<PAGE>
 
________________________________________________________________________________
               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                             ______________________

                                  FORM 10-KSB
(Mark One)
[ X ]     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
          FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

[   ]     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
          FOR THE TRANSITION PERIOD FROM _______________________ to ___________


COMMISSION FILE NUMBER     0-26730
                       ---------------------------------------------------------
 
                         FIRST SAVINGS FINANCIAL CORP.
                 (Name of small business issuer in its charter)


             NORTH CAROLINA                              56-1928110
      ------------------------------                     ----------
      (State or other jurisdiction of       (I.R.S. Employer Identification No.)
      incorporation or organization)

501 SOUTH MAIN STREET, POST OFFICE BOX 1885
      REIDSVILLE, NORTH CAROLINA                                 27323-1885
---------------------------------------------                    ----------
 (Address of principal executive offices)                        (Zip Code)


                                (910) 342-4251
                        ------------------------------
                          (Issuer's telephone number)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                          COMMON STOCK, NO PAR VALUE
                   ------------------------------------------               
                               (Title of class)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes    X    No  _____
     -----           

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.            [X]

State issuer's revenues for its most recent fiscal year   $3,842,910
                                                         ------------

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days.

Common Stock, no par value -- $7,182,208 (based on the price at which the stock
was sold on February 21, 1997 of $11.00 per share).

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.


      COMMON STOCK, NO PAR VALUE                           986,321
      ----------------------------              ------------------------------
              (Class)                           (Outstanding at March 1, 1997)


                      DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
1996 (the "1996 Annual Report"), are incorporated by reference into Part I and
Part II.
Portions of the Proxy Statement for the Annual Meeting of Stockholders on April
16, 1997 (the "Proxy Statement"), are incorporated by reference into Part III.

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):  Yes  _____  No  X
                                                                           ---
________________________________________________________________________________
<PAGE>
 
                                     PART I

ITEM 1.   DESCRIPTION OF BUSINESS

GENERAL

     Prior to September 22, 1995, First Savings Bank of Rockingham County, Inc.,
SSB (the "Bank") operated as a mutual North Carolina-chartered savings bank.  On
September 22, 1995, the Bank converted from a North Carolina-chartered mutual
savings bank to a North Carolina-chartered stock savings bank (the
"Conversion").  In connection with the Conversion, all of the issued and
outstanding capital stock of the Bank was acquired by First Savings Financial
Corp., a North Carolina corporation (the "Company") which was organized to
become the Bank's holding company.  At that time, the Company had an initial
public offering of its common stock, no par value (the "Common Stock").

     The Company is a savings bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Company Act of 1956, as amended (the "BHCA") and the savings bank
holding company laws of North Carolina.  The Company's office is located at 501
South Main Street, Reidsville, North Carolina.  The Company's activities consist
of investing the proceeds of its initial public offering which were retained at
the holding company level and owning the Bank.  The Company's principal sources
of income are earnings on its investments.  In addition, the Company will
receive any dividends which are declared and paid by the Bank on its capital
stock.

     The Bank was chartered by the State of North Carolina as Rockingham
Building and Loan Association in 1915.  It has been a member of the Federal Home
Loan Bank ("FHLB") since 1933 and its accounts have been federally insured up to
allowable limits since 1938.  In 1940, the institution converted to a federal
savings and loan association charter and changed its name to First Federal
Savings and Loan Association of Reidsville.  In 1990, First Federal converted to
a federal savings bank charter and changed its name to First Federal Savings
Bank of Reidsville.  In 1992, First Federal converted to a North Carolina
savings bank charter and changed its name to First Savings Bank of Rockingham
County, S.S.B.

     The Bank is primarily engaged in soliciting deposit accounts from the
general public, making mortgage loans to finance the acquisition and
construction of residential dwellings and making limited types of consumer
loans.  The Bank conducts its business through its office at 501 South Main
Street, Reidsville, North Carolina.

     The operations of the Bank and depository institutions in general are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of depository institution regulatory agencies, including the
Federal Reserve, the Federal Deposit Insurance Corporation (the "FDIC") and the
North Carolina Administrator, Savings Institutions Division, North Carolina
Department of Commerce (the "Administrator"). Deposit flows and cost of funds
are influenced by interest rates on competing investments and general market
rates of interest.  Lending activities are affected by the demand for financing
of real estate and other types of loans, which in turn are affected by the
interest rates at which such financing may be offered and other factors
affecting local demand and availability of funds.

     The business of the Company parallels that of the Bank and is discussed
hereafter interchangeably.

PRIMARY MARKET AREA

     The Bank's primary market area includes Rockingham County, North Carolina.
This market area is located approximately 20 miles north of Greensboro, North
Carolina and 20 miles south of Danville, Virginia. Employment is spread among
manufacturing, agriculture and other non-manufacturing activities.  Tobacco is
the primary crop produced in the Bank's market area and the Rockingham County
economy has been closely tied 

                                       2
<PAGE>
 
to the tobacco industry in the past. Major employers in Rockingham County
include Reynolds Aluminum Company (beer can manufacturer), Miller Brewery (beer
brewery), Sara Lee Knit Products (apparel manufacturer), Pluma, Inc. (apparel
manufacturer), Burlington Industries (textile manufacturer), Fieldcrest Mills
(textile manufacturer), and Unifi, Inc. (textile manufacturer). Consistent with
the Bank's emphasis on being a community-oriented financial institution,
management estimates that, as of December 31, 1996, the vast majority of the
Bank's deposits were held by customers in its primary market area.

     The Rockingham County economy, because it is manufacturing dependent, is
more susceptible to economic downturns than more diversified markets.
Rockingham County's unemployment rates for several years have been higher than
the state average, with unemployment rates of 7.4%, 7.1%, 6.7%, 7.1% and 4.6%
for 1991, 1992, 1993, 1994 and 1995, respectively, as compared to statewide
unemployment rates of 5.5%, 5.9%, 6.3%, 4.4% and 4.3% for 1991, 1992, 1993, 1994
and 1995, respectively.

     In recent periods, Reidsville and Rockingham County have experienced
declining populations.  This decline in population is predicted to continue into
the year 2000 and beyond.  However, several new small and medium sized
manufacturing and wholesale/retail businesses have moved, or have announced
plans to move, to the Bank's market area in the last 24 months.

     The Bank encounters strong competition both in the attraction of deposits
and origination of real estate and other loans.  Such competition could serve as
an impediment to the Bank's attempts to diversify its loan portfolio, expand its
revenue base, and increase its net interest rate spread.  In addition, any
decline in real estate values in the Bank's market area could result in an
increase in nonperforming assets, could hamper disposition of nonperforming
assets and could result in losses upon disposition.

     Based upon comparative data as of June 30, 1996, the Bank had approximately
4.94% of the deposits in Rockingham County.

LENDING ACTIVITIES

     GENERAL.  The principal lending activity of the Bank historically has been
the origination of conventional first mortgage single family residential loans
concentrated in its primary market area.  The Bank also makes loans on two-to-
four family dwelling units, multiple family dwelling units, non-residential
property and unimproved real estate. The Bank also makes some consumer loans,
all of which are secured by certificates of deposit.  In addition, the Bank
makes commercial loans, all of which are personally guaranteed and secured by
real estate. The Bank also offers equity lines of credit, all of which are
secured by a primary residence.

     The Bank's net loan portfolio totaled approximately $32.8 million on
December 31, 1996, or 61.6% of its total assets.  On that date, approximately
$30.6 million or 93.4% of loans outstanding consisted of loans secured by
mortgages on one-to-four family residential properties, $1.7 million or 5.1%
were loans secured by multifamily residential properties, approximately $1.1
million or 3.3% of loans were secured by non-residential real estate,
approximately $609,000 or 1.9% of loans were secured by undeveloped land, and
approximately $63,000 or 0.2% were loans secured by savings accounts or
certificates of deposit.

     The Bank's present lending policies are structured to increase the match of
rate sensitive assets to rate sensitive liabilities.  This policy is being
carried out in residential lending by emphasizing shorter terms on fixed-rate
loans and adjustable-rate mortgage loans; however, the Bank has found that
fixed-rate loan products are usually more attractive to customers in its market
area, particularly during periods of lower interest rates.  The Bank generally
underwrites such loans according to Federal National Mortgage Association
("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") guidelines.  Under
certain circumstances, the Bank may waive, in order to remain competitive with
larger mortgage lenders in its area, survey requirements on real estate secured
loans with terms of 15 years or less.  Also, the Bank does not routinely require
title insurance on its mortgage loans. Instead, the Bank obtains an attorney's
opinion of title.

                                       3
<PAGE>
 
     ANALYSIS OF LOAN PORTFOLIO.  Set forth below is selected data relating to
the composition of the Bank's loan portfolio by type of loan and type of
security on the dates indicated.  Percentages in the table represent percentages
of net total loans.

