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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended June 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended _______________
Commission file number 0-27098
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FIRST SAVINGS BANCORP, INC.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1842701
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
205 S.E. Broad Street, P.O. Box 1657
Southern Pines, North Carolina 28388
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (910) 692-6222
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Securities Registered Pursuant to Section 12(b) of the Act: None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
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Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting and non-voting stock held by non-
affiliates of the registrant. The aggregate market value shall be computed by
reference to the price at which the stock was sold, or the average bid and asked
prices of such stock, as of a specified date within 60 days prior to the date of
filing. $69,646,540 common stock, no par value, based on the closing price of
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such common stock on August 31, 1999.
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
3,482,327 shares of common stock, no par value, outstanding at August 31, 1999.
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DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the Annual Report of First Savings Bancorp, Inc. for the year ended
June 30, 1999, are incorporated by reference into Part I, Part II and Part IV.
Portions of the Proxy Statement for the 1999 Annual Meeting of Shareholders of
First Savings Bancorp, Inc. to be held on October 28, 1999, are incorporated by
reference into Part III.
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PART I
ITEM 1. BUSINESS
General
First Savings Bancorp, Inc. (the "Holding Company") is a savings bank
holding company registered with the Board of Governors of the Federal Reserve
System (the "Federal Reserve") under the Bank Holding Company Act of 1956, as
amended (the "BHCA"), and the savings bank holding company laws of North
Carolina. The Holding Company's office is located at 205 S.E. Broad Street,
Southern Pines, North Carolina. The Holding Company's activities consist of 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 six offices in Southern Pines,
Pinehurst, Carthage and West End, North Carolina.
The Holding Company and the Bank are collectively referred to herein as
"First Savings."
Market Area
First Savings' primary market area consists of Moore County, North
Carolina. Moore County is home to many retirement communities and, with its
many renowned golf courses in Pinehurst and Southern Pines, has an active
tourist and convention business. As a result, the economy of Moore County is
primarily service oriented. However, there is also employment in manufacturing,
agricultural and governmental activities. Major employers of First Savings'
market area include Resorts of Pinehurst, Firsthealth Moore Regional Hospital,
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, 1999, over 98% of the net amount of First
Savings' real estate loan portfolio was secured by properties in North Carolina.
On June 30, 1999, the largest amount First Savings had outstanding to any one
borrower and its affiliates was approximately $2,357,000. This loan was
performing in accordance with its original terms as of that date. In addition
to interest earned
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on loans, First Savings receives fees in connection with loan originations, loan
modifications, late payments, loan assumptions and other miscellaneous services.
First Savings does not originate its loans with the intention that they
will be sold in the secondary market. Loans generally are not originated in
conformity with purchase requirements of the Federal Home Loan Mortgage
Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA"). First
Savings originates loans which satisfy its underwriting requirements which are
tailored for its local community. As a result, many of such loans do not
satisfy various requirements imposed by the FHLMC or the FNMA. Accordingly,
such loans are not readily saleable in the secondary market. Such loans could
be sold only after incurring certain costs, such as costs for surveys and title
insurance and/or discounting the purchase price.
First Savings purchased loan participations totaling $65,000, $95,000, and
$145,000 during the years ended June 30, 1999, 1998 and 1997, 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, 1999, 1998 and 1997, was 188.01%, 109.36%, and 241.60%, 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, 1999, 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, 1999, $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, 1999, 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.
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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,
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1999 1998 1997
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Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
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(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits in other
financial institutions................. $ 3,085 $ 3,085 $ 3,991 $ 3,991 $ 6,301 $ 6,301
========= ======= ========= ======= ========= =======
Securities available-for-sale/1/:
U.S. government and agency
securities............................. $ 54,036 $53,437 $ 71,164 $71,695 $ 78,881 $79,282
Obligations of states and political
subdivisions........................... 1,335 1,359 950 987 950 975
Federal Home Loan Bank stock............. 1,929 1,929 1,930 1,930 1,930 1,930
Other.................................... 50 50 50 50
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Total securities available-for-sale........ $ 57,350 $56,775 $ 74,094 $74,662 $ 81,760 $87,187
========= ======= ========= ======= ========= =======
Securities held-to-maturity/1/:
U.S. government and agency
securities............................. $ 13,015 $13,000 $ $ $ $
Obligations of states and political
subdivisions........................... -- --
Federal Home Loan Bank stock.............
Mortgage-backed securities............... 23,693 23,154 6,572 6,672
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Total securities held-to-maturity.......... $ 36,708 $36,154 $ $ $ 6,572 $ 6,672
========= ======= ========= ======= ========= =======
</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.
Information regarding the interest rate sensitivity of First Savings'
mortgage-backed and investment securities as of June 30, 1999 is set forth on
page 5 of the First Savings' 1999 Annual Report which is incorporated herein by
reference.
Deposits and Borrowings
Deposits. Deposits are the primary source of First Savings' funds for
lending and other investment purposes. On June 30, 1999, 1998 and 1997, First
Savings' savings deposits totaled $226.7 million, $211.9 million, and $204.3
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.
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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, 1999, the aggregate amount outstanding of certificates of
deposit in amounts of $100,000 or more was approximately $31.2 million. Some of
these deposits were deposits of state and local governments which are subject to
rebidding from time to time and to securitization requirements. The scheduled
maturities of certificates of deposit with balances of $100,000 or more are set
out on page 30 of First Savings' 1999 Annual Report which is incorporated herein
by reference.
Borrowings. First Savings is a member of the FHLB of Atlanta, and the
FHLB system functions in a reserve credit capacity for savings institutions. As
a member, First Savings is required to own capital stock in the FHLB of Atlanta
and is authorized to apply for advances from the FHLB of Atlanta on the security
of that stock and a floating lien on certain of its real estate secured loans
and other assets. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of an institution's net worth or on the FHLB
of Atlanta's assessment of the institution's creditworthiness. As of June 30,
1999, 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.
Subsidiaries
The Bank has one wholly-owned subsidiary, Moore Service Corporation ("Moore
Service"). Moore Service, a North Carolina corporation, serves as the trustee
in 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 John F. Burns 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, 1999, there were at least twelve other financial
institutions with offices in Moore County, North Carolina. Based upon
comparative data as of June 30, 1999, First Savings had the second largest share
of deposits in Moore County, totaling approximately 21% of all deposits in the
county.
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Employees
As of June 30, 1999, First Savings had 48 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, 1999, 1998 and 1997, contributions to this plan were
$121,987, $112,910, and $97,539, 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
General. 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%.
Bad Debt Reserves. 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. 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.
In August 1996, provisions repealing the thrift bad debt rules were passed
by Congress as part of "The Small Business Job Protection Act of 1996." The new
rules eliminated the 8% of taxable income method for deducting additions to the
tax bad debt reserves for all thrifts for tax years beginning after December 31,
1995. For taxable years beginning after December 31, 1995, the Bank's bad debt
deduction is based on the experience method. These rules also require that all
thrift institutions recapture all or a portion of their bad debt reserves added
since the last taxable year beginning before January 1, 1988. The new rules
allow an institution to suspend the bad debt reserve recapture for the 1996 and
1997 tax years if the institution's lending activity for those years is equal to
or greater than the institution's average mortgage lending activity for the six
taxable years preceding 1996 adjusted for inflation. For this purpose, only home
purchase and home improvement loans are included and the institution can elect
to have the tax years with the highest and lowest lending activity removed form
the average calculation. If an institution is permitted to postpone the reserve
recapture, it must begin its six year recapture no later than the 1998 tax year.
The Bank has previously recorded a deferred tax liability equal to the bad debt
recapture applicable to the post-1987 additions to its bad debt reserve. As a
result, this recapture requirement applicable to 1987 additions to bad debt
reserves will have no material impact on the Bank's net income or federal income
tax expense.
Taxable Distributions and Recapture. Prior to the 1996 legislation, bad
debt reserves created prior to the 1988 tax year were subject to recapture into
taxable income should the thrift institution fail to meet certain thrift asset
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and definitional tests. New federal legislation eliminated these thrift-related
recapture rules. The Bank is not required to provide a deferred tax liability
for the tax effect of additions to the tax bad debt reserve through 1987.
Retained income at June 30, 1999, includes approximately $5.3 million 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.
Alternative Minimum Tax. 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:
. the excess of the bad debt deduction over the amount that would have been
allowable on the basis of actual experience;
. interest on certain tax-exempt bonds issued after August 7, 1986; and
. 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.
First Savings' federal income tax returns have not been audited in the last
ten tax years.
State and Local Taxation
Under North Carolina law, the corporate income tax rate for the 1996, 1997
and 1998 tax years was 7.75%, 7.5% and 7.25%, respectively, 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 is 7% in 1999 and, under current
legislation, will drop to 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.
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General. The Holding Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank. As a savings bank holding company
subject to the Bank Holding Company Act of 1956, as amended ("BHCA"), the
Holding Company is subject to certain regulations of the Federal Reserve. Under
the BHCA, the Holding Company's activities and those of its subsidiaries are
limited to banking, managing or controlling banks, furnishing services to or
performing services for its subsidiaries or engaging in any other activity which
the Federal Reserve determines to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. The BHCA prohibits the
Holding Company from acquiring direct or indirect control of more than 5% of the
outstanding voting stock or substantially all of the assets of any bank or
savings bank or merging or consolidating with another bank holding company or
savings bank holding company without prior approval of the Federal Reserve.
Additionally, the BHCA prohibits the Holding Company from engaging in, or
acquiring ownership or control of, more than 5% of the outstanding voting stock
of any company engaged in a nonbanking business unless such business is
determined by the Federal Reserve to be so closely related to banking as to be
properly incident thereto. The BHCA generally does not place territorial
restrictions on the activities of such nonbanking related activities.
Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of the Holding Company.
Control is conclusively presumed to exist if, among other things, a person
acquires more than 25% of any class of voting stock of the Holding Company or
controls in any manner the election of a majority of the directors of the
Holding Company. Control is presumed to exist if a person acquires more than 10%
of any class of voting stock and the stock is registered under Section 12 of the
Exchange Act or the acquiror will be the largest shareholder after the
acquisition.
Capital 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 FDIC insurance funds in the
event the depository institution becomes in danger of default or in default. For
example, 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, insured depository institutions under common control are
required 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 and 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.
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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.
Dividend and Repurchase Limitations. The Company must obtain Federal
Reserve approval in order to use more than 10% of its net worth to make stock
repurchases 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 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. 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. The Company has registered its Common Stock with
the Securities Exchange Commission pursuant to Section 12(g) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). 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.
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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. Generally, North Carolina-chartered savings banks whose deposits are
insured by the SAIF are subject to restrictions with respect to activities and
investments, transactions with affiliates and loans-to-one-borrower similar to
those applicable to federally-chartered SAIF-insured savings associations. Such
examination and regulation is intended primarily for the protection of
depositors and the federal deposit insurance funds.
The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As holders of loans secured by real property and as owners
of real property, financial institutions, including the Bank, may be subject to
potential liability under various statutes and regulations applicable to
property owners generally, including statutes and regulations relating to the
environmental condition of real property.
The FDIC has extensive enforcement authority over North Carolina-chartered
savings banks, including the Bank. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.
The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
Transactions with Affiliates. Under current federal law, transactions
between savings institutions and any affiliate are governed by Sections 23A and
23B of the Federal Reserve Act. An affiliate of a savings institution is any
company or entity that controls, is controlled by or is under common control
with the savings institution. In a holding company context, the parent holding
company of a savings institution and any companies which are controlled by such
parent holding company are affiliates of the savings institution. Generally,
Sections 23A and 23 B (i) establish certain collateral requirements for loans to
affiliates; (ii) limit the extent to which the savings institution or its
subsidiaries may engage in "covered transactions" with any one affiliate to an
amount equal to 10% of such savings institution's capital stock and surplus, and
contain an aggregate limit on all such transactions with all affiliates to an
amount equal to 20% of such capital stock and surplus and (iii) require that all
such transactions be on terms substantially the same, or at least as favorable
to the savings institution or the subsidiary, as those provided to a
nonaffiliate. The term "covered transaction" includes the making of loans or
other extensions of credit to an affiliate, the purchase of assets from an
affiliate, the purchase of, or an investment in, the securities of an affiliate,
the acceptance of securities of an affiliate as collateral for a loan or
extension of credit to any person, or issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate.
Further, current federal law has extended to savings institutions the
restrictions contained in Section 22(h) of the Federal Reserve Act with respect
to loans to directors, executive officers and principal stockholders. Under
Section 22(h), loans to directors, executive officers and stockholders who own,
directly or indirectly, more than 10% of any class
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of voting securities 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 (as discussed below), and all loans
to such persons may not exceed the institution's unimpaired capital and
unimpaired 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. Section 22(h) also generally prohibits a depository
institution from paying the overdrafts of any of its executive officers or
directors.
Deposit Insurance. The FDIC administers two separate deposit insurance
funds. The SAIF maintains a fund to insure the deposits of most savings
institutions and the BIF maintains a fund to insure the deposits of most
commercial banks. The Bank is a member of the SAIF of the FDIC.
The Bank is required to pay assessments to the FDIC based on a percentage
of its insured deposits. Under the FDIC's risk-based deposit assessment system,
the assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC, which is
determined by the institution's capital level and supervisory evaluations. Based
on the data reported to regulators for the date closest to the last day of the
seventh month preceding the semi-annual assessment period, institutions are
assigned to one of three capital groups - well capitalized, adequately
capitalized or undercapitalized - using the same percentage criteria as in the
prompt correct action regulations. See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three
subgroups on the basis of supervisory evaluations by the institution's primary
supervisory authority and such other information as the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. Subgroup A consists of financially sound institutions
with only a few minor weaknesses. Subgroup B consists of institutions that
demonstrate weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk of loss to the deposit
insurance fund. Subgroup C consists of institutions that pose a substantial
probability of loss to the deposit insurance fund unless effective corrective
action is taken.
