-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T9eXTHpYF+uKKLa00lbipGeNEsj0O+oljIkzNWwb6/E/IJGrPD0ZIvUJaLI7ipkk V4Ur9KuY7LBEikl/l8bXeQ== 0001021408-98-000671.txt : 19980928 0001021408-98-000671.hdr.sgml : 19980928 ACCESSION NUMBER: 0001021408-98-000671 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980925 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST SAVINGS BANCORP INC CENTRAL INDEX KEY: 0000912836 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 560408240 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-27098 FILM NUMBER: 98714864 BUSINESS ADDRESS: STREET 1: P O BOX 1657 CITY: SOUTHERN PINES STATE: NC ZIP: 28388 BUSINESS PHONE: 9106926222 MAIL ADDRESS: STREET 1: P O BOX 1657 CITY: SOUTHERN PINES STATE: NC ZIP: 28388 10-K405 1 FORM 10-K - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ______ Commission file number 0-27098 ------------------ FIRST SAVINGS BANCORP, INC. -------------------------------------------------------------- (Exact name of registrant as specified in its charter) NORTH CAROLINA 56-1842701 --------------------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 205 S.E. BROAD STREET, P.O. BOX 1657 SOUTHERN PINES, NORTH CAROLINA 28388 -------------------------------------- ---------- (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code (910) 692-6222 -------------- Securities Registered Pursuant to Section 12(b) of the Act: NONE ----------- Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE -------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ ----- State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within 60 days prior to the date of filing. $78,216,180 COMMON STOCK, NO PAR ---------------------------------- VALUE, BASED ON THE CLOSING PRICE OF SUCH COMMON STOCK ON AUGUST 31, 1998. - -------------------------------------------------------------------------- Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 3,724,580 SHARES OF COMMON STOCK, NO PAR VALUE, OUTSTANDING AT AUGUST 31, 1998. - -------------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Annual Report of First Savings Bancorp, Inc. for the year ended June 30, 1998, are incorporated by reference into Part I, Part II and Part IV. Portions of the Proxy Statement for the 1998 Annual Meeting of Shareholders of First Savings Bancorp, Inc. to be held on October 29, 1998, are incorporated by reference into Part III. Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] 2 PART I ITEM 1. BUSINESS GENERAL First Savings Bancorp, Inc. (the "Holding Company" or the "Company") is a savings bank holding company registered with the Board of Governors of the Federal Reserve System (the "Federal Reserve") under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and the savings bank holding company laws of North Carolina. The Holding Company's office is located at 205 S.E. Broad Street, Southern Pines, North Carolina. The Holding Company's activities primarily consist of the ownership of First Savings Bank of Moore County, Inc., SSB (the "Bank"). The Holding Company's principal sources of income are earnings on its investments. In addition, the Holding Company receives any dividends which are declared and paid by the Bank on its capital stock. The Bank was originally chartered in 1922. It is a member of the Federal Home Loan Bank ("FHLB") system and its accounts are federally insured up to allowable limits. The Bank is primarily engaged in soliciting deposit accounts from the general public, making loans primarily secured by residential real estate and making limited types of consumer loans. The operations of the Bank and depository institutions in general are significantly influenced by general economic conditions and by related monetary and fiscal policies of depository institution regulatory agencies, including the Federal Reserve, the Federal Deposit Insurance Corporation (the "FDIC") and the North Carolina Administrator, Savings Institutions Division, North Carolina Department of Commerce (the "Administrator"). Deposit flows and cost of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. The Bank conducts its business through five offices in Southern Pines, Pinehurst, Carthage and West End, North Carolina. The Holding Company and the Bank are collectively referred to herein as "First Savings." MARKET AREA First Savings' primary market area consists of Moore County, North Carolina. Moore County is home to many retirement communities and, with its many renowned golf courses in Pinehurst and Southern Pines, has an active tourist and convention business. As a result, the economy of Moore County is primarily service oriented. However, there is also employment in manufacturing, agricultural and governmental activities. Major employers in First Savings' market area include Resorts of Pinehurst, Firsthealth Moore Regional Hospital, Gulstan Carpets, Perdue, Inc. and Stanly Furniture Company. LENDING ACTIVITIES First Savings' primary source of revenue is interest and fee income from its real estate lending activities, consisting primarily of mortgage loans for the purchase, refinancing or construction of one-to-four family residential real property located in its primary market area. First Savings also makes loans secured by multi-family residential and non-residential real estate, home equity and home improvement loans, savings account loans, installment loans and credit card loans. As a result, over 98% of First Savings' loan portfolio is secured by real estate. As of June 30, 1998, over 99% of the net amount of First Savings' real estate loan portfolio was secured by properties in North Carolina. On June 30, 1998, the largest amount First Savings had outstanding to any one borrower and its affiliates 3 was approximately $2,324,000. This loan was performing in accordance with its original terms as of that date. In addition to interest earned on loans, First Savings receives fees in connection with loan originations, loan modifications, late payments, loan assumptions and other miscellaneous services. The Bank's general policy is to place a loan on nonaccrual status when the loan becomes 90 days delinquent. Interest on loans that are contractually 90 days or more past due is reserved through an allowance account. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent cash payments are received, and in management's judgement, the borrower's ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status. As of June 30 1998, 1997 and 1996, the reserve for uncollected interest was $7,945, $6,419 and $2,308, respectively. First Savings does not originate its loans with the intention that they will be sold in the secondary market. Loans generally are not originated in conformity with purchase requirements of the Federal Home Loan Mortgage Corporation ("FHLMC") or Federal National Mortgage Association ("FNMA"). First Savings originates loans which satisfy its underwriting requirements which are tailored for its local community. As a result, many of such loans do not satisfy various requirements imposed by the FHLMC or the FNMA. Accordingly, such loans are not readily saleable in the secondary market. Such loans could be sold only after incurring certain costs, such as costs for surveys and title insurance and/or discounting the purchase price. First Savings purchased loan participations totaling $95,000, $145,000 and $1,570,000 during the years ended June 30, 1998, 1997 and 1996, respectively. All such loan participations are secured by real property located in North Carolina. First Savings' ratio of loan loss allowances to nonperforming assets at June 30, 1998, 1997 and 1996, was 109.36%, 241.60%, and 454.48%, respectively. INVESTMENTS AND MORTGAGE-BACKED SECURITIES Interest income from mortgage-backed securities and investment securities generally provides the second largest source of income to First Savings after interest on loans. In addition, First Savings receives interest income from interest-bearing deposits in other financial institutions. On June 30, 1998, First Savings' investment securities portfolio consisted of U.S. government and U.S. agency obligations, North Carolina and municipal obligations and FHLB of Atlanta stock. As of June 30, 1998, $6.0 million of investment securities were pledged as collateral for individual and public deposits. As a member of the FHLB of Atlanta, First Savings is required to maintain an investment in stock of the FHLB of Atlanta equal to the greater of 1% of First Savings' outstanding home loans or 5% of its outstanding advances from the FHLB of Atlanta. No ready market exists for such stock, which is carried at cost. As of June 30, 1998, First Savings' investment in stock of the FHLB of Atlanta was approximately $1.9 million. North Carolina regulations require First Savings to maintain a minimum amount of liquid assets which may be invested in specified short-term securities. See "SUPERVISION AND REGULATION - Liquidity." As is described above, First Savings is also permitted to make certain other securities investments. First Savings has adopted an investment policy which is implemented by First Savings' investment committee, which meets at least monthly. First Savings' investment strategy is intended, among other things, to (i) provide and maintain liquidity, (ii) maintain a balance of high quality, diversified investments to minimize risk, (iii) provide collateral for pledging requirements, (iv) serve as a countercyclical balance to earnings from lending operations, (v) maximize returns, and (vi) manage interest rate risk. In terms of priorities, safety is considered more important than liquidity or return on investment. First Savings does not engage in hedging activities. 4 The following table sets forth certain information regarding First Savings' cash investments and the carrying and market values of First Savings' mortgage-backed securities and investment portfolio at the dates indicated.
AT JUNE 30, --------------------------------------------------------------- 1998 1997 1996 ------------------- ------------------- ------------------- AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE COST VALUE --------- -------- --------- -------- --------- -------- (IN THOUSANDS) Interest-bearing deposits in other financial institutions............. $ 3,991 $ 3,991 $ 6,301 $ 6,301 $ 713 $ 713 ======= ======= ======= ======= ======= ======= Securities available-for-sale/1/: U.S. government and agency securities........................ $71,164 $71,695 $78,881 $79,282 $63,919 $63,889 Obligations of states and political subdivisions...................... 950 987 950 975 2,150 2,180 Federal Home Loan Bank stock......... 1,930 1,930 1,930 1,930 1,930 1,930 Other................................ 50 50 ------- ------- ------- ------- ------- ------- Total securities available-for-sale.... $74,094 $74,662 $81,760 $82,187 $67,999 $67,999 ======= ======= ======= ======= ======= ======= Securities held-to-maturity/1/: U.S. government and agency securities........................ $ $ $ $ $ $ Obligations of states and political subdivisions...................... Federal Home Loan Bank stock......... Mortgage-backed securities........... 9,737 9,821 6,572 6,672 2,965 3,016 ------- ------- ------- ------- ------- ------- Total securities held-to-maturity...... $ 9,737 $ 9,821 $ 6,572 $ 6,672 $ 2,965 $ 3,016 ======= ======= ======= ======= ======= =======
________________________________ /1/ The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities" which addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. These investments are to be classified in three categories and accounted for as follows: (i) debt securities that the entity has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; (ii) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with net unrealized gains and losses included in earnings; and (iii) debt and equity securities not classified as either held-to-maturity or trading securities are classified as securities available-for-sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of equity. First Savings has no trading securities. First Savings adopted SFAS 115 on July 1, 1994. 5 The following table sets forth certain information regarding First Savings' cash investments and the carrying value, weighted average yields and contractual maturities of First Savings' mortgage-backed and investment securities as of June 30, 1998.
AFTER ONE THROUGH AFTER FIVE THROUGH ONE YEAR OR LESS FIVE YEARS TEN YEARS AFTER TEN YEARS -------------------- -------------------- -------------------- -------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD --------- --------- --------- --------- --------- --------- --------- --------- (IN THOUSANDS) Interest-bearing deposits in other financial institutions.............. $ 3,991 6.10% $ % $ % % ------- ------- ------- ------- ------- ------ ------- ------- Securities available-for-sale: U.S. government and agency securities........... $26,198 6.77% $20,468 6.54% $14,014 6.85% $11,015 7.24% N.C. State and municipal obligations(1)....... 987 5.35 Federal Home Loan Bank stock................... 1,930 7.50 Other.................... $ 50 4.19 ------- ------- ------- ------- ------- ------ ------- ------- Total securities available-for-sale. $28,178 6.82% $20,468 6.54% $15,001 6,74% $11,015 7.24% ------- ------- ------- ------- ------- ------ ------- ------- Securities held-to-maturity: Mortgage-backed securities.............. $ $ 340 9.31% $ 148 9.81% $ 9,249 7.52% ------- ------- ------- ------- ------- ------ ------- ------- Total investments, at carrying value................... $28,178 $20,808 $15,149 $20,264 ------- ------- ------- ------- Total interest-bearing deposits and investments............. $32,169 $20,808 $15,149 $20,264 ======= ======= ======= ======= TOTAL ------------------- WEIGHTED ARRYING AVERAGE VALUE YIELD -------- --------- Interest-bearing deposits in other financial institutions.............. $ 3,991 6.10% ------- ------- Securities available-for-sale: U.S. government and agency securities........... $71,695 6.78% N.C. State and municipal obligations(1)....... 987 5.35 Federal Home Loan Bank stock................... 1,930 7.50 Other.................... 50 4.19 ------- ------ Total securities available-for-sale. $74,662 6.93% ------- ------- Securities held-to-maturity: Mortgage-backed securities.............. $ 9,737 7.617% ------- ------- Total investments, at carrying value................... $84,399 ------- Total interest-bearing deposits and investments............. $88,390 =======
(1) Yields on obligations of states and political subdivisions are not calculated on a tax-equivalent basis. 6 DEPOSITS AND BORROWINGS DEPOSITS. Deposits are the primary source of First Savings' funds for lending and other investment purposes. On June 30, 1998, 1997 and 1996, First Savings' deposits totalled $211.9 million, $204.3 million and $187.4 million, respectively. In addition to deposits, First Savings derives funds from loan principal repayments, interest payments, interest income from mortgage-backed securities, investment income, interest from its own interest-bearing deposits, and otherwise from its operations. Loan repayments are a relatively stable source of funds while deposit inflows and outflows may be significantly influenced by general interest rates and money market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer term basis for general business purposes. First Savings attracts both short-term and long-term deposits from the general public by offering a variety of accounts and rates. First Savings offers passbook savings accounts, checking accounts, money market accounts and fixed interest rate certificates with varying maturities. All deposit flows are greatly influenced by economic conditions, the general level of interest rates, competition and other factors, including the restructuring of the thrift industry. First Savings' deposits traditionally have been obtained primarily from its market area. First Savings utilizes traditional marketing methods to attract new customers and savings deposits, including print media advertising and direct mailings. First Savings does not advertise for deposits outside of its local market area and it has no brokered deposits. As of June 30, 1998, the aggregate amount outstanding of certificates of deposit in amounts of $100,000 or more was approximately $28.9 million. Some of these deposits were deposits of state and local governments which are subject to rebidding from time to time and to securitization requirements. The following table presents the maturity of these time certificates of deposit at the dates indicated.
JUNE 30, 1998 -------------- (IN THOUSANDS) 3 months or less..................................................... $ 5,399 Over 3 months through 6 months....................................... 7,300 Over 6 months through 12 months...................................... 6,940 Over 12 months....................................................... 9.276 ------- Total........................................................... $28,915 =======
BORROWINGS. First Savings is a member of the FHLB of Atlanta. The FHLB system functions in a reserve credit capacity for savings institutions. As a member, First Savings is required to own capital stock in the FHLB of Atlanta and is authorized to apply for advances from the FHLB of Atlanta on the security of that stock and a floating lien on certain of its real estate secured loans and other assets. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution's net worth or on the FHLB of Atlanta's assessment of the institution's creditworthiness. As of June 30, 1998, First Savings had $20.0 million in borrowings outstanding to the FHLB of Atlanta. Upon First Savings' conversion to the stock form of ownership, the First Savings Bank of Moore County, Inc., SSB Employee Stock Ownership Plan ("ESOP") became effective. As part of the conversion, the ESOP borrowed $648,000 from an independent third party lender and First Savings contributed $72,000 to the ESOP. This $720,000 was used to purchase 72,000 shares of common stock issued in the conversion. The note was assumed by the Holding Company in January 1997. The note payable is collateralized by the common shares purchased by the ESOP with the proceeds. The note will be repaid principally from First Savings' discretionary contributions to the ESOP over a period not to exceed ten years. Dividends paid on shares held by the ESOP may also be used to reduce the note. The note is not guaranteed by First Savings. Unearned compensation related to the ESOP note payable is amortized on a straight-line basis over ten years. 7 SUBSIDIARIES The Bank has one wholly-owned subsidiary, Moore Service Corporation ("Moore Service"). Moore Service, a North Carolina corporation, serves as the trustee for deeds of trust securing loans made by First Savings. The financial statements of Moore Service are consolidated with those of First Savings. Moore Service has the same Board of Directors as the Bank, and William E. Samuels, Jr. is its Chief Executive Officer. COMPETITION First Savings faces strong competition both in attracting deposits and making real estate and other loans. Its most direct competition for deposits has historically come from other savings institutions, credit unions and commercial banks located in its primary market area, including large financial institutions which have greater financial and marketing resources available to them. First Savings has also faced additional significant competition for investors' funds from short-term money market securities and other corporate and government securities. The ability of First Savings to attract and retain savings deposits depends on its ability to generally provide a rate of return, liquidity and risk comparable to that offered by competing investment opportunities. As of June 30, 1998, there were at least twelve other financial institutions with offices in Moore County, North Carolina. Based upon comparative data as of June 30, 1998, First Savings had the second largest share of deposits in Moore County, totaling approximately 21% of all deposits in the county. EMPLOYEES As of June 30, 1998, First Savings had 42 full-time employees and two part- time employees. First Savings provides its employees with a comprehensive benefits program, including basic and major medical insurance, life and disability insurance, sick leave, education cost sharing, and payment of certain civic club dues. In addition, First Savings maintains an employee profit sharing plan covering all eligible employees. Under this plan, First Savings annually contributes an amount equal to at least 5% of participants' salaries. During the fiscal years ended June 30, 1998, 1997 and 1996, contributions to this plan were $112,910, $97,539, and $93,402, respectively. In addition, First Savings pays discretionary bonuses to all of its employees based upon its after-tax earnings. In recent years, these bonuses have equalled 4% of after- tax earnings. In addition, First Savings has an ESOP, a stock based management recognition plan and stock option plans. Employees are not represented by any union or collective bargaining group, and First Savings considers its employee relations to be good. FEDERAL INCOME TAXATION Savings institutions such as First Savings are subject to the taxing provisions of the Internal Revenue Code of 1986, as amended (the "Code"), for corporations, as modified by certain provisions specifically applicable for financial or thrift institutions. Income is reported using the accrual method of accounting. The maximum corporate federal income tax rate is 35%. For fiscal years beginning prior to December 31, 1995, thrift institutions which qualified under certain definitional tests and other conditions of the Code were permitted certain favorable provisions regarding their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans (generally loans secured by interests in real property improved or to be improved) under (i) a method based on a percentage of the institution's taxable income, as adjusted (the "percentage of taxable income method") or (ii) a method based on actual loss experience (the "experience method"). The reserve for nonqualifying loans was computed using the experience method. The percentage of taxable income method was limited to 8% of taxable income. This method could not raise the reserve to exceed 6% of qualifying real property loans at the end of the year. Moreover, the additions for qualifying real property loans, when added to nonqualifying loans, could not exceed 12% of the amount by which total deposits or withdrawable accounts exceed the sum of surplus, undivided profits and reserves at the beginning of the year. The experience method was the amount necessary to increase the balance of the reserve 8 at the close of the year to the greater of (i) the amount which bore the same ratio to loans outstanding at the close of the year as the total net bad debts sustained during the current and five preceding years bore to the sum of the loans outstanding at the close of such six years or (ii) the balance in the reserve account at the close of the last taxable year beginning before 1988 (assuming that the loans outstanding have not declined since such date). In order to qualify for the percentage of income method, an institution had to have at least 60% of its assets as "qualifying assets" which generally included, cash, obligations of the United States government or an agency or instrumentality thereof or of a state or political subdivision, residential real estate-related loans, or loans secured by savings accounts and property used in the conduct of its business. In addition, it had to meet certain other supervisory tests and operate principally for the purpose of acquiring savings and investing in loans. Institutions which became ineligible to use the percentage of income method had to change to either the reserve method or the specific charge-off method that applied to banks. Large thrift institutions, those generally exceeding $500 million in assets, had to convert to the specific charge-off method. In computing its bad debt reserve for federal income taxes, First Savings elected to use the experience method in fiscal years 1995, 1996, and 1997. Bad debt reserve balances in excess of the balance computed under the experience method or amounts maintained in a supplemental reserve built up prior to 1962 ("excess bad debt reserve") require inclusion in taxable income upon certain distributions to shareholders. Distributions in redemption or liquidation of stock or distributions with respect to its stock in excess of earnings and profits accumulated in years beginning after December 31, 1951, are treated as a distribution from the excess bad debt reserve. When such a distribution takes place and it is treated as from the excess bad debt reserve, the thrift is required to reduce its reserve by such amount and simultaneously recognize the amount as an item of taxable income increased by the amount of income tax imposed on the inclusion. Dividends not in excess of earnings and profits accumulated since December 31, 1951 will not require inclusion of part or all of the bad debt reserve in taxable income. First Savings has accumulated earnings and profits since December 31, 1951 and has an excess in its bad debt reserve. Distributions in excess of current and accumulated earnings and profits will increase taxable income. Net retained earnings at June 30, 1998 includes approximately $5.3 million for which no provision for federal income tax has been made. Legislation passed by the U.S. Congress and signed by the President in August 1996 contains a provision that repeals the percentage of taxable income method of accounting for thrift bad debt reserves for tax years beginning after December 31, 1995. The legislation will trigger bad debt reserve recapture for post-1987 excess reserves over a six-year period. At June 30, 1998, First Savings' post-1987 excess reserves amounted to approximately $1.3 million. A special provision suspends recapture of post-1987 excess reserves for up to two years if, during those years, the institution satisfies a "residential loan requirement." This requirement will be met if the principal amount of the institution's residential loans exceeds a base year amount, which is determined by reference to the average of the institution's residential loans during the six taxable years ending before January 1, 1996. However, notwithstanding this special provision, recapture must begin no later than the first taxable year beginning after December 31, 1997. First Savings may also be subject to the corporate alternative minimum tax ("AMT"). This tax is applicable only to the extent it exceeds the regular corporate income tax. The AMT is imposed at the rate of 20% of the corporation's alternative minimum taxable income ("AMTI") subject to applicable statutory exemptions. AMTI is calculated by adding certain tax preference items and making certain adjustments to the corporation's regular taxable income. Preference items and adjustments generally applicable to financial institutions include, but are not limited to, the following: (i) the excess of the bad debt deduction over the amount that would have been allowable on the basis of actual experience; (ii) interest on certain tax-exempt bonds issued after August 7, 1986; and (iii) 75% of the excess, if any, of a corporation's adjusted earnings and profits over its AMTI (as otherwise determined with certain adjustments). Net operating loss carryovers, subject to certain adjustments, may be utilized to offset up to 90% of the AMTI. Credit for AMT paid may be available in future years to reduce future regular federal income tax liability. First Savings has not been subject to the AMT in recent years. 