<TABLE>
<CAPTION>
                                                             At December 31,
                                                   ------------------------------------
                                                         1996                1995
                                                   -----------------  -----------------
                                                              % of               % of
                                                    Amount    Total    Amount    Total
                                                   --------  -------  --------  -------
                                                         (Dollars in Thousands)
<S>                                                <C>       <C>      <C>       <C>
Type of loan:
  Real estate loans:
     First mortgage loans on existing property...   $32,896  100.32%   $30,124   99.68%
     Construction loans..........................     1,093    3.33%       932    3.08%
                                                    -------  ------    -------  ------
        Total real estate loans..................    33,989  103.65%    31,056  102.76%
                                                    -------  ------    -------  ------
 
  Non-real estate loans:
     Consumer loans (1)..........................        63    0.19%        79    0.26%
     Commercial loans............................                            -       -
                                                    -------  ------    -------  ------
        Total non-real estate loans..............        63    0.19%        79    0.26%
                                                    -------  ------    -------  ------
        Total loans, gross.......................    34,052  103.84%    31,135  103.02%
 
Less:
  Loans in process...............................       882    2.69%       518    1.71%
  Allowance for possible loan losses.............       300    0.91%       259    0.86%
  Deferred loan fees.............................        80    0.24%       135    0.45%
                                                    -------  ------    -------  ------
        Total loans, net.........................   $32,790  100.00%   $30,223  100.00%
                                                    =======  ======    =======  ======
 
Type of security:
  Real estate loans:
     First mortgage loans on 1-4 dwelling units..   $30,616   93.37%   $26,453   87.53%
     Loans on 5 or more dwelling units...........     1,678    5.12%     1,263    4.18%
     Loans on nonresidential property............     1,086    3.31%     2,655    8.78%
     Land........................................       609    1.85%       685    2.27%
                                                    -------  ------    -------  ------
        Total real estate loans..................    33,989  103.65%    31,056  102.76%
                                                    -------  ------    -------  ------
  Non-real estate loans:
     Deposit account loans.......................        63    0.19%        79    0.26%
                                                    -------  ------    -------  ------
        Total non-real estate loans..............        63    0.19%        79    0.26%
                                                    -------  ------    -------  ------
        Total loans, gross.......................    34,052  103.84%    31,135  103.02%
 
Less:
  Loans in process...............................       882    2.69%       518    1.71%
  Allowance for possible loan losses.............       300    0.91%       259    0.86%
  Deferred loan fees.............................        80    0.24%       135    0.45%
                                                    -------  ------    -------  ------
        Total loans, net.........................   $32,790  100.00%   $30,223  100.00%
                                                    =======  ======    =======  ======
</TABLE>

_______________________
(1) Comprised entirely of loans secured by deposit accounts.

                                       4
<PAGE>
 
     LOAN MATURITY SCHEDULE.  The following table sets forth certain information
at the periods indicated regarding the dollar amount of loans maturing or
repricing in the Bank's portfolio based on the contractual maturity or
repricing.  Demand loans, having no stated schedule of repayment and no stated
maturity, are reported as due in one year or less.  Construction loans are
reported net of loans in process.

<TABLE>
<CAPTION>
                                                  At December 31, 1996
                              ------------------------------------------------------------
                                1997    1998   1999   2000-2004   2005-thereafter  Total
                              --------  -----  -----  ----------  ---------------  -------
                                                 (Dollars in Thousands)
<S>                           <C>       <C>    <C>    <C>         <C>              <C>
Residential and commercial
  real estate loans..........    $ 307  $ 121  $ 442  $    1,623  $30,403          $32,896

Construction loans...........      211     --     --          --       --              211

Other loans..................       56      7     --          --       --               63
                                 -----  -----  -----  ----------  -------          -------
Total........................    $ 574  $ 128  $ 442  $    1,623  $30,403          $33,170
                                 =====  =====  =====  ==========  =======          =======
</TABLE>

     REAL ESTATE LOANS. The primary lending activity of the Bank has been the
origination of conventional real estate loans.  Of these loans, the substantial
majority are residential real estate loans secured by one-to-four family
dwelling units. The Bank's real estate loan portfolio also includes a small
amount of loans on multi-family dwelling units, non-residential real estate and
unimproved land.  At December 31, 1996, the Bank had approximately $32.3 million
in net outstanding loans secured by residential real estate and $1.7 million in
net outstanding loans secured by non-residential real estate.

     The Bank's lending policies limit the maximum loan-to-value ratio on one-
to-four family residential mortgage loans to 95% of the lesser of the appraised
value or purchase price.  With limited exceptions, all such loans with a loan-
to-value ratio in excess of 80% require private mortgage insurance.  The Bank
also is limited by regulation in the amount that it can lend to any one
borrower. See "Regulation of the Bank --Loans-To-One-Borrower."

     The Bank makes both fixed rate and adjustable rate mortgage loans secured
by one-to-four family residential real estate. At December 31, 1996,
approximately $28.3 million or 92.5% of the Bank's one-to-four family
residential real estate loans had fixed rates, and only approximately $2.3
million or 7.5% of the Bank's one-to-four family residential real estate loans
had adjustable rates.  Fixed rate loans generally have terms of 15 years or
less.  Adjustable rate loans have terms of up to 30 years.  The Bank's
experience indicates that such loans remain outstanding for periods
significantly shorter than their contractual terms.  The Bank estimates that its
15-year loans generally remain outstanding for approximately seven years and its
30-year loans generally remain outstanding for approximately 14 years.
Borrowers may refinance or prepay loans at their option, without the imposition
of any prepayment penalty.

     The retention of adjustable rate loans in the Bank's portfolio helps reduce
the Bank's exposure to increases in prevailing market interest rates.  However,
there are unquantifiable credit risks resulting from potential increases in
costs to borrowers in the event of upward repricing of adjustable rate loans.
It is possible that during periods of rising interest rates, the risk of default
on adjustable rate loans may increase due to increases in interest costs to
borrowers. Further, although adjustable rate loans allow the Bank to increase
the sensitivity of its interest-earning assets to changes in interest rates, the
extent of this interest sensitivity is limited by the initial fixed rate period
before the first adjustment and the periodic and lifetime interest rate
adjustment limitations and the ability of borrowers to convert the loans to
fixed rates.  Accordingly, there can be no assurance that yields on the Bank's
adjustable rate loans will fully adjust to compensate for increases in the
Bank's cost of funds. Finally, 

                                       5
<PAGE>
 
adjustable rate loans increase the Bank's exposure to decreases in prevailing
market interest rates, although decreases in the Bank's cost of funds tend to
offset this effect.

     While the Bank has emphasized its adjustable rate products in the past, it
has found that fixed rate products are more attractive to single-family
residential loan customers in its market area.  The Bank holds its loans in its
portfolio.

     All mortgage interest rates are reviewed weekly and changed according to
market conditions.  Rates may be locked in for 60 days at the time of the
application or may float.  The rates on adjustable rate mortgage loans now being
originated by the Bank change based upon the Treasury securities index adjusted
to a constant maturity of one year.  The applicable index for these types of
loans generally adjusts on an annual basis.  Most of such loans have annual and
lifetime adjustment limitations on rate increases.

     The Bank offers equity lines of credit up to 80% of the appraised value of
the primary residence.  The maximum term is for 15 years with a monthly minimum
payment of 1.5% of the outstanding balance or $100, whichever is greater.  Rates
on equity lines are variable rates of interest tied to the Wall Street Journal
Prime Rate.

     At December 31, 1996, the Bank had approximately $1.7 million in
outstanding loans secured by multi-family residential real estate, comprising
approximately 5.1% of its loan portfolio as of that date, and approximately $1.1
million in outstanding commercial real estate loans, comprising approximately
3.3% of its net loan portfolio as of that date.  Substantially all of the Bank's
loans secured by commercial real estate and multi-family residential real estate
have fixed rates.  Such loans are typically made to a maximum of 75% of the
lesser of the purchase price or appraised value of the property for a maximum
term of 30 years with a call provision after seven years.  The interest rates on
such loans vary and are set by the Board of Directors and the Loan Committee.
Most of the commercial real estate loans are secured by office, retail, other
commercial real estate, and church properties.

     Commercial real estate lending entails significant additional risks
compared with one-to-four family residential lending.  For example, commercial
real estate loans typically involve large loan balances to single borrowers or
groups of related borrowers, the payment experience on such loans typically is
dependent on the successful operation of the real estate project, and these
risks can be significantly impacted by supply and demand conditions in the
market for multi-family residential units and commercial office space, and, as
such, may be subject to a greater extent to adverse conditions in the economy
generally.  In addition, church loans may be dependent on the congregation's
voluntary contributions, which may be affected by local employment levels and
other factors.  To minimize the effects of these risks, the Bank generally
limits commercial real estate lending to its market area and to borrowers with
which management has substantial experience or who are otherwise well known to
management.  It is the Bank's practice to obtain personal guarantees from all
principals obtaining commercial real estate loans.  In assessing the value of
such guarantees, the Bank reviews the individual's personal financial
statements, credit reports, tax returns and other financial information.  At
December 31, 1996, the Bank's loans in excess of $300,000 included one loan with
an outstanding principal balance of $351,056 and secured by a 20-unit apartment
building located in Reidsville and one loan with an outstanding principal
balance of $409,336 secured by unimproved land located in Eden, North Carolina.

     The Bank will lend up to 65% of the lesser of the purchase price or
appraised value of unimproved land for a maximum term of 15 years.  The interest
rate for unimproved land loans generally will be .5% to 1% above the current
residential owner occupied rate.

     OTHER LOANS.  The Bank also makes loans secured by certificates of deposit.
At December 31, 1996, the Bank had approximately $63,000 in such loans.  The
interest rates on these loans is 3% above the interest rate being paid on the
certificate of deposit serving as collateral, and the maximum amounts of these
loans is 90% of the related deposit accounts.  The Bank does not make any other
type of non-real estate secured loans and does not make unsecured loans.

                                       6
<PAGE>
 
     CONSTRUCTION LOANS.  At December 31, 1996, the Bank had approximately
$1,093,000 in outstanding construction loans.  Most of these loans are
construction-permanent loans which provide for the payment of interest only
during the period of construction and then convert to a permanent loan requiring
monthly payments of principal and interest.  These loans are made on both fixed
and adjustable rate terms and have a maximum loan-to-value ratio of 95% of the
lower of the appraised value or the sum of the cost of construction plus the
value of the land.  In most cases, such loans with a loan-to-value ratio in
excess of 80% require private mortgage insurance.