The assessment rate for SAIF members had ranged from 0.23% of deposits for
well capitalized institutions in Subgroup A to 0.31% of deposits for
undercapitalized institutions in Subgroup C while assessments for over 90% of
the BIF members had been the statutory minimum of $2,000. However, recently
enacted legislation provided for a one-time assessment equal to 65.7 basis
points times insured deposits as of March 31, 1995. This assessment fully
capitalized the SAIF. Accordingly, although the special assessment resulted in a
$1.2 million pre-tax (or a $700,000 net of tax) one-time charge to the Bank
during its fiscal year ended December 31, 1996, the recapitalization of the SAIF
had the effect of reducing the Bank's future deposit insurance premiums to the
SAIF. Under the recently enacted legislation, most BIF members will be assessed
approximately 1.3 basis points while the rate for most SAIF members will be
approximately 6.4 basis points until January 1, 2000. At that time, BIF and SAIF
members will begin pro rata sharing of the payment at an expected rate of 2.43
basis points.
The Bank's deposit accounts are insured by the FDIC under the SAIF to the
maximum extent permitted by law. The Bank pays deposit insurance premiums to the
FDIC based on a risk-based assessment system established by the FDIC for all
SAIF-member institutions. Under applicable regulations, institutions are
assigned to one of three capital groups that are based solely on the level of an
institution's capital ("well capitalized," "adequately capitalized" or
"undercapitalized"), which are defined in the same manner as the regulations
establishing the prompt corrective action system discussed below. The matrix so
created results in nine assessment risk classifications, with rates that, until
September 30, 1996, ranged from 0.23% for well capitalized, financially sound
institutions with only a few minor
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weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk to the SAIF unless effective corrective action is taken.
Community Reinvestment Act. The Bank, like other financial institutions, is
subject to the Community Reinvestment Act, as amended ("CRA"). A purpose of the
CRA is to encourage financial institutions to help meet the credit needs of its
entire community, including the needs of low- and moderate-income neighborhoods.
Financial institutions' compliance with the CRA is regularly evaluated by their
regulatory agencies.
Under recently adopted regulations, institutions are first 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." 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."
During the Bank's last compliance examination, which was performed by the
FDIC on December 29, 1998, the Bank received a "outstanding" rating with respect
to CRA compliance. The Bank's rating with respect to CRA compliance would be a
factor to be considered by the Federal Reserve and FDIC in considering
applications submitted by the Bank to acquire branches or to acquire or combine
with other financial institutions and, if such rating was less than
"satisfactory," could result in the denial of such applications.
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 intangibles goodwill items, identified losses and
investments in securities subsidiaries), 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, 1999, 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, 1999, see Note 11 captioned "Regulatory
Restriction" on pages 32 and 33 of the 1999 Annual Report.
Each federal banking agency is required to establish risk-based capital
standards to 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.
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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.
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.
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. Notwithstanding the limits just described,
savings banks may 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
. the purchase price of each single-family dwelling in the development does
not exceed $500,000;
. the savings institution is in compliance with its fully phased-in capital
requirements;
. the loans comply with applicable loan-to-value requirements;
. the aggregate amount of loans made under this authority does not exceed
150% of net worth; and
. 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, 1999, the largest aggregate amount of loans which the Bank
had to any one borrower was $2.4 million; these loans were performing in
accordance with their original terms as of June 30, 1999. The Bank had no loans
outstanding which management believes violate the applicable loans-to-one
borrower limits.
Limitations on Rates Paid for Deposits. Regulations promulgated by the FDIC
place limitations on the ability of insured depository institutions to accept,
renew or roll over deposits by offering rates of interest which are
significantly higher than the prevailing rates of interest on deposits offered
by other insured depository institutions having the same type of charter in such
depository institution's normal market area. Under these regulations, "well
capitalized" depository institutions may accept, renew or roll such deposits
over without restriction, "adequately capitalized" depository institutions may
accept, renew or roll such deposits over with a waiver from the FDIC (subject to
certain restrictions on payments of rates) and "undercapitalized" depository
institutions may not accept, renew or roll such deposits over. The definitions
of "well capitalized," "adequately capitalized" and "undercapitalized" are the
same definitions adopted by the FDIC to implement the corrective action
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991.
See "-- Prompt Corrective Regulatory Action." As of June 30, 1999, the Bank was
considered to be "well capitalized" and, thus, was not subject to the
limitations on rates payable on its deposits.
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
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advances (borrowings) from the FHLB of Atlanta. On June 30, 1999, the Bank was
in compliance with this requirement with an investment in FHLB of Atlanta stock
of $1.9 million.
Federal Reserve System. Regulation D, promulgated by the Federal Reserve,
imposes reserve requirements on all depository institutions, including savings
banks and savings institutions, which maintain transaction accounts or non-
personal time deposits. Checking accounts, NOW accounts and certain other types
of accounts that permit payments or transfers to third parties fall within the
definition of transaction accounts and are subject to Regulation D reserve
requirements, as are any non-personal time deposits (including certain money
market deposit accounts) at a savings institution. For 1998, a depository
institution must maintain average daily reserves equal to 3% of the first $47.8
million of net transaction accounts, plus 10% of that portion of total
transaction accounts in excess of $47.8 million. The first $4.7 million of
otherwise reservable balances are exempt from the reserve requirements. These
percentages and threshold limits are subject to adjustment by 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 an insured institution, such as the 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. Such acquisitions of control may be disapproved if it is
determined, among other things, that
. the acquisition would substantially lessen competition;
. the financial condition of the acquiring person might jeopardize the
financial stability of the savings bank or prejudice the interests of its
depositors; or
. 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.
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, 1999, the Bank's liquidity ratio, calculated in
accordance with North Carolina regulations, was approximately 30.1%.
Prompt Corrective Regulatory Action. The Federal Deposit Insurance
Corporation Act of 1991 provided 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
. a total risk-based capital ratio of 10% or greater,
. a Tier I risk-based capital ratio of 6% or greater,
. a leverage ratio of 5% or greater and
. is not subject to any order or written directive to meet and maintain a
specific capital level for any capital measure.
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An "adequately capitalized" institution is defined as one that has
. a total risk-based capital ratio of 8% or greater,
. a Tier I risk-based capital ratio of 4% or greater and
. 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 "undercapitalized" if it has
. a total risk-based capital ratio of less than 8%,
. a Tier I risk-based capital ratio of less than 4% or
. 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).
An institution is considered "significantly undercapitalized" if the institution
has
. a total risk-based capital ratio of less than 6%, or
. a Tier I risk-based capital ratio of less than 3% or
. a leverage ratio of less than 3%.
An institution is considered "critically undercapitalized" if the institution
has a ratio of tangible equity to total assets equal to or less than 2%. The
Bank is considered to be "well capitalized" under the rules set forth above.
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, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time. Unlike interstate acquisitions, a state may
deny interstate branching if it specifically elects to do so by June 1, 1997.
States may choose to allow interstate branching prior to June 1, 1997 by opting-
in to a group of states that permits these transactions. These states generally
allow interstate branching via a merger of an out-of-state bank with an in-state
bank, or on a de novo basis. North Carolina has enacted legislation permitting
branching transactions.
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
fiscal 2000, the amount of dividends that can be paid by the Bank without prior
approval from regulators is approximately $2.5 million. These funds should be
adequate to cover the Holding Company's needs.
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Under FDIC regulations, stock repurchases may be made by the Bank only
after receipt of FDIC approval. 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.
Additional Federal Limitations on Activities. Recent FDIC law and
regulations generally provide that the Bank may not engage as principal in any
type of activity, or in any activity in an amount, not permitted for national
banks, or directly acquire or retain any equity investment of a type or in an
amount not permitted for national banks. The FDIC has authority to grant
exceptions from these prohibitions (other than with respect to non-service
corporation equity investments) if it determines no significant risk to the
insurance fund is posed by the amount of the investment or the activity to be
engaged in and if the Bank is and continues to be in compliance with fully
phased-in capital standards. National banks are generally not permitted to hold
equity investments other than shares of service corporations and certain federal
agency securities. Moreover, the activities in which service corporations for
savings banks are permitted to engage are limited to those of service
corporations for national banks.
Savings banks are also required to notify the FDIC at least 30 days prior
to the establishment or acquisition of any subsidiary, or at least 30 days prior
to conducting any such new activity. Any such activities must be conducted in
accordance with the regulations and orders of the FDIC and the Administrator.
Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not of investment
grade (generally referred to as "junk bonds").
Other North Carolina Regulation. As a North Carolina-chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
includes, but is not limited to: the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest. North Carolina law
requires that the Bank maintain federal deposit insurance as a condition of
doing business.
The Administrator conducts regular examinations of North Carolina-chartered
savings banks. The purpose of such examinations is to assure that institutions
are being operated in compliance with applicable North Carolina law and
regulations and in a safe and sound manner. These examinations are usually
conducted on a joint basis with the FDIC. In addition, the Administrator is
required to conduct an examination of any institution when he has good reason to
believe that the standing and responsibility of the institution is of doubtful
character or when he otherwise deems it prudent. The Administrator is empowered
to order the revocation of the license of an institution if he finds that it has
violated or is in violation of any North Carolina law or regulation and that
revocation is necessary in order to preserve the assets of the institution and
protect the interests of its depositors. The Administrator has the power to
issue cease and desist orders if any person or institution is engaging in, or
has engaged in, any unsafe or unsound practice or unfair and discriminatory
practice in the conduct of its business or in violation of any other law, rule
or regulation.
A North Carolina-chartered savings bank must maintain net worth, computed
in accordance with the Administrator's requirements, of 5% of total assets and
liquidity of 10% of total assets, as discussed above. Additionally, a North
Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.
Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North Carolina-
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to
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. obligations of the United States, or those guaranteed by it;
. obligations of the State of North Carolina;
. bank demand or time deposits;
. stock or obligations of the federal deposit insurance fund or a FHLB;
. savings accounts of any savings institution as approved by the board of
directors; and
. 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.
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ITEM 2. PROPERTIES
At June 30, 1999, First Savings conducted its business from the
headquarters office in Southern Pines, North Carolina, and its five 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, 1999. 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 and the Belle Meade Office for which there
is currently no lease agreement. Rentals paid by First Savings under that lease
totaled $10,200 for the fiscal year ended June 30, 1999.
Net Book
Value of
Address Property
------- --------
Headquarters Office $521,711
205 S.E. Broad Street
Southern Pines, North Carolina 28387
Pinecrest Plaza Office 983,077
46 Pinecrest Plaza
Southern Pines, North Carolina 28387
Pinehurst Office 27,012
10 Chinquapin Road
Pinehurst, North Carolina 28374
Carthage Office 103,727
109 Monroe Street
Carthage, North Carolina 28327
Seven Lakes Office 127,050
200 Grant Street
Seven Lakes Shopping Center
West End, North Carolina 27376
Belle Meade Office 4,466
100 Waters Drive
Belle Meade Retirement Resort
Southern Pines, North Carolina 28387
The total net book value of First Savings' furniture, fixtures and equipment on
June 30, 1999 was $532,168. 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, 1999.
19
<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' 1999 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' 1999 Annual Report
which is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
See the information set forth under Item 1 above and the information set
forth under the sections captioned "Financial Highlights" on page 1 and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" on pages 4 through 16 in First Savings' 1999 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' 1999 Annual Report, which section is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of First Savings and supplementary
data set forth on pages 18 through 38 of First Savings' 1999 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, 1999 and the
interim subsequent period. See the information set forth under the section
captioned "Proposal 2 -- Ratification of Selection of Independent Auditor" on
page 13 of the Proxy Statement for the 1999 Annual Meeting of Shareholders of
First Savings Bancorp, Inc. to be held on October 28, 1999 (the "Proxy
Statement").
20
<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 8 under the section captioned "Proposal 1 - Election of Directors" of the
Proxy Statement and the section captioned "Compliance with Section 16(a) of the
Exchange Act" on page 4 of the Proxy Statement, which sections are incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION AND TRANSACTIONS
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Directors' Compensation" and
"-- Management Compensation" on pages 6 through 7 and 8 through 10,
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 set forth under the section
captioned "Security Ownership of Certain Beneficial owners" on pages 2 through 4
of the Proxy Statement, which section is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no reportable transactions during the two most recent
fiscal years nor are any reportable transactions proposed as of the date of this
Form 10-K. See also the section captioned "Proposal 1 - Election of Directors -
Certain Indebtedness and Transactions of Management" on page 13 of the Proxy
Statement, which section is incorporated herein by reference.
21
<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' 1999
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,
1999 and 1998
(c) Consolidated Statements of Income for the Years Ended June 30,
1999, 1998 and 1997
(d) Consolidated Statements of Shareholders' Equity for the Years
Ended June 30, 1999, 1998 and 1997
(e) Consolidated Statements of Cash Flows for the Years Ended June
30, 1999, 1998 and 1997
(f) Notes to Consolidated Financial Statements
14(a)2. Financial Statement Schedules
All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial
Statements.
