<PAGE>
________________________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _______________________ to ___________
COMMISSION FILE NUMBER 0-26730
---------------------------------------------------------
FIRST SAVINGS FINANCIAL CORP.
(Name of small business issuer in its charter)
NORTH CAROLINA 56-1928110
------------------------------ ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
501 SOUTH MAIN STREET, POST OFFICE BOX 1885
REIDSVILLE, NORTH CAROLINA 27323-1885
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(910) 342-4251
------------------------------
(Issuer's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
------------------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 _____
-----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will 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-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year $3,842,910
------------
State the aggregate market value of the voting stock held by non-affiliates
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 the past 60
days.
Common Stock, no par value -- $7,182,208 (based on the price at which the stock
was sold on February 21, 1997 of $11.00 per share).
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
COMMON STOCK, NO PAR VALUE 986,321
---------------------------- ------------------------------
(Class) (Outstanding at March 1, 1997)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
1996 (the "1996 Annual Report"), are incorporated by reference into Part I and
Part II.
Portions of the Proxy Statement for the Annual Meeting of Stockholders on April
16, 1997 (the "Proxy Statement"), are incorporated by reference into Part III.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): Yes _____ No X
---
________________________________________________________________________________
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Prior to September 22, 1995, First Savings Bank of Rockingham County, Inc.,
SSB (the "Bank") operated as a mutual North Carolina-chartered savings bank. On
September 22, 1995, the Bank converted from a North Carolina-chartered mutual
savings bank to a North Carolina-chartered stock savings bank (the
"Conversion"). In connection with the Conversion, all of the issued and
outstanding capital stock of the Bank was acquired by First Savings Financial
Corp., a North Carolina corporation (the "Company") which was organized to
become the Bank's holding company. At that time, the Company had an initial
public offering of its common stock, no par value (the "Common Stock").
The Company is a savings bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Company Act of 1956, as amended (the "BHCA") and the savings bank
holding company laws of North Carolina. The Company's office is located at 501
South Main Street, Reidsville, North Carolina. The Company's activities consist
of investing the proceeds of its initial public offering which were retained at
the holding company level and owning the Bank. The Company's principal sources
of income are earnings on its investments. In addition, the Company will
receive any dividends which are declared and paid by the Bank on its capital
stock.
The Bank was chartered by the State of North Carolina as Rockingham
Building and Loan Association in 1915. It has been a member of the Federal Home
Loan Bank ("FHLB") since 1933 and its accounts have been federally insured up to
allowable limits since 1938. In 1940, the institution converted to a federal
savings and loan association charter and changed its name to First Federal
Savings and Loan Association of Reidsville. In 1990, First Federal converted to
a federal savings bank charter and changed its name to First Federal Savings
Bank of Reidsville. In 1992, First Federal converted to a North Carolina
savings bank charter and changed its name to First Savings Bank of Rockingham
County, S.S.B.
The Bank is primarily engaged in soliciting deposit accounts from the
general public, making mortgage loans to finance the acquisition and
construction of residential dwellings and making limited types of consumer
loans. The Bank conducts its business through its office at 501 South Main
Street, Reidsville, North Carolina.
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 business of the Company parallels that of the Bank and is discussed
hereafter interchangeably.
PRIMARY MARKET AREA
The Bank's primary market area includes Rockingham County, North Carolina.
This market area is located approximately 20 miles north of Greensboro, North
Carolina and 20 miles south of Danville, Virginia. Employment is spread among
manufacturing, agriculture and other non-manufacturing activities. Tobacco is
the primary crop produced in the Bank's market area and the Rockingham County
economy has been closely tied
2
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to the tobacco industry in the past. Major employers in Rockingham County
include Reynolds Aluminum Company (beer can manufacturer), Miller Brewery (beer
brewery), Sara Lee Knit Products (apparel manufacturer), Pluma, Inc. (apparel
manufacturer), Burlington Industries (textile manufacturer), Fieldcrest Mills
(textile manufacturer), and Unifi, Inc. (textile manufacturer). Consistent with
the Bank's emphasis on being a community-oriented financial institution,
management estimates that, as of December 31, 1996, the vast majority of the
Bank's deposits were held by customers in its primary market area.
The Rockingham County economy, because it is manufacturing dependent, is
more susceptible to economic downturns than more diversified markets.
Rockingham County's unemployment rates for several years have been higher than
the state average, with unemployment rates of 7.4%, 7.1%, 6.7%, 7.1% and 4.6%
for 1991, 1992, 1993, 1994 and 1995, respectively, as compared to statewide
unemployment rates of 5.5%, 5.9%, 6.3%, 4.4% and 4.3% for 1991, 1992, 1993, 1994
and 1995, respectively.
In recent periods, Reidsville and Rockingham County have experienced
declining populations. This decline in population is predicted to continue into
the year 2000 and beyond. However, several new small and medium sized
manufacturing and wholesale/retail businesses have moved, or have announced
plans to move, to the Bank's market area in the last 24 months.
The Bank encounters strong competition both in the attraction of deposits
and origination of real estate and other loans. Such competition could serve as
an impediment to the Bank's attempts to diversify its loan portfolio, expand its
revenue base, and increase its net interest rate spread. In addition, any
decline in real estate values in the Bank's market area could result in an
increase in nonperforming assets, could hamper disposition of nonperforming
assets and could result in losses upon disposition.
Based upon comparative data as of June 30, 1996, the Bank had approximately
4.94% of the deposits in Rockingham County.
LENDING ACTIVITIES
GENERAL. The principal lending activity of the Bank historically has been
the origination of conventional first mortgage single family residential loans
concentrated in its primary market area. The Bank also makes loans on two-to-
four family dwelling units, multiple family dwelling units, non-residential
property and unimproved real estate. The Bank also makes some consumer loans,
all of which are secured by certificates of deposit. In addition, the Bank
makes commercial loans, all of which are personally guaranteed and secured by
real estate. The Bank also offers equity lines of credit, all of which are
secured by a primary residence.
The Bank's net loan portfolio totaled approximately $32.8 million on
December 31, 1996, or 61.6% of its total assets. On that date, approximately
$30.6 million or 93.4% of loans outstanding consisted of loans secured by
mortgages on one-to-four family residential properties, $1.7 million or 5.1%
were loans secured by multifamily residential properties, approximately $1.1
million or 3.3% of loans were secured by non-residential real estate,
approximately $609,000 or 1.9% of loans were secured by undeveloped land, and
approximately $63,000 or 0.2% were loans secured by savings accounts or
certificates of deposit.
The Bank's present lending policies are structured to increase the match of
rate sensitive assets to rate sensitive liabilities. This policy is being
carried out in residential lending by emphasizing shorter terms on fixed-rate
loans and adjustable-rate mortgage loans; however, the Bank has found that
fixed-rate loan products are usually more attractive to customers in its market
area, particularly during periods of lower interest rates. The Bank generally
underwrites such loans according to Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") guidelines. Under
certain circumstances, the Bank may waive, in order to remain competitive with
larger mortgage lenders in its area, survey requirements on real estate secured
loans with terms of 15 years or less. Also, the Bank does not routinely require
title insurance on its mortgage loans. Instead, the Bank obtains an attorney's
opinion of title.
3
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ANALYSIS OF LOAN PORTFOLIO. Set forth below is selected data relating to
the composition of the Bank's loan portfolio by type of loan and type of
security on the dates indicated. Percentages in the table represent percentages
of net total loans.
<TABLE>
<CAPTION>
At December 31,
------------------------------------
1996 1995
----------------- -----------------
% of % of
Amount Total Amount Total
-------- ------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Type of loan:
Real estate loans:
First mortgage loans on existing property... $32,896 100.32% $30,124 99.68%
Construction loans.......................... 1,093 3.33% 932 3.08%
------- ------ ------- ------
Total real estate loans.................. 33,989 103.65% 31,056 102.76%
------- ------ ------- ------
Non-real estate loans:
Consumer loans (1).......................... 63 0.19% 79 0.26%
Commercial loans............................ - -
------- ------ ------- ------
Total non-real estate loans.............. 63 0.19% 79 0.26%
------- ------ ------- ------
Total loans, gross....................... 34,052 103.84% 31,135 103.02%
Less:
Loans in process............................... 882 2.69% 518 1.71%
Allowance for possible loan losses............. 300 0.91% 259 0.86%
Deferred loan fees............................. 80 0.24% 135 0.45%
------- ------ ------- ------
Total loans, net......................... $32,790 100.00% $30,223 100.00%
======= ====== ======= ======
Type of security:
Real estate loans:
First mortgage loans on 1-4 dwelling units.. $30,616 93.37% $26,453 87.53%
Loans on 5 or more dwelling units........... 1,678 5.12% 1,263 4.18%
Loans on nonresidential property............ 1,086 3.31% 2,655 8.78%
Land........................................ 609 1.85% 685 2.27%
------- ------ ------- ------
Total real estate loans.................. 33,989 103.65% 31,056 102.76%
------- ------ ------- ------
Non-real estate loans:
Deposit account loans....................... 63 0.19% 79 0.26%
------- ------ ------- ------
Total non-real estate loans.............. 63 0.19% 79 0.26%
------- ------ ------- ------
Total loans, gross....................... 34,052 103.84% 31,135 103.02%
Less:
Loans in process............................... 882 2.69% 518 1.71%
Allowance for possible loan losses............. 300 0.91% 259 0.86%
Deferred loan fees............................. 80 0.24% 135 0.45%
------- ------ ------- ------
Total loans, net......................... $32,790 100.00% $30,223 100.00%
======= ====== ======= ======
</TABLE>
_______________________
(1) Comprised entirely of loans secured by deposit accounts.
4
<PAGE>
LOAN MATURITY SCHEDULE. The following table sets forth certain information
at the periods indicated regarding the dollar amount of loans maturing or
repricing in the Bank's portfolio based on the contractual maturity or
repricing. Demand loans, having no stated schedule of repayment and no stated
maturity, are reported as due in one year or less. Construction loans are
reported net of loans in process.
<TABLE>
<CAPTION>
At December 31, 1996
------------------------------------------------------------
1997 1998 1999 2000-2004 2005-thereafter Total
-------- ----- ----- ---------- --------------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential and commercial
real estate loans.......... $ 307 $ 121 $ 442 $ 1,623 $30,403 $32,896
Construction loans........... 211 -- -- -- -- 211
Other loans.................. 56 7 -- -- -- 63
----- ----- ----- ---------- ------- -------
Total........................ $ 574 $ 128 $ 442 $ 1,623 $30,403 $33,170
===== ===== ===== ========== ======= =======
</TABLE>
REAL ESTATE LOANS. The primary lending activity of the Bank has been the
origination of conventional real estate loans. Of these loans, the substantial
majority are residential real estate loans secured by one-to-four family
dwelling units. The Bank's real estate loan portfolio also includes a small
amount of loans on multi-family dwelling units, non-residential real estate and
unimproved land. At December 31, 1996, the Bank had approximately $32.3 million
in net outstanding loans secured by residential real estate and $1.7 million in
net outstanding loans secured by non-residential real estate.
The Bank's lending policies limit the maximum loan-to-value ratio on one-
to-four family residential mortgage loans to 95% of the lesser of the appraised
value or purchase price. With limited exceptions, all such loans with a loan-
to-value ratio in excess of 80% require private mortgage insurance. The Bank
also is limited by regulation in the amount that it can lend to any one
borrower. See "Regulation of the Bank --Loans-To-One-Borrower."
The Bank makes both fixed rate and adjustable rate mortgage loans secured
by one-to-four family residential real estate. At December 31, 1996,
approximately $28.3 million or 92.5% of the Bank's one-to-four family
residential real estate loans had fixed rates, and only approximately $2.3
million or 7.5% of the Bank's one-to-four family residential real estate loans
had adjustable rates. Fixed rate loans generally have terms of 15 years or
less. Adjustable rate loans have terms of up to 30 years. The Bank's
experience indicates that such loans remain outstanding for periods
significantly shorter than their contractual terms. The Bank estimates that its
15-year loans generally remain outstanding for approximately seven years and its
30-year loans generally remain outstanding for approximately 14 years.
Borrowers may refinance or prepay loans at their option, without the imposition
of any prepayment penalty.
The retention of adjustable rate loans in the Bank's portfolio helps reduce
the Bank's exposure to increases in prevailing market interest rates. However,
there are unquantifiable credit risks resulting from potential increases in
costs to borrowers in the event of upward repricing of adjustable rate loans.
It is possible that during periods of rising interest rates, the risk of default
on adjustable rate loans may increase due to increases in interest costs to
borrowers. Further, although adjustable rate loans allow the Bank to increase
the sensitivity of its interest-earning assets to changes in interest rates, the
extent of this interest sensitivity is limited by the initial fixed rate period
before the first adjustment and the periodic and lifetime interest rate
adjustment limitations and the ability of borrowers to convert the loans to
fixed rates. Accordingly, there can be no assurance that yields on the Bank's
adjustable rate loans will fully adjust to compensate for increases in the
Bank's cost of funds. Finally,
5
<PAGE>
adjustable rate loans increase the Bank's exposure to decreases in prevailing
market interest rates, although decreases in the Bank's cost of funds tend to
offset this effect.
While the Bank has emphasized its adjustable rate products in the past, it
has found that fixed rate products are more attractive to single-family
residential loan customers in its market area. The Bank holds its loans in its
portfolio.
All mortgage interest rates are reviewed weekly and changed according to
market conditions. Rates may be locked in for 60 days at the time of the
application or may float. The rates on adjustable rate mortgage loans now being
originated by the Bank change based upon the Treasury securities index adjusted
to a constant maturity of one year. The applicable index for these types of
loans generally adjusts on an annual basis. Most of such loans have annual and
lifetime adjustment limitations on rate increases.
The Bank offers equity lines of credit up to 80% of the appraised value of
the primary residence. The maximum term is for 15 years with a monthly minimum
payment of 1.5% of the outstanding balance or $100, whichever is greater. Rates
on equity lines are variable rates of interest tied to the Wall Street Journal
Prime Rate.
At December 31, 1996, the Bank had approximately $1.7 million in
outstanding loans secured by multi-family residential real estate, comprising
approximately 5.1% of its loan portfolio as of that date, and approximately $1.1
million in outstanding commercial real estate loans, comprising approximately
3.3% of its net loan portfolio as of that date. Substantially all of the Bank's
loans secured by commercial real estate and multi-family residential real estate
have fixed rates. Such loans are typically made to a maximum of 75% of the
lesser of the purchase price or appraised value of the property for a maximum
term of 30 years with a call provision after seven years. The interest rates on
such loans vary and are set by the Board of Directors and the Loan Committee.
Most of the commercial real estate loans are secured by office, retail, other
commercial real estate, and church properties.
Commercial real estate lending entails significant additional risks
compared with one-to-four family residential lending. For example, commercial
real estate loans typically involve large loan balances to single borrowers or
groups of related borrowers, the payment experience on such loans typically is
dependent on the successful operation of the real estate project, and these
risks can be significantly impacted by supply and demand conditions in the
market for multi-family residential units and commercial office space, and, as
such, may be subject to a greater extent to adverse conditions in the economy
generally. In addition, church loans may be dependent on the congregation's
voluntary contributions, which may be affected by local employment levels and
other factors. To minimize the effects of these risks, the Bank generally
limits commercial real estate lending to its market area and to borrowers with
which management has substantial experience or who are otherwise well known to
management. It is the Bank's practice to obtain personal guarantees from all
principals obtaining commercial real estate loans. In assessing the value of
such guarantees, the Bank reviews the individual's personal financial
statements, credit reports, tax returns and other financial information. At
December 31, 1996, the Bank's loans in excess of $300,000 included one loan with
an outstanding principal balance of $351,056 and secured by a 20-unit apartment
building located in Reidsville and one loan with an outstanding principal
balance of $409,336 secured by unimproved land located in Eden, North Carolina.
The Bank will lend up to 65% of the lesser of the purchase price or
appraised value of unimproved land for a maximum term of 15 years. The interest
rate for unimproved land loans generally will be .5% to 1% above the current
residential owner occupied rate.
OTHER LOANS. The Bank also makes loans secured by certificates of deposit.
At December 31, 1996, the Bank had approximately $63,000 in such loans. The
interest rates on these loans is 3% above the interest rate being paid on the
certificate of deposit serving as collateral, and the maximum amounts of these
loans is 90% of the related deposit accounts. The Bank does not make any other
type of non-real estate secured loans and does not make unsecured loans.
6
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CONSTRUCTION LOANS. At December 31, 1996, the Bank had approximately
$1,093,000 in outstanding construction loans. Most of these loans are
construction-permanent loans which provide for the payment of interest only
during the period of construction and then convert to a permanent loan requiring
monthly payments of principal and interest. These loans are made on both fixed
and adjustable rate terms and have a maximum loan-to-value ratio of 95% of the
lower of the appraised value or the sum of the cost of construction plus the
value of the land. In most cases, such loans with a loan-to-value ratio in
excess of 80% require private mortgage insurance.
Construction loans are generally considered to involve a higher degree of
risk than long-term financing secured by improved occupied real estate. These
risks may be magnified when the construction loan is made to an individual who
is neither a builder nor a general contractor. A lender's risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's value at the completion of construction and the estimated cost
(including interest) of construction. During the construction phase, a number
of factors could result in delays and cost overruns. If the estimate of
construction cost proves to be inaccurate, the lender may be required to advance
funds beyond the amount originally committed in order to permit completion of
the project. If the estimate of anticipated value proves to be inaccurate, the
lender may have security which has a value insufficient to assure full
repayment. The Bank has sought to minimize this risk by limiting construction
lending to qualified borrowers in the Bank's market area and by limiting the
aggregate amount of outstanding construction loans. The Bank investigates the
character, expertise and financial standing of the borrower and determines the
borrower's capacity to successfully complete the project.
LOAN SOLICITATION, PROCESSING AND UNDERWRITING. Loan originations come
from a mixture of walk-in customers, real estate brokers, builders, depositors,
loan customers and direct solicitation by the Bank's loan officer.