     Construction loans are generally considered to involve a higher degree of
risk than long-term financing secured by improved occupied real estate.  These
risks may be magnified when the construction loan is made to an individual who
is neither a builder nor a general contractor.  A lender's risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's value at the completion of construction and the estimated cost
(including interest) of construction.  During the construction phase, a number
of factors could result in delays and cost overruns.  If the estimate of
construction cost proves to be inaccurate, the lender may be required to advance
funds beyond the amount originally committed in order to permit completion of
the project.  If the estimate of anticipated value proves to be inaccurate, the
lender may have security which has a value insufficient to assure full
repayment.  The Bank has sought to minimize this risk by limiting construction
lending to qualified borrowers in the Bank's market area and by limiting the
aggregate amount of outstanding construction loans.  The Bank investigates the
character, expertise and financial standing of the borrower and determines the
borrower's capacity to successfully complete the project.

     LOAN SOLICITATION, PROCESSING AND UNDERWRITING.  Loan originations come
from a mixture of walk-in customers, real estate brokers, builders, depositors,
loan customers and direct solicitation by the Bank's loan officer.

     During its loan approval process, the Bank assesses the applicant's ability
to make principal and interest payments on the loan and the value of the
property securing the loan.  The Bank obtains detailed written loan applications
to determine the borrower's ability to repay and verifies responses on the loan
application through the use of credit reports, financial statements, and other
confirmations.  Under current practice, the Chief Executive Officer or loan
officer of the Bank analyzes the loan application and the property involved, and
an appraiser inspects and appraises the property.  The Bank requires appraisals
on all real estate loans.  The Bank also obtains information concerning the
income, financial condition, employment and the credit history of the applicant.
The Chief Executive Officer together with the loan officer can approve loans not
exceeding $100,000. All mortgage loans in excess of $100,000 but not exceeding
$200,000 are approved by the Loan Committee of the Bank which is composed of
Messrs. Hooper, Brady and Kemp.  Approval by the full Board of Directors is
required for mortgage loans of more than $200,000.  All loans to affiliated
persons are approved by a disinterested majority of the Board of Directors.  All
approved loans are reviewed and ratified by the Board of Directors during the
monthly Board meeting.  Hazard insurance is required for all residential real
estate mortgage loans, equity lines of credit and commercial real estate loans.
No hazard insurance is required for loans secured by unimproved land.  Flood
insurance is required if property securing the loans is in a designated flood
zone.  With certain limited exceptions, title insurance is not required on
mortgage loans but the Bank does obtain an attorney's opinion of title on all
such loans.  In most cases, residential real estate loans and construction loans
in which the loan-to-value ratio exceeds 80% require private mortgage insurance.

     LOAN ORIGINATION, PURCHASES AND SALES.  The Bank's loans generally are
secured by property in its market area.  With certain limited exceptions,
residential mortgage loans are not underwritten according to FNMA and FHLMC
guidelines and the Bank has not sold any whole loans. During the years ended
December 31, 1996 and 1995, the Bank's loan originations totaled $9.0 million
and $2.2 million, respectively.

     LOAN COMMITMENTS.  The Bank is obligated to make advances under
construction loans and home equity lines of credit.  It issues commitments with
respect to interest rates for up to 60 days.  As of December 31, 1996, the Bank
had no permanent loan commitments and unused home equity lines of credit were $1
million.

                                       7
<PAGE>
 
     INTEREST RATES, TERMS, POINTS AND FEES.  Interest rates and fees charged on
the Bank's loans are affected primarily by the market demand for loans,
competition, the supply of money available for lending purposes and the Bank's
cost of funds.  These factors are affected by, among other things, general
economic conditions and the policies of the federal government, including the
Federal Reserve, tax policies and governmental budgetary matters.

     In addition to earning interest on loans, the Bank receives fees in
connection with originating loans.  Fees for prepayments of commercial real
estate loans, loan modifications, late payments, loan assumptions and other
miscellaneous services in connection with loans are also charged by the Bank.

     NON-PERFORMING ASSETS AND ASSET CLASSIFICATION.  Loans are reviewed on a
regular basis and are placed on a nonaccrual status when, in the opinion of
management, the collection of additional principal or interest is doubtful.  The
purposes of this review policy are to define the risk of collectibility of the
Bank's loans, to identify problem assets, to assure that valuation allowances
are adequate, to measure compliance with established polices and procedures and
to provide management and the Board of Directors with information necessary to
evaluate and collect on the Bank's assets.  In most cases, a late charge is
assessed once the loan is more than 15 days delinquent.  When a loan is
delinquent, the borrower will be contacted by mail and payment is requested.  If
the delinquency continues, subsequent efforts will be made to contact the
delinquent borrower by mail and in person.  Generally, if a loan continues in a
delinquent status for 60 days or more, the Bank will initiate foreclosure
proceedings.

     Real estate acquired by the Bank as a result of foreclosure is classified
as real estate owned until such time as it is sold.  When such property is
acquired, it is recorded at the lower of its fair value, less estimated costs to
sell, or the outstanding balance of the loan.  Any required write-down of the
loan to its fair market value is charged to the allowance for loan losses. As of
December 1996, the Bank had no property classified as real estate owned.

     The following table sets forth information with respect to the Bank's non-
performing assets identified by the Bank, at the dates indicated.

<TABLE>
<CAPTION> 
                                                           At December 31,
                                                      ------------------------
                                                          1996         1995
                                                      ------------  ----------
                                                      (Dollars in Thousands)
     <S>                                              <C>           <C>
     Loans not accruing interest....................     $  26          $  93
     Accruing loans 90 days or more past due........         -              -
                                                         -----          -----
          Total non-performing loans................        26             93
     Real estate owned..............................         -              -
                                                         -----          -----
          Total non-performing assets...............     $  26          $  93
                                                         =====          =====
     Non-performing assets to total assets..........       .05%           .16%
                                                         =====          =====
</TABLE>

     Applicable regulations require each savings institution to classify its own
assets on a regular basis.  In addition, in connection with examinations of
savings institutions, examiners have authority to identify problem assets and,
if appropriate, classify them.  An asset is classified substandard if it is
determined to involve a distinct possibility that the savings institution could
sustain some loss if deficiencies associated with the loan, including inadequate
documentation, are not corrected.  An asset is classified as doubtful if full
collection is highly questionable or improbable.  An asset is classified as a
loss if it is considered uncollectible, even if partial recovery could be
expected in the future.  The regulations also provide for a special mention
classification, described as assets which do not currently expose an institution
to a sufficient degree of risk to warrant classification, but do possess credit
deficiencies or potential weaknesses deserving management's close attention.
Assets classified as substandard or doubtful require the institution to
establish some percentage as general allowances for possible 

                                       8
<PAGE>
 
loan losses. If an asset or portion thereof is classified loss, the savings
institution must either establish specific allowances for possible loan losses
in the amount of the portion of the asset classified loss, or charge off such
amount. Examiners may disagree with the savings institution's classification and
amounts reserved. As of December 31, 1996, the Bank had $313,991 in assets
classified as substandard and no assets classified as doubtful or loss. The Bank
had no assets in the special mention classification as of December 31, 1996.

     ALLOWANCE FOR LOAN LOSSES.  In originating loans, the Bank recognizes that
credit losses will be experienced and that the risk of loss will vary with,
among other things, the type of loan being made, the credit worthiness of the
borrower over the term of the loan and, in the case of a secured loan, the
quality of security for the loan as well as general economic conditions.  It is
management's policy to maintain an adequate allowance for loan losses based on,
among other things, the Bank's historical loan loss experience, evaluation of
economic conditions and regular reviews of delinquencies and loan portfolio
quality.  Specific allowances are provided for individual loans when ultimate
collection is considered questionable by management after reviewing the current
status of loans which are contractually past due and considering the fair value
of the collateral for the loans.

     Effective January 1, 1995, the Bank adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan"
("SFAS No. 114"), and Statement of Financial Accounting Standards No. 118,
"Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures." Under SFAS No. 114, the allowance for loan losses relating to
loans that are determined to be impaired is based on discounted cash flows using
the loan's initial effective interest rate or the fair value of the collateral
for certain collateral dependent loans.  The Bank previously measured loan
impairment in a method generally comparable to the methods prescribed in SFAS
No. 114.  Accordingly, no additional provisions for loan losses were required as
a result of adopting this accounting standard.  At December 31, 1996 and 1995,
there were no loans considered impaired under SFAS No. 114.

     Management continues to actively monitor the Bank's asset quality, to
charge off loans against the allowance for loan losses when appropriate and to
provide specific loss reserves when necessary.  Although management believes it
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ substantially from the economic conditions in the assumptions
used in making the initial determinations.  In addition, various regulatory
agencies, as an integral part of their examination processes, periodically
review the Bank's allowance for possible loan losses.  Such agencies may require
the Bank to make adjustments to the allowance based on their judgments of
information available to them at the time of their examination.  See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Asset Quality."

     During the first quarter of 1995, the Bank was increasing its provision for
loan losses mainly due to management's recognition of the increased credit risk
in the loan portfolio as a result of the anticipated closing of the American
Tobacco Company ("ATC") plant in Reidsville in 1996.  However, during 1996, the
Reidsville plant was purchased by another tobacco company.  The new owner is
continuing to operate the plant with a reduced work force.  At December 31,
1996, the Bank had loans to ATC employees and former employees totaling $2.1
million or 6.5% of total loans.  Further changes in the status of this plant's
ongoing operation may require additional increases in the allowance in the
future.  The full impact of the change in the plant's status on the Bank's loan
portfolio and the local economy is not known at this time.

                                       9
<PAGE>
 
     The following table describes the activity related to the Bank's allowance
for possible loan losses for the periods indicated.