14(a)3. Exhibits
Exhibit (3)(i) Certificate of Incorporation, incorporated
herein by reference to Exhibit (2), Appendix C,
to the Registration Statement on Form 8-A,
Registration No. 0-27-098, dated October 26,
1995
Exhibit (3)(ii) Bylaws, incorporated herein by reference to
Exhibit (2), Appendix D, to the Registration
Statement on Form 8-A, Registration No. 0-27-
098, dated October 26, 1995
Exhibit (4) Specimen Stock Certificate, incorporated herein
by reference to Exhibit (5) to the Registration
Statement on Form 8-A, Registration No. 0-27-
098, dated October 26, 1995
Exhibit (10)(i) First Savings Bank of Moore County, Inc., SSB
Pinehurst Office Lease, incorporated herein by
reference to Exhibit (10)(i) to the
Registration Statement on Form 8-A,
Registration No. 0-27-098, dated October 26,
1995
Exhibit (10)(ii)(a) Employee Stock Option Plan of First Savings
Bank of Moore County, Inc., SSB, incorporated
herein by reference to Exhibit (10)(ii)(a) to
the Registration Statement on Form 8-A,
Registration No. 0-27-098, dated October 26,
1995
Exhibit (10)(ii)(b) Director Stock Option Plan of First Savings
Bank of Moore County, Inc., SSB, incorporated
herein by reference to Exhibit (10)(ii)(b) to
the Registration Statement on Form 8-A,
Registration No. 0-27-098, dated October 26,
1995
22
<PAGE>
Exhibit (10)(ii)(c) Management Recognition Plan of First Savings
Bank of Moore County, Inc., SSB, incorporated
herein by reference to Exhibit (10)(ii)(c) to
the Registration Statement on Form 8-A,
Registration No. 0-27-098, dated October 26,
1995
Exhibit (10)(ii)(d) Bonus Compensation Plan of First Savings Bank
of Moore County, Inc., SSB, incorporated herein
by reference to Exhibit (10)(ii)(d) to the
Registration Statement on Form 8-A,
Registration No. 0-27-098, dated October 26,
1995
Exhibit (10)(ii)(e) Employment Agreement between First Savings Bank
of Moore County, Inc., SSB and William E.
Samuels, Jr., incorporated herein by reference
to Exhibit (10)(ii)(e) to the Registration
Statement on Form 8-A, Registration No. 0-27-
098, dated October 26, 1995
Exhibit (10)(ii)(f) Employment Agreement between First Savings Bank
of Moore County, Inc., SSB and John F. Burns,
incorporated herein by reference to Exhibit
(10)(ii)(f) to the Registration Statement on
Form 8-A, Registration No. 0-27-098, dated
October 26, 1995
Exhibit (10)(ii)(g) First Savings Bancorp, Inc. Second Nonqualified
Stock Option Plan for Directors, dated June 30,
1999
Exhibit (11) Statement Regarding Computation of Per Share
Earnings
Exhibit (12) Statement Regarding Computation of Ratios
Exhibit (13) 1999 Annual Report to Security Holders
Exhibit (21) Subsidiaries of the Registrant, incorporated
herein by reference to Exhibit (21) to the
Registration Statement on Form 8-A,
Registration No. 0-27-098, dated October 26,
1995
Exhibit (27) Financial Data Schedule
14(b) First Savings filed no reports on Form 8-K during the last quarter of
the fiscal year ended June 30, 1999.
23
<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 9, 1999 By: /s/ John F. Burns
----------------------------------------
John F. Burns
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/ John F. Burns President, Chief Executive September 9, 1999
- --------------------------------------
John F. Burns Officer and Director
/s/ William E. Samuels, Jr. Chairman of the Board of Directors of September 9, 1999
- --------------------------------------
William E. Samuels, Jr. the Company and Senior Vice President
of the Bank
/s/ Timothy S. Maples Vice President, Chief Financial Officer September 9, 1999
- --------------------------------------
Timothy S. Maples and Treasurer
/s/ Virginia C. Brandt Director September 9, 1999
- --------------------------------------
Virginia C. Brandt
/s/ H. David Bruton Director September 9, 1999
- --------------------------------------
H. David Bruton
/s/ Felton J. Capel Director September 9, 1999
- --------------------------------------
Felton J. Capel
/s/ J. E. Causey Director September 9, 1999
- --------------------------------------
J. E. Causey
/s/ Henry A. Clayton Director September 9, 1999
- --------------------------------------
Henry A. Clayton
/s/ Frank G. Hardister Director September 9, 1999
- --------------------------------------
Frank G. Hardister
/s/ W. Harrell Johnson Director September 9, 1999
- --------------------------------------
W. Harrell Johnson
/s/ Joe Montesanti, Jr. Director September 9, 1999
- --------------------------------------
Joe Montesanti, Jr.
/s/ Thomas F. Phillips Director September 9, 1999
- --------------------------------------
Thomas F. Phillips
</TABLE>
24
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
(10)(ii)(g) First Savings Bancorp, Inc. Second Nonqualified Stock Option Plan
for Directors, dated June 30, 1999
(11) Statement Regarding Computation of Per Share Earnings
(12) Statement Regarding Computation of Ratios
(13) 1999 Annual Report to Security Holders
(27) Financial Data Schedule
25
<PAGE>
FIRST SAVINGS BANCORP, INC.
SECOND NONQUALIFIED STOCK OPTION PLAN FOR DIRECTORS
THIS IS THE FIRST SAVINGS BANCORP, INC., SECOND NONQUALIFIED STOCK OPTION
PLAN FOR DIRECTORS (the "Plan") of First Savings Bancorp, Inc., ("First
Savings"), a bank holding company organized in 1995, under which options to
purchase shares of common stock ("Common Stock") of First Savings may be granted
from time to time to eligible directors of First Savings or any other
corporation or other entity of which First Savings owns not less than fifty
percent (50%) of any class of equity securities, directly or indirectly (a
"Subsidiary" or the "Subsidiaries"), subject to the provisions set forth as
follows:
1. PURPOSE. The purpose of this Plan is to provide a long range incentive
-------
for directors to remain in the management of First Savings or a Subsidiary, to
perform at increasing levels of effectiveness and to acquire a permanent stake
in First Savings with the interest and outlook of an owner. These objectives
will be promoted through the granting to directors of options to acquire shares
of Common Stock pursuant to the terms of this Plan.
2. ADMINISTRATION. The Plan shall be administered by the committee (the
--------------
"Committee") of the Board of Directors of First Savings (the "Board") who are
"disinterested persons" under Rule 16b-3(c)(2)(i) of the Rules and Regulations
under the Securities Act of 1934 (the "Exchange Act"). The Committee may
designate any officers or employees of First Savings or any Subsidiary to assist
in the administration of the Plan and to execute documents on behalf of the
Committee and perform such other ministerial duties as may be delegated to them
by the Committee.
Subject to the provisions of the Plan, the determinations or the
interpretation and construction of any provision of the Plan by the Committee
shall be final and conclusive upon all persons affected thereby. By way of
illustration and not of limitation, the Committee shall have the discretion (a)
to construe and interpret the Plan and all options granted hereunder and to
determine the terms and provisions (and amendments thereof) of the options
granted under the Plan (which need not be identical); (b) to define the terms
used in the Plan and in the options granted hereunder; (c) to prescribe, amend
and rescind the rules and regulations relating to the Plan; (d) to determine the
individuals to whom and the time or times at which such options shall be
granted, the number of shares to be subject to each option, the option price,
and the determination of leaves of absence which may be granted to participants
without constituting a termination of their services as a director for the
purposes of the Plan; and (e) to make all other determinations necessary or
advisable for the administration of the Plan.
3. STOCK AVAILABLE FOR OPTIONS. The stock to be subject to options under
---------------------------
the Plan shall be authorized but unissued shares of common stock of First
Savings or, in the discretion of the Board, issued shares which have been
reacquired by First Savings. The total amount of stock for which options may be
granted under the
<PAGE>
Plan is 20,000 shares of common stock issued by First Savings. Such number of
shares is subject to any capital adjustments as provided in Section 12. In the
event that an option granted under the Plan to any director expires or is
terminated unexercised as to any shares covered thereby, such shares thereafter
shall be available for the granting of options under the Plan: however, if the
expiration or termination date of an option is beyond the term of existence of
the Plan as described in Section 16, then any shares covered by unexercised or
terminated options shall not reactivate the existence of the Plan and therefore
may not be available for the additional grants under the Plan.
4. ELIGIBILITY. Options shall be granted only to individuals who meet the
-----------
following eligibility requirements:
(a) Such individual must be a member of the Board of Directors of
First Savings or one or more Subsidiaries.
(b) Such individual must have such knowledge and experience in
financial and business matters that he is capable of evaluating the merits
and risks of the investment involved in the exercise of the options.
(c) Such individual being otherwise eligible under this Section 4,
shall have been selected by the Committee as a person to whom an option
shall be granted under the Plan.
If, pursuant to the terms of the Plan, it is necessary that the percentage
of stock ownership of any individual be determined, stock ownership of First
Savings or of a related corporation which is owned (directly or indirectly) by
or for such individual's brothers and sisters (whether by the whole or half
blood), spouse, ancestors, and lineal descendants shall be considered as owned
by such individual.
5. INITIAL GRANTS. Subject to the provisions of this Plan, options shall
--------------
be awarded to the directors, as set forth on Exhibit A. Such options shall be
deemed granted as of the effective date of the execution by the optionee of a
Stock Option Grant and Agreement in the form attached hereto as Exhibit B.
6. OPTION PRICE.
------------
(a) The option price of each option granted under the Plan shall be
not less than one hundred percent (100%) of the market value of the Common Stock
on the date of grant of the option. "Market value" shall be determined by the
Committee by taking the average of the bid and ask price at which the stock was
traded on the over-the-counter market on that date, assuming that the stock is
publicly-held stock which was actively traded in an established market at the
time the option was granted. In the event that the stock is not publicly traded
at the time of the grant of the option, the "market value" shall be determined
in good faith by the Committee after such consultation with legal, accounting
and other experts as the Committee may deem advisable. The Committee shall
maintain a written record of its method of determining such value.
<PAGE>
(b) The option price shall be payable to First Savings either (i) in
cash or by check, bank draft or money order payable to the order of First
Savings, or (ii) at the discretion of the Committee, through the delivery of
shares of the common stock of First Savings owned by the optionee with a value
equal to the option price, or (iii) at the discretion of the Committee by a
combination of (i) and (ii) above. No shares shall be delivered until full
payment has been made. The Committee may not approve a reduction of such option
price, or the cancellation of any such options and the regranting thereof to the
same optionee at a lower purchase price, at a time when the market value of the
shares is lower than it was when such option was granted.
7. EXPIRATION OF OPTIONS. The Committee shall determine the expiration
---------------------
date or dates of each option, but such expiration date shall be not later than
ten (10) years after the date such option is granted.
8. TERMS AND CONDITIONS OF OPTIONS.
-------------------------------
(a) All options must be granted within ten (10) years of the
Effective Date of this Plan as defined in Section 16.
(b) The grant of options shall be evidenced by a written instrument
containing terms and conditions established by the Committee consistent with the
provision of this Plan.
(c) Not less than one hundred (100) shares may be purchased at any
one time unless the number purchased is the total number at that time
purchasable under the Plan.
(d) The Committee may grant an option or options and stipulate that a
portion of such option expires or becomes exercisable at a stated interval or
that portions of such option expire or become exercisable at several stated
intervals.
(e) An optionee shall have no rights as a shareholder with respect to
any shares covered by his option until payment in full by him for the shares
being purchased. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distributions
or other rights for which the record date is prior to the date such stock is
fully paid for, except as provided in Section 12 hereof.
9. EXERCISE OF OPTIONS.
-------------------
(a) In no event shall an option be deemed granted by First Savings or
exercisable by a director prior to the mutual execution by First Savings and the
director of an option agreement in a form substantially similar to Exhibit B
hereto which shall comport with the requirements of Section 8(b) (the "Option
Agreement"). All options granted pursuant to this Plan shall be exercisable for
the first time on the effective date of the grant of the options, which shall be
on the effective date of execution by the optionee
<PAGE>
of a Stock Option Grant and Agreement in the form attached hereto as Exhibit B.
The options shall expire on the expiration date set forth in the Option
Agreement executed by each such optionee.
(b) No option may be exercised and no shares may be acquired under the
Plan prior to the timely filing by both the optionee and First Savings of all
appropriate documents that may be required by applicable federal and state
securities laws and state corporate laws.
10. RESTRICTIONS ON TRANSFER. An option granted under this Plan may not
------------------------
be transferred except by will or the laws of descent and distribution and,
during the lifetime of the optionee to whom it was granted, may be exercised
only by such optionee.
11. CAPITAL ADJUSTMENTS AFFECTING COMMON STOCK.
------------------------------------------
(a) If the outstanding shares of Common Stock of First Savings are
increased, decreased, changed into or exchanged for a different number or kind
of shares or securities of First Savings through recapitalization,
reclassification, stock dividend, stock split, amendment to First Savings'
Certificate of Incorporation, reverse stock split, or similar occurrence, an
appropriate adjustment shall be made in the number and/or kind of securities
allocated to the options previously and subsequently granted under the Plan,
without change in the aggregate purchase price applicable to the unexercised
portion of the outstanding options but with a corresponding adjustment in the
price for each share or other unit of any security covered by the options.
(b) To the extent that the foregoing adjustments relate to particular
stock or securities of First Savings subject to option under this Plan, such
adjustments shall be made by the Committee, whose determination in that respect
shall be final and conclusive.
(c) The grant of an option pursuant to this Plan shall not affect in
any way the right or power of First Savings to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or any part of its business or assets.
(d) No fractional shares of stock shall be issued under the Plan for
any such adjustment.
12. INVESTMENT PURPOSE. At the discretion of the Committee, any option
------------------
agreement may provide that the optionee shall, by accepting the option,
represent and agree, for himself and his transferees by will or the laws of
descent and distribution, that all shares of stock purchased upon the exercise
of the option will be acquired for investment and not for resale or
distribution, and that upon each exercise of any portion of an option, the
person entitled to exercise the same shall furnish evidence of such facts
<PAGE>
which is satisfactory to First Savings. Certificates for shares of stock
acquired under the Plan may be issued bearing such restrictive legends as First
Savings and its counsel may deem necessary to ensure that the optionee is not an
"underwriter" within the meaning of the regulations of the Securities Exchange
Commission.
