<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ______
Commission file number 0-27098
------------------
FIRST SAVINGS BANCORP, INC.
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1842701
--------------------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
205 S.E. BROAD STREET, P.O. BOX 1657
SOUTHERN PINES, NORTH CAROLINA 28388
-------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (910) 692-6222
--------------
Securities Registered Pursuant to Section 12(b) of the Act: NONE
-----------
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
--------------------------------
(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 _____
-----
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing. $78,216,180 COMMON STOCK, NO PAR
----------------------------------
VALUE, BASED ON THE CLOSING PRICE OF SUCH COMMON STOCK ON AUGUST 31, 1998.
- --------------------------------------------------------------------------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
3,724,580 SHARES OF COMMON STOCK, NO PAR VALUE, OUTSTANDING AT AUGUST 31, 1998.
- --------------------------------------------------------------------------------
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Annual Report of First
Savings Bancorp, Inc. for the year ended June 30, 1998, are incorporated by
reference into Part I, Part II and Part IV.
Portions of the Proxy Statement for the 1998 Annual Meeting of Shareholders of
First Savings Bancorp, Inc. to be held on October 29, 1998, are incorporated by
reference into Part III.
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. [X]
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
First Savings Bancorp, Inc. (the "Holding Company" or the "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
primarily consist of the ownership of 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 in First Savings'
market area include Resorts of Pinehurst, Firsthealth Moore Regional Hospital,
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, 1998, over 99% of the net amount of
First Savings' real estate loan portfolio was secured by properties in North
Carolina. On June 30, 1998, the largest amount First Savings had outstanding to
any one borrower and its affiliates
3
<PAGE>
was approximately $2,324,000. 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.
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 judgement, 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. As of June 30 1998, 1997 and 1996, the
reserve for uncollected interest was $7,945, $6,419 and $2,308, respectively.
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 $95,000, $145,000
and $1,570,000 during the years ended June 30, 1998, 1997 and 1996,
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, 1998, 1997 and 1996, was 109.36%, 241.60%, and 454.48%,
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, 1998, 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.
As of June 30, 1998, $6.0 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, 1998, 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.
4
<PAGE>
The following table sets forth certain information regarding First
Savings' cash investments and the carrying and market values of First Savings'
mortgage-backed securities and investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30,
---------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
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............. $ 3,991 $ 3,991 $ 6,301 $ 6,301 $ 713 $ 713
======= ======= ======= ======= ======= =======
Securities available-for-sale/1/:
U.S. government and agency
securities........................ $71,164 $71,695 $78,881 $79,282 $63,919 $63,889
Obligations of states and political
subdivisions...................... 950 987 950 975 2,150 2,180
Federal Home Loan Bank stock......... 1,930 1,930 1,930 1,930 1,930 1,930
Other................................ 50 50
------- ------- ------- ------- ------- -------
Total securities available-for-sale.... $74,094 $74,662 $81,760 $82,187 $67,999 $67,999
======= ======= ======= ======= ======= =======
Securities held-to-maturity/1/:
U.S. government and agency
securities........................ $ $ $ $ $ $
Obligations of states and political
subdivisions......................
Federal Home Loan Bank stock.........
Mortgage-backed securities........... 9,737 9,821 6,572 6,672 2,965 3,016
------- ------- ------- ------- ------- -------
Total securities held-to-maturity...... $ 9,737 $ 9,821 $ 6,572 $ 6,672 $ 2,965 $ 3,016
======= ======= ======= ======= ======= =======
</TABLE>
________________________________
/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.
5
<PAGE>
The following table sets forth certain information regarding First Savings'
cash investments and the carrying value, weighted average yields and contractual
maturities of First Savings' mortgage-backed and investment securities as of
June 30, 1998.
<TABLE>
<CAPTION>
AFTER ONE THROUGH AFTER FIVE THROUGH
ONE YEAR OR LESS FIVE YEARS TEN YEARS AFTER TEN YEARS
-------------------- -------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits
in other financial
institutions.............. $ 3,991 6.10% $ % $ % %
------- ------- ------- ------- ------- ------ ------- -------
Securities
available-for-sale:
U.S. government and
agency
securities........... $26,198 6.77% $20,468 6.54% $14,014 6.85% $11,015 7.24%
N.C. State and municipal
obligations(1)....... 987 5.35
Federal Home Loan Bank
stock................... 1,930 7.50
Other.................... $ 50 4.19
------- ------- ------- ------- ------- ------ ------- -------
Total securities
available-for-sale. $28,178 6.82% $20,468 6.54% $15,001 6,74% $11,015 7.24%
------- ------- ------- ------- ------- ------ ------- -------
Securities
held-to-maturity:
Mortgage-backed
securities.............. $ $ 340 9.31% $ 148 9.81% $ 9,249 7.52%
------- ------- ------- ------- ------- ------ ------- -------
Total investments, at
carrying
value................... $28,178 $20,808 $15,149 $20,264
------- ------- ------- -------
Total interest-bearing
deposits and
investments............. $32,169 $20,808 $15,149 $20,264
======= ======= ======= =======
<CAPTION>
TOTAL
-------------------
WEIGHTED
ARRYING AVERAGE
VALUE YIELD
-------- ---------
<S> <C> <C>
Interest-bearing deposits
in other financial
institutions.............. $ 3,991 6.10%
------- -------
Securities
available-for-sale:
U.S. government and
agency
securities........... $71,695 6.78%
N.C. State and municipal
obligations(1)....... 987 5.35
Federal Home Loan Bank
stock................... 1,930 7.50
Other.................... 50 4.19
------- ------
Total securities
available-for-sale. $74,662 6.93%
------- -------
Securities
held-to-maturity:
Mortgage-backed
securities.............. $ 9,737 7.617%
------- -------
Total investments, at
carrying
value................... $84,399
-------
Total interest-bearing
deposits and
investments............. $88,390
=======
</TABLE>
(1) Yields on obligations of states and political subdivisions are not
calculated on a tax-equivalent basis.
6
<PAGE>
DEPOSITS AND BORROWINGS
DEPOSITS. Deposits are the primary source of First Savings' funds for
lending and other investment purposes. On June 30, 1998, 1997 and 1996, First
Savings' deposits totalled $211.9 million, $204.3 million and $187.4 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, 1998, the aggregate amount outstanding of certificates of
deposit in amounts of $100,000 or more was approximately $28.9 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,
1998
--------------
(IN THOUSANDS)
<S> <C>
3 months or less..................................................... $ 5,399
Over 3 months through 6 months....................................... 7,300
Over 6 months through 12 months...................................... 6,940
Over 12 months....................................................... 9.276
-------
Total........................................................... $28,915
=======
</TABLE>
BORROWINGS. First Savings is a member of the FHLB of Atlanta. 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,
1998, 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.
7
<PAGE>
SUBSIDIARIES
The Bank has one wholly-owned subsidiary, Moore Service Corporation ("Moore
Service"). Moore Service, a North Carolina corporation, serves as the trustee
for deeds of trust securing loans made by 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, 1998, there were at least twelve other financial
institutions with offices in Moore County, North Carolina. Based upon
comparative data as of June 30, 1998, 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, 1998, First Savings had 42 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.
During the fiscal years ended June 30, 1998, 1997 and 1996, contributions to
this plan were $112,910, $97,539, and $93,402, 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, First Savings has an ESOP, a stock based management
recognition plan and stock option plans. 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.
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
8
<PAGE>
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, 1998
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, 1998, 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 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.
9
<PAGE>
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. 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 7.25% in 1998, and will
drop to 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 bank holding company
subject to the Bank Holding Company Act of 1956, as amended (the "BHCA"), the
Holding Company is subject to certain regulations of the Federal Reserve Board
(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 and loan 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.
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 of North Carolina
Savings Institutions Division (the "Administrator").
10
<PAGE>
CAPITOL MAINTENANCE. 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 Federal Deposit Insurance
Corporation (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.
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.
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. 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. 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.
11
<PAGE>
DIVIDEND AND REPURCHASE LIMITATIONS. The Holding 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.
First Saving is also subject to limits on dividend payments. First Savings is
prohibited, under the North Carolina Business Corporation Act, from paying a
dividend if such payment would (i) cause First Savings to be unable to pay its
debts as they become due in the ordinary course of business or (ii) reduce First
Savings' total assets below the sum of First Savings' total liabilities plus any
amounts which would be needed, if First Savings were to be dissolved at the time
of distribution, to satisfy the preferential rights that are superior to holders
of the common stock. 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."
FEDERAL SECURITIES LAW OF 1934, AS AMENDED (THE "EXCHANGE ACT"). The
Company has registered its Common Stock with the SEC pursuant to Section 12(g)
of the Securities 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 1933, as amended (the
"Securities Act") 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 significantly affect
the operations of federally insured savings institutions and other federally
regulated financial institutions. The operation of regulated depository
institutions, including the Bank, is subject to changes in applicable statutes
and regulations from time to time. Such changes may or may not be favorable to
the Bank.
The Bank is a North Carolina-chartered savings bank, is a member of the
Federal Home Loan Bank ("FHLB") system, and its deposits are insured by the FDIC
through the Savings Association Insurance Fund ("SAIF"). It is subject to
examination and regulation by the FDIC and the Administrator and to regulations
governing such matters as capital standards, mergers, establishment of branch
offices, subsidiary investments and activities, and general investment
authority. Such examination and regulation is intended primarily for the
protection of depositors and the federal deposit insurance funds.
12
<PAGE>
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 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 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.
13
<PAGE>
DEPOSIT INSURANCE. The Bank's deposit accounts are insured by the FDIC
through 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. As of July, 1998, SAIF members are charged an
assessment of 0.061% 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 .012% 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."
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
14
<PAGE>
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, 1998, 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, 1998, see Note 11 captioned "Regulatory
Restrictions" on pages 33 and 34 of the 1998 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.
15
<PAGE>
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 has not had 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. This rule has not had 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, 1998, the largest aggregate amount of loans which the Bank
had to any one borrower was $2.3 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, 1998, 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, 1998, 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
16
<PAGE>
shareholder. Such acquisitions of control may be disapproved if it is
determined, among other things, that (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings bank or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisition of control by such person.
For three years following the Bank's conversion from mutual to stock form,
North Carolina conversion regulations require the prior written approval of the
Administrator before any person may directly or indirectly offer to acquire or
acquire the beneficial ownership of more than 10% of any class of an equity
security of the Bank. If any person were to so acquire the beneficial ownership
of more than 10% of any class of any equity security without prior 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, 1998, the Bank's liquidity ratio, calculated in
accordance with North Carolina regulations, was approximately 25.9%.
ADDITIONAL LIMITATIONS ON ACTIVITIES. 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
17
<PAGE>
measure. An "adequately capitalized" institution is defined as one that has (i)
a total risk-based capital ratio of 8% or greater, (ii) a Tier I risk-based
capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or
3% or greater in the case of an institution with the highest examination rating
and which is not experiencing or anticipating significant growth). An
institution is considered (A) "undercapitalized" if it has (i) a total risk-
based capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio of
less than 4% or (iii) a leverage ratio of less than 4% (or 3% 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.
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, 1998, 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.
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. A source of the Holding Company's funds are dividends
received from the Bank. In fiscal 1999, the amount of dividends that can be
paid without prior approval from regulators is approximately $2.0 million.
These funds should be adequate to cover the Holding Company's needs. Also,
without the prior written approval of the Administrator, a North Carolina-
chartered stock savings bank, for a period of five years after its conversion
from mutual to stock form, may not repurchase any of its capital stock. The
Administrator will give approval to repurchase only upon a showing that the
proposed repurchase will not adversely affect the safety and soundness of the
institution.
In addition, the Bank is not permitted to declare or pay a cash dividend or
repurchase any of its capital stock if the effect thereof would be to cause its
net worth to be reduced below the amount required for the liquidation account
established in connection with the Bank's conversion from mutual to stock
ownership.
OTHER NORTH CAROLINA REGULATION. As a North Carolina-chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
18
<PAGE>
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, 1998, 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, 1998. 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 $9,300 for the fiscal year ended June 30, 1998.
NET BOOK
VALUE OF
ADDRESS PROPERTY
------- --------
Headquarters Office $ 525,386
205 S.E. Broad Street
Southern Pines, North Carolina 28387
Pinecrest Plaza Office 1,007,514
46 Pinecrest Plaza
Southern Pines, North Carolina 28387
Pinehurst Office 22,189
10 Chinquapin Road
Pinehurst, North Carolina 28374
Carthage Office 106,542
109 Monroe Street
Carthage, North Carolina 28327
Seven Lakes Office 112,900
200 Grant Street
Seven Lakes Shopping Center
West End, North Carolina 27376
The total net book value of First Savings' furniture, fixtures and equipment on
June 30, 1998 was $134,323. 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, 1998.
20
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is set forth under the section
captioned "Capital Stock" on page 40 of First Savings' 1998 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' 1998 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 2 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" on pages 4 through 17 in First Savings' 1998 Annual Report, which
sections are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is set forth under the caption
"Market Risk" on page 5 of "Management's Discussion and Analysis" in First
Savings' 1998 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of First Savings and supplementary
data set forth on pages 19 through 38 of First Savings' 1998 Annual Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting
and financial disclosures during the fiscal year ended June 30, 1998 and the
interim subsequent period. See the information set forth under the section
captioned "Proposal 2 - Ratification of Selection of Independent Auditor" on
page 14 of the Proxy Statement.