During its loan approval process, the Bank assesses the applicant's ability
to make principal and interest payments on the loan and the value of the
property securing the loan. The Bank obtains detailed written loan applications
to determine the borrower's ability to repay and verifies responses on the loan
application through the use of credit reports, financial statements, and other
confirmations. Under current practice, the Chief Executive Officer or loan
officer of the Bank analyzes the loan application and the property involved, and
an appraiser inspects and appraises the property. The Bank requires appraisals
on all real estate loans. The Bank also obtains information concerning the
income, financial condition, employment and the credit history of the applicant.
The Chief Executive Officer together with the loan officer can approve loans not
exceeding $100,000. All mortgage loans in excess of $100,000 but not exceeding
$200,000 are approved by the Loan Committee of the Bank which is composed of
Messrs. Hooper, Brady and Kemp. Approval by the full Board of Directors is
required for mortgage loans of more than $200,000. All loans to affiliated
persons are approved by a disinterested majority of the Board of Directors. All
approved loans are reviewed and ratified by the Board of Directors during the
monthly Board meeting. Hazard insurance is required for all residential real
estate mortgage loans, equity lines of credit and commercial real estate loans.
No hazard insurance is required for loans secured by unimproved land. Flood
insurance is required if property securing the loans is in a designated flood
zone. With certain limited exceptions, title insurance is not required on
mortgage loans but the Bank does obtain an attorney's opinion of title on all
such loans. In most cases, residential real estate loans and construction loans
in which the loan-to-value ratio exceeds 80% require private mortgage insurance.
LOAN ORIGINATION, PURCHASES AND SALES. The Bank's loans generally are
secured by property in its market area. With certain limited exceptions,
residential mortgage loans are not underwritten according to FNMA and FHLMC
guidelines and the Bank has not sold any whole loans. During the years ended
December 31, 1996 and 1995, the Bank's loan originations totaled $9.0 million
and $2.2 million, respectively.
LOAN COMMITMENTS. The Bank is obligated to make advances under
construction loans and home equity lines of credit. It issues commitments with
respect to interest rates for up to 60 days. As of December 31, 1996, the Bank
had no permanent loan commitments and unused home equity lines of credit were $1
million.
7
<PAGE>
INTEREST RATES, TERMS, POINTS AND FEES. Interest rates and fees charged on
the Bank's loans are affected primarily by the market demand for loans,
competition, the supply of money available for lending purposes and the Bank's
cost of funds. These factors are affected by, among other things, general
economic conditions and the policies of the federal government, including the
Federal Reserve, tax policies and governmental budgetary matters.
In addition to earning interest on loans, the Bank receives fees in
connection with originating loans. Fees for prepayments of commercial real
estate loans, loan modifications, late payments, loan assumptions and other
miscellaneous services in connection with loans are also charged by the Bank.
NON-PERFORMING ASSETS AND ASSET CLASSIFICATION. Loans are reviewed on a
regular basis and are placed on a nonaccrual status when, in the opinion of
management, the collection of additional principal or interest is doubtful. The
purposes of this review policy are to define the risk of collectibility of the
Bank's loans, to identify problem assets, to assure that valuation allowances
are adequate, to measure compliance with established polices and procedures and
to provide management and the Board of Directors with information necessary to
evaluate and collect on the Bank's assets. In most cases, a late charge is
assessed once the loan is more than 15 days delinquent. When a loan is
delinquent, the borrower will be contacted by mail and payment is requested. If
the delinquency continues, subsequent efforts will be made to contact the
delinquent borrower by mail and in person. Generally, if a loan continues in a
delinquent status for 60 days or more, the Bank will initiate foreclosure
proceedings.
Real estate acquired by the Bank as a result of foreclosure is classified
as real estate owned until such time as it is sold. When such property is
acquired, it is recorded at the lower of its fair value, less estimated costs to
sell, or the outstanding balance of the loan. Any required write-down of the
loan to its fair market value is charged to the allowance for loan losses. As of
December 1996, the Bank had no property classified as real estate owned.
The following table sets forth information with respect to the Bank's non-
performing assets identified by the Bank, at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------
1996 1995
------------ ----------
(Dollars in Thousands)
<S> <C> <C>
Loans not accruing interest.................... $ 26 $ 93
Accruing loans 90 days or more past due........ - -
----- -----
Total non-performing loans................ 26 93
Real estate owned.............................. - -
----- -----
Total non-performing assets............... $ 26 $ 93
===== =====
Non-performing assets to total assets.......... .05% .16%
===== =====
</TABLE>
Applicable regulations require each savings institution to classify its own
assets on a regular basis. In addition, in connection with examinations of
savings institutions, examiners have authority to identify problem assets and,
if appropriate, classify them. An asset is classified substandard if it is
determined to involve a distinct possibility that the savings institution could
sustain some loss if deficiencies associated with the loan, including inadequate
documentation, are not corrected. An asset is classified as doubtful if full
collection is highly questionable or improbable. An asset is classified as a
loss if it is considered uncollectible, even if partial recovery could be
expected in the future. The regulations also provide for a special mention
classification, described as assets which do not currently expose an institution
to a sufficient degree of risk to warrant classification, but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Assets classified as substandard or doubtful require the institution to
establish some percentage as general allowances for possible
8
<PAGE>
loan losses. If an asset or portion thereof is classified loss, the savings
institution must either establish specific allowances for possible loan losses
in the amount of the portion of the asset classified loss, or charge off such
amount. Examiners may disagree with the savings institution's classification and
amounts reserved. As of December 31, 1996, the Bank had $313,991 in assets
classified as substandard and no assets classified as doubtful or loss. The Bank
had no assets in the special mention classification as of December 31, 1996.
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 credit worthiness of the
borrower over the term of the loan and, in the case of a secured loan, the
quality of 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 reviews 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 fair value
of the collateral for the loans.
Effective January 1, 1995, the Bank adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("SFAS No. 114"), and Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." Under SFAS No. 114, the allowance for loan losses relating to
loans that are determined to be impaired is based on discounted cash flows using
the loan's initial effective interest rate or the fair value of the collateral
for certain collateral dependent loans. The Bank previously measured loan
impairment in a method generally comparable to the methods prescribed in SFAS
No. 114. Accordingly, no additional provisions for loan losses were required as
a result of adopting this accounting standard. At December 31, 1996 and 1995,
there were no loans considered impaired under SFAS No. 114.
Management continues to actively monitor the Bank's 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. In addition, various regulatory
agencies, as an integral part of their examination processes, periodically
review the Bank's allowance for possible loan losses. Such agencies may require
the Bank to make adjustments to the allowance based on their judgments of
information available to them at the time of their examination. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Asset Quality."
During the first quarter of 1995, the Bank was increasing its provision for
loan losses mainly due to management's recognition of the increased credit risk
in the loan portfolio as a result of the anticipated closing of the American
Tobacco Company ("ATC") plant in Reidsville in 1996. However, during 1996, the
Reidsville plant was purchased by another tobacco company. The new owner is
continuing to operate the plant with a reduced work force. At December 31,
1996, the Bank had loans to ATC employees and former employees totaling $2.1
million or 6.5% of total loans. Further changes in the status of this plant's
ongoing operation may require additional increases in the allowance in the
future. The full impact of the change in the plant's status on the Bank's loan
portfolio and the local economy is not known at this time.
9
<PAGE>
The following table describes the activity related to the Bank's allowance
for possible loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1996 1995
------------- ----------
(Dollars in Thousands)
<S> <C> <C>
Balance, beginning of period.................................................. $ 259 $ 214
Provision for loan losses..................................................... 8 105
Charge-offs -- Real estate mortgage........................................... - 60
Recoveries.................................................................... 33 -
--------- -------
Balance, end of period........................................................ $ 300 $ 259
========= =======
Ratio of net charge-offs to average loans outstanding during the period....... - .19%
========= =======
Ratio of allowance for loan losses to total loans at the end of the period.... .91% .85%
========= =======
Ratio of allowance for loan losses to total nonperforming loans at the
end of the period........................................................... 1,153.85% 278.49%
========= =======
</TABLE>
INVESTMENTS AND MORTGAGE-BACKED SECURITIES ACTIVITIES
Interest income from interest-bearing deposits in other financial
institutions and investment and mortgage-backed securities generally provides
the second largest source of income to the Bank after interest on loans. At
December 31, 1996, the Bank's interest-bearing deposits in other financial
institutions and investment and mortgage-backed securities portfolio was
approximately $19.1 million and consisted primarily of interest-bearing balances
in other financial institutions, U.S. government and agency obligations,
municipal bonds, FHLMC certificates and stock in the FHLB of Atlanta. The
Bank's investment policy prohibits the use of derivatives or other complex
securities or the use of the investment portfolio for speculative purposes.
The Bank adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"), as of January 1, 1994. Prior to its adoption, investment and mortgage-
backed securities were carried at amortized cost and were not adjusted to the
lower of cost or market because management intended to hold such investments to
maturity and were not aware of any conditions which would impair its ability to
do so. Upon adoption of SFAS No. 115, the Bank carries its securities at fair
value or amortized cost depending on the classification of such securities.
Debt securities that the Bank has a positive intent and ability to hold to
maturity are classified as "held-to-maturity" and reported at amortized cost.
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 unrealized gains and losses included in earnings.
Debt and equity securities not classified in either of the preceding categories
are classified as "available for sale" and reported at fair value with
unrealized gains and losses, net of related tax effects, reported as a separate
component of equity.
Gain or loss on sale of securities is recognized when realized and is based
on the specific-identification method. Amortization of premiums and accretion
of discounts are recognized as adjustments to interest income using a method
which approximates the interest method.
In November 1995, the Financial Accounting Standards Board (the "FASB")
issued an implementation guide for SFAS No. 115. The FASB stated that the
transition provisions included in the guide permit a one-time opportunity for
companies to reconsider their ability and intent to hold the securities
accounted for under SFAS No. 115 to maturity and allow entities to transfer
securities from the held to maturity category without tainting their remaining
held to maturity securities. The FASB emphasized that this would be a one-time
event and that any transfers from the held to maturity category to the available
for sale category under this provision must be made by December 31, 1995. On
December 14, 1995, the Bank transferred $12,146,775 from the investment
securities held to maturity category to the investment securities available for
sale category and transferred
10
<PAGE>
$1,525,227 from the mortgage-backed securities held to maturity category to the
mortgage-backed securities available for sale category as allowed under the
provisions of the implementation guide. On the date of the transfer, those
securities were recorded as available for sale securities at their current fair
value, which resulted in the recognition of an unrealized gain of $208,065 being
recorded, net of the related tax effect of $70,042, as an addition to
stockholders' equity.
As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's 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
December 31, 1996, the Bank's investment in stock of the FHLB of Atlanta was
$413,000. See Note 5 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS."
North Carolina regulations require the Bank to maintain a minimum amount of
liquid assets (10% of assets) which may be invested in specified short-term
securities. The Bank is also permitted to make certain other securities
investments. Investment decisions are made by authorized officers of the Bank
under policies established by the Board of Directors. Such investments are
managed in an effort to produce the highest yield consistent with maintaining
safety of principal and compliance with regulations governing the savings
industry.
The following tables set forth certain information regarding the Bank's
investment and mortgage-backed securities portfolio, as well as other interest-
earning assets at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------
1996 1995
---------- ----------
(Dollars in Thousands)
<S> <C> <C>
HELD TO MATURITY:
U.S. Government securities:
U.S. Treasury securities due:
Within 12 months....................... $ 500 $ 8,007
Beyond 12 months but within 5 years.... 500 500
------- -------
1,000 8,507
AVAILABLE FOR SALE:
U.S. Government securities:
U.S. Treasury securities due:
Within 12 months....................... 2,503 15,302
Beyond 12 months but within 5 years.... 13,453 509
Beyond 5 years but within 10 years..... 493 -
------- -------
16,449 15,811
Municipal securities due after 5 years....... 108 108
Mortgage-backed securities................... 599 710
INTEREST-BEARING BALANCES IN OTHER BANKS..... 561 1,088
FHLB STOCK................................... 413 413
------- -------
$19,130 $26,637
======= =======
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1996
----------------------------------------------------------------------------------------------------
After One Year
One Year or Less Through Five Years After Five Years Total
--------------------- --------------------- ------------------------ ---------------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield (1) Value Yield (1) Value Yield (1) Value Yield (1)
--------- --------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Treasury
securities...... $ 500,000 6.50% $ 500,351 5.50% - - $ 1,000,351 6.00%
AVAILABLE FOR SALE:
U.S. Treasury
securities...... 2,503,235 6.07% 13,452,931 6.14% $ 492,540 6.45% 16,448,706 6.14%
Municipal
securities...... - - - - 108,309 6.30% 108,309 6.30%
Mortgage-backed
securities...... 298,281 7.00% 301,065 5.50% - - 599,346 6.25%
INTEREST-BEARING
BALANCES IN OTHER
BANKS.............. 561,269 6.70% - - - - 561,269 6.70%
FHLB STOCK........... - - - - 412,800 7.25% 412,800 7.25%
---------- ---- ----------- ---- ---------- ---- ----------- ----
TOTAL........... $3,862,785 6.29% $14,254,347 6.10% $1,013,649 6.76% $19,130,781 6.18%
========== ==== =========== ==== ========== ==== =========== ====
</TABLE>
(1) Yields are based on book values.
DEPOSITS AND BORROWINGS
GENERAL. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank 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. 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. However, in recent
years the Bank has not borrowed any money to satisfy its lending and investment
needs.
DEPOSITS. On December 31, 1996, the Bank's deposits totaled $43.1 million.
The Bank offers statement savings, money market accounts and certificate of
deposit accounts. The Bank does not offer checking accounts because it
currently is not cost effective to provide that product. Deposit account terms
vary, with the principal differences being the minimum balance required, the
time periods the funds must remain on deposit and the interest rate. The
deregulation of various controls on insured deposits has allowed the Bank to be
more competitive in obtaining funds and has given it more flexibility to meet
the threat of net deposit outflows. While the deregulation of rates payable on
deposits has allowed the Bank to be competitive in the acquisition and retention
of funds, it has also resulted in a more volatile cost of funds.
12
<PAGE>
Maturity terms, service fees and withdrawal penalties are established by
the Bank on a periodic basis. Determination of rates and terms are predicated on
funds acquisition and liquidity requirements, rates paid by competitors, growth
goals and federal regulations. The Bank markets its deposit programs in a
number of ways. Its office displays rate boards and brochures which outline the
features of the various accounts. From time to time the Bank advertises in local
newspapers and on radio.
The Bank's policy is to attract deposits from local residents. It does not
solicit deposits outside of Rockingham County or deposits through brokers. The
percentage of total savings accounts which are from out-of-state sources is not
significant.
The following table sets forth certain information regarding the Bank's
deposits at the dates indicated.
<TABLE>
<CAPTION>
At December 31, 1996
---------------------------------
Weighted Percentage
average of total
rate Category Minimum Balance deposits
-------- -------- ------- ------- ----------
<S> <C> <C> <C> <C>
2.00% Statement savings accounts.......... $ 100 $ 2,114 4.91%
2.48% Money market deposit accounts....... 1,000 1,751 4.07%
4.41% 91 day certificates................. 500 475 1.10%
4.82% 6 month certificates................ 500 6,098 14.16%
5.11% 1 year certificates................. 500 8,085 18.77%
5.36% 18 month certificates............... 500 810 1.88%
5.83% 2 year certificates................. 500 4,354 10.11%
5.55% 30 month certificates............... 500 1,601 3.72%
5.76% 3 year certificates................. 500 1,783 4.14%
5.70% 4 year certificates................. 500 2,892 6.71%
6.35% 5 year certificates................. 500 5,520 12.82%
- 6 year certificates................. 500 - -
- 8 year certificates................. 500 - -
5.83% Jumbo............................... 100,000 7,584 17.61%
----------- ------
$ 43,067 100.00%
=========== ======
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1995
---------------------------------
Weighted Percentage
average of total
rate Category Minimum Balance deposits
-------- -------- ------- ------- ----------
<S> <C> <C> <C> <C>
2.40% Statement savings accounts........... $ 100 $ 2,201,000 4.66%
3.30% Money market deposit accounts........ 1,000 1,948,000 4.12%
4.95% 91 day certificates.................. 500 502,000 1.06%
5.38% 6 month certificates................. 500 6,607,000 13.99%
5.74% 1 year certificates.................. 500 6,246,000 13.22%
5.55% 18 month certificates................ 500 933,000 1.98%
5.61% 2 year certificates.................. 500 7,096,000 15.02%
5.28% 30 month certificates................ 500 1,970,000 4.17%
5.59% 3 year certificates.................. 500 2,421,000 5.13%
5.89% 4 year certificates.................. 500 3,642,000 7.71%
6.44% 5 year certificates.................. 500 5,174,000 10.96%
7.75% 6 year certificates.................. 500 11,000 0.02%
7.65% 8 year certificates.................. 500 15,000 0.03%
6.00% Jumbo................................ 100,000 8,466,000 17.93%
----------- ------
$47,232,000 100.00%
=========== ======
</TABLE>
The following table sets forth changes in the dollar amounts of deposits in
the various types of accounts offered by the Bank between the dates indicated
and the prior year-end.
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1995
------------------------------ -------------------------------
% of Increase % of Increase
Amount deposits (decrease) Amount deposits (decrease)
------- -------- ---------- ------ -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement savings accounts.......... $ 2,114 4.91% $ (87) $ 2,201 4.66% $ (824)
Money market deposit accounts....... 1,751 4.07% (197) 1,948 4.12% (868)
Certificates of deposit............. 39,202 91.02% (3,881) 43,083 91.22% (588)
------- ------ ------- ------- ------ -------
$43,067 100.00% $(4,165) $47,232 100.00% $(2,280)
======= ====== ======= ======= ====== =======
</TABLE>
As of December 31, 1996, the aggregate amount outstanding of time
certificates of deposit in amounts greater than $100,000 was approximately $6.8
million. Some of these deposits were deposits of state and local governments
which are subject to rebidding from time to time and to collateralization
requirements.
