as of June 30, 1997.
12. LEASES
Rentals under a long-term operating lease for First Savings' branch
office building in Pinehurst totaled $9,000 for each of the years ended
June 30, 1997, 1996 and 1995. 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, 1997, the minimum rental commitments required under this
noncancelable lease are as follows:
<TABLE>
<CAPTION>
Year Ending
<S> <C>
1998 $ 9,300
1999 10,200
2000 10,200
2001 10,200
2002 10,200
Thereafter 7,650
-------------
Total $ 57,750
=============
</TABLE>
- --------------------------------------------------------------------------------
33
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
The following methods and assumptions are used to estimate the fair value
of each class of financial instruments for which it is practical to
estimate that value.
Cash and Due From Banks and Interest Bearing Deposits With Banks
----------------------------------------------------------------
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.
Borrowed Funds
--------------
The carrying amount is a reasonable estimate of fair value.
- --------------------------------------------------------------------------------
34
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The estimated fair values of the Bank's financial instruments at June 30
are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks and
interest bearing deposits $ 9,102,219 $ 9,102,219 $ 4,718,222 $ 4,718,222
Securities 88,758,806 88,858,740 70,963,904 71,014,493
Loans receivable 192,237,609 195,970,477 177,430,728 172,874,050
--------------------------------------------------------------------------------
$290,098,634 $293,931,436 $ 253,112,854 $ 248,606,765
================================================================================
Financial liabilities:
Deposits $204,316,774 $203,716,128 $ 187,424,224 $ 185,002,489
Borrowed funds 20,000,000 20,000,000 421,952 421,952
--------------------------------------------------------------------------------
$224,316,774 $223,716,128 $ 187,846,176 $ 185,424,441
================================================================================
</TABLE>
The fair value estimates presented herein are based on pertinent
information available to management at June 30, 1997 and 1996,
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.
- --------------------------------------------------------------------------------
35
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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>
1997
Total interest and dividend income $ 4,796 $ 4,863 $ 4,953 $ 5,446
Total interest expense 2,311 2,369 2,377 2,725
----------------------------------------------------------------
Net interest income 2,485 2,494 2,576 2,721
Provision for loan losses
----------------------------------------------------------------
Net interest income after
provision for loan losses 2,485 2,494 2,576 2,721
Other expense, net 2,010 * 737 756 709
----------------------------------------------------------------
Income before income taxes 475 1,757 1,820 2,012
Income tax expense 173 586 656 740
----------------------------------------------------------------
Net income $ 302 $ 1,171 $ 1,164 $ 1,272
================================================================
Net earnings per share $ 0.08 $ 0.30 $ 0.29 $ 0.32
================================================================
Weighted average shares outstanding 3,974,368 3,948,720 3,961,840 3,976,525
================================================================
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
================================================================
</TABLE>
*Includes nonrecurring charge associated with the SAIF assessment.
- --------------------------------------------------------------------------------
36
- --------------------------------------------------------------------------------
<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, 1997 and 1996 and for the year ended June 30,
1997 and the period November 1, 1995 to June 30, 1996 is presented below:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------
<S> <C> <C>
Assets
Interest bearing deposits with subsidiary $ 7,481,196 $ 1,320,670
Securities at market value 10,246,855 10,274,500
Investment in subsidiary 49,322,904 55,931,035
Other assets 653,180 342,769
---------------- ----------------
Total assets $ 67,704,135 $ 67,868,974
================ ================
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 509,203 $ 1,057,588
Shareholders' equity 67,194,932 66,811,386
---------------- ----------------
Total liabilities and shareholders' equity $ 67,704,135 $ 67,868,974
================ ================
Condensed Statement of Income
Interest on securities $ 670,595 $ 383,227
Earnings of subsidiary 3,538,555 2,419,456
---------------- ----------------
4,209,150 2,802,683
Other expenses 108,497 16,310
---------------- ----------------
Income before income tax 4,100,653 2,786,373
Income tax expense 192,000 124,000
---------------- ----------------
Net Income $ 3,908,653 $ 2,662,373
================ ================
</TABLE>
For the year ended June 30, 1997, the Bank subsidiary paid cash dividends of
$10,627,130 to the parent.
- --------------------------------------------------------------------------------
37
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
DIRECTORS, OFFICERS
AND
OFFICE LOCATIONS
- --------------------------------------------------------------------------------
FIRST SAVINGS BANCORP, INC.
BOARD OF DIRECTORS
J.E. Causey, Chairman of the Board
Causey Construction & Realty
William E. Samuels, President
Chief Executive Officer
First Savings Bank of Moore County, Inc., SSB
Joe Montesanti, Jr.