21
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is set forth in the tables on pages 5
and 6 under the section captioned "Proposal 1 - Election of Directors" of the
Proxy Statement for the 1998 Annual Meeting of Shareholders of First Savings
Bancorp, Inc. to be held on October 29, 1998 (the "Proxy Statement") and the
section captioned "Section 16(a) Beneficial Ownership Reporting Compliance" on
page 4 of the Proxy Statement, which sections are incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Directors' Compensation" and " -
Management Compensation" on page 8 and pages 9 through 12, respectively, of the
Proxy Statement, which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
from the section captioned "Security Ownership of Certain Beneficial Owners" on
pages 2 through 4 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no reportable transactions since the beginning of the
Holding Company's last fiscal year 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 14 of the Proxy Statement, which section is incorporated herein by
reference.
22
<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' 1998
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,
1998 and 1997
(c) Consolidated Statements of Income for the Years Ended June 30,
1998, 1997 and 1996
(d) Consolidated Statements of Shareholders' Equity for the Years
Ended June 30, 1998, 1997, and 1996
(e) Consolidated Statements of Cash Flows for the Years Ended June
30, 1998, 1997 and 1996
(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
23
<PAGE>
the Registration Statement on Form 8-A,
Registration No. 0-27-098, dated October 26,
1995
Exhibit (10)(ii)(c) Management Recognition Plan of First Savings
Bank of Moore County, Inc., SSB, incorporated
herein by reference to Exhibit (10)(ii)(c) to
the Registration Statement on Form 8-A,
Registration No. 0-27-098, dated October 26,
1995
Exhibit (10)(ii)(d) Bonus Compensation Plan of First Savings Bank
of Moore County, Inc., SSB, incorporated
herein by reference to Exhibit (10)(ii)(d) to
the Registration Statement on Form 8-A,
Registration No. 0-27-098, dated October 26,
1995
Exhibit (10)(ii)(e) Employment Agreement between First Savings
Bank of Moore County, Inc., SSB and William
E. Samuels, Jr., incorporated herein by
reference to Exhibit (10)(ii)(e) to the
Registration Statement on Form 8-A,
Registration No. 0-27-098, dated October 26,
1995
Exhibit (10)(ii)(f) Employment Agreement between First Savings
Bank of Moore County, Inc., SSB and John F.
Burns, incorporated herein by reference to
Exhibit (10)(ii)(f) to the Registration
Statement on Form 8-A, Registration No. 0-27-
098, dated October 26, 1995
Exhibit (11) Statement Regarding Computation of Per Share
Earnings
Exhibit (12) Statement Regarding Computation of Ratios
Exhibit (13) 1998 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, 1998.
24
<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 24, 1998 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 24, 1998
- -----------------------------
William E. Samuels, Jr. Officer and Director
/s/ John F. Burns Executive Vice President, Secretary September 24, 1998
- -----------------------------
John F. Burns and Director
/s/ Timothy S. Maples Vice President and September 24, 1998
- -----------------------------
Timothy S. Maples Principal Financial Officer
/s/ Virginia C. Brandt Director September 24, 1998
- -----------------------------
Virginia C. Brandt
/s/ H. David Bruton Director September 24, 1998
- -----------------------------
H. David Bruton
/s/ Felton J. Capel Director September 24, 1998
- -----------------------------
Felton J. Capel
/s/ J. E. Causey Director September 24, 1998
- -----------------------------
J. E. Causey
/s/ Henry A. Clayton Director September 24, 1998
- -----------------------------
Henry A. Clayton
/s/ Frank G. Hardister Director September 24, 1998
- -----------------------------
Frank G. Hardister
/s/ W. Harrell Johnson Director September 24, 1998
- -----------------------------
W. Harrell Johnson
/s/ Joe Montesanti, Jr. Director September 24, 1998
- -----------------------------
Joe Montesanti, Jr.
/s/ Thomas F. Phillips Director September 24, 1998
- -----------------------------
Thomas F. Phillips
</TABLE>
25
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(11) Statement Regarding Computation of Per Share Earnings
(12) Statement Regarding Computation of Ratios
(13) 1998 Annual Report to Security Holders
(27) Financial Data Schedule
26
<PAGE>
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Effective July 1, 1997, First Savings adopted the provisions of Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"),
which establishes standards for computing and presenting earnings per share
(EPS) data. SFAS 128 simplifies the standards for computing EPS previously
found in APB Opinion No. 15, "Earnings Per Share," and makes them comparable to
international EPS standards. Under SFAS 128, basic EPS replaces the former
presentation of primary EPS. Also, a dual presentation of basic and diluted EPS
is required on the face of the income statement for all entities with complex
capital structures, and a reconciliation must be provided of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. In accordance with SFAS 128, all prior period EPS data
have been restated.
Basic net income per share for the years ended June 30, 1998, 1997 and 1996 was
$1.42, $1.05 and $1.05, respectively. Diluted net income per share for the same
periods was $1.31, $0.98 and $0.98, respectively. Basic net income per share,
or basic EPS, is computed by dividing net income by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if First if First Savings' dilutive stock options
were exercised. The numerator of the basic EPS computation is the same as the
numerator of the diluted EPS computation for all periods presented. A
reconciliation of the denominators of the basic and diluted EPS computations is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Basic EPS denominator - weighted average
number of common shares outstanding 3,698,197 3,706,704 3,744,000
Dilutive share effect arising from assumed
exercise of stock options 323,757 263,602 249,070
--------- --------- ---------
Diluted EPS denominator 4,021,954 3,970,306 3,993,070
========= ========= =========
</TABLE>
<PAGE>
STATEMENT REGARDING COMPUTATION OF RATIOS
The averages used in computing the performance ratios provided in Item 7
represent average daily balances.
<PAGE>
FIVE YEAR SUMMARY
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Balance of:
Assets $304,168 $294,217 $256,986 $251,787 $248,202
Loans receivable, net 208,094 192,238 177,431 159,777 142,779
Mortgage-backed securities 9,737 6,572 2,965 4,484 5,872
Securities 74,662 82,187 67,999 81,372 93,554
Deposits 211,925 204,317 187,424 183,080 182,199
Borrowed funds 20,000 20,000 422 543 648
Shareholders' equity 69,521 67,195 66,811 65,511 63,294
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended June 30,
------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest and dividend income $ 22,543 $ 20,058 $ 18,550 $ 17,438 $ 16,658
Interest expense 11,083 9,782 9,215 8,140 8,102
-------- -------- -------- -------- --------
Net interest income 11,460 10,276 9,335 9,298 8,556
Provision for loan losses - - - - -
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses 11,460 10,276 9,335 9,298 8,556
Non-interest income 616 425 364 7 379
General and administrative expenses 3,758 4,637 3,693 3,584 5,693
-------- -------- -------- -------- --------
Income before income taxes 8,318 6,064 6,006 5,721 3,242
Income tax expense 3,060 2,155 2,085 1,948 1,066
-------- -------- -------- -------- --------
Net income $ 5,258 $ 3,909 $ 3,921 $ 3,773 $ 2,176
======== ======== ======== ======== ========
Per common share data:
Net income, basic $ 1.42 $ 1.05 $ 1.05 $ 1.01 $ 0.10 *
======== ======== ======== ======== ========
Net income, diluted $ 1.30 $ 0.98 $ 0.98 $ 0.95 $ 0.10 *
======== ======== ======== ======== ========
Cash dividends $ 0.94 $ 0.74 $ 0.64 $ 0.60 $ 0.15
======== ======== ======== ======== ========
</TABLE>
* Presented for the period from stock conversion through June 30, 1994.
GROWTH WITH MOORE COUNTRY
ABOUT OUR COVER...
As this report reflects, First Savings is enjoying
robust growth. So is Moore County and, without question,
we are a beneficiary of the vibrant, dynamic markets we
serve.
PHOTO
Our cover indicates that Moore County's population
has doubled in the last thirty years. First Savings'
assets have doubled in the last eleven. As we look ahead,
we see a continuation - indeed an acceleration - in the
county's growth and quality of life trends, and
consequently increased opportunities for us to reward you,
our valued shareholders, for your continuing support.
JOHN F. BURNS, EXECUTIVE VICE PRESIDENT (STANDING),
AND WILLIAM E. SAMUELS, PRESIDENT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Financial Highlights.................................................... 2
Chief Executive Officer's Message....................................... 3
Management's Discussion & Analysis...................................... 4-17
Report of Independent Auditors.......................................... 18
Consolidated Statements of Financial Condition.......................... 19
Consolidated Statements of Income....................................... 20
Consolidated Statements of Shareholders' Equity......................... 21
Consolidated Statements of Cash Flows................................... 22-23
Notes to Consolidated Financial Statements.............................. 24-38
Directors, Officers and Office Locations................................ 39
Corporate Information................................................... 40
</TABLE>
1
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
AT OR FOR THE TWELVE MONTHS ENDED
JUNE 30,
------------------------------------
SELECTED FINANCIAL DATA 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income $5,258,467 $3,908,653 $3,920,755
PER COMMON SHARE DATA
Net income
Basic $ 1.42 $ 1.05 $ 1.05
Diluted $ 1.30 $ 0.98 $ 0.98
Book value $ 18.73 $ 18.26 $ 17.85
Tangible book value $ 18.73 $ 18.26 $ 17.85
Number of common shares outstanding 3,710,820 3,679,185 3,744,000
AT YEAR END (THOUSANDS)
Assets $ 304,168 $ 294,217 $ 256,986
Deposits 211,925 204,317 187,424
Loans receivable, net 208,094 192,238 177,431
Shareholders' equity 69,521 67,195 66,811
RATIOS
Return on average assets 1.76% 1.45% 1.53%
Return on average assets * N/A 1.71% N/A
Return on average equity 7.68% 5.85% 5.86%
Return on average equity * N/A 6.90% N/A
Equity to total assets (year end) 22.86% 22.84% 26.00%
Nonperforming assets to total assets 0.18% 0.08% 0.05%
Allowance for loan losses to net loans 0.29% 0.31% 0.34%
Dividends declared/earnings per share 71.76% 75.51% 65.31%
</TABLE>
* Excludes the nonrecurring charge associated with the special SAIF assessment
in 1997.
2
<PAGE>
CHIEF EXECUTIVE OFFICER'S
MESSAGE
September 28, 1998
To Our Shareholders
I am pleased to report to you that First Savings experienced continued growth
and record earnings for the year ended June 30, 1998. Excluding a nonrecurring
SAIF assessment in fiscal 1997, net income increased 14%, from $4.6 million in
fiscal 1997 to $5.3 million in fiscal 1998. Return on average assets for the
year ended June 30, 1998 was exemplary at 1.76%. Key to the success of First
Savings' profitability is our asset quality. As of June 30, 1998, nonperforming
assets to total assets was .18%. During fiscal 1998, First Savings reached a
new high for loan growth. Loan originations increased 17% and net loans
increased 9% from $192.2 million in fiscal 1997 to $208.1 million in fiscal
1998.
Other areas of sustained growth for First Savings were in deposits and total
assets. We are also particularly proud of our continuing dividend growth.
During fiscal 1998, dividends on an annualized basis increased from $0.88 per
share to $1.00 per share. As you can see, First Savings remains quite committed
to a high level of performance.
In this pursuit, customer service has always been a primary interest at First
Savings...and always will be. That is the reason we take so seriously the
emerging issue of potential computer systems' problems involving the year 2000
that could impact virtually every business and household in America. With this
in mind, your Board established a committee in July of 1997 to address potential
year 2000 issues. This led to our development of a comprehensive plan of action
that embraces all aspects of our operation.
This plan includes replacing all three of our existing Automatic Teller Machines
with state-of-the-art Diebold equipment while adding a fourth ATM of similar
capability at our Carthage office. All of our computer equipment, now seven
years old, is being replaced to conform with year 2000 requirements. These
activities will provide improved service to all of our valued customers which is
consistent with our committee's goal for you to conduct all of your First
Savings transactions with the same ease and confidence in the year 2000 that you
do today.
Effective December 31, 1998, I shall retire as President and Chief Executive
Officer of First Savings Bank. When making this decision, I agreed to remain
with the bank on a part-time basis, involved in loan operations, special
projects and in other ways as needed. I will also continue to serve as a member
of your Board. My wife and I have a large family, including nine grandchildren,
and I anticipate spending more time with them while pursuing other activities.
Upon my retirement, John F. Burns, Executive Vice President and Secretary of
First Savings, will succeed me as President and Chief Executive Officer of First
Savings. John has worked with me at the bank since 1972. He is a graduate of
UNC-Chapel Hill and The Graduate School of Banking of the South, and is totally
dedicated to First Savings. He is very capable of guiding First Savings into
the new century.
I again encourage all of you to bank with First Savings. We now have over 3,000
shareholders. With your help, a dedicated Board of Directors and a highly
trained and motivated staff, we can move First Savings to significantly greater
heights.
Sincerely,
PHOTO HERE.