13. APPLICATION OF FUNDS. The proceeds received by First Savings from the
--------------------
sale of common stock pursuant to options will be used for general corporate
purposes.
14. NO OBLIGATION TO EXERCISE OPTION. The granting of an option shall
--------------------------------
impose no obligation upon the optionee to exercise such option.
15. EFFECTIVE DATE OF PLAN. The plan will become effective upon the
----------------------
approval by the First Savings' Board of Directors.
16. TERM OF PLAN. Options may be granted pursuant to this Plan from time
------------
to time within ten (10) years from the effective date of the Plan.
17. TIME OF GRANTING OF OPTIONS. Nothing contained in the Plan or in any
---------------------------
resolution adopted or to be adopted by the Board or the shareholders of First
Savings and no action taken by the Board or Committee shall constitute the
granting of any option hereunder. The granting of an option pursuant to the Plan
shall take place only when an Option Agreement shall have been duly executed and
delivered by and on behalf of First Savings at the direction of the Committee.
18. WITHHOLDING TAXES. Whenever First Savings proposes or is required to
-----------------
issue or transfer shares of stock under the Plan. First Savings shall have the
right to require the optionee to remit to First Savings an amount sufficient to
satisfy any Federal, state and/or local withholding tax requirements prior to
the delivery of any certificate or certificates for such shares. Alternatively,
First Savings may issue or transfer such shares of stock net of the number of
shares sufficient to satisfy the withholding tax requirements. For withholding
tax purposes, the shares of stock shall be valued on the date the withholding
obligation is incurred.
19. TERMINATION AND AMENDMENT. The Board may at any time alter, suspend,
-------------------------
terminate or discontinue the Plan, but may not, without the consent of the
holder of an option previously granted, make any alteration which would deprive
the optionee of his or her rights with respect thereto.
20. CAPTIONS AND HEADINGS; GENDER AND NUMBER. Captions and paragraph
----------------------------------------
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part, and shall not serve as a basis
for interpretation or construction of this Plan. As used herein, the masculine
gender shall include the feminine and neuter, and the singular number shall
include the plural, and vice versa, whenever such meanings are appropriate.
<PAGE>
21. EXPENSES OF ADMINISTRATION OF PLAN. All costs and expenses incurred
----------------------------------
in the operation and administration of this Plan shall be borne by First Savings
or by a Subsidiary. First Savings shall also indemnify, defend and hold each
member of the Committee harmless against all claims, expenses and liabilities
arising out of or related to the exercise of the Committee's powers and the
discharge of the Committee's duties hereunder.
22. GOVERNING LAW. Without regard to the principles of conflicts of laws,
-------------
the laws of the State of North Carolina shall govern and control the validity,
interpretation, performance, and enforcement of this Plan.
23. INSPECTION OF PLAN. A copy of this Plan, and any amendments thereto,
------------------
shall be maintained by the Secretary of First Savings and shall be shown to any
proper person making inquiry about it.
24. OTHER PROVISIONS. The option agreements authorized under this Plan
----------------
shall contain such other provisions not inconsistent with the foregoing,
including, without limitation, increased restrictions upon the exercise of the
option, as the Committee may deem advisable.
<PAGE>
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
Basic earnings per share represent income available to common shareholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect additional common shares that would
have been outstanding if the dilutive potential common shares had been issued,
as well as any adjustment to income that would have resulted from the assumed
issuance. Potential common shares that may be issued by First Savings relate
solely to outstanding stock options and are determined using the treasury stock
method.
Earning per common share have been computed based on the following:
<TABLE>
<CAPTION>
Years ended June 30,
-------------------------------------------------
1999 1998 1997
------------- -------------- ------------
<S> <C> <C> <C>
Average number of common shares
outstanding used to calculate basic
earnings per share 3,641,708 3,698,197 3,706,704
Effect of dilutive options 273,499 323,757 263,602
----------- --------- ---------
Average number of common shares
outstanding used to calculate diluted
earnings per common share 3,915,207 4,021,954 3,970,306
=========== ========= =========
</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,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Balance of:
Assets $313,233 $304,168 $294,217 $256,986 $251,787
Loans receivable, net 208,678 208,094 192,238 177,431 159,777
Investment securities held-to-maturity 36,708 9,737 6,572 2,965 4,484
Investment securities available-for-sale 54,846 72,732 80,257 66,069 76,374
Deposits 226,651 211,925 204,317 187,424 183,080
Borrowed funds 20,000 20,000 20,000 422 543
Shareholders' equity 64,228 69,521 67,195 66,811 65,511
For the Years Ended June 30,
------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
Operating Data:
Interest and dividend income $ 21,765 $ 22,543 $ 20,058 $ 18,550 $ 17,438
Interest expense 10,274 11,083 9,782 9,215 8,140
-------- -------- -------- -------- --------
Net interest income 11,491 11,460 10,276 9,335 9,298
Provision for loan losses - - - - -
-------- -------- -------- -------- --------
Net interest income after provision for
loan losses 11,491 11,460 10,276 9,335 9,298
Non-interest income 721 616 425 364 7
General and administrative expenses 4,066 3,758 4,637 3,693 3,584
-------- -------- -------- -------- --------
Income before income taxes 8,146 8,318 6,064 6,006 5,721
Income tax expense 2,985 3,060 2,155 2,085 1,948
-------- -------- -------- -------- --------
Net income $ 5,161 $ 5,258 $ 3,909 $ 3,921 $ 3,773
======== ======== ======== ======== ========
Per common share data:
Net income, basic $1.42 $1.42 $1.05 $1.05 $ 1.01
======== ======== ======== ======== ========
Net income, diluted $1.32 $1.30 $0.98 $0.98 $ 0.95
======== ======== ======== ======== ========
Cash dividends $1.01 $0.94 $0.74 $0.64 $ 0.60
======== ======== ======== ======== ========
</TABLE>
- ---------------------------------GROWING WITH-----------------------------------
MOORE COUNTY
About our cover...
Photo
<PAGE>
- -----------------------------FINANCIAL HIGHLIGHTS-------------------------------
<TABLE>
<CAPTION>
At or for the Twelve Months Ended
June 30,
-------------------------------------
SELECTED FINANCIAL DATA 1999 1998 1997
----------- ----------- -----------
Net income $5,160,975 $5,258,467 $3,908,653
<S> <C> <C> <C>
PER COMMON SHARE DATA
Net income
Basic $ 1.42 $ 1.42 $ 1.05
Diluted $ 1.32 $ 1.30 $ 0.98
Book value $ 18.33 $ 18.73 $ 18.26
Tangible book value $ 18.33 $ 18.73 $ 18.26
Number of common shares outstanding 3,503,763 3,710,820 3,679,185
AT YEAR END (THOUSANDS)
Assets $ 313,233 $ 304,168 $ 294,217
Deposits 226,651 211,925 204,317
Loans receivable, net 208,678 208,094 192,238
Shareholders' equity 64,228 69,521 67,195
RATIOS
Return on average assets 1.73% 1.76% 1.45%
Return on average assets * N/A N/A 1.71%
Return on average equity 7.61% 7.68% 5.85%
Return on average equity * N/A N/A 6.90%
Equity to total assets (year end) 20.50% 22.86% 22.84%
Nonperforming assets to total assets 0.10% 0.18% 0.08%
Allowance for loan losses to net loans 0.29% 0.29% 0.31%
Dividends declared/earnings per share 76.52% 71.76% 75.51%
</TABLE>
* Excludes the nonrecurring charge associated with the special SAIF assessment
in 1997.
<TABLE>
<CAPTION>
- -------------------------------TABLE OF CONTENTS--------------------------------
<S> <C>
Chief Executive Officer's Message................ 2
Management's Discussion & Analysis............... 4-16
Report of Independent Auditors................... 17
Consolidated Statements of Financial Condition... 18
Consolidated Statements of Income................ 19
Consolidated Statements of Shareholders' Equity.. 20
Consolidated Statements of Cash Flows............ 21-22
Notes to Consolidated Financial Statements....... 23-38
Directors, Officers and Office Locations......... 39
Corporate Information............................ 40
</TABLE>
- ---------------------------------------1----------------------------------------
<PAGE>
- ---------------------------CHIEF EXECUTIVE OFFICER'S---------------------------
MESSAGE
September 24, 1999
Dear Shareholders:
By almost any standard, this past year was a stellar one for your Corporation.
So much so that First Savings was ranked by U.S. BANKER Magazine as the best
performer among U.S. community banks in three of six primary criteria. The
publication based its evaluations on the Top 200 largest community banks in the
U.S. with less than $432 million in assets. First Savings ranked 25th in the
country overall and first in three categories: efficiency, leverage and tier one
-----
capital ratios.
Fiscal 1999 was a noteworthy year for First Savings. Total assets and deposits
grew $9.1 million, or 3.0% and $14.7 million, or 6.9%, respectively, from fiscal
1998. Although net loans have increased slightly, secondary loan originations
increased significantly, evidenced by the 103.8% increase in related fee income.
In a year of falling bank stock prices, First Savings aggressively exercised its
strategy to repurchase shares of First Savings common stock. During fiscal 1999,
First Savings repurchased 311,400 shares of its common stock on the open market.
Although the lost earnings associated with the cost of the stock repurchased
negatively impacted net income, basic net income per share was unchanged and
diluted net income per share increased as a result of fewer shares outstanding.
Highlights for the year ended June 30, 1999 included:
. Opening of new office at Belle Meade - First Savings established its sixth
office in June, launching a full-service branch in the elegant clubhouse of
the Belle Meade Retirement Resort located near Pinehurst and Southern Pines.
Initial response from incoming residents has exceeded our most optimistic
projections.
. Capital Improvements - For added customer convenience, we replaced our old
ATMs at the Southern Pines, Pinecrest Plaza and Seven Lakes offices with
state-of-the-art machines and added an ATM at our Carthage office. We also
completed the installation of a Wide Area Network (WAN), providing for the
total integration of all offices on a centralized computer system. Any office
can now easily access extensive account information instantly for any
customer.
. Long Term Health Care Insurance - The first of several new services
introduced this past year, this comprehensive product provides, with
qualification, significant assistance through insurance should one ever need
long-term care.
. Alternative Investments - Another new service, this program offers one-stop
shopping to satisfy virtually all of an investor's needs. Available products
include annuities, discount brokerage services, mutual funds and many others.
. Degree Account - Still another new product, this offers checking account
services to students, part of our overall effort to attract younger customers
to the Bank.
First Savings Bank has been Moore County's community bank for over 77 years and
we look forward to continuing to serve the growing financial needs of county
residents. New services that will be introduced to our customers in the near
future include VISA debit cards and telephone banking. As we grow, we must
continue to have the right executives functioning as effectively as possible
within the appropriate organizational structure. Toward this end, I have
appointed the following senior management team: William A. Roberts, Vice
President, Compliance and Human Resources; Timothy S. Maples, Vice President and
CFO; Michael F. McMillan, Vice President and Senior Loan Officer; S. Allan Beck,
Vice President and Senior Loan Officer; and Sherry B. Yow, Vice President,
Operations.
As to the readiness of our computer systems when the calendar turns to 2000, we
assure you that our plans are in complete compliance with all four of the FDIC's
recommended action steps and we will continue to test all systems right up to
the new year. Contingency planning has also been completed with testing
scheduled for this fall. An outside consulting firm has been quite helpful to us
throughout our preparation period, which now exceeds two years. Greater detail
about our Y2K planning can be found in the Management's Discussion and Analysis
section of this report.
- ---------------------------------------2----------------------------------------
<PAGE>
- ---------------------------CHIEF EXECUTIVE OFFICER'S----------------------------
MESSAGE
I would like to thank the Board of Directors, our Staff and particularly Bill
Samuels for their support and patience since I have assumed the responsibilities
of President and CEO. I am genuinely excited about the future of our bank and I
can assure you that your Board of Directors and the Staff will continue to look
for every opportunity to increase shareholder value.
Sincerely yours,
John F. Burns
President and Chief Executive Officer
- ---------------------------------------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 was host to 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,
1999, First Savings had total assets of approximately $313.2 million, net loans
of $208.7 million, deposits of approximately $226.7 million and shareholders'
equity of $64.2 million.
First Savings is principally engaged in the business of attracting deposits from
the general public and using such deposits and other funds to make real estate,
consumer and commercial loans. On June 30, 1999, approximately 85.1% 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 investment
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 1999, the Bank originated 625 mortgage loans
totaling $61.6 million, of which $39.6 million were one, three or five-year
adjustable-rate mortgages or home equity loans. At June 30, 1999, $176.0 million
or 84.3% of the Bank's $208.7 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 $ 1,438 $ 1,261 $ 3,151 $ 12,917 $ 15,713 $ 34,480 $ 35,514
Average interest rate 8.75% 8.96% 8.21% 7.95% 8.41%
Variable rate $ 44,768 $ 55,633 $ 24,643 $ 46,965 $ 2,785 $174,794 $176,152
Average interest rate 7.75% 7.35% 7.54% 7.81% 7.71%
Investment Securities (B)
Interest-earning deposits $ 3,085 $ - $ - $ - $ - $ 3,085 $ 3,085
Average interest rate 5.75% -% -% -% -%
Securities available for sale $ 9,680 $ 14,817 $ 17,187 $ 13,162 $ - $ 54,846 $ 54,846
Average interest rate 7.38% 6.45% 5.78% 6.21% -%
Securities held to maturity $ 4,199 $ 114 $ 84 $ 13,111 $ 19,200 $ 36,708 $ 36,154
Average interest rate 6.91% 9.37% 9.65% 6.05% 6.37%
Nonmarketable equity securities $ - $ - $ - $ - $ 1,930 $ 1,930 $ 1,930
Average interest rate -% -% -% -% 7.50%
Debt Obligations (C)
Interest-bearing deposits $176,014 $ 40,980 $ 5,922 $ - $ - $222,916 $225,487
Average interest rate 4.08% 5.25% 5.85% -% -%
Borrowings $ 10,000 5,000 5,000 - - $ 20,000 $ 20,226
Average interest rate 5.46% 5.01% 5.26% -% -%
</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, 1999 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, 1999 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, 1999.