<TABLE>
<CAPTION>
                                                                               Year ended December 31,
                                                                              -------------------------
                                                                                  1996          1995
                                                                              -------------  ----------
                                                                               (Dollars in Thousands)
<S>                                                                           <C>            <C>
Balance, beginning of period..................................................   $     259     $   214
Provision for loan losses.....................................................           8         105
Charge-offs -- Real estate mortgage...........................................           -          60
Recoveries....................................................................          33           -
                                                                                 ---------     -------
Balance, end of period........................................................   $     300     $   259
                                                                                 =========     =======
Ratio of net charge-offs to average loans outstanding during the period.......           -         .19%
                                                                                 =========     =======
Ratio of allowance for loan losses to total loans at the end of the period....         .91%        .85%
                                                                                 =========     =======
Ratio of allowance for loan losses to total nonperforming loans at the
  end of the period...........................................................    1,153.85%     278.49%
                                                                                 =========     =======
</TABLE>

INVESTMENTS AND MORTGAGE-BACKED SECURITIES ACTIVITIES

     Interest income from interest-bearing deposits in other financial
institutions and investment and mortgage-backed securities generally provides
the second largest source of income to the Bank after interest on loans.  At
December 31, 1996, the Bank's interest-bearing deposits in other financial
institutions and investment and mortgage-backed securities portfolio was
approximately $19.1 million and consisted primarily of interest-bearing balances
in other financial institutions, U.S. government and agency obligations,
municipal bonds, FHLMC certificates and stock in the FHLB of Atlanta.  The
Bank's investment policy prohibits the use of derivatives or other complex
securities or the use of the investment portfolio for speculative purposes.

     The Bank adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"), as of January 1, 1994.  Prior to its adoption, investment and mortgage-
backed securities were carried at amortized cost and were not adjusted to the
lower of cost or market because management intended to hold such investments to
maturity and were not aware of any conditions which would impair its ability to
do so.  Upon adoption of SFAS No. 115, the Bank carries its securities at fair
value or amortized cost depending on the classification of such securities.
Debt securities that the Bank has a positive intent and ability to hold to
maturity are classified as "held-to-maturity" and reported at amortized cost.
Debt and equity securities that are bought and held principally for the purpose
of selling them in the near term are classified as "trading securities" and
reported at fair value, with unrealized gains and losses included in earnings.
Debt and equity securities not classified in either of the preceding categories
are classified as "available for sale" and reported at fair value with
unrealized gains and losses, net of related tax effects, reported as a separate
component of equity.

     Gain or loss on sale of securities is recognized when realized and is based
on the specific-identification method.  Amortization of premiums and accretion
of discounts are recognized as adjustments to interest income using a method
which approximates the interest method.

     In November 1995, the Financial Accounting Standards Board (the "FASB")
issued an implementation guide for SFAS No. 115.  The FASB stated that the
transition provisions included in the guide permit a one-time opportunity for
companies to reconsider their ability and intent to hold the securities
accounted for under SFAS No. 115 to maturity and allow entities to transfer
securities from the held to maturity category without tainting their remaining
held to maturity securities.  The FASB emphasized that this would be a one-time
event and that any transfers from the held to maturity category to the available
for sale category under this provision must be made by December 31, 1995.  On
December 14, 1995, the Bank transferred $12,146,775 from the investment
securities held to maturity category to the investment securities available for
sale category and transferred 

                                      10
<PAGE>
 
$1,525,227 from the mortgage-backed securities held to maturity category to the
mortgage-backed securities available for sale category as allowed under the
provisions of the implementation guide. On the date of the transfer, those
securities were recorded as available for sale securities at their current fair
value, which resulted in the recognition of an unrealized gain of $208,065 being
recorded, net of the related tax effect of $70,042, as an addition to
stockholders' equity.

     As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's outstanding home loans or 5% of its outstanding advances from the FHLB of
Atlanta.  No ready market exists for such stock, which is carried at cost. As of
December 31, 1996, the Bank's investment in stock of the FHLB of Atlanta was
$413,000.  See Note 5 of "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS."

     North Carolina regulations require the Bank to maintain a minimum amount of
liquid assets (10% of assets) which may be invested in specified short-term
securities.  The Bank is also permitted to make certain other securities
investments.  Investment decisions are made by authorized officers of the Bank
under policies established by the Board of Directors.  Such investments are
managed in an effort to produce the highest yield consistent with maintaining
safety of principal and compliance with regulations governing the savings
industry.

     The following tables set forth certain information regarding the Bank's
investment and mortgage-backed securities portfolio, as well as other interest-
earning assets at the dates indicated.

<TABLE>
<CAPTION>
                                                     At December 31,
                                                  ----------------------
                                                     1996        1995
                                                  ----------  ----------
                                                  (Dollars in Thousands)
     <S>                                          <C>         <C>
     HELD TO MATURITY:
     U.S. Government securities:
        U.S. Treasury securities due:
           Within 12 months.......................   $   500     $ 8,007
           Beyond 12 months but within 5 years....       500         500
                                                     -------     -------
                                                       1,000       8,507
     
     AVAILABLE FOR SALE:
     U.S. Government securities:
        U.S. Treasury securities due:
           Within 12 months.......................     2,503      15,302
           Beyond 12 months but within 5 years....    13,453         509
           Beyond 5 years but within 10 years.....       493           -
                                                     -------     -------
                                                      16,449      15,811

     Municipal securities due after 5 years.......       108         108
     Mortgage-backed securities...................       599         710

     INTEREST-BEARING BALANCES IN OTHER BANKS.....       561       1,088
     FHLB STOCK...................................       413         413
                                                     -------     -------
                                                     $19,130     $26,637
                                                     =======     =======
</TABLE>

                                      11
<PAGE>
 
<TABLE>
<CAPTION>
                                                             At December 31, 1996
                       ----------------------------------------------------------------------------------------------------
                                                  After One Year
                         One Year or Less       Through Five Years            After Five Years               Total
                       ---------------------   ---------------------       ------------------------   ---------------------
                                   Weighted                Weighted                       Weighted                Weighted
                        Carrying    Average    Carrying     Average        Carrying        Average    Carrying     Average
                         Value     Yield (1)     Value     Yield (1)        Value         Yield (1)     Value     Yield (1)
                       ---------   ---------   --------    ---------       --------       ---------   --------    ---------
<S>                    <C>         <C>        <C>          <C>             <C>            <C>        <C>          <C>
HELD TO MATURITY:

  U.S. Treasury
     securities......  $  500,000      6.50%  $   500,351      5.50%                -            -   $ 1,000,351       6.00%       
                                                                                                                                   
AVAILABLE FOR SALE:                                                                                                                

  U.S. Treasury                                                                                                                    
     securities......   2,503,235      6.07%   13,452,931      6.14%       $  492,540         6.45%   16,448,706       6.14%       

   Municipal                                                                                                                       
     securities......           -         -             -         -           108,309         6.30%      108,309       6.30%       

   Mortgage-backed                                                                                                                 
     securities......     298,281      7.00%      301,065      5.50%                -            -       599,346       6.25%       
                                                                                                                                   
INTEREST-BEARING                                                                                                                   
  BALANCES IN OTHER                                                                                                                
  BANKS..............     561,269      6.70%            -         -                 -            -       561,269       6.70%       
                                                                                                                                   
FHLB STOCK...........           -         -             -         -           412,800         7.25%      412,800       7.25%       
                       ----------      ----   -----------      ----        ----------         ----   -----------       ----        
     TOTAL...........  $3,862,785      6.29%  $14,254,347      6.10%       $1,013,649         6.76%  $19,130,781       6.18%       
                       ==========      ====   ===========      ====        ==========         ====   ===========       ====         
</TABLE>

(1)  Yields are based on book values.



DEPOSITS AND BORROWINGS

     GENERAL.  Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments, interest payments, interest income from
mortgage-backed securities, investment income, interest from its own interest-
bearing deposits and otherwise from its operations.  Deposit inflows and
outflows may be significantly influenced by general interest rates and money
market conditions.  Borrowings may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources.  They may also
be used on a longer term basis for general business purposes. However, in recent
years the Bank has not borrowed any money to satisfy its lending and investment
needs.

     DEPOSITS.  On December 31, 1996, the Bank's deposits totaled $43.1 million.
The Bank offers statement savings, money market accounts and certificate of
deposit accounts.  The Bank does not offer checking accounts because it
currently is not cost effective to provide that product.  Deposit account terms
vary, with the principal differences being the minimum balance required, the
time periods the funds must remain on deposit and the interest rate.  The
deregulation of various controls on insured deposits has allowed the Bank to be
more competitive in obtaining funds and has given it more flexibility to meet
the threat of net deposit outflows.  While the deregulation of rates payable on
deposits has allowed the Bank to be competitive in the acquisition and retention
of funds, it has also resulted in a more volatile cost of funds.

                                       12
<PAGE>
 
     Maturity terms, service fees and withdrawal penalties are established by
the Bank on a periodic basis. Determination of rates and terms are predicated on
funds acquisition and liquidity requirements, rates paid by competitors, growth
goals and federal regulations.  The Bank markets its deposit programs in a
number of ways. Its office displays rate boards and brochures which outline the
features of the various accounts. From time to time the Bank advertises in local
newspapers and on radio.

     The Bank's policy is to attract deposits from local residents.  It does not
solicit deposits outside of Rockingham County or deposits through brokers.  The
percentage of total savings accounts which are from out-of-state sources is not
significant.

     The following table sets forth certain information regarding the Bank's
deposits at the dates indicated.

