<PAGE>
 
                               FIVE YEAR SUMMARY

<TABLE> 
<CAPTION> 
                                                                    At June 30,
                                                 ------------------------------------------------
                                                   1998      1997      1996      1995      1994
                                                 --------  --------  --------  --------  --------
                                                               (Dollars in thousands)
<S>                                              <C>       <C>       <C>       <C>       <C>    
FINANCIAL CONDITION DATA:
Balance of:
 Assets                                          $304,168  $294,217  $256,986  $251,787  $248,202
 Loans receivable, net                            208,094   192,238   177,431   159,777   142,779
 Mortgage-backed securities                         9,737     6,572     2,965     4,484     5,872
 Securities                                        74,662    82,187    67,999    81,372    93,554
 Deposits                                         211,925   204,317   187,424   183,080   182,199
 Borrowed funds                                    20,000    20,000       422       543       648
 Shareholders' equity                              69,521    67,195    66,811    65,511    63,294
</TABLE> 

<TABLE> 
<CAPTION> 
                                                            For the Years Ended June 30,
                                                 ------------------------------------------------
                                                   1998      1997      1996      1995      1994
                                                 --------  --------  --------  --------  --------
                                                   (Dollars in thousands, except per share data)
<S>                                              <C>       <C>       <C>       <C>       <C> 
OPERATING DATA:
 Interest and dividend income                    $ 22,543  $ 20,058  $ 18,550  $ 17,438  $ 16,658
 Interest expense                                  11,083     9,782     9,215     8,140     8,102
                                                 --------  --------  --------  --------  --------
 Net interest income                               11,460    10,276     9,335     9,298     8,556
 Provision for loan losses                              -         -         -         -         -
                                                 --------  --------  --------  --------  --------
 Net interest income after provision for
  loan losses                                      11,460    10,276     9,335     9,298     8,556
 Non-interest income                                  616       425       364         7       379
 General and administrative expenses                3,758     4,637     3,693     3,584     5,693
                                                 --------  --------  --------  --------  --------
 Income before income taxes                         8,318     6,064     6,006     5,721     3,242
 Income tax expense                                 3,060     2,155     2,085     1,948     1,066
                                                 --------  --------  --------  --------  --------
 Net income                                      $  5,258  $  3,909  $  3,921  $  3,773  $  2,176
                                                 ========  ========  ========  ========  ========
Per common share data:
 Net income, basic                               $   1.42  $   1.05  $   1.05  $   1.01  $   0.10 * 
                                                 ========  ========  ========  ========  ========
 Net income, diluted                             $   1.30  $   0.98  $   0.98  $   0.95  $   0.10 * 
                                                 ========  ========  ========  ========  ========
 Cash dividends                                  $   0.94  $   0.74  $   0.64  $   0.60  $   0.15
                                                 ========  ========  ========  ========  ========
</TABLE>

* Presented for the period from stock conversion through June 30, 1994.


                           GROWTH WITH MOORE COUNTRY

                                           ABOUT OUR COVER...

                           As this report reflects, First Savings is enjoying
                      robust growth. So is Moore County and, without question,
                      we are a beneficiary of the vibrant, dynamic markets we
                      serve.
     PHOTO
                           Our cover indicates that Moore County's population
                      has doubled in the last thirty years. First Savings'
                      assets have doubled in the last eleven. As we look ahead,
                      we see a continuation - indeed an acceleration - in the
                      county's growth and quality of life trends, and
                      consequently increased opportunities for us to reward you,
                      our valued shareholders, for your continuing support.