William E. Samuels
President and Chief Executive Officer
William E. Samuels, President and Chief
Executive Officer, with his grandson,
William F. Giuseffi, First Savings'
youngest shareholder.
3
<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, 1998, First Savings had total assets of approximately
$304.2 million, net loans of $208.1 million, deposits of approximately $211.9
million and shareholders' equity of $69.5 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, 1998, approximately 83.1% 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, and branch occupancy and related expenses.
FINANCIAL CONDITION
This annual report to shareholders contains certain forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and other business of First Savings 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 1998, the Bank originated 629 mortgage loans
totaling $64.7 million, of which $27.1 million were one, three or five-year
adjustable-rate mortgages or home equity loans. At June 30, 1998, $170.9 million
or 82.1% of the Bank's $208.1 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.
4
<PAGE>
MANAGEMENT'S
DISCUSSION & ANALYSIS
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
First Savings' market risk primarily stems from interest rate risk, the
potential economic loss due to future changes in interest rates, which is
inherent in lending and deposit gathering activities. First Savings' objective
is to manage the mix of interest-sensitive assets and liabilities to moderate
interest rate risk and stabilize the net interest margin while enhancing
profitability.
THE FOLLOWING TABLE PROVIDES INFORMATION ABOUT FIRST SAVINGS' FINANCIAL
INSTRUMENTS THAT ARE SENSITIVE TO CHANGES IN INTEREST RATES. ALL DOLLAR AMOUNTS
IN THE TABLE ARE EXPRESSED IN THOUSANDS.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
-------------------------------------------------------------
MORE THAN OVER MORE THAN
1 YEAR 1 YEAR 3 YEARS 5 YEARS MORE THAN FAIR
OR LESS TO 3 YEARS TO 5 YEARS TO 10 YEARS 10 YEARS TOTAL VALUE
--------- ----------- ----------- ------------ ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
LOANS RECEIVABLE (A)
Fixed Rate $ 350 $ 1,649 $ 3,268 $12,356 $20,176 $ 37,799 $ 39,957
Average interest rate 8.86% 8.13% 8.49% 8.24% 8.49%
Variable rate $ 48,457 $49,612 $21,805 $47,538 $ 3,479 $170,891 $168,137
Average interest rate 8.01% 7.70% 7.70% 7.82% 7.70%
INVESTMENT SECURITIES (B)
Interest-earning deposits $ 3,991 $ - $ - $ - $ - $ 3,991 $ 3,991
Average interest rate 6.10% -% -% -% -%
Securities available for sale $ 26,249 $18,453 $ 3,002 $14,014 $11,014 $ 72,732 $ 72,732
Average interest rate 5.63% 6.61% 6.22% 6.74% 7.24%
Securities held to maturity $ - $ 167 $ 173 $ 148 $ 9,249 $ 9,737 $ 9,821
Average interest rate -% 9.45% 8.94% 9.53% 7.33%
Nonmarketable equity securities $ 1,930 $ - $ - $ - $ - $ 1,930 $ 1,930
Average interest rate 7.50% -% -% -% -%
DEBT OBLIGATIONS (C)
Interest-bearing deposits $173,854 $28,906 $ 6,051 $ 302 $ - $209,113 $208,013
Average interest rate 4.51% 5.58% 5.90% 6.00% -%
Borrowings $ 20,000 - - - - $ 20,000 $ 19,976
Average interest rate 6.25% -% -% -% -%
</TABLE>
(A) For loans receivable, the table presents principal cash flows by fixed and
adjustable rate. The table includes contractual maturities for fixed rate
loans and adjustable rate loans are assumed to reprice at contractual
repricing intervals. The table presents fair values at June 30, 1998 and
weighted average interest rates by maturity dates.
(B) For investment securities, including securities available for sale,
securities held to maturity, and nonmarketable equity securities, the table
presents contractual maturities. Interest-earning deposits are due on
demand financial instruments and are presented in the due in one year
category. Nonmarketable equity securities, which consists of Federal Home
Loan Bank stock, have no contractual maturity and are placed in the longest
expected maturity date. The table presents fair values at June 30, 1998 and
weighted average interest rates by maturity dates.
(C) For interest-bearing deposits and borrowings, the table presents principal
cash flows and weighted average interest rates by expected maturity dates
and fair values at June 30, 1998.
5
<PAGE>
MANAGEMENT'S
DISCUSSION & ANALYSIS
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 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, 1998, 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, 1998
-----------------------------------------------------------------------------------------------------
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 $ 35,596 $ 43,846 $ 17,517 $44,259 $ 3,414 $144,632
Fixed rate 1-4 family 56 376 2,571 11,217 17,561 31,781
Adjustable rate
non-residential 2,719 5,766 4,288 3,279 65 16,117
Fixed rate non-residential - 182 434 1,105 2,615 4,336
Home equity and property
improvement 8,970 - - - - 8,970
Other loans 1,466 1,091 263 34 - 2,854
Investments 32,050 18,101 2,993 13,940 11,000 78,084
Mortgage-backed securities - 167 173 148 9,249 9,737
--------- -------- -------- ------- ------- --------
Total interest-earning $ 80,857 $ 69,529 $ 28,239 $73,982 $43,904 $296,511
assets ========= ======== ======== ======= ======= ========
INTEREST-BEARING LIABILITIES:
Deposits:
Certificates of deposit $ 96,633 $ 28,906 $ 6,051 $ 302 $ - $131,892
Interest-bearing checking 20,618 - - - - 20,618
Money market deposit accounts 42,567 - - - - 42,567
Passbook savings 14,036 - - - - 14,036
Borrowed funds 20,000 - - - - 20,000
--------- -------- -------- ------- ------- --------
Total interest-bearing $ 193,854 $ 28,906 $ 6,051 $ 302 $ - $229,113
liabilities ========= ======== ======== ======= ======= ========
INTEREST SENSITIVITY GAP
PER PERIOD $(112,997) $ 40,623 $ 22,188 $73,680 $43,904 $ 67,398
CUMULATIVE INTEREST
SENSITIVITY GAP $(112,997) $(72,374) $(50,186) $23,494 $67,398 $ 67,398
CUMULATIVE GAP AS A PERCENTAGE OF
TOTAL INTEREST-EARNING ASSETS (38.11)% (24.41)% (16.93)% 7.92% 22.73% 22.73%
CUMULATIVE INTEREST-EARNING ASSETS
AS A PERCENTAGE OF INTEREST-BEARING
LIABILITIES 41.71% 67.51% 78.07% 110.25% 129.42% 129.42%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
MANAGEMENT'S
DISCUSSION & ANALYSIS
Passbook accounts, money market deposit accounts and negotiable order of
withdrawal or other transaction accounts are assumed to be subject to immediate
repricing and depositor availability and have been placed in the shortest
period. No prepayment assumptions have been made for any interest-earning assets
or interest-bearing liabilities. In addition, the table does not reflect
scheduled principal payments which will be received throughout the lives of the
loans. The interest sensitivity of First Savings' assets and liabilities
illustrated in the table would vary substantially if different assumptions were
used or if actual experience differs from that indicated by such assumptions.
The Gap Analysis table does not necessarily indicate the impact of general
interest rate movements on the Bank's net interest yield because the repricing
of various categories of assets and liabilities is discretionary and is subject
to competitive and other pressures. As a result, various assets and liabilities
indicated as repricing within the same period may in fact reprice at different
times and at different rate levels.
LIQUIDITY
Maintaining adequate liquidity while managing interest rate risk is the primary
goal of First Savings' asset and liability management strategy. Liquidity is the
ability to fund the needs of the Bank's borrowers and depositors, pay operating
expenses, and meet regulatory liquidity requirements. Maturing investments, loan
and mortgage-backed security principal repayments, deposits and income from
operations are the main sources of liquidity. The Bank's primary uses of
liquidity are to fund loans and to make investments.
As of June 30, 1998, liquid assets (cash and cash equivalents, and marketable
investment securities) were approximately $92.2 million, which represents 43.5%
of deposits. As a North Carolina chartered savings bank, First Savings is
required to maintain liquid assets equal to at least 10.0% of its total assets.
For purposes of this requirement, liquid assets consist of cash and readily
marketable investments and mortgage-backed securities. At June 30, 1998, this
liquidity ratio, based on North Carolina regulations, was 25.88%. Management
considers current liquidity levels to be adequate to meet First Savings'
foreseeable needs.
At June 30, 1998, outstanding mortgage loan commitments and available home
equity line of credit balances were $20.5 million, available credit card line of
credit balances were $3.6 million and the undisbursed portion of construction
loans was $5.6 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, 1998 and
1997, First Savings exceeded all such requirements.
First Savings is also subject to limits on dividend payments. First Savings is
prohibited, under the North Carolina Business Corporation Act, from paying a
dividend if such payment would (i) cause First Savings to be unable to pay its
debts as they become due in the ordinary course of business or (ii) reduce First
Savings' total assets below the sum of First Savings' total liabilities plus any
amounts which would be needed, if First Savings 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, or repurchase any of its
common stock. A source of First Savings' funds are dividends received from the
Bank. In fiscal 1999, the amount of dividends that can be paid without prior
approval from regulators is approximately $2.0 million. These funds should be
adequate to cover First Savings' needs.
7
<PAGE>
MANAGEMENT'S
DISCUSSION & ANALYSIS
ACCOUNTING AND REGULATORY MATTERS
Management is not aware of any known trends, events, uncertainties or current
recommendations by regulatory authorities that will have or that are reasonably
likely to have a material effect on First Savings' liquidity, capital resources,
or other operations.
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,
----------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- ------------------------ -------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
-------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning deposits $ 6,167 $ 391 6.34% $ 7,623 $ 449 5.89% $ 2,170 $ 161 7.42%
Investments, net, at cost 77,009 5,222 6.78% 67,269 4,317 6.42% 75,155 4,690 6.24%
Mortgage-backed securities 9,143 668 7.31% 4,537 338 7.45% 3,842 293 7.63%
Loans receivable, net 199,776 16,262 8.14% 185,120 14,954 8.08% 168,579 13,406 7.95%
-------- ------- -------- ------- -------- -------
Total interest-earning assets 292,095 22,543 7.72% 264,549 20,058 7.58% 249,746 18,550 7.43%
------- ------- -------
Non-interest-earning assets 6,680 5,734 5,963
-------- -------- --------
Total assets $298,775 $270,283 $255,709
======== ======== ========
Interest-bearing liabilities:
Passbooks savings $ 13,723 $ 428 3.12% $ 10,994 $ 297 2.70% $ 10,093 $ 252 2.50%
NOW and money market accounts 66,100 2,166 3.28% 63,199 2,108 3.34% 57,130 1,956 3.42%
Certificates of deposit 129,698 7,371 5.68% 122,761 7,091 5.78% 117,436 6,957 5.92%
Borrowed funds 17,786 1,118 6.29% 4,694 286 6.09% 845 50 5.92%
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities 227,307 11,083 4.88% 201,648 9,782 4.85% 185,504 9,215 4.97%
------- ------- -------
Non-interest-bearing liabilities 2,672 1,789 3,272
-------- -------- --------
Total liabilities 229,979 203,437 188,776
Shareholders' equity 68,796 66,846 66,933
-------- -------- --------
Total liabilities and shareholders'
equity $298,775 $270,283 $255,709
======== ======== ========
Net interest income and interest rate
spread $11,460 2.84% $10,276 2.73% $ 9,335 2.46%
======= ======= =======
Net interest-earning assets and net
interest margin $ 64,788 3.92% $ 62,901 3.88% $ 64,242 3.74%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 128.50% 131.19% 134.63%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
MANAGEMENT'S
DISCUSSION & ANALYSIS
The table below provides information regarding changes in interest income and
interest expense for the periods indicatedGlenn HeplerFinancial Printing
GroupTHE 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,
---------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
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 $ (86) $ 34 $ (6) $ (58) $ 405 $ (33) $ (84) $ 288
Investments (1) 625 245 35 905 (492) 133 (14) (373)
Mortgage-backed securities 343 (6) (7) 330 53 (7) (1) 45
Loan portfolio 1,184 115 9 1,308 1,315 212 21 1,548
------ -------- ------- -------- ------ ------- -------- -------
Total interest income 2,066 388 31 2,485 1,281 305 (78) 1,508
------ -------- ------- -------- ------ ------- -------- -------
Interest expense:
Passbooks savings 74 46 11 131 22 21 2 45
NOW and money market 97 (37) (2) 58 208 (51) (5) 152
accounts
Certificates of deposit 400 (114) (6) 280 315 (173) (8) 134
Borrowed funds 798 9 25 832 228 1 7 236
------ -------- ------- -------- ------ ------- -------- -------
Total interest expense 1,369 (96) 28 1,301 773 (202) (4) 567
------ -------- ------- -------- ------ ------- -------- -------
Net interest income $ 697 $ 484 $ 3 $ 1,184 $ 508 $ 507 $ (74) $ 941
(expense) ====== ======== ======= ======== ====== ======= ======== =======
(1) Includes investment securities and FHLB stock.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
LOAN PORTFOLIO COMPOSITION
First Savings' consolidated net loan portfolio totaled approximately $208.1
million at June 30, 1998, representing 68.4% of First Savings' total assets. At
June 30, 1998, approximately 82.1% of First Savings' net loan portfolio was
composed of adjustable rate loans, and approximately 18.1% of First Savings'
net loan portfolio was composed of fixed rate loans. At June 30, 1998,
approximately $172.9 million, or 83.1%, of First Savings' net loan portfolio
was composed of one-to-four family residential real estate loans. On such date,
approximately $39.1 million, or 18.8%, of First Savings' net loan portfolio was
composed of multi-family residential, commercial and other real estate loans.