9 First Savings' federal income tax returns have not been audited in the last ten tax years. STATE TAXATION Under North Carolina law, the corporate income tax is 7.75% of federal taxable income as computed under the Code, subject to certain prescribed adjustments. An annual state franchise tax is imposed at a rate of 0.15% applied to the greatest of the institution's (i) capital stock, surplus and undivided profits, (ii) investment in tangible property in North Carolina or (iii) appraised valuation of property in North Carolina. The North Carolina corporate tax rate dropped to 7.25% in 1998, and will drop to 7.00% in 1999 and 6.90% thereafter. SUPERVISION AND REGULATION REGULATION OF THE HOLDING COMPANY Bank holding companies and state savings banks are extensively regulated under both federal and state law. The following is a brief summary of certain statutes and rules and regulations that affect or will affect the Company and the Bank. This summary is qualified in its entirety by reference to the particular statute and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of the Company and the Bank. Supervision, regulation and examination of the Company and the Bank by the regulatory agencies are intended primarily for the protection of depositors rather than shareholders of the Company. GENERAL. The Holding Company was organized for the purpose of acquiring and holding all of the capital stock of the Bank. As a bank holding company subject to the Bank Holding Company Act of 1956, as amended (the "BHCA"), the Holding Company is subject to certain regulations of the Federal Reserve Board (the "Federal Reserve"). Under the BHCA, the Holding Company's activities and those of its subsidiaries are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries or engaging in any other activity which the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The BHCA prohibits the Holding Company from acquiring direct or indirect control of more than 5% of the outstanding voting stock or substantially all of the assets of any bank or savings bank or merging or consolidating with another bank holding company or savings and loan holding company without prior approval of the Federal Reserve. Additionally, the BHCA prohibits the Holding Company from engaging in, or acquiring ownership or control of, more than 5% of the outstanding voting stock of any company engaged in a nonbanking business unless such business is determined by the Federal Reserve to be so closely related to banking as to be properly incident thereto. The BHCA generally does not place territorial restrictions on the activities of such nonbanking related activities. Similarly, Federal Reserve approval (or, in certain cases, non-disapproval) must be obtained prior to any person acquiring control of the Holding Company. Control is conclusively presumed to exist if, among other things, a person acquires more than 25% of any class of voting stock of the Holding Company or controls in any manner the election of a majority of the directors of the Holding Company. Control is presumed to exist if a person acquires more than 10% of any class of voting stock and the stock is registered under Section 12 of the Exchange Act or the acquiror will be the largest shareholder after the acquisition. The Holding Company is also registered under the savings bank holding company laws of North Carolina. Accordingly, the Holding Company is also subject to regulation and supervision by the Administrator of North Carolina Savings Institutions Division (the "Administrator"). 10 CAPITOL MAINTENANCE. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the Federal Deposit Insurance Corporation (the "FDIC") insurance funds in the event the depository institution becomes in danger of default or in default. For example, under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("1991 Banking Law"), to avoid receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that may become "undercapitalized" with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution's total assets at the time the institution became undercapitalized or (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all acceptable capital standards as of the time the institution fails to comply with such capital restoration plan. Under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The Federal Reserve, under the BHCA, also has the authority to require a bank holding company to terminate any activity or to relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company. In addition, the "cross-guarantee" provisions of the Federal Deposit Insurance Act, as amended ("FDIA") require insured depository institutions under common control to reimburse the FDIC for any loss suffered by either the Savings Association Insurance Fund (the "SAIF") or the Bank Insurance Fund (the "BIF") as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the SAIF or the BIF or both. The FDIC's claim for damages is superior to claims of stockholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions. In connection with the Administrator's approval of the Holding Company's application to acquire control of the Bank, the Holding Company was required to execute a Capital Maintenance Agreement whereby it has agreed to maintain the Bank's capital in an amount sufficient to enable the Bank to satisfy all regulatory capital requirements. CAPITAL ADEQUACY GUIDELINES FOR HOLDING COMPANIES. The Federal Reserve has adopted capital adequacy guidelines for bank holding companies and banks that are members of the Federal Reserve system and have consolidated assets of $150 million or more. Bank holding companies subject to the Federal Reserve's capital adequacy guidelines are required to comply with the Federal Reserve's risk-based capital regulations. Under these regulations, the minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%. At least half of the total capital is required to be "Tier I capital," principally consisting of common stockholders' equity, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less certain goodwill items. The remainder ("Tier II capital") may consist of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock, and a limited amount of the general loan loss allowance. In addition to the risk-based capital guidelines, the Federal Reserve has adopted a minimum Tier I (leverage) capital ratio, under which a bank holding company must maintain a minimum level of Tier I capital to average total consolidated assets of at least 3% in the case of a bank holding company which has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a Tier I (leverage) capital ratio of at least 1% to 2% above the stated minimum. For bank holding companies with less than $150 million in consolidated assets, the guidelines are applied on a bank-only basis unless the parent bank holding company (i) is engaged in nonbank activity involving significant leverage or (ii) has a significant amount of outstanding debt that is held by the general public. 11 DIVIDEND AND REPURCHASE LIMITATIONS. The Holding Company must obtain Federal Reserve approval prior to repurchasing common stock for in excess of 10% of its net worth during any twelve-month period unless the Company (i) both before and after the redemption satisfies capital requirements for "well capitalized" state member banks; (ii) received a one or two rating in its last examination; and (iii) is not the subject of any unresolved supervisory issues. First Saving is also subject to limits on dividend payments. First Savings is prohibited, under the North Carolina Business Corporation Act, from paying a dividend if such payment would (i) cause First Savings to be unable to pay its debts as they become due in the ordinary course of business or (ii) reduce First Savings' total assets below the sum of First Savings' total liabilities plus any amounts which would be needed, if First Savings were to be dissolved at the time of distribution, to satisfy the preferential rights that are superior to holders of the common stock. Although the payment of dividends and repurchase of stock by the Company are subject to the requirements and limitations of North Carolina corporate law, except as set forth in this paragraph, neither the Administrator nor the FDIC have promulgated any regulations specifically limiting the right of the Company to pay dividends and repurchase shares. However, the ability of the Company to pay dividends or repurchase shares may be dependent upon the Company's receipt of dividends from the Bank. The Bank's ability to pay dividends is limited. See " -- Regulation of the Bank -- Restrictions on Dividends and Other Capital Distributions." FEDERAL SECURITIES LAW OF 1934, AS AMENDED (THE "EXCHANGE ACT"). The Company has registered its Common Stock with the SEC pursuant to Section 12(g) of the Securities Exchange Act and will not deregister the Common Stock for a period of three years following the completion of the Conversion. As a result of such registration, the proxy and tender offer rules, insider trading reporting requirements, annual and periodic reporting and other requirements of the Exchange Act are applicable to the Company. The registration under the Securities Act of 1933, as amended (the "Securities Act") of the Common Stock does not cover the resale of such shares. Shares of the Common Stock purchased by persons who are not affiliates of the Company may be resold without registration. Shares purchased by an affiliate of the Company are subject to the resale provisions of Rule 144 under the Securities Act. So long as the Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) will be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Provision may be made in the future by the Company to permit affiliates to have their shares registered for sale under the Securities Act under certain circumstances. There are currently no demand registration rights outstanding. However, in the event the Company at some future time determines to issue additional shares from its authorized but unissued shares, the Company might offer registration rights to certain of its affiliates who want to sell their shares. REGULATION OF THE BANK GENERAL. Federal and state legislation and regulation significantly affect the operations of federally insured savings institutions and other federally regulated financial institutions. The operation of regulated depository institutions, including the Bank, is subject to changes in applicable statutes and regulations from time to time. Such changes may or may not be favorable to the Bank. The Bank is a North Carolina-chartered savings bank, is a member of the Federal Home Loan Bank ("FHLB") system, and its deposits are insured by the FDIC through the Savings Association Insurance Fund ("SAIF"). It is subject to examination and regulation by the FDIC and the Administrator and to regulations governing such matters as capital standards, mergers, establishment of branch offices, subsidiary investments and activities, and general investment authority. Such examination and regulation is intended primarily for the protection of depositors and the federal deposit insurance funds. 12 The Bank is subject to various regulations promulgated by the Federal Reserve including, without limitation, Regulation B (Equal Credit Opportunity), Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O (Loans to Executive Officers, Directors and Principal Shareholders), Regulation Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD (Truth in Savings). As holders of loans secured by real property and as owners of real property, financial institutions, including the Bank, may be subject to potential liability under various statutes and regulations applicable to property owners generally, including statutes and regulations relating to the environmental condition of real property. The FDIC has extensive enforcement authority over the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices. The grounds for appointment of a conservator or receiver for a North Carolina savings bank on the basis of an institution's financial condition include: (i) insolvency, in that the assets of the savings bank are less than its liabilities to depositors and others; (ii) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (iii) existence of an unsafe or unsound condition to transact business; (iv) likelihood that the savings bank will be unable to meet the demands of its depositors or to pay its obligations in the normal course of business; and (v) insufficient capital or the incurring or likely incurring of losses that will deplete substantially all of the institution's capital with no reasonable prospect of replenishment of capital without federal assistance. TRANSACTIONS WITH AFFILIATES. Under current federal law, transactions between savings institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings institution is any company or entity that controls, is controlled by or is under common control with the savings institution. In a holding company context, the parent holding company of a savings institution and any companies which are controlled by such parent holding company are affiliates of the savings institution. Generally, Sections 23A and 23 B (i) establish certain collateral requirements for loans to affiliates; (ii) limit the extent to which the savings institution or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such savings institution's capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus and (iii) require that all such transactions be on terms substantially the same, or at least as favorable to the savings institution or the subsidiary, as those provided to a nonaffiliate. The term "covered transaction" includes the making of loans or other extensions of credit to an affiliate, the purchase of assets from an affiliate, the purchase of, or an investment in, the securities of an affiliate, the acceptance of securities of an affiliate as collateral for a loan or extension of credit to any person, or issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. Further, current federal law has extended to savings institutions the restrictions contained in Section 22(h) of the Federal Reserve Act with respect to loans to directors, executive officers and principal stockholders. Under Section 22(h), loans to directors, executive officers and stockholders who own more than 10% of a savings institution and certain affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the savings institution's loans-to-one borrower limit as established by federal law (generally equal to 15% of the institution's unimpaired capital and surplus). Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers and stockholders who own more than 10% of a savings institution, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the savings institution. Any "interested" director may not participate in the voting. The Federal Reserve has prescribed the loan amount (which includes all other outstanding loans to such person), as to which such prior board of director approval is required, as being the greater of $25,000 or 5% of unimpaired capital and unimpaired surplus (up to $500,000). Further, pursuant to Section 22(h) the Federal Reserve requires that loans to directors, executive officers, and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons and not involve more than the normal risk of repayment or present other unfavorable features. 13 DEPOSIT INSURANCE. The Bank's deposit accounts are insured by the FDIC through the SAIF to the maximum extent permitted by law. The Bank pays deposit insurance premiums to the FDIC based on a risk-based assessment system established by the FDIC for all SAIF-member institutions. Under applicable regulations, institutions are assigned to one of three capital groups that are based solely on the level of an institution's capital ("well capitalized," "adequately capitalized" or "undercapitalized"), which are defined in the same manner as the regulations establishing the prompt corrective action system discussed below. The matrix so created results in nine assessment risk classifications, with rates that, until September 30, 1996, ranged from 0.23% for well capitalized, financially sound institutions with only a few minor weaknesses to 0.31% for undercapitalized institutions that pose a substantial risk to the SAIF unless effective corrective action is taken. Pursuant to the Deposit Insurance Fund Act (the "DIF Act"), which was enacted on September 30, 1996, the FDIC imposed a special assessment on each depository institution with SAIF-assessable deposits which resulted in the SAIF achieving its designated reserve ratio. In connection therewith, the FDIC reduced the assessment schedule for SAIF members, effective January 1, 1997, to a range of 0% to 0.27%, with most institutions, including the Bank, paying 0%. This assessment schedule is the same as that for the BIF, which reached its designated reserve ratio in 1995. As of July, 1998, SAIF members are charged an assessment of 0.061% of SAIF-assessable deposits for the purpose of paying interest on the obligations issued by the Financing Corporation ("FICO") in the 1980s to help fund the thrift industry cleanup. BIF-assessable deposits will be charged an assessment to help pay interest on the FICO bonds at a rate of approximately .012% until the earlier of December 31, 1999 or the date upon which the last savings association ceases to exist, after which time the assessment will be the same for all insured deposits. The DIF Act provides for the merger of the BIF and the SAIF into the Deposit Insurance Fund on January 1, 1999, but only if no insured depository institution is a savings association on that date. The DIF Act contemplates the development of a common charter for all federally chartered depository institutions and the abolition of separate charters for national banks and federal savings associations. It is not known what form the common charter may take and what effect, if any, the adoption of a new charter would have on the operation of the Bank. The FDIC may terminate the deposit insurance of any insured depository institution if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances that could result in termination of the deposit insurance of the Bank. COMMUNITY REINVESTMENT ACT. The Bank, like other financial institutions, is subject to the Community Reinvestment Act, as amended ("CRA"). A purpose of this Act is to encourage financial institutions to help meet the credit needs of its entire community, including the needs of low- and moderate-income neighborhoods. A savings bank is evaluated and rated under three categories: a lending test, an investment test and a service test. For each of these three tests, the savings bank is given a rating of either "outstanding," "high satisfactory," "low satisfactory," "needs to improve" or "substantial non- compliance." A set of criteria for each rating is included in the regulation. If an institution disagrees with a particular rating, the institution has the burden of rebutting the presumption by clearly establishing that the quantative measures do not accurately present its actual performance, or that demographics, competitive conditions or economic or legal limitations peculiar to the service area should be considered. The ratings received under the three tests are used to determine the overall composite CRA rating or "outstanding," "satisfactory," "needs to improve" or "substantial non-compliance." During the Bank's last compliance examination, which was performed by the FDIC on February 13, 1996, the Bank received a "satisfactory" rating with respect to CRA compliance. The Bank's rating with respect to CRA 14 compliance would be a factor to be considered by the Federal Reserve and FDIC in considering applications submitted by the Bank to acquire branches or to acquire or combine with other financial institutions and take other actions and could result in the denial of such applications. The federal banking regulatory agencies have issued a revision of the CRA regulations, which became effective on January 1, 1996, to implement a new evaluation system that rates institutions based on their actual performance in meeting community credit needs. Under the regulations, a savings bank will first be evaluated and rated under three categories: a lending test, an investment test and a service test. For each of these three tests, the savings bank will be given a rating of either "outstanding," "high satisfactory," "low satisfactory," "needs to improve" or "substantial non-compliance." A set of criteria for each rating has been developed and is included in the regulation. If an institution disagrees with a particular rating, the institution has the burden of rebutting the presumption by clearly establishing that the quantitative measures do not accurately present its actual performance, or that demographics, competitive conditions or economic or legal limitations peculiar to its service area should be considered. The ratings received under the three tests will be used to determine the overall composite CRA rating. The composite ratings will be the same as those that are currently given: "outstanding," "satisfactory," "needs to improve" or "substantial non-compliance." CAPITAL REQUIREMENTS. The FDIC requires the Bank to have a minimum leverage ratio of Tier I capital (principally consisting of common stockholders' equity, noncumulative perpetual preferred stock and minority interests in consolidated subsidiaries, less certain intangible and goodwill items), to total assets of at least 3%; provided, however that all institutions, other than those (i) receiving the highest rating during the examination process and (ii) not anticipating or experiencing any significant growth, are required to maintain a ratio of 1% or 2% above the stated minimum, with an absolute minimum leverage ratio of not less than 4%. The FDIC also requires the Bank to have a ratio of total capital to risk-weighted assets, including certain off-balance sheet activities, such as standby letters of credit, of at least 8%. At least half of the total capital is required to be Tier I capital. The remainder (Tier II capital) may consist of a limited amount of subordinated debt, certain hybrid capital instruments, other debt securities, certain types of preferred stock and a limited amount of general loan loss allowance. An institution which fails to meet minimum capital requirements may be subject to a capital directive which is enforceable in the same manner and to the same extent as a final cease and desist order, and must submit a capital plan within 60 days to the FDIC. If the leverage ratio falls to 2% or less, the institution may be deemed to be operating in an unsafe or unsound condition, allowing the FDIC to take various enforcement actions, including possible termination of insurance or placement of the institution in receivership. The Administrator requires that net worth equal at least 5% of total assets. Intangible assets must be deducted from net worth and assets when computing compliance with this requirement. At June 30, 1998, the Bank complied with each of the capital requirements of the FDIC and the Administrator. For a description of the Bank's required and actual capital levels on June 30, 1998, see Note 11 captioned "Regulatory Restrictions" on pages 33 and 34 of the 1998 Annual Report. Each federal banking agency was required by law to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk, and the risk of nontraditional activities, as well as reflect the actual performance and expected risk of loss on multi-family mortgages. On August 2, 1995, the federal banking agencies issued a joint notice of adoption of final risk-based capital rules to take account of interest rate risk. The final regulation required an assessment of the need for additional capital on a case-by-case basis, considering both the level of measured exposure and qualitative risk factors. The final rule also stated an intent to, in the future, establish an explicit minimum capital charge for interest rate risk based on the level of a bank's measured interest rate risk exposure. The final regulation has not had a material impact on the Bank's capital requirements. 15 Effective June 26, 1996, the federal banking agencies issued a joint policy statement announcing the agencies' election not to adopt a standardized measure and explicit capital charge for interest rate risk at that time. Rather, the policy statement (i) identifies the main elements of sound interest rate risk management, (ii) describes prudent principles and practices for each of those elements, and (iii) describes the critical factors affecting the agencies' evaluation of a bank's interest rate risk when making a determination of capital adequacy. The joint policy statement has not had a material impact on the Bank's management of interest rate risk. In December 1994, the FDIC adopted a final rule changing its risk-based capital rules to recognize the effect of bilateral netting agreements in reducing the credit risk of two types of financial derivatives - interest and exchange rate contracts. Under the rule, savings banks are permitted to net positive and negative mark-to-market values of rate contracts with the same counterparty, subject to legally enforceable bilateral netting contracts that meet certain criteria. This represents a change from the prior rules which recognized only a very limited form of netting. This rule has not had a material effect upon its financial condition or results of operations. LOANS-TO-ONE-BORROWER. The Bank is subject to the Administrator's loans- to-one-borrower limits. Under these limits, no loans and extensions of credit to any borrower outstanding at one time and not fully secured by readily marketable collateral shall exceed 15% of the net worth of the savings bank. Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10% of net worth. These limits also authorize savings banks to make loans to one borrower, for any purpose, in an amount not to exceed $500,000. A savings institution also is authorized to make loans to one borrower to develop domestic residential housing units, not to exceed the lesser of $30 million, or 30% of the savings institution's net worth, provided that (i) the purchase price of each single-family dwelling in the development does not exceed $500,000; (ii) the savings institution is in compliance with its fully phased-in capital requirements; (iii) the loans comply with applicable loan-to-value requirements; (iv) the aggregate amount of loans made under this authority does not exceed 150% of net worth; and (v) the institution's regulator issues an order permitting the savings institution to use this higher limit. These limits also authorize a savings bank to make loans to one borrower to finance the sale of real property acquired in satisfaction of debts in an amount up to 50% of net worth. As of June 30, 1998, the largest aggregate amount of loans which the Bank had to any one borrower was $2.3 million. The Bank had no loans outstanding which management believes violate the applicable loans-to-one-borrower limits. FEDERAL HOME LOAN BANK SYSTEM. The FHLB system provides a central credit facility for member institutions. As a member of the FHLB of Atlanta, the Bank is required to own capital stock in the FHLB of Atlanta in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans, home purchase contracts and similar obligations at the end of each calendar year, or 5% of its outstanding advances (borrowings) from the FHLB of Atlanta. On June 30, 1998, the Bank was in compliance with this requirement with an investment in FHLB of Atlanta stock of $1.9 million. FEDERAL RESERVE SYSTEM. Federal Reserve regulations require savings banks, not otherwise exempt from the regulations, to maintain reserves against their transaction accounts (primarily negotiable order of withdrawal accounts) and certain nonpersonal time deposits. The reserve requirements are subject to adjustment by the Federal Reserve. As of June 30, 1998, the Bank was in compliance with the applicable reserve requirements of the Federal Reserve. RESTRICTIONS ON ACQUISITIONS. Federal law generally provides that no "person," acting directly or indirectly or through or in concert with one or more other persons, may acquire "control," as that term is defined in FDIC regulations, of a state savings bank without giving at least 60 days' written notice to the FDIC and providing the FDIC an opportunity to disapprove the proposed acquisition. Pursuant to regulations governing acquisitions of control, control of an insured institution is conclusively deemed to have been acquired, among other things, upon the acquisition of more than 25% of any class of voting stock. In addition, control is presumed to have been acquired, subject to rebuttal, upon the acquisition of more than 10% of any class of voting stock, and the issuer's securities are registered under Section 12 of the Exchange Act or the person would be the single largest 16 shareholder. Such acquisitions of control may be disapproved if it is determined, among other things, that (i) the acquisition would substantially lessen competition; (ii) the financial condition of the acquiring person might jeopardize the financial stability of the savings bank or prejudice the interests of its depositors; or (iii) the competency, experience or integrity of the acquiring person or the proposed management personnel indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person. For three years following the Bank's conversion from mutual to stock form, North Carolina conversion regulations require the prior written approval of the Administrator before any person may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of any class of an equity security of the Bank. If any person were to so acquire the beneficial ownership of more than 10% of any class of any equity security without prior written approval, the securities beneficially owned in excess of 10% would not be counted as shares entitled to vote and would not be voted or counted as voting shares in connection with any matter submitted to stockholders for a vote. Approval is not required for (i) any offer with a view toward public resale made exclusively to the Bank or its underwriters or the selling group acting on its behalf or (ii) any offer to acquire or acquisition of beneficial ownership of more than 10% of the common stock of the Bank by a corporation whose ownership is or will be substantially the same as the ownership of the Bank, provided that the offer or acquisition is made more than one year following the consummation of the conversion. During the second and third years after the conversion, the Administrator may approve such an acquisition of more than 10% of beneficial ownership upon a finding that (i) the acquisition is necessary to protect the safety and soundness of the Holding Company and the Bank or the Boards of Directors of the Holding Company and the Bank support the acquisition and (iii) the acquiror is of good character and integrity and possesses satisfactory managerial skills, the acquiror will be a source of financial strength to the Holding Company and the Bank and the public interests will not be adversely affected. LIQUIDITY. The Bank is subject to the Administrator's requirement that the ratio of liquid assets to total assets equal at least 10%. The computation of liquidity under North Carolina regulation allows the inclusion of mortgage- backed securities and investments which, in the judgment of the Administrator, have a readily marketable value, including investments with maturities in excess of five years. At June 30, 1998, the Bank's liquidity ratio, calculated in accordance with North Carolina regulations, was approximately 25.9%. ADDITIONAL LIMITATIONS ON ACTIVITIES. FDIC law and regulations generally provide that the Bank may not engage as principal in any type of activity, or in any activity in an amount, not permitted for national banks, or directly acquire or retain any equity investment of a type or in an amount not permitted for national banks. The FDIC has authority to grant exceptions from these prohibitions (other than with respect to non-service corporation equity investments) if it determines no significant risk to the insurance fund is posed by the amount of the investment or the activity to be engaged in and if the Bank is and continues to be in compliance with fully phased-in capital standards. National banks are generally not permitted to hold equity investments other than shares of service corporations and certain federal agency securities. Moreover, the activities in which service corporations for savings banks are permitted to engage are limited to those of service corporations for national banks. Savings banks are also required to notify the FDIC at least 30 days prior to the establishment or acquisition of any subsidiary, or at least 30 days prior to conducting any such new activity. Any such activities must be conducted in accordance with the regulations and orders of the FDIC and the Administrator. Savings banks are also generally prohibited from directly or indirectly acquiring or retaining any corporate debt security that is not of investment grade (generally referred to as "junk bonds"). PROMPT CORRECTIVE REGULATORY ACTION. Federal law provides the federal banking agencies with broad powers to take corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," or "critically undercapitalized." Under the FDIC regulations applicable to the Bank, an institution is considered "well capitalized" if it has (i) a total risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not subject to any order or written directive to meet and maintain a specific capital level for any capital 17 measure. An "adequately capitalized" institution is defined as one that has (i) a total risk-based capital ratio of 8% or greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a leverage ratio of 4% or greater (or 3% or greater in the case of an institution with the highest examination rating and which is not experiencing or anticipating significant growth). An institution is considered (A) "undercapitalized" if it has (i) a total risk- based capital ratio of less than 8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage ratio of less than 4% (or 3% in the case of an institution with the highest examination rating and which is not experiencing or anticipating significant growth); (B) "significantly undercapitalized" if the institution has (i) a total risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C) "critically undercapitalized" if the institution has a ratio of tangible equity to total assets equal to or less than 2%. INTERSTATE BANKING. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking Act"), effective September 29, 1995, permits adequately capitalized bank and savings bank holding companies to acquire control of banks and savings banks in any state. Such interstate acquisitions are subject to certain restrictions. States may require the bank or savings bank being acquired to have been in existence for a certain length of time but not in excess of five years. In addition, no bank or saving bank may acquire more than 10% of the insured deposits in the United States or more than 30% of the insured deposits in any one state, unless the state has specifically legislated a higher deposit cap. States are free to legislate stricter deposit caps. The Interstate Banking Act also provides for interstate branching, effective June 1, 1998, allowing interstate branching in all states, provided that a particular state has not specifically denied interstate branching by legislation prior to such time. Unlike interstate acquisitions, a state may deny interstate branching if it specifically elects to do so by June 1, 1997. States may choose to allow interstate branching prior to June 1, 1997 by opting- in to a group of states that permits these transactions. These states generally allow interstate branching via a merger of an out-of-state bank with an in-state bank, or on a de novo basis. North Carolina has enacted legislation permitting branching transactions. RESTRICTIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. A North Carolina-chartered stock savings bank may not declare or pay a cash dividend on, or repurchase any of, its capital stock if the effect of such transaction would be to reduce the net worth of the institution to an amount which is less than the minimum amount required by applicable federal and state regulations. In addition, a North Carolina-chartered stock savings bank, for a period of five years after its conversion from mutual to stock form, must obtain the written approval from the Administrator before declaring or paying a cash dividend on its capital stock in an amount in excess of one-half of the greater of (i) the institution's net income for the most recent fiscal year end, or (ii) the average of the institution's net income after dividends for the most recent fiscal year end and not more than two of the immediately preceding fiscal year ends, if applicable. A source of the Holding Company's funds are dividends received from the Bank. In fiscal 1999, the amount of dividends that can be paid without prior approval from regulators is approximately $2.0 million. These funds should be adequate to cover the Holding Company's needs. Also, without the prior written approval of the Administrator, a North Carolina- chartered stock savings bank, for a period of five years after its conversion from mutual to stock form, may not repurchase any of its capital stock. The Administrator will give approval to repurchase only upon a showing that the proposed repurchase will not adversely affect the safety and soundness of the institution. In addition, the Bank is not permitted to declare or pay a cash dividend or repurchase any of its capital stock if the effect thereof would be to cause its net worth to be reduced below the amount required for the liquidation account established in connection with the Bank's conversion from mutual to stock ownership. OTHER NORTH CAROLINA REGULATION. As a North Carolina-chartered savings bank, the Bank derives its authority from, and is regulated by, the Administrator. The Administrator has the right to promulgate rules and regulations necessary for the supervision and regulation of North Carolina savings banks under his jurisdiction and for the protection of the public investing in such institutions. The regulatory authority of the Administrator 18 includes, but is not limited to: the establishment of reserve requirements; the regulation of the payment of dividends; the regulation of stock repurchases, the regulation of incorporators, stockholders, directors, officers and employees; the establishment of permitted types of withdrawable accounts and types of contracts for savings programs, loans and investments; and the regulation of the conduct and management of savings banks, chartering and branching of institutions, mergers, conversions and conflicts of interest. North Carolina law requires that the Bank maintain federal deposit insurance as a condition of doing business. The Administrator conducts regular examinations of North Carolina-chartered savings banks. The purpose of such examinations is to assure that institutions are being operated in compliance with applicable North Carolina law and regulations and in a safe and sound manner. These examinations are usually conducted on a joint basis with the FDIC. In addition, the Administrator is required to conduct an examination of any institution when he has good reason to believe that the standing and responsibility of the institution is of doubtful character or when he otherwise deems it prudent. The Administrator is empowered to order the revocation of the license of an institution if he finds that it has violated or is in violation of any North Carolina law or regulation and that revocation is necessary in order to preserve the assets of the institution and protect the interests of its depositors. The Administrator has the power to issue cease and desist orders if any person or institution is engaging in, or has engaged in, any unsafe or unsound practice or unfair and discriminatory practice in the conduct of its business or in violation of any other law, rule or regulation. A North Carolina-chartered savings bank must maintain net worth, computed in accordance with the Administrator's requirements, of 5% of total assets and liquidity of 10% of total assets, as discussed above. Additionally, a North Carolina-chartered savings bank is required to maintain general valuation allowances and specific loss reserves in the same amounts as required by the FDIC. Subject to limitation by the Administrator, North Carolina-chartered savings banks may make any loan or investment or engage in any activity which is permitted to federally chartered institutions. However, a North Carolina- chartered savings bank cannot invest more than 15% of its total assets in business, commercial, corporate and agricultural loans. In addition to such lending authority, North Carolina-chartered savings banks are authorized to invest funds, in excess of loan demand, in certain statutorily permitted investments, including but not limited to (i) obligations of the United States, or those guaranteed by it; (ii) obligations of the State of North Carolina; (iii) bank demand or time deposits; (iv) stock or obligations of the federal deposit insurance fund or a FHLB; (v) savings accounts of any savings institution as approved by the board of directors; and (vi) stock or obligations of any agency of the State of North Carolina or of the United States or of any corporation doing business in North Carolina whose principal business is to make education loans. North Carolina law provides a procedure by which savings institutions may consolidate or merge, subject to approval of the Administrator. The approval is conditioned upon findings by the Administrator that, among other things, such merger or consolidation will promote the best interests of the members or stockholders of the merging institutions. North Carolina law also provides for simultaneous mergers and conversions and for supervisory mergers conducted by the Administrator. FUTURE REQUIREMENTS. Statutes and regulations are regularly introduced which contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions. It cannot be predicted whether or what form any proposed statute or regulation will be adopted or the extent to which the business of the Company and the Bank may be affected by such statute or regulation. 19 ITEM 2. PROPERTIES At June 30, 1998, First Savings conducted its business from the headquarters office in Southern Pines, North Carolina, and its four branch offices in Southern Pines, Pinehurst, Carthage and West End, North Carolina. The following table sets forth certain information regarding First Savings' properties as of June 30, 1998. All properties are owned by First Savings, with the exception of the Pinehurst Office which has been leased for a term of 15 years with an expiration date of 2003. Rentals paid by First Savings under that lease totalled $9,300 for the fiscal year ended June 30, 1998. NET BOOK VALUE OF ADDRESS PROPERTY ------- -------- Headquarters Office $ 525,386 205 S.E. Broad Street Southern Pines, North Carolina 28387 Pinecrest Plaza Office 1,007,514 46 Pinecrest Plaza Southern Pines, North Carolina 28387 Pinehurst Office 22,189 10 Chinquapin Road Pinehurst, North Carolina 28374 Carthage Office 106,542 109 Monroe Street Carthage, North Carolina 28327 Seven Lakes Office 112,900 200 Grant Street Seven Lakes Shopping Center West End, North Carolina 27376 The total net book value of First Savings' furniture, fixtures and equipment on June 30, 1998 was $134,323. The properties are considered by First Savings' management to be in good condition. ITEM 3. LEGAL PROCEEDINGS In the opinion of management, First Savings is not involved in any pending legal proceedings other than routine, non-material proceedings occurring in the ordinary course of business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Holding Company's stockholders during the quarter ended June 30, 1998. 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this Item is set forth under the section captioned "Capital Stock" on page 40 of First Savings' 1998 Annual Report which is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information required by this Item is set forth in the table captioned "Five Year Summary" on the inside cover of First Savings' 1998 Annual Report which is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION See the information set forth under Item 1 above and the information set forth under the sections captioned "Financial Highlights" on page 2 and "Management's Discussion and Analysis of Financial Condition and Results of Operation" on pages 4 through 17 in First Savings' 1998 Annual Report, which sections are incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is set forth under the caption "Market Risk" on page 5 of "Management's Discussion and Analysis" in First Savings' 1998 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of First Savings and supplementary data set forth on pages 19 through 38 of First Savings' 1998 Annual Report are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants on accounting and financial disclosures during the fiscal year ended June 30, 1998 and the interim subsequent period. See the information set forth under the section captioned "Proposal 2 - Ratification of Selection of Independent Auditor" on page 14 of the Proxy Statement. 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is set forth in the tables on pages 5 and 6 under the section captioned "Proposal 1 - Election of Directors" of the Proxy Statement for the 1998 Annual Meeting of Shareholders of First Savings Bancorp, Inc. to be held on October 29, 1998 (the "Proxy Statement") and the section captioned "Section 16(a) Beneficial Ownership Reporting Compliance" on page 4 of the Proxy Statement, which sections are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is set forth under the sections captioned "Proposal 1 - Election of Directors - Directors' Compensation" and " - Management Compensation" on page 8 and pages 9 through 12, respectively, of the Proxy Statement, which sections are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference from the section captioned "Security Ownership of Certain Beneficial Owners" on pages 2 through 4 of the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There have been no reportable transactions since the beginning of the Holding Company's last fiscal year nor are any reportable transactions proposed as of the date of this Form 10-K. See also the section captioned "Proposal 1 - Election of Directors - Certain Indebtedness and Transactions of Management" on page 14 of the Proxy Statement, which section is incorporated herein by reference. 22 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 14(a)1. Consolidated Financial Statements (contained in First Savings' 1998 Annual Report attached hereto as Exhibit (13) and incorporated herein by reference) (a) Independent Auditors' Report (b) Consolidated Statements of Financial Condition as of June 30, 1998 and 1997 (c) Consolidated Statements of Income for the Years Ended June 30, 1998, 1997 and 1996 (d) Consolidated Statements of Shareholders' Equity for the Years Ended June 30, 1998, 1997, and 1996 (e) Consolidated Statements of Cash Flows for the Years Ended June 30, 1998, 1997 and 1996 (f) Notes to Consolidated Financial Statements 14(a)2. Financial Statement Schedules All schedules have been omitted as the required information is either inapplicable or included in the Notes to Consolidated Financial Statements. 14(a)3. Exhibits Exhibit (3)(i) Certificate of Incorporation, incorporated herein by reference to Exhibit (2), Appendix C, to the Registration Statement on Form 8-A, Registration No. 0-27-098, dated October 26, 1995 Exhibit (3)(ii) Bylaws, incorporated herein by reference to Exhibit (2), Appendix D, to the Registration Statement on Form 8-A, Registration No. 0-27- 098, dated October 26, 1995 Exhibit (4) Specimen Stock Certificate, incorporated herein by reference to Exhibit (5) to the Registration Statement on Form 8-A, Registration No. 0-27-098, dated October 26, 1995 Exhibit (10)(i) First Savings Bank of Moore County, Inc., SSB Pinehurst Office Lease, incorporated herein by reference to Exhibit (10)(i) to the Registration Statement on Form 8-A, Registration No. 0-27-098, dated October 26, 1995 Exhibit (10)(ii)(a) Employee Stock Option Plan of First Savings Bank of Moore County, Inc., SSB, incorporated herein by reference to Exhibit (10)(ii)(a) to the Registration Statement on Form 8-A, Registration No. 0-27-098, dated October 26, 1995 Exhibit (10)(ii)(b) Director Stock Option Plan of First Savings Bank of Moore County, Inc., SSB, incorporated herein by reference to Exhibit (10)(ii)(b) to 23 the Registration Statement on Form 8-A, Registration No. 0-27-098, dated October 26, 1995 Exhibit (10)(ii)(c) Management Recognition Plan of First Savings Bank of Moore County, Inc., SSB, incorporated herein by reference to Exhibit (10)(ii)(c) to the Registration Statement on Form 8-A, Registration No. 0-27-098, dated October 26, 1995 Exhibit (10)(ii)(d) Bonus Compensation Plan of First Savings Bank of Moore County, Inc., SSB, incorporated herein by reference to Exhibit (10)(ii)(d) to the Registration Statement on Form 8-A, Registration No. 0-27-098, dated October 26, 1995 Exhibit (10)(ii)(e) Employment Agreement between First Savings Bank of Moore County, Inc., SSB and William E. Samuels, Jr., incorporated herein by reference to Exhibit (10)(ii)(e) to the Registration Statement on Form 8-A, Registration No. 0-27-098, dated October 26, 1995 Exhibit (10)(ii)(f) Employment Agreement between First Savings Bank of Moore County, Inc., SSB and John F. Burns, incorporated herein by reference to Exhibit (10)(ii)(f) to the Registration Statement on Form 8-A, Registration No. 0-27- 098, dated October 26, 1995 Exhibit (11) Statement Regarding Computation of Per Share Earnings Exhibit (12) Statement Regarding Computation of Ratios Exhibit (13) 1998 Annual Report to Security Holders Exhibit (16) Deloitte & Touche LLP Letter of Concurrence, incorporated herein by reference to Exhibit 16 to the Registrant's Form 10-K for the year ended June 30, 1997 Exhibit (21) Subsidiaries of the Registrant, incorporated herein by reference to Exhibit (21) to the Registration Statement on Form 8-A, Registration No. 0-27-098, dated October 26, 1995 Exhibit (27) Financial Data Schedule 14(b) First Savings filed no reports on Form 8-K during the last quarter of the fiscal year ended June 30, 1998. 24 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST SAVINGS BANCORP, INC. Date: September 24, 1998 By: /s/ William E. Samuels, Jr. ------------------ ------------------------------- William E. Samuels, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature Title Date - ----------------------------- ----------------------------------- ------------------ /s/ William E. Samuels, Jr. President, Chief Executive September 24, 1998 - ----------------------------- William E. Samuels, Jr. Officer and Director /s/ John F. Burns Executive Vice President, Secretary September 24, 1998 - ----------------------------- John F. Burns and Director /s/ Timothy S. Maples Vice President and September 24, 1998 - ----------------------------- Timothy S. Maples Principal Financial Officer /s/ Virginia C. Brandt Director September 24, 1998 - ----------------------------- Virginia C. Brandt /s/ H. David Bruton Director September 24, 1998 - ----------------------------- H. David Bruton /s/ Felton J. Capel Director September 24, 1998 - ----------------------------- Felton J. Capel /s/ J. E. Causey Director September 24, 1998 - ----------------------------- J. E. Causey /s/ Henry A. Clayton Director September 24, 1998 - ----------------------------- Henry A. Clayton /s/ Frank G. Hardister Director September 24, 1998 - ----------------------------- Frank G. Hardister /s/ W. Harrell Johnson Director September 24, 1998 - ----------------------------- W. Harrell Johnson /s/ Joe Montesanti, Jr. Director September 24, 1998 - ----------------------------- Joe Montesanti, Jr. /s/ Thomas F. Phillips Director September 24, 1998 - ----------------------------- Thomas F. Phillips