                           JOHN F. BURNS, EXECUTIVE VICE PRESIDENT (STANDING),
                           AND WILLIAM E. SAMUELS, PRESIDENT
<PAGE>
 
                               TABLE OF CONTENTS

<TABLE> 
<S>                                                                        <C>
Financial Highlights....................................................       2
 
Chief Executive Officer's Message.......................................       3
 
Management's Discussion & Analysis......................................    4-17
 
Report of Independent Auditors..........................................      18
 
Consolidated Statements of Financial Condition..........................      19
 
Consolidated Statements of Income.......................................      20
 
Consolidated Statements of Shareholders' Equity.........................      21
 
Consolidated Statements of Cash Flows...................................   22-23
 
Notes to Consolidated Financial Statements..............................   24-38
 
Directors, Officers and Office Locations................................      39
 
Corporate Information...................................................      40
</TABLE> 

                                       1
<PAGE>
 
                             FINANCIAL HIGHLIGHTS

<TABLE> 
<CAPTION> 
                                                     AT OR FOR THE TWELVE MONTHS ENDED
                                                                  JUNE 30,
                                                   ------------------------------------
SELECTED FINANCIAL DATA                               1998         1997         1996
                                                   ----------   ----------   ----------
<S>                                                <C>          <C>          <C> 
Net income                                         $5,258,467   $3,908,653   $3,920,755
 
PER COMMON SHARE DATA
 
Net income
 Basic                                             $     1.42   $     1.05   $     1.05
 Diluted                                           $     1.30   $     0.98   $     0.98
Book value                                         $    18.73   $    18.26   $    17.85
Tangible book value                                $    18.73   $    18.26   $    17.85
Number of common shares outstanding                 3,710,820    3,679,185    3,744,000
 
AT YEAR END (THOUSANDS)
 
Assets                                             $  304,168   $  294,217   $  256,986
Deposits                                              211,925      204,317      187,424
Loans receivable, net                                 208,094      192,238      177,431
Shareholders' equity                                   69,521       67,195       66,811
 
RATIOS
 
Return on average assets                                 1.76%        1.45%        1.53%
Return on average assets *                                N/A         1.71%         N/A
Return on average equity                                 7.68%        5.85%        5.86%
Return on average equity *                                N/A         6.90%         N/A
Equity to total assets (year end)                       22.86%       22.84%       26.00%
Nonperforming assets to total assets                     0.18%        0.08%        0.05%
Allowance for loan losses to net loans                   0.29%        0.31%        0.34%
Dividends declared/earnings per share                   71.76%       75.51%       65.31%
</TABLE>

*  Excludes the nonrecurring charge associated with the special SAIF assessment
   in 1997.

                                       2
<PAGE>
 
                           CHIEF EXECUTIVE OFFICER'S
                                    MESSAGE


                                                              September 28, 1998

To Our Shareholders

I am pleased to report to you that First Savings experienced continued growth
and record earnings for the year ended June 30, 1998.  Excluding a nonrecurring
SAIF assessment in fiscal 1997, net income increased 14%, from $4.6 million in
fiscal 1997 to $5.3 million in fiscal 1998.  Return on average assets for the
year ended June 30, 1998 was exemplary at 1.76%.  Key to the success of First
Savings' profitability is our asset quality.  As of June 30, 1998, nonperforming
assets to total assets was .18%.  During fiscal 1998, First Savings reached a
new high for loan growth.  Loan originations increased 17% and net loans
increased 9% from $192.2 million in fiscal 1997 to $208.1 million in fiscal
1998.

Other areas of sustained growth for First Savings were in deposits and total
assets.  We are also particularly proud of our continuing dividend growth.
During fiscal 1998, dividends on an annualized basis increased from $0.88 per
share to $1.00 per share.  As you can see, First Savings remains quite committed
to a high level of performance.

In this pursuit, customer service has always been a primary interest at First
Savings...and always will be.  That is the reason we take so seriously the
emerging issue of potential computer systems' problems involving the year 2000
that could impact virtually every business and household in America.  With this
in mind, your Board established a committee in July of 1997 to address potential
year 2000 issues.  This led to our development of a comprehensive plan of action
that embraces all aspects of our operation.

This plan includes replacing all three of our existing Automatic Teller Machines
with state-of-the-art Diebold equipment while adding a fourth ATM of similar
capability at our Carthage office.  All of our computer equipment, now seven
years old, is being replaced to conform with year 2000 requirements.  These
activities will provide improved service to all of our valued customers which is
consistent with our committee's goal for you to conduct all of your First
Savings transactions with the same ease and confidence in the year 2000 that you
do today.