- ---------------------------------------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, 1999, 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, 1999
---------------------------------------------------------------------------------------------------
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 $ 25,920 $ 48,710 $ 19,042 $ 42,584 $ 2,746 $ 139,002
Fixed rate 1-4 family 20 679 1,765 10,604 12,877 25,945
Adjustable rate
non-residential 6,149 6,923 5,601 4,381 39 23,093
Fixed rate non-residential 26 151 460 1,421 2,790 4,848
Home equity and property
improvement 12,699 - - - - 12,699
Other loans 1,392 431 926 892 46 3,687
Investments 14,743 14,817 17,187 26,127 - 72,874
Mortgage-backed securities 4,199 114 84 96 19,200 23,693
------------- -------------- --------------- -------------- -------------- ------------
Total interest-earning
assets $ 65,148 $ 71,825 $ 45,065 $ 86,105 $ 37,698 $ 305,841
============= ============== =============== ============== ============== ============
INTEREST-BEARING
LIABILITIES:
Deposits:
Certificates of deposit $ 88,087 $ 40,980 $ 5,922 $ - $ - $ 134,989
Interest-bearing checking 22,737 - - - - 22,737
Money market deposit
accounts 50,435 - - - - 50,435
Passbook savings 14,755 - - - - 14,755
Borrowed funds 10,000 5,000 5,000 - - 20,000
------------- -------------- --------------- -------------- -------------- ------------
Total interest-bearing
liabilities $ 186,014 $ 45,980 $ 10,922 $ - $ - $ 242,916
============= ============== =============== ============== ============== ============
INTEREST SENSITIVITY GAP
PER PERIOD $ (120,866) $ 25,845 $ 34,143 $ $86,105 $ 37,698 $ 62,925
CUMULATIVE INTEREST
SENSITIVITY GAP $ (120,866) $ (95,021) $ (60,878) $ 25,227 $ 62,925 $ 62,925
CUMULATIVE GAP AS A
PERCENTAGE OF
TOTAL INTEREST-EARNING
ASSETS (39.52%) (31.07%) (19.91)% 8.25% 20.57% 20.57%
CUMULATIVE
INTEREST-EARNING ASSETS
AS A PERCENTAGE OF
INTEREST-BEARING
LIABILITIES 35.02% 59.04% (74.94)% 110.39% 125.90% 125.90%
- ------------------------------------------------------------------------------------------------------------------------------------
</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, 1999, liquid assets (cash and cash equivalents and marketable
investment securities) were approximately $100.3 million, which represents 44.2%
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, 1999, this
liquidity ratio, based on North Carolina regulations, was 30.1%. Management
considers current liquidity levels to be adequate to meet First Savings'
foreseeable needs.
At June 30, 1999, outstanding loan commitments and available lines of credit
balances were $28.1 million, and the undisbursed portion of construction loans
was $7.8 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, 1999 and
1998, First Savings exceeded all such requirements.
First Savings is subject to restrictions on stock repurchases and must obtain
Federal Reserve and FDIC approvals before making certain stock repurchases.
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. Moreover, the ability of First Savings to pay dividends or
repurchase shares may be dependent upon the receipt of dividends from the Bank
subsidiary.
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, including the amount required for the liquidation account
established in connection with the Bank's conversion from mutual to stock
ownership. A source of First Savings' funds are dividends received from the
Bank. In fiscal 2000, the amount of dividends that can be paid without prior
approval from regulators is approximately $2.5 million. These funds should be
adequate to cover First Savings' needs.
- ---------------------------------------7----------------------------------------
<PAGE>
- ---------------------------------MANAGEMENT'S-----------------------------------
DISCUSSION & ANALYSIS
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,
-------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
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 $ 6,867 $ 377 5.49% $ 6,167 $ 391 6.34% $ 7,623 $ 449 5.89%
Investments, net, at cost 57,553 3,727 6.48% 77,009 5,222 6.78% 67,269 4,317 6.42%
Mortgage-backed securities 16,888 1,085 6.43% 9,143 668 7.31% 4,537 338 7.45%
Loans receivable, net 208,384 16,576 7.95% 199,776 16,262 8.14% 185,120 14,954 8.08%
-------- ------- -------- ------- -------- -------
Total interest-earning assets 289,692 21,765 7.51% 292,095 22,543 7.72% 264,549 20,058 7.58%
------- ------- -------
Non-interest-earning assets 9,367 6,680 5,734
-------- -------- --------
Total assets $299,059 $298,775 $270,283
======== ======== ========
Interest-bearing liabilities:
Passbooks savings $ 14,561 459 3.15% $ 13,723 428 3.12% $ 10,994 297 2.70%
NOW and money market accounts 71,019 2,178 3.07% 66,100 2,166 3.28% 63,199 2,108 3.34%
Certificates of deposit 133,062 7,205 5.41% 129,698 7,371 5.68% 122,761 7,091 5.78%
Borrowed funds 7,555 432 5.72% 17,786 1,118 6.29% 4,694 286 6.09%
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities 226,197 10,274 4.54% 227,307 11,083 4.88% 201,648 9,782 4.85%
------- ------- -------
Non-interest-bearing liabilities 5,078 2,672 1,789
-------- -------- --------
Total liabilities 231,275 229,979 203,437
Shareholders' equity 67,784 68,796 66,846
-------- -------- --------
Total liabilities and shareholders'
equity $299,059 $298,775 $270,283
======== ======== ========
Net interest income and interest rate
spread $11,491 2.97% $11,460 2.84% $10,276 2.73%
======= ======= =======
Net interest-earning assets and net
interest margin $ 58,417 3.97% $ 64,788 3.92% $ 62,901 3.88%
Percentage of average interest-earning
assets to average interest-bearing
liabilities 125.26% 128.50% 131.19%
</TABLE>
- ---------------------------------------8----------------------------------------
<PAGE>
- ---------------------------------MANAGEMENT'S-----------------------------------
DISCUSSION & ANALYSIS
Rate Volume Analysis
The table below provides information regarding changes in interest income and
interest expense for the periods indicated. For each category of interest-
earning asset and interest-bearing liability, information is provided on changes
attributable to (i) changes in volume (changes in volume multiplied by the prior
period's rate); (ii) changes in rates (change in rate multiplied by the prior
period's volume); (iii) changes in rate-volume (changes in rate multiplied by
changes in volume); and (iv) net change (the sum of previous columns.)
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
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 $ 44 $ (52) $ (6) $ (14) $ (86) $ 34 $ (6) $ (58)
Investments (1) (1,319) (235) 59 (1,495) 625 245 35 905
Mortgage-backed securities 566 (80) (68) 418 343 (6) (7) 330
Loan portfolio 701 (371) (16) 314 1,184 115 9 1,308
------------ ----------- ------------ ------------ ------------ ---------- ------------ -------
Total interest income (8) (738) (31) (777) 2,066 388 31 2,485
------------ ----------- ------------ ------------ ------------ ---------- ------------ -------
Interest expense:
Passbooks savings 26 5 - 31 74 46 11 131
NOW and money market 161 (139) (10) 12 97 (37) (2) 58
accounts
Certificates of deposit 191 (348) (9) (166) 400 (114) (6) 280
Borrowed funds (643) (101) 58 (686) 798 9 25 832
------------ ----------- ------------ ------------ ------------ ---------- ------------ -------
Total interest expense (265) (583) 39 (809) 1,369 (96) 28 1,301
------------ ----------- ------------ ------------ ------------ ---------- ------------ -------
Net interest income
(expense) $ 257 $ (155) $ (70) $ 32 $ 697 $ 484 $ 3 $1,184
============ =========== ============ ============ ============ ========== ============ =======
</TABLE>
(1) Includes investment securities and FHLB stock.
- ---------------------------------------9----------------------------------------
<PAGE>
- ---------------------------------MANGEMENT'S------------------------------------
DISCUSSION & ANALYSIS
Loan Portfolio Composition
First Savings' consolidated net loan portfolio totaled approximately $208.7
million at June 30, 1999, representing 66.6% of First Savings' total assets. At
June 30, 1999, approximately 84.3% of First Savings' net loan portfolio was
composed of adjustable rate loans, and approximately 15.7% of First Savings' net
loan portfolio was composed of fixed rate loans. At June 30, 1999, approximately
$161.8 million, or 77.5%, of First Savings' net loan portfolio was composed of
one-to-four family residential real estate loans. On such date, approximately
$52.1 million, or 25.0%, of First Savings' net loan portfolio was composed of
multi-family residential, commercial and other real estate loans.
The following table sets forth the composition of First Savings' loan portfolio
by type of loan at the dates indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------- ------------------- ------------------- ------------------- ------------------
% 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 $161,785 77.53% $172,915 83.09% $162,620 84.59% $151,934 85.63% $137,855 86.28%
Multi-family (5 or more 3,264 1.56% 2,969 1.43% 2,601 1.35% 3,070 1.73% 2,272 1.42%
units)
Construction 16,082 7.71% 10,592 5.09% 10,969 5.71% 8,123 4.58% 7,951 4.98%
Commercial real estate
and other properties 20,229 9.69% 16,568 7.96% 13,285 6.91% 12,028 6.78% 11,844 7.41%
Home equity and property
improvement 12,549 6.01% 8,970 4.31% 8,449 4.40% 5,607 3.16% 4,066 2.55%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 213,909 102.50% 212,014 101.88% 197,924 102.96% 180,762 101.88% 163,988 102.64%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Other:
Savings account loans 901 0.43% 900 0.43% 909 0.47% 875 0.49% 703 0.44%
Installment loans 1,606 0.77% 797 0.38% 621 0.32% 351 0.20% 111 0.07%
Credit card loans 1,182 0.57% 1,157 0.56% 951 0.50% 520 0.29% - -%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total other loans 3,689 1.77% 2,854 1.37% 2,481 1.29% 1,746 0.98% 814 0.51%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Less:
Unearned fees and 498 0.24% 547 0.26% 555 0.29% 509 0.29% 458 0.29%
discounts
Loans in process 7,826 3.75% 5,631 2.71% 7,008 3.65% 3,959 2.23% 3,958 2.48%
Allowance for loan losses 596 0.28% 596 0.28% 604 0.31% 609 0.34% 609 0.38%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total reductions 8,920 4.27% 6,774 3.25% 8,167 4.25% 5,077 2.86% 5,025 3.15%
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans receivable, net $208,678 100.00% $208,094 100.00% $192,238 100.00% $177,431 100.00% $159,777 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
- --------------------------------------10----------------------------------------
<PAGE>
- ---------------------------------MANGEMENT'S------------------------------------
DISCUSSION & ANALYSIS
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.
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,
--------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate:
Residential $ 317 $ 545 $ 250 $ 134 $ 139
Commercial - - - - 133
Consumer - - - - -
----- ----- ----- ----- -----
Total 317 545 250 134 272
----- ----- ----- ----- -----
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 317 545 250 134 272
Foreclosed real estate - - - - -
Other nonperforming assets - - - - -
----- ----- ----- ----- -----
Total nonperforming assets $ 317 $ 545 $ 250 $ 134 $ 272
===== ===== ===== ===== =====
Total loans delinquent 90 days or more to
net loans 0.16% 0.26% 0.13% 0.08% 0.17%
Total loans delinquent 90 days or more to
total assets 0.10% 0.18% 0.08% 0.05% 0.11%
Total nonperforming assets to total assets 0.10% 0.18% 0.08% 0.05% 0.11%
</TABLE>
- --------------------------------------11----------------------------------------
<PAGE>
- ---------------------------------MANGEMENT'S------------------------------------
DISCUSSION & ANALYSIS
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.
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,
---------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ---------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance beginning of period $ 596 $ 604 $ 609 $ 609 $ 609
Provision for loan losses and losses on foreclosed real estate - - - - -
-------- ------ ------- ----- -----
Charge-offs:
Residential 1-4 family - - - - (4)
Commercial real estate and other properties - - - - -
Home equity and property improvements - - - - -
Construction - - - - -
Savings accounts - - - - -
Other consumer - (8) (5) - -
Commercial - - - - -
-------- ------ ------- ----- -----
- (8) (5) - (4)
-------- ------ ------- ----- -----
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 $ 596 $ 604 $ 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% 0.00%
======== ====== ======= ===== =====
</TABLE>
- --------------------------------------12----------------------------------------
<PAGE>
- ---------------------------------MANAGEMENT'S-----------------------------------
DISCUSSION & ANALYSYS
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,
-----------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- -----------------------
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 $ 459 77.01% $ 463 77.68% $ 400 66.23%
Commercial real estate and other property 67 11.24% 64 10.74% 73 12.08%
Home equity and property improvement 36 6.04% 16 2.68% 21 3.48%
Construction 24 4.03% 9 1.52% 7 1.16%
--------- ------ ----- ------ ----- ------
Total real estate loans 586 98.32% 552 92.62% 501 82.95%
Savings account loans - -% - -% - -%
Other consumer loans 10 1.68% 44 7.38% 103 17.05%
--------- ------ --------- ------ -------- ------
Total allowance for loan losses $ 596 100.00% $ 596 100.00% $ 604 100.00%
========= ====== ========= ====== ======== ======
</TABLE>
RESULTS OF OPERATIONS FOR
THE FISCAL YEARS ENDED
JUNE 30, 1999
AND
JUNE 30, 1998
General
First Savings recorded net income of $5.2 million for the year ended June 30,
1999, compared to $5.3 million earned for the year ended June 30, 1998. Basic
and fully diluted earnings per share were $1.42 and $1.32, respectively, for the
year ended June 30, 1999 compared to $1.42 and $1.30, respectively, for the year
ended June 30, 1998.