<TABLE>
<CAPTION>
                                                                At December 31, 1996
                                                         ---------------------------------

     Weighted                                                                   Percentage
     average                                                                     of total
       rate               Category                       Minimum     Balance     deposits
     --------             --------                       -------     -------    ----------
     <S>        <C>                                      <C>       <C>          <C>
      2.00%     Statement savings accounts..........     $    100  $     2,114        4.91%
      2.48%     Money market deposit accounts.......        1,000        1,751        4.07%
      4.41%     91 day certificates.................          500          475        1.10%
      4.82%     6 month certificates................          500        6,098       14.16%
      5.11%     1 year certificates.................          500        8,085       18.77%
      5.36%     18 month certificates...............          500          810        1.88%
      5.83%     2 year certificates.................          500        4,354       10.11%
      5.55%     30 month certificates...............          500        1,601        3.72%
      5.76%     3 year certificates.................          500        1,783        4.14%
      5.70%     4 year certificates.................          500        2,892        6.71%
      6.35%     5 year certificates.................          500        5,520       12.82%
        -       6 year certificates.................          500            -           -
        -       8 year certificates.................          500            -           -
      5.83%     Jumbo...............................      100,000        7,584       17.61%
                                                                   -----------      ------
                                                                   $    43,067      100.00%
                                                                   ===========      ======
</TABLE> 

                                       13
<PAGE>
 
<TABLE>
<CAPTION>
                                                               At December 31, 1995
                                                        ---------------------------------
    Weighted                                                                   Percentage
    average                                                                     of total
      rate               Category                       Minimum     Balance     deposits
    --------             --------                       -------     -------    ----------
    <S>        <C>                                      <C>       <C>          <C> 
     2.40%     Statement savings accounts...........    $    100  $ 2,201,000        4.66%
     3.30%     Money market deposit accounts........       1,000    1,948,000        4.12%
     4.95%     91 day certificates..................         500      502,000        1.06%
     5.38%     6 month certificates.................         500    6,607,000       13.99%
     5.74%     1 year certificates..................         500    6,246,000       13.22%
     5.55%     18 month certificates................         500      933,000        1.98%
     5.61%     2 year certificates..................         500    7,096,000       15.02%
     5.28%     30 month certificates................         500    1,970,000        4.17%
     5.59%     3 year certificates..................         500    2,421,000        5.13%
     5.89%     4 year certificates..................         500    3,642,000        7.71%
     6.44%     5 year certificates..................         500    5,174,000       10.96%
     7.75%     6 year certificates..................         500       11,000        0.02%
     7.65%     8 year certificates..................         500       15,000        0.03%
     6.00%     Jumbo................................     100,000    8,466,000       17.93%
                                                                  -----------      ------
                                                                  $47,232,000      100.00%
                                                                  ===========      ======
</TABLE>



     The following table sets forth changes in the dollar amounts of deposits in
the various types of accounts offered by the Bank between the dates indicated
and the prior year-end.

<TABLE>
<CAPTION>
                                               At December 31, 1996             At December 31, 1995       
                                          ------------------------------  -------------------------------  
                                                     % of      Increase              % of      Increase    
                                          Amount   deposits   (decrease)  Amount   deposits    (decrease)  
                                          -------  --------   ----------  ------   --------    ----------  
                                                               (Dollars in Thousands)                      
<S>                                       <C>      <C>        <C>         <C>      <C>         <C>          
Statement savings accounts..........      $ 2,114      4.91%    $   (87)  $ 2,201      4.66%      $  (824)     
Money market deposit accounts.......        1,751      4.07%       (197)    1,948      4.12%         (868)     
Certificates of deposit.............       39,202     91.02%     (3,881)   43,083     91.22%         (588)     
                                          -------    ------     -------   -------    ------       -------      
                                          $43,067    100.00%    $(4,165)  $47,232    100.00%      $(2,280)     
                                          =======    ======     =======   =======    ======       =======       
</TABLE>

     As of December 31, 1996, the aggregate amount outstanding of time
certificates of deposit in amounts greater than $100,000 was approximately $6.8
million.  Some of these deposits were deposits of state and local governments
which are subject to rebidding from time to time and to collateralization
requirements.

                                       14
<PAGE>
 
     The following table presents the maturity of all time certificates of
deposit as of December 31, 1996.

<TABLE>
<CAPTION>
                             Amount due during year ended December 31,    
                          ------------------------------------------------
                            1997     1998     1999    Thereafter   Total  
                          --------  -------  -------  ----------  --------
                                       (Dollars in Thousands)             
<S>                       <C>       <C>      <C>      <C>         <C>     
Less than 6.0% .......     $22,355   $5,328   $1,775      $1,522   $30,980
6.01% - 7.00%  .......       3,656    1,344      996         534     6,530
7.01% - 8.25%  .......         340      745      307         300     1,692
                           -------   ------   ------      ------   -------
                           $26,351   $7,417   $3,078      $2,356   $39,202
                           =======   ======   ======      ======   ======= 
</TABLE>

     BORROWINGS.  The FHLB of Atlanta functions as a central reserve bank
providing credit for savings institutions and certain other member financial
institutions.  As a member, the Bank is required to own capital stock in the
FHLB of Atlanta and is authorized to apply for advances on the security of such
stock and certain of its home mortgages and other assets (principally,
securities which are obligations of, or guaranteed by, the United States)
provided certain standards related to credit worthiness have been met.  Advances
are made pursuant to several different programs.  Each credit program has its
own interest rate and range of maturities.  Depending on the program,
limitations on the amount of advances are based either on a fixed percentage of
an institution's net worth or on the FHLB of Atlanta's assessment of the
institution's credit worthiness.  The Bank has not had any outstanding
borrowings from the FHLB of Atlanta or any other source since 1989.

COMPETITION

     The Bank faces strong competition in the attraction of deposits (its
primary source of lendable funds) and in the origination of real estate loans.
Its most direct competition for deposits and for real estate loans has
historically come from other savings institutions, commercial banks, mortgage
companies, investment houses and credit unions located in this primary market
area.

     The Bank competes for loans principally through the interest rates and loan
fees it charges and the personal service, efficiency and quality of the services
it provides borrowers and real estate brokers.  It competes for deposits by
offering depositors a variety of deposit accounts, a convenient office location,
a drive-in facility, tax deferred retirement programs, traveler's checks, bank
checks and other financial services. As of December 31, 1996, there were at
least twelve other credit unions, commercial banks and mortgage companies as
well as numerous other financial services providers, located in the Bank's
primary market area.

     Legislation enacted in the past 15 years has significantly expanded the
range of services which savings institutions can offer the public.  In addition,
since 1978 the regulatory authorities have largely deregulated interest rate
controls and changed other regulations affecting deposits.  These changes and an
increasingly sophisticated public have increased competition between depository
institutions and institutions offering other types of investment vehicles for
deposits (such as money market mutual funds, Treasury securities, municipal
bonds, etc.) and have increased competition with commercial banks with respect
to loans, checking accounts and other types of financial services.  In addition,
large conglomerates and investment banking firms have entered the market for
financial services.  The Bank has found it increasingly difficult to compete
with the larger financial institutions in its market area for both deposits and
loans because of the Bank's small size, which limits the types and the scope of
the services which the Bank can provide to customers.  This increased
competition has contributed to the slow erosion of the Bank's core deposits as
its aging customer base is replaced by a more 

                                       15
<PAGE>
 
transient, less loyal and less affluent customer base. This increased
competition has also resulted in a reduction in loan applications meeting the
Bank's loan underwriting requirements.

SUBSIDIARY ACTIVITIES

     The Company has one wholly-owned subsidiary, First Savings Bank of
Rockingham County, Inc., SSB. The Bank does not have any subsidiaries.

PERSONNEL

     As of December 31, 1996, the Bank had nine full-time employees and no part-
time employees.  The employees are not represented by a collective bargaining
unit.  The Bank believes its relationship with its employees to be good.

FEDERAL TAXATION

     Thrift institutions are subject to provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), in the same general manner as other
corporations.  Prior to recent legislation, institutions such as the Bank which
met certain definitional tests and other conditions prescribed by the Code
benefitted from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve.  For purposes of
the bad debt reserve deduction, loans were separated into "qualifying real
property loans," which generally are loans secured by certain interests in real
property, and "nonqualifying loans," which are all other loans.  The bad debt
reserve deduction with respect to nonqualifying loans must be based on actual
loss experience.  The amount of the bad debt reserve deduction with respect to
qualifying real property loans could be based upon (a) actual loss experience or
(b) a percentage of taxable income before such deduction.

     The Bank, which files its federal income tax returns on a calendar year
basis, could generally elect to use the method which resulted in the greatest
deduction for federal income tax purposes, which generally was the percentage of
taxable income method.

     Earnings appropriated to an institution's bad debt reserve and claimed as a
tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount was included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.

     Legislation recently signed by the President repealed the percentage of
taxable income method of calculating the bad debt reserve.  Savings
associations, like the Bank, which have previously used that method are required
to recapture into taxable income post-1987 reserves in excess of the reserves
calculated under the experience method over a six-year period beginning with the
first taxable year beginning after December 31, 1995.  The start of such
recapture may be delayed until the third taxable year beginning after December
31, 1995 if the dollar amount of the institution's residential loan originations
in each year is not less than the average dollar amount of residential loans
originated in each of the six most recent years, disregarding the years with the
highest and lowest originations during such period.  For purposes of this test,
residential loan originations would not include refinancings and home equity
loans.  The Bank has provided deferred taxes for the amount of the recapture.

     Beginning with the first taxable year beginning after December 31, 1995,
savings institutions, such as the Bank, will be treated the same as commercial
banks.  Institutions with $500 million or more in assets will only be able to
take a tax deduction when a loan is actually charged off.  Institutions with
less than $500 million in assets will still be permitted to make deductible bad
debt additions to reserves, but only using the experience method.

                                       16
<PAGE>
 
     The Bank's federal income tax returns have been audited through December
31, 1992.