25 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION - ----------- ----------- (11) Statement Regarding Computation of Per Share Earnings (12) Statement Regarding Computation of Ratios (13) 1998 Annual Report to Security Holders (27) Financial Data Schedule 26 EX-11 2 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS Effective July 1, 1997, First Savings adopted the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which establishes standards for computing and presenting earnings per share (EPS) data. SFAS 128 simplifies the standards for computing EPS previously found in APB Opinion No. 15, "Earnings Per Share," and makes them comparable to international EPS standards. Under SFAS 128, basic EPS replaces the former presentation of primary EPS. Also, a dual presentation of basic and diluted EPS is required on the face of the income statement for all entities with complex capital structures, and a reconciliation must be provided of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In accordance with SFAS 128, all prior period EPS data have been restated. Basic net income per share for the years ended June 30, 1998, 1997 and 1996 was $1.42, $1.05 and $1.05, respectively. Diluted net income per share for the same periods was $1.31, $0.98 and $0.98, respectively. Basic net income per share, or basic EPS, is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if First if First Savings' dilutive stock options were exercised. The numerator of the basic EPS computation is the same as the numerator of the diluted EPS computation for all periods presented. A reconciliation of the denominators of the basic and diluted EPS computations is as follows:
1998 1997 1996 --------- --------- --------- Basic EPS denominator - weighted average number of common shares outstanding 3,698,197 3,706,704 3,744,000 Dilutive share effect arising from assumed exercise of stock options 323,757 263,602 249,070 --------- --------- --------- Diluted EPS denominator 4,021,954 3,970,306 3,993,070 ========= ========= =========
EX-12 3 STATEMENT RE: COMPUTATION RATIOS STATEMENT REGARDING COMPUTATION OF RATIOS The averages used in computing the performance ratios provided in Item 7 represent average daily balances. EX-13 4 ANNUAL REPORT FIVE YEAR SUMMARY
At June 30, ------------------------------------------------ 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (Dollars in thousands) FINANCIAL CONDITION DATA: Balance of: Assets $304,168 $294,217 $256,986 $251,787 $248,202 Loans receivable, net 208,094 192,238 177,431 159,777 142,779 Mortgage-backed securities 9,737 6,572 2,965 4,484 5,872 Securities 74,662 82,187 67,999 81,372 93,554 Deposits 211,925 204,317 187,424 183,080 182,199 Borrowed funds 20,000 20,000 422 543 648 Shareholders' equity 69,521 67,195 66,811 65,511 63,294
For the Years Ended June 30, ------------------------------------------------ 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (Dollars in thousands, except per share data) OPERATING DATA: Interest and dividend income $ 22,543 $ 20,058 $ 18,550 $ 17,438 $ 16,658 Interest expense 11,083 9,782 9,215 8,140 8,102 -------- -------- -------- -------- -------- Net interest income 11,460 10,276 9,335 9,298 8,556 Provision for loan losses - - - - - -------- -------- -------- -------- -------- Net interest income after provision for loan losses 11,460 10,276 9,335 9,298 8,556 Non-interest income 616 425 364 7 379 General and administrative expenses 3,758 4,637 3,693 3,584 5,693 -------- -------- -------- -------- -------- Income before income taxes 8,318 6,064 6,006 5,721 3,242 Income tax expense 3,060 2,155 2,085 1,948 1,066 -------- -------- -------- -------- -------- Net income $ 5,258 $ 3,909 $ 3,921 $ 3,773 $ 2,176 ======== ======== ======== ======== ======== Per common share data: Net income, basic $ 1.42 $ 1.05 $ 1.05 $ 1.01 $ 0.10 * ======== ======== ======== ======== ======== Net income, diluted $ 1.30 $ 0.98 $ 0.98 $ 0.95 $ 0.10 * ======== ======== ======== ======== ======== Cash dividends $ 0.94 $ 0.74 $ 0.64 $ 0.60 $ 0.15 ======== ======== ======== ======== ========
* Presented for the period from stock conversion through June 30, 1994. GROWTH WITH MOORE COUNTRY ABOUT OUR COVER... As this report reflects, First Savings is enjoying robust growth. So is Moore County and, without question, we are a beneficiary of the vibrant, dynamic markets we serve. PHOTO Our cover indicates that Moore County's population has doubled in the last thirty years. First Savings' assets have doubled in the last eleven. As we look ahead, we see a continuation - indeed an acceleration - in the county's growth and quality of life trends, and consequently increased opportunities for us to reward you, our valued shareholders, for your continuing support. JOHN F. BURNS, EXECUTIVE VICE PRESIDENT (STANDING), AND WILLIAM E. SAMUELS, PRESIDENT TABLE OF CONTENTS Financial Highlights.................................................... 2 Chief Executive Officer's Message....................................... 3 Management's Discussion & Analysis...................................... 4-17 Report of Independent Auditors.......................................... 18 Consolidated Statements of Financial Condition.......................... 19 Consolidated Statements of Income....................................... 20 Consolidated Statements of Shareholders' Equity......................... 21 Consolidated Statements of Cash Flows................................... 22-23 Notes to Consolidated Financial Statements.............................. 24-38 Directors, Officers and Office Locations................................ 39 Corporate Information................................................... 40
1 FINANCIAL HIGHLIGHTS
AT OR FOR THE TWELVE MONTHS ENDED JUNE 30, ------------------------------------ SELECTED FINANCIAL DATA 1998 1997 1996 ---------- ---------- ---------- Net income $5,258,467 $3,908,653 $3,920,755 PER COMMON SHARE DATA Net income Basic $ 1.42 $ 1.05 $ 1.05 Diluted $ 1.30 $ 0.98 $ 0.98 Book value $ 18.73 $ 18.26 $ 17.85 Tangible book value $ 18.73 $ 18.26 $ 17.85 Number of common shares outstanding 3,710,820 3,679,185 3,744,000 AT YEAR END (THOUSANDS) Assets $ 304,168 $ 294,217 $ 256,986 Deposits 211,925 204,317 187,424 Loans receivable, net 208,094 192,238 177,431 Shareholders' equity 69,521 67,195 66,811 RATIOS Return on average assets 1.76% 1.45% 1.53% Return on average assets * N/A 1.71% N/A Return on average equity 7.68% 5.85% 5.86% Return on average equity * N/A 6.90% N/A Equity to total assets (year end) 22.86% 22.84% 26.00% Nonperforming assets to total assets 0.18% 0.08% 0.05% Allowance for loan losses to net loans 0.29% 0.31% 0.34% Dividends declared/earnings per share 71.76% 75.51% 65.31%
* Excludes the nonrecurring charge associated with the special SAIF assessment in 1997. 2 CHIEF EXECUTIVE OFFICER'S MESSAGE September 28, 1998 To Our Shareholders I am pleased to report to you that First Savings experienced continued growth and record earnings for the year ended June 30, 1998. Excluding a nonrecurring SAIF assessment in fiscal 1997, net income increased 14%, from $4.6 million in fiscal 1997 to $5.3 million in fiscal 1998. Return on average assets for the year ended June 30, 1998 was exemplary at 1.76%. Key to the success of First Savings' profitability is our asset quality. As of June 30, 1998, nonperforming assets to total assets was .18%. During fiscal 1998, First Savings reached a new high for loan growth. Loan originations increased 17% and net loans increased 9% from $192.2 million in fiscal 1997 to $208.1 million in fiscal 1998. Other areas of sustained growth for First Savings were in deposits and total assets. We are also particularly proud of our continuing dividend growth. During fiscal 1998, dividends on an annualized basis increased from $0.88 per share to $1.00 per share. As you can see, First Savings remains quite committed to a high level of performance. In this pursuit, customer service has always been a primary interest at First Savings...and always will be. That is the reason we take so seriously the emerging issue of potential computer systems' problems involving the year 2000 that could impact virtually every business and household in America. With this in mind, your Board established a committee in July of 1997 to address potential year 2000 issues. This led to our development of a comprehensive plan of action that embraces all aspects of our operation. This plan includes replacing all three of our existing Automatic Teller Machines with state-of-the-art Diebold equipment while adding a fourth ATM of similar capability at our Carthage office. All of our computer equipment, now seven years old, is being replaced to conform with year 2000 requirements. These activities will provide improved service to all of our valued customers which is consistent with our committee's goal for you to conduct all of your First Savings transactions with the same ease and confidence in the year 2000 that you do today. Effective December 31, 1998, I shall retire as President and Chief Executive Officer of First Savings Bank. When making this decision, I agreed to remain with the bank on a part-time basis, involved in loan operations, special projects and in other ways as needed. I will also continue to serve as a member of your Board. My wife and I have a large family, including nine grandchildren, and I anticipate spending more time with them while pursuing other activities. Upon my retirement, John F. Burns, Executive Vice President and Secretary of First Savings, will succeed me as President and Chief Executive Officer of First Savings. John has worked with me at the bank since 1972. He is a graduate of UNC-Chapel Hill and The Graduate School of Banking of the South, and is totally dedicated to First Savings. He is very capable of guiding First Savings into the new century. I again encourage all of you to bank with First Savings. We now have over 3,000 shareholders. With your help, a dedicated Board of Directors and a highly trained and motivated staff, we can move First Savings to significantly greater heights. Sincerely, PHOTO HERE. William E. Samuels President and Chief Executive Officer William E. Samuels, President and Chief Executive Officer, with his grandson, William F. Giuseffi, First Savings' youngest shareholder. 3 MANAGEMENT'S DISCUSSION & ANALYSIS INTRODUCTION First Savings Bancorp, Inc. (First Savings Bancorp, Inc., and its subsidiary, First Savings Bank of Moore County, Inc., SSB, are collectively referred to as "First Savings") is a bank holding company organized under the laws of the state of North Carolina. First Savings Bank of Moore County, Inc., SSB (the "Bank") is a North Carolina chartered savings bank and its deposits are insured by the Savings Association Insurance Fund ("SAIF") administered by the Federal Deposit Insurance Corporation ("FDIC"). First Savings converted from a federally chartered savings bank to a North Carolina chartered savings bank on June 22, 1993, and effective January 6, 1994 converted to a capital stock institution. First Savings' primary market area is Moore County, North Carolina. Moore County is home to several nationally recognized golf courses and is a popular tourist and convention destination. The famed Pinehurst Resort is located approximately three miles from Southern Pines. The Pinehurst Resort, founded in 1895, boasts eight championship golf courses, including Pinehurst No. 2 which is to be host of the 1999 U.S. Open. In addition, Moore County is a popular retirement community. As a result, the economy of Moore County is primarily service oriented. On June 30, 1998, First Savings had total assets of approximately $304.2 million, net loans of $208.1 million, deposits of approximately $211.9 million and shareholders' equity of $69.5 million. First Savings is principally engaged in the business of attracting deposits from the general public and using such deposits and other funds to make real estate loans. On June 30, 1998, approximately 83.1% of First Savings' net loan portfolio was composed of one-to-four family residential real estate loans. Revenues of First Savings are derived primarily from interest on loans. First Savings also receives interest income from its securities, mortgage-backed securities and interest-bearing deposit balances. The major expenses of First Savings are interest on deposits and general and administrative expenses such as salaries, employee benefits, and branch occupancy and related expenses. FINANCIAL CONDITION This annual report to shareholders contains certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and other business of First Savings that are subject to various factors which could cause actual results to differ materially from those estimates. Factors which could influence the estimates include changes in national, regional and local market conditions, legislative and regulatory conditions, and the interest rate environment. The following management's discussion and analysis is presented to assist in understanding the financial condition and results of operations. This discussion should be read in conjunction with the audited consolidated financial statements and related footnotes presented in this report. ASSET/LIABILITY MANAGEMENT A principal operating strategy of First Savings has been the development of a better match between the repricing of interest-earning assets and interest- bearing liabilities in order to reduce the Bank's exposure to adverse changes in interest rates. Principal among First Savings' asset/liability management strategies has been (1) the origination of adjustable-rate, single-family mortgage loans; (2) the origination of adjustable-rate home equity line of credit loans; (3) maintaining a short-term investment portfolio; and (4) attempting to lengthen deposit maturities. During fiscal year 1998, the Bank originated 629 mortgage loans totaling $64.7 million, of which $27.1 million were one, three or five-year adjustable-rate mortgages or home equity loans. At June 30, 1998, $170.9 million or 82.1% of the Bank's $208.1 million in total net loans had adjustable interest rates. Although earnings could still be affected negatively by a rapid and sustained increase in the level of interest rates, management believes assets and liabilities are structured to preserve net income during interest rate changes. 4 MANAGEMENT'S DISCUSSION & ANALYSIS MARKET RISK Market risk is the risk of loss from adverse changes in market prices and rates. First Savings' market risk primarily stems from interest rate risk, the potential economic loss due to future changes in interest rates, which is inherent in lending and deposit gathering activities. First Savings' objective is to manage the mix of interest-sensitive assets and liabilities to moderate interest rate risk and stabilize the net interest margin while enhancing profitability. THE FOLLOWING TABLE PROVIDES INFORMATION ABOUT FIRST SAVINGS' FINANCIAL INSTRUMENTS THAT ARE SENSITIVE TO CHANGES IN INTEREST RATES. ALL DOLLAR AMOUNTS IN THE TABLE ARE EXPRESSED IN THOUSANDS.
EXPECTED MATURITY DATE ------------------------------------------------------------- MORE THAN OVER MORE THAN 1 YEAR 1 YEAR 3 YEARS 5 YEARS MORE THAN FAIR OR LESS TO 3 YEARS TO 5 YEARS TO 10 YEARS 10 YEARS TOTAL VALUE --------- ----------- ----------- ------------ ---------- -------- -------- LOANS RECEIVABLE (A) Fixed Rate $ 350 $ 1,649 $ 3,268 $12,356 $20,176 $ 37,799 $ 39,957 Average interest rate 8.86% 8.13% 8.49% 8.24% 8.49% Variable rate $ 48,457 $49,612 $21,805 $47,538 $ 3,479 $170,891 $168,137 Average interest rate 8.01% 7.70% 7.70% 7.82% 7.70% INVESTMENT SECURITIES (B) Interest-earning deposits $ 3,991 $ - $ - $ - $ - $ 3,991 $ 3,991 Average interest rate 6.10% -% -% -% -% Securities available for sale $ 26,249 $18,453 $ 3,002 $14,014 $11,014 $ 72,732 $ 72,732 Average interest rate 5.63% 6.61% 6.22% 6.74% 7.24% Securities held to maturity $ - $ 167 $ 173 $ 148 $ 9,249 $ 9,737 $ 9,821 Average interest rate -% 9.45% 8.94% 9.53% 7.33% Nonmarketable equity securities $ 1,930 $ - $ - $ - $ - $ 1,930 $ 1,930 Average interest rate 7.50% -% -% -% -% DEBT OBLIGATIONS (C) Interest-bearing deposits $173,854 $28,906 $ 6,051 $ 302 $ - $209,113 $208,013 Average interest rate 4.51% 5.58% 5.90% 6.00% -% Borrowings $ 20,000 - - - - $ 20,000 $ 19,976 Average interest rate 6.25% -% -% -% -%
(A) For loans receivable, the table presents principal cash flows by fixed and adjustable rate. The table includes contractual maturities for fixed rate loans and adjustable rate loans are assumed to reprice at contractual repricing intervals. The table presents fair values at June 30, 1998 and weighted average interest rates by maturity dates. (B) For investment securities, including securities available for sale, securities held to maturity, and nonmarketable equity securities, the table presents contractual maturities. Interest-earning deposits are due on demand financial instruments and are presented in the due in one year category. Nonmarketable equity securities, which consists of Federal Home Loan Bank stock, have no contractual maturity and are placed in the longest expected maturity date. The table presents fair values at June 30, 1998 and weighted average interest rates by maturity dates. (C) For interest-bearing deposits and borrowings, the table presents principal cash flows and weighted average interest rates by expected maturity dates and fair values at June 30, 1998. 5 MANAGEMENT'S DISCUSSION & ANALYSIS GAP ANALYSIS First Savings' asset/liability management may be analyzed by examining the extent to which its assets and liabilities are "interest rate sensitive" and by monitoring its interest rate sensitivity "gap." An asset or liability is said to be interest rate sensitive within a specific time period if it matures or reprices during that period. The interest rate sensitivity gap is defined as the excess of interest-earning assets maturing or repricing within a specific time period over interest-bearing liabilities maturing or repricing within that same time period. Gap is considered positive when the amount of interest rate sensitive assets repricing or maturing within a period exceeds the amount of interest rate sensitive liabilities repricing or maturing during that same period. Gap is considered negative when the amount of interest rate sensitive liabilities repricing or maturing within a period exceeds the amount of interest rate sensitive assets repricing or maturing during that same period. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income. THE FOLLOWING GAP ANALYSIS TABLE SETS FORTH THE AMOUNTS OF INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES OUTSTANDING AT JUNE 30, 1998, WHICH ARE EXPECTED TO REPRICE OR MATURE IN EACH OF THE FUTURE TIME PERIODS SHOWN. THE ASSETS OR LIABILITIES SHOWN, WHICH REPRICE OR MATURE DURING A PARTICULAR PERIOD, WERE DETERMINED IN ACCORDANCE WITH THE CONTRACTUAL TERMS OF THE ASSET OR LIABILITY. ADJUSTABLE-RATE LOANS ARE ASSUMED TO REPRICE AT CONTRACTUAL REPRICING INTERVALS.
- ------------------------------------------------------------------------------------------------------------------------------------ TERMS TO REPRICING AT JUNE 30, 1998 ----------------------------------------------------------------------------------------------------- MORE THAN MORE THAN MORE THAN 1 YEAR 1 YEAR 3 YEARS 5 YEARS MORE THAN GAP ANALYSIS OR LESS TO 3 YEARS TO 5 YEARS TO 10 YEARS 10 YEARS TOTAL ----------------- ---------------- ---------------- --------------- -------------- -------- (Dollars in thousands) INTEREST-EARNING ASSETS: Mortgage loans: Adjustable rate residential 1-4 family $ 35,596 $ 43,846 $ 17,517 $44,259 $ 3,414 $144,632 Fixed rate 1-4 family 56 376 2,571 11,217 17,561 31,781 Adjustable rate non-residential 2,719 5,766 4,288 3,279 65 16,117 Fixed rate non-residential - 182 434 1,105 2,615 4,336 Home equity and property improvement 8,970 - - - - 8,970 Other loans 1,466 1,091 263 34 - 2,854 Investments 32,050 18,101 2,993 13,940 11,000 78,084 Mortgage-backed securities - 167 173 148 9,249 9,737 --------- -------- -------- ------- ------- -------- Total interest-earning $ 80,857 $ 69,529 $ 28,239 $73,982 $43,904 $296,511 assets ========= ======== ======== ======= ======= ======== INTEREST-BEARING LIABILITIES: Deposits: Certificates of deposit $ 96,633 $ 28,906 $ 6,051 $ 302 $ - $131,892 Interest-bearing checking 20,618 - - - - 20,618 Money market deposit accounts 42,567 - - - - 42,567 Passbook savings 14,036 - - - - 14,036 Borrowed funds 20,000 - - - - 20,000 --------- -------- -------- ------- ------- -------- Total interest-bearing $ 193,854 $ 28,906 $ 6,051 $ 302 $ - $229,113 liabilities ========= ======== ======== ======= ======= ======== INTEREST SENSITIVITY GAP PER PERIOD $(112,997) $ 40,623 $ 22,188 $73,680 $43,904 $ 67,398 CUMULATIVE INTEREST SENSITIVITY GAP $(112,997) $(72,374) $(50,186) $23,494 $67,398 $ 67,398 CUMULATIVE GAP AS A PERCENTAGE OF TOTAL INTEREST-EARNING ASSETS (38.11)% (24.41)% (16.93)% 7.92% 22.73% 22.73% CUMULATIVE INTEREST-EARNING ASSETS AS A PERCENTAGE OF INTEREST-BEARING LIABILITIES 41.71% 67.51% 78.07% 110.25% 129.42% 129.42% - ------------------------------------------------------------------------------------------------------------------------------------
6 MANAGEMENT'S DISCUSSION & ANALYSIS Passbook accounts, money market deposit accounts and negotiable order of withdrawal or other transaction accounts are assumed to be subject to immediate repricing and depositor availability and have been placed in the shortest period. No prepayment assumptions have been made for any interest-earning assets or interest-bearing liabilities. In addition, the table does not reflect scheduled principal payments which will be received throughout the lives of the loans. The interest sensitivity of First Savings' assets and liabilities illustrated in the table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions. The Gap Analysis table does not necessarily indicate the impact of general interest rate movements on the Bank's net interest yield because the repricing of various categories of assets and liabilities is discretionary and is subject to competitive and other pressures. As a result, various assets and liabilities indicated as repricing within the same period may in fact reprice at different times and at different rate levels. LIQUIDITY Maintaining adequate liquidity while managing interest rate risk is the primary goal of First Savings' asset and liability management strategy. Liquidity is the ability to fund the needs of the Bank's borrowers and depositors, pay operating expenses, and meet regulatory liquidity requirements. Maturing investments, loan and mortgage-backed security principal repayments, deposits and income from operations are the main sources of liquidity. The Bank's primary uses of liquidity are to fund loans and to make investments. As of June 30, 1998, liquid assets (cash and cash equivalents, and marketable investment securities) were approximately $92.2 million, which represents 43.5% of deposits. As a North Carolina chartered savings bank, First Savings is required to maintain liquid assets equal to at least 10.0% of its total assets. For purposes of this requirement, liquid assets consist of cash and readily marketable investments and mortgage-backed securities. At June 30, 1998, this liquidity ratio, based on North Carolina regulations, was 25.88%. Management considers current liquidity levels to be adequate to meet First Savings' foreseeable needs. At June 30, 1998, outstanding mortgage loan commitments and available home equity line of credit balances were $20.5 million, available credit card line of credit balances were $3.6 million and the undisbursed portion of construction loans was $5.6 million. Funding for these commitments is expected to be provided from deposits, loan and mortgage-backed securities principal repayments, maturing investments and income generated from operations. CAPITAL RESOURCES Under federal capital regulations, First Savings must satisfy certain minimum leverage ratio requirements and risk-based capital requirements. Failure to meet such requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on First Savings' financial statements. At June 30, 1998 and 1997, First Savings exceeded all such requirements. First Savings is also subject to limits on dividend payments. First Savings is prohibited, under the North Carolina Business Corporation Act, from paying a dividend if such payment would (i) cause First Savings to be unable to pay its debts as they become due in the ordinary course of business or (ii) reduce First Savings' total assets below the sum of First Savings' total liabilities plus any amounts which would be needed, if First Savings were to be dissolved at the time of distribution, to satisfy the preferential rights that are superior to holders of the Common Stock. Payment of dividends by the Bank subsidiary to the holding company is subject to various restrictions. Under applicable banking regulations, the Bank may not declare a cash dividend if the effect thereof would be to reduce its net worth to an amount less than the minimum required by federal and state banking regulations. In addition, for a period of five years after the consummation of the Bank's stock conversion, which occurred on January 6, 1994, the Bank will be required to obtain prior written approval from the Administrator of the Savings Institutions Division, North Carolina Department of Commerce, before it can declare a cash dividend in an amount in excess of one-half the greater of (i) its net income for the most recent fiscal year or (ii) the average of its net income after dividends for the most recent fiscal year and not more than two of the immediately preceding fiscal years, as applicable, or repurchase any of its common stock. A source of First Savings' funds are dividends received from the Bank. In fiscal 1999, the amount of dividends that can be paid without prior approval from regulators is approximately $2.0 million. These funds should be adequate to cover First Savings' needs. 7 MANAGEMENT'S DISCUSSION & ANALYSIS ACCOUNTING AND REGULATORY MATTERS Management is not aware of any known trends, events, uncertainties or current recommendations by regulatory authorities that will have or that are reasonably likely to have a material effect on First Savings' liquidity, capital resources, or other operations. AVERAGE YIELD/COST ANALYSIS THE FOLLOWING TABLE CONTAINS INFORMATION RELATING TO FIRST SAVINGS' AVERAGE BALANCE SHEET AND REFLECTS THE AVERAGE YIELDS ON ASSETS AND AVERAGE COSTS OF LIABILITIES FOR THE PERIODS INDICATED. SUCH YIELDS AND COSTS ARE DERIVED BY DIVIDING INCOME OR EXPENSE BY THE AVERAGE BALANCES OF ASSETS OR LIABILITIES, RESPECTIVELY, FOR THE PERIODS PRESENTED.