Nonperforming assets (loans 90 days or more delinquent and foreclosed real
estate owned) were $317,000 or 0.10% of total assets at June 30, 1999, compared
to $545,000 or 0.18% at June 30, 1998. First Savings did not have any real
estate owned at June 30, 1999 or June 30, 1998.
Net Interest Income
Net interest income for the year ended June 30, 1999 and 1998, was $11.5
million. The average yield on interest-earning assets decreased by 21 basis
points, and the average cost of interest-bearing liabilities decreased by 34
basis points for the year ended June 30, 1999, increasing the Bank's interest
rate spread to 2.97% compared to 2.84% for the year ended June 30, 1998. The
average balance of interest-earning assets and interest-bearing liabilities
during the fiscal year ended June 30, 1999 was $289.7 million and $226.2
million, respectively, compared to $292.1 million and $227.3 million,
respectively, during the fiscal year ended June 30, 1998. The Average Yield/Cost
Analysis table reflects the average yields on assets and average cost of
liabilities for the years ended June 30, 1999, 1998, and 1997. 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, 1999 was $21.8 million as compared to $22.5 million for fiscal year 1998, a
decrease of $700,000 or 3.1%. This decrease was due primarily to decreases in
average interest-earning assets.
Interest Expense
Total interest expense for the year ended June 30, 1999 decreased by $809,000 or
7.3% when compared to the prior year. The Bank's cost of funds decreased from
4.88% in 1998 to 4.54% in 1999; and, average interest-bearing liabilities
decreased from $227.3 million at June 30, 1998 to $226.2 million at June 30,
1999.
- --------------------------------------13----------------------------------------
<PAGE>
- ---------------------------------MANAGEMENT'S-----------------------------------
DISCUSSION & ANALYSYS
Interest expense on borrowed funds decreased $686,000 from $1,118,000 in 1998 to
$432,000 in 1999. This decrease is the result of maturing advances from the
Federal Home Loan Bank (FHLB) in 1999. The decrease in average borrowings was a
result of principal payments, funded primarily by maturing investment
securities. Average borrowings for the years ended June 30, 1999 and 1998 were
$7.6 million and $17.8 million, respectively.
Allowance for Loan Losses
At June 30, 1998, the allowance for loan losses was $596,000. During fiscal year
1999, First Savings did not add to this reserve. With no charge-offs during the
current year, the allowance for loan losses at June 30, 1999 remained unchanged.
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, 1999 was $721,000
as compared to $616,000 for the fiscal year ended June 30, 1998. The 17.0%
increase is primarily attributable to increased levels of fees and service
charges during the year ended June 30, 1999.
General and Administrative Expenses
General and administrative expenses for fiscal year ended June 30, 1999 were
$4.1 million compared to $3.8 million for the fiscal year ended June 30, 1998.
Income Taxes
Income tax expense decreased for the fiscal year ended June 30, 1999 to $3.0
million, as compared to $3.1 million for the same period in 1998. The decrease
in income taxes was attributed to the lower level of pre-tax income.
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.
- --------------------------------------14----------------------------------------
<PAGE>
- ---------------------------------MANAGEMENT'S-----------------------------------
DISCUSSION & ANALYSYS
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.
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.
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' performance than
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.
Recent Accounting Pronouncements
FASB Statement on Accounting for Derivative Instruments and Hedging Activities.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, this Statement was amended by
SFAS No. 137 to defer the effective date to fiscal years beginning after June
15, 2000. This Statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative
instruments embedded in other contracts, and requires that an entity recognize
all derivatives as assets or liabilities in the statement of financial condition
and measure them at fair value. If certain conditions are met, an entity may
elect to designate a derivative as follows: (a) a hedge of exposure to changes
in the fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of an unrecognized
firm commitment, an available-for-sale security, a foreign currency denominated
forecasted transaction, or a net investment in a foreign operation. The
Statement generally provides for matching the timing of the recognition of the
gain or loss
- --------------------------------------15----------------------------------------
<PAGE>
- ---------------------------------MANAGEMENT'S-----------------------------------
DISCUSSION & ANALYSYS
on derivatives designated as hedging instruments with the recognition of the
changes in the fair value of the item being hedged. Depending on the type of
hedge, such recognition will be in either net income or other comprehensive
income. For a derivative not designated as a hedging instrument, changes in
fair value will be recognized in net income in the period of change. Management
anticipates that the 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 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 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
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 five phases of the plan. 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.
- --------------------------------------16----------------------------------------
<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, 1999 and
1998, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended June 30, 1999.
These financial statements are the responsibility of First Savings' management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Savings
Bancorp, Inc. and subsidiary at June 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1999 in conformity with generally accepted accounting principles.
Sanford, North Carolina
July 23, 1999
- --------------------------------------17----------------------------------------
<PAGE>
- ----------------------------CONSOLIDATED STATEMENTS-----------------------------
OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30,
----------------------------
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,752,962 $ 3,825,590
Interest-earning deposits with banks 3,084,729 3,990,718
Investment securities available for sale, at fair value (amortized cost
of $55,420,488 and $72,163,962 at June 30, 1999 and 1998,
respectively) (Note 2) 54,845,928 72,731,962
Investment securities held to maturity, at amortized cost (fair value
of $36,154,008 and $9,821,460 at June 30, 1999 and 1998,
respectively) (Note 2) 36,707,787 9,737,212
Loans receivable, net (Note 3) 208,677,915 208,094,461
Accrued interest receivable (Note 4) 1,729,739 1,748,809
Premises and equipment, net (Note 5) 2,340,161 1,935,927
Stock in the Federal Home Loan Bank of Atlanta, at cost 1,928,800 1,929,600
Prepaid expenses and other assets 164,537 173,950
------------ ------------
TOTAL $313,232,558 $304,168,229
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits (Note 6) $226,651,010 $211,924,932
Borrowed funds (Note 7) 20,000,000 20,000,000
Advances from borrowers for taxes and insurance 77,551 90,217
Accrued interest payable on deposits 159,000 141,564
Accrued expenses and other liabilities 1,671,399 1,623,593
Federal and state income taxes:
Currently payable 26,680 38,102
Deferred, net (Note 10) 419,146 828,616
------------ ------------
Total liabilities 249,004,786 234,647,024
------------ ------------
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;
3,503,763 and 3,710,820 shares issued and outstanding at June 30,
1999 and 1998, respectively 33,018,336 35,536,799
Unearned compensation related to ESOP note payable (Note 12) (15,852) (158,302)
Retained earnings 31,604,498 33,767,828
Accumulated other comprehensive income (loss) (379,210) 374,880
------------ ------------
Total shareholders' equity 64,227,772 69,521,205
------------ ------------
TOTAL $313,232,558 $304,168,229
============ ============
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------18----------------------------------------
<PAGE>
- ----------------------------CONSOLIDATED STATEMENTS-----------------------------
OF INCOME
<TABLE>
<CAPTION>
Years Ended June 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest on loans receivable $16,575,738 $16,262,488 $14,954,452
Interest on investment securities available for sale 3,579,557 5,077,872 4,177,307
Interest on investment securities held to maturity 1,085,529 668,469 337,717
Dividends on equity securities 147,334 143,199 139,703
Other 376,888 391,465 449,184
----------- ----------- -----------
Total interest and dividend income 21,765,046 22,543,493 20,058,363
----------- ----------- -----------
INTEREST EXPENSE:
Deposits (Note 6) 9,841,843 9,965,356 9,496,129
Borrowed funds (Note 7) 432,259 1,118,002 286,280
----------- ----------- -----------
Total interest expense 10,274,102 11,083,358 9,782,409
----------- ----------- -----------
Net interest income 11,490,944 11,460,135 10,275,954
Provision for loan losses (Note 3) - - -
----------- ----------- -----------
Net interest income after provision for loan losses 11,490,944 11,460,135 10,275,954
----------- ----------- -----------
NON-INTEREST INCOME:
Fees and service charges 656,636 542,206 370,795
Income from real estate operations 7,813 7,514 7,964
Rent on safe deposit boxes 45,151 33,648 33,450
Other, net 11,105 32,531 12,949
----------- ----------- -----------
Total non-interest income, net 720,705 615,899 425,158
----------- ----------- -----------
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and fringe benefits (Note 12) 2,195,249 2,102,433 2,002,924
Occupancy and building (Note 13) 261,089 210,623 207,089
Premiums and assessments 128,255 131,512 1,326,809
Computer services 482,339 355,216 300,905
Other 998,742 957,783 799,732
----------- ----------- -----------
Total general and administrative expenses 4,065,674 3,757,567 4,637,459
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 8,145,975 8,318,467 6,063,653
INCOME TAX EXPENSE (Note 10) 2,985,000 3,060,000 2,155,000
----------- ----------- -----------
NET INCOME $ 5,160,975 $ 5,258,467 $ 3,908,653
=========== =========== ===========
NET INCOME PER COMMON SHARE
Basic $ 1.42 $ 1.42 $ 1.05
=========== =========== ===========
Diluted $ 1.32 $ 1.30 $ 0.98
=========== =========== ===========
AVERAGE COMMON SHARES
OUTSTANDING
Basic 3,641,708 3,698,197 3,706,704
Diluted 3,915,207 4,021,954 3,970,306
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------19----------------------------------------
<PAGE>
- ----------------------------CONSOLIDATED STATEMENTS-----------------------------
OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Stock Unearned Retained Comprehensive Shareholders'
---------------------------
Shares Amount Compensation Earnings Income (Loss) Equity
------------ ----------- ------------ ------------ --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JUNE 30, 1996 3,744,000 $36,451,561 $ (421,952) $ 30,781,853 $ (76) $ 66,811,386
Comprehensive income:
Net income - - - 3,908,653 - 3,908,653
Change in net unrealized gain (loss)
on securities available for sale, net
of reclassification adjustment and
income taxes of $144,979 - - - - 281,434 281,434
-------------
Total comprehensive income 4,190,087
-------------
Proceeds from exercise of stock options 11,685 65,019 - - - 65,019
Earned ESOP compensation - 115,925 128,450 - - 244,375
Stock repurchase (76,500) (1,395,532) - - - (1,395,532)
Cash dividends declared ($.74 per share) - - - (2,720,403) - (2,720,403)
--------- ----------- ------------ ----------- ------------ -------------
BALANCE AT JUNE 30, 1997 3,679,185 35,236,973 (293,502) 31,970,103 281,358 67,194,932
Comprehensive income:
Net income - - - 5,258,467 - 5,258,467
Change in net unrealized gain (loss)
on securities available for sale, net
of reclassification adjustment and
income taxes of $48,178 - - - - 93,522 93,522
-------------
Total comprehensive income 5,351,989
-------------
Proceeds from exercise of stock options 31,635 120,424 - - - 120,424
Earned ESOP compensation - 179,402 135,200 - - 314,602
Cash dividends declared ($.94 per share) - - - (3,460,742) - (3,460,742)
--------- ----------- ------------ ----------- ------------ -------------
BALANCE AT JUNE 30, 1998 3,710,820 35,536,799 (158,302) 33,767,828 374,880 69,521,205
Comprehensive income:
Net income - - - 5,160,975 - 5,160,975
Change in net unrealized gain (loss)
on securities available for sale,
net of reclassification adjustment
and income taxes of $388,471 - - - - (754,090) (754,090)
-------------
Total comprehensive income 4,406,885
-------------
Proceeds from exercise of stock options 104,343 425,684 - - - 425,684
Earned ESOP compensation - 170,308 142,450 - - 312,758
Stock repurchase (311,400) (3,114,455) - (3,669,936) - (6,784,391)
Cash dividends declared ($1.01 per share) - - - (3,654,369) - (3,654,369)
--------- ----------- ------------ ----------- ------------ -------------
BALANCE AT JUNE 30, 1999 3,503,763 $33,018,336 $ (15,852) $31,604,498 $ (379,210) $ 64,227,772
========= =========== =========== =========== ============ =============
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------20----------------------------------------
<PAGE>
- ----------------------------CONSOLIDATED STATEMENTS-----------------------------
OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------------------
1999 1998 1997
------------- ----------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 5,160,975 $ 5,258,467 $ 3,908,653
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of premises and equipment 122,090 97,115 94,055
Release of ESOP shares 312,758 314,602 244,375
Net amortization on investments 172,849 125,638 512,067
Deferred income taxes (21,000) 12,000 (7,000)
Loan origination fees and costs deferred, net of
current amortization (49,077) (8,381) 46,139
Gain on sale of real estate - (21,065) (8,531)
Gain on sale of premises and equipment - (7,045) -
Changes in:
Accrued interest receivable 19,070 87,660 (214,430)
Prepaid expenses and other assets 9,413 9,375 (81,231)
Accrued interest payable on deposits 17,436 37,967 (9,554)
Accrued expenses and other liabilities 70,966 95,708 194,613
Taxes payable (11,422) (333,516) 242,040
------------- --------------- ------------
Net cash provided by operating activities 5,804,058 5,668,525 4,921,196
------------- --------------- ------------
INVESTING ACTIVITIES:
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 (37,380,000) (24,050,075) (31,251,432)
Held to maturity investment securities (30,001,190) (4,801,336) -
Proceeds from maturities and calls of:
Available for sale investment securities 54,000,800 31,500,000 11,700,000
Held to maturity investment securities 2,981,240 1,727,505 1,670,878
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 (534,377) (15,848,471) (14,940,293)
Purchases of premises and equipment (526,324) (71,318) (43,014)
Improvement costs on real estate - (36,378) (6,196)
------------- --------------- ------------
Net cash used in investing activities (11,459,851) (11,378,989) (32,768,057)
------------- --------------- ------------
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------21----------------------------------------
<PAGE>
- ----------------------------CONSOLIDATED STATEMENTS-----------------------------
OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net increase in deposits $14,726,078 $ 7,608,158 $16,892,550
Increase (decrease) in advances from borrowers
for taxes and insurance (12,666) (11,549) 17,210
Net increase in borrowed funds - - 19,578,048
Net proceeds from exercise of stock options 425,684 120,424 65,019
Repurchases of common stock (6,784,391) - (1,395,532)
Cash dividends paid (3,677,529) (3,292,480) (2,926,437)
----------- ----------- -----------
Net cash provided by financing activities 4,677,176 4,424,553 32,230,858
----------- ----------- -----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (978,617) (1,285,911) 4,383,997
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 7,816,308 9,102,219 4,718,222
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 6,837,691 $ 7,816,308 $ 9,102,219
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for:
Interest on deposits $ 9,824,407 $ 9,927,389 $ 9,505,683
Interest on borrowed funds 373,860 1,145,718 208,888
Income taxes 3,008,099 2,685,000 1,963,036
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Loans receivable transferred to foreclosed real estate $ - $ - $ 87,273
Unrealized gain (loss) on investment securities available
for sale, net of deferred income taxes (754,090) 93,522 281,434
Declared but unpaid dividends 910,978 927,705 740,137
</TABLE>
See notes to consolidated financial statements.