9
<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,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ----------------- ------------------ ---------------- ------------------
% OF % of % of % of % of
Amount TOTAL Amount Total Amount Total Amount Total Amount Total
--------- ------- --------- ------- --------- ------- -------- ------ -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $172,915 83.09% $162,620 84.59% $151,934 85.63% $137,855 86.28% $124,751 87.37%
Multi-family (5 or more 2,969 1.43% 2,601 1.35% 3,070 1.73% 2,272 1.42% 3,393 2.37%
units)
Construction 10,592 5.09% 10,969 5.71% 8,123 4.58% 7,951 4.98% 5,263 3.69%
Commercial real estate
and other
properties 16,568 7.96% 13,285 6.91% 12,028 6.78% 11,844 7.41% 11,022 7.72%
Home equity and property
improvement 8,970 4.31% 8,449 4.40% 5,607 3.16% 4,066 2.55% 2,852 2.00%
-------- ------ -------- ------- -------- ------- -------- ------- -------- -------
Total real estate loans 212,014 101.88% 197,924 102.96% 180,762 101.88% 163,988 102.64% 147,281 103.15%
-------- ------ -------- ------- -------- ------- -------- ------- -------- -------
Other:
Savings account loans 900 0.43% 909 0.47% 875 0.49% 703 0.44% 604 0.42%
Installment loans 797 0.38% 621 0.32% 351 0.20% 111 0.07% - -%
Credit card loans 1,157 0.56% 951 0.50% 520 0.29% - -% - -%
-------- ------ -------- ------- -------- ------- -------- ------- -------- -------
Total other loans 2,854 1.37% 2,481 1.29% 1,746 0.98% 814 0.51% 604 0.42%
-------- ------ -------- ------- -------- ------- -------- ------- -------- -------
Less:
Unearned fees and 547 0.26% 555 0.29% 509 0.29% 458 0.29% 369 0.26%
discounts
Loans in process 5,631 2.71% 7,008 3.65% 3,959 2.23% 3,958 2.48% 4,128 2.89%
Allowance for loan losses 596 0.28% 604 0.31% 609 0.34% 609 0.38% 609 0.42%
-------- ------ -------- ------- -------- ------- -------- ------- -------- -------
Total reductions 6,774 3.25% 8,167 4.25% 5,077 2.86% 5,025 3.15% 5,106 3.57%
-------- ------ -------- ------- -------- ------- -------- ------- -------- -------
Total loans receivable, net $208,094 100.00% $192,238 100.00% $177,431 100.00% $159,777 100.00% $142,779 100.00%
======== ====== ======== ======= ======== ======= ======== ======= ======== =======
</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.
10
<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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
JUNE 30,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate:
Residential $ 545 $ 250 $ 134 $ 139 $ 329
Commercial - - - 133 -
Consumer - - - - -
----------- ---------- ---------- ---------- ----------
Total 545 250 134 272 329
----------- ---------- ---------- ---------- ----------
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 545 250 134 272 329
Foreclosed real estate - - - - -
Other nonperforming assets - - - - -
----------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 545 $ 250 $ 134 $ 272 $ 329
=========== ========== ========== ========== ==========
Total loans delinquent 90 days or more to
net loans 0.26% 0.13% 0.08% 0.17% 0.23%
Total loans delinquent 90 days or more to
total assets 0.18% 0.08% 0.05% 0.11% 0.13%
Total nonperforming assets to total assets 0.18% 0.08% 0.05% 0.11% 0.13%
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
11
<PAGE>
MANAGEMENTS
DISCUSSION & ANALYSIS
After reviewing general economic conditions, industry standards and allowances
of comparable institutions in its peer group, the Bank did not increase the
allowance during fiscal 1998. 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,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance beginning of period $ 604 $ 609 $ 609 $ 609 $ 630
Provision for loan losses and losses on
foreclosed real estate - - - - -
---------- ---------- ---------- ---------- ----------
Charge-offs:
Residential 1-4 family - - - (4) (21)
Commercial real estate and other properties - - - - -
Home equity and property improvements - - - - -
Construction - - - - -
Savings accounts - - - - -
Other consumer (8) (5) - - -
Commercial - - - - -
---------- ---------- ---------- ---------- ----------
(8) (5) - (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 $ 596 $ 604 $ 609 $ 609 $ 609
========== ========== ========== ========== ==========
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.00% 0.00% 0.00% 0.00% 0.01%
========== ========== ========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
</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,
------------------------------------------------------------------------------------
1998 1997 1996
------------------------ ------------------------ -----------------------
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 $ 463 77.68% $ 400 66.23% $ 503 82.59%
Commercial real estate and other property 64 10.74% 73 12.08% 50 8.21%
Home equity and property improvement 16 2.68% 21 3.48% 17 2.79%
Construction 9 1.52% 7 1.16% 15 2.47%
--------- ----------- --------- ----------- --------- -----------
Total real estate loans 552 92.62% 501 82.95% 585 96.06%
Savings account loans - -% - -% - -%
Other consumer loans 44 7.38% 103 17.05% 24 3.94%
--------- ----------- --------- ----------- --------- -----------
Total allowance for loan losses $ 596 100.00% $ 604 100.00% $ 609 100.00%
========= =========== ========= =========== ========= ===========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
MANAGEMENTS
DISCUSSION & ANALYSIS
RESULTS OF OPERATIONS FOR
THE FISCAL YEARS ENDED
JUNE 30, 1998
AND
JUNE 30, 1997
GENERAL
First Savings recorded net income of $5.3 million for the year ended June 30,
1998, an increase of 35.9% over the $3.9 million earned for the year ended June
30, 1997. Basic and fully diluted earnings per share were $1.42 and $1.30,
respectively, for the year ended June 30, 1998 compared to $1.05 and $0.98,
respectively, for the year ended June 30, 1997. 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. Basic and fully diluted earnings per share for fiscal year
1997, excluding the nonrecurring SAIF assessment, were $1.24 and $1.16,
respectively. The primary factor contributing to First Savings core earnings
growth was a 12% increase in the Bank's net interest margin. Non-interest income
was higher in 1998 primarily due to increases in fees and service charges.
Nonperforming assets (loans 90 days or more delinquent and foreclosed real
estate owned) were $545,000 or 0.18% of total assets at June 30, 1998, compared
to $250,000 or .08% at June 30, 1997. First Savings did not have any real estate
owned at June 30, 1998 or June 30, 1997.
NET INTEREST INCOME
Net interest income for the years ended June 30, 1998 and 1997, was $11.5
million and $10.3 million, respectively. The primary reason for the increase in
net interest income during the fiscal year ended June 30, 1998 was due to a
higher interest rate spread. The average yield on interest-earning assets
increased by 14 basis points, and the average cost of interest-bearing
liabilities increased by 3 basis points for the year ended June 30, 1998,
increasing the Bank's interest rate spread to 2.84% compared to 2.73% for the
year ended June 30, 1997. The average balance of interest-earning assets and
interest-bearing liabilities during the fiscal year ended June 30, 1998 was
$292.1 million and $227.3 million, respectively, compared to $264.5 million and
$201.6 million, respectively, during the fiscal year ended June 30, 1997. The
Average Yield/Cost Analysis table reflects the average yields on assets and
average cost of liabilities for the years ended June 30, 1998, 1997, and 1996.
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, 1998 was $22.5 million as compared to $20.1 million for fiscal year 1997, an
increase of $2.4 million or 11.9%. 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, 1998 increased by $1.3
million or 13.3% when compared to the prior year. The Bank's cost of funds
increased from 4.85% in 1997 to 4.88% in 1998; and, average interest-bearing
liabilities increased 12.7% from $201.6 million at June 30, 1997 to $227.3
million at June 30, 1998.
Interest expense on borrowed funds increased $832,000 from $286,000 in 1997 to
$1,118,000 in 1998. This increase is the result of advances from the Federal
Home Loan Bank (FHLB) in 1998. 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, 1998 and 1997 were $17.8 million
and $4.7 million, respectively.
ALLOWANCE FOR LOAN LOSSES
At June 30, 1997, the allowance for loan losses was $604,000. During fiscal year
1998, First Savings did not add to this reserve. With only $8,000 in charge-offs
during the current year, the allowance for loan losses at June 30, 1998
decreased slightly to $596,000. Management considers this level to be
appropriate based on lending volume, the current level of delinquencies, other
nonperforming assets and the overall economic conditions.
NON-INTEREST INCOME
Total non-interest income for the fiscal year ended June 30, 1998 was $616,000
as compared to $425,000 for the fiscal year ended June 30, 1997. The 44.9%
increase is primarily attributable to high levels of fees and service charges
during the year ended June 30, 1998.
13
<PAGE>
MANAGEMENTS
DISCUSSION & ANALYSIS
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for fiscal year ended June 30, 1998 were
$3.8 million compared to $4.6 million for the fiscal year ended June 30, 1997.
Excluding the nonrecurring SAIF assessment in fiscal 1997, general and
administrative expense would have been $3.5 million.
INCOME TAXES
Income tax expense increased for the fiscal year ended June 30, 1998 to $3.1
million, as compared to $2.2 million for the same period in 1997. 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, 1997
AND
JUNE 30, 1996
GENERAL
First Savings recorded net income of $3.9 million for each of 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 and 1996. 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.
14
<PAGE>
MANAGEMENTS
DISCUSSION & ANALYSIS
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.
NON-INTEREST INCOME
Total non-interest 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.
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.
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 First Savings' operations. Unlike most industrial companies,
nearly all First Savings' assets and liabilities are monetary in nature. As a
result, interest rates have a greater impact on First Savings' performancethan
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.
RECENT ACCOUNTING PRONOUNCEMENTS
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 First Savings would include net unrealized
holding gains and losses on investment securities available for sale. This
Statement will be effective for First Savings' fiscal year ending June 30, 1999,
and First Savings does not intend to early adopt. Had First Savings early
adopted this Statement, it would have reported comprehensive income of
$5,351,989, $4,190,087 and $3,446,327 for the years ended June 30, 1998, 1997
and 1996, respectively.
FASB STATEMENT ON DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. In July 1997, the FASB issued SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information. SFAS No. 131 requires
disclosures for each segment that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. It requires limited segment data on a
quarterly basis. It also requires geographic data by country, as opposed to
broader geographic regions as permitted under current standards. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted. As First Savings has only one operating segment, adoption
of SFAS No. 131 is not expected to have a significant impact on the consolidated
financial statements.
FASB STATEMENT ON EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT
BENEFITS. In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. SFAS No. 132 standardizes the
disclosure requirements of pensions and other postretirement benefits. It does
not change any measurement or recognition provisions, and thus will not
materially impact First Savings. SFAS No. 132 is effective for fiscal years
beginning after December 15, 1997.
15
<PAGE>
MANAGEMENTS
DISCUSSION & ANALYSIS
FASB STATEMENT ON ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts. Under this standard, entities are required to carry all
derivative instruments in the statement of financial condition at fair value.
The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, on the reason for holding it. If
certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposure to changes in fair values, cash flows, or
foreign currencies. If the hedged exposure is a fair value exposure, the gain or
loss on the derivative instrument is recognized in earnings in the period of
change together with the offsetting loss or gain on the hedged item attributable
to the risk being hedged. If the hedged exposure is a cash flow exposure, the
effective portion of the gain or loss on the derivative instrument is reported
initially as a component of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction affects
earnings. Any amounts excluded from the assessment of hedge effectiveness as
well as the ineffective portion of the gain or loss are reported in earnings
immediately. Accounting for foreign currency hedges is similar to accounting for
fair value and cash flow hedges. If the derivative instrument is not designated
as a hedge, the gain or loss is recognized in earnings in the period of change.
Management anticipates that this statement will have no effect on its
consolidated financial statements.
YEAR 2000 COMPLIANCE
The "Year 2000" issue confronting First Savings and its suppliers, customers,
customers' suppliers and competitors centers on the inability of computer
systems to recognize the Year 2000. Many existing computer programs and systems
were originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending new millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, First Savings and its operations may be
significantly affected by the Year 2000 issue due to its dependence on computer
generated financial information. Software, hardware, and equipment both within
and outside First Savings' direct control and with whom First Savings
electronically or operationally interfaces (e.g. third party vendors providing
data processing, information system management, maintenance of computer systems,
and credit bureau information) are likely to be affected. Furthermore, if
computer systems are not adequately changed to identify the Year 2000, many
computer applications could fail or create erroneous results. As a result, many
calculations which rely on date field information, such as interest, payment or
due dates and other operating functions, could generate results which are
significantly misstated, and First Savings could experience a temporary
inability to process transactions, prepare statements or engage in similar
normal business activities. In addition, under certain circumstances, failure to
adequately address the Year 2000 issue could adversely affect the viability of
First Savings' suppliers and creditors and the creditworthiness of its
borrowers. Thus, if not adequately addressed, the Year 2000 matter could result
in a significant adverse impact on products, services and the competitive
condition of First Savings.