14
<PAGE>
The following table presents the maturity of all time certificates of
deposit as of December 31, 1996.
<TABLE>
<CAPTION>
Amount due during year ended December 31,
------------------------------------------------
1997 1998 1999 Thereafter Total
-------- ------- ------- ---------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Less than 6.0% ....... $22,355 $5,328 $1,775 $1,522 $30,980
6.01% - 7.00% ....... 3,656 1,344 996 534 6,530
7.01% - 8.25% ....... 340 745 307 300 1,692
------- ------ ------ ------ -------
$26,351 $7,417 $3,078 $2,356 $39,202
======= ====== ====== ====== =======
</TABLE>
BORROWINGS. The FHLB of Atlanta functions as a central reserve bank
providing credit for savings institutions and certain other member financial
institutions. As a member, the Bank is required to own capital stock in the
FHLB of Atlanta and is authorized to apply for advances on the security of such
stock and certain of its home mortgages and other assets (principally,
securities which are obligations of, or guaranteed by, the United States)
provided certain standards related to credit worthiness have been met. Advances
are made pursuant to several different programs. 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 credit worthiness. The Bank has not had any outstanding
borrowings from the FHLB of Atlanta or any other source since 1989.
COMPETITION
The Bank faces strong competition in the attraction of deposits (its
primary source of lendable funds) and in the origination of real estate loans.
Its most direct competition for deposits and for real estate loans has
historically come from other savings institutions, commercial banks, mortgage
companies, investment houses and credit unions located in this primary market
area.
The Bank competes for loans principally through the interest rates and loan
fees it charges and the personal service, efficiency and quality of the services
it provides borrowers and real estate brokers. It competes for deposits by
offering depositors a variety of deposit accounts, a convenient office location,
a drive-in facility, tax deferred retirement programs, traveler's checks, bank
checks and other financial services. As of December 31, 1996, there were at
least twelve other credit unions, commercial banks and mortgage companies as
well as numerous other financial services providers, located in the Bank's
primary market area.
Legislation enacted in the past 15 years has significantly expanded the
range of services which savings institutions can offer the public. In addition,
since 1978 the regulatory authorities have largely deregulated interest rate
controls and changed other regulations affecting deposits. These changes and an
increasingly sophisticated public have increased competition between depository
institutions and institutions offering other types of investment vehicles for
deposits (such as money market mutual funds, Treasury securities, municipal
bonds, etc.) and have increased competition with commercial banks with respect
to loans, checking accounts and other types of financial services. In addition,
large conglomerates and investment banking firms have entered the market for
financial services. The Bank has found it increasingly difficult to compete
with the larger financial institutions in its market area for both deposits and
loans because of the Bank's small size, which limits the types and the scope of
the services which the Bank can provide to customers. This increased
competition has contributed to the slow erosion of the Bank's core deposits as
its aging customer base is replaced by a more
15
<PAGE>
transient, less loyal and less affluent customer base. This increased
competition has also resulted in a reduction in loan applications meeting the
Bank's loan underwriting requirements.
SUBSIDIARY ACTIVITIES
The Company has one wholly-owned subsidiary, First Savings Bank of
Rockingham County, Inc., SSB. The Bank does not have any subsidiaries.
PERSONNEL
As of December 31, 1996, the Bank had nine full-time employees and no part-
time employees. The employees are not represented by a collective bargaining
unit. The Bank believes its relationship with its employees to be good.
FEDERAL TAXATION
Thrift institutions are subject to provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), in the same general manner as other
corporations. Prior to recent legislation, institutions such as the Bank which
met certain definitional tests and other conditions prescribed by the Code
benefitted from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. For purposes of
the bad debt reserve deduction, loans were separated into "qualifying real
property loans," which generally are loans secured by certain interests in real
property, and "nonqualifying loans," which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans must be based on actual
loss experience. The amount of the bad debt reserve deduction with respect to
qualifying real property loans could be based upon (a) actual loss experience or
(b) a percentage of taxable income before such deduction.
The Bank, which files its federal income tax returns on a calendar year
basis, could generally elect to use the method which resulted in the greatest
deduction for federal income tax purposes, which generally was the percentage of
taxable income method.
Earnings appropriated to an institution's bad debt reserve and claimed as a
tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount was included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
Legislation recently signed by the President repealed the percentage of
taxable income method of calculating the bad debt reserve. Savings
associations, like the Bank, which have previously used that method are required
to recapture into taxable income post-1987 reserves in excess of the reserves
calculated under the experience method over a six-year period beginning with the
first taxable year beginning after December 31, 1995. The start of such
recapture may be delayed until the third taxable year beginning after December
31, 1995 if the dollar amount of the institution's residential loan originations
in each year is not less than the average dollar amount of residential loans
originated in each of the six most recent years, disregarding the years with the
highest and lowest originations during such period. For purposes of this test,
residential loan originations would not include refinancings and home equity
loans. The Bank has provided deferred taxes for the amount of the recapture.
Beginning with the first taxable year beginning after December 31, 1995,
savings institutions, such as the Bank, will be treated the same as commercial
banks. Institutions with $500 million or more in assets will only be able to
take a tax deduction when a loan is actually charged off. Institutions with
less than $500 million in assets will still be permitted to make deductible bad
debt additions to reserves, but only using the experience method.
16
<PAGE>
The Bank's federal income tax returns have been audited through December
31, 1992.
STATE AND LOCAL TAXATION
Under North Carolina law, the corporate income tax is 7.75% of federal
taxable income as computed under the Code, subject to certain prescribed
adjustments. An annual state franchise tax is imposed at a rate of 0.15%
applied to the greatest of the institutions (i) capital stock, surplus and
undivided profits, (ii) investment in tangible property in North Carolina or
(iii) 55% of the appraised valuation of property in North Carolina.
REGULATION OF THE COMPANY
Bank holding companies and state savings banks are extensively regulated
under both federal and state law. The following is a brief summary of certain
statutes and rules and regulations that affect or will affect the Company and
the Bank. This summary is qualified in its entirety by reference to the
particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank. Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Company.
GENERAL. The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank to be issued in the Conversion. As
a savings bank holding company subject to the Bank Holding Company Act of 1956,
as amended ("BHCA"), the Company is subject to certain regulations of the
Federal Reserve. Under the BHCA, the 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 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 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.
Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of the Company. Control
is conclusively presumed to exist if, among other things, a person acquires more
than 25% of any class of voting stock of the holding company or controls in any
manner the election of a majority of the directors of the holding company.
Control is presumed to exist if a person acquires more than 10% of any class of
voting stock and the stock is registered under Section 12 of the Exchange Act or
the acquiror will be the largest shareholder after the acquisition.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger 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
17
<PAGE>
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 or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing Common Stock in excess of ten
percent of its net worth during a rolling twelve month period. As a result of
the Company's ownership of the Bank, the Company is registered under the savings
bank holding company laws of North Carolina. Accordingly, the Company is also
subject to regulation and supervision by the Administrator.
CAPITAL ADEQUACY GUIDELINES FOR HOLDING COMPANIES. The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies and banks that
are members of the Federal Reserve system and have consolidated assets of $150
million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines. 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 capital (leverage) 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 capital (leverage) ratio of at least 1% to 2% above the
stated minimum.
FEDERAL SECURITIES LAW
The Company has registered its Common Stock with the SEC pursuant to
Section 12(g) of the Exchange Act and will not deregister the Common Stock for a
period of three years following the completion of the Conversion. As a result
of such registration, the proxy and tender offer rules, insider trading
reporting requirements, annual and periodic reporting and other requirements of
the Exchange Act are applicable to the Company.
18
<PAGE>
The registration under the Securities Act of the Offerings of the Common
Stock does not cover the resale of such shares. Shares of the Common Stock
purchased by persons who are not affiliates of the Company may be resold without
registration. Shares purchased by an affiliate of the Company are subject to
the resale provisions of Rule 144 under the Securities Act. So long as the
Company meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) will be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances. There are currently no demand
registration rights outstanding. However, in the event the Company at some
future time determines to issue additional shares from its authorized but
unissued shares, the Company might offer registration rights to certain of its
affiliates who want to sell their shares.
REGULATION OF THE BANK
GENERAL. Federal and state legislation and regulation have significantly
affected the operations of federally insured savings institutions and other
federally regulated financial institutions in the past several years and have
increased competition among savings institutions, commercial banks and other
providers of financial services. In addition, federal legislation has imposed
new limitations on investment authority, and higher insurance and examination
assessments on savings institutions and has made other changes that may
adversely affect the future operations and competitiveness of savings
institutions with other financial institutions, including commercial banks and
their holding companies. The operations of regulated depository institutions,
including the Bank, will continue to be subject to changes in applicable
statutes and regulations from time to time.
The Bank is a North Carolina-chartered savings bank, is a member of the
FHLB system, and its deposits are insured by the FDIC through the 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 state chartered savings banks whose
deposits are issued by the SAIF are subject to restrictions with respect to
activities and investments, transactions with affiliates and loans-to-one
borrower similar to those applicable to SAIF insured savings associations. Such
examination and regulation is intended primarily for the protection of
depositors and the federal deposit insurance funds.
The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As creditors 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
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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 the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the savings bank.
Generally, subsidiaries of a bank, other than a bank subsidiary, and certain
other types of companies are not considered to be affiliates. Generally,
Sections 23A and 23B (i) limit the extent to which the Bank or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such the Bank'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 (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the Bank 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 banks the restrictions
contained in Section 22(h) of the Federal Reserve Act and its implementing
regulations with respect to loans to directors, executive officers and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who own more than 10% of a savings bank, 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 bank's
loans-to-one borrower limit as established by federal law 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 bank, and their respective
affiliates, unless such loan is approved in advance by a majority of the
disinterested directors of the board of directors of the savings bank and the
Company. 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 Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the SAIF. Under the FDIC's risk-based deposit insurance 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
corrective 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
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undercapitalized institutions in Subgroup C while assessments for over 90% of
the BIF members had been the statutory minimum of $2,000. Recently enacted
legislation provided for a one-time assessment of 65.7 basis points of insured
deposits as of March 31, 1995, that fully capitalized the SAIF and had the
effect of reducing future SAIF assessments. Accordingly, although the special
assessment resulted in a one-time charge to the Bank of approximately $316,000
pre-tax, 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, both BIF and SAIF members will be assessed an amount for the
Financing Corporation Bond payments. BIF members will be assessed approximately
1.3 basis points while the SAIF rate 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.
COMMUNITY REINVESTMENT ACT. The Bank, like other financial institutions,
is subject to the Community Reinvestment Act, as amended ("CRA"). A purpose of
this Act is to encourage financial institutions to help meet the credit needs of
its entire community, including the needs of low- and moderate-income
neighborhoods. During the Bank's last compliance examination, which was
performed by the FDIC under the old CRA regulations in January 1994, the Bank
received a "satisfactory" rating with respect to CRA compliance. The Bank's
rating with respect to CRA compliance would be a factor to be considered by the
Federal Reserve and FDIC in considering applications submitted by the Bank to
acquire branches or to acquire or combine with other financial institutions and
take other actions and could result in the denial of such applications.
The federal banking regulatory agencies have issued a rewrite of the CRA
regulations, which became effective on January 1, 1996, to implement a new
evaluation system that rates institutions based on their actual performance in
meeting community credit needs. Under the regulations, a savings bank will be
evaluated and rated under three categories: a lending test, an investment test
and a service test. For each of these three tests, the savings bank will be
given a rating of either "outstanding," "high satisfactory," "low satisfactory,"
"needs to improve" or "substantial non-compliance." A set of criteria for each
rating has been developed and is included in the regulation. If an institution
disagrees with a particular rating, the institution has the burden of rebutting
the presumption by clearly establishing that the quantative measures do not
accurately present its actual performance, or that demographics, competitive
conditions or economic or legal limitations peculiar to the service area should
be considered. The ratings received under the three tests will be used to
determine the overall composite CRA rating. The composite ratings will be the
same as those that are currently given: "outstanding," "satisfactory," "needs to
improve" or "substantial non-compliance."
CAPITAL REQUIREMENTS APPLICABLE TO THE BANK. The FDIC requires the Bank to
have a minimum leverage ratio of Tier I capital (principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, less certain intangible items,
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 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
bank 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. At December 31, 1996,
the Bank had a leverage ratio of 16.37%.
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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 December 31, 1996, the Bank complied with each of the capital
requirements of the FDIC and the Administrator.
Each federal banking agency is required to establish risk-based capital
standards that 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 multifamily mortgages. The
agencies approved a final rule in June 1995 amending the risk-based capital
standards to consider explicitly "a bank's exposure to declines in the economic
value of its capital due to changes in interest rates" when evaluating capital
adequacy. Also in June 1995, the agencies requested public comment on a
proposed Joint Agency Policy Statement regarding the measurement and assessment
of interest rate risk. Small banks would be exempted from the proposed Policy
Statement and associated reporting requirements in order to lessen regulatory
burden on small, well-managed banks. The Bank cannot assess at this point the
impact the final rule or the proposed policy statement will have on its capital
requirements.
LOANS-TO-ONE-BORROWER. The Bank is subject to the Administrator's loans-
to-one-borrower limits. Under these limits, no loans and extensions of credit
to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the net worth of the savings bank.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth. These limits also authorize
savings banks to make loans-to-one-borrower, for any purpose, in an amount not
to exceed $500,000. A savings bank 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 bank's net worth, provided that the
purchase price of each single-family dwelling in the development does not exceed
$500,000 and the aggregate amount of loans made under this authority does not
exceed 150% of net worth. 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 December 31, 1996, the largest aggregate amount of loans which the
Bank had to any one borrower was $628,235. The Bank had no loans outstanding
which management believes violate the applicable loans-to-one-borrower limits.
The Bank does not believe that the loans-to-one-borrower limits will have a
significant impact on its business, operations and earnings.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB of Atlanta, the Bank
is required to own capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On December 31, 1996, the Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock of $412,800.
Each FHLB is required to contribute at least 10% of its reserves and
undivided profits to fund the principal and a portion of the interest on certain
bonds and certain other obligations which are used to fund the resolution of
troubled savings association cases, and to transfer a percentage of its annual
net earnings to the Affordable Housing Program. These contributions continue to
reduce the FHLB of Atlanta's earnings and the Bank's dividends on its FHLB of
Atlanta stock.
FEDERAL RESERVE SYSTEM. Federal Reserve regulations require savings banks,
not otherwise exempt from the regulations, to maintain reserves against their
transaction accounts (primarily negotiable order of withdrawal accounts) and
certain nonpersonal time deposits. The reserve requirements are subject to
adjustment by the Federal Reserve. As of December 31, 1996, the Bank was exempt
from the applicable reserve requirements of the Federal Reserve.
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RESTRICTIONS ON ACQUISITIONS. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of a state savings bank without giving at least 60 days' written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition. Pursuant to regulations governing acquisitions of
control, control of an insured institution is conclusively deemed to have been
acquired by, among other things, 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 (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings bank or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisitions 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. On December 31, 1996, the Bank's liquidity ratio, calculated in
accordance with North Carolina regulations, was approximately 36%.
ADDITIONAL LIMITATIONS ON ACTIVITIES. Recent FDIC law and regulations
generally provide that the Bank may not engage as principal in any type of
activity, or in any activity in an amount, not permitted for national banks, or
directly acquire or retain any equity investment of a type or in an amount not
permitted for national banks. The FDIC has authority to grant exceptions from
these prohibitions (other than with respect to non-service corporation equity
investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the activity to be engaged in and if the Bank
is and continues to be in compliance with fully phased-in capital standards.
National banks are generally not permitted to hold equity investments other than
shares of service corporations and certain federal agency securities. Moreover,
the activities in which service corporations are permitted to engage are limited
to those of service corporations for national banks.
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"). State 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.
PROMPT CORRECTIVE REGULATORY ACTION. Federal law provides the federal
banking agencies with broad powers to take corrective action to resolve problems
of insured depository institutions. The extent of these powers depends upon
whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized." Under the FDIC regulations applicable to the
Bank, an institution is considered "well capitalized" if it has (i) a total
risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital
ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not
subject to any order or written directive to meet and maintain a specific
capital level for any capital measure. An "adequately capitalized" institution
is defined as one that has (i) a total risk-based capital ratio of 8% or
greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a
leverage ratio of 4% or greater (or 3% or greater in the case of an institution
with the highest examination rating and which is not experiencing or
anticipating significant growth). An institution is considered (A)
"undercapitalized" if it has (i) a total risk-based capital ratio of less than
8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage
ratio of less than 4% (or 3% in the case of an institution with the highest
examination rating and which is not experiencing or anticipating significant
growth); (B) "significantly undercapitalized" if the institution has (i) a total
risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%.
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INTERSTATE BANKING. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), effective September 29,
1995, permits adequately capitalized bank and savings bank holding companies to
acquire control of banks and savings banks in any state. The states may
specifically permit interstate acquisitions prior to September 29, 1995, by
enacting legislation that provides for such transactions. North Carolina adopted
nationwide reciprocal interstate acquisition legislation in 1994.
Such interstate acquisitions are subject to certain restrictions. States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years. In addition, no
bank or saving bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state, unless
the state has specifically legislated a higher deposit cap. States are free to
legislate stricter deposit caps.
The Interstate Banking Act also provides for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time. Unlike interstate acquisitions, a state may
deny interstate branching if it specifically elects to do so by June 1, 1997.
States may choose to allow interstate branching prior to June 1, 1997 by opting-
in to a group of states that permits these transactions. These states generally
allow interstate branching via a merger of an out-of-state bank with an in-state
bank, or on a de novo basis. North Carolina has enacted legislation permitting
branching transactions.