- --------------------------------------22----------------------------------------
<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 and 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 statement of financial condition
captions "cash and due from banks" and "interest earning deposits with
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 in other comprehensive income.
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.
- --------------------------------------23----------------------------------------
<PAGE>
- ------------------------------NOTES TO CONSOLIDATED-----------------------------
FINANCIAL STATEMENTS
Effective July 1, 1995, the Bank follows Statement of Financial
Accounting Standards (SFAS) 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.
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 Common Share - Basic earnings per share represent income
available to common shareholders divided by the weighted-average number
of common shares outstanding during the period. Diluted earnings per
share reflect additional common shares that would have been outstanding
if dilutive potential common shares had been issued, as well as any
adjustment to income that would have resulted from the assumed issuance.
Potential common shares that may be issued by First Savings relate solely
to outstanding stock options and are determined using the treasury stock
method.
Earnings per common share have been computed based on the following:
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Average number of common shares outstanding used to
calculate basic earnings per common share 3,641,708 3,698,197 3,706,704
Effect of dilutive options 273,499 323,757 263,602
---------- ---------- ----------
Average number of common shares outstanding
used to calculate diluted earnings per common
share 3,915,207 4,021,954 3,970,306
========== ========== ==========
</TABLE>
- --------------------------------------24----------------------------------------
<PAGE>
- ------------------------------NOTES TO CONSOLIDATED-----------------------------
FINANCIAL STATEMENTS
j. Stock Compensation Plans - Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, encourages all
entities to adopt a fair value based method of accounting for employee
stock compensation plans, whereby compensation cost is measured at the
grant date based on the value of the award and is recognized over the
service period, which is usually the vesting period. However, it also
allows an entity to continue to measure compensation cost for those plans
using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees, whereby compensation cost is the excess, if any, of the
quoted market price of the stock at the grant date (or other measurement
date) over the amount an employee must pay to acquire the stock. Stock
options issued under the Company's stock option plan have no intrinsic
value at the grant date, and, under Opinion No. 25, no compensation cost
is recognized for them. The Company has elected to continue with the
accounting methodology in Opinion No. 25 and, as a result, has provided
pro forma disclosures of net income and earnings per share and other
disclosures, as if the fair value based method of accounting had been
applied. The pro forma disclosures include the effects of all awards
granted on or after January 1, 1995.
k. Cash Dividends - On June 11, 1999, First Savings declared a $0.26 per
share cash dividend to shareholders of record on June 30, 1999, payable
on July 22, 1999.
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
1998 and 1997 have been reclassified to conform to the 1999 presentation.
n. Comprehensive Income - First Savings adopted SFAS No. 130, Reporting
Comprehensive Income, as of July 1, 1998 and has reclassified its
consolidated financial statements for the years ended June 30, 1998 and
1997 to reflect its provisions. Accounting principles generally require
that recognized revenue, expenses, gains and losses be included in net
income. Although certain changes in assets and liabilities, such as
unrealized gains and losses on available-for-sale securities, are
reported as a separate component of the equity section of the statement
of financial condition, such items, along with net income, are components
of comprehensive income. The Adoption of SFAS No. 130 had no effect on
First Savings' net income or shareholders' equity.
- --------------------------------------25----------------------------------------
<PAGE>
- ------------------------------NOTES TO CONSOLIDATED-----------------------------
FINANCIAL STATEMENTS
o. Recent Accounting Pronouncements
FASB Statement on Accounting for Derivative Instruments and Hedging
Activities. In June 1998, the FASB issued Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. In June 1999, this
Statement was amended by SFAS No. 137 to defer the effective date to
fiscal years beginning after June 15, 2000. This Statement establishes
accounting and reporting standards for derivative instruments and hedging
activities, including certain derivative instruments embedded in other
contracts, and requires that an entity recognize all derivatives as
assets or liabilities in the statement of financial condition and measure
them at fair value. If certain conditions are met, an entity may elect to
designate a derivative as follows: (a) a hedge of exposure to changes in
the fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure
of an unrecognized firm commitment, an available-for-sale security, a
foreign currency denominated forecasted transaction, or a net investment
in a foreign operation. The Statement generally provides for matching the
timing of the recognition of the gain or loss on derivatives designated
as hedging instruments with the recognition of the changes in the fair
value of the item being hedged. Depending on the type of hedge, such
recognition will be in either net income or other comprehensive income.
For a derivative not designated as a hedging instrument, changes in fair
value will be recognized in net income in the period of change.
Management anticipates that the statement will have no effect on First
Savings' 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, 1999:
U.S. government and agency securities $54,035,552 $183,070 $781,892 $53,436,730
N.C. state and municipal obligations 1,334,862 25,368 1,106 1,359,124
The Bankers Bank stock 50,074 - - 50,074
----------- -------- -------- -----------
Total $55,420,488 $208,438 $782,998 $54,845,928
=========== ======== ======== ===========
To be held to maturity:
June 30, 1999:
Mortgage-backed securities $23,692,823 $207,562 $746,377 $23,154,008
U.S. Government and agency securities 13,014,964 - 14,964 13,000,000
----------- -------- -------- -----------
Total $36,707,787 $207,562 $761,341 $36,154,008
=========== ======== ======== ===========
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
=========== ======== ======== ===========
</TABLE>
- --------------------------------------26----------------------------------------
<PAGE>
- -----------------------------NOTES TO CONSOLIDATED------------------------------
FINANCIAL STATEMENTS
The scheduled maturities of securities at June 30, 1999 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 $ 9,615,813 $ 9,679,359 $ - $ -
Due after one year through five years 32,291,447 32,004,327 - -
Due after five years through ten years 13,513,228 13,162,242 13,014,964 13,000,000
Mortgage-backed securities - - 23,692,823 23,154,008
----------- ----------- ----------- -----------
Total $55,420,488 $54,845,928 $36,707,787 $36,154,008
=========== =========== =========== ===========
</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 $740,072 and
$755,008 at June 30, 1999 and 1998, 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>
1999 1998
------------ ------------
<S> <C> <C>
Mortgage loans:
First mortgage loans $199,998,508 $201,000,679
First mortgage loan participations 1,361,174 2,043,873
Equity line loans 12,549,121 8,969,553
------------ ------------
213,908,803 212,014,105
Less:
Loans in process 7,825,845 5,630,585
Net deferred loan fees 497,690 546,767
------------ ------------
Total mortgage loans 205,585,268 205,836,753
Savings account loans 900,569 899,699
Installment loans 1,606,327 797,138
Credit card loans 1,181,566 1,156,686
------------ ------------
Total mortgage and other loans 209,273,730 208,690,276
Less allowance for loan losses 595,815 595,815
------------ ------------
Loans receivable, net $208,677,915 $208,094,461
============ ============
</TABLE>
- --------------------------------------27----------------------------------------
<PAGE>
- -----------------------------NOTES TO CONSOLIDATED------------------------------
FINANCIAL STATEMENTS
At June 30, 1999, the Bank had mortgage loan commitments of approximately
$6,904,000 and pre-approved but unused lines of credit totaling $21,168,000.
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, 1999, 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. $ 1,438 1 mo. - 1 yr. $ 44,768
1 yr. - 3 yr. 1,261 1 yr. - 3 yr. 55,633
3 yr. - 5 yr. 3,151 3 yr. - 5 yr. 24,643
5 yr. - 10 yr. 12,917 5 yr. - 10 yr. 46,965
10 yr. and over 15,713 10 yr. and over 2,785
------- --------
Total $34,480 Total $174,794
======= ========
</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, 1999 and 1998, loans to directors and officers were
approximately $776,000 and $801,000, 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. This 15% limitation results in a dollar
limitation of approximately $9,634,000 at June 30, 1999. The Bank was in
compliance with the limitation as of June 30, 1999.
Changes in the allowance for loan losses for the years ended June 30 are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year $595,815 $604,187 $608,739
Provision for loan losses - - -
Charge-offs - (8,372) (4,552)
Recoveries - - -
-------- -------- --------
Balance at end of year $595,815 $595,815 $604,187
======== ======== ========
</TABLE>
In conformity with SFAS 114, as amended by SFAS 118, none of the Bank's
loans are considered to be impaired.
- --------------------------------------28----------------------------------------
<PAGE>
- -----------------------------NOTES TO CONSOLIDATED------------------------------
FINANCIAL STATEMENTS
4. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at June 30 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Loans receivable $ 572,240 $ 410,978
Mortgage-backed securities 165,633 76,316
Securities 955,796 1,225,434
Other 36,070 36,081
---------- ----------
Total $1,729,739 $1,748,809
========== ==========
</TABLE>
5. PREMISES AND EQUIPMENT
Premises and equipment at June 30, which are stated at cost, are summarized
as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land $ 379,306 $ 379,306
Office buildings and improvements 2,325,201 2,269,486
Furniture, fixtures and equipment 1,106,063 660,643
Motor vehicles 63,045 37,856
---------- ----------
Total 3,873,615 3,347,291
Less allowance for depreciation 1,533,454 1,411,364
---------- ----------
Premises and equipment, net $2,340,161 $1,935,927
========== ==========
</TABLE>
6. DEPOSITS
Deposits at June 30 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
NOW accounts $ 26,472,319 $ 23,429,916
Money market deposits 50,435,217 42,567,590
Passbook savings 14,754,727 14,035,680
Certificates of deposit 134,988,747 131,891,746
------------ ------------
Total $226,651,010 $211,924,932
============ ============
</TABLE>
The aggregate amounts of certificates of deposit with a minimum denomination
of $100,000 were approximately $31,168,000 and $28,915,000 at June 30, 1999
and 1998, respectively.
- --------------------------------------29----------------------------------------
<PAGE>
- -----------------------------NOTES TO CONSOLIDATED------------------------------
FINANCIAL STATEMENTS
At June 30, 1999, $88.1 million of the total certificates of deposit are
scheduled to mature in one year or less, $41.0 million are scheduled to
mature in more than one year to three years, and $5.9 million are scheduled
to mature in more than three years to five years.
The scheduled maturities of certificates of deposit with balances of
$100,000 or more at June 30, 1999 are as follows:
Total
--------------
(In thousands)
Three months or less $ 7,623
Over three months through six months 4,008
Over six months through 12 months 9,516
Over 12 months 10,021
-------------
Total certificate accounts $ 31,168
=============
Included in deposits are non-interest-bearing balances totaling $3,734,861
and $4,028,120 as of June 30, 1999 and 1998, respectively.
7. BORROWED FUNDS
Borrowed funds at June 30, 1999 and 1998 consist of advances from the
Federal Home Loan Bank (FHLB). These advances, with weighted average rates,
are as follows:
6.00% no contractual maturity $ 5,000,000
5.01% due on or before April 22, 2004 5,000,000
4.92% due on or before May 14, 2004 5,000,000
5.26% due on or before April 21, 2009 5,000,000
------------
Total $ 20,000,000
============
The above advances have been made against a $62.0 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, 1999, 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, 1999, First Savings had interest-earning assets of $305,840,974
having a weighted-average effective yield of 7.26% and interest-bearing
liabilities of $242,916,149 having a weighted-average effective interest
rate of 4.37%.
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.
- --------------------------------------30----------------------------------------
<PAGE>
- -----------------------------NOTES TO CONSOLIDATED------------------------------
FINANCIAL STATEMENTS
The components of income tax expense for the years ended June 30 are
summarized as follows:
1999 1998 1997
---------- ---------- ----------
Current tax provision $3,006,000 $3,048,000 $2,162,000
Deferred tax provision (21,000) 12,000 (7,000)
---------- ---------- ----------
Total $2,985,000 $3,060,000 $2,155,000
========== ========== ==========
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>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income taxes at the statutory federal rate $2,769,631 $2,828,279 $2,061,642
Increases (decreases) resulting from:
Tax exempt interest - net (17,836) (15,036) (10,833)
State income taxes - net of federal benefit 217,306 235,702 101,319
Other, net 15,899 11,055 2,872
---------- ---------- ----------
Income tax expense $2,985,000 $3,060,000 $2,155,000
========== ========== ==========
</TABLE>
Deferred taxes arising from each type of temporary difference at June 30
are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Loan fees and costs $ 193,029 $ 213,870
Unrealized loss on securities available-for-sale 195,350 -
---------- ----------
388,379 213,870
---------- ----------
Deferred tax liabilities:
Federal Home Loan Bank stock dividends 329,029 329,029
Depreciation 188,516 230,357
Bad debt reserve 289,980 289,980
Unrealized gain on securities available for sale - 193,120
---------- ----------
Total 807,525 1,042,486
---------- ----------
Net deferred tax liability $ 419,146 $ 828,616
========== ==========
</TABLE>
Retained earnings at June 30, 1999 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. The Bank
is recapturing, over a six-year period, $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 provided
for the taxes arising from the reserve recapture, and thus the ultimate
payment of the taxes will not result in a charge to earnings.