Effective December 31, 1998, I shall retire as President and Chief Executive
Officer of First Savings Bank.  When making this decision, I agreed to remain
with the bank on a part-time basis, involved in loan operations, special
projects and in other ways as needed.  I will also continue to serve as a member
of your Board.  My wife and I have a large family, including nine grandchildren,
and I anticipate spending more time with them while pursuing other activities.

Upon my retirement, John F. Burns, Executive Vice President and Secretary of
First Savings, will succeed me as President and Chief Executive Officer of First
Savings.  John has worked with me at the bank since 1972.  He is a graduate of
UNC-Chapel Hill and The Graduate School of Banking of the South, and is totally
dedicated to First Savings.  He is very capable of guiding First Savings into
the new century.

I again encourage all of you to bank with First Savings.  We now have over 3,000
shareholders.  With your help, a dedicated Board of Directors and a highly
trained and motivated staff, we can move First Savings to significantly greater
heights.

Sincerely,


                                                   PHOTO HERE.

William E. Samuels
President and Chief Executive Officer


                                         William E. Samuels, President and Chief
                                         Executive Officer, with his grandson,
                                         William F. Giuseffi, First Savings'
                                         youngest shareholder.

                                       3
<PAGE>
 
                                 MANAGEMENT'S
                             DISCUSSION & ANALYSIS

INTRODUCTION

First Savings Bancorp, Inc. (First Savings Bancorp, Inc., and its subsidiary,
First Savings Bank of Moore County, Inc., SSB, are collectively referred to as
"First Savings") is a bank holding company organized under the laws of the state
of North Carolina. First Savings Bank of Moore County, Inc., SSB (the "Bank") is
a North Carolina chartered savings bank and its deposits are insured by the
Savings Association Insurance Fund ("SAIF") administered by the Federal Deposit
Insurance Corporation ("FDIC"). First Savings converted from a federally
chartered savings bank to a North Carolina chartered savings bank on June 22,
1993, and effective January 6, 1994 converted to a capital stock institution.

First Savings' primary market area is Moore County, North Carolina. Moore County
is home to several nationally recognized golf courses and is a popular tourist
and convention destination. The famed Pinehurst Resort is located approximately
three miles from Southern Pines. The Pinehurst Resort, founded in 1895, boasts
eight championship golf courses, including Pinehurst No. 2 which is to be host
of the 1999 U.S. Open. In addition, Moore County is a popular retirement
community. As a result, the economy of Moore County is primarily service
oriented. On June 30, 1998, First Savings had total assets of approximately
$304.2 million, net loans of $208.1 million, deposits of approximately $211.9
million and shareholders' equity of $69.5 million.

First Savings is principally engaged in the business of attracting deposits from
the general public and using such deposits and other funds to make real estate
loans. On June 30, 1998, approximately 83.1% of First Savings' net loan
portfolio was composed of one-to-four family residential real estate loans.
Revenues of First Savings are derived primarily from interest on loans. First
Savings also receives interest income from its securities, mortgage-backed
securities and interest-bearing deposit balances. The major expenses of First
Savings are interest on deposits and general and administrative expenses such as
salaries, employee benefits, and branch occupancy and related expenses.


FINANCIAL CONDITION

This annual report to shareholders contains certain forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and other business of First Savings that are subject to various
factors which could cause actual results to differ materially from those
estimates. Factors which could influence the estimates include changes in
national, regional and local market conditions, legislative and regulatory
conditions, and the interest rate environment.

The following management's discussion and analysis is presented to assist in
understanding the financial condition and results of operations. This discussion
should be read in conjunction with the audited consolidated financial statements
and related footnotes presented in this report.

                          ASSET/LIABILITY MANAGEMENT

A principal operating strategy of First Savings has been the development of a
better match between the repricing of interest-earning assets and interest-
bearing liabilities in order to reduce the Bank's exposure to adverse changes in
interest rates.