It is anticipated that the Interstate Banking Act will increase competition
within the markets in which the Bank now operates, although the extent to which
such competition will increase in such markets or the timing of such increase
cannot be predicted.
RESTRICTIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. In
addition, a North Carolina-chartered stock savings bank, for a period of five
years after its conversion from mutual to stock form, must obtain the written
approval from the Administrator before declaring or paying a cash dividend on
its capital stock in an amount in excess of one-half of the greater of (i) the
institution's net income for the most recent fiscal year end, or (ii) the
average of the institution's net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends, if applicable. Under FDIC regulations, stock repurchases may be made by
the savings bank only upon receipt of FDIC approval.
Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution.
In addition, the Bank is not permitted to declare or pay a cash dividend on
or repurchase any of its capital stock if the effect thereof would be to cause
its net worth to be reduced below the amount required for the liquidation
account established in connection with the Bank's conversion from mutual to
stock ownership.
OTHER NORTH CAROLINA REGULATIONS. 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
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and branching of institutions, mergers, conversions and conflicts of interest.
North Carolina law requires that the Bank maintain federal deposit insurance as
a condition of doing business.
The Administrator conducts regular examinations of North Carolina-chartered
savings banks. The purpose of such examinations is to assure that institutions
are being operated in compliance with applicable North Carolina law and
regulations and in a safe and sound manner. These examinations are usually
conducted on a joint basis with the FDIC. In addition, the Administrator is
required to conduct an examination of any institution when he has good reason to
believe that the standing and responsibility of the institution is of doubtful
character or when he otherwise deems it prudent. The Administrator is empowered
to order the revocation of the license of an institution if he finds that it has
violated or is in violation of any North Carolina law or regulation and that
revocation is necessary in order to preserve the assets of the institution and
protect the interests of its depositors. The Administrator has the power to
issue cease and desist orders if any person or institution is engaging in, or
has engaged in, any unsafe or unsound practice or unfair and discriminatory
practice in the conduct of its business or in violation of any other law, rule
or regulation.
A North Carolina-chartered savings bank must maintain net worth, computed
in accordance with the Administrator's requirements, of 5% of total assets and
liquidity of 10% of total assets, as discussed above. Additionally, a North
Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.
Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North Carolina-
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.
North Carolina law provides a procedure by which savings institutions may
consolidate or merge, subject to approval of the Administrator. The approval is
conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.
FUTURE REQUIREMENTS. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company and the Bank may be affected by such
statute or regulation.
ITEM 2. DESCRIPTION OF PROPERTY
The Bank operates one office located in Reidsville, North Carolina, and
currently has no plans to open or buy any branches. The Bank commenced
operations at the 501 South Main Street, Reidsville, North Carolina office in
1969. The property is considered by the Bank's management to be in good
condition. The Bank's net book value of its investment in that office,
excluding furniture and fixtures, was approximately $73,000 at December 31,
1996.
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ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, neither the Company nor the Bank is 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 Company's stockholders during the
quarter ended December 31, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
See the information under the section captioned "Stock Information" on page
37 in the Company's 1996 Annual Report, which section is incorporated herein by
reference. See "Item 1. DESCRIPTION OF BUSINESS--Regulation of the Bank--
Restrictions on Dividends and Other Capital Distributions" above for regulatory
restrictions which limit the ability of the Bank to pay dividends to the
Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
See the information set forth under Item I above and the information set
forth under the section captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 3 through 11 in the
Company's 1996 Annual Report, which section is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements of the Company set forth on pages 12
through 35 in the Company's 1996 Annual Report are incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company and the Bank first engaged KPMG Peat Marwick LLP on May 2,
1995. The Bank's former independent auditor, Haynes Strand Henry and Company,
who had no prior auditing experience with SEC reporting companies, resigned on
that date. The decision to change independent auditors was approved by the
Bank's Board of Directors. The former auditor's report on the Bank's financial
statements for the fiscal years ended December 31, 1993 and 1992 did not contain
an adverse opinion or disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or accounting principles. During each such year and
the subsequent interim period through such auditor's resignation, there were no
disagreements between the Bank and such auditor on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which, if not resolved to the satisfaction of such auditor, would have
caused it to make reference to the subject of such disagreement in connection
with its reports.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH 16(A) OF THE EXCHANGE ACT
The information required by this Item regarding directors and executive
officers of the Company is set forth under the sections captioned "Proposal 1 -
Election of Directors - Nominees" on page 7 of the Proxy Statement and "Proposal
1 - Election of Directors - Executive Officers" on page 9 of the Proxy
Statement, which sections are incorporated herein by reference.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on
page 6 of the Proxy Statement, which is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Directors Compensation" on pages
8 and 9 and " - Management Compensation" on pages 9 through 14 of the Proxy
Statement, which sections are incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners" on pages 2
through 5 of the Proxy Statement.
ITEM 12. 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-KSB.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
13(a) Exhibits
A listing of the exhibits to this Report on Form 10-KSB is set
forth on the Index of Exhibits which immediately precedes such
exhibits and is incorporated herein by this reference.
13(b) The Company filed no reports on Form 8-K during the last quarter
of the fiscal year ended December 31, 1996
27
<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 FINANCIAL CORP.
By: /s/ David S. Kemp
----------------------------------------
David S. Kemp
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/ David S. Kemp
- -------------------------- President, Chief Executive March 28, 1997
David S. Kemp Officer and Director
/s/ Cynthia F. Teague Vice-President, Chief Financial March 28, 1997
- -------------------------- Officer and Chief Accounting
Cynthia F. Teague Officer
/s/ Pat F. Brady Director March 28, 1997
- --------------------------
Pat F. Brady
/s/ Fred B. Coates Director March 28, 1997
- --------------------------
Fred B. Coates
/s/ Phillip M. Hooper Director March 28, 1997
- --------------------------
Phillip M. Hooper
/s/ George I. Richardson Director March 28, 1997
- --------------------------
George I. Richardson
/s/ Benton S. Smothers Director March 28, 1997
- --------------------------
Benton S. Smothers
/s/ Gilbert R. Upchurch Director March 28, 1997
- --------------------------
Gilbert R. Upchurch
</TABLE>
28
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(3)(i) Certificate of Incorporation, incorporated herein by reference to
Exhibit (3)(i) to the Registration Statement on Form S-1,
Registration No. 33-93096, dated June 5, 1995 and amended on July
31, 1995 and August 9, 1995
(3)(ii) Bylaws, incorporated herein by reference to Exhibit (3)(ii) to
the Registration Statement on Form S-1, Registration No. 33-
93096, dated June 5, 1995 and amended on July 31, 1995 and August
9, 1995
(4) Specimen Stock Certificate, incorporated herein by reference to
Exhibit (2) to the Annual Report on Form 10-KSB for the year
ended December 31, 1996
(11) Statement Regarding Computation of Per Share Earnings
(13) Portions of 1996 Annual Report to Security Holders
(21) Subsidiary of The Company
(23) Consent of KPMG Peat Marwick LLP
<PAGE>
EXHIBIT 11
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<S> <C>
Net loss $(403,986)
Less: Change in fair value of ESOP shares subject to put option (64,945)
---------
Net loss available to common shareholders $(468,931)
=========
Weighted average shares outstanding 919,979
=========
Loss per share $ (0.51)
=========
</TABLE>
<PAGE>
[LOGO OF FIRST SAVINGS FINANCIAL CORP. APPEARS HERE]
FIRST
SAVINGS
FINANCIAL
CORP.
1996 ANNUAL REPORT
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Selected Financial and Other Data...............................1
Letter to Shareholders..........................................2
Management's Discussion and Analysis............................3
Independent Auditors' Report...................................12
Consolidated Financial Statements..............................13
Notes to the Consolidated Financial Statements.................18
Officers and Directors.........................................36
Corporate and Other Information................................37
</TABLE>
This Annual Report to Shareholders contains forward-looking statements. These
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those anticipated in the forward-
looking statements. Factors that might cause such a difference include, but are
not limited to, changes in the interest rate environment, management's business
strategy, national, regional and local market conditions and legislative and
regulatory conditions.
Readers should not place undue reliance on forward-looking statements, which
reflect management's view only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect
subsequent events or circumstances. Readers should also carefully review the
risk factors described in other documents the Company files from time to time
with the Securities and Exchange Commission.
<PAGE>
SELECTED FINANCIAL
AND OTHER DATA OF FIRST SAVINGS FINANCIAL CORP. AND SUBSIDIARY
<TABLE>
<CAPTION>
As of or for the year ended
December 31,
1996 1995
---- ----
(dollars in thousands)
<S> <C> <C>
Financial condition data:
Total assets $53,227 59,055
Investments (1) 18,531 25,927
Loans receivable, net 32,790 30,223
Mortgage-backed securities 599 710
Deposits 43,067 47,232
Stockholders' equity 9,014 10,991
Operating data: $ 3,854 3,888
Interest expense 2,449 2,569
------- ------
Net interest income 1,405 1,319
Provision for loan losses 8 105
------- ------
Net interest income after
provision for loan losses 1,397 1,214
Noninterest income (loss) (11) 65
Noninterest expense 1,847 1,106
------- ------
Income (loss) before income taxes (461) 173
Income tax expense (benefit) (57) 35
------- ------
Net income (loss) $ (404) 138
======= ======
Number of:
Loans outstanding 856 868
Deposit accounts 2,447 2,582
Return on average assets (.70)% .24%
Return on average equity (3.88)% 1.89%
Average equity to average assets 18.09% 12.87%
Interest rate spread 1.63% 1.73%
Net yield on average
interest-earning assets 2.54% 2.40%
Average interest-earning
assets to average interest-
bearing liabilities 120.65% 114.23%
Ratio of noninterest expense to
average total assets 3.21% 1.95%
Nonperforming assets to
total assets 0.05% 0.16%
</TABLE>
(1) Includes interest-bearing deposits, Federal Home Loan Bank stock and
investment securities.
1
<PAGE>
To Our Shareholders:
The Board of Directors and management of First Savings Financial Corp. would
like to thank you for your support during the Company's first full year of
operation. The two most notable events during 1996 were the payment of a
special dividend to shareholders of $1.00 in May, in addition to two $.25
regular dividends, and the payment of a one-time special assessment of $316,000
to the Federal Deposit Insurance Corporation in November. The FDIC assessed all
savings institutions. Both events, as well as other changes affecting the
Company's financial condition during the past year, are discussed in further
detail in the accompanying Annual Report to Shareholders.
As reported to you earlier, we have received an acquisition proposal from First
Citizens BancShares, Inc., Raleigh, North Carolina. The Board of Directors is
actively considering this proposal with the assistance of our financial
advisors. On February 26, the Board notified First Citizens that its proposal
is generally acceptable, and we began the process of negotiating a definitive
agreement. By the time this letter reaches you, an agreement may have been
announced. If a definitive agreement is reached, we will schedule a special
shareholders meeting to consider First Citizens' proposal.
Regardless of the outcome of the current merger discussions, we look forward to
your continued support.
Very truly yours,
FIRST SAVINGS FINANCIAL CORP.
/s/ David S. Kemp
David S. Kemp
President
2
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
First Savings Financial Corp. was incorporated under North Carolina law in April
1996 for the purpose of acquiring and holding all of the outstanding capital
stock of First Savings Bank of Rockingham County, Inc., SSB ("First Savings") to
be issued in connection with the conversion of First Savings from mutual to
stock ownership. First Savings Financial Corp. and First Savings are
collectively referred to as "the Company".
On September 22, 1995, First Savings completed its conversion from a North
Carolina-chartered mutual savings bank to a North Carolina-chartered stock
savings bank (the "Conversion") and First Savings Financial Corp. issued and
sold 948,386 shares of common stock (no par value) to certain depositors of
First Savings. Total proceeds of $9,483,860 were reduced by Conversion expenses
of $509,728. First Savings Financial Corp. retained 50% of the net Conversion
proceeds after deducting the proceeds of the loan to the First Savings Bank of
Rockingham County, Inc., SSB Employee Stock Ownership Plan (the "ESOP") and paid
the balance to First Savings in exchange for all of the common stock of First
Savings issued in the Conversion.
First Savings Financial Corp. does not have any significant assets other than
the shares of First Savings' capital stock and the loan receivable held with
respect to its loan to the ESOP, and does not have any significant liabilities.
Cash flows to First Savings Financial Corp. are dependent upon earnings from the
investment of its portion of net proceeds from the Conversion and any dividends
received from First Savings. Presently, there are no plans for expansion of
First Savings Financial Corp.'s operations.
First Savings is primarily engaged in soliciting deposit accounts from the
general public, making mortgage loans to finance the acquisition and
construction of residential dwellings and making limited types of consumer
loans. First Savings' results of operations depend primarily on net interest
income, which is the difference between interest income from interest-earning
assets and interest expense on interest-bearing liabilities. To a much lesser
extent, First Savings' operations are affected by noninterest income, such as
miscellaneous fee income from loans, gains and losses from the sale of
investment and mortgage-backed securities and other sources of income. First
Savings' principal operating expenses, aside from interest expense, consist of
compensation and employee benefits, federal deposit insurance premiums,
occupancy costs, and other general and administrative expenses.
The operation of First Savings and depository institutions in general are
significantly influenced by general economic conditions and by related monetary,
fiscal and other policies of depository institution regulatory agencies,
including the Federal Reserve, the Federal Deposit Insurance Corporation (the
"FDIC") and the North Carolina Administrator of Savings Institutions (the
"Administrator"). Deposit flows and costs 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 Company conducts its business through its office at 501 South Main Street,
Reidsville, North Carolina. First Savings' primary market area is Rockingham
County in North Carolina. Based upon deposit market share data as of June 30,
1996, First Savings was the second smallest community bank or thrift institution
with branch operations in Rockingham County.
3
<PAGE>
Comparison of the Results of Operations for the Years Ended December 31, 1996
and 1995
Summary
- -------
Net loss for the year ended December 31, 1996 was $403,986 as compared to net
income of $138,258 for the year ended December 31, 1995. The decrease in net
income of $542,244 is due to several factors, including an increase in
compensation expense of $350,714, and increase in federal and other insurance
premiums of $280,996, and an increase in professional fees of $95,304.
Offsetting these effects was an increase in net interest income of $85,455, a
decrease in the provision for loan losses of $97,500 and a decrease in income
tax expense of $91,800.
Net interest income
- -------------------
Net interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (i) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest bearing liabilities ("net
earning balance"). Due to the competition in its market area for both deposits
and loans, the Company's interest rate spread continues to be well below the
average for similar-sized institutions. This is expected to be true in the
future.
Net interest income increased $85,455 or 6.5% to $1,404,867 between 1995 and
1996. The net yield on interest-earning assets for the year ended December 31,
1996 was 2.54% compared to 2.40% in 1995, which was well below the average for
similar-sized institutions. This trend is expected to continue in future
periods. These increases were principally due to a decrease in total interest
expense of $119,554, resulting from an decrease in the average balance of
deposits from $48,215,000 in 1996 to $45,768,000 in 1995.
The following table sets forth information relating to average balances of the
Company's assets and liabilities for the years ended December 31, 1996 and 1995.
The table reflects the average yield on interest-earning assets and interest-
bearing liabilities for the periods indicated (derived by dividing income or
expense by the average monthly balance of interest-earning assets or interest-
bearing liabilities, respectively) as well as the "net yield on interest earning
assets" for the periods shown. For the purpose of preparing this table,
nonaccrual loans have been included in the average balances for loans.
4
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31, 1996 Year ended December 31, 1995
------------------------------------------------------------------------------------------------------
Average Average Average Average
balances Interest rate balances Interest rate
-------- -------- ---- -------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing balances
in other banks $ 941,000 $ 67,779 7.20% $ 2,039,000 $ 135,086 6.63%
Investment securities 21,519,000 1,300,364 6.04% 19,674,000 1,109,731 5.64%
Mortgage-backed securities 674,000 38,047 5.64% 1,527,000 120,130 7.87%
FHLB stock 413,000 29,928 7.25% 413,000 29,928 7.25%
Loans 31,674,000 2,417,939 7.63% 31,421,000 2,493,281 7.94%
---------- --------- ---- ---------- --------- ----
Total interest-earning
assets 55,221,000 3,854,057 6.98% 55,074,000 3,888,156 7.06%
--------- ---- --------- -----
Other assets 2,327,000 1,751,000
---------- ----------
Total assets $57,548,000 $56,825,000
========== ==========
Interest-bearing liabilities:
Savings $ 2,203,000 $ 48,994 2.22% $ 2,495,000 $ 70,808 2.84%
Money market accounts 2,014,000 52,972 2.63% 2,247,000 73,189 3.26%
Time deposits 41,551,000 2,347,224 5.65% 43,473,000 2,424,747 5.58%
---------- --------- ---- ---------- --------- ----
Total interest-bearing
liabilities 45,768,000 2,449,190 5.35% 48,215,000 2,568,744 5.33%
--------- ---- --------- ----
Other liabilities 1,372,000 1,295,000
Stockholders' equity 10,408,000 7,315,000
---------- ----------
Total liabilities and
stockholders' equity $57,548,000 $56,825,000
========== ==========
Net interest income and
interest rate spread $ 1,404,867 1.63% $1,319,412 1.73%
========= ==== ========= ====
Net yield on average
interest-earning assets 2.54% 2.40%
==== ====
</TABLE>
5
<PAGE>
Total interest income decreased to $3,854,057 in 1996 from $3,888,156 in 1995.
The decrease in interest income is principally due to a decrease in loan
interest income to $2,417,939 in 1996 from $2,493,281 in 1995. This decrease is
primarily due to a reduction in the average rate earned on loans of 31 basis
points from 7.94% in 1995 to 7.63% in 1996. The Company attributes this change
to the competition for loans in its primary market area and management's
aggressive pricing strategy to attract loans. The Company expects that
competition will remain at current levels in the future.