- --------------------------------------31----------------------------------------
<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 following 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>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------ ------------ ----- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
Total Capital (to Risk Weighted Assets):
Consolidated $ 65,202,797 41.73% $ 12,501,360 >8.0% N/A
-
First Savings Bank of Moore Co., Inc., SSB $ 60,245,919 38.51% $ 12,516,560 >8.0% $15,645,700 >10.0%
- -
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $ 64,606,982 41.34% $ 6,250,680 >4.0% N/A
-
First Savings Bank of Moore Co., Inc., SSB $ 59,650,104 38.13% $ 6,258,280 >4.0% $ 9,387,420 >6.0%
- -
Tier 1 Capital (to Average Assets):
Consolidated $ 64,606,982 20.86% $ 12,385,840 >4.0% N/A
-
First Savings Bank of Moore Co., Inc., SSB $ 59,650,104 19.04% $ 12,350,040 >4.0% $15,437,550 >5.0%
- -
As of June 30, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated $ 69,742,140 48.67% $ 11,464,080 >4.0% N/A N/A
-
First Savings Bank of Moore Co., Inc., SSB $ 54,933,352 38.34% $ 11,461,920 >8.0% $14,327,400 >10.0%
- -
Tier 1 Capital (to Risk Weighted Assets):
Consolidated $ 69,146,325 48.25% $ 5,732,040 >4.0% N/A N/A
-
First Savings Bank of Moore Co., Inc., SSB $ 54,337,537 37.93% $ 5,730,960 >4.0% $ 8,596,440 >6.0%
- -
Tier 1 Capital (to Average Assets):
Consolidated $ 69,146,325 23.05% $ 11,997,160 >4.0% N/A N/A
-
First Savings Bank of Moore Co., Inc., SSB $ 54,337,537 18.67% $ 11,641,120 >4.0% $14,551,400 >5.0%
- -
</TABLE>
In addition to federal regulatory requirements, the Bank is subject to a
North Carolina savings bank capital requirement of at least 5% of total
assets. At June 30, 1999 and 1998, the Bank's capital ratio under the North
Carolina requirement was 19.19% and 18.74%, respectively.
At June 30, 1999 and 1998, First Savings and the Bank exceeded all capital
requirements.
- --------------------------------------32----------------------------------------
<PAGE>
- -----------------------------NOTES TO CONSOLIDATED------------------------------
FINANCIAL STATEMENTS
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.
During the year ended June 30, 1999, First Savings repurchased and retired
311,400 shares of its common stock in accordance with a stock repurchase
plan. At June 30, 1999, First Savings' Board has authorized the purchase of
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,
1999, 1998 and 1997 were $121,987, $112,910, and $97,539, 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. 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 $312,758;
$314,602, and $244,375, has been incurred during the years ended June 30,
1999, 1998 and 1997, respectively, including $170,308, $179,402, and
$115,925, 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 an Employee Stock Option Plan ("Employee Plan") for
officers and two Nonqualified Stock Option Plans for Directors (the
"Directors Plans") 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 one of the two Directors Plans, respectively, at an exercise price of
$10 per share. No options were granted under either plan during the fiscal
years ended June 30, 1995, 1996, 1997, or 1998. During the year ended June
30, 1999, options for 10,000 shares were granted under both the second
Directors Plan and second Employee Plan at an exercise price of $20.00 and
$21.50, respectively. Under the plans, participants may exercise options by
exchanging, at fair value, shares of common stock which they already own.
At June 30, 1999, options for 70,000 shares of common stock were reserved
for future issuance for the Employee Plan. As of June 30, 1999, options for
124,614 common shares have been exercised under the Employee Plan and
options for 99,050 common shares have been exercised under the Directors
Plans.
- --------------------------------------33----------------------------------------
<PAGE>
- ----------------------------NOTES TO CONSOLIDATED-------------------------------
FINANCIAL STATEMENTS
First Savings applies APB Opinion 25 and related interpretations in
accounting for the stock option plans. Accordingly, no compensation cost
has been recognized. Had compensation cost for First Savings' stock option
plans been determined based on the fair value at the grant dates for awards
under the plans, consistent with the method prescribed by FASB Statement No.
123, First Savings' net income and earnings per share for the year ended
June 30, 1999 (the only year subsequent to July 1, 1995 in which options
were granted) would have been adjusted to the pro forma amounts indicated
below:
Year ended
June 30, 1999
----------------------
(in thousands, except
per share data)
Net Income
As reported $ 5,161
Pro forma 5,091
Net income per common share - basic
As reported 1.42
Pro forma 1.40
Net income per common share - diluted
As reported 1.32
Pro forma 1.30
The fair value of each option granted in the year ended June 30, 1999 is
estimated on the date of the grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
Dividend yield: 4.87%
Expected life: 7 years
Expected volatility: 21.00%
Risk-free interest rate: 5.50%
A summary of the status of the First Savings' stock option plan is presented
below:
<TABLE>
<CAPTION>
Year ended
----------------------------------------------------
1999 1998 1997
---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ------ ----------- -------- --------- --------
Options outstanding at beginning of year 568,286 $10.00 613,189 $10.00 630,000 $10.00
Granted 20,000 20.75 - - - -
Exercised (153,900) 10.00 (44,903) 10.00 (16,811) 10.00
Forfeited - - - - - -
--------- ---------- --------
Options outstanding at end of year 434,386 568,286 613,189
========= ========== ========
Options exercisable at year-end 356,586 478,686 487,389
========= ========== ========
Weighted-average fair value of options
granted during the year $20.75 $ - $ -
========= ========== ========
</TABLE>
- --------------------------------------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 $10,200 for the year ended June 30, 1999 and
$9,000 for each of the years ended June 30, 1998 and 1997. 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, 1999, the minimum rental commitments required under this
noncancelable lease are as follows:
Year Ending
2000 $10,200
2001 10,200
2002 10,200
2003 7,650
-------
Total $38,250
=======
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 approximate contract amount of the Bank's exposure to off-
balance sheet risk as of June 30, 1999 is as follows:
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit, mortgage loans $ 6,904,000
Undisbursed construction loans 7,826,000
Undisbursed lines of credit 21,168,000
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 due from banks 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>
1999 1998
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks and $ 6,837,691 $ 6,837,691 $ 7,816,308 $ 7,816,308
interest-earning deposits
Securities 93,482,515 92,928,736 84,398,774 84,483,022
Loans receivable 208,677,915 211,666,054 208,094,461 209,610,186
------------ ------------ ------------ ------------
$308,998,121 $311,432,481 $300,309,543 $301,909,516
============ ============ ============ ============
Financial liabilities:
Deposits $226,651,010 $225,486,925 $211,924,932 $210,824,998
Borrowed funds 20,000,000 20,226,033 20,000,000 19,975,856
------------ ------------ ------------ ------------
$246,651,010 $245,712,958 $231,924,932 $230,800,854
============ ============ ============ ============
</TABLE>
The fair value estimates presented herein are based on pertinent information
available to management at June 30, 1999 and 1998, 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>
1999
Total interest and dividend income $ 5,579 $ 5,407 $ 5,256 $ 5,523
Total interest expense 2,710 2,530 2,414 2,620
---------- ---------- ---------- ----------
Net interest income 2,869 2,877 2,842 2,903
Provision for loan losses - - - -
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 2,869 2,877 2,842 2,903
Other expense, net 823 801 847 874
---------- ---------- ---------- ----------
Income before income taxes 2,046 2,076 1,995 2,029
Income tax expense 752 763 734 736
---------- ---------- ---------- ----------
Net income $ 1,294 $ 1,313 $ 1,261 $ 1,293
========== ========== ========== ==========
Net income per common share
Basic $ 0.35 $ 0.35 $ 0.35 $ 0.37
Diluted $ 0.32 $ 0.33 $ 0.33 $ 0.34
Average common shares outstanding
Basic 3,718,420 3,711,147 3,613,559 3,530,212
Diluted 4,018,718 3,998,413 3,879,896 3,749,911
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
</TABLE>
- --------------------------------------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, 1999 and 1998 and for the years ended June 30, 1999
and 1998 is presented below:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash and due from subsidiary $ 5,150,836 $ 3,841,153
Securities at market value - 10,126,516
Investment in subsidiary 59,270,894 54,675,457
Other assets 717,432 1,825,074
----------- -----------
Total assets $65,139,162 $70,468,200
=========== ===========
Liabilities and Shareholders' Equity
Accrued expenses and other liabilities $ 911,390 $ 946,995
Shareholders' equity 64,227,772 69,521,205
----------- -----------
Total liabilities and shareholders' equity $65,139,162 $70,468,200
=========== ===========
Condensed Statements of Income
Interest on securities $ 385,339 $ 670,874
Earnings of subsidiary 4,999,808 4,934,659
----------- -----------
5,385,147 5,605,533
Other expenses 140,172 175,066
----------- -----------
Income before income tax 5,244,975 5,430,467
Income tax expense 84,000 172,000
----------- -----------
Net income $ 5,160,975 $ 5,258,467
=========== ===========
</TABLE>
For the years ended June 30, 1999 and 1998, the Bank subsidiary did not pay
cash dividends to the parent.
- --------------------------------------38----------------------------------------
<PAGE>
- --------------------------FIRST SAVINGS BANCORP, INC.---------------------------
BOARD OF DIRECTORS
William E. Samuels, Chairman of the Board
First Savings Bank of Moore County
<TABLE>
<S> <C>
Virginia C. Brandt H. David Bruton, M.D.
Certified Public Accountant Secretary of NC Dept. of Health and Human Services
Holden, Brandt, & Longfellow, P.C.
Felton J. Capel
John F. Burns, President Owner of Century Associates of North Carolina
Chief Executive Officer A distributor of cookware and other housewares
First Savings Bank of Moore County
Frank G. Hardister
J. Edwin Causey, Chairman Emeritus President of Powell Funeral Home
Retired Contractor
Henry A. Clayton Joe Montesanti, Jr.
Retired Merchant Retired Pharmacist
Dr. W. Harrell Johnson Thomas F. Phillips
Retired Dentist Owner of Phillips Motor Company
</TABLE>
- ---------------------------FIRST SAVINGS BANK STAFF-----------------------------
John F. Burns, President
Senior Management Team
<TABLE>
<S> <C> <C> <C> <C>
S. Allan Beck Timothy S. Maples Michael F. McMillan William A. Roberts Sherry B. Yow
VP, Sr. Loan Officer VP, CFO VP, Sr. Loan Officer VP, Compliance VP, Operations
Human Resources
Southern Pines Office Carthage Office
Vice Presidents Stuart F. Fields, Branch Manager
Donna B. Morgan Joel H. Salmon Patsy M. Salmon
Carol M. Williams
Assistant Vice Presidents
Carol F. Allred Margaret V. Hightower Seven Lakes Office
Sandra G. Blake Caroline M. Lemmond Kim Y. Bailey, Vice President
Wanda M. Ring Karen T. Arrington
Sherry S. Blake
Staff Patricia U. Cole
Tammy O. Barnett Marian B. Lauffer Shirley M. Puckett
Shelia C. Brown Betty K. Lomax
Dianna B. Bullard Kimberly H. Matthews Pinecrest Plaza Office
Derinda F. Hobson Angel J. McKeithan Charles H. McWilliams, Asst. Vice President
Susanna C. Hunley Audra W. McLean Patsy M. McDonald, Asst. Vice President
Candice C. Jeffrey Barbara W. Ussery Kelly M. Fulton
Betty S. Kramer Pamela C. Wase Martha M. Lunday
M. Lucille McLeod
Pinehurst Office
Teresa T. Cole, Asst. Vice President Belle Meade Office
Lynette F. Williams, Vice President Patricia W. Jackson, Vice President
Katherine R. Hill Doris B. Andrews, Vice President
Nancy L. Howle
Deborah H. Williams
</TABLE>
- --------------------------------------39----------------------------------------
<PAGE>
- -----------------------------CORPORATE INFORMATION------------------------------
<TABLE>
<S> <C>
Corporate Headquarters Independent Accountants
First Savings Bancorp, Inc. Dixon Odom pllc
205 SE Broad Street, Post Office Box 1657 408 Summit Drive
Southern Pines, North Carolina 28388 Post Office Box 70
(910) 692-6222 Sanford, North Carolina 27331
Special Counsel Form 10-K
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P. Copies of 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
Registrar and Transfer Company For additional information, please contact
10 Commerce Drive John F. Burns or Timothy S. Maples at
Cranford, NJ 07016-3572 (910) 692-6222.
1-800-368-5948
Annual Meeting
The 1999 Annual Meeting of Shareholders of
First Savings Bancorp, Inc. will be held at the
Holiday Inn, US#1, Southern Pines, NC on
October 28, 1999 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, 1999, there were 3,503,763 shares outstanding
and 1,002 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. The following table reflects the stock trading and dividend
payment frequency of First Savings for the years ended June 30, 1999 and 1998.
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, 1999:
First Quarter Ending September 30 $ 24.88 $ 21.00 $ 0.25 N/A
Second Quarter Ending December 31 $ 23.75 $ 20.88 $ 0.25 N/A
Third Quarter Ending March 31 $ 22.50 $ 21.50 $ 0.25 N/A
Fourth Quarter Ending June 30 $ 22.19 $ 19.13 $ 0.26 N/A
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
</TABLE>
This annual report has not been reviewed or confirmed for accuracy or relevance
by the Federal Deposit Insurance Corporation.
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