Principal among First Savings' asset/liability management strategies has been
(1) the origination of adjustable-rate, single-family mortgage loans; (2) the
origination of adjustable-rate home equity line of credit loans; (3) maintaining
a short-term investment portfolio; and (4) attempting to lengthen deposit
maturities. During fiscal year 1998, the Bank originated 629 mortgage loans
totaling $64.7 million, of which $27.1 million were one, three or five-year
adjustable-rate mortgages or home equity loans. At June 30, 1998, $170.9 million
or 82.1% of the Bank's $208.1 million in total net loans had adjustable interest
rates. Although earnings could still be affected negatively by a rapid and
sustained increase in the level of interest rates, management believes assets
and liabilities are structured to preserve net income during interest rate
changes.

                                       4
<PAGE>
 
                                 MANAGEMENT'S
                             DISCUSSION & ANALYSIS

                                  MARKET RISK

Market risk is the risk of loss from adverse changes in market prices and rates.
First Savings' market risk primarily stems from interest rate risk, the
potential economic loss due to future changes in interest rates, which is
inherent in lending and deposit gathering activities.  First Savings' objective
is to manage the mix of interest-sensitive assets and liabilities to moderate
interest rate risk and stabilize the net interest margin while enhancing
profitability.

THE FOLLOWING TABLE PROVIDES INFORMATION ABOUT FIRST SAVINGS' FINANCIAL
INSTRUMENTS THAT ARE SENSITIVE TO CHANGES IN INTEREST RATES.  ALL DOLLAR AMOUNTS
IN THE TABLE ARE EXPRESSED IN THOUSANDS.

<TABLE>
<CAPTION>
                                                              EXPECTED MATURITY DATE
                                    -------------------------------------------------------------
                                                MORE THAN      OVER       MORE THAN
                                     1 YEAR      1 YEAR       3 YEARS      5 YEARS     MORE THAN               FAIR
                                     OR LESS   TO 3 YEARS   TO 5 YEARS   TO 10 YEARS    10 YEARS    TOTAL     VALUE
                                    ---------  -----------  -----------  ------------  ----------  --------  --------
<S>                                 <C>        <C>          <C>          <C>           <C>         <C>       <C>
LOANS RECEIVABLE (A)
 Fixed Rate                         $    350      $ 1,649      $ 3,268       $12,356     $20,176   $ 37,799  $ 39,957
  Average interest rate                 8.86%        8.13%        8.49%         8.24%       8.49%
 Variable rate                      $ 48,457      $49,612      $21,805       $47,538     $ 3,479   $170,891  $168,137
  Average interest rate                 8.01%        7.70%        7.70%         7.82%       7.70%
 
INVESTMENT SECURITIES (B)
 Interest-earning deposits          $  3,991      $     -      $     -       $     -     $     -   $  3,991  $  3,991
  Average interest rate                 6.10%           -%           -%            -%          -%
 Securities available for sale      $ 26,249      $18,453      $ 3,002       $14,014     $11,014   $ 72,732  $ 72,732
  Average interest rate                 5.63%        6.61%        6.22%         6.74%       7.24%
 Securities held to maturity        $      -      $   167      $   173       $   148     $ 9,249   $  9,737  $  9,821
  Average interest rate                    -%        9.45%        8.94%         9.53%       7.33%
 Nonmarketable equity securities    $  1,930      $     -      $     -       $     -     $     -   $  1,930  $  1,930
  Average interest rate                 7.50%           -%           -%            -%          -%
 
DEBT OBLIGATIONS (C)
 Interest-bearing deposits          $173,854      $28,906      $ 6,051       $   302     $     -   $209,113  $208,013
  Average interest rate                 4.51%        5.58%        5.90%         6.00%          -%
 Borrowings                         $ 20,000            -            -             -           -   $ 20,000  $ 19,976
  Average interest rate                 6.25%           -%           -%            -%          -%
</TABLE>

(A) For loans receivable, the table presents principal cash flows by fixed and
    adjustable rate.  The table includes contractual maturities for fixed rate
    loans and adjustable rate loans are assumed to reprice at contractual
    repricing intervals.  The table presents fair values at June 30, 1998 and
    weighted average interest rates by maturity dates.
(B) For investment securities, including securities available for sale,
    securities held to maturity, and nonmarketable equity securities, the table
    presents contractual maturities.  Interest-earning deposits are due on
    demand financial instruments and are presented in the due in one year
    category.  Nonmarketable equity securities, which consists of Federal Home
    Loan Bank stock, have no contractual maturity and are placed in the longest
    expected maturity date.  The table presents fair values at June 30, 1998 and
    weighted average interest rates by maturity dates.
(C) For interest-bearing deposits and borrowings, the table presents principal
    cash flows and weighted average interest rates by expected maturity dates
    and fair values at June 30, 1998.