Retired Pharmacist
H. David Bruton, M.D.
Secretary of the Department of Health and Human Resources of North Carolina
Dr. W. Harrell Johnson
Retired Dentist
John F. Burns, Secretary/Treasurer
Executive Vice President
First Savings Bank of Moore County, Inc., SSB
H.A. Clayton
Retired Merchant
Thomas F. Phillips
Owner of Phillips Motor Company
Frank G. Hardister
President of Powell Funeral Home
- --------------------------------------------------------------------------------
FIRST SAVINGS BANK
STAFF
- --------------------------------------------------------------------------------
Southern Pines Office
William E. Samuels, President
John F. Burns, Executive Vice President
& Secretary/Treasurer
Vice Presidents
S. Allan Beck Michael F. McMillan
Timothy S. Maples Donna B. Morgan
Sherry B. Yow
Assistant Vice Presidents
Carol F. Allred Wanda M. Ring
Sandra G. Blake Joel H. Salmon
Staff
Tammy O. Barnett Marian E. Lauffer
Dianna B. Bullard Caroline M. Lemmond
Kimberly O. Hedrick Betty K. Lomax
Margaret V. Hightower Angel J. McKeithan
James C. Hinton Karen M. Riley
Derinda F. Hobson Barbara W. Ussery
Betty S. Kramer Pam C. Wase
Pinehurst Office
Doris B. Andrews, Vice President
Teresa T. Cole, Assistant Vice President
Lynette F. Williams, Assistant Vice President
Nancy L. Howle
Deborah H. Williams
Carthage Office
Patricia W. Jackson, Vice President
Patsy M. Salmon
Carol M. Williams
Seven Lakes Office
Kim Y. Bailey, Vice President
Sherry S. Blake
Shirley M. Puckett
Paula M. Taggart
Pinecrest Plaza Office
William A. Roberts, Vice President
Patsy M. McDonald, Assistant Vice President
Susanna C. Hunley
Martha M. Lunday
Audra W. McLean
- --------------------------------------------------------------------------------
38
- --------------------------------------------------------------------------------
<PAGE>
[STAFF PICTURE APPEARS HERE]
<PAGE>
- --------------------------------------------------------------------------------
CORPORATE
INFORMATION
- --------------------------------------------------------------------------------
Corporate Headquarters
First Savings Bancorp, Inc.
205 SE Broad Street
Post Office Box 1657
Southern Pines, North Carolina 28388
(910) 692-6222
Special Counsel
Brooks, Pierce, McLendon,
Humphrey & Leonard, LLP
230 North Elm Street
Post Office Box 26000
Greensboro, North Carolina 27420
Transfer Agent
Wachovia Bank of North Carolina, N.A.
Corporate Trust Department
Post Office Box 3001
Winston-Salem, North Carolina 27102
1-800-633-4236
Independent Accountants
Dixon, Odom & Co., L.L.P.
6 Turnberry Wood
Post Office Box 1655
Southern Pines, North Carolina 28387
Form 10-K
Copies of the First Savings Bancorp, Inc.
Form 10-K may be obtained by shareholders without charge
by writing to Margaret V. Hightower at the Corporate
Headquarters address.
Additional Information
For additional information, please contact
John F. Burns, Timothy S. Maples, or
William E. Samuels
at
(910) 692-6222.
Annual Meeting
The 1997 Annual Meeting of Shareholders of
First Savings Bancorp, Inc.
will be held at the
Holiday Inn, US#1, Southern Pines, NC on
October 30, 1997 at 10:00 a.m.
All shareholders are cordially invited to attend.
- --------------------------------------------------------------------------------
CAPITAL STOCK
- --------------------------------------------------------------------------------
First Savings' common stock is traded on the NASDAQ National Market System under
the symbol "SOPN." As of June 30, 1997, there were 3,679,185 shares outstanding
and 1,140 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's 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.
- --------------------------------------------------------------------------------
Quarterly Common Stock Performance and Dividends Declared
For the Year Ended June 30, 1997
<TABLE>
<CAPTION>
Dividends
Stock Price Declared, Per Share
------------------------- ------------------------
High Low Regular Special
<S> <C> <C> <C> <C>
First Quarter Ending September 30 $ 18.81 $ 16.75 $ 0.17 N/A
Second Quarter Ending December 31 $ 19.00 $ 17.25 $ 0.17 N/A
Third Quarter Ending March 31 $ 20.25 $ 17.88 $ 0.20 N/A
Fourth Quarter Ending June 30 $ 24.50 $ 19.38 $ 0.20 N/A
<CAPTION>
For the Year Ended June 30, 1996
<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
</TABLE>
- --------------------------------------------------------------------------------
This annual report has not been reviewed or confirmed for accuracy or relevance
by the Federal Deposit Insurance Corporation.
- --------------------------------------------------------------------------------
40
- --------------------------------------------------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 2,801,422
<INT-BEARING-DEPOSITS> 6,300,797
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 82,186,644
<INVESTMENTS-CARRYING> 6,300,797
<INVESTMENTS-MARKET> 6,672,096
<LOANS> 192,841,796
<ALLOWANCE> 604,187
<TOTAL-ASSETS> 294,216,748
<DEPOSITS> 204,316,774
<SHORT-TERM> 15,000,000
<LIABILITIES-OTHER> 2,705,042
<LONG-TERM> 5,000,000
0
0
<COMMON> 35,236,973
<OTHER-SE> 31,957,959
<TOTAL-LIABILITIES-AND-EQUITY> 294,216,748
<INTEREST-LOAN> 14,954,452
<INTEREST-INVEST> 4,654,727
<INTEREST-OTHER> 449,184
<INTEREST-TOTAL> 20,058,363
<INTEREST-DEPOSIT> 9,496,129
<INTEREST-EXPENSE> 9,782,409
<INTEREST-INCOME-NET> 10,275,954
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,637,459
<INCOME-PRETAX> 6,063,653
<INCOME-PRE-EXTRAORDINARY> 6,063,653
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,908,653
<EPS-PRIMARY> 0.98
<EPS-DILUTED> 0.98
<YIELD-ACTUAL> 3.88
<LOANS-NON> 250,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 608,739
<CHARGE-OFFS> 4,552
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 604,187
<ALLOWANCE-DOMESTIC> 171,277
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 433,133
</TABLE>