Also contributing to the decrease in interest income is a decrease in both
average volume and average rate earned on mortgage-backed securities. In 1996
the average volume of mortgage-backed securities was $674,000 as compared to
$1,527,000 in 1995. The decrease is due to the Company selling a mortgage-
backed security during the fourth quarter of 1995 and principal reductions on
the remaining mortgage-backed securities during 1996 and 1995. The average rate
earned on mortgage-backed securities for 1996 was 5.64% as compared to 7.87% in
1995.
The decrease in interest income on loans receivable and mortgage-backed
securities was partially offset by an increase in both the average volume and
the average rate earned on investment securities. In 1996, the average balance
of investment securities was $21,519,000 compared to $19,674,000 in 1995. This
increase was due to the Company investing net conversion proceeds in investment
securities during the fourth quarter of 1995. The average rate earned on
investment securities for 1996 was 6.04% compared to 5.64% in 1995. This
increase is attributable to the Company maintaining an investment portfolio with
relatively short maturities, which benefited the Company as interest rates
increased during 1996. The Company's investment securities portfolio represents
a significant percentage of total assets and is above the average for similar-
sized institutions. The Company believes that this will also be true in the
future. This has a negative effect on income due to the lower yield on the
investment securities portfolio in comparison to the yield on the loan
portfolio.
Total interest expense decreased $119,554 or 4.7% to $2,449,190 in 1996 from
$2,568,744 in 1995. This decrease in interest expense was largely due to a
decrease in the volume of certificates of deposit accounts. The average volume
of certificate of deposit accounts decreased by $1,922,000 to $41,551,000 in
1996 from $43,473,000 in 1995. Despite this decrease, the Company's level of
certificate of deposit accounts, which are not considered core deposits, remains
high compared to similar-sized companies, and is expected to remain high in the
future. This is primarily due to the competitive pressures in the marketplace
for deposit accounts. The Company expects that competition will remain at
current levels in the future. This decrease was partially offset by an increase
in the average rate paid on certificate of deposit accounts of seven basis
points from 5.58% in 1995 to 5.65% in 1996, in an effort to attract deposits.
As a result, the Company's average cost of funds remains higher than the average
at comparable institutions, a trend which is expected to continue in the future.
6
<PAGE>
The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and interest-
bearing liabilities. The table distinguishes between (i) changes attributable
to volume (changes in volume multiplied by the prior period's rate), (ii)
changes attributable to rate (changes in rate multiplied by the prior period's
volume) and (iii) net change (the sum of the previous columns). The change
attributable to both rate and volume ( changes in rate multiplied by changes in
volume) has been allocated equally to both the changes attributable to volume
and the changes attributable to rate.
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1996 vs 1995 December 31, 1995 vs. 1994
------------------------------- --------------------------------
Increase (decrease) due to Increase (decrease) due to
------------------------------- --------------------------------
Volume Rate Total Volume Rate Total
variance variance variance variance variance variance
--------- --------- --------- -------- -------- ---------
(dollars in thousands) (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ 20 $(95) $ (75) $(254) $ (7) $(261)
Mortgage-backed securities (58) (25) (83) (16) 10 (6)
Investment securities 108 83 191 178 130 308
Interest-bearing balances in other banks (76) 9 (67) 43 34 77
FHLB stock - - - - 4 4
----- ---- ----- ----- ----- -----
Total interest-earning assets (6) (28) (34) (49) 171 122
----- ---- ----- ----- ----- -----
Interest expense:
Savings (7) (14) (21) (17) (4) (21)
Money market accounts (7) (13) (20) (22) (1) (23)
Time deposits (108) 30 (78) (14) 354 340
----- ---- ----- ----- ----- -----
Total interest-bearing liabilities (122) 3 (119) (53) 349 296
----- ---- --- ----- ----- -----
Net interest income $ 116 $(31) $ 85 $ 4 $(178) $(174)
===== ==== ===== ===== ===== =====
</TABLE>
Provision for loan losses
- -------------------------
During the year ended December 31, 1996, First Savings recorded a provision for
loan losses of $7,500, compared to $105,000 in 1995. During 1996, First Savings
had no charge-offs and a $33,000 recovery as compared to a $60,000 charge-off
and no recoveries during 1995. The 1996 recovery related to the 1995 charge-
off. Nonperforming loans, which consist of loans not accruing interest, as a
percentage of total loans were .05% and .16% at December 31, 1996 and 1995,
respectively. During the first quarter of 1995, First Savings was increasing
its provision for loan losses mainly due to management's recognition of the
increased credit risk in the loan portfolio as a result of the anticipated
closing of the American Tobacco Company ("ATC") plant in Reidsville in 1996.
However, during 1996, the Reidsville plant was purchased by another tobacco
company. The new owner is continuing to operate the plant with a reduced work
force. At December 31, 1996, First Savings had loans to ATC employees and
former employees totaling $2.1 million or 6.5% of total loans. Further changes
in the status of this plant's ongoing operation may require additional increases
in the allowance in the future. The full impact of the change in the plant's
status on First Savings' loan portfolio and the local economy is not known at
this time.
Noninterest income
- ------------------
Noninterest income(loss) decreased $76,264 during 1996 to noninterest loss of
$11,147 from noninterest income of $65,117 in 1995. The Company's noninterest
income is below the average for similar-sized institutions. The decrease in
noninterest income is due to the net losses on the sale of investment securities
of $26,932 in 1996 as compared to net gains realized on the sale of investment
and mortgage-backed securities of $49,775 in 1995. The Company does not have
significant sources of fee or noninterest income.
Noninterest expense
- -------------------
Noninterest expense increased to $1,847,006 in 1996 from $1,106,271 in 1995.
The largest component of noninterest expense for 1996 and 1995 was compensation
expense, which totaled $998,719 in 1996, compared to $648,005 in 1995. This
increase was mainly attributable to approximately $254,500 in compensation
expense relating to the fair value of the earned ESOP shares released or
committed to be
7
<PAGE>
released during 1996 as compared to $99,000 in 1995. First Savings had
approximately $140,000 increase in compensation expense associated with the
directors' deferred compensation plans due to a full year of expense for the May
1995 plan, a plan amendment and some accelerated expense due to the death of one
director. In addition, in April 1996 the Board of Directors and the stockholders
approved a Management Recognition Plan (the "MRP") for directors and employees.
Compensation expense related to the MRP was $56,000 in 1996.
As noted above, the increase in compensation expense in 1996 was principally
related to the ESOP shares released and allocated to participants in June 1996.
Such expense was higher than normal because the proceeds received on the ESOP
shares from the $3.00 per common share dividend declared in December 1995 and
the $1.00 per common share dividend declared in May 1996 were used to make an
additional principal payment on the ESOP loan in June 1996. Accordingly, of the
75,870 total ESOP shares, 28,808 shares were released and allocated on June 30,
1996. At December 31, 1996, 6,447 shares are committed to be released in
September 1997. The fair value of the pro-rata number of those shares earned
during 1996 (1,784 shares) has been expensed in 1996. The remaining 4,663
shares committed to be released in September 1997, with a fair value of
approximately $58,300 at December 31, 1996, will be expensed over the first nine
months of 1997.
Noninterest expense also included a one time cost of approximately $316,000
pertaining to a special assessment by the FDIC on all Savings Association
Insurance Fund ("SAIF") insured financial institutions to recapitalize the SAIF.
Federal and other insurance premiums increased $280,996 to $414,800 as a result
of this special assessment.
Professional fees increased approximately $95,000 due to increased legal and
accounting fees, resulting from increased reporting and filing requirements
associated with a stock institution and holding company as compared to a mutual
institution.
Income taxes
- ------------
Income tax benefit for the year ended December 31, 1996 was $56,800 as compared
to income tax expense of $35,000 for the year ended December 31, 1995. The 1996
income tax benefit was reduced by the nondeductibility of a significant portion
of the compensation expense related to the ESOP. The portion of the expense
related to the additional principal payment on the ESOP loan in June 1996 from
the proceeds received on the ESOP shares from the December 1995 and May 1996
dividends is nondeductible for tax purposes. The effective tax rate of 20% for
the year ended December 31, 1995 is lower than the statutory rate of 34%
primarily because of the allowed deduction of $132,000 in merger/conversion
expenses incurred during 1994 and 1993 due to the termination of the
merger/conversion agreement with First Citizens BancShares, Inc. during the
first quarter of 1995. This reduction in the 1995 income tax expense was
partially offset by the nondeductibility of a significant portion of the
compensation expense related to the ESOP in 1995. As noted above, the portion
of the expense related to the additional principal payment on the ESOP loan in
June 1996 from the proceeds on the ESOP shares from the December 1995 dividend
is nondeductible for tax purposes.
Comparison of Financial Condition at December 31, 1996 and 1995
Total assets decreased by $5.8 million or 9.9% from $59.0 million at December
31, 1995 to $53.2 million at December 31, 1996. The decrease in assets is
mainly due to a decrease in investment securities of $6.9 million from $24.4
million at December 31, 1995 to $17.5 at December 31, 1996. Proceeds from sales
and maturities of investment securities have been used to fund loan growth of
$2.6 million, to pay dividends of $1.4 million and for various other operating
needs due to the net loss in 1996.
Loans receivable increased from $30.2 million at December 31, 1995 to $32.8
million at December 31, 1996. First Savings' ability to expand its lending base
and the size of its loan portfolio continues to be constrained by the lack of
strong loan demand and competitive pressures in its primary lending market.
Deposits decreased $4.1 million or 8.8% to $43.1 million at December 31, 1996
from $47.2 million at December 31, 1995. The decrease is primarily due to the
competitive pressures in the marketplace for deposits.
8
<PAGE>
Stockholders' equity decreased from $11.0 million at December 31, 1995 to $9.0
million at December 31, 1996, with the decrease due to a net unrealized loss on
securities of $81,000 at December 31, 1996 as compared to a net unrealized gain
of $129,000 at December 31, 1995 and a net loss in 1996 of $403,986.
Additionally, in May 1996 the Company declared a dividend of a $1.00 per common
share and in August and November 1996 the Company declared dividends of $.25 per
common share. Such dividends totaled $1,380,000 and were paid from common stock
as a return of capital.
The common stock held by the ESOP has a "put option" feature since the common
stock of the Company is not publicly traded as defined by the ESOP. The "put
option" feature permits the participants to sell their common shares obtained
from the ESOP to the Company at the current fair market value during the option
periods. Accordingly, the common stock of the ESOP and the related amount of
unearned ESOP shares are recorded outside stockholders' equity. An adjustment
has been recorded to retained earnings to reflect the earned ESOP shares at fair
value as of December 31, 1996 and 1995, respectively.
Asset Quality
Asset quality of First Savings remained strong throughout 1996 and 1995, with
nonperforming assets at .05% and .16%, respectively, of total assets.
Nonperforming assets, which consist of loans not accruing interest, were $26,000
and $93,000 at December 31, 1996 and 1995, respectively. There was no real
estate owned at December 31, 1996 or 1995.
The American Tobacco Company ("ATC"), a tobacco products manufacturing plant
located in Reidsville, which employed approximately 1,000 people, announced in
1994 that it would close in 1996. Most of the employees were not transferred by
the manufacturer and , therefore, may have become unemployed or may have been
forced to accept lower paying positions with other employers. However in 1996,
the Reidsville plant was purchased by another tobacco company. The new owner is
continuing to operate the plant with a reduced workforce. At December 31,
1996, First Savings had loans with principal balances outstanding totaling $2.1
million, or 6.5% of total loans, to employees and former employees of this
plant. The long-term effect of the plant's change in status on the Rockingham
County economy and the employees and former employees are not known at this
time. However, First Savings believes that the change in ownership and the
reduced workforce could result in an increase in nonperforming assets.
Management is currently unaware of any significant potential problem loans or
any other concentrations of credit risk which exist in the portfolio. At
December 31, 1996 and 1995, there were no loans considered to be impaired under
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan".
Interest Rate Risk
First Savings is significantly liability sensitive in the one-year and three-
year time horizons. As a result, during periods of rising interest rates, First
Savings' interest-bearing liabilities (principally deposits) will be expected to
reprice at a faster rate than its interest-earning assets. Therefore, during
periods of rising interest rates, First Savings' net interest income would be
expected to be negatively impacted. Rapid and substantial increases in interest
rates could significantly reduce First Savings' net income or create net losses.
This trend is expected to continue into the future.
Regulatory Matters
As noted above, on September 30, 1996, there was a one time special assessment
by the FDIC on all SAIF insured financial institutions to recapitalize the SAIF.
The SAIF recapitalization will result in a reduction in future FDIC deposit
insurance premiums. Such premiums will be reduced from 23 cents per $100 of
deposits to 6.4 cents per $100 of deposits beginning in January 1997. This
would reduce the Company's deposit insurance premium to approximately $28,000
annually at current deposit levels as compared to approximately $112,000 paid in
the year ended December 31, 1995.
9
<PAGE>
Management is not presently aware of any current recommendation by regulatory
authorities which, if implemented, would have a material effect on the Company's
liquidity, capital resources or operations.
Liquidity
First Savings' primary sources of internally generated funds are principal
repayments and payoffs of loans receivable, cash flow generated from operations,
repayments from mortgage-backed securities, maturing investments and increases
in deposits. External sources of funds include the ability to access advances
from the Federal Home Loan Bank of Atlanta.
As a North Carolina-chartered savings bank, First Savings must maintain liquid
assets equal to at least 10% of total assets. The computation of liquidity
under North Carolina regulations allows the inclusion of mortgage-backed
securities and investments with a readily marketable value, including
investments with maturities in excess of five years. First Savings' liquidity
ratio at December 31, 1996, as computed under North Carolina regulations, was
approximately 36%. Liquidity remains above the average for similar-sized
institutions. This reflects the Company's difficulty in increasing loan
production and negatively affects the Company's net interest income. This trend
is expected to continue in the future.
Impact of Inflation and Changing Prices
The consolidated financial statements and accompanying footnotes 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 consideration for changes in the relative purchasing
power of money over time due to inflation. The assets and liabilities of the
Company are primarily monetary in nature and changes in interest rates have a
greater impact on the Company's performance than do the effect of inflation.
Capital Resources
As a North Carolina-chartered savings bank, First Savings is subject to the
capital requirements of the FDIC and the Administrator. The FDIC requires First
Savings to maintain minimum ratios of Tier I capital to total risk-weighted
assets and total capital to risk-weighted assets of 4% and 8%, respectively. To
be "well capitalized," the FDIC requires ratios of Tier I capital to total risk-
weighted assets and total capital to risk-weighted assets of 6% and 10%,
respectively. Tier I capital consists of total stockholders' equity calculated
in accordance with generally accepted accounting principles less intangible
assets, and total capital is comprised of Tier I capital plus certain
adjustments, the only one of which is applicable to First Savings is the
allowance for loan losses. Risk-weighted assets reflect First Savings' on- and
off-balance sheet exposures after such exposures have been adjusted for their
relative risk levels using formulas set forth in FDIC regulations. First Savings
is also subject to a leverage capital requirement, which calls for a minimum
ratio of Tier I capital (as defined above) to quarterly average total assets of
3%, and a ratio of 5% to be "well capitalized." The Administrator requires a net
worth equal to at least 5% of assets. At December 31, 1996, First Savings was in
compliance with the capital requirements of both the FDIC and the Administrator
and is deemed to be "well capitalized."
First Savings' high capital level coupled with limited investment options for
that capital has resulted in lower returns on shareholders' equity than might be
achieved otherwise. This trend is expected to continue in the future.
Recent Developments
The Company has received an acquisition proposal to merge with and into First
Citizens BancShares, Inc. ("BancShares") and is in the process of negotiating a
definitive agreement with BancShares. BancShares is a bank holding company
headquartered in Raleigh, North Carolina with assets of approximately $8 billion
at December 31, 1996. Under the terms of the proposal, each outstanding share of
the Company would be converted into the right to receive $10.75 in cash. If an
agreement is reached, the merger is expected to be
10
<PAGE>
finalized in the fall of 1997 and is subject to a number of conditions,
including approval by regulatory authorities and the stockholders of the
Company.
Current Accounting Issues
In March 1995, the Financial Accounting Standards Board ("the FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," ("SFAS No.
121") which establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those assets
to be held and used and for those to be disposed of. This statement requires
that long-lived assets and certain intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Adoption of SFAS No. 121 is required for fiscal years
beginning after December 15, 1995. The Company adopted this Statement on
January 1, 1996 without any impact on its consolidated financial statements.
In May 1995, the FASB issued Statement of Financial Accounting Standards No.
122, "Accounting for Mortgage Servicing Rights, an amendment of FASB Statement
No. 65"("SFAS No. 121"). The statement amends FASB Statement No. 65 to require
that the rights to service mortgage loans for others, however those servicing
rights are acquired, be recognized as separate assets, eliminating the
previously existing accounting distinction between servicing rights acquired
through purchase transactions and those acquired through loan originations.
SFAS No. 122 is required to be adopted and applied prospectively for fiscal
years beginning after December 15, 1995 to transactions involving the sale or
securitization of mortgage loans with servicing rights retained. The Company
adopted this Statement on January 1, 1996 without any impact on its consolidated
financial statements.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123. "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123
defines a fair value based method of accounting for an employee stock option or
similar equity instrument. 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" ("APB 25"). Entities electing to
remain with the accounting in APB 25 must make pro forma disclosures of net
income and, if presented, earnings per share, as if the fair value based method
of accounting defined in SFAS No. 123 had been applied. The accounting
requirements of SFAS No. 123 are effective for transactions entered into in
fiscal years that begin after December 15, 1995, though they may be adopted on
issuance. The Company adopted this statement on January 1, 1996 and elected to
continue to measure compensation cost using APB 25. The pro forma net loss and
net loss per share amounts were not material to the Company in 1996.
In August 1996, the FASB issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities using a financial-components approach
that focuses on control of the asset or liability. It requires that an entity
recognize only assets it controls and liabilities it has incurred and should
derecognize assets only when control has been surrendered and derecognize
liabilities only when they have been extinguished. SFAS No. 125 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively. The
Company plans to adopt this Statement on January 1, 1997 without any impact on
its consolidated financial statements.