Financial institution regulators have recently increased their focus upon Year
2000 compliance issues, issuing guidance concerning the responsibilities of
senior management and directors. The Federal Financial Institutions Examination
Council ("FFIEC") has issued several interagency statements on Year 2000 Project
Management Awareness. These statements require financial institutions to, among
other things, examine the Year 2000 implications of reliance on vendors, data
exchange and potential impact on customers, suppliers and borrowers. These
statements also require each federally regulated financial institution to survey
its exposure, measure its risk and prepare a plan in order to solve the Year
2000 issue. In addition, the federal banking regulators have issued safety and
soundness guidelines to be followed by insured depository institutions, such as
the Bank, to assure resolution of any Year 2000 problems. The federal banking
agencies have asserted that Year 2000 testing and certification is a key safety
and soundness issue in conjunction with regulatory exams, and thus an
institution's failure to address appropriately the Year 2000 issue could result
in supervisory action, including such enforcement actions as the reduction of
the institution's supervisory ratings, the denial of applications for approval
of a merger or acquisition, or the imposition of civil money penalties.
In order to address the Year 2000 issue and to minimize its potential adverse
impact, management is engaged in a process to identify areas that will be
affected by the Year 2000, assess their potential impact on operations, monitor
16
<PAGE>
MANAGEMENTS
DISCUSSION & ANALYSIS
the progress of third party software vendors in addressing the matter, test
changes provided by these vendors, and develop contingency plans for any
critical systems which are not effectively reprogrammed. The plan is divided
into the five phases: (1) awareness, (2) assessment, (3) renovations, (4)
validation, and (5) implementation.
First Savings has substantially completed the first two phases of the plan and
is currently working internally and with external vendors on the final three
phases. First Savings outsources its item processing operations to a service
provider. First Savings' Year 2000 compliance is being closely coordinated with
that of the service provider.
First Savings does not currently expect that the cost of its Year 2000
compliance program will be material to its financial condition or results of
operations, and expects that it will satisfy such compliance program without
material disruption of its operations. In the event that First Savings'
significant suppliers do not successfully and timely achieve Year 2000
compliance, First Savings' business, results of operations or financial
condition could be adversely affected.
17
<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, 1998 and
1997, and the related consolidated statements of income, shareholders' equity
and cash flows for the years 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 audits. The consolidated
financial statements of First Savings Bancorp, Inc. and subsidiary as of and for
the year ended June 30, 1996 were audited by other auditors whose report dated
August 16, 1996 expressed an unqualified opinion.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the 1998 and 1997 consolidated financial statements present
fairly, in all material respects, the financial position of First Savings
Bancorp, Inc. and subsidiary at June 30, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Southern Pines, North Carolina
August 13, 1998
18
<PAGE>
CONSOLIDATED STATEMENTS
OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,825,590 $ 2,801,422
Interest-earning deposits with banks 3,990,718 6,300,797
Investment securities available for sale, at fair value (amortized cost
of $72,163,962 and $79,830,744 at June 30, 1998 and 1997,
respectively) (Note 2) 72,731,962 80,257,044
Investment securities held to maturity, at amortized cost (fair value
of $9,821,460 and $6,672,096 at June 30, 1998 and 1997,
respectively) (Note 2) 9,737,212 6,572,162
Loans receivable, net (Note 3) 208,094,461 192,237,609
Accrued interest receivable (Note 4) 1,748,809 1,836,469
Premises and equipment, net (Note 5) 1,935,927 1,967,690
Stock in the Federal Home Loan Bank of Atlanta, at cost 1,929,600 1,929,600
Prepaid expenses and other assets 173,950 313,955
------------ ------------
TOTAL $304,168,229 $294,216,748
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 6) $211,924,932 $204,316,774
Borrowed funds (Note 7) 20,000,000 20,000,000
Advances from borrowers for taxes and insurance 90,217 101,766
Accrued interest payable on deposits 141,564 103,597
Accrued expenses and other liabilities 1,623,593 1,359,623
Federal and state income taxes:
Currently payable 38,102 371,618
Deferred, net (Note 10) 828,616 768,438
------------ ------------
Total liabilities 234,647,024 227,021,816
------------ ------------
COMMITMENTS (Notes 3, 13 and 14)
SHAREHOLDERS' EQUITY (Notes 10 and 11):
Preferred stock, no par value, 5,000,000 shares authorized, none
issued and outstanding - -
Common stock, no par value, 20,000,000 shares authorized;
3,710,820 shares issued and outstanding
in 1998; 3,679,185 in 1997 35,536,799 35,236,973
Unearned compensation related to ESOP note payable (Note 12) (158,302) (293,502)
Net unrealized gain (loss) on securities available for sale 374,880 281,358
Retained earnings 33,767,828 31,970,103
------------ ------------
Total shareholders' equity 69,521,205 67,194,932
------------ ------------
TOTAL $304,168,229 $294,216,748
============ ============
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
CONSOLIDATED STATEMENTS
OF INCOME
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------
1998 1997 1996
--------- -------- ------------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest on loans receivable $16,262,488 $14,954,452 $13,406,157
Interest on investment securities available for sale 5,077,872 4,177,307 4,549,718
Interest on investment securities held to maturity 668,469 337,717 293,452
Dividends on equity securities 143,199 139,703 140,089
Other 391,465 449,184 160,551
----------- ----------- -------------
Total interest and dividend income 22,543,493 20,058,363 18,549,967
----------- ----------- -------------
INTEREST EXPENSE:
Deposits (Note 6) 9,965,356 9,496,129 9,165,030
Borrowed funds (Note 7) 1,118,002 286,280 50,324
----------- ----------- -------------
Total interest expense 11,083,358 9,782,409 9,215,354
----------- ----------- -------------
Net interest income 11,460,135 10,275,954 9,334,613
Provision for loan losses (Note 3) - - -
----------- ----------- -------------
Net interest income after provision for loan losses 11,460,135 10,275,954 9,334,613
----------- ----------- -------------
NON-INTEREST INCOME:
Fees and service charges 542,206 370,795 311,462
Income from real estate operations 7,514 7,964 7,230
Rent on safe deposit boxes 33,648 33,450 32,801
Other, net 32,531 12,949 12,429
----------- ----------- -------------
Total non-interest income, net 615,899 425,158 363,922
----------- ----------- -------------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and fringe benefits (Note 12) 2,102,433 2,002,924 2,038,817
Occupancy and building (Note 13) 210,623 207,089 227,831
Premiums and assessments 131,512 1,326,809 416,491
Computer services 355,216 300,905 281,394
Other 957,783 799,732 728,247
----------- ----------- -------------
Total general and administrative expenses 3,757,567 4,637,459 3,692,780
----------- ----------- -------------
INCOME BEFORE INCOME TAXES 8,318,467 6,063,653 6,005,755
INCOME TAX EXPENSE (Note 10) 3,060,000 2,155,000 2,085,000
----------- ----------- -------------
NET INCOME $ 5,258,467 $ 3,908,653 $ 3,920,755
=========== =========== =============
NET INCOME PER COMMON SHARE
Basic $ 1.42 $ 1.05 $ 1.05
=========== =========== =============
Diluted $ 1.30 $ 0.98 $ 0.98
=========== =========== =============
AVERAGE COMMON SHARES OUTSTANDING
Basic 3,698,197 3,706,704 3,744,000
Diluted 4,021,954 3,970,306 3,993,070
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
------------------------------------------------------------------------------------
NET UNREALIZED
GAIN (LOSS) ON
SECURITIES
COMMON STOCK UNEARNED AVAILABLE FOR RETAINED SHAREHOLDERS'
-----------------------
SHARES AMOUNT COMPENSATION SALE EARNINGS EQUITY
--------- ----------- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 1, 1995 3,744,000 $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 income taxes of $244,401 - - - (474,428) - (474,428)
Net income for year - - - - 3,920,755 3,920,755
Cash dividends declared
($.64 per share) - - - - (2,366,931) (2,366,931)
--------- ----------- --------- -------------- ----------- -------------
BALANCE, JUNE 30, 1996 3,744,000 36,451,561 (421,952) (76) 30,781,853 66,811,386
Stock repurchase (76,500) (1,395,532) - - - (1,395,532)
Proceeds from exercise of stock
options 11,685 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 income taxes of $144,979 - - - 281,434 - 281,434
Net income for year - - - - 3,908,653 3,908,653
Cash dividends declared
($.74 per share) - - - - (2,720,403) (2,720,403)
--------- ----------- --------- -------------- ----------- -------------
BALANCE, JUNE 30, 1997 3,679,185 35,236,973 (293,502) 281,358 31,970,103 67,194,932
Proceeds from exercise of stock
options 31,635 120,424 - - - 120,424
Earned ESOP compensation - 179,402 135,200 - - 314,602
Change in net unrealized gain (loss)
on available for sale securities, net
of income taxes of $48,178 - - - 93,522 - 93,522
Net income for year - - - - 5,258,467 5,258,467
Cash dividends declared
($0.94 per share) - - - - (3,460,742) (3,460,742)
--------- ----------- --------- -------------- ----------- -------------
BALANCE, JUNE 30, 1998 3,710,820 $35,536,799 $(158,302) $ 374,880 $33,767,828 $69,521,205
========= =========== ========= ============== =========== =============
</TABLE>
See notes to consolidated financial statements.
21
<PAGE>
CONSOLIDATED STATEMENTS
OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------------------------------
1998 1997 1996
--------------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 5,258,467 $ 3,908,653 $ 3,920,755
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of premises and equipment 97,115 94,055 120,433
Issuance of ESOP shares 314,602 244,375 220,873
Net amortization on investments 125,638 512,067 617,085
Deferred income taxes 12,000 (7,000) (18,600)
Loan origination fees and costs deferred, net of
current amortization (8,381) 46,139 51,455
Gain on sale of real estate (21,065) (8,531) -
Gain on sale of premises and equipment (7,045) - -
Changes in:
Accrued interest receivable 87,660 (214,430) 139,276
Prepaid expenses and other assets 9,375 (81,231) (46,129)
Accrued interest payable on deposits 37,967 (9,554) 8,614
Accrued expenses and other liabilities 95,708 194,613 (81,382)
Taxes payable (333,516) 242,040 129,578
------------ ------------ ------------
Net cash provided by operating activities 5,668,525 4,921,196 5,061,958
------------ ------------ ------------
INVESTING ACTIVITIES:
Net (increase) decrease in interest-earning deposits
with banks 2,310,079 (5,587,822) 356,376
Proceeds from maturities of certificates of deposit - 7,000,000 -
Purchases of certificates of deposit - (7,000,000) -
Purchases of:
Available for sale investment securities (24,050,075) (31,251,432) -
Held to maturity investment securities (4,801,336) - -
Proceeds from maturities and calls of:
Available for sale investment securities 31,500,000 11,700,000 11,000,000
Held to maturity investment securities 1,727,505 1,670,878 1,487,573
Proceeds from sale of real estate 188,073 102,000 -
Proceeds from sale of premises and equipment 13,011 - -
Loan originations, net of repayments and net fees (15,848,471) (14,940,293) (17,704,972)
Purchases of premises and equipment (71,318) (43,014) (74,326)
Improvement costs on real estate (36,378) (6,196) -
------------ ------------ ------------
Net cash used in investing activities (9,068,910) (38,355,879) (4,935,349)
------------ ------------ ------------
</TABLE>
22
<PAGE>
CONSOLIDATED STATEMENTS
OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase in deposits $ 7,608,158 $ 16,892,550 $ 4,343,882
Increase (decrease) in advances from borrowers
for taxes and insurance (11,549) 17,210 16,306
Net increase (decrease) in borrowed funds - 19,578,048 (120,928)
Net proceeds from exercise of stock options 120,424 65,019 -
Repurchases of common stock - (1,395,532) -
Cash dividends paid (3,292,480) (2,926,437) (2,500,773)
------------ ------------ ------------
Net cash provided by financing activities 4,424,553 32,230,858 1,738,487
------------ ------------ ------------
INCREASE (DECREASE) IN CASH
AND DUE FROM BANKS 1,024,168 (1,203,825) 1,865,096
CASH AND DUE FROM BANKS,
BEGINNING OF YEAR 2,801,422 4,005,247 2,140,151
------------ ------------ ------------
CASH AND DUE FROM BANKS,
END OF YEAR $ 3,825,590 $ 2,801,422 $ 4,005,247
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for:
Interest on deposits $ 9,927,389 $ 9,505,683 $ 9,173,644
Interest on borrowed funds 1,145,718 208,888 51,952
Income taxes 2,685,000 1,963,036 1,971,500
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
Loans receivable transferred to foreclosed real estate $ - $ 87,273 $ -
Unrealized gain (loss) on investment securities available
for sale, net of deferred income taxes 93,522 281,434 (474,428)
Declared but unpaid dividends 927,705 740,137 636,480
</TABLE>
See notes to consolidated financial statements.