- ------------------------------------------------------------------------------------------------------------------------------------ YEARS ENDED JUNE 30, ---------------------------------------------------------------------------------------- 1998 1997 1996 --------------------------- ------------------------ ------------------------- AVERAGE AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST -------- -------- -------- -------- -------- -------- -------- -------- -------- (Dollars in thousands) Interest-earning assets: Interest-earning deposits $ 6,167 $ 391 6.34% $ 7,623 $ 449 5.89% $ 2,170 $ 161 7.42% Investments, net, at cost 77,009 5,222 6.78% 67,269 4,317 6.42% 75,155 4,690 6.24% Mortgage-backed securities 9,143 668 7.31% 4,537 338 7.45% 3,842 293 7.63% Loans receivable, net 199,776 16,262 8.14% 185,120 14,954 8.08% 168,579 13,406 7.95% -------- ------- -------- ------- -------- ------- Total interest-earning assets 292,095 22,543 7.72% 264,549 20,058 7.58% 249,746 18,550 7.43% ------- ------- ------- Non-interest-earning assets 6,680 5,734 5,963 -------- -------- -------- Total assets $298,775 $270,283 $255,709 ======== ======== ======== Interest-bearing liabilities: Passbooks savings $ 13,723 $ 428 3.12% $ 10,994 $ 297 2.70% $ 10,093 $ 252 2.50% NOW and money market accounts 66,100 2,166 3.28% 63,199 2,108 3.34% 57,130 1,956 3.42% Certificates of deposit 129,698 7,371 5.68% 122,761 7,091 5.78% 117,436 6,957 5.92% Borrowed funds 17,786 1,118 6.29% 4,694 286 6.09% 845 50 5.92% -------- ------- -------- ------- -------- ------- Total interest-bearing liabilities 227,307 11,083 4.88% 201,648 9,782 4.85% 185,504 9,215 4.97% ------- ------- ------- Non-interest-bearing liabilities 2,672 1,789 3,272 -------- -------- -------- Total liabilities 229,979 203,437 188,776 Shareholders' equity 68,796 66,846 66,933 -------- -------- -------- Total liabilities and shareholders' equity $298,775 $270,283 $255,709 ======== ======== ======== Net interest income and interest rate spread $11,460 2.84% $10,276 2.73% $ 9,335 2.46% ======= ======= ======= Net interest-earning assets and net interest margin $ 64,788 3.92% $ 62,901 3.88% $ 64,242 3.74% Percentage of average interest-earning assets to average interest-bearing liabilities 128.50% 131.19% 134.63% - ------------------------------------------------------------------------------------------------------------------------------------
8 MANAGEMENT'S DISCUSSION & ANALYSIS The table below provides information regarding changes in interest income and interest expense for the periods indicatedGlenn HeplerFinancial Printing GroupTHE TABLE BELOW PROVIDES INFORMATION REGARDING CHANGES IN INTEREST INCOME AND INTEREST EXPENSE FOR THE PERIODS INDICATED. FOR EACH CATEGORY OF INTEREST- EARNING ASSET AND INTEREST-BEARING LIABILITY, INFORMATION IS PROVIDED ON CHANGES ATTRIBUTABLE TO (I) CHANGES IN VOLUME (CHANGES IN VOLUME MULTIPLIED BY THE PRIOR PERIOD'S RATE); (II) CHANGES IN RATES (CHANGE IN RATE MULTIPLIED BY THE PRIOR PERIOD'S VOLUME); (III) CHANGES IN RATE-VOLUME (CHANGES IN RATE MULTIPLIED BY CHANGES IN VOLUME); AND (IV) NET CHANGE (THE SUM OF PREVIOUS COLUMNS.)
- -------------------------------------------------------------------------------------------------------------------- Years Ended June 30, --------------------------------------------------------------------------------- 1998 vs. 1997 1997 vs. 1996 INCREASE (DECREASE) Increase (Decrease) Due to Due to ----------------------------------------- -------------------------------------- RATE/ Rate/ Volume RATE VOLUME TOTAL Volume Rate Volume Total --------- -------- -------- -------- -------- ------- -------- ------- (Dollars in thousands) Interest income: Interest-earning deposits $ (86) $ 34 $ (6) $ (58) $ 405 $ (33) $ (84) $ 288 Investments (1) 625 245 35 905 (492) 133 (14) (373) Mortgage-backed securities 343 (6) (7) 330 53 (7) (1) 45 Loan portfolio 1,184 115 9 1,308 1,315 212 21 1,548 ------ -------- ------- -------- ------ ------- -------- ------- Total interest income 2,066 388 31 2,485 1,281 305 (78) 1,508 ------ -------- ------- -------- ------ ------- -------- ------- Interest expense: Passbooks savings 74 46 11 131 22 21 2 45 NOW and money market 97 (37) (2) 58 208 (51) (5) 152 accounts Certificates of deposit 400 (114) (6) 280 315 (173) (8) 134 Borrowed funds 798 9 25 832 228 1 7 236 ------ -------- ------- -------- ------ ------- -------- ------- Total interest expense 1,369 (96) 28 1,301 773 (202) (4) 567 ------ -------- ------- -------- ------ ------- -------- ------- Net interest income $ 697 $ 484 $ 3 $ 1,184 $ 508 $ 507 $ (74) $ 941 (expense) ====== ======== ======= ======== ====== ======= ======== ======= (1) Includes investment securities and FHLB stock. - --------------------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO COMPOSITION First Savings' consolidated net loan portfolio totaled approximately $208.1 million at June 30, 1998, representing 68.4% of First Savings' total assets. At June 30, 1998, approximately 82.1% of First Savings' net loan portfolio was composed of adjustable rate loans, and approximately 18.1% of First Savings' net loan portfolio was composed of fixed rate loans. At June 30, 1998, approximately $172.9 million, or 83.1%, of First Savings' net loan portfolio was composed of one-to-four family residential real estate loans. On such date, approximately $39.1 million, or 18.8%, of First Savings' net loan portfolio was composed of multi-family residential, commercial and other real estate loans. 9 MANAGEMENT'S DISCUSSION & ANALYSIS THE FOLLOWING TABLE SETS FORTH THE COMPOSITION OF FIRST SAVINGS' LOAN PORTFOLIO BY TYPE OF LOAN AT THE DATES INDICATED.
June 30, ----------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------------- ----------------- ------------------ ---------------- ------------------ % OF % of % of % of % of Amount TOTAL Amount Total Amount Total Amount Total Amount Total --------- ------- --------- ------- --------- ------- -------- ------ -------- ------- (Dollars in thousands) Real estate loans: Residential 1-4 family $172,915 83.09% $162,620 84.59% $151,934 85.63% $137,855 86.28% $124,751 87.37% Multi-family (5 or more 2,969 1.43% 2,601 1.35% 3,070 1.73% 2,272 1.42% 3,393 2.37% units) Construction 10,592 5.09% 10,969 5.71% 8,123 4.58% 7,951 4.98% 5,263 3.69% Commercial real estate and other properties 16,568 7.96% 13,285 6.91% 12,028 6.78% 11,844 7.41% 11,022 7.72% Home equity and property improvement 8,970 4.31% 8,449 4.40% 5,607 3.16% 4,066 2.55% 2,852 2.00% -------- ------ -------- ------- -------- ------- -------- ------- -------- ------- Total real estate loans 212,014 101.88% 197,924 102.96% 180,762 101.88% 163,988 102.64% 147,281 103.15% -------- ------ -------- ------- -------- ------- -------- ------- -------- ------- Other: Savings account loans 900 0.43% 909 0.47% 875 0.49% 703 0.44% 604 0.42% Installment loans 797 0.38% 621 0.32% 351 0.20% 111 0.07% - -% Credit card loans 1,157 0.56% 951 0.50% 520 0.29% - -% - -% -------- ------ -------- ------- -------- ------- -------- ------- -------- ------- Total other loans 2,854 1.37% 2,481 1.29% 1,746 0.98% 814 0.51% 604 0.42% -------- ------ -------- ------- -------- ------- -------- ------- -------- ------- Less: Unearned fees and 547 0.26% 555 0.29% 509 0.29% 458 0.29% 369 0.26% discounts Loans in process 5,631 2.71% 7,008 3.65% 3,959 2.23% 3,958 2.48% 4,128 2.89% Allowance for loan losses 596 0.28% 604 0.31% 609 0.34% 609 0.38% 609 0.42% -------- ------ -------- ------- -------- ------- -------- ------- -------- ------- Total reductions 6,774 3.25% 8,167 4.25% 5,077 2.86% 5,025 3.15% 5,106 3.57% -------- ------ -------- ------- -------- ------- -------- ------- -------- ------- Total loans receivable, net $208,094 100.00% $192,238 100.00% $177,431 100.00% $159,777 100.00% $142,779 100.00% ======== ====== ======== ======= ======== ======= ======== ======= ======== =======
NONPERFORMING ASSETS The Bank's general policy is to place a loan on nonaccrual status when the loan becomes 90 days delinquent. Interest on loans that are contractually 90 days or more past due is reserved through an allowance account. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent cash payments are received, and in management's judgment, the borrower's ability to make periodic interest and principal payments is back to normal, in which case the loan is returned to accrual status. 10 MANAGEMENT'S DISCUSSION & ANALYSIS THE FOLLOWING TABLE SETS FORTH INFORMATION WITH RESPECT TO NONPERFORMING ASSETS IDENTIFIED BY THE BANK, INCLUDING NONACCRUAL LOANS AND FORECLOSED REAL ESTATE, AT THE DATES INDICATED. DURING THE PERIODS SHOWN, FIRST SAVINGS HAD NO "RESTRUCTURED LOANS" AS DEFINED BY STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 15.
- ----------------------------------------------------------------------------------------------------------------------------------- JUNE 30, -------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Loans accounted for on a nonaccrual basis: Real estate: Residential $ 545 $ 250 $ 134 $ 139 $ 329 Commercial - - - 133 - Consumer - - - - - ----------- ---------- ---------- ---------- ---------- Total 545 250 134 272 329 ----------- ---------- ---------- ---------- ---------- Accruing loans which are contractually past due 90 days or more: Real estate: Residential - - - - - Commercial - - - - - Consumer - - - - - ----------- ---------- ---------- ---------- ---------- Total - - - - - ----------- ---------- ---------- ---------- ---------- Total of nonaccrual and 90 days past due loans 545 250 134 272 329 Foreclosed real estate - - - - - Other nonperforming assets - - - - - ----------- ---------- ---------- ---------- ---------- Total nonperforming assets $ 545 $ 250 $ 134 $ 272 $ 329 =========== ========== ========== ========== ========== Total loans delinquent 90 days or more to net loans 0.26% 0.13% 0.08% 0.17% 0.23% Total loans delinquent 90 days or more to total assets 0.18% 0.08% 0.05% 0.11% 0.13% Total nonperforming assets to total assets 0.18% 0.08% 0.05% 0.11% 0.13% - -----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES In originating loans, the Bank recognizes that credit losses will be experienced and that the risk of loss will vary with, among other things, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a secured loan, the quality of the security for the loan, as well as general economic conditions. It is management's policy to maintain an adequate allowance for loan losses based on, among other things, the Bank's historical loan loss experience, evaluation of economic conditions and regular review of delinquencies and loan portfolio quality. Specific allowances are provided for individual loans when ultimate collection is considered questionable by management after reviewing the current status of loans which are contractually past due and considering the net realizable value of the security for the loans. 11 MANAGEMENTS DISCUSSION & ANALYSIS After reviewing general economic conditions, industry standards and allowances of comparable institutions in its peer group, the Bank did not increase the allowance during fiscal 1998. Management continues to actively monitor First Savings' asset quality, to charge off loans against the allowance for loan losses when appropriate and to provide specific loss reserves when necessary. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the economic conditions in the assumptions used in making the initial determinations. THE FOLLOWING TABLE DESCRIBES THE ACTIVITY RELATED TO THE BANK'S ALLOWANCE FOR LOAN LOSSES FOR THE DATES INDICATED.
- ------------------------------------------------------------------------------------------------------------------------------------ JUNE 30, --------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- (Dollars in thousands) Balance beginning of period $ 604 $ 609 $ 609 $ 609 $ 630 Provision for loan losses and losses on foreclosed real estate - - - - - ---------- ---------- ---------- ---------- ---------- Charge-offs: Residential 1-4 family - - - (4) (21) Commercial real estate and other properties - - - - - Home equity and property improvements - - - - - Construction - - - - - Savings accounts - - - - - Other consumer (8) (5) - - - Commercial - - - - - ---------- ---------- ---------- ---------- ---------- (8) (5) - (4) (21) ---------- ---------- ---------- ---------- ---------- Recoveries: Residential 1-4 family - - - 4 - Commercial real estate and other properties - - - - - Construction - - - - - Savings accounts - - - - - Other consumer - - - - - Commercial - - - - - ---------- ---------- ---------- ---------- ---------- - - - 4 - ---------- ---------- ---------- ---------- ---------- Balance at end of period $ 596 $ 604 $ 609 $ 609 $ 609 ========== ========== ========== ========== ========== Ratio of net charge-offs during the period to average loans outstanding during the period 0.00% 0.00% 0.00% 0.00% 0.01% ========== ========== ========== ========== ========== - ------------------------------------------------------------------------------------------------------------------------------------
THE FOLLOWING TABLE SETS FORTH THE COMPOSITION OF THE ALLOWANCE FOR LOAN LOSSES BY TYPE OF LOAN AT THE DATES INDICATED.
- ------------------------------------------------------------------------------------------------------------------------------------ JUNE 30, ------------------------------------------------------------------------------------ 1998 1997 1996 ------------------------ ------------------------ ----------------------- Amount of Amount of Amount of Amount of Loans to Amount of Loans to Amount of Loans to Allowance Gross Loans Allowance Gross Loans Allowance Gross Loans --------- ----------- --------- ----------- --------- ----------- (Dollars in thousands) Real estate loans: Residential 1-4 family $ 463 77.68% $ 400 66.23% $ 503 82.59% Commercial real estate and other property 64 10.74% 73 12.08% 50 8.21% Home equity and property improvement 16 2.68% 21 3.48% 17 2.79% Construction 9 1.52% 7 1.16% 15 2.47% --------- ----------- --------- ----------- --------- ----------- Total real estate loans 552 92.62% 501 82.95% 585 96.06% Savings account loans - -% - -% - -% Other consumer loans 44 7.38% 103 17.05% 24 3.94% --------- ----------- --------- ----------- --------- ----------- Total allowance for loan losses $ 596 100.00% $ 604 100.00% $ 609 100.00% ========= =========== ========= =========== ========= =========== - ------------------------------------------------------------------------------------------------------------------------------------
12 MANAGEMENTS DISCUSSION & ANALYSIS RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1998 AND JUNE 30, 1997 GENERAL First Savings recorded net income of $5.3 million for the year ended June 30, 1998, an increase of 35.9% over the $3.9 million earned for the year ended June 30, 1997. Basic and fully diluted earnings per share were $1.42 and $1.30, respectively, for the year ended June 30, 1998 compared to $1.05 and $0.98, respectively, for the year ended June 30, 1997. During fiscal 1997, First Savings paid a nonrecurring deposit insurance assessment to the Savings Association Insurance Fund ("SAIF") of approximately $1.2 million. Net of income taxes, this special assessment had the effect of reducing net income for the year by approximately $700,000. Net income excluding this nonrecurring charge was $4.6 million. Basic and fully diluted earnings per share for fiscal year 1997, excluding the nonrecurring SAIF assessment, were $1.24 and $1.16, respectively. The primary factor contributing to First Savings core earnings growth was a 12% increase in the Bank's net interest margin. Non-interest income was higher in 1998 primarily due to increases in fees and service charges. Nonperforming assets (loans 90 days or more delinquent and foreclosed real estate owned) were $545,000 or 0.18% of total assets at June 30, 1998, compared to $250,000 or .08% at June 30, 1997. First Savings did not have any real estate owned at June 30, 1998 or June 30, 1997. NET INTEREST INCOME Net interest income for the years ended June 30, 1998 and 1997, was $11.5 million and $10.3 million, respectively. The primary reason for the increase in net interest income during the fiscal year ended June 30, 1998 was due to a higher interest rate spread. The average yield on interest-earning assets increased by 14 basis points, and the average cost of interest-bearing liabilities increased by 3 basis points for the year ended June 30, 1998, increasing the Bank's interest rate spread to 2.84% compared to 2.73% for the year ended June 30, 1997. The average balance of interest-earning assets and interest-bearing liabilities during the fiscal year ended June 30, 1998 was $292.1 million and $227.3 million, respectively, compared to $264.5 million and $201.6 million, respectively, during the fiscal year ended June 30, 1997. The Average Yield/Cost Analysis table reflects the average yields on assets and average cost of liabilities for the years ended June 30, 1998, 1997, and 1996. Such average yields and costs are derived by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the period presented. INTEREST AND DIVIDEND INCOME First Savings' total interest and dividend income for the fiscal year ended June 30, 1998 was $22.5 million as compared to $20.1 million for fiscal year 1997, an increase of $2.4 million or 11.9%. This increase was due primarily to increases in average interest-earning assets and their related yields. INTEREST EXPENSE Total interest expense for the year ended June 30, 1998 increased by $1.3 million or 13.3% when compared to the prior year. The Bank's cost of funds increased from 4.85% in 1997 to 4.88% in 1998; and, average interest-bearing liabilities increased 12.7% from $201.6 million at June 30, 1997 to $227.3 million at June 30, 1998. Interest expense on borrowed funds increased $832,000 from $286,000 in 1997 to $1,118,000 in 1998. This increase is the result of advances from the Federal Home Loan Bank (FHLB) in 1998. The increase in borrowings was a result of investment strategies implemented during the fourth quarter of fiscal 1997. Average borrowings for the years ended June 30, 1998 and 1997 were $17.8 million and $4.7 million, respectively. ALLOWANCE FOR LOAN LOSSES At June 30, 1997, the allowance for loan losses was $604,000. During fiscal year 1998, First Savings did not add to this reserve. With only $8,000 in charge-offs during the current year, the allowance for loan losses at June 30, 1998 decreased slightly to $596,000. Management considers this level to be appropriate based on lending volume, the current level of delinquencies, other nonperforming assets and the overall economic conditions. NON-INTEREST INCOME Total non-interest income for the fiscal year ended June 30, 1998 was $616,000 as compared to $425,000 for the fiscal year ended June 30, 1997. The 44.9% increase is primarily attributable to high levels of fees and service charges during the year ended June 30, 1998. 13 MANAGEMENTS DISCUSSION & ANALYSIS GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for fiscal year ended June 30, 1998 were $3.8 million compared to $4.6 million for the fiscal year ended June 30, 1997. Excluding the nonrecurring SAIF assessment in fiscal 1997, general and administrative expense would have been $3.5 million. INCOME TAXES Income tax expense increased for the fiscal year ended June 30, 1998 to $3.1 million, as compared to $2.2 million for the same period in 1997. The increase in income taxes was attributed to the higher level of pre-tax income and to increased state income taxes as a larger portion of the Bank's income was subject to such taxes. RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1997 AND JUNE 30, 1996 GENERAL First Savings recorded net income of $3.9 million for each of the years ended June 30, 1997 and 1996. During fiscal 1997, First Savings paid a nonrecurring deposit insurance assessment to the Savings Association Insurance Fund ("SAIF") of approximately $1.2 million. Net of income taxes, this special assessment had the effect of reducing net income for the year by approximately $700,000. Net income excluding this nonrecurring charge was $4.6 million, representing an increase of 17.9% compared to the prior year. Earnings per share for fiscal years 1997 and 1996 were $0.98. Earnings per share for fiscal year 1997, excluding the nonrecurring SAIF assessment, were $1.16. The primary factor contributing to First Savings' core earnings growth was an increase in the Bank's net interest margin. Non-interest income was higher in 1997 primarily due to increases in fees and service charges. Nonperforming assets (loans 90 days or more delinquent and foreclosed real estate owned) were $250,000 or .08% of total assets at June 30, 1997, compared to $134,000 or .05% at June 30, 1996. First Savings did not have any real estate owned at June 30, 1997 or June 30, 1996. NET INTEREST INCOME Net interest income for the years ended June 30, 1997 and 1996, was $10.3 million and $9.3 million, respectively. The primary reason for the increase in net interest income during the fiscal year ended June 30, 1997 was due to a higher interest rate spread. The average yield on interest-earning assets increased by 15 basis points, and the average cost of interest-bearing liabilities decreased by 12 basis points for the year ended June 30, 1997, increasing the Bank's interest rate spread to 2.73% compared to 2.46% for the year ended June 30, 1996. The average balance of interest-earning assets and interest-bearing liabilities during the fiscal year ended June 30, 1997 was $264.5 million and $201.6 million, respectively, compared to $249.7 million and $185.5 million, respectively, during the fiscal year ended June 30, 1996. The Average Yield/Cost Analysis table reflects the average yields on assets and average cost of liabilities for the years ended June 30, 1997 and 1996. Such average yields and costs are derived by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the period presented. INTEREST AND DIVIDEND INCOME First Savings' total interest and dividend income for the fiscal year ended June 30, 1997 was $20.1 million as compared to $18.5 million for fiscal year 1996, an increase of $1.6 million or 8.6%. This increase was due primarily to increases in average interest-earning assets and their related yields. INTEREST EXPENSE Total interest expense for the year ended June 30, 1997 increased by $567,000 or 6.2% when compared to the prior year. The Bank's cost of funds decreased from 4.97% in 1996 to 4.85% in 1997; however, average interest-bearing liabilities increased 8.7% from $185.5 million at June 30, 1996 to $201.6 million at June 30, 1997. Interest expense on borrowed funds increased $236,000 from $50,000 in 1996 to $286,000 in 1997. This increase is the result of advances from the Federal Home Loan Bank (FHLB) in 1997. Borrowings comprised of an ESOP note payable at June 30, 1996, increased from $422,000 to $20.0 million at June 30, 1997 which consisted of FHLB advances. The increase in borrowings was a result of investment strategies implemented during the fourth quarter of fiscal 1997. Average borrowings for the years ended June 30, 1997 and 1996 were $4.7 million and $845,000, respectively. 