11
<PAGE>
Independent Auditors' Report
The Board of Directors
First Savings Financial Corp.
Reidsville, North Carolina
We have audited the accompanying consolidated statements of financial condition
of First Savings Financial Corp. and subsidiary ("the Company") as of
December 31, 1996 and 1995 and the related consolidated statements of income,
stockholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Savings
Financial Corp. and subsidiary as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Greensboro, North Carolina
January 10, 1997
12
<PAGE>
FIRST SAVINGS FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Financial Condition
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
Assets
------
<S> <C> <C>
Cash and due from banks $ 255,891 891,034
Interest-bearing deposits in other financial institutions 561,269 1,087,641
Investment securities (note 2):
Held to maturity (market value of $988,195 and $8,529,543
at December 31, 1996 and 1995, respectively) 1,000,351 8,507,472
Available for sale, at market value (cost of $16,673,527 and
$15,717,228 at December 31 1996 and 1995, respectively) 16,557,015 15,919,254
Mortgage-backed securities (note 3):
Available for sale, at market value (cost of $605,164 and $716,881
at December 31, 1996 and 1995, respectively) 599,346 710,233
Loans receivable (net of allowance for loan losses of $299,825
and $259,466 at December 31, 1996 and 1995, respectively) (note 4) 32,789,901 30,223,497
Accrued interest receivable (note 4) 385,494 508,883
Federal Home Loan Bank stock, at cost (note 5) 412,800 412,800
Premises and equipment, net (note 6) 101,584 116,555
Other assets (notes 8 and 9) 563,314 677,343
----------- ----------
$53,226,965 59,054,712
=========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Deposit accounts (note 7) 43,066,580 47,231,789
Other liabilities (note 10) 763,525 743,060
----------- ----------
Total liabilities 43,830,105 47,974,849
----------- ----------
ESOP stock subject to put option (note 13) 382,400 88,439
----------- ----------
Stockholders' equity (notes 12, 13, 14 and 15):
Preferred stock - no par value; authorized 5,000,000 shares;
no shares issued or outstanding - -
Common stock - no par value; authorized 20,000,000 shares;
issued and outstanding 986,321 and 948,386 shares at
December 31, 1996 and 1995, respectively 4,727,234 5,659,804
Retained earnings, substantially restricted 4,733,711 5,202,642
Net unrealized gains (losses) on securities (80,730) 128,978
Deferred stock awards (365,755) -
----------- ----------
Total stockholders' equity 9,014,460 10,991,424
----------- ----------
Commitments (notes 4, 9, 10, 13, 14 and 15)
$53,226,965 59,054,712
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
FIRST SAVINGS FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Income (Loss)
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Interest income:
Loans receivable $2,417,939 2,493,281
Mortgage-backed securities 38,047 120,130
Investment securities 1,300,364 1,109,731
Interest-bearing balances in other banks 67,779 135,086
Stock in the Federal Home Loan Bank 29,928 29,928
---------- ---------
Total interest income 3,854,057 3,888,156
Interest expense on deposit accounts (note 7) 2,449,190 2,568,744
---------- ---------
Net interest income 1,404,867 1,319,412
Provision for loan losses (note 4) 7,500 105,000
---------- ---------
Net interest income after provision for loan losses 1,397,367 1,214,412
Noninterest income:
Net gain (loss) on securities available for sale (26,932) 49,775
Other 15,785 15,342
---------- ---------
Total noninterest income (loss) (11,147) 65,117
---------- ---------
Noninterest expense:
Compensation, payroll taxes, and fringe benefits
(notes 9, 10, 13 and 15) 998,719 648,005
Occupancy and equipment 43,548 43,772
Federal and other insurance premiums (note 11) 414,800 133,804
Data processing fees 54,933 55,782
Advertising 20,454 17,560
Professional fees 156,784 61,480
Other expenses 157,768 145,868
---------- ---------
Total noninterest expense 1,847,006 1,106,271
---------- ---------
Income (loss) before income taxes (460,786) 173,258
Income tax expense (benefit) (note 8) (56,800) 35,000
---------- ---------
Net income (loss) (403,986) 138,258
Change in fair value of ESOP shares subject to put option
(note 13) 64,945 11,535
---------- ---------
Net income (loss) available to common shareholders $ (468,931) 126,723
========== =========
Net income (loss) available to common shareholders per share (note 1) $ (.51) 0.03
=== ====
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
FIRST SAVINGS FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Net
Unrealized Deferred Total
Common Retained Gains (Losses) Stock Stockholders'
Stock Earnings on Securities Awards Equity
----- -------- ------------- ------ ------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ - 5,115,445 - - 5,115,445
Net income - 138,258 - - 138,258
Net proceeds from issuance of
no par common stock 8,215,432 - - - 8,215,432
Common stock of the ESOP 22,394 - - - 22,394
Change in fair value of ESOP
shares subject to put option - (11,535) - - (11,535)
Net unrealized gains on securities - - 128,978 - 128,978
Dividends paid ($3.00 per
common share) (2,578,022) (39,526) - - (2,617,548)
--------- --------- ------- -------- ----------
Balance at December 31, 1995 5,659,804 5,202,642 128,978 - 10,991,424
Net loss - (403,986) - - (403,986)
Deferred stock awards 422,027 - - (422,027) -
Amortization of deferred
stock awards - - - 56,272 56,272
Common stock of the ESOP 25,484 - - - 25,484
Change in fair value of ESOP
shares subject to put option - (64,945) - - (64,945)
Net unrealized loss on securities - - (209,708) - (209,708)
Dividends paid ($1.00 per
common share) (910,451) - - - (910,451)
Dividends paid ($.25 per common
share) (469,630) - - - (469,630)
--------- --------- ------- -------- ----------
Balance at December 31, 1996 $ 4,727,234 4,733,711 (80,730) (365,755) 9,014,460
========= ========= ======= ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
FIRST SAVINGS FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (403,986) 138,258
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for loan losses 7,500 105,000
Amortization, net 25,089 (45,861)
Depreciation 15,987 15,979
Net loss (gain) on securities available for sale 26,932 (49,775)
Deferred loan origination fee (costs), net (20,802) 7,891
Compensation expense on ESOP shares 254,500 99,298
Compensation expense on deferred stock awards 56,272 -
Deferred income tax benefit (116,100) (12,600)
Decrease (increase) in accrued interest receivable 123,389 (98,412)
Decrease (increase) in other assets 170,429 (156,114)
Increase in other liabilities 188,165 33,921
--------- ----------
Net cash provided by operating activities 327,375 37,585
--------- ----------
Cash flows from investing activities:
Purchases of investment securities held to maturity (500,000) (11,070,690)
Proceeds from maturities and issuer calls of investment
securities held to maturity 8,000,000 8,000,000
Purchase of investment securities available for sale (5,485,793) (7,118,969)
Proceeds from sale of investment securities available for sale 3,954,053 3,554,977
Proceeds from maturities and issuer calls of investment
securities available for sale 500,000 -
Principal collected on mortgage-backed securities available
for sale 108,304 195,212
Proceeds from sale of mortgage-backed securities available for sale - 854,003
Net (increase) decrease in loans receivable (2,519,148) 2,582,318
Purchases of premises and equipment (1,016) (8,606)
--------- ----------
Net cash provided by (used in) investing activities 4,056,400 (3,011,755)
--------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock - 8,215,432
Dividends paid (1,380,081) (2,617,548)
Net decrease in deposits (4,165,209) (2,279,933)
--------- ----------
Net cash provided by (used in) financing activities (5,545,290) 3,317,951
--------- ----------
Net increase (decrease) in cash and cash equivalents (1,161,515) 343,781
Cash and cash equivalents at beginning of year 1,978,675 1,634,894
--------- ----------
Cash and cash equivalents at end of year $ 817,160 1,978,675
========= ==========
</TABLE>
(Continued)
16
<PAGE>
FIRST SAVINGS FINANCIAL CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
<TABLE>
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 2,465,626 2,572,151
Income taxes, net of tax refunds $ (41,000) 96,600
========= ==========
Noncash investing and financing activities:
Transfer of investment securities from held to maturity to
available for sale $ - 12,146,775
Transfer of mortgage-backed securities from held to
maturity to available for sale $ - 1,525,227
========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
FIRST SAVINGS FINANCIAL CORP. AND SUBSIDIARY
Notes to the Consolidated Financial Statements
December 31, 1996 and 1995
(1) Summary of Significant Accounting Policies
------------------------------------------
The following is a description of the more significant accounting and
reporting policies First Savings Financial Corp. follows in preparing
and presenting its consolidated financial statements.
(a) Basis of Presentation
---------------------
The consolidated financial statements include the accounts of
the First Savings Financial Corp. and its wholly-owned
subsidiary, First Savings Bank of Rockingham County, Inc., SSB
("First Savings") and its wholly-owned subsidiary, First Service
Corporation of Reidsville (collectively referred to as "the
Company"). On April 3, 1995, First Service Corporation of
Reidsville was dissolved. All intercompany transactions and
balances are eliminated in consolidation.
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities at the date of
the financial statements, as well as the amounts of income and
expenses during the reporting period. Actual results could
differ from those estimates.
In certain instances, amounts previously reported in the 1995
consolidated financial statements have been reclassified to
present them in the format selected for 1996. Such
reclassifications have no effect on the net income or retained
earnings as previously reported.
(b) Formation of First Savings Financial Corp.
------------------------------------------
In April, 1995, First Savings adopted a Plan of Holding Company
Conversion whereby First Savings would convert from mutual to
stock form, and concurrently become a wholly-owned subsidiary of
First Savings Financial Corp., a newly formed holding company.
On September 22, 1995, First Savings completed its conversion
from a North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank ("the Conversion") and
First Savings Financial Corp. issued and sold 948,386 shares of
common stock (no par value) at $10 per share. Total proceeds of
$9,483,860 were reduced by Conversion expenses of $509,728.
First Savings Financial Corp. retained 50% of the net Conversion
proceeds after deducting the proceeds of the loan to the First
Savings Bank of Rockingham County, Inc., SSB Employee Stock
Ownership Plan ("the ESOP") and paid the balance to First
Savings in exchange for the common stock of First Savings issued
in the Conversion.
At the time of the Conversion, First Savings established a
liquidation account in an amount equal to its net worth at June
30, 1995. The liquidation account will be maintained for the
benefit of eligible deposit account holders who continue to
maintain their deposit accounts in First Savings after the
Conversion. Only in the event of a complete liquidation will
each eligible deposit account holder be entitled to receive a
liquidating distribution in the amount of the then current
adjusted subaccount balance for the deposit accounts then held
before any liquidation distribution may be made with respect to
common stock. Dividends paid by First Savings subsequent to the
Conversion cannot be paid from this liquidation account.
18
<PAGE>
First Savings may not declare or pay a cash dividend on or
repurchase any of its common stock if its net worth would
thereby be reduced below either the aggregate amount then
required for the liquidation account or the minimum regulatory
requirement imposed by federal and state regulations.
In addition, for a period of five years after the Conversion,
First Savings will be required, under existing North Carolina
regulations, to obtain prior written approval of the N.C.
Administrator of Savings Institutions ("the Administrator")
before it can declare and pay a cash dividend on its capital
stock in an amount in excess of one-half of the greater of (i)
its net income for the most recent fiscal year, or (ii) the
average of its net income after dividends for the most recent
fiscal year and not more than two of the immediately preceding
fiscal years, if applicable. As a result of this limitation,
First Savings cannot pay a dividend without the approval of the
Administrator.
The Company also has authorized 5,000,000 shares of no par value
preferred stock, none of which was issued and outstanding at
December 31, 1996 and 1995, respectively.
(c) Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks and interest-bearing balances in
other financial institutions. Generally, cash and cash
equivalents are considered to have maturities of three months or
less.
The Administrator requires that First Savings maintain liquid
assets (consisting of "cash and readily marketable investments")
of at least 10% of total assets.
(d) Investment Securities and Mortgage-Backed Securities
----------------------------------------------------
Effective January 1, 1994, First Savings adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," ("SFAS No. 115").
This statement 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: (1) debt securities that the entity
has the positive intent and the ability to hold to maturity are
classified as held to maturity and reported at amortized cost;
(2) 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 unrealized gains and losses included in earnings; and (3)
debt and equity securities not classified as either held-to-
maturity securities or trading securities are classified as
available-for-sale securities and reported at fair value, with
unrealized gains and losses net of related taxes excluded from
earnings and reported as a separate component of retained
earnings. Upon adoption of SFAS No. 115, First Savings
classified all of its investment and mortgage-backed securities
as held to maturity; therefore, an adjustment to retained
earnings was not required.
In November 1995, the Financial Accounting Standards Board ("the
FASB") issued an implementation guide for SFAS No. 115. The FASB
stated that the transition provisions included in the guide
permit a one-time opportunity for companies to reconsider their
ability and intent to hold securities accounted for under SFAS
No. 115 to maturity and allow entities to transfer securities
from the held to maturity category without tainting their
remaining held to maturity securities. The FASB emphasized that
this would be a one-time event and that any transfers from the
held to maturity category to the available for sale category
under this provision must be made by December 31, 1995. On
December 14, 1995, First Savings transferred $12,146,775 from
the investment securities held to maturity category to the
investment securities available for sale
19
<PAGE>
category and transferred $1,525,227 from the mortgage-backed
securities held to maturity category to the mortgage-backed
securities available for sale category as allowed under the
provisions of the implementation guide. On the date of the
transfer, the investment securities held to maturity and the
mortgage-backed securities held to maturity were recorded as
available for sale securities at their current fair value, which
resulted in the recognition of an unrealized gain of $208,065
being recorded, net of the related tax effect of $70,742, as an
addition to stockholders' equity.
Realized gains and losses on sales of securities are determined
based upon the specific identification method. Premiums and
discounts are amortized or accreted into income using a method
that approximates the level yield method.
(e) Allowance and Provision for Loan Losses
---------------------------------------
First Savings provides for loan losses on the allowance method.
Accordingly, all loan losses are charged to the allowance and
all recoveries are credited to the allowance.
Effective January 1, 1995, First Savings adopted Statement of
Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan," ("SFAS No. 114") and Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures."
Under SFAS No. 114, the 1995 allowance for loan losses related
to loans determined to be impaired is based on discounted cash
flows using the loan's initial effective interest rate or the
fair value of the collateral for certain collateral dependent
loans. First Savings previously measured loan impairment in a
manner generally comparable to the methods prescribed in SFAS
No. 114. Accordingly, no additional provision for loan losses
was required as a result of adoption of SFAS No. 114.
Management evaluates the carrying value of loans periodically
and the allowance is adjusted accordingly. While management uses
the best information available to make evaluations, future
adjustments to the allowance may be necessary if conditions
differ substantially from the assumptions used in making the
evaluations. Additions to the allowance for loan losses are
provided by charges to operations based on various factors
which, in management's judgment, deserve current recognition in
estimating possible losses. Such factors considered by
management include the market value of the underlying
collateral, growth and composition of the loan portfolio, the
amounts and timing of future cash flow expected to be received
on impaired loans, the relationship of the allowance for loan
losses to outstanding loans, delinquency trends, and economic
conditions.
In addition, various regulatory agencies, as an integral part of
their examination process, periodically review First Savings'
allowance for loan losses. Such agencies may require First
Savings to recognize changes to the allowance based on their
judgments about information available to them at the time of
their examination.
(f) Loan Interest Income
--------------------
Loans are carried at their principal amount outstanding and
interest income is recorded as earned on an accrual basis. The
determination to discontinue the accrual of interest is based on
a review of each loan. Generally, the accrual of interest is
discontinued on all loans greater than 90 days past due,
including a loan impaired under SFAS No. 114, as to principal or
interest, unless in management's opinion collection of both
principal and interest is assured by way of collateralization,
guaranties or other security and the loan is in the process of
collection. Such interest is either charged off or reserved
through an allowance account. If amounts are received on loans
for which the accrual of interest has been discontinued, a
determination is made as to whether
20
<PAGE>
payments received should be recorded as a reduction of the
principal balance or as interest income. The loan is returned to
accrual status when, in management's judgment, the borrower has
demonstrated the ability to make periodic interest and principal
payments on a timely basis.
(g) Premises and Equipment
----------------------
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is provided over the estimated useful
lives of the related assets principally on a straight-line
basis. Estimated lives are generally 40 years for buildings,
building components and improvements, and five to eight years
for furniture, fixtures, and equipment.
Maintenance and repairs are charged to expense as incurred and
improvements are capitalized. The costs and accumulated
depreciation relating to premises and equipment retired or
otherwise disposed of are eliminated from the accounts and any
resulting gains or losses are credited or charged to income.
(h) Loan Origination Fees and Costs
-------------------------------
Loan origination fees and certain direct loan origination costs
are deferred upon origination of the related loan. Net deferred
fees are being amortized to loan interest income over the
contractual life of the loan using a level yield method.
(i) Income Taxes
------------
The Company accounts for income taxes using the asset and
liability method, the objective of which is to establish
deferred tax assets and liabilities for the temporary
differences between the financial reporting basis and the income
tax basis of the Company's assets and liabilities at enacted tax
rates expected to be in effect when such amounts are realized or
settled.
(j) Earnings (Loss) Per Share
-------------------------
The Conversion discussed in note 1(b) was effective September
22, 1995. Accordingly, the earnings per share data for the year
ended December 31, 1995 is comprised of earnings for the post
conversion period.