23
<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. and its wholly-owned
subsidiary, First Savings Bank of Moore County, Inc., SSB (the "Bank"),
together referred to as "First Savings." 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 are
carried at fair value and 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
shareholders' 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.
24
<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's policies regarding write-offs, recoveries, or income recognition.
d. Foreclosed Real Estate - Foreclosed real estate is recorded initially at
the lower of the loan balance plus unpaid accrued interest or the
estimated fair value of the property at the date of foreclosure, and
subsequently reduced by additional allowances which are charged to
earnings if the estimated fair value of the property declines below its
initial value. Costs related to the improvement of the property are
capitalized, whereas those related to holding the property are expensed.
Such properties are held for sale and, accordingly, no depreciation or
amortization expense is recognized.
e. Premises and Equipment - Premises and equipment are stated at cost.
Depreciation is computed by the straight-line method over the estimated
useful lives of the various classes of assets. The cost of leasehold
improvements is amortized by the straight-line method over the lesser of
the lives of the improvements or the terms of the lease. Estimated useful
lives are as follows:
Office buildings and improvements 8 to 50 years
Furniture, fixtures and equipment 3 to 10 years
Motor vehicles 4 years
f. Investment in Federal Home Loan Bank Stock - As a requirement for
membership, the Bank invests in stock of the Federal Home Loan Bank of
Atlanta ("FHLB"). This investment is carried at cost.
g. 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.
h. 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").
i. Earnings Per Share - Effective July 1, 1997, First Savings adopted the
provisions of Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128"), which establishes standards for
computing and presenting earnings per share (EPS) data. SFAS 128
simplifies the standards for computing EPS previously found in APB
Opinion No. 15, "Earnings Per Share," and makes them comparable to
international EPS standards. Under SFAS 128, basic EPS replaces the
former presentation of primary EPS. Also, a dual presentation of basic
and diluted EPS is required on the face of the income statement for all
entitites with complex capital structures, and a reconciliation must be
provided of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. In
accordance with SFAS 128, all prior period EPS data have been restated.
Basic net income per share, or basic EPS, is computed by dividing net
income by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur
if First Savings' dilutive stock options were exercised. The numerator of
the basic EPS computation is the same as the numerator of the diluted EPS
computation for all periods presented. A reconciliation of the
denominators of the basic and diluted EPS computations is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- ------------- --------------
<S> <C> <C> <C>
Basic EPS denominator - weighted average number
of common shares outstanding 3,698,197 3,706,704 3,744,000
Dilutive share effect arising from assumed exercise
of stock options 323,757 263,602 249,070
--------- --------- ---------
Diluted EPS denominator 4,021,954 3,970,306 3,993,070
========= ========= =========
</TABLE>
25
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
j. Stock Options - Effective July 1, 1997, First Savings adopted Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), which requires either (i) the fair value of
employee stock-based compensation plans be recorded as a component of
compensation expense in the statement of income as of the date of grant
of awards related to such plans or (ii) the impact of such fair value on
net income and earnings per share be disclosed in a footnote to financial
statements for awards granted after December 15, 1994, if the accounting
for such awards continues to be in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Since the adoption of SFAS
123, First Savings has not granted any options.
k. Cash Dividends - On June 18, 1998, First Savings declared a $.25 per
share cash dividend to shareholders of record on June 30, 1998, payable
on July 20, 1998.
l. Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Material estimates that are particularly sensitive to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the
allowances for losses on loans and foreclosed real estate, management
obtains independent appraisals for significant properties.
A majority of the Bank's loan portfolio consists of single-family
residential loans in its market area. The regional economy is currently
stable and consists of various types of industry. Real estate prices in
this market are also stable; however, the ultimate collectibility of a
substantial portion of the Bank's loan portfolio is susceptible to
changes in local market conditions.
While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition,
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowances for losses on loans and
foreclosed real estate. Such agencies may require the Bank to recognize
additions to the allowances based on their judgments about information
available to them at the time of their examination. Because of these
factors, it is reasonably possible that the allowances for losses on
loans and foreclosed real estate may change materially in the near term.
m. Reclassifications - Certain consolidated financial statement amounts for
1997 and 1996 have been reclassified to conform to the 1998 presentation.
n. Recent Accounting Pronouncements:
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 First Savings
would include net unrealized holding gains and losses on investment
securities available for sale. This Statement will be effective for First
Savings' fiscal year ending June 30, 1999, and First Savings does not
intend to early adopt. Had First Savings early adopted this Statement, it
would have reported comprehensive income of $5,351,989, $4,190,087 and
$3,446,327 for the years ended June 30, 1998, 1997 and 1996,
respectively.
FASB STATEMENT ON DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. In July 1997, the FASB issued SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information. SFAS No. 131 requires
disclosures for each segment that are similar to those required under
current standards with the addition of quarterly disclosure requirements
and a finer partitioning of geographic disclosures. It requires limited
segment data on a quarterly basis. It also requires geographic data by
country, as opposed to broader geographic regions as permitted under
current standards. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997, with earlier application permitted. As First
Savings has only one operating segment, adoption of SFAS No. 131 is not
expected to have a significant impact on the consolidated financial
statements.
26
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FASB STATEMENT ON EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS. In February 1998, the FASB issued SFAS No. 132,
Employers' Disclosures about Pensions and Other Postretirement Benefits.
SFAS No. 132 standardizes the disclosure requirements of pensions and
other postretirement benefits. It does not change any measurement or
recognition provisions, and thus will not materially impact First
Savings. SFAS No. 132 is effective for fiscal years beginning after
December 15, 1997.
FASB Statement on Accounting for Derivative Instruments and Hedging
Activities. In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This Statement
standardizes the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts. Under this standard,
entities are required to carry all derivative instruments in the
statement of financial condition at fair value. The accounting for
changes in the fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, on the reason for holding it.
If certain conditions are met, entities may elect to designate a
derivative instrument as a hedge of exposure to changes in fair values,
cash flows, or foreign currencies. If the hedged exposure is a fair value
exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change together with the offsetting loss or
gain on the hedged item attributable to the risk being hedged. If the
hedged exposure is a cash flow exposure, the effective portion of the
gain or loss on the derivative instrument is reported initially as a
component of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction
affects earnings. Any amounts excluded from the assessment of hedge
effectiveness as well as the ineffective portion of the gain or loss are
reported in earnings immediately. Accounting for foreign currency hedges
is similar to accounting for fair value and cash flow hedges. If the
derivative instrument is not designated as a hedge, the gain or loss is
recognized in earnings in the period of change. Management anticipates
that this statement will have no effect on its 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 FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Available for sale:
June 30, 1998:
U.S. government and agency securities $71,163,888 $556,735 $ 25,243 $71,695,380
N.C. state and municipal obligations 950,000 36,508 - 986,508
The Bankers Bank stock 50,074 - - 50,074
----------- -------- -------- -----------
Total $72,163,962 $593,243 $ 25,243 $72,731,962
=========== ======== ======== ===========
To be held to maturity:
June 30, 1998:
Mortgage-backed securities $ 9,737,212 $ 95,709 $ 11,461 $ 9,821,460
=========== ======== ======== ===========
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
----------- -------- -------- -----------
Total $79,830,744 $590,368 $164,068 $80,257,044
=========== ======== ======== ===========
To be held to maturity:
June 30, 1997:
Mortgage-backed securities $ 6,572,162 $ 99,934 $ - $ 6,672,096
=========== ======== ======== ===========
</TABLE>
There were no sales of securities for the years ended June 30, 1998 and
1997.
27
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
THE SCHEDULED MATURITIES OF SECURITIES AT JUNE 30, 1998 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 $26,129,635 $26,248,780 $ - $ -
Due after one year through five years 21,094,168 21,454,574 - -
Due after five years through ten years 13,940,159 14,013,915 - -
Due after ten years 11,000,000 11,014,693 - -
----------- ----------- ---------- ----------
72,163,962 72,731,962 - -
Mortgage-backed securities - - 9,737,212 9,821,460
----------- ----------- ---------- ----------
Total $72,163,962 $72,731,962 $9,737,212 $9,821,460
=========== =========== ========== ==========
</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.
Available for sale securities with carrying and fair values of $6,091,450
and $7,246,579 at June 30, 1998 and 1997, respectively, were pledged to
secure public monies on deposit as required by law.
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>
1998 1997
------------ ------------
<S> <C> <C>
Mortgage loans:
First mortgage loans $201,000,679 $187,293,870
First mortgage loan participations 2,043,873 2,268,368
Property improvement loans - 2,239
Equity line loans 8,969,553 8,360,529
------------ ------------
212,014,105 197,925,006
Less:
Loans in process 5,630,585 7,007,956
Net deferred loan fees 546,767 555,148
------------ ------------
Total mortgage loans 205,836,753 190,361,902
Savings account loans 899,699 908,515
Installment loans 797,138 620,742
Credit card loans 1,156,686 950,637
------------ ------------
Total mortgage and other loans 208,690,276 192,841,796
Less allowance for loan losses 595,815 604,187
------------ ------------
Loans receivable, net $208,094,461 $192,237,609
============ ============
</TABLE>
28
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
At June 30, 1998, the Bank had mortgage loan commitments of approximately
$12,798,000 and pre-approved but unused lines of credit totaling
$16,875,000. In management's opinion, these commitments, and undisbursed
proceeds on construction loans in process above, represent no more than
normal lending risk to the Bank and will be funded from normal sources of
liquidity.
AT JUNE 30, 1998, 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 THOUSANDS) ADJUSTMENT (IN THOUSANDS)
------------ ------------------ -------------- ---------------
<S> <C> <C> <C>
1 mo. - 1 yr. $ 350 1 mo. - 1 yr. $ 48,457
1 yr. - 3 yr. 1,649 1 yr. - 3 yr. 49,612
3 yr. - 5 yr. 3,268 3 yr. - 5 yr. 21,805
5 yr. - 10 yr. 12,356 5 yr. - 10 yr. 47,538
10 yr. and over 20,176 10 yr. and over 3,479
------- --------
Total $37,799 Total $170,891
======= ========
</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, 1998 and 1997, loans to directors and officers were
approximately $800,520 and $776,000, 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
$10,428,000 at June 30, 1998. The Bank was in compliance with the
limitation as of June 30, 1998.
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES FOR THE YEARS ENDED JUNE 30 ARE
SUMMARIZED AS FOLLOWS:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Balance at beginning of year $604,187 $608,739 $608,739
Provision for loan losses - - -
Charge-offs (8,372) (4,552) -
Recoveries - - -
-------- -------- --------
Balance at end of year $595,815 $604,187 $608,739
======== ======== ========
</TABLE>
In conformity with SFAS 114, as amended by SFAS 118, none of the Bank's
loans are considered to be impaired.
29
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
4. ACCRUED INTEREST RECEIVABLE
ACCRUED INTEREST RECEIVABLE AT JUNE 30 IS SUMMARIZED AS FOLLOWS:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Loans receivable $ 410,978 $ 145,185
Mortgage-backed securities 76,316 80,503
Securities 1,225,434 1,575,903
Other 36,081 34,878
---------- ----------
Total $1,748,809 $1,836,469
========== ==========
</TABLE>
5. PREMISES AND EQUIPMENT
PREMISES AND EQUIPMENT AT JUNE 30, WHICH ARE STATED AT COST, ARE SUMMARIZED
AS FOLLOWS:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land $ 379,306 $ 379,306
Office buildings and improvements 2,269,486 2,233,113
Furniture, fixtures and equipment 660,643 645,140
Motor vehicles 37,856 39,838
---------- ----------
Total 3,347,291 3,297,397
Less allowance for depreciation 1,411,364 1,329,707
---------- ----------
Premises and equipment, net $1,935,927 $1,967,690
========== ==========
</TABLE>
6. DEPOSITS
Deposits at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
NOW accounts $ 23,429,916 $ 19,776,505
Money market deposits 42,567,590 41,668,099
Passbook savings 14,035,680 13,070,907
Certificates of deposit 131,891,746 129,801,263
------------ ------------
Total $211,924,932 $204,316,774
============ ============
</TABLE>
The aggregate amounts of certificates of deposit with a minimum denomination
of $100,000 were approximately $28,915,000 and $25,465,000 in 1998 and 1997,
respectively.
30
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
AT JUNE 30, 1998, THE SCHEDULED MATURITIES OF CERTIFICATES OF DEPOSIT ARE AS
FOLLOWS:
(In thousands)
1999 $ 96,633
2000 24,945
2001 and thereafter 10,314
--------
$131,892
========
Included in deposits are non-interest-bearing balances totaling $4,028,120
and $1,556,535 as of June 30, 1998 and 1997, respectively.
7. BORROWED FUNDS
Borrowed funds at June 30, 1998 and 1997 consist of advances from the
Federal Home Loan Bank (FHLB). These advances, with weighted average rates,
are as follows:
6.25% due on or before June 30, 1999 $20,000,000
===========
The above advances have been made against a $52.0 million line of credit
secured by a blanket floating lien on the Bank's one-to-four family
residential mortgage loans.
8. INTEREST RATE RISK
First Savings is engaged principally in providing first mortgage loans to
individuals and commercial enterprises. At June 30, 1998, 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, 1998, First Savings had interest-earning assets of $296,511,768
having a weighted-average effective yield of 7.67% and interest-bearing
liabilities of $216,114,359 having a weighted-average effective interest
rate of 4.82%.