                                       5
<PAGE>
 
                                 MANAGEMENT'S
                             DISCUSSION & ANALYSIS

GAP ANALYSIS

First Savings' asset/liability management may be analyzed by examining the
extent to which its assets and liabilities are "interest rate sensitive" and by
monitoring its interest rate sensitivity "gap." An asset or liability is said to
be interest rate sensitive within a specific time period if it matures or
reprices during that period. The interest rate sensitivity gap is defined as the
excess of interest-earning assets maturing or repricing within a specific time
period over interest-bearing liabilities maturing or repricing within that same
time period. Gap is considered positive when the amount of interest rate
sensitive assets repricing or maturing within a period exceeds the amount of
interest rate sensitive liabilities repricing or maturing during that same
period. Gap is considered negative when the amount of interest rate sensitive
liabilities repricing or maturing within a period exceeds the amount of interest
rate sensitive assets repricing or maturing during that same period. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income while a positive gap would tend to result in an increase in
net interest income. During a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income while a positive gap
would tend to adversely affect net interest income.
                                                                            
THE FOLLOWING GAP ANALYSIS TABLE SETS FORTH THE AMOUNTS OF INTEREST-EARNING
ASSETS AND INTEREST-BEARING LIABILITIES OUTSTANDING AT JUNE 30, 1998, WHICH ARE
EXPECTED TO REPRICE OR MATURE IN EACH OF THE FUTURE TIME PERIODS SHOWN. THE
ASSETS OR LIABILITIES SHOWN, WHICH REPRICE OR MATURE DURING A PARTICULAR PERIOD,
WERE DETERMINED IN ACCORDANCE WITH THE CONTRACTUAL TERMS OF THE ASSET OR
LIABILITY. ADJUSTABLE-RATE LOANS ARE ASSUMED TO REPRICE AT CONTRACTUAL REPRICING
INTERVALS.

<TABLE>
<CAPTION> 
------------------------------------------------------------------------------------------------------------------------------------


                                                                    TERMS TO REPRICING AT JUNE 30, 1998
                             -----------------------------------------------------------------------------------------------------
                                                    MORE THAN          MORE THAN          MORE THAN
                                  1 YEAR              1 YEAR            3 YEARS            5 YEARS         MORE THAN
GAP ANALYSIS                      OR LESS           TO 3 YEARS         TO 5 YEARS        TO 10 YEARS        10 YEARS       TOTAL
                             -----------------   ----------------   ----------------   ---------------   --------------   --------
                                                                      (Dollars in thousands)
<S>                          <C>                 <C>                <C>                <C>               <C>              <C>
INTEREST-EARNING ASSETS:
Mortgage loans:
 Adjustable rate residential        
 1-4 family                          $  35,596           $ 43,846           $ 17,517           $44,259          $ 3,414   $144,632
 Fixed rate 1-4 family                      56                376              2,571            11,217           17,561     31,781
 Adjustable rate                       
  non-residential                        2,719              5,766              4,288             3,279               65     16,117
 Fixed rate non-residential                  -                182                434             1,105            2,615      4,336
 Home equity and property           
  improvement                            8,970                  -                  -                 -                -      8,970
Other loans                              1,466              1,091                263                34                -      2,854
Investments                             32,050             18,101              2,993            13,940           11,000     78,084
Mortgage-backed securities                   -                167                173               148            9,249      9,737
                                     ---------           --------           --------           -------          -------   --------
 
Total interest-earning               $  80,857           $ 69,529           $ 28,239           $73,982          $43,904   $296,511
 assets                              =========           ========           ========           =======          =======   ========
 