<TABLE>
<CAPTION>
For the period from
For the year ended September 22, 1995 to
December 31, 1996 December 31, 1995
-------------------- ----------------------
<S> <C> <C>
Net income (loss) $(403,986) 40,110
Less: Change in fair value of
ESOP shares subject to
put option (64,945) (11,535)
--------- -------
Net income (loss)
available to
common shareholders $(468,931) 28,575
========= =======
Weighted average number of
shares outstanding 919,979 880,206
========= =======
Earnings (loss) per share $ (0.51) 0.03
========= =======
</TABLE>
21
<PAGE>
(2) Investment Securities
---------------------
A summary of investment securities follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Par Amortized Unrealized Unrealized Market
Value Cost Gains Losses Value
----- ---- ----- ------ -----
December 31, 1996
-----------------
<S> <C> <C> <C> <C> <C>
Held to maturity:
U.S. Government and agency
obligations due:
Within 12 months $ 500,000 500,000 1,800 - 501,800
Beyond 12 months
but within 5 years 500,000 500,351 - (13,956) 486,395
----------- ---------- ------- -------- ----------
$ 1,000,000 1,000,351 1,800 (13,956) 988,195
=========== ========== ======= ======== ==========
Available for Sale:
U.S. Government and agency
obligations due:
Within 12 months $ 2,500,000 2,497,882 7,900 (2,547) 2,503,235
Beyond 12 months
but within 5 years 13,500,000 13,576,883 8,764 (132,716) 13,452,931
Beyond 5 years
but within 10 years 500,000 500,000 - (7,460) 492,540
Municipal obligations due:
After five years 100,000 98,762 9,547 - 108,309
----------- ---------- ------- -------- ----------
$16,600,000 16,673,527 26,211 (142,723) 16,557,015
=========== ========== ======= ======== ==========
December 31, 1995
-----------------
Held to maturity:
U.S. Government and agency
obligations due:
Within 12 months $ 8,000,000 8,007,472 21,875 (8,109) 8,021,238
Beyond 12 months
but within 5 years 500,000 500,000 8,305 - 508,305
----------- ---------- ------- -------- ----------
$ 8,500,000 8,507,472 30,180 (8,109) 8,529,543
=========== ========== ======= ======== ==========
Available for Sale:
U.S. Government and agency
obligations due:
Within 12 months $15,000,000 15,118,597 186,317 (2,464) 15,302,450
Beyond 12 months
but within 5 years 500,000 500,000 8,550 - 508,550
Municipal obligations due:
After five years 100,000 98,631 9,623 - 108,254
----------- ---------- ------- -------- ----------
$15,600,000 15,717,228 204,490 (2,464) 15,919,254
=========== ========== ======= ======== ==========
</TABLE>
Proceeds from sale of investment securities available for sale were $3,954,053
and $3,554,977 in 1996 and 1995, respectively, which generated gross gains of
$358 and $5,091 in 1996 and 1995, respectively, and gross losses of $27,290
and $973 in 1996 and 1995, respectively.
22
<PAGE>
(3) Mortgage-Backed Securities
--------------------------
A summary of mortgage-backed securities follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
---------- ---------- ---------
Principal Amortized Unrealized Unrealized Market
Amount Cost Gains Losses Value
--------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
December 31, 1996
-----------------
Available for sale:
FHLMC 5.50% - 7.00%,
due 1997 through 1999 $ 601,358 605,164 - 5,818 599,346
========= ========= ====== ====== =======
December 31, 1995
-----------------
Available for sale:
FHLMC 5.50% - 7.00%,
due 1997 through 1999 $ 709,580 716,881 - 6,648 710,233
========= ======= ======= ====== =======
</TABLE>
Proceeds from sale of mortgage-backed securities available for sale were
$854,003 in 1995, which generated gross gains of $45,657. No mortgage-
backed securities were sold during 1996.
(4) Loans Receivable
----------------
Loans receivable consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
---- ----
<S> <C> <C>
First mortgage loans, (primarily
residential,1-4 units) $30,398,171 27,716,387
Commercial real estate 1,695,000 1,679,393
Construction 1,092,604 932,000
Equity lines of credit 802,815 728,971
Loans secured by deposit accounts 63,022 79,353
Undisbursed proceeds on loans in process (882,061) (518,480)
Deferred loan fees, net (79,825) (134,661)
----------- ----------
Loans receivable 33,089,726 30,482,963
Less: allowance for loan losses (299,825) (259,466)
----------- ----------
Loans receivable, net $32,789,901 30,223,497
=========== ==========
</TABLE>
The following is a reconciliation of the allowance for loan losses for the
years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance at beginning of year $ 259,466 214,466
Provision for loan losses 7,500 105,000
Charge-offs - (60,000)
Recoveries 32,859 -
----------- ----------
Balance at end of year $ 299,825 259,466
=========== ==========
</TABLE>
23
<PAGE>
A comparative summary of accrued interest receivable follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1996 1995
---- ----
<S> <C> <C>
Loans receivable $103,636 129,621
Investment securities 271,207 368,088
Mortgage-back securities 3,128 3,630
Other 7,523 7,544
-------- -------
$385,494 508,883
======== =======
</TABLE>
First Savings grants residential, residential construction, and home equity
loans to customers primarily throughout its market area of Rockingham
County, North Carolina. As reflected in the summary of loans
receivable at December 31, 1996, the largest component of the First
Savings' loan portfolio consists of lower-risk, single-family 1-4
unit, residential loans, for which repayment and collateral values can
be affected by local economic conditions.
During 1994, management became aware of the closing of a tobacco product
manufacturer located in Reidsville. Most of the employees were not
transferred by the manufacturer and, therefore, may have become
unemployed or may have been forced to accept lower paying positions
with other employers. However, in 1996, the Reidsville plant was
purchased by another tobacco company. The new owner is continuing to
operate the plant with a reduced workforce. At December 31, 1996,
First Savings had loans receivable of approximately $2,140,000 or 6.5%
of total loans receivable, to employees and former employees of this
plant.
At December 31, 1996, First Savings did not have any loan commitments
outstanding. Unused equity lines of credit amounted to approximately
$1,002,000 at December 31, 1996. In the opinion of management, these
loan commitments, in addition to undisbursed proceeds on loans in
process, represent no more than normal lending risk to First Savings
and will be funded from normal sources of liquidity.
First Savings has nonaccrual loans of approximately $26,000 and $93,000 at
December 31, 1996 and 1995, respectively. If these loans had been
current in accordance with their original terms and had been
outstanding throughout the years ended December 31, 1996 and 1995,
gross interest income of approximately $2,500 and $7,800,
respectively, would have been recorded. Interest income on these loans
included in net income was approximately $1,600 and $5,000 for 1996
and 1995, respectively. At December 31, 1996 and 1995, there were no
loans considered impaired under SFAS No. 114.
First Savings has no loans serviced for others.
First Savings offers loans to their officers and directors for the financing
of their personal residences and for other personal purposes. These
loans are made in the ordinary course of business and are made on
substantially the same terms prevailing at the time as comparable
transactions with other persons. Management does not believe these
loans involve more than the normal risk of collectibility or present
other unfavorable features.
24
<PAGE>
The following is a reconciliation of aggregate loans outstanding to
executive officers, directors, and their immediate families for the year
ended December 31, 1996:
<TABLE>
<S> <C>
Balance at beginning of year $311,863
New loans -
Principal repayments (26,962)
-------
Balance at end of year $284,901
=======
</TABLE>
(5) Investment in FHLB Stock
------------------------
As a member of the Federal Home Loan Bank of Atlanta (the "FHLB"), First
Savings is required to maintain an investment in the stock of the FHLB
in an amount equal to the greater of one percent of First Savings'
outstanding home loans or five percent of any outstanding advances
from the FHLB. No ready market exists for such stock, which is
carried at cost, and it has no quoted market value.
(6) Premises and Equipment
----------------------
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
Office buildings and improvements $ 219,152 219,152
Furniture, fixtures and equipment 155,095 154,180
------- -------
374,247 373,332
Less accumulated depreciation (272,663) (256,777)
------- -------
$ 101,584 116,555
======= =======
</TABLE>
(7) Deposit Accounts
----------------
A summary of deposit accounts at December 31, 1996 and 1995, follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Statement savings $ 2,114,031 2,201,273
Money market savings accounts 1,750,543 1,947,629
Certificates of deposit 39,202,006 43,082,887
---------- ----------
$43,066,580 47,231,789
=========== ==========
</TABLE>
Deposit account interest expense consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
---- ----
<S> <C> <C>
Statement savings $ 48,994 70,808
Money market savings accounts 52,972 73,189
Certificates of deposit 2,347,224 2,424,747
----------- ----------
$ 2,449,190 2,568,744
=========== ==========
</TABLE>
Certificate of deposit accounts as of December 31, 1996, mature in the
following years and amounts:
1997 - $26,351,045; 1998 - $7,416,878; 1999 - $3,078,238; and
thereafter -$2,355,845.
Deposits accounts with balances exceeding $100,000 totaled $6,781,096 and
$7,453,147 at December 31, 1996 and 1995, respectively. Interest
expense on such accounts was $379,522 and $528,299 for the years ended
December 31, 1996 and 1995, respectively.
25
<PAGE>
(8) Income Taxes
--------------
Income tax expense (benefit) for the years ended December 31, 1996
and 1995 consists of:
<TABLE>
<CAPTION>
1996 1995
---------------------------- ---------------------------
Current Deferred Total Current Deferred Total
------- --------- -------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Federal $59,300 (94,800) (35,500) 46,600 (10,400) 36,200
State - (21,300) (21,300) 1,000 (2,200) (1,200)
------- -------- ------- ------ ------- ------
$59,300 (116,100) (56,800) 47,600 (12,600) 35,000
======= ======== ======= ====== ======= ======
</TABLE>
The income tax expense (benefit) for the years presented differed from the
amount computed by applying the federal income tax rate of 34% to
income before income taxes because of the following:
<TABLE>
<CAPTION>
1996 1995
--------------------- ------------------
Amount Percent Amount Percent
---------- --------- -------- --------
<S> <C> <C> <C> <C>
Income tax expense (benefit)
at federal rate $(156,700) (34.0%) 59,000 34.0%
Increase (decrease) in income
taxes resulting from:
Compensation expense 81,400 18.0 31,000 18.0
Expenses of abandoned
merger - - (45,000) (26.0)
Other, net 18,500 4.0 (10,000) (6.0)
--------- ----- ------- -----
$ (56,800) (12.0%) 35,000 20.0%
========= ===== ======= =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and (liabilities) at December 31,
1996 and 1995 are presented below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Loan fees, net of deferred costs $ 28,700 53,100
Deferred compensation 70,300 16,000
Allowance for loan losses, net - 1,300
Accrual to cash adjustment 84,100 -
Capital loss carryforward 6,300 -
Unrealized loss on securities 41,600 -
--------- --------
Total gross deferred tax assets 231,000 70,400
--------- --------
Less valuation allowance - -
--------- --------
Net deferred tax assets 231,000 70,400
--------- --------
Deferred tax liabilities:
FHLB stock basis for financial reporting
purposes in excess of tax basis (67,400) (67,400)
Allowance for loan losses, net (24,100) -
Depreciable basis of fixed assets (10,000) (5,400)
Prepaid pension expense (59,500) (70,900)
Prepaid insurance expense (13,600) (21,100)
Unrealized gains on securities - (66,400)
Accrual to cash adjustment - (6,900)
--------- --------
Total gross deferred tax liability (174,600) (238,100)
--------- --------
Net deferred tax asset (liability) $ 56,400 (167,700)
========= ========
</TABLE>
26
<PAGE>
No valuation allowance for deferred tax assets was required at December 31,
1996 and 1995. Management has determined that it is more likely than not
that the net deferred tax assets can be supported by recoveries of taxes
paid in the three-year carryback period and reduction of future taxable
income.
(9) Benefit Plans
-------------
First Savings has a defined benefit pension plan covering all of its
employees. Based upon actuarial computations at December 31, 1996 and
1995, the plan's funded status and amounts recognized in First
Savings' statements of financial condition at December 31, 1996 and
1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation (including vested
benefit of $717,030 and $626,815 in 1996 and
1995, respectively) $ 729,691 629,946
========== =======
Projected benefit obligation for service
rendered to date 1,050,318 822,965
Plan assets at fair value 1,090,022 954,570
---------- -------
Funded (unfunded) status 39,704 131,605
Unrecognized net obligation being amortized over 15 years 54,181 61,922
Unrecognized prior service cost 118,514 128,660
Unrecognized net (gain) loss 68,335 (12,452)
---------- -------
Prepaid pension cost $ 280,734 309,735
========== =======
</TABLE>
Net periodic pension cost included the following components for the years
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- -------
<S> <C> <C>
Service cost - benefits earned during the period $ 77,470 52,757
Interest cost on projected benefit obligation 68,049 50,064
Actual return on plan assets (75,641) (87,316)
Net amortization and deferral 18,934 40,289
---------- -------
Net periodic pension cost included in compensation
expense $ 88,812 55,794
========== =======
</TABLE>
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.5% at December
31, 1996 and 7% at December 31, 1995. The rate of increase in future
compensation levels used in determining the actuarial present value of
the projected benefit obligation was 6% at December 31, 1996 and 5% at
December 31, 1995. The expected long-term rate of return on plan
assets was 8% for 1996 and 1995. First Savings' contributions to the
plan are based on computations by independent actuarial consultants.
Plan assets consist of deposits in First Savings and common stock of
the Company.
In May 1995, First Savings decided to terminate its defined contribution
retirement plan which qualified under Section 401(k) of the Internal
Revenue Code. The assets were frozen as of June 30, 1995 and the
funds were distributed in August 1995. First Savings contributions
were $4,095 in 1995.
27
<PAGE>
(10) Deferred Compensation Plans
---------------------------
First Savings has deferred compensation agreements with certain directors.
These agreements guarantee the payment of stated monthly benefits over
a ten-year period to those directors at age 65 or, upon the director's
death, to their beneficiaries. In order to receive the full amount of
the deferred compensation, the director must continuously serve First
Savings as a director for five years from the date of the agreement.
The agreements also provide for certain monthly benefits in the event
of the director's early retirement, death prior to retirement,
termination or disability. The expense recognized by First Savings
for the years ended December 31, 1996 and 1995, related to these
agreements was $96,100 and $46,862, respectively. Other liabilities
in the accompanying statements of financial condition include $511,156
and $430,545 at December 31, 1996 and 1995, respectively, for the
related accrued liabilities under these agreements.
On May 1, 1995, First Savings entered into a Retirement Plan Agreement
with each director of First Savings. The agreements provide a monthly
payment of $500 upon retirement following a director's attainment of
age 65 (but no sooner than five years from the date of the retirement
plan agreement), death or disability. Payments under the agreements
are to be made in equal monthly installments over a period of 120
months. The expense recognized by First Savings for the year ended
December 31, 1996 and 1995, respectively, related to this agreement
was $88,652 and $33,814. Other liabilities in the accompanying
statements of financial condition include $118,966 and $33,814 at
December 31, 1996 and 1995, respectively, for the related accrued
liability under these agreements.
In conjunction with these agreements to provide deferred compensation,
First Savings has purchased life insurance policies on these
directors, which accumulate cash surrender values. The amount of cash
surrender value was $180,907 and $161,945 at December 31, 1996 and
1995, respectively, and is included in other assets in the
accompanying statements of financial condition.
(11) Federal Deposit Insurance Expense
---------------------------------
Eligible deposit accounts are insured up to $100,000 by the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). Federal deposit insurance expense amounted to
$404,507 and $112,295, for the years ended December 31, 1996 and 1995,
respectively.
On September 30, 1996, Congress passed legislation allowing a special
assessment to be levied by the FDIC to recapitalize the SAIF. The
special assessment was based on the level of SAIF deposits a financial
institution had as of March 31, 1995 subject to a 20% reduction for
certain qualifying deposits. First Savings' special assessment totaled
$316,146 and is included in the 1996 federal deposit insurance expense
above. On December 11, 1996, the FDIC approved a final rule
retroactive to October 1, 1996 which lowered rates on assessments paid
to the SAIF. First Savings received a refund of $19,607, which reduced
federal deposit insurance expense and is also included above.
(12) Retained Income Dividends and Regulatory Matters
------------------------------------------------
Retained income at December 31, 1996, includes approximately $1,424,000
for which no provision for federal income tax has been made. This
amount represents an allocation of income to bad debt deductions for
tax purposes only. Reduction of such amount for purposes other than to
absorb bad debt losses could create taxable income in certain remote
instances, which will be subject to the then current corporate income
tax rate.
28
<PAGE>
In May 1996, the Company declared and paid a $1.00 per common share
dividend, totaling $910,451. The Company declared a $.25 per common
share dividend in August 1996, totaling $234,815, which was paid in
September 1996 and declared a $.25 per common share dividend in
November 1996, totaling $234,815, which was paid in December 1996. All
1996 dividends were paid from common stock as a return of capital. In
December 1995, the Company declared and paid a dividend of $3.00 per
common share, consisting of approximately $0.05 from accumulated
earnings and approximately $2.95 from common stock as a return of
capital.
As a North Carolina-chartered savings bank, First Savings is subject to
the capital requirements of the FDIC and the Administrator. The FDIC
requires First Savings to maintain minimum ratios of Tier I capital to
total risk-weighted assets and total capital to risk-weighted assets
of 4% and 8%, respectively. To be "well capitalized," the FDIC
requires ratios of Tier I capital to total risk-weighted assets and
total capital to risk-weighted assets of 6% and 10%, respectively.
Tier I capital consists of total stockholders' equity calculated in
accordance with generally accepted accounting principles less
intangible assets, and total capital is comprised of Tier I capital
plus certain adjustments, the only one of which is applicable to First
Savings is the allowance for loan losses. Risk-weighted assets reflect
First Savings' on- and off-balance sheet exposures after such
exposures have been adjusted for their relative risk levels using
formulas set forth in FDIC regulations. First Savings is also subject
to a leverage capital requirement, which calls for a minimum ratio of
Tier I capital (as defined above) to quarterly average total assets of
3%, and a ratio of 5% to be "well capitalized." The Administrator
requires a net worth equal to at least 5% of assets.
At December 31, 1996 and 1995, First Savings was in compliance with all of
the aforementioned capital requirements as summarized below.