9. SPECIAL SAIF ASSESSMENT
On September 30, 1996, the Deposit Insurance Funds Act of 1996 was signed
into law. The legislation included a special assessment to recapitalize the
SAIF insurance fund up to its statutory goal of 1.25% of insured funds. The
assessment required the Bank to pay an amount equal to 65.7 basis points of
its SAIF-assessable deposit base as of March 31, 1995, which resulted in a
charge to income during the year ended June 30, 1997 of $1.2 million.
10. 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>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Current tax provision $3,048,000 $2,162,000 $2,103,600
Deferred tax provision 12,000 (7,000) (18,600)
---------- ---------- ----------
Total $3,060,000 $2,155,000 $2,085,000
========== ========== ==========
</TABLE>
31
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
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>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes at the statutory federal rate $2,828,279 $2,061,642 $2,041,957
Increases (decreases) resulting from:
Tax exempt interest - net (15,036) (10,833) (29,091)
State income taxes - net of federal benefit 235,702 101,319 70,150
Other, net 11,055 2,872 1,984
---------- ---------- ----------
Income tax expense $3,060,000 $2,155,000 $2,085,000
========== ========== ==========
</TABLE>
Deferred taxes arising from each type of temporary difference at June 30
are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets:
Loan fees and costs $ 213,870 $ 218,176
---------- ----------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends 329,029 329,029
Depreciation 230,357 222,663
Bad debt reserve 289,980 289,980
Unrealized gain on securities available for sale 193,120 144,942
---------- ----------
Total 1,042,486 986,614
---------- ----------
Net deferred tax liability $ 828,616 $ 768,438
========== ==========
</TABLE>
Retained earnings at June 30, 1998 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.
32
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
11. REGULATORY RESTRICTIONS
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 December 31, 1997, 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.
REGULATORY CAPITAL AMOUNTS AND RATIOS FOR FIRST SAVINGS AND THE BANK ARE
PRESENTED IN THE TABLE BELOW:
<TABLE>
<CAPTION>
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
------------------- --------------------------------
AMOUNT RATIO AMOUNT RATIO
----------- ------ ----------- ---------
<S> <C> <C> <C> <C>
AS OF JUNE 30, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated $69,742,140 48.67% $11,464,080 greater than or Equal to 8.0%
First Savings Bank of Moore Co., Inc., SSB $54,933,352 38.34% $11,461,920 greater than or Equal to 8.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $69,146,325 48.25% $ 5,732,040 greater than or Equal to 4.0%
First Savings Bank of Moore Co., Inc., SSB $54,337,537 37.93% $ 5,730,960 greater than or Equal to 4.0%
Tier 1 Capital (to Average Assets):
Consolidated $69,146,325 23.05% $11,997,160 greater than or Equal to 4.0%
First Savings Bank of Moore Co., Inc., SSB $54,337,537 18.67% $11,641,120 greater than or Equal to 4.0%
As of June 30, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated $67,517,761 52.15% $10,358,080 greater than or Equal to 8.0%
First Savings Bank of Moore Co., Inc., SSB $49,692,461 38.38% $10,356,880 greater than or Equal to 8.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $66,913,574 51.68% $ 5,179,040 greater than or Equal to 4.0%
First Savings Bank of Moore Co., Inc., SSB $49,088,274 37.92% $ 5,178,440 greater than or Equal to 4.0%
Tier 1 Capital (to Average Assets):
Consolidated $66,913,574 24.71% $10,927,600 greater than or Equal to 4.0%
First Savings Bank of Moore Co., Inc., SSB $49,088,274 19.08% $10,290,120 greater than or Equal to 4.0%
TO BE WELL
Capitalized Under
Prompt Corrective
ACTION PROVISIONS
-------------------
AMOUNT RATIO
----------- ------
AS OF JUNE 30, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated N/A N/A
First Savings Bank of Moore Co., Inc., SSB $14,327,400 greater than or Equal to 10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated N/A N/A
First Savings Bank of Moore Co., Inc., SSB $ 8,596,440 greater than or Equal to 6.0%
Tier 1 Capital (to Average Assets):
Consolidated N/A N/A
First Savings Bank of Moore Co., Inc., SSB $14,551,400 greater than or Equal to 5.0%
As of June 30, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated N/A N/A
First Savings Bank of Moore Co., Inc., SSB $12,946,100 greater than or Equal to 10.0%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated N/A N/A
First Savings Bank of Moore Co., Inc., SSB $ 7,767,660 greater than or Equal to 6.0%
Tier 1 Capital (to Average Assets):
Consolidated N/A N/A
First Savings Bank of Moore Co., Inc., SSB $12,862,650 greater than or Equal to 5.0%
</TABLE>
33
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
In addition 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, 1998 and 1997, the Bank's capital ratio under the North Carolina
requirement was 18.74% and 17.54%, respectively.
At June 30, 1998 and 1997, First Savings and the Bank exceeded all capital
First Savings is also subject to limits on dividend payments. First Savings
is prohibited under the North Carolina Business Corporation Act, from paying
a dividend if such payment would (i) cause First Savings to be unable to pay
its debts as they become due in the ordinary course of business or (ii)
reduce First Savings' total assets below the sum of First Savings' total
liabilities plus any amounts which would be needed, if First Savings 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, or repurchase any of its common stock. A source
of First Savings' funds are dividends received from the Bank. In fiscal
1999, the amount of dividends that can be paid without prior approval from
regulators is approximately $2.0 million. These funds should be adequate to
cover First Savings' needs.
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, 1998, First Savings' Board has authorized the purchase of
297,900 additional shares under the plan.
12. COMPENSATION PLANS
First Savings maintains an employee profit sharing plan covering all
eligible employees. Contributions to the plan for the years ended June 30,
1998, 1997 and 1996 were $112,910, $97,539 and $93,402, 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
$314,602, $244,375 and $220,873, has been incurred during the years ended
June 30, 1998, 1997 and 1996, respectively, including $179,402, $115,925,
and $99,945, 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 both plans, participants may exercise options by exchanging, at fair
value, shares of common stock which they already own. At June 30, 1998,
options for 90,000 shares of common stock were reserved for future issuance
for the Employee Plan. As of June 30, 1998, 61,714 options have been
exercised under the Employee Plan. No options had been exercised under the
Directors' Plan as of June 30, 1998.
34
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
13. 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,
1998, 1997 and 1996. 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, 1998, THE MINIMUM RENTAL COMMITMENTS REQUIRED UNDER THIS
NONCANCELABLE LEASE ARE AS FOLLOWS:
Year Ending
1999 $10,200
2000 10,200
2001 10,200
2002 10,200
2003 7,650
-------
Total $48,450
=======
14. CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK
The Bank generally originates single-family residential loans within its
primary lending area of Moore County. The Bank's underwriting policies
require such loans to be made at no greater than 80% loan-to-value based
upon appraised values unless private mortgage insurance is obtained. These
loans are secured by the underlying properties.
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to fund loans, standby
letters of credit and lines of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the statements of financial condition. The contract or
notional amounts of those instruments reflect the extent of involvement the
Bank has in particular classes of financial instruments.
A summary of the contract amount of the Bank's exposure to off-balance sheet
risk as of June 30, 1998 is as follows:
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit, mortgage loans $ 7,167,000
Undisbursed construction loans 5,631,000
Undisbursed lines of credit 16,875,000
15. 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 were 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-Earning Deposits With Banks
----------------------------------------------------------------
The carrying amounts for cash and interest-earning deposits with banks
approximate fair value because of the short maturities of those instruments.
35
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
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 fair value of borrowed funds is based upon the discounted value using
current rates at which borrowings of similar maturity could be obtained.
THE ESTIMATED FAIR VALUES OF THE BANK'S FINANCIAL INSTRUMENTS AT JUNE 30 ARE
AS FOLLOWS:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks and $ 7,816,308 $ 7,816,308 $ 9,102,219 $ 9,102,219
interest-earning deposits
Securities 84,398,774 84,483,022 88,758,806 88,858,740
Loans receivable 208,094,461 209,610,186 192,237,609 195,970,477
------------ ------------ ------------ ------------
$300,309,543 $301,909,516 $290,098,634 $293,931,436
============ ============ ============ ============
Financial liabilities:
Deposits $211,924,932 $210,824,998 $204,316,774 $203,716,128
Borrowed funds 20,000,000 19,975,856 20,000,000 19,994,635
------------ ------------ ------------ ------------
$231,924,932 $230,800,854 $224,316,774 $223,710,763
============ ============ ============ ============
</TABLE>
The fair value estimates presented herein are based on pertinent information
available to management at June 30, 1998 and 1997, 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.
36
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
16. 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>
1998
Total interest and dividend income $ 5,597 $ 5,664 $ 5,661 $ 5,621
Total interest expense 2,793 2,817 2,752 2,721
---------- ---------- ---------- ----------
Net interest income 2,804 2,847 2,909 2,900
Provision for loan losses - - - -
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 2,804 2,847 2,909 2,900
Other expense, net 784 790 757 811
---------- ---------- ---------- ----------
Income before income taxes 2,020 2,057 2,152 2,089
Income tax expense 744 759 798 759
---------- ---------- ---------- ----------
Net income $ 1,276 $ 1,298 $ 1,354 $ 1,330
========== ========== ========== ==========
NET INCOME PER COMMON SHARE
Basic $ 0.35 $ 0.35 $ 0.36 $ 0.36
Diluted $ 0.32 $ 0.32 $ 0.34 $ 0.33
AVERAGE COMMON SHARES OUTSTANDING
Basic 3,682,500 3,674,737 3,704,823 3,710,490
Diluted 3,984,737 4,016,668 4,035,403 4,028,537
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 income per common share
Basic $ 0.08 $ 0.32 $ 0.32 $ 0.35
Diluted $ 0.08 $ 0.30 $ 0.29 $ 0.32
Average common shares outstanding
Basic 3,744,000 3,703,176 3,692,481 3,686,789
Diluted 3,974,368 3,948,720 3,961,840 3,976,525
</TABLE>
* Includes nonrecurring charge associated with the SAIF assessment.
37
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
17. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information of First Savings Bancorp, Inc., the parent
company, at June 30, 1998 and 1997 and for the years ended June 30, 1998 and
1997 is presented below:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Interest-earning deposits with subsidiary $ 3,841,153 $ 7,481,196
Securities at market value 10,126,516 10,246,855
Investment in subsidiary 54,675,457 49,322,904
Other assets 1,825,074 653,180
----------- -----------
Total assets $70,468,200 $67,704,135
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 946,995 $ 509,203
Shareholders' equity 69,521,205 67,194,932
----------- -----------
Total liabilities and shareholders' equity $70,468,200 $67,704,135
=========== ===========
CONDENSED STATEMENTS OF INCOME
Interest on securities $ 670,874 $ 670,595
Earnings of subsidiary 4,934,659 3,538,555
----------- -----------
5,605,533 4,209,150
Other expenses 175,066 108,497
----------- -----------
Income before income tax 5,430,467 4,100,653
Income tax expense 172,000 192,000
----------- -----------
Net income $ 5,258,467 $ 3,908,653
=========== ===========
</TABLE>
For the year ended June 30, 1998, the Bank subsidiary did not pay cash
dividends to the parent.
38
<PAGE>
DIRECTORS, OFFICERS
AND OFFICE LOCATIONS
FIRST SAVINGS BANCORP, INC.
BOARD OF DIRECTORS
J. E. CAUSEY, Chairman of the Board
Causey Construction & Realty
<TABLE>
<CAPTION>
<S> <C>
WILLIAM E. SAMUELS, President JOHN F. BURNS, Secretary
Chief Executive Officer Executive Vice President
First Savings Bank of Moore County, Inc., SSB First Savings Bank of Moore
County, Inc., SSB
JOE MONTESANTI, JR. H. A. CLAYTON
Retired Pharmacist Retired Merchant
H. DAVID BRUTON, M.D.
Secretary of North Carolina Department THOMAS F. PHILLIPS
of Health and Human Services Owner of Phillips Motor Company
DR. W. HARRELL JOHNSON FRANK G. HARDISTER
Retired Dentist President of Powell Funeral Home
VIRGINIA C. BRANDT FELTON J. CAPEL
Certified Public Accountant Owner of Century Associates of North Carolina
Holden, Brandt,
& Longfellow, P.C.