STATE AND LOCAL TAXATION

     Under North Carolina law, the corporate income tax is 7.75% of federal
taxable income as computed under the Code, subject to certain prescribed
adjustments.  An annual state franchise tax is imposed at a rate of 0.15%
applied to the greatest of the institutions (i) capital stock, surplus and
undivided profits, (ii) investment in tangible property in North Carolina or
(iii) 55% of the appraised valuation of property in North Carolina.

REGULATION OF THE COMPANY

     Bank holding companies and state savings banks are extensively regulated
under both federal and state law.  The following is a brief summary of certain
statutes and rules and regulations that affect or will affect the Company and
the Bank.  This summary is qualified in its entirety by reference to the
particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank.  Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Company.

     GENERAL.  The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank to be issued in the Conversion.  As
a savings bank holding company subject to the Bank Holding Company Act of 1956,
as amended ("BHCA"), the Company is subject to certain regulations of the
Federal Reserve.  Under the BHCA, the Company's activities and those of its
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other
activity which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The BHCA prohibits the Company from acquiring direct or indirect control of more
than 5% of the outstanding voting stock or substantially all of the assets of
any bank or savings bank or merging or consolidating with another bank holding
company or savings bank holding company without prior approval of the Federal
Reserve.

     Additionally, the BHCA prohibits the Company from engaging in, or acquiring
ownership or control of, more than 5% of the outstanding voting stock of any
company engaged in a nonbanking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be properly
incident thereto.

     Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of the Company.  Control
is conclusively presumed to exist if, among other things, a person acquires more
than 25% of any class of voting stock of the holding company or controls in any
manner the election of a majority of the directors of the holding company.
Control is presumed to exist if a person acquires more than 10% of any class of
voting stock and the stock is registered under Section 12 of the Exchange Act or
the acquiror will be the largest shareholder after the acquisition.

     There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default or in default.  For example, to avoid
receivership of an insured depository institution subsidiary, a bank holding
company is required to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized" with the terms of any
capital restoration plan filed by such subsidiary with its appropriate federal
banking agency up to the lesser of (i) an amount equal to 5% of the
institution's total assets at the time the institution became undercapitalized
or (ii) the amount which is necessary (or would have been necessary) to bring
the institution into compliance with all acceptable capital standards as of the
time the institution fails to comply with such capital restoration plan.  Under
a policy of the Federal Reserve 

                                       17
<PAGE>
 
with respect to bank holding company operations, a bank holding company is
required to serve as a source of financial strength to its subsidiary depository
institutions and to commit resources to support such institutions in
circumstances where it might not do so absent such policy. The Federal Reserve
under the BHCA also has the authority to require a bank holding company to
terminate any activity or to relinquish control of a nonbank subsidiary (other
than a nonbank subsidiary of a bank) upon the Federal Reserve's determination
that such activity or control constitutes a serious risk to the financial
soundness and stability of any bank subsidiary of the bank holding company.

     In addition, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by either the Savings
Association Insurance Fund (the "SAIF") or the Bank Insurance Fund (the "BIF")
as a result of the default of a commonly controlled insured depository
institution or for any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default.  The FDIC may decline to
enforce the cross-guarantee provisions if it determines that a waiver is in the
best interest of the SAIF or the BIF or both.  The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.

     Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing Common Stock in excess of ten
percent of its net worth during a rolling twelve month period. As a result of
the Company's ownership of the Bank, the Company is registered under the savings
bank holding company laws of North Carolina.  Accordingly, the Company is also
subject to regulation and supervision by the Administrator.

     CAPITAL ADEQUACY GUIDELINES FOR HOLDING COMPANIES.  The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies and banks that
are members of the Federal Reserve system and have consolidated assets of $150
million or more.  For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.

     Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines. Under these regulations, the minimum ratio of
total capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) is 8%.  At least half of the
total capital is required to be "Tier I capital," principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less certain goodwill
items.  The remainder ("Tier II capital") may consist of a limited amount of
subordinated debt, certain hybrid capital instruments and other debt securities,
perpetual preferred stock, and a limited amount of the general loan loss
allowance.  In addition to the risk-based capital guidelines, the Federal
Reserve has adopted a minimum Tier I capital (leverage) ratio, under which a
bank holding company must maintain a minimum level of Tier I capital to average
total consolidated assets of at least 3% in the case of a bank holding company
which has the highest regulatory examination rating and is not contemplating
significant growth or expansion.  All other bank holding companies are expected
to maintain a Tier I capital (leverage) ratio of at least 1% to 2% above the
stated minimum.

FEDERAL SECURITIES LAW

     The Company has registered its Common Stock with the SEC pursuant to
Section 12(g) of the Exchange Act and will not deregister the Common Stock for a
period of three years following the completion of the Conversion.  As a result
of such registration, the proxy and tender offer rules, insider trading
reporting requirements, annual and periodic reporting and other requirements of
the Exchange Act are applicable to the Company.

                                       18
<PAGE>
 
     The registration under the Securities Act of the Offerings of the Common
Stock does not cover the resale of such shares.  Shares of the Common Stock
purchased by persons who are not affiliates of the Company may be resold without
registration.  Shares purchased by an affiliate of the Company are subject to
the resale provisions of Rule 144 under the Securities Act.  So long as the
Company meets the current public information requirements of Rule 144 under the
Securities Act, each affiliate of the Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) will be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Company or (ii) the average weekly volume of trading in such shares during the
preceding four calendar weeks.  Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act under certain circumstances.  There are currently no demand
registration rights outstanding.  However, in the event the Company at some
future time determines to issue additional shares from its authorized but
unissued shares, the Company might offer registration rights to certain of its
affiliates who want to sell their shares.

REGULATION OF THE BANK

     GENERAL.  Federal and state legislation and regulation have significantly
affected the operations of federally insured savings institutions and other
federally regulated financial institutions in the past several years and have
increased competition among savings institutions, commercial banks and other
providers of financial services.  In addition, federal legislation has imposed
new limitations on investment authority, and higher insurance and examination
assessments on savings institutions and has made other changes that may
adversely affect the future operations and competitiveness of savings
institutions with other financial institutions, including commercial banks and
their holding companies.  The operations of regulated depository institutions,
including the Bank, will continue to be subject to changes in applicable
statutes and regulations from time to time.

     The Bank is a North Carolina-chartered savings bank, is a member of the
FHLB system, and its deposits are insured by the FDIC through the SAIF.  It is
subject to examination and regulation by the FDIC and the Administrator and to
regulations governing such matters as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities, and general investment
authority.  Generally, North Carolina state chartered savings banks whose
deposits are issued by the SAIF are subject to restrictions with respect to
activities and investments, transactions with affiliates and loans-to-one
borrower similar to those applicable to SAIF insured savings associations.  Such
examination and regulation is intended primarily for the protection of
depositors and the federal deposit insurance funds.

     The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings).  As creditors of loans secured by real property and as
owners of real property, financial institutions, including the Bank, may be
subject to potential liability under various statutes and regulations applicable
to property owners generally, including statutes and regulations relating to the
environmental condition of real property.

     The FDIC has extensive enforcement authority over North Carolina-chartered
savings banks, including the Bank.  This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to initiate injunctive actions.  In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.

     The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal 

                                       19
<PAGE>
 
course of business; and (v) insufficient capital or the incurring or likely
incurring of losses that will deplete substantially all of the institution's
capital with no reasonable prospect of replenishment of capital without federal
assistance.

     TRANSACTIONS WITH AFFILIATES.  Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act.  An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the savings bank.
Generally, subsidiaries of a bank, other than a bank subsidiary, and certain
other types of companies are not considered to be affiliates. Generally,
Sections 23A and 23B (i) limit the extent to which the Bank or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such the Bank's capital stock and surplus, and contain an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the Bank or the
subsidiary as those provided to a nonaffiliate.  The term "covered transaction"
includes the making of loans or other extensions of credit to an affiliate, the
purchase of assets from an affiliate, the purchase of, or an investment in, the
securities of an affiliate, the acceptance of securities of an affiliate as
collateral for a loan or extension of credit to any person, or issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate.

     Further, current federal law has extended to savings banks the restrictions
contained in Section 22(h) of the Federal Reserve Act and its implementing
regulations with respect to loans to directors, executive officers and principal
stockholders.  Under Section 22(h), loans to directors, executive officers and
stockholders who own more than 10% of a savings bank, and certain affiliated
entities of any of the foregoing, may not exceed, together with all other
outstanding loans to such person and affiliated entities, the savings bank's
loans-to-one borrower limit as established by federal law and all loans to such
persons may not exceed the institution's unimpaired capital and unimpaired
surplus.  Section 22(h) also prohibits loans above amounts prescribed by the
appropriate federal banking agency to directors, executive officers and
stockholders who own more than 10% of a savings bank, and their respective
affiliates, unless such loan is approved in advance by a majority of the
disinterested directors of the board of directors of the savings bank and the
Company.  Any "interested" director may not participate in the voting.  The
Federal Reserve has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval is required, as being the greater of $25,000 or 5% of unimpaired
capital and unimpaired surplus (up to $500,000).  Further, pursuant to Section
22(h) the Federal Reserve requires that loans to directors, executive officers,
and principal stockholders be made on terms substantially the same as offered in
comparable transactions to other persons and not involve more than the normal
risk of repayment or present other unfavorable features.  Section 22(h) also
generally prohibits a depository institution from paying the overdrafts of any
of its executive officers or directors.