<TABLE>
<CAPTION>
At December 31,
----------------
1996 1995
---- ----
(dollars in thousands)
<S> <C> <C>
Tier I Capital:
Common stockholders' equity $ 8,875 9,026
Unrealized holding loss (gain) on securities
available for sale 80 (122)
------- ------
Total Tier I capital $ 8,955 8,904
======= ======
Tier II Capital:
Total Tier I capital $ 8,955 8,904
Qualifying allowance for loan losses 274 260
------- ------
Total capital $ 9,229 9,164
======= ======
Risk-weighted assets 21,899 20,920
Fourth quarter average assets 54,704 62,149
Risk-based capital ratios:
Tier I capital as a percent of risk-weighted
assets 40.89% 42.56
Minimum required Tier I capital 4.00 4.00
Total capital as a percent of risk-weighted
assets 42.14 43.80
Minimum required total capital 8.00 8.00
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
At December 31,
--------------------
1996 1995
---- ----
(dollars in thousands)
<S> <C> <C>
Leverage capital ratios:
Tier I capital as a percent of fourth quarter
average assets 16.37% 14.33
Minimum required Tier I leverage capital 3.00 3.00
North Carolina regulatory capital:
Total capital as a percent of fourth
quarter average assets 16.87 14.74
Minimum required North Carolina capital 5.00 5.00
</TABLE>
(13) Employee Stock Ownership Plan ("ESOP")
--------------------------------------
First Savings sponsors an ESOP which purchased 75,870 shares or 8% of the
common stock issued in the Conversion. Contributions to the ESOP are
made by First Savings on a discretionary basis, and are allocated
among ESOP participants on the basis of relative compensation in the
year of allocation. Benefits will vest in full upon five years of
service with credit given for years of service prior to the
Conversion.
The ESOP has been funded by a loan from First Savings Financial Corp. in
the amount of $758,700. The loan is secured by the shares of stock
purchased by the ESOP and is not guaranteed by First Savings.
Principal and interest payments on the loan are funded primarily from
discretionary contributions by First Savings. Dividends, if any, paid
on shares held by the ESOP may also be used to reduce the loan. The
number of ESOP shares released and allocated to participants each year
is determined by a formula based on current year principal and
interest payments made on the ESOP loan and total future payments to
be made.
The Company records compensation expense for shares released to employees,
as a result of contributions by the Company or dividends paid on
unreleased shares in the ESOP, equal to the fair value of the shares.
The Company recorded ESOP related compensation expense of
approximately $254,500 and $99,300 for the years ended December 31,
1996 and 1995, respectively. At December 31, 1996, 28,808 shares have
been released and allocated to participants, 47,062 shares are
unreleased and 6,447 shares are committed to be released in September
1997. The fair value of the pro-rata number of the committed shares
which were earned during 1996 (1,784 shares) has been expensed in
1996. The remaining 4,663 shares committed to be released in September
1997, with a fair value of approximately $58,300 at December 31, 1996,
will be expensed over the first nine months of 1997.
The common stock held by the ESOP has a "put option" feature since the
common stock of the Company is not "publicly traded" as defined by the
ESOP. The "put option" feature permits the participants to sell their
common shares obtained from the ESOP to the Company at the current
fair market value during the option periods. Accordingly, the common
stock of the ESOP and related amount of unearned ESOP shares are
recorded outside stockholders' equity. An adjustment has been recorded
to retained earnings to reflect the earned ESOP shares at fair value
as of December 31, 1996 and 1995. The fair value of the unearned ESOP
shares is $565,975 and $784,070 at December 31, 1996 and 1995,
respectively.
30
<PAGE>
(14) Stock Option Plan
-----------------
The Board of Directors of the Company has adopted a Stock Option Plan for
employees and directors which was approved by the stockholders at the
annual meeting on April 18, 1996. Under the terms of the plan, 94,838
shares of the Company's common stock were granted to the employees and
directors on April 19, 1996. Such options have an option exercise
price of $11.125, which was the fair value of the stock on April 19,
1996. Such stock options will have a term of ten years and a vesting
schedule which provides that 20% of the options granted will vest on
the first anniversary of the date of the grant and 20% will vest on
each subsequent anniversary date, so that the options will be
completely vested at the end of the five years after the date of the
grant.
The Company adopted Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation", on January 1,
1996. SFAS 123 encourages companies to account for stock compensation
awards based on their fair value at the date the awards are granted.
The resulting compensation cost would be shown as an expense on the
income statement. Companies may choose to continue to measure
compensation for stock-based plans using the intrinsic method of
accounting prescribed by APB Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees." Entities electing to continue the
accounting prescribed in APB 25 will be required to disclose in the
notes to the financial statements what net income and earnings per
share would have been if the fair value-based method of accounting
defined in SFAS No. 23 had been applied. The Company elected to
continue to measure compensation cost using APB 25. The pro forma net
loss and net loss per share amounts were not material to the Company
in 1996.
(15) Management Recognition Plan
---------------------------
The Board of Directors of the Company has approved a Management
Recognition Plan (the "MRP") for directors and employees. The MRP was
approved by the stockholders at the annual meeting on April 18, 1996.
Under the terms of the plan, 37,935 shares of common stock were
awarded to directors and employees on April 18, 1996. The shares
awarded pursuant to the MRP have a vesting schedule which provides
that 20% of the shares awarded will automatically vest on the first
anniversary of the effective date of award and 20% will vest on each
subsequent anniversary date, so the shares will be completely vested
at the end of five years after the date of award. Compensation expense
related to the MRP was $56,272 for the year ended December 31, 1996.
(16) First Savings Financial Corp.
-----------------------------
The principal asset of First Savings Financial Corp. is its investment in
First Savings, and its principal source of income is equity earnings
from First Savings. Certain regulatory and other requirements restrict
the lending of funds by First Savings to First Savings Financial Corp.
and the amount of dividends which can be paid to First Savings
Financial Corp.
See note 1 of Notes to the Consolidated Financial Statements for a
description of the restrictions on payment of dividends by First
Savings. Also refer to Note 1 of Notes to the Consolidated Financial
Statements for information regarding the liquidation accounts
established at First Savings and the regulatory capital requirements
of First Savings, and refer to Note 12 for information regarding
restrictions on retained earnings to absorb possible bad debt losses
for income tax purposes.
31
<PAGE>
The following is a summary of selected financial information for First
Savings Financial Corp.:
Balance Sheet
-------------
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Assets
------
Cash $ 75,823 259,480
Investment securities available for sale,
at market value (cost of $1,030,769) - 1,042,188
Investment in First Savings 9,327,437 9,707,581
Accrued interest receivable 11,858 26,492
Other assets 22,162 76,904
--------- ----------
Total assets $9,437,280 11,112,645
========= ==========
Liabilities and Stockholders' equity
------------------------------------
Liabilities $ 40,420 32,782
ESOP stock subject to put option 382,400 88,439
Stockholders' equity 9,014,460 10,991,424
--------- ----------
Total liabilities and
stockholders' equity $9,437,280 11,112,645
========= ==========
<CAPTION>
For the period
For the year ended from September 22, 1995
December 31, 1996 to December 31, 1995
----------------- --------------------
Income Statement
----------------
<S> <C> <C>
Interest income $ 99,234 65,923
Equity in undistributed (losses)
earnings of First Savings (359,130) 14,827
Noninterest income (loss) (18,671) 5,091
Noninterest expenses 140,919 31,831
--------- ---------
Income (loss) before taxes (419,486) 54,010
Income tax expense
(benefit) (15,500) 13,900
--------- ---------
Net income (loss) (403,986) 40,110
Change in fair value of
ESOP shares subject
to put option (64,945) (11,535)
--------- ---------
Net income (loss)
available to common
shareholders $ (468,931) 28,575
========= =========
Statement of Cash Flows
-----------------------
Cash flows from operating activities:
Net income $ (403,986) 40,110
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed net
earnings (loss) of First
Savings 359,130 (14,827)
Loss (gain) on sale of securities 18,671 (5,091)
Amortization, net 22,019 (2,301)
Note receivable from ESOP - (758,700)
Payments received on note receivable 311,930 -
Deferred tax benefit (13,976) (1,574)
Decrease (increase) in accrued
interest receivable 14,634 (26,492)
Increase in other assets (12,622) -
Increase in liabilities 9,946 30,474
-------- ----------
Net cash provided by (used in)
operating activities 305,746 (738,401)
-------- ----------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
For the period
For the year ended from September 22, 1995
December 31, 1996 to December 31, 1995
------------------- ------------------------
<S> <C> <C>
Cash flow from investing
activities:
Investment in First Savings $ - (4,107,716)
Purchase of investment
securities - (4,079,327)
Proceeds from sale of
investment securities
available for sale 990,079 3,055,950
------- ---------
Net cash provided by (used
in) investing activities 990,079 (5,131,093)
------- ----------
Cash flows from financing
activities:
Proceeds from sale of common
stock, net - 8,974,132
Dividends paid (1,479,482) (2,845,158)
--------- ---------
Net cash provided by (used
in) financing activities (1,479,482) 6,128,974
--------- ---------
Net increase (decrease) in
cash and cash equivalents (183,657) 259,480
Cash and cash equivalents at
beginning of period 259,480 -
--------- ----------
Cash and cash equivalents at
end of period $ 75,823 259,480
========= ==========
</TABLE>
The dividends paid of $1,479,482 and $2,845,158 in 1996 and 1995,
respectively, include the dividends paid to the ESOP of $99,400 and
$227,610 in 1996 and 1995, respectively. The proceeds from the sale of
common stock of $8,974,132 include the proceeds of $758,700 from the
sale of common stock to the ESOP.
(17) Fair Value of Financial Instruments
-----------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," ("SFAS No. 107") requires a
company to disclose the fair value of its financial instruments,
whether or not recognized in the balance sheet, where it is practical
to estimate that value.
The fair value estimates are made at a specific point in time based on
relevant market information about the financial instrument. These
estimates do not reflect any premium or discount that could result
from offering for sale at one time the company's entire holding of a
particular financial instrument. In cases where quoted market prices
are not available, fair value estimates are based on judgments
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore,
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have
a significant effect on fair value estimates and have not been
considered in the estimates. Finally, the fair value estimates
presented herein are based on pertinent information available to
management. Such amounts have not been comprehensively 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.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents
-------------------------
The carrying amounts reported in the balance sheet for cash and cash
equivalents and for interest-bearing deposits in other financial
institutions approximate those assets' fair values.
33
<PAGE>
Investment and Mortgage-Backed Securities
-----------------------------------------
Fair values were based on quoted market prices, where available. If quoted
market prices were not available, fair values were based on quoted
market prices of comparable instruments.
Loans Receivable
----------------
The carrying values, reduced by estimated inherent credit losses, of
variable-rate loans and other loans with short-term characteristics
were considered fair values. The fair value of certain 1-4 family
residential loans were based on quoted market prices of similar loans
sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics and credit losses inherent in the
portfolio. For other loans, the fair market values were calculated by
discounting scheduled future cash flows using current interest rates
offered on loans with similar terms, adjusted to reflect the estimated
credit losses inherent in the portfolio.
Deposit Accounts
----------------
The fair value of deposits with no stated maturity, passbook, and money
market deposits, was, by definition, equal to the amount payable on
demand. The fair value of certificates of deposit was estimated using
the rates currently offered for deposits of similar remaining
maturities.
The estimated fair values of financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------
Carrying Estimated
value fair value
----- ----------
<S> <C> <C>
Financial Assets:
- -----------------
Cash and cash equivalents $ 817,000 817,000
Investment securities 17,557,000 17,545,000
Mortgage-backed securities 599,000 599,000
Loans receivable, net of allowance
for loan losses 32,790,000 32,909,000
FHLB stock 413,000 413,000
=========== ==========
Financial Liabilities:
- ---------------------
Deposit accounts $ 43,067,000 43,379,000
=========== ==========
<CAPTION>
December 31, 1995
------------------------------
Carrying Estimated
value fair value
----- ----------
<S> <C> <C>
Financial Assets:
- ----------------
Cash and cash equivalents $ 1,979,000 1,979,000
Investment securities 24,427,000 24,449,000
Mortgage-backed securities 710,000 710,000
Loans receivable, net of allowance
for loan losses 30,223,000 30,791,000
FHLB stock $ 413,000 413,000
=========== ==========
Financial Liabilities:
- ---------------------
Deposit accounts $ 47,232,000 47,574,000
=========== ==========
</TABLE>
34
<PAGE>
At December 31, 1996 and 1995, First Savings had unused commitments on
equity lines of credit. These off-balance sheet commitments are
generally exercisable at the market rate prevailing at the date the
underlying transaction will be completed and, therefore, they were
deemed to have no current fair market value.
SFAS No. 107 excludes certain financial instruments and all non-financial
instruments from its disclosures requirements. The disclosures also do
not include premises and equipment and certain intangible assets, such
as customer relationships, and goodwill. Accordingly, the aggregate
fair value amounts presented above do not represent the underlying
value of the Company.
(18) Proposed Merger
---------------
The Company has received an acquisition proposal to merge with and into
First Citizens BancShares, Inc. ("BancShares") and is in the process
of negotiating a definitive agreement with BancShares. BancShares is a
bank holding company headquartered in Raleigh, North Carolina with
assets of approximately $8 billion at December 31, 1996. Under the
terms of the proposal, each outstanding share of the Company would be
converted into the right to receive $10.75 in cash. If an agreement is
reached, the merger is expected to be finalized in the fall of 1997
and is subject to a number of conditions, including approval by
regulatory authorities and the stockholders of the Company.
35
<PAGE>
Board of Directors
First Savings Financial Corp. and First Savings Bank of Rockingham County, Inc.,
- --------------------------------------------------------------------------------
SSB
---
<TABLE>
<S> <C>
Fred B. Coates, Chairman Pat F. Brady
Veterinary Consultant to Reidsville Owner of Pat Brady Oil Co.,
Veterinary Hospital since 1982 an oil and gas distributor located
in Reidsville since 1958
David S. Kemp Phillip M. Hooper
President and Chief Executive Retired retailer
Officer of First Savings since 1980
Benton S. Smothers George I. Richardson
Partner in Smothers Brothers Farms Retired family practice physician
since 1976; Smothers Brothers Insurance
since 1967 and Vice President of Smothers
Warehouse since 1976; all tobacco farming Gilbert R. Upchurch
related businesses located Dental practice in Reidsville since 1964
in Rockingham County
</TABLE>
Officers
First Savings Financial Corp.
-----------------------------
<TABLE>
<S> <C>
David S. Kemp Cynthia F. Teague
President and Chief Executive Officer Vice President and Chief Financial Officer
Alecia S. Jones
Secretary and Treasurer
<CAPTION>
First Savings Bank of Rockingham County, Inc., SSB
---------------------------------------------------
<S> <C>
David S. Kemp Cynthia F. Teague
President and Chief Executive Officer Vice President and Chief Financial
Officer
Alecia S. Jones
Secretary and Treasurer
</TABLE>
36
<PAGE>
Corporate Information
Annual Meeting
The annual meeting of stockholders
will be held on April 17, 1997 at 2:00
p.m. at the office of First Savings
Financial Corp. at 501 South Main
Street, Reidsville, North Carolina.
Transfer Agent
Stockholders having questions about
their stock certificates or dividends
should contact the transfer agent at:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
Independent Accountants
KPMG Peat Marwick LLP
301 North Elm Street
Suite 700
Greensboro, North Carolina 27401
Special Counsel
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P.
Post Office Box 26000
230 North Elm Street
Greensboro, North Carolina 27420
Corporate Office
501 South Main Street
Reidsville, North Carolina 27323
(910) 342-4251
Additional Information
A copy of Form 10-KSB may be obtained
by writing Cynthia Teague at
P. O. Box 1885, Reidsville, North Carolina 27323-1885.
For additional information, contact Cynthia Teague,
Chief Financial Officer, at (910) 342-4251.
Stock Information
The Company's common stock began trading on
September 22, 1995. As of February 28, 1997, there
were approximately 197 holders 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. There is no established market for the Company's
common stock, excluding limited sporadic quotations,
although the Company's common stock is quoted over-
the-counter through the National Daily Quotation System
"pink sheets" published by the National Quotation
Bureau, Inc.
The Company declared dividends of $1.00 per share in
December 1995, $1.00 per share in May 1996 and
$.25 per share in August and November 1996.
See Note 1 of Notes to the Consolidated Financial
Statements for regulatory restrictions which limit the
ability of First Savings to pay dividends to the Company.
Based upon information provided to management by
certain securities firms effecting transactions in the
Company's common stock on an agency basis, the
high and low bids for the Company's common stock
in 1996 follows:
<TABLE>
<CAPTION>
High Bid Low Bid
-------- -------
<S> <C> <C>
1996
First Quarter $11.50 11.125
Second Quarter 12.25 11.00
Third Quarter 12.25 11.625
Fourth Quarter 13.00 11.75
1995
Fourth Quarter $13.50 11.25
</TABLE>
These quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may
not represent actual transactions.
37
<PAGE>
Post Office Box 1885
Reidsville, North Carolina 27323-1885
(910) 342-4251
MEMBER FDIC
<PAGE>
EXHIBIT 21
SUBSIDIARY OF THE COMPANY
The Company has one wholly-owned subsidiary, First Savings Bank of
Rockingham County, Inc., SSB (the "Bank").
<PAGE>
INDEPENDENT AUDITORS' CONSENT
-----------------------------
We consent to incorporation by reference in the Registration Statement on Form
S-8 of First Savings Financial Corp. of our report dated January 10, 1997
relating to the consolidated statements of financial condition of First Savings
Financial Corp. as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for the years then
ended, which report was incorporated by reference in the December 31, 1996 Form
10-KSB of First Savings Financial Corp.
/s/ KPMG Peat Marwick LLP
--------------------------
KPMG Peat Marwick LLP
Greensboro, North Carolina
March 28, 1997