FIRST SAVINGS BANK STAFF
SOUTHERN PINES OFFICE PINEHURST OFFICE
William E. Samuels, President Doris B. Andrews, Vice President
John F. Burns, Executive Vice President Teresa T. Cole, Assistant Vice President
and Secretary Lynette F. Williams, Assistant Vice President
Nancy L. Howle
Deborah H. Williams
Vice Presidents
S. Allan Beck Michael F. McMillan CARTHAGE OFFICE
Timothy S. Maples Donna B. Morgan Patricia W. Jackson, Vice President
Sherry B. Yow Patsy M. Salmon
Carol M. Williams
Assistant Vice Presidents
SEVEN LAKES OFFICE
Carol F. Allred Margaret V. Hightower Kim Y. Bailey, Vice President
Sandra G. Blake Wanda M. Ring Sherry S. Blake
Joel H. Salmon Shirley M. Puckett
Sharon W. Styers
Paula M. Taggart
Staff
Tammy O. Barnett Marian E. Lauffer PINECREST PLAZA OFFICE
Shelia C. Brown Caroline M. Lemmond
Dianna B. Bullard Betty K. Lomax William A. Roberts, Vice President
Kimberly O. Hedrick Angel J. McKeithan Patsy M. McDonald, Assistant Vice President
Derinda F. Hobson Audra W. McLean Susanna C. Hunley
Betty S. Kramer Barbara W. Ussery Martha M. Lunday
Pamela C. Wase Amanda L. VandeReit
</TABLE>
39
<PAGE>
CORPORATE INFORMATION
<TABLE>
<CAPTION>
<S> <C>
CORPORATE HEADQUARTERS INDEPENDENT ACCOUNTANTS
First Savings Bancorp, Inc. Dixon Odom pllc
205 SE Broad Street, Post Office Box 1657 6 Tunberry Wood
Southern Pines, North Carolina 28388 Post Office Box 1655
(910) 692-6222 Southern Pines, North Carolina 28387
SPECIAL COUNSEL FORM 10-K
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P. COPIES OF THE FIRST SAVINGS BANCORP, INC. FORM 10-K
230 North Elm Street MAY BE OBTAINED BY SHAREHOLDERS WITHOUT CHARGE BY
Post Office Box 26000 WRITING TO MARGARET V. HIGHTOWER AT THE CORPORATE
Greensboro, North Carolina 27420 HEADQUARTERS ADDRESS.
TRANSFER AGENT ADDITIONAL INFORMATION
Wachovia Bank of North Carolina, N.A. For additional information, please contact
Corporate Trust Department, Post Office Box 3001 John F. Burns, Timothy S. Maples, or
Winston-Salem, North Carolina 27102 William E. Samuels at
1-800-633-4236 (910) 692-6222.
ANNUAL MEETING
The 1998 Annual Meeting of Shareholders of
First Savings Bancorp, Inc. will be held at the
Holiday Inn, US#1, Southern Pines, NC on
October 29, 1998 at 10:00 a.m.
All shareholders are cordially invited to attend.
</TABLE>
CAPITAL STOCK
First Savings' common stock is traded on the NASDAQ National Market System under
the symbol "SOPN." As of June 30, 1998, there were 3,710,820 shares outstanding
and 1,016 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
<TABLE>
<CAPTION>
Dividends
Stock Price DECLARED, PER SHARE
--------------------------- ----------------------------
High LOW REGULAR SPECIAL
----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
For the Year Ended June 30, 1998:
First Quarter Ending September 30 $ 23.88 $ 20.00 $ 0.22 N/A
Second Quarter Ending December 31 $ 25.50 $ 22.00 $ 0.22 N/A
Third Quarter Ending March 31 $ 26.00 $ 22.19 $ 0.25 N/A
Fourth Quarter Ending June 30 $ 25.75 $ 22.25 $ 0.25 N/A
For the Year Ended June 30, 1997:
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
</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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 3,826
<INT-BEARING-DEPOSITS> 3,991
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 72,732
<INVESTMENTS-CARRYING> 9,737
<INVESTMENTS-MARKET> 9,821
<LOANS> 208,690
<ALLOWANCE> 596
<TOTAL-ASSETS> 304,168
<DEPOSITS> 211,925
<SHORT-TERM> 20,000
<LIABILITIES-OTHER> 2,722
<LONG-TERM> 0
0
0
<COMMON> 35,537
<OTHER-SE> 33,984
<TOTAL-LIABILITIES-AND-EQUITY> 304,168
<INTEREST-LOAN> 16,262
<INTEREST-INVEST> 5,890
<INTEREST-OTHER> 391
<INTEREST-TOTAL> 22,543
<INTEREST-DEPOSIT> 9,965
<INTEREST-EXPENSE> 11,083
<INTEREST-INCOME-NET> 11,460
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,758
<INCOME-PRETAX> 8,318
<INCOME-PRE-EXTRAORDINARY> 8,318
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,258
<EPS-PRIMARY> 1.42
<EPS-DILUTED> 1.30
<YIELD-ACTUAL> 3.92
<LOANS-NON> 545
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 604
<CHARGE-OFFS> 8
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 596
<ALLOWANCE-DOMESTIC> 207
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 389
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1996
<PERIOD-START> JAN-01-1996 JUL-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1996
<CASH> 2,457 2,457
<INT-BEARING-DEPOSITS> 792 792
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 73,914 73,914
<INVESTMENTS-CARRYING> 3,546 3,546
<INVESTMENTS-MARKET> 3,632 3,632
<LOANS> 172,496 172,496
<ALLOWANCE> 609 609
<TOTAL-ASSETS> 256,294 256,294
<DEPOSITS> 186,492 186,492
<SHORT-TERM> 433 433
<LIABILITIES-OTHER> 2,191 2,191
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 36,426 36,426
<OTHER-SE> 30,752 30,752
<TOTAL-LIABILITIES-AND-EQUITY> 256,294 256,294
<INTEREST-LOAN> 3,377 9,934
<INTEREST-INVEST> 1,248 3,831
<INTEREST-OTHER> 20 111
<INTEREST-TOTAL> 4,645 13,876
<INTEREST-DEPOSIT> 2,257 6,914
<INTEREST-EXPENSE> 2,283 6,956
<INTEREST-INCOME-NET> 2,362 6,920
<LOAN-LOSSES> 0 0
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 960 2,751
<INCOME-PRETAX> 1,502 4,435
<INCOME-PRE-EXTRAORDINARY> 1,502 4,435
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 980 2,902
<EPS-PRIMARY> 0.26 0.73
<EPS-DILUTED> 0.25 0.73
<YIELD-ACTUAL> 3.81 3.73
<LOANS-NON> 77 77
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 609 609
<CHARGE-OFFS> 0 0
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 609 609
<ALLOWANCE-DOMESTIC> 609 609
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 479 479
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 4,005
<INT-BEARING-DEPOSITS> 713
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 69,999
<INVESTMENTS-CARRYING> 2,965
<INVESTMENTS-MARKET> 3,016
<LOANS> 178,040
<ALLOWANCE> 609
<TOTAL-ASSETS> 256,986
<DEPOSITS> 187,424
<SHORT-TERM> 422
<LIABILITIES-OTHER> 2,329
<LONG-TERM> 0
0
0
<COMMON> 36,452
<OTHER-SE> 30,359
<TOTAL-LIABILITIES-AND-EQUITY> 256,986
<INTEREST-LOAN> 13,406
<INTEREST-INVEST> 4,983
<INTEREST-OTHER> 161
<INTEREST-TOTAL> 18,550
<INTEREST-DEPOSIT> 9,165
<INTEREST-EXPENSE> 9,215
<INTEREST-INCOME-NET> 9,335
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,693
<INCOME-PRETAX> 6,006
<INCOME-PRE-EXTRAORDINARY> 6,006
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,921
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 0.98
<YIELD-ACTUAL> 3.74
<LOANS-NON> 134
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 609
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 609
<ALLOWANCE-DOMESTIC> 609
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 452
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,248
<INT-BEARING-DEPOSITS> 4,669
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 66,894
<INVESTMENTS-CARRYING> 2,700
<INVESTMENTS-MARKET> 2,719
<LOANS> 183,012
<ALLOWANCE> 609
<TOTAL-ASSETS> 263,203
<DEPOSITS> 192,390
<SHORT-TERM> 404
<LIABILITIES-OTHER> 3,395
<LONG-TERM> 0
0
0
<COMMON> 36,476
<OTHER-SE> 30,538
<TOTAL-LIABILITIES-AND-EQUITY> 263,203
<INTEREST-LOAN> 3,637
<INTEREST-INVEST> 1,106
<INTEREST-OTHER> 52
<INTEREST-TOTAL> 4,795
<INTEREST-DEPOSIT> 2,304
<INTEREST-EXPENSE> 2,310
<INTEREST-INCOME-NET> 2,485
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,105
<INCOME-PRETAX> 474
<INCOME-PRE-EXTRAORDINARY> 474
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 301
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
<YIELD-ACTUAL> 3.98
<LOANS-NON> 271
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 609
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 609
<ALLOWANCE-DOMESTIC> 609
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 444
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> OCT-01-1996 JUL-01-1996
<PERIOD-END> DEC-31-1996 DEC-31-1996
<CASH> 7,025 7,025
<INT-BEARING-DEPOSITS> 7,106 7,106
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 61,534 61,534
<INVESTMENTS-CARRYING> 1,548 1,548
<INVESTMENTS-MARKET> 1,626 1,626
<LOANS> 185,209 185,209
<ALLOWANCE> 609 609
<TOTAL-ASSETS> 265,888 265,888
<DEPOSITS> 196,699 196,699
<SHORT-TERM> 392 392
<LIABILITIES-OTHER> 2,299 2,299
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 35,530 35,530
<OTHER-SE> 30,968 30,968
<TOTAL-LIABILITIES-AND-EQUITY> 265,888 265,888
<INTEREST-LOAN> 3,706 7,343
<INTEREST-INVEST> 1,045 2,151
<INTEREST-OTHER> 113 165
<INTEREST-TOTAL> 4,864 9,659
<INTEREST-DEPOSIT> 2,364 4,667
<INTEREST-EXPENSE> 2,370 4,679
<INTEREST-INCOME-NET> 2,494 4,980
<LOAN-LOSSES> 0 0
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 832 2,938
<INCOME-PRETAX> 1,757 2,231
<INCOME-PRE-EXTRAORDINARY> 1,757 2,231
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,171 1,472
<EPS-PRIMARY> 0.32 0.40
<EPS-DILUTED> 0.30 0.37
<YIELD-ACTUAL> 3.96 3.97
<LOANS-NON> 222 222
<LOANS-PAST> 21 21
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 222 222
<ALLOWANCE-OPEN> 609 609
<CHARGE-OFFS> 0 0
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 609 609
<ALLOWANCE-DOMESTIC> 165 165
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 444 444
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997
<PERIOD-START> JAN-01-1997 JUL-01-1996
<PERIOD-END> MAR-31-1997 MAR-31-1997
<CASH> 1,607 1,607
<INT-BEARING-DEPOSITS> 13,678 13,678
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 57,944 57,944
<INVESTMENTS-CARRYING> 6,788 6,788
<INVESTMENTS-MARKET> 6,796 6,796
<LOANS> 187,714 187,714
<ALLOWANCE> 604 604
<TOTAL-ASSETS> 271,121 271,121
<DEPOSITS> 202,335 202,335
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 2,076 2,076
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 35,593 35,593
<OTHER-SE> 31,117 31,117
<TOTAL-LIABILITIES-AND-EQUITY> 271,121 271,121
<INTEREST-LOAN> 3,750 11,092
<INTEREST-INVEST> 1,055 3,213
<INTEREST-OTHER> 143 307
<INTEREST-TOTAL> 4,948 14,612
<INTEREST-DEPOSIT> 2,377 7,044
<INTEREST-EXPENSE> 2,377 7,057
<INTEREST-INCOME-NET> 2,571 7,555
<LOAN-LOSSES> 0 0
<SECURITIES-GAINS> 0 0
<EXPENSE-OTHER> 857 3,794
<INCOME-PRETAX> 1,815 4,051
<INCOME-PRE-EXTRAORDINARY> 1,815 4,051
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,159 2,636
<EPS-PRIMARY> 0.31 0.71
<EPS-DILUTED> 0.29 0.66
<YIELD-ACTUAL> 3.88 3.94
<LOANS-NON> 220 220
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 609 609
<CHARGE-OFFS> 5 5
<RECOVERIES> 0 0
<ALLOWANCE-CLOSE> 604 604
<ALLOWANCE-DOMESTIC> 165 165
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 439 439
</TABLE>
<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> 1.05
<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>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,791
<INT-BEARING-DEPOSITS> 6,995
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 78,853
<INVESTMENTS-CARRYING> 6,394
<INVESTMENTS-MARKET> 6,453
<LOANS> 195,684
<ALLOWANCE> 604
<TOTAL-ASSETS> 295,315
<DEPOSITS> 206,438
<SHORT-TERM> 8,000
<LIABILITIES-OTHER> 2,928
<LONG-TERM> 10,000
0
0
<COMMON> 35,344
<OTHER-SE> 32,605
<TOTAL-LIABILITIES-AND-EQUITY> 295,315
<INTEREST-LOAN> 3,947
<INTEREST-INVEST> 1,542
<INTEREST-OTHER> 108
<INTEREST-TOTAL> 5,597
<INTEREST-DEPOSIT> 2,488
<INTEREST-EXPENSE> 2,793
<INTEREST-INCOME-NET> 2,804
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 907
<INCOME-PRETAX> 2,020
<INCOME-PRE-EXTRAORDINARY> 2,020
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,276
<EPS-PRIMARY> 0.35
<EPS-DILUTED> 0.32
<YIELD-ACTUAL> 3.85
<LOANS-NON> 861
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 861
<ALLOWANCE-OPEN> 604
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 604
<ALLOWANCE-DOMESTIC> 203
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 401
</TABLE>