     DEPOSIT INSURANCE.  The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the SAIF.  Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations.  Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations.  See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund.  Subgroup A consists of financially sound institutions with only
a few minor weaknesses.  Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken.  The
assessment rate for SAIF members had ranged from 0.23% of deposits for well
capitalized institutions in Subgroup A to 0.31% of deposits for

                                       20
<PAGE>
 
undercapitalized institutions in Subgroup C while assessments for over 90% of
the BIF members had been the statutory minimum of $2,000. Recently enacted
legislation provided for a one-time assessment of 65.7 basis points of insured
deposits as of March 31, 1995, that fully capitalized the SAIF and had the
effect of reducing future SAIF assessments. Accordingly, although the special
assessment resulted in a one-time charge to the Bank of approximately $316,000
pre-tax, the recapitalization of the SAIF had the effect of reducing the Bank's
future deposit insurance premiums to the SAIF. Under the recently enacted
legislation, both BIF and SAIF members will be assessed an amount for the
Financing Corporation Bond payments. BIF members will be assessed approximately
1.3 basis points while the SAIF rate will be approximately 6.4 basis points
until January 1, 2000. At that time, BIF and SAIF members will begin pro rata
sharing of the payment at an expected rate of 2.43 basis points.

     COMMUNITY REINVESTMENT ACT.  The Bank, like other financial institutions,
is subject to the Community Reinvestment Act, as amended ("CRA"). A purpose of
this Act is to encourage financial institutions to help meet the credit needs of
its entire community, including the needs of low- and moderate-income
neighborhoods. During the Bank's last compliance examination, which was
performed by the FDIC under the old CRA regulations in January 1994, the Bank
received a "satisfactory" rating with respect to CRA compliance. The Bank's
rating with respect to CRA compliance would be a factor to be considered by the
Federal Reserve and FDIC in considering applications submitted by the Bank to
acquire branches or to acquire or combine with other financial institutions and
take other actions and could result in the denial of such applications.

     The federal banking regulatory agencies have issued a rewrite of the CRA
regulations, which became effective on January 1, 1996, to implement a new
evaluation system that rates institutions based on their actual performance in
meeting community credit needs.  Under the regulations, a savings bank will be
evaluated and rated under three categories: a lending test, an investment test
and a service test.  For each of these three tests, the savings bank will be
given a rating of either "outstanding," "high satisfactory," "low satisfactory,"
"needs to improve" or "substantial non-compliance."  A set of criteria for each
rating has been developed and is included in the regulation.  If an institution
disagrees with a particular rating, the institution has the burden of rebutting
the presumption by clearly establishing that the quantative measures do not
accurately present its actual performance, or that demographics, competitive
conditions or economic or legal limitations peculiar to the service area should
be considered.  The ratings received under the three tests will be used to
determine the overall composite CRA rating.  The composite ratings will be the
same as those that are currently given: "outstanding," "satisfactory," "needs to
improve" or "substantial non-compliance."

     CAPITAL REQUIREMENTS APPLICABLE TO THE BANK.  The FDIC requires the Bank to
have a minimum leverage ratio of Tier I capital (principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, less certain intangible items,
goodwill items, identified losses and investments in securities subsidiaries) to
total assets of at least 3%; provided, however that all institutions, other than
those (i) receiving the highest rating during the examination process and (ii)
not anticipating or experiencing any significant growth, are required to
maintain a ratio of 1% or 2% above the stated minimum, with an absolute minimum
leverage ratio of not less than 4%. The FDIC also requires the Bank to have a
ratio of total capital to risk-weighted assets, including certain off-balance
sheet activities, such as standby letters of credit, of at least 8%. At least
half of the total capital is required to be Tier I capital. The remainder ("Tier
II capital") may consist of a limited amount of subordinated debt, certain
hybrid capital instruments, other debt securities, certain types of preferred
stock and a limited amount of loan loss allowance.

     An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC.  If the leverage ratio falls to 2% or less, the
bank may be deemed to be operating in an unsafe or unsound condition, allowing
the FDIC to take various enforcement actions, including possible termination of
insurance or placement of the institution in receivership. At December 31, 1996,
the Bank had a leverage ratio of 16.37%.

                                       21
<PAGE>
 
     The Administrator requires that net worth equal at least 5% of total
assets.  Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement.

     At December 31, 1996, the Bank complied with each of the capital
requirements of the FDIC and the Administrator.

     Each federal banking agency is required to establish risk-based capital
standards that take adequate account of interest rate risk, concentration of
credit risk, and the risk of nontraditional activities, as well as reflect the
actual performance and expected risk of loss on multifamily mortgages.  The
agencies approved a final rule in June 1995 amending the risk-based capital
standards to consider explicitly "a bank's exposure to declines in the economic
value of its capital due to changes in interest rates" when evaluating capital
adequacy.  Also in June 1995, the agencies requested public comment on a
proposed Joint Agency Policy Statement regarding the measurement and assessment
of interest rate risk.  Small banks would be exempted from the proposed Policy
Statement and associated reporting requirements in order to lessen regulatory
burden on small, well-managed banks.  The Bank cannot assess at this point the
impact the final rule or the proposed policy statement will have on its capital
requirements.

     LOANS-TO-ONE-BORROWER.  The Bank is subject to the Administrator's loans-
to-one-borrower limits.  Under these limits, no loans and extensions of credit
to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the net worth of the savings bank.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth.  These limits also authorize
savings banks to make loans-to-one-borrower, for any purpose, in an amount not
to exceed $500,000.  A savings bank also is authorized to make loans-to-one-
borrower to develop domestic residential housing units, not to exceed the lesser
of $30 million or 30% of the savings bank's net worth, provided that the
purchase price of each single-family dwelling in the development does not exceed
$500,000 and the aggregate amount of loans made under this authority does not
exceed 150% of net worth.  These limits also authorize a savings bank to make
loans-to-one-borrower to finance the sale of real property acquired in
satisfaction of debts in an amount up to 50% of net worth.

     As of December 31, 1996, the largest aggregate amount of loans which the
Bank had to any one borrower was $628,235.  The Bank had no loans outstanding
which management believes violate the applicable loans-to-one-borrower limits.
The Bank does not believe that the loans-to-one-borrower limits will have a
significant impact on its business, operations and earnings.

     FEDERAL HOME LOAN BANK SYSTEM.  The FHLB system provides a central credit
facility for member institutions.  As a member of the FHLB of Atlanta, the Bank
is required to own capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta.  On December 31, 1996, the Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock of $412,800.

     Each FHLB is required to contribute at least 10% of its reserves and
undivided profits to fund the principal and a portion of the interest on certain
bonds and certain other obligations which are used to fund the resolution of
troubled savings association cases, and to transfer a percentage of its annual
net earnings to the Affordable Housing Program.  These contributions continue to
reduce the FHLB of Atlanta's earnings and the Bank's dividends on its FHLB of
Atlanta stock.

     FEDERAL RESERVE SYSTEM.  Federal Reserve regulations require savings banks,
not otherwise exempt from the regulations, to maintain reserves against their
transaction accounts (primarily negotiable order of withdrawal accounts) and
certain nonpersonal time deposits.  The reserve requirements are subject to
adjustment by the Federal Reserve. As of December 31, 1996, the Bank was exempt
from the applicable reserve requirements of the Federal Reserve.

                                       22
<PAGE>
 
     RESTRICTIONS ON ACQUISITIONS.  Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of a state savings bank without giving at least 60 days' written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition.  Pursuant to regulations governing acquisitions of
control, control of an insured institution is conclusively deemed to have been
acquired by, among other things, the acquisition of more than 25% of any class
of voting stock.  In addition, control is presumed to have been acquired,
subject to rebuttal, upon the acquisition of more than 10% of any class of
voting stock.  Such acquisitions of control may be disapproved if it is
determined, among other things, that (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings bank or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisitions of control by such person.

     LIQUIDITY.  The Bank is subject to the Administrator's requirement that the
ratio of liquid assets to total assets equal at least 10%.  The computation of
liquidity under North Carolina regulation allows the inclusion of mortgage-
backed securities and investments which, in the judgment of the Administrator,
have a readily marketable value, including investments with maturities in excess
of five years.  On December 31, 1996, the Bank's liquidity ratio, calculated in
accordance with North Carolina regulations, was approximately 36%.

     ADDITIONAL LIMITATIONS ON ACTIVITIES.  Recent FDIC law and regulations
generally provide that the Bank may not engage as principal in any type of
activity, or in any activity in an amount, not permitted for national banks, or
directly acquire or retain any equity investment of a type or in an amount not
permitted for national banks.  The FDIC has authority to grant exceptions from
these prohibitions (other than with respect to non-service corporation equity
investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the activity to be engaged in and if the Bank
is and continues to be in compliance with fully phased-in capital standards.
National banks are generally not permitted to hold equity investments other than
shares of service corporations and certain federal agency securities.  Moreover,
the activities in which service corporations are permitted to engage are limited
to those of service corporations for national banks.

     Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not of investment
grade (generally referred to as "junk bonds").  State savings banks are also
required to notify the FDIC at least 30 days prior to the establishment or
acquisition of any subsidiary, or at least 30 days prior to conducting any such
new activity.  Any such activities must be conducted in accordance with the
regulations and orders of the FDIC and the Administrator.

     PROMPT CORRECTIVE REGULATORY ACTION.  Federal law provides the federal
banking agencies with broad powers to take corrective action to resolve problems
of insured depository institutions.  The extent of these powers depends upon
whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized."  Under the FDIC regulations applicable to the
Bank, an institution is considered "well capitalized" if it has (i) a total
risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital
ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not
subject to any order or written directive to meet and maintain a specific
capital level for any capital measure.  An "adequately capitalized" institution
is defined as one that has (i) a total risk-based capital ratio of 8% or
greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a
leverage ratio of 4% or greater (or 3% or greater in the case of an institution
with the highest examination rating and which is not experiencing or
anticipating significant growth).  An institution is considered (A)
"undercapitalized" if it has (i) a total risk-based capital ratio of less than
8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage
ratio of less than 4% (or 3% in the case of an institution with the highest
examination rating and which is not experiencing or anticipating significant
growth); (B) "significantly undercapitalized" if the institution has (i) a total
risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%.