14 MANAGEMENTS DISCUSSION & ANALYSIS ALLOWANCE FOR LOAN LOSSES At June 30, 1996, the allowance for loan losses was $609,000. During fiscal year 1997, First Savings did not add to this reserve. With only $5,000 in charge-offs during the current year, the allowance for loan losses at June 30, 1997 decreased slightly to $604,000. Management considers this level to be appropriate based on lending volume, the current level of delinquencies other nonperforming assets and the overall economic conditions. NON-INTEREST INCOME Total non-interest income for the fiscal year ended June 30, 1997 was $425,000 as compared to $364,000 for fiscal year ended June 30, 1996. The increase is primarily attributable to increases in fees and service charges of $59,000 during the year ended June 30, 1997. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for fiscal year ended June 30, 1997 were $4.6 million compared to $3.7 million for the fiscal year ended June 30, 1996. The increase was attributed to the nonrecurring charge of $1.2 million associated with the SAIF assessment. INCOME TAXES Income tax expense increased slightly for the fiscal year ended June 30, 1997 to $2.2 million, as compared to $2.1 million for the same period in 1996. The increase in income taxes was attributed to the higher level of pre-tax income and to increased state income taxes as a larger portion of the Bank's income was subject to such taxes. IMPACT OF INFLATION AND CHANGING PRICES The financial statements and notes thereto presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of First Savings' operations. Unlike most industrial companies, nearly all First Savings' assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on First Savings' performancethan do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. RECENT ACCOUNTING PRONOUNCEMENTS FASB STATEMENT ON REPORTING COMPREHENSIVE INCOME. In June 1997, the FASB issued SFAS No. 130. This Statement establishes standards of reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. In addition to net income as has been historically determined, comprehensive income for First Savings would include net unrealized holding gains and losses on investment securities available for sale. This Statement will be effective for First Savings' fiscal year ending June 30, 1999, and First Savings does not intend to early adopt. Had First Savings early adopted this Statement, it would have reported comprehensive income of $5,351,989, $4,190,087 and $3,446,327 for the years ended June 30, 1998, 1997 and 1996, respectively. FASB STATEMENT ON DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In July 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information. SFAS No. 131 requires disclosures for each segment that are similar to those required under current standards with the addition of quarterly disclosure requirements and a finer partitioning of geographic disclosures. It requires limited segment data on a quarterly basis. It also requires geographic data by country, as opposed to broader geographic regions as permitted under current standards. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. As First Savings has only one operating segment, adoption of SFAS No. 131 is not expected to have a significant impact on the consolidated financial statements. FASB STATEMENT ON EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132 standardizes the disclosure requirements of pensions and other postretirement benefits. It does not change any measurement or recognition provisions, and thus will not materially impact First Savings. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. 15 MANAGEMENTS DISCUSSION & ANALYSIS FASB STATEMENT ON ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under this standard, entities are required to carry all derivative instruments in the statement of financial condition at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposure to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss are reported in earnings immediately. Accounting for foreign currency hedges is similar to accounting for fair value and cash flow hedges. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change. Management anticipates that this statement will have no effect on its consolidated financial statements. YEAR 2000 COMPLIANCE The "Year 2000" issue confronting First Savings and its suppliers, customers, customers' suppliers and competitors centers on the inability of computer systems to recognize the Year 2000. Many existing computer programs and systems were originally programmed with six digit dates that provided only two digits to identify the calendar year in the date field, without considering the upcoming change in the century. With the impending new millennium, these programs and computers will recognize "00" as the year 1900 rather than the year 2000. Like most financial service providers, First Savings and its operations may be significantly affected by the Year 2000 issue due to its dependence on computer generated financial information. Software, hardware, and equipment both within and outside First Savings' direct control and with whom First Savings electronically or operationally interfaces (e.g. third party vendors providing data processing, information system management, maintenance of computer systems, and credit bureau information) are likely to be affected. Furthermore, if computer systems are not adequately changed to identify the Year 2000, many computer applications could fail or create erroneous results. As a result, many calculations which rely on date field information, such as interest, payment or due dates and other operating functions, could generate results which are significantly misstated, and First Savings could experience a temporary inability to process transactions, prepare statements or engage in similar normal business activities. In addition, under certain circumstances, failure to adequately address the Year 2000 issue could adversely affect the viability of First Savings' suppliers and creditors and the creditworthiness of its borrowers. Thus, if not adequately addressed, the Year 2000 matter could result in a significant adverse impact on products, services and the competitive condition of First Savings. Financial institution regulators have recently increased their focus upon Year 2000 compliance issues, issuing guidance concerning the responsibilities of senior management and directors. The Federal Financial Institutions Examination Council ("FFIEC") has issued several interagency statements on Year 2000 Project Management Awareness. These statements require financial institutions to, among other things, examine the Year 2000 implications of reliance on vendors, data exchange and potential impact on customers, suppliers and borrowers. These statements also require each federally regulated financial institution to survey its exposure, measure its risk and prepare a plan in order to solve the Year 2000 issue. In addition, the federal banking regulators have issued safety and soundness guidelines to be followed by insured depository institutions, such as the Bank, to assure resolution of any Year 2000 problems. The federal banking agencies have asserted that Year 2000 testing and certification is a key safety and soundness issue in conjunction with regulatory exams, and thus an institution's failure to address appropriately the Year 2000 issue could result in supervisory action, including such enforcement actions as the reduction of the institution's supervisory ratings, the denial of applications for approval of a merger or acquisition, or the imposition of civil money penalties. In order to address the Year 2000 issue and to minimize its potential adverse impact, management is engaged in a process to identify areas that will be affected by the Year 2000, assess their potential impact on operations, monitor 16 MANAGEMENTS DISCUSSION & ANALYSIS the progress of third party software vendors in addressing the matter, test changes provided by these vendors, and develop contingency plans for any critical systems which are not effectively reprogrammed. The plan is divided into the five phases: (1) awareness, (2) assessment, (3) renovations, (4) validation, and (5) implementation. First Savings has substantially completed the first two phases of the plan and is currently working internally and with external vendors on the final three phases. First Savings outsources its item processing operations to a service provider. First Savings' Year 2000 compliance is being closely coordinated with that of the service provider. First Savings does not currently expect that the cost of its Year 2000 compliance program will be material to its financial condition or results of operations, and expects that it will satisfy such compliance program without material disruption of its operations. In the event that First Savings' significant suppliers do not successfully and timely achieve Year 2000 compliance, First Savings' business, results of operations or financial condition could be adversely affected. 17 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders First Savings Bancorp, Inc. Southern Pines, North Carolina We have audited the consolidated statements of financial condition of First Savings Bancorp, Inc. and subsidiary ("First Savings") as of June 30, 1998 and 1997, and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of First Savings' management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements of First Savings Bancorp, Inc. and subsidiary as of and for the year ended June 30, 1996 were audited by other auditors whose report dated August 16, 1996 expressed an unqualified opinion. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1998 and 1997 consolidated financial statements present fairly, in all material respects, the financial position of First Savings Bancorp, Inc. and subsidiary at June 30, 1998 and 1997, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Southern Pines, North Carolina August 13, 1998 18 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, ---------------------------- 1998 1997 ------------- ------------- ASSETS Cash and due from banks $ 3,825,590 $ 2,801,422 Interest-earning deposits with banks 3,990,718 6,300,797 Investment securities available for sale, at fair value (amortized cost of $72,163,962 and $79,830,744 at June 30, 1998 and 1997, respectively) (Note 2) 72,731,962 80,257,044 Investment securities held to maturity, at amortized cost (fair value of $9,821,460 and $6,672,096 at June 30, 1998 and 1997, respectively) (Note 2) 9,737,212 6,572,162 Loans receivable, net (Note 3) 208,094,461 192,237,609 Accrued interest receivable (Note 4) 1,748,809 1,836,469 Premises and equipment, net (Note 5) 1,935,927 1,967,690 Stock in the Federal Home Loan Bank of Atlanta, at cost 1,929,600 1,929,600 Prepaid expenses and other assets 173,950 313,955 ------------ ------------ TOTAL $304,168,229 $294,216,748 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposits (Note 6) $211,924,932 $204,316,774 Borrowed funds (Note 7) 20,000,000 20,000,000 Advances from borrowers for taxes and insurance 90,217 101,766 Accrued interest payable on deposits 141,564 103,597 Accrued expenses and other liabilities 1,623,593 1,359,623 Federal and state income taxes: Currently payable 38,102 371,618 Deferred, net (Note 10) 828,616 768,438 ------------ ------------ Total liabilities 234,647,024 227,021,816 ------------ ------------ COMMITMENTS (Notes 3, 13 and 14) SHAREHOLDERS' EQUITY (Notes 10 and 11): Preferred stock, no par value, 5,000,000 shares authorized, none issued and outstanding - - Common stock, no par value, 20,000,000 shares authorized; 3,710,820 shares issued and outstanding in 1998; 3,679,185 in 1997 35,536,799 35,236,973 Unearned compensation related to ESOP note payable (Note 12) (158,302) (293,502) Net unrealized gain (loss) on securities available for sale 374,880 281,358 Retained earnings 33,767,828 31,970,103 ------------ ------------ Total shareholders' equity 69,521,205 67,194,932 ------------ ------------ TOTAL $304,168,229 $294,216,748 ============ ============
See notes to consolidated financial statements. 19 CONSOLIDATED STATEMENTS OF INCOME
Years Ended June 30, ----------------------------------------- 1998 1997 1996 --------- -------- ------------ INTEREST AND DIVIDEND INCOME: Interest on loans receivable $16,262,488 $14,954,452 $13,406,157 Interest on investment securities available for sale 5,077,872 4,177,307 4,549,718 Interest on investment securities held to maturity 668,469 337,717 293,452 Dividends on equity securities 143,199 139,703 140,089 Other 391,465 449,184 160,551 ----------- ----------- ------------- Total interest and dividend income 22,543,493 20,058,363 18,549,967 ----------- ----------- ------------- INTEREST EXPENSE: Deposits (Note 6) 9,965,356 9,496,129 9,165,030 Borrowed funds (Note 7) 1,118,002 286,280 50,324 ----------- ----------- ------------- Total interest expense 11,083,358 9,782,409 9,215,354 ----------- ----------- ------------- Net interest income 11,460,135 10,275,954 9,334,613 Provision for loan losses (Note 3) - - - ----------- ----------- ------------- Net interest income after provision for loan losses 11,460,135 10,275,954 9,334,613 ----------- ----------- ------------- NON-INTEREST INCOME: Fees and service charges 542,206 370,795 311,462 Income from real estate operations 7,514 7,964 7,230 Rent on safe deposit boxes 33,648 33,450 32,801 Other, net 32,531 12,949 12,429 ----------- ----------- ------------- Total non-interest income, net 615,899 425,158 363,922 ----------- ----------- ------------- GENERAL AND ADMINISTRATIVE EXPENSES: Compensation and fringe benefits (Note 12) 2,102,433 2,002,924 2,038,817 Occupancy and building (Note 13) 210,623 207,089 227,831 Premiums and assessments 131,512 1,326,809 416,491 Computer services 355,216 300,905 281,394 Other 957,783 799,732 728,247 ----------- ----------- ------------- Total general and administrative expenses 3,757,567 4,637,459 3,692,780 ----------- ----------- ------------- INCOME BEFORE INCOME TAXES 8,318,467 6,063,653 6,005,755 INCOME TAX EXPENSE (Note 10) 3,060,000 2,155,000 2,085,000 ----------- ----------- ------------- NET INCOME $ 5,258,467 $ 3,908,653 $ 3,920,755 =========== =========== ============= NET INCOME PER COMMON SHARE Basic $ 1.42 $ 1.05 $ 1.05 =========== =========== ============= Diluted $ 1.30 $ 0.98 $ 0.98 =========== =========== ============= AVERAGE COMMON SHARES OUTSTANDING Basic 3,698,197 3,706,704 3,744,000 Diluted 4,021,954 3,970,306 3,993,070
See notes to consolidated financial statements. 20 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998, 1997 AND 1996 ------------------------------------------------------------------------------------ NET UNREALIZED GAIN (LOSS) ON SECURITIES COMMON STOCK UNEARNED AVAILABLE FOR RETAINED SHAREHOLDERS' ----------------------- SHARES AMOUNT COMPENSATION SALE EARNINGS EQUITY --------- ----------- ------------ -------------- ----------- ------------- BALANCE, JULY 1, 1995 3,744,000 $36,351,616 $(542,880) $ 474,352 $29,228,029 $65,511,117 Earned ESOP compensation - 99,945 120,928 - - 220,873 Change in net unrealized gain (loss) on available for sale securities, net of income taxes of $244,401 - - - (474,428) - (474,428) Net income for year - - - - 3,920,755 3,920,755 Cash dividends declared ($.64 per share) - - - - (2,366,931) (2,366,931) --------- ----------- --------- -------------- ----------- ------------- BALANCE, JUNE 30, 1996 3,744,000 36,451,561 (421,952) (76) 30,781,853 66,811,386 Stock repurchase (76,500) (1,395,532) - - - (1,395,532) Proceeds from exercise of stock options 11,685 65,019 - - - 65,019 Earned ESOP compensation - 115,925 128,450 - - 244,375 Change in net unrealized gain (loss) on available for sale securities, net of income taxes of $144,979 - - - 281,434 - 281,434 Net income for year - - - - 3,908,653 3,908,653 Cash dividends declared ($.74 per share) - - - - (2,720,403) (2,720,403) --------- ----------- --------- -------------- ----------- ------------- BALANCE, JUNE 30, 1997 3,679,185 35,236,973 (293,502) 281,358 31,970,103 67,194,932 Proceeds from exercise of stock options 31,635 120,424 - - - 120,424 Earned ESOP compensation - 179,402 135,200 - - 314,602 Change in net unrealized gain (loss) on available for sale securities, net of income taxes of $48,178 - - - 93,522 - 93,522 Net income for year - - - - 5,258,467 5,258,467 Cash dividends declared ($0.94 per share) - - - - (3,460,742) (3,460,742) --------- ----------- --------- -------------- ----------- ------------- BALANCE, JUNE 30, 1998 3,710,820 $35,536,799 $(158,302) $ 374,880 $33,767,828 $69,521,205 ========= =========== ========= ============== =========== =============
See notes to consolidated financial statements. 21 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, --------------------------------------------------- 1998 1997 1996 --------------------- ------------- ------------- OPERATING ACTIVITIES: Net income $ 5,258,467 $ 3,908,653 $ 3,920,755 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of premises and equipment 97,115 94,055 120,433 Issuance of ESOP shares 314,602 244,375 220,873 Net amortization on investments 125,638 512,067 617,085 Deferred income taxes 12,000 (7,000) (18,600) Loan origination fees and costs deferred, net of current amortization (8,381) 46,139 51,455 Gain on sale of real estate (21,065) (8,531) - Gain on sale of premises and equipment (7,045) - - Changes in: Accrued interest receivable 87,660 (214,430) 139,276 Prepaid expenses and other assets 9,375 (81,231) (46,129) Accrued interest payable on deposits 37,967 (9,554) 8,614 Accrued expenses and other liabilities 95,708 194,613 (81,382) Taxes payable (333,516) 242,040 129,578 ------------ ------------ ------------ Net cash provided by operating activities 5,668,525 4,921,196 5,061,958 ------------ ------------ ------------ INVESTING ACTIVITIES: Net (increase) decrease in interest-earning deposits with banks 2,310,079 (5,587,822) 356,376 Proceeds from maturities of certificates of deposit - 7,000,000 - Purchases of certificates of deposit - (7,000,000) - Purchases of: Available for sale investment securities (24,050,075) (31,251,432) - Held to maturity investment securities (4,801,336) - - Proceeds from maturities and calls of: Available for sale investment securities 31,500,000 11,700,000 11,000,000 Held to maturity investment securities 1,727,505 1,670,878 1,487,573 Proceeds from sale of real estate 188,073 102,000 - Proceeds from sale of premises and equipment 13,011 - - Loan originations, net of repayments and net fees (15,848,471) (14,940,293) (17,704,972) Purchases of premises and equipment (71,318) (43,014) (74,326) Improvement costs on real estate (36,378) (6,196) - ------------ ------------ ------------ Net cash used in investing activities (9,068,910) (38,355,879) (4,935,349) ------------ ------------ ------------
22 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, ------------------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ FINANCING ACTIVITIES: Net increase in deposits $ 7,608,158 $ 16,892,550 $ 4,343,882 Increase (decrease) in advances from borrowers for taxes and insurance (11,549) 17,210 16,306 Net increase (decrease) in borrowed funds - 19,578,048 (120,928) Net proceeds from exercise of stock options 120,424 65,019 - Repurchases of common stock - (1,395,532) - Cash dividends paid (3,292,480) (2,926,437) (2,500,773) ------------ ------------ ------------ Net cash provided by financing activities 4,424,553 32,230,858 1,738,487 ------------ ------------ ------------ INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 1,024,168 (1,203,825) 1,865,096 CASH AND DUE FROM BANKS, BEGINNING OF YEAR 2,801,422 4,005,247 2,140,151 ------------ ------------ ------------ CASH AND DUE FROM BANKS, END OF YEAR $ 3,825,590 $ 2,801,422 $ 4,005,247 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid for: Interest on deposits $ 9,927,389 $ 9,505,683 $ 9,173,644 Interest on borrowed funds 1,145,718 208,888 51,952 Income taxes 2,685,000 1,963,036 1,971,500 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES Loans receivable transferred to foreclosed real estate $ - $ 87,273 $ - Unrealized gain (loss) on investment securities available for sale, net of deferred income taxes 93,522 281,434 (474,428) Declared but unpaid dividends 927,705 740,137 636,480
See notes to consolidated financial statements. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES BASIS OF PRESENTATION - The accompanying consolidated financial statements include the accounts of First Savings Bancorp, Inc. and its wholly-owned subsidiary, First Savings Bank of Moore County, Inc., SSB (the "Bank"), together referred to as "First Savings." All significant intercompany balances and transactions have been eliminated in consolidation. SIGNIFICANT ACCOUNTING POLICIES - The significant accounting policies of First Savings are summarized below: a. Cash Equivalents - For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption "cash and due from banks." b. Investments in Securities - First Savings' investments in securities are classified in two categories and accounted for as follows: . Securities to be Held to Maturity - Bonds, notes and debentures for which First Savings has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. . Securities Available for Sale - Securities available for sale are carried at fair value and consist of bonds, notes, debentures, and certain equity securities not classified as trading securities or as securities to be held to maturity. Declines in the fair value of individual held-to-maturity and available- for-sale securities below their cost that are considered to be other than temporary would result in write-downs of the individual securities to their fair value. The related write-downs would be included in earnings as realized losses. Unrealized holding gains and losses, net of tax, on securities available for sale are reported as a net amount in a separate component of shareholders' equity until realized. Gains and losses on the sale of securities available for sale are determined using the specific-identification method. c. Loans Receivable - Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balances, less the allowance for loan losses and net deferred loan-origination fees and discounts. Interest on loans is recorded as borrowers' monthly payments become due. Accrual of interest on past due loans is discontinued after 90 days. The Bank defers loan origination fees net of certain direct loan origination costs. Such net fees and costs are recognized as an adjustment to yield over the lives of the related loans. The allowance for loan losses is established through a provision for loan losses charged to operations. Loans are charged off against the allowance when management believes that collectibility is unlikely. The allowance is an amount that management believes will be adequate to absorb losses on existing loans that may become uncollectible based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into account such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions that may affect the borrowers' ability to pay. While management uses the best information available to make evaluations, future adjustments may be necessary if economic or other conditions differ substantially from the assumptions used. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Effective July 1, 1995, the Bank adopted Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan ("SFAS 114"), and Statement of Financial Accounting Standards No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures ("SFAS 118"). SFAS 114 requires that the carrying value of an impaired loan be based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral, if the loan is collateral dependent. Under SFAS 114, a loan is considered impaired when, based on current information, it is probable that the borrower will be unable to pay contractual interest or principal payments as scheduled in the loan agreement. SFAS 114 applies to all loans except one-to-four family residential mortgage loans and small balance homogeneous consumer loans that are collectively evaluated for impairment. The Bank does not currently have any loans which are considered to be impaired. Adoption of the new standard had no impact on the level of the overall allowance for loan losses or on operating results and does not affect the Bank's policies regarding write-offs, recoveries, or income recognition. d. Foreclosed Real Estate - Foreclosed real estate is recorded initially at the lower of the loan balance plus unpaid accrued interest or the estimated fair value of the property at the date of foreclosure, and subsequently reduced by additional allowances which are charged to earnings if the estimated fair value of the property declines below its initial value. Costs related to the improvement of the property are capitalized, whereas those related to holding the property are expensed. Such properties are held for sale and, accordingly, no depreciation or amortization expense is recognized. e. Premises and Equipment - Premises and equipment are stated at cost. Depreciation is computed by the straight-line method over the estimated useful lives of the various classes of assets. The cost of leasehold improvements is amortized by the straight-line method over the lesser of the lives of the improvements or the terms of the lease. Estimated useful lives are as follows: Office buildings and improvements 8 to 50 years Furniture, fixtures and equipment 3 to 10 years Motor vehicles 4 years f. Investment in Federal Home Loan Bank Stock - As a requirement for membership, the Bank invests in stock of the Federal Home Loan Bank of Atlanta ("FHLB"). This investment is carried at cost. g. Deferred Income Taxes - Deferred income taxes (benefits) are provided on temporary differences between the financial statement carrying values and the tax bases of assets and liabilities. h. Insurance of Accounts - Eligible savings accounts are insured up to $100,000 by the Savings Association Insurance Fund ("SAIF"), which is administered by the Federal Deposit Insurance Corporation ("FDIC"). i. Earnings Per Share - Effective July 1, 1997, First Savings adopted the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which establishes standards for computing and presenting earnings per share (EPS) data. SFAS 128 simplifies the standards for computing EPS previously found in APB Opinion No. 15, "Earnings Per Share," and makes them comparable to international EPS standards. Under SFAS 128, basic EPS replaces the former presentation of primary EPS. Also, a dual presentation of basic and diluted EPS is required on the face of the income statement for all entitites with complex capital structures, and a reconciliation must be provided of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. In accordance with SFAS 128, all prior period EPS data have been restated. Basic net income per share, or basic EPS, is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if First Savings' dilutive stock options were exercised. The numerator of the basic EPS computation is the same as the numerator of the diluted EPS computation for all periods presented. A reconciliation of the denominators of the basic and diluted EPS computations is as follows:
1998 1997 1996 --------------- ------------- -------------- Basic EPS denominator - weighted average number of common shares outstanding 3,698,197 3,706,704 3,744,000 Dilutive share effect arising from assumed exercise of stock options 323,757 263,602 249,070 --------- --------- --------- Diluted EPS denominator 4,021,954 3,970,306 3,993,070 ========= ========= =========
25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS j. Stock Options - Effective July 1, 1997, First Savings adopted Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), which requires either (i) the fair value of employee stock-based compensation plans be recorded as a component of compensation expense in the statement of income as of the date of grant of awards related to such plans or (ii) the impact of such fair value on net income and earnings per share be disclosed in a footnote to financial statements for awards granted after December 15, 1994, if the accounting for such awards continues to be in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Since the adoption of SFAS 123, First Savings has not granted any options. k. Cash Dividends - On June 18, 1998, First Savings declared a $.25 per share cash dividend to shareholders of record on June 30, 1998, payable on July 20, 1998. l. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly sensitive to significant change relate to the determination of the allowance for losses on loans and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. A majority of the Bank's loan portfolio consists of single-family residential loans in its market area. The regional economy is currently stable and consists of various types of industry. Real estate prices in this market are also stable; however, the ultimate collectibility of a substantial portion of the Bank's loan portfolio is susceptible to changes in local market conditions. While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowances for losses on loans and foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowances based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowances for losses on loans and foreclosed real estate may change materially in the near term. m. Reclassifications - Certain consolidated financial statement amounts for 1997 and 1996 have been reclassified to conform to the 1998 presentation. n. Recent Accounting Pronouncements: FASB STATEMENT ON REPORTING COMPREHENSIVE INCOME. In June 1997, the FASB issued SFAS No. 130. This Statement establishes standards of reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. In addition to net income as has been historically determined, comprehensive income for First Savings would include net unrealized holding gains and losses on investment securities available for sale. This Statement will be effective for First Savings' fiscal year ending June 30, 1999, and First Savings does not intend to early adopt. Had First Savings early adopted this Statement, it would have reported comprehensive income of $5,351,989, $4,190,087 and $3,446,327 for the years ended June 30, 1998, 1997 and 1996, respectively. FASB STATEMENT ON DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In July 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information. SFAS No. 131 requires disclosures for each segment that are similar to those required under current standards with the addition of quarterly disclosure requirements and a finer partitioning of geographic disclosures. It requires limited segment data on a quarterly basis. It also requires geographic data by country, as opposed to broader geographic regions as permitted under current standards. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997, with earlier application permitted. As First Savings has only one operating segment, adoption of SFAS No. 131 is not expected to have a significant impact on the consolidated financial statements. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FASB STATEMENT ON EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. SFAS No. 132 standardizes the disclosure requirements of pensions and other postretirement benefits. It does not change any measurement or recognition provisions, and thus will not materially impact First Savings. SFAS No. 132 is effective for fiscal years beginning after December 15, 1997. FASB Statement on Accounting for Derivative Instruments and Hedging Activities. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under this standard, entities are required to carry all derivative instruments in the statement of financial condition at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding it. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposure to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss are reported in earnings immediately. Accounting for foreign currency hedges is similar to accounting for fair value and cash flow hedges. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change. Management anticipates that this statement will have no effect on its consolidated financial statements. 2. SECURITIES THE CARRYING AMOUNTS AND FAIR VALUES OF FIRST SAVINGS' SECURITIES AT JUNE 30 ARE SUMMARIZED AS FOLLOWS:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------- ---------- ---------- ----------- Available for sale: June 30, 1998: U.S. government and agency securities $71,163,888 $556,735 $ 25,243 $71,695,380 N.C. state and municipal obligations 950,000 36,508 - 986,508 The Bankers Bank stock 50,074 - - 50,074 ----------- -------- -------- ----------- Total $72,163,962 $593,243 $ 25,243 $72,731,962 =========== ======== ======== =========== To be held to maturity: June 30, 1998: Mortgage-backed securities $ 9,737,212 $ 95,709 $ 11,461 $ 9,821,460 =========== ======== ======== =========== Available for sale: June 30, 1997: U.S. government and agency securities $78,880,744 $565,687 $164,068 $79,282,363 N.C. state and municipal obligations 950,000 24,681 - 974,681 ----------- -------- -------- ----------- Total $79,830,744 $590,368 $164,068 $80,257,044 =========== ======== ======== =========== To be held to maturity: June 30, 1997: Mortgage-backed securities $ 6,572,162 $ 99,934 $ - $ 6,672,096 =========== ======== ======== ===========
There were no sales of securities for the years ended June 30, 1998 and 1997. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THE SCHEDULED MATURITIES OF SECURITIES AT JUNE 30, 1998 ARE SUMMARIZED AS FOLLOWS:
SECURITIES SECURITIES TO BE AVAILABLE FOR SALE HELD TO MATURITY ------------------------ ---------------------- Amortized Fair AMORTIZED FAIR Cost VALUE COST VALUE ----------- ----------- ---------- ---------- Due in one year or less $26,129,635 $26,248,780 $ - $ - Due after one year through five years 21,094,168 21,454,574 - - Due after five years through ten years 13,940,159 14,013,915 - - Due after ten years 11,000,000 11,014,693 - - ----------- ----------- ---------- ---------- 72,163,962 72,731,962 - - Mortgage-backed securities - - 9,737,212 9,821,460 ----------- ----------- ---------- ---------- Total $72,163,962 $72,731,962 $9,737,212 $9,821,460 =========== =========== ========== ==========
Expected maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Available for sale securities with carrying and fair values of $6,091,450 and $7,246,579 at June 30, 1998 and 1997, respectively, were pledged to secure public monies on deposit as required by law. 3. LOANS RECEIVABLE THE LOAN PORTFOLIO AT JUNE 30 CONSISTS OF THE VARIOUS TYPES OF LOANS MADE PRINCIPALLY TO BORROWERS LOCATED IN MOORE COUNTY, NORTH CAROLINA, AND ARE CLASSIFIED BY MAJOR TYPE AS FOLLOWS:
1998 1997 ------------ ------------ Mortgage loans: First mortgage loans $201,000,679 $187,293,870 First mortgage loan participations 2,043,873 2,268,368 Property improvement loans - 2,239 Equity line loans 8,969,553 8,360,529 ------------ ------------ 212,014,105 197,925,006 Less: Loans in process 5,630,585 7,007,956 Net deferred loan fees 546,767 555,148 ------------ ------------ Total mortgage loans 205,836,753 190,361,902 Savings account loans 899,699 908,515 Installment loans 797,138 620,742 Credit card loans 1,156,686 950,637 ------------ ------------ Total mortgage and other loans 208,690,276 192,841,796 Less allowance for loan losses 595,815 604,187 ------------ ------------ Loans receivable, net $208,094,461 $192,237,609 ============ ============
28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At June 30, 1998, the Bank had mortgage loan commitments of approximately $12,798,000 and pre-approved but unused lines of credit totaling $16,875,000. In management's opinion, these commitments, and undisbursed proceeds on construction loans in process above, represent no more than normal lending risk to the Bank and will be funded from normal sources of liquidity. AT JUNE 30, 1998, THE COMPOSITION OF LOANS BY FIXED AND ADJUSTABLE RATES WAS AS FOLLOWS:
FIXED RATE ADJUSTABLE RATE ---------------------------------- ------------------------------- TERM TO BOOK VALUE TERM TO BOOK VALUE MATURITY (IN THOUSANDS) ADJUSTMENT (IN THOUSANDS) ------------ ------------------ -------------- --------------- 1 mo. - 1 yr. $ 350 1 mo. - 1 yr. $ 48,457 1 yr. - 3 yr. 1,649 1 yr. - 3 yr. 49,612 3 yr. - 5 yr. 3,268 3 yr. - 5 yr. 21,805 5 yr. - 10 yr. 12,356 5 yr. - 10 yr. 47,538 10 yr. and over 20,176 10 yr. and over 3,479 ------- -------- Total $37,799 Total $170,891 ======= ========
The adjustable rate mortgage loans have interest rate adjustment limitations and are generally indexed to the weekly average yield on United States Treasury securities adjusted to a constant maturity one-year, three-year, or five-year as made available by the Federal Reserve Board. Future market factors may affect the correlation of the interest rate adjustment with the rates the Bank pays on the short-term deposits that primarily have been utilized to fund these loans. The Bank, through its normal lending activity, originates and maintains loans which are substantially concentrated in Moore County, North Carolina. At June 30, 1998 and 1997, loans to directors and officers were approximately $800,520 and $776,000, respectively. Such loans are made on the same terms as those offered to other customers. The Bank's lending policy calls for collateral or other forms of repayment assurance to be received from the borrower at the time of loan origination. Such collateral or other form of repayment assurance is subject to changes in economic value due to various factors beyond the control of the Bank and such changes could be significant. The Bank is subject to numerous lending-related regulations. For example, the Bank may not make real estate loans to one borrower in excess of 15% of its unimpaired capital and surplus, except for loans not to exceed $500,000. This 15% limitation results in a dollar limitation of approximately $10,428,000 at June 30, 1998. The Bank was in compliance with the limitation as of June 30, 1998. CHANGES IN THE ALLOWANCE FOR LOAN LOSSES FOR THE YEARS ENDED JUNE 30 ARE SUMMARIZED AS FOLLOWS:
1998 1997 1996 ---------- ---------- --------- Balance at beginning of year $604,187 $608,739 $608,739 Provision for loan losses - - - Charge-offs (8,372) (4,552) - Recoveries - - - -------- -------- -------- Balance at end of year $595,815 $604,187 $608,739 ======== ======== ========
In conformity with SFAS 114, as amended by SFAS 118, none of the Bank's loans are considered to be impaired. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. ACCRUED INTEREST RECEIVABLE ACCRUED INTEREST RECEIVABLE AT JUNE 30 IS SUMMARIZED AS FOLLOWS:
1998 1997 ---------- ---------- Loans receivable $ 410,978 $ 145,185 Mortgage-backed securities 76,316 80,503 Securities 1,225,434 1,575,903 Other 36,081 34,878 ---------- ---------- Total $1,748,809 $1,836,469 ========== ==========
5. PREMISES AND EQUIPMENT PREMISES AND EQUIPMENT AT JUNE 30, WHICH ARE STATED AT COST, ARE SUMMARIZED AS FOLLOWS:
1998 1997 ---------- ---------- Land $ 379,306 $ 379,306 Office buildings and improvements 2,269,486 2,233,113 Furniture, fixtures and equipment 660,643 645,140 Motor vehicles 37,856 39,838 ---------- ---------- Total 3,347,291 3,297,397 Less allowance for depreciation 1,411,364 1,329,707 ---------- ---------- Premises and equipment, net $1,935,927 $1,967,690 ========== ==========
6. DEPOSITS Deposits at June 30 are summarized as follows:
1998 1997 ------------ ------------ NOW accounts $ 23,429,916 $ 19,776,505 Money market deposits 42,567,590 41,668,099 Passbook savings 14,035,680 13,070,907 Certificates of deposit 131,891,746 129,801,263 ------------ ------------ Total $211,924,932 $204,316,774 ============ ============
The aggregate amounts of certificates of deposit with a minimum denomination of $100,000 were approximately $28,915,000 and $25,465,000 in 1998 and 1997, respectively. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AT JUNE 30, 1998, THE SCHEDULED MATURITIES OF CERTIFICATES OF DEPOSIT ARE AS FOLLOWS: (In thousands) 1999 $ 96,633 2000 24,945 2001 and thereafter 10,314 -------- $131,892 ======== Included in deposits are non-interest-bearing balances totaling $4,028,120 and $1,556,535 as of June 30, 1998 and 1997, respectively. 7. BORROWED FUNDS Borrowed funds at June 30, 1998 and 1997 consist of advances from the Federal Home Loan Bank (FHLB). These advances, with weighted average rates, are as follows: 6.25% due on or before June 30, 1999 $20,000,000 =========== The above advances have been made against a $52.0 million line of credit secured by a blanket floating lien on the Bank's one-to-four family residential mortgage loans. 8. INTEREST RATE RISK First Savings is engaged principally in providing first mortgage loans to individuals and commercial enterprises. At June 30, 1998, First Savings' interest-earning assets consisted of assets that earn interest at both fixed and adjustable rates. Those assets were funded primarily with short-term liabilities that have interest rates that vary with market rates over time. At June 30, 1998, First Savings had interest-earning assets of $296,511,768 having a weighted-average effective yield of 7.67% and interest-bearing liabilities of $216,114,359 having a weighted-average effective interest rate of 4.82%. 9. SPECIAL SAIF ASSESSMENT On September 30, 1996, the Deposit Insurance Funds Act of 1996 was signed into law. The legislation included a special assessment to recapitalize the SAIF insurance fund up to its statutory goal of 1.25% of insured funds. The assessment required the Bank to pay an amount equal to 65.7 basis points of its SAIF-assessable deposit base as of March 31, 1995, which resulted in a charge to income during the year ended June 30, 1997 of $1.2 million. 10. INCOME TAXES First Savings uses the asset and liability method to account for income taxes. Under the asset and liability method, deferred income taxes are recognized for the tax consequences of "temporary differences," by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. THE COMPONENTS OF INCOME TAX EXPENSE FOR THE YEARS ENDED JUNE 30 ARE SUMMARIZED AS FOLLOWS:
1998 1997 1996 ---------- ----------- ----------- Current tax provision $3,048,000 $2,162,000 $2,103,600 Deferred tax provision 12,000 (7,000) (18,600) ---------- ---------- ---------- Total $3,060,000 $2,155,000 $2,085,000 ========== ========== ==========
31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A RECONCILIATION OF INCOME TAXES COMPUTED FOR THE YEARS ENDED JUNE 30 AT THE STATUTORY FEDERAL INCOME TAX RATE (34%) TO THE PROVISION FOR INCOME TAXES IS AS FOLLOWS:
1998 1997 1996 ----------- ----------- ----------- Income taxes at the statutory federal rate $2,828,279 $2,061,642 $2,041,957 Increases (decreases) resulting from: Tax exempt interest - net (15,036) (10,833) (29,091) State income taxes - net of federal benefit 235,702 101,319 70,150 Other, net 11,055 2,872 1,984 ---------- ---------- ---------- Income tax expense $3,060,000 $2,155,000 $2,085,000 ========== ========== ==========
Deferred taxes arising from each type of temporary difference at June 30 are summarized as follows:
1998 1997 ---------- ---------- Deferred tax assets: Loan fees and costs $ 213,870 $ 218,176 ---------- ---------- Deferred tax liabilities: Federal Home Loan Bank stock dividends 329,029 329,029 Depreciation 230,357 222,663 Bad debt reserve 289,980 289,980 Unrealized gain on securities available for sale 193,120 144,942 ---------- ---------- Total 1,042,486 986,614 ---------- ---------- Net deferred tax liability $ 828,616 $ 768,438 ========== ==========
Retained earnings at June 30, 1998 includes approximately $5,300,000 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions for income tax purposes only. Reductions of the amount so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which would be subject to the then current corporate income tax rate. During 1996, Congress enacted certain tax legislation that exempted thrift institutions from being taxed on these pre-1987 bad debt reserves. Further, the use of the reserve method is now required for all thrifts. The Bank will be recapturing $1,300,000 of its tax bad debt reserve created subsequent to 1986 by using the percentage of taxable income method, requiring payment of additional income taxes of approximately $500,000. Deferred income taxes have been previously established for the taxes arising from the reserve recapture, and thus the ultimate payment of the taxes will not result in a charge to earnings. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. REGULATORY RESTRICTIONS Federal banking regulations require that bank holding companies and their bank subsidiaries meet various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on First Savings' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Savings must meet specific capital guidelines that involve quantitative measures of First Savings' assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. First Savings' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require First Savings to maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. As of December 31, 1997, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the category. REGULATORY CAPITAL AMOUNTS AND RATIOS FOR FIRST SAVINGS AND THE BANK ARE PRESENTED IN THE TABLE BELOW:
FOR CAPITAL ACTUAL ADEQUACY PURPOSES ------------------- -------------------------------- AMOUNT RATIO AMOUNT RATIO ----------- ------ ----------- --------- AS OF JUNE 30, 1998: Total Capital (to Risk Weighted Assets): Consolidated $69,742,140 48.67% $11,464,080 greater than or Equal to 8.0% First Savings Bank of Moore Co., Inc., SSB $54,933,352 38.34% $11,461,920 greater than or Equal to 8.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated $69,146,325 48.25% $ 5,732,040 greater than or Equal to 4.0% First Savings Bank of Moore Co., Inc., SSB $54,337,537 37.93% $ 5,730,960 greater than or Equal to 4.0% Tier 1 Capital (to Average Assets): Consolidated $69,146,325 23.05% $11,997,160 greater than or Equal to 4.0% First Savings Bank of Moore Co., Inc., SSB $54,337,537 18.67% $11,641,120 greater than or Equal to 4.0% As of June 30, 1997: Total Capital (to Risk Weighted Assets): Consolidated $67,517,761 52.15% $10,358,080 greater than or Equal to 8.0% First Savings Bank of Moore Co., Inc., SSB $49,692,461 38.38% $10,356,880 greater than or Equal to 8.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated $66,913,574 51.68% $ 5,179,040 greater than or Equal to 4.0% First Savings Bank of Moore Co., Inc., SSB $49,088,274 37.92% $ 5,178,440 greater than or Equal to 4.0% Tier 1 Capital (to Average Assets): Consolidated $66,913,574 24.71% $10,927,600 greater than or Equal to 4.0% First Savings Bank of Moore Co., Inc., SSB $49,088,274 19.08% $10,290,120 greater than or Equal to 4.0% TO BE WELL Capitalized Under Prompt Corrective ACTION PROVISIONS ------------------- AMOUNT RATIO ----------- ------ AS OF JUNE 30, 1998: Total Capital (to Risk Weighted Assets): Consolidated N/A N/A First Savings Bank of Moore Co., Inc., SSB $14,327,400 greater than or Equal to 10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated N/A N/A First Savings Bank of Moore Co., Inc., SSB $ 8,596,440 greater than or Equal to 6.0% Tier 1 Capital (to Average Assets): Consolidated N/A N/A First Savings Bank of Moore Co., Inc., SSB $14,551,400 greater than or Equal to 5.0% As of June 30, 1997: Total Capital (to Risk Weighted Assets): Consolidated N/A N/A First Savings Bank of Moore Co., Inc., SSB $12,946,100 greater than or Equal to 10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated N/A N/A First Savings Bank of Moore Co., Inc., SSB $ 7,767,660 greater than or Equal to 6.0% Tier 1 Capital (to Average Assets): Consolidated N/A N/A First Savings Bank of Moore Co., Inc., SSB $12,862,650 greater than or Equal to 5.0%
33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In addition federal regulatory requirements, the Bank is subject to a North Carolina savings bank capital requirement of at least 5% of total assets. At June 30, 1998 and 1997, the Bank's capital ratio under the North Carolina requirement was 18.74% and 17.54%, respectively. At June 30, 1998 and 1997, First Savings and the Bank exceeded all capital First Savings is also subject to limits on dividend payments. First Savings is prohibited under the North Carolina Business Corporation Act, from paying a dividend if such payment would (i) cause First Savings to be unable to pay its debts as they become due in the ordinary course of business or (ii) reduce First Savings' total assets below the sum of First Savings' total liabilities plus any amounts which would be needed, if First Savings were to be dissolved at the time of distribution, to satisfy the preferential rights that are superior to holders of the Common Stock. Payment of dividends by the Bank subsidiary to the holding company is subject to various restrictions. Under applicable banking regulations, the Bank may not declare a cash dividend if the effect thereof would be to reduce its net worth to an amount less than the minimum required by federal and state banking regulations. In addition, for a period of five years after the consummation of the Bank's stock conversion, which occurred on January 6, 1994, the Bank will be required to obtain prior written approval from the Administrator of the Savings Institutions Division, North Carolina Department of Commerce, before it can declare a cash dividend in an amount in excess of one-half the greater of (i) its net income for the most recent fiscal year or (ii) the average of its net income after dividends for the most recent fiscal year and not more than two of the immediately preceding fiscal years, as applicable, or repurchase any of its common stock. A source of First Savings' funds are dividends received from the Bank. In fiscal 1999, the amount of dividends that can be paid without prior approval from regulators is approximately $2.0 million. These funds should be adequate to cover First Savings' needs. During the year ended June 30, 1997, First Savings repurchased and retired 76,500 shares of its common stock in accordance with a stock repurchase plan. At June 30, 1998, First Savings' Board has authorized the purchase of 297,900 additional shares under the plan. 12. COMPENSATION PLANS First Savings maintains an employee profit sharing plan covering all eligible employees. Contributions to the plan for the years ended June 30, 1998, 1997 and 1996 were $112,910, $97,539 and $93,402, respectively. Upon the Bank's conversion to stock form, the First Savings Bank of Moore County, Inc., SSB Employee Stock Ownership Plan ("ESOP") became effective. As part of the conversion, the ESOP borrowed $648,000 and the Bank contributed $72,000 in order to purchase 72,000 shares at $10 per share of common stock issued in the conversion. (See Note 7.) The ESOP note payable is to be paid over a period not to exceed ten years, principally from the Bank's discretionary contributions to the ESOP. Dividends paid on shares held by the ESOP may also be used to reduce the note. ESOP expense of $314,602, $244,375 and $220,873, has been incurred during the years ended June 30, 1998, 1997 and 1996, respectively, including $179,402, $115,925, and $99,945, respectively, which represents the difference between the fair market value of the shares which have been released or committed to be released to participants and the cost of these shares to the ESOP. These amounts have been credited to common stock and charged to compensation expense in accordance with the provisions of AICPA Statement of Position 93- 6. First Savings has also adopted an Employee Stock Option Plan ("Employee Plan") for officers and a Nonqualified Stock Option Plan for Directors (the "Directors Plan") for nonemployee directors. The options have an original term of ten years. The option exercise price is the market price of the common stock on the date the option is granted. During the year ended June 30, 1994, 270,000 and 360,000 options were granted under the Employee Plan and Directors Plan, respectively, at an exercise price of $10 per share. Under both plans, participants may exercise options by exchanging, at fair value, shares of common stock which they already own. At June 30, 1998, options for 90,000 shares of common stock were reserved for future issuance for the Employee Plan. As of June 30, 1998, 61,714 options have been exercised under the Employee Plan. No options had been exercised under the Directors' Plan as of June 30, 1998. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. LEASES Rentals under a long-term operating lease for First Savings' branch office building in Pinehurst totaled $9,000 for each of the years ended June 30, 1998, 1997 and 1996. The lease, which has a term of 15 years, contains an escalation provision for a $100 per month increase at the end of five and ten years. AT JUNE 30, 1998, THE MINIMUM RENTAL COMMITMENTS REQUIRED UNDER THIS NONCANCELABLE LEASE ARE AS FOLLOWS: Year Ending 1999 $10,200 2000 10,200 2001 10,200 2002 10,200 2003 7,650 ------- Total $48,450 ======= 14. CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK The Bank generally originates single-family residential loans within its primary lending area of Moore County. The Bank's underwriting policies require such loans to be made at no greater than 80% loan-to-value based upon appraised values unless private mortgage insurance is obtained. These loans are secured by the underlying properties. The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to fund loans, standby letters of credit and lines of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statements of financial condition. The contract or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. A summary of the contract amount of the Bank's exposure to off-balance sheet risk as of June 30, 1998 is as follows: Financial instruments whose contract amounts represent credit risk: Commitments to extend credit, mortgage loans $ 7,167,000 Undisbursed construction loans 5,631,000 Undisbursed lines of credit 16,875,000 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, Disclosures About Fair Value of Financial Instruments. The estimated fair value amounts have been determined by First Savings using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts First Savings could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate that value. Cash and Due From Banks and Interest-Earning Deposits With Banks ---------------------------------------------------------------- The carrying amounts for cash and interest-earning deposits with banks approximate fair value because of the short maturities of those instruments. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Securities and Mortgage-Backed Securities ----------------------------------------- For securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans Receivable ---------------- For mortgage loans receivable, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits -------- The fair value of NOW accounts, savings accounts, and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Borrowed Funds -------------- The fair value of borrowed funds is based upon the discounted value using current rates at which borrowings of similar maturity could be obtained. THE ESTIMATED FAIR VALUES OF THE BANK'S FINANCIAL INSTRUMENTS AT JUNE 30 ARE AS FOLLOWS:
1998 1997 -------------------------- -------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------ ------------ ------------ Financial assets: Cash and due from banks and $ 7,816,308 $ 7,816,308 $ 9,102,219 $ 9,102,219 interest-earning deposits Securities 84,398,774 84,483,022 88,758,806 88,858,740 Loans receivable 208,094,461 209,610,186 192,237,609 195,970,477 ------------ ------------ ------------ ------------ $300,309,543 $301,909,516 $290,098,634 $293,931,436 ============ ============ ============ ============ Financial liabilities: Deposits $211,924,932 $210,824,998 $204,316,774 $203,716,128 Borrowed funds 20,000,000 19,975,856 20,000,000 19,994,635 ------------ ------------ ------------ ------------ $231,924,932 $230,800,854 $224,316,774 $223,710,763 ============ ============ ============ ============
The fair value estimates presented herein are based on pertinent information available to management at June 30, 1998 and 1997, respectively. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been significantly revalued for purposes of these financial statements since that date and, therefore, current estimates of fair value may differ significantly from the amounts presented herein. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. QUARTERLY FINANCIAL DATA (UNAUDITED) QUARTERLY OPERATING DATA FOR THE YEARS ENDED JUNE 30 IS SUMMARIZED AS FOLLOWS:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ---------- ---------- ---------- ---------- (In thousands, except per share) 1998 Total interest and dividend income $ 5,597 $ 5,664 $ 5,661 $ 5,621 Total interest expense 2,793 2,817 2,752 2,721 ---------- ---------- ---------- ---------- Net interest income 2,804 2,847 2,909 2,900 Provision for loan losses - - - - ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 2,804 2,847 2,909 2,900 Other expense, net 784 790 757 811 ---------- ---------- ---------- ---------- Income before income taxes 2,020 2,057 2,152 2,089 Income tax expense 744 759 798 759 ---------- ---------- ---------- ---------- Net income $ 1,276 $ 1,298 $ 1,354 $ 1,330 ========== ========== ========== ========== NET INCOME PER COMMON SHARE Basic $ 0.35 $ 0.35 $ 0.36 $ 0.36 Diluted $ 0.32 $ 0.32 $ 0.34 $ 0.33 AVERAGE COMMON SHARES OUTSTANDING Basic 3,682,500 3,674,737 3,704,823 3,710,490 Diluted 3,984,737 4,016,668 4,035,403 4,028,537 1997 Total interest and dividend income $ 4,796 $ 4,863 $ 4,953 $ 5,446 Total interest expense 2,311 $ 2,369 2,377 2,725 ---------- ---------- ---------- ---------- Net interest income 2,485 2,494 2,576 2,721 Provision for loan losses - - - - ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 2,485 2,494 2,576 2,721 Other expense, net 2,010 * 737 756 709 ---------- ---------- ---------- ---------- Income before income taxes 475 1,757 1,820 2,012 Income tax expense 173 586 656 740 ---------- ---------- ---------- ---------- Net income $ 302 $ 1,171 $ 1,164 $ 1,272 ========== ========== ========== ========== Net income per common share Basic $ 0.08 $ 0.32 $ 0.32 $ 0.35 Diluted $ 0.08 $ 0.30 $ 0.29 $ 0.32 Average common shares outstanding Basic 3,744,000 3,703,176 3,692,481 3,686,789 Diluted 3,974,368 3,948,720 3,961,840 3,976,525
* Includes nonrecurring charge associated with the SAIF assessment. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. PARENT COMPANY FINANCIAL INFORMATION Condensed financial information of First Savings Bancorp, Inc., the parent company, at June 30, 1998 and 1997 and for the years ended June 30, 1998 and 1997 is presented below:
1998 1997 ----------- ----------- ASSETS Interest-earning deposits with subsidiary $ 3,841,153 $ 7,481,196 Securities at market value 10,126,516 10,246,855 Investment in subsidiary 54,675,457 49,322,904 Other assets 1,825,074 653,180 ----------- ----------- Total assets $70,468,200 $67,704,135 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Accrued expenses and other liabilities $ 946,995 $ 509,203 Shareholders' equity 69,521,205 67,194,932 ----------- ----------- Total liabilities and shareholders' equity $70,468,200 $67,704,135 =========== =========== CONDENSED STATEMENTS OF INCOME Interest on securities $ 670,874 $ 670,595 Earnings of subsidiary 4,934,659 3,538,555 ----------- ----------- 5,605,533 4,209,150 Other expenses 175,066 108,497 ----------- ----------- Income before income tax 5,430,467 4,100,653 Income tax expense 172,000 192,000 ----------- ----------- Net income $ 5,258,467 $ 3,908,653 =========== ===========
For the year ended June 30, 1998, the Bank subsidiary did not pay cash dividends to the parent. 38 DIRECTORS, OFFICERS AND OFFICE LOCATIONS FIRST SAVINGS BANCORP, INC. BOARD OF DIRECTORS J. E. CAUSEY, Chairman of the Board Causey Construction & Realty
WILLIAM E. SAMUELS, President JOHN F. BURNS, Secretary Chief Executive Officer Executive Vice President First Savings Bank of Moore County, Inc., SSB First Savings Bank of Moore County, Inc., SSB JOE MONTESANTI, JR. H. A. CLAYTON Retired Pharmacist Retired Merchant H. DAVID BRUTON, M.D. Secretary of North Carolina Department THOMAS F. PHILLIPS of Health and Human Services Owner of Phillips Motor Company DR. W. HARRELL JOHNSON FRANK G. HARDISTER Retired Dentist President of Powell Funeral Home VIRGINIA C. BRANDT FELTON J. CAPEL Certified Public Accountant Owner of Century Associates of North Carolina Holden, Brandt, & Longfellow, P.C. FIRST SAVINGS BANK STAFF SOUTHERN PINES OFFICE PINEHURST OFFICE William E. Samuels, President Doris B. Andrews, Vice President John F. Burns, Executive Vice President Teresa T. Cole, Assistant Vice President and Secretary Lynette F. Williams, Assistant Vice President Nancy L. Howle Deborah H. Williams Vice Presidents S. Allan Beck Michael F. McMillan CARTHAGE OFFICE Timothy S. Maples Donna B. Morgan Patricia W. Jackson, Vice President Sherry B. Yow Patsy M. Salmon Carol M. Williams Assistant Vice Presidents SEVEN LAKES OFFICE Carol F. Allred Margaret V. Hightower Kim Y. Bailey, Vice President Sandra G. Blake Wanda M. Ring Sherry S. Blake Joel H. Salmon Shirley M. Puckett Sharon W. Styers Paula M. Taggart Staff Tammy O. Barnett Marian E. Lauffer PINECREST PLAZA OFFICE Shelia C. Brown Caroline M. Lemmond Dianna B. Bullard Betty K. Lomax William A. Roberts, Vice President Kimberly O. Hedrick Angel J. McKeithan Patsy M. McDonald, Assistant Vice President Derinda F. Hobson Audra W. McLean Susanna C. Hunley Betty S. Kramer Barbara W. Ussery Martha M. Lunday Pamela C. Wase Amanda L. VandeReit
39 CORPORATE INFORMATION
CORPORATE HEADQUARTERS INDEPENDENT ACCOUNTANTS First Savings Bancorp, Inc. Dixon Odom pllc 205 SE Broad Street, Post Office Box 1657 6 Tunberry Wood Southern Pines, North Carolina 28388 Post Office Box 1655 (910) 692-6222 Southern Pines, North Carolina 28387 SPECIAL COUNSEL FORM 10-K Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P. COPIES OF THE FIRST SAVINGS BANCORP, INC. FORM 10-K 230 North Elm Street MAY BE OBTAINED BY SHAREHOLDERS WITHOUT CHARGE BY Post Office Box 26000 WRITING TO MARGARET V. HIGHTOWER AT THE CORPORATE Greensboro, North Carolina 27420 HEADQUARTERS ADDRESS. TRANSFER AGENT ADDITIONAL INFORMATION Wachovia Bank of North Carolina, N.A. For additional information, please contact Corporate Trust Department, Post Office Box 3001 John F. Burns, Timothy S. Maples, or Winston-Salem, North Carolina 27102 William E. Samuels at 1-800-633-4236 (910) 692-6222. ANNUAL MEETING The 1998 Annual Meeting of Shareholders of First Savings Bancorp, Inc. will be held at the Holiday Inn, US#1, Southern Pines, NC on October 29, 1998 at 10:00 a.m. All shareholders are cordially invited to attend.
CAPITAL STOCK First Savings' common stock is traded on the NASDAQ National Market System under the symbol "SOPN." As of June 30, 1998, there were 3,710,820 shares outstanding and 1,016 shareholders of record, not including the number of persons or entities whose stock is held in nominee or street name through various brokerage firms or banks. Payment of dividends by the Bank subsidiary to the holding company is subject to various restrictions. Under applicable banking regulations, the Bank may not declare a cash dividend if the effect thereof would be to reduce its net worth to an amount less than the minimum required by federal and state banking regulations. In addition, for a period of five years after the consummation of the Bank's stock conversion, which occurred on January 6, 1994, the Bank will be required to obtain prior written approval from the Administrator of the Savings Institutions Division, North Carolina Department of Commerce, before it can declare a cash dividend in an amount in excess of one- half the greater of (i) its net income for the most recent fiscal year or (ii) the average of its net income after dividends for the most recent fiscal year and not more than two of the immediately preceding fiscal years, as applicable. QUARTERLY COMMON STOCK PERFORMANCE AND DIVIDENDS DECLARED
Dividends Stock Price DECLARED, PER SHARE --------------------------- ---------------------------- High LOW REGULAR SPECIAL ----------- ---------- ------------ ----------- For the Year Ended June 30, 1998: First Quarter Ending September 30 $ 23.88 $ 20.00 $ 0.22 N/A Second Quarter Ending December 31 $ 25.50 $ 22.00 $ 0.22 N/A Third Quarter Ending March 31 $ 26.00 $ 22.19 $ 0.25 N/A Fourth Quarter Ending June 30 $ 25.75 $ 22.25 $ 0.25 N/A For the Year Ended June 30, 1997: First Quarter Ending September 30 $ 18.81 $ 16.75 $ 0.17 N/A Second Quarter Ending December 31 $ 19.00 $ 17.25 $ 0.17 N/A Third Quarter Ending March 31 $ 20.25 $ 17.88 $ 0.20 N/A Fourth Quarter Ending June 30 $ 24.50 $ 19.38 $ 0.20 N/A
THIS ANNUAL REPORT HAS NOT BEEN REVIEWED OR CONFIRMED FOR ACCURACY OR RELEVANCE BY THE FEDERAL DEPOSIT INSURANCE CORPORATION. 40 EX-27 5 FINANCIAL DATA SCHEDULE
9 1,000 YEAR JUN-30-1998 JUL-01-1997 JUN-30-1998 3,826 3,991 0 0 72,732 9,737 9,821 208,690 596 304,168 211,925 20,000 2,722 0 0 0 35,537 33,984 304,168 16,262 5,890 391 22,543 9,965 11,083 11,460 0 0 3,758 8,318 8,318 0 0 5,258 1.42 1.30 3.92 545 0 0 0 604 8 0 596 207 0 389
EX-27.1 6 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS 9-MOS JUN-30-1996 JUN-30-1996 JAN-01-1996 JUL-01-1995 MAR-31-1996 MAR-31-1996 2,457 2,457 792 792 0 0 0 0 73,914 73,914 3,546 3,546 3,632 3,632 172,496 172,496 609 609 256,294 256,294 186,492 186,492 433 433 2,191 2,191 0 0 0 0 0 0 36,426 36,426 30,752 30,752 256,294 256,294 3,377 9,934 1,248 3,831 20 111 4,645 13,876 2,257 6,914 2,283 6,956 2,362 6,920 0 0 0 0 960 2,751 1,502 4,435 1,502 4,435 0 0 0 0 980 2,902 0.26 0.73 0.25 0.73 3.81 3.73 77 77 0 0 0 0 0 0 609 609 0 0 0 0 609 609 609 609 0 0 479 479
EX-27.2 7 FINANCIAL DATA SCHEDULE
9 1,000 YEAR JUN-30-1996 JUL-01-1995 JUN-30-1996 4,005 713 0 0 69,999 2,965 3,016 178,040 609 256,986 187,424 422 2,329 0 0 0 36,452 30,359 256,986 13,406 4,983 161 18,550 9,165 9,215 9,335 0 0 3,693 6,006 6,006 0 0 3,921 1.05 0.98 3.74 134 0 0 0 609 0 0 609 609 0 452
EX-27.3 8 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS JUN-30-1997 JUL-01-1996 SEP-30-1996 3,248 4,669 0 0 66,894 2,700 2,719 183,012 609 263,203 192,390 404 3,395 0 0 0 36,476 30,538 263,203 3,637 1,106 52 4,795 2,304 2,310 2,485 0 0 2,105 474 474 0 0 301 .08 .08 3.98 271 0 0 0 609 0 0 609 609 0 444
EX-27.4 9 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS 6-MOS JUN-30-1997 JUN-30-1997 OCT-01-1996 JUL-01-1996 DEC-31-1996 DEC-31-1996 7,025 7,025 7,106 7,106 0 0 0 0 61,534 61,534 1,548 1,548 1,626 1,626 185,209 185,209 609 609 265,888 265,888 196,699 196,699 392 392 2,299 2,299 0 0 0 0 0 0 35,530 35,530 30,968 30,968 265,888 265,888 3,706 7,343 1,045 2,151 113 165 4,864 9,659 2,364 4,667 2,370 4,679 2,494 4,980 0 0 0 0 832 2,938 1,757 2,231 1,757 2,231 0 0 0 0 1,171 1,472 0.32 0.40 0.30 0.37 3.96 3.97 222 222 21 21 0 0 222 222 609 609 0 0 0 0 609 609 165 165 0 0 444 444
EX-27.5 10 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS 9-MOS JUN-30-1997 JUN-30-1997 JAN-01-1997 JUL-01-1996 MAR-31-1997 MAR-31-1997 1,607 1,607 13,678 13,678 0 0 0 0 57,944 57,944 6,788 6,788 6,796 6,796 187,714 187,714 604 604 271,121 271,121 202,335 202,335 0 0 2,076 2,076 0 0 0 0 0 0 35,593 35,593 31,117 31,117 271,121 271,121 3,750 11,092 1,055 3,213 143 307 4,948 14,612 2,377 7,044 2,377 7,057 2,571 7,555 0 0 0 0 857 3,794 1,815 4,051 1,815 4,051 0 0 0 0 1,159 2,636 0.31 0.71 0.29 0.66 3.88 3.94 220 220 0 0 0 0 0 0 609 609 5 5 0 0 604 604 165 165 0 0 439 439
EX-27.6 11 FINANCIAL DATA SCHEDULE
9 YEAR JUN-30-1997 JUL-01-1996 JUN-30-1997 2,801,422 6,300,797 0 0 82,186,644 6,300,797 6,672,096 192,841,796 604,187 294,216,748 204,316,774 15,000,000 2,705,042 5,000,000 0 0 35,236,973 31,957,959 294,216,748 14,954,452 4,654,727 449,184 20,058,363 9,496,129 9,782,409 10,275,954 0 0 4,637,459 6,063,653 6,063,653 0 0 3,908,653 1.05 0.98 3.88 250,000 0 0 0 608,739 4,552 0 604,187 171,277 0 433,133
EX-27.7 12 FINANCIAL DATA SCHEDULE
9 1,000 3-MOS JUN-30-1998 JUL-01-1997 SEP-30-1997 2,791 6,995 0 0 78,853 6,394 6,453 195,684 604 295,315 206,438 8,000 2,928 10,000 0 0 35,344 32,605 295,315 3,947 1,542 108 5,597 2,488 2,793 2,804 0 0 907 2,020 2,020 0 0 1,276 0.35 0.32 3.85 861 0 0 861 604 0 0 604 203 0 401
-----END PRIVACY-ENHANCED MESSAGE-----