                                       23
<PAGE>
 
     INTERSTATE BANKING.  The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), effective September 29,
1995, permits adequately capitalized bank and savings bank holding companies to
acquire control of banks and savings banks in any state.  The states may
specifically permit interstate acquisitions prior to September 29, 1995, by
enacting legislation that provides for such transactions. North Carolina adopted
nationwide reciprocal interstate acquisition legislation in 1994.

     Such interstate acquisitions are subject to certain restrictions.  States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years. In addition, no
bank or saving bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state, unless
the state has specifically legislated a higher deposit cap. States are free to
legislate stricter deposit caps.

     The Interstate Banking Act also provides for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time.  Unlike interstate acquisitions, a state may
deny interstate branching if it specifically elects to do so by June 1, 1997.
States may choose to allow interstate branching prior to June 1, 1997 by opting-
in to a group of states that permits these transactions.  These states generally
allow interstate branching via a merger of an out-of-state bank with an in-state
bank, or on a de novo basis.  North Carolina has enacted legislation permitting
branching transactions.

     It is anticipated that the Interstate Banking Act will increase competition
within the markets in which the Bank now operates, although the extent to which
such competition will increase in such markets or the timing of such increase
cannot be predicted.

     RESTRICTIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS.  A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations.  In
addition, a North Carolina-chartered stock savings bank, for a period of five
years after its conversion from mutual to stock form, must obtain the written
approval from the Administrator before declaring or paying a cash dividend on
its capital stock in an amount in excess of one-half of the greater of (i) the
institution's net income for the most recent fiscal year end, or (ii) the
average of the institution's net income after dividends for the most recent
fiscal year end and not more than two of the immediately preceding fiscal year
ends, if applicable.  Under FDIC regulations, stock repurchases may be made by
the savings bank only upon receipt of FDIC approval.

     Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution.

     In addition, the Bank is not permitted to declare or pay a cash dividend on
or repurchase any of its capital stock if the effect thereof would be to cause
its net worth to be reduced below the amount required for the liquidation
account established in connection with the Bank's conversion from mutual to
stock ownership.

     OTHER NORTH CAROLINA REGULATIONS.  As a North Carolina-chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator.  The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions.  The regulatory authority of the Administrator
includes, but is not limited to, the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering 

                                       24
<PAGE>
 
and branching of institutions, mergers, conversions and conflicts of interest.
North Carolina law requires that the Bank maintain federal deposit insurance as
a condition of doing business.

     The Administrator conducts regular examinations of North Carolina-chartered
savings banks. The purpose of such examinations is to assure that institutions
are being operated in compliance with applicable North Carolina law and
regulations and in a safe and sound manner. These examinations are usually
conducted on a joint basis with the FDIC. In addition, the Administrator is
required to conduct an examination of any institution when he has good reason to
believe that the standing and responsibility of the institution is of doubtful
character or when he otherwise deems it prudent. The Administrator is empowered
to order the revocation of the license of an institution if he finds that it has
violated or is in violation of any North Carolina law or regulation and that
revocation is necessary in order to preserve the assets of the institution and
protect the interests of its depositors. The Administrator has the power to
issue cease and desist orders if any person or institution is engaging in, or
has engaged in, any unsafe or unsound practice or unfair and discriminatory
practice in the conduct of its business or in violation of any other law, rule
or regulation.

     A North Carolina-chartered savings bank must maintain net worth, computed
in accordance with the Administrator's requirements, of 5% of total assets and
liquidity of 10% of total assets, as discussed above. Additionally, a North
Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.

     Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions.  However, a North Carolina-
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans.  In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.

     North Carolina law provides a procedure by which savings institutions may
consolidate or merge, subject to approval of the Administrator.  The approval is
conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions.  North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.

     FUTURE REQUIREMENTS.  Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions.  It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company and the Bank may be affected by such
statute or regulation.

ITEM 2.   DESCRIPTION OF PROPERTY

     The Bank operates one office located in Reidsville, North Carolina, and
currently has no plans to open or buy any branches.  The Bank commenced
operations at the 501 South Main Street, Reidsville, North Carolina office in
1969.  The property is considered by the Bank's management to be in good
condition.  The Bank's net book value of its investment in that office,
excluding furniture and fixtures, was approximately $73,000 at December 31,
1996.

                                       25
<PAGE>
 
ITEM 3.   LEGAL PROCEEDINGS

     In the opinion of management, neither the Company nor the Bank is involved
in any pending legal proceedings other than routine, non-material proceedings
occurring in the ordinary course of business.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matter was submitted to a vote of the Company's stockholders during the
quarter ended December 31, 1996.



                                    PART II

ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     See the information under the section captioned "Stock Information" on page
37 in the Company's 1996 Annual Report, which section is incorporated herein by
reference.  See "Item 1.  DESCRIPTION OF BUSINESS--Regulation of the Bank--
Restrictions on Dividends and Other Capital Distributions" above for regulatory
restrictions which limit the ability of the Bank to pay dividends to the
Company.

ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

     See the information set forth under Item I above and the information set
forth under the section captioned "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 3 through 11 in the
Company's 1996 Annual Report, which section is incorporated herein by reference.

ITEM 7.   FINANCIAL STATEMENTS

     The consolidated financial statements of the Company set forth on pages 12
through 35 in the Company's 1996 Annual Report are incorporated herein by
reference.

ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

     The Company and the Bank first engaged KPMG Peat Marwick LLP on May 2,
1995.  The Bank's former independent auditor, Haynes Strand Henry and Company,
who had no prior auditing experience with SEC reporting companies, resigned on
that date.  The decision to change independent auditors was approved by the
Bank's Board of Directors.  The former auditor's report on the Bank's financial
statements for the fiscal years ended December 31, 1993 and 1992 did not contain
an adverse opinion or disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or accounting principles.  During each such year and
the subsequent interim period through such auditor's resignation, there were no
disagreements between the Bank and such auditor on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which, if not resolved to the satisfaction of such auditor, would have
caused it to make reference to the subject of such disagreement in connection
with its reports.

                                       26
<PAGE>
 
                                    PART III

ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
          COMPLIANCE WITH 16(A) OF THE EXCHANGE ACT

     The information required by this Item regarding directors and executive
officers of the Company is set forth under the sections captioned "Proposal 1 -
Election of Directors - Nominees" on page 7 of the Proxy Statement and "Proposal
1 - Election of Directors - Executive Officers" on page 9 of the Proxy
Statement, which sections are incorporated herein by reference.

     The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on
page 6 of the Proxy Statement, which is incorporated herein by reference.

ITEM 10.  EXECUTIVE COMPENSATION

     The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Directors Compensation" on pages
8 and 9 and " - Management Compensation" on pages 9 through 14 of the Proxy
Statement, which sections are incorporated herein by reference.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners" on pages 2
through 5 of the Proxy Statement.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     There have been no reportable transactions during the two most recent
fiscal years nor are any reportable transactions proposed as of the date of this
Form 10-KSB.

ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K

13(a)          Exhibits

               A listing of the exhibits to this Report on Form 10-KSB is set
               forth on the Index of Exhibits which immediately precedes such
               exhibits and is incorporated herein by this reference.

13(b)          The Company filed no reports on Form 8-K during the last quarter
               of the fiscal year ended December 31, 1996

                                       27
<PAGE>
 
                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                   FIRST SAVINGS FINANCIAL CORP.

                                   By:  /s/ David S. Kemp
                                        ----------------------------------------
                                        David S. Kemp
                                        President and Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
Signature                             Title                       Date        
---------                             -----                       ----        
<S>                         <C>                              <C>              
/s/ David S. Kemp                                                             
--------------------------  President, Chief Executive       March 28, 1997   
David S. Kemp               Officer and Director                              
                                                                              
/s/ Cynthia F. Teague       Vice-President, Chief Financial  March 28, 1997   
--------------------------  Officer and Chief Accounting                      
Cynthia F. Teague           Officer                                           
                                                                              
/s/ Pat F. Brady            Director                         March 28, 1997   
--------------------------                                                    
Pat F. Brady                                                                  
                                                                              
/s/ Fred B. Coates          Director                         March 28, 1997    
--------------------------                                                    
Fred B. Coates                                                                
                                                                              
/s/ Phillip M. Hooper       Director                         March 28, 1997    
--------------------------
Phillip M. Hooper                                                              
                                                                              
/s/ George I. Richardson    Director                         March 28, 1997 
--------------------------
George I. Richardson                                                          
                                                                              
/s/ Benton S. Smothers      Director                         March 28, 1997 
--------------------------
Benton S. Smothers                                                             
                                                                              
/s/ Gilbert R. Upchurch     Director                         March 28, 1997 
-------------------------- 
Gilbert R. Upchurch 
</TABLE>

                                       28
<PAGE>
 
                               INDEX TO EXHIBITS


EXHIBIT NO.                              DESCRIPTION
-----------                              -----------

   (3)(i)      Certificate of Incorporation, incorporated herein by reference to
               Exhibit (3)(i) to the Registration Statement on Form S-1,
               Registration No. 33-93096, dated June 5, 1995 and amended on July
               31, 1995 and August 9, 1995

   (3)(ii)     Bylaws, incorporated herein by reference to Exhibit (3)(ii) to
               the Registration Statement on Form S-1, Registration No. 33-
               93096, dated June 5, 1995 and amended on July 31, 1995 and August
               9, 1995

   (4)         Specimen Stock Certificate, incorporated herein by reference to
               Exhibit (2) to the Annual Report on Form 10-KSB for the year
               ended December 31, 1996

   (11)        Statement Regarding Computation of Per Share Earnings

   (13)        Portions of 1996 Annual Report to Security Holders

   (21)        Subsidiary of The Company

   (23)        Consent of KPMG Peat Marwick LLP