INTEREST-BEARING LIABILITIES:
Deposits:
 Certificates of deposit             $  96,633           $ 28,906           $  6,051           $   302          $     -   $131,892
 Interest-bearing checking              20,618                  -                  -                 -                -     20,618
 Money market deposit  accounts         42,567                  -                  -                 -                -     42,567
 Passbook savings                       14,036                  -                  -                 -                -     14,036
Borrowed funds                          20,000                  -                  -                 -                -     20,000
                                     ---------           --------           --------           -------          -------   --------
 
Total interest-bearing               $ 193,854           $ 28,906           $  6,051           $   302          $     -   $229,113
 liabilities                         =========           ========           ========           =======          =======   ========
 
INTEREST SENSITIVITY GAP             
 PER PERIOD                          $(112,997)          $ 40,623           $ 22,188           $73,680          $43,904   $ 67,398
 
CUMULATIVE INTEREST                  
 SENSITIVITY GAP                     $(112,997)          $(72,374)          $(50,186)          $23,494          $67,398   $ 67,398
 
CUMULATIVE GAP AS A PERCENTAGE OF
TOTAL INTEREST-EARNING  ASSETS          (38.11)%           (24.41)%           (16.93)%            7.92%           22.73%     22.73%

 
CUMULATIVE INTEREST-EARNING ASSETS
AS A PERCENTAGE OF INTEREST-BEARING
LIABILITIES                              41.71%             67.51%             78.07%           110.25%         129.42%     129.42%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE> 

                                       6
<PAGE>
 
                                 MANAGEMENT'S
                             DISCUSSION & ANALYSIS

Passbook accounts, money market deposit accounts and negotiable order of
withdrawal or other transaction accounts are assumed to be subject to immediate
repricing and depositor availability and have been placed in the shortest
period. No prepayment assumptions have been made for any interest-earning assets
or interest-bearing liabilities. In addition, the table does not reflect
scheduled principal payments which will be received throughout the lives of the
loans. The interest sensitivity of First Savings' assets and liabilities
illustrated in the table would vary substantially if different assumptions were
used or if actual experience differs from that indicated by such assumptions.
                                                 
The Gap Analysis table does not necessarily indicate the impact of general
interest rate movements on the Bank's net interest yield because the repricing
of various categories of assets and liabilities is discretionary and is subject
to competitive and other pressures. As a result, various assets and liabilities
indicated as repricing within the same period may in fact reprice at different
times and at different rate levels.
                                                 
                                  LIQUIDITY 

Maintaining adequate liquidity while managing interest rate risk is the primary
goal of First Savings' asset and liability management strategy. Liquidity is the
ability to fund the needs of the Bank's borrowers and depositors, pay operating
expenses, and meet regulatory liquidity requirements. Maturing investments, loan
and mortgage-backed security principal repayments, deposits and income from
operations are the main sources of liquidity. The Bank's primary uses of
liquidity are to fund loans and to make investments.
 
As of June 30, 1998, liquid assets (cash and cash equivalents, and marketable
investment securities) were approximately $92.2 million, which represents 43.5%
of deposits. As a North Carolina chartered savings bank, First Savings is
required to maintain liquid assets equal to at least 10.0% of its total assets.
For purposes of this requirement, liquid assets consist of cash and readily
marketable investments and mortgage-backed securities. At June 30, 1998, this
liquidity ratio, based on North Carolina regulations, was 25.88%. Management
considers current liquidity levels to be adequate to meet First Savings'
foreseeable needs.
 
At June 30, 1998, outstanding mortgage loan commitments and available home
equity line of credit balances were $20.5 million, available credit card line of
credit balances were $3.6 million and the undisbursed portion of construction
loans was $5.6 million. Funding for these commitments is expected to be provided
from deposits, loan and mortgage-backed securities principal repayments,
maturing investments and income generated from operations.
                                                                            
                             CAPITAL RESOURCES   

Under federal capital regulations, First Savings must satisfy certain minimum
leverage ratio requirements and risk-based capital requirements. Failure to meet
such requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on First Savings' financial statements. At June 30, 1998 and
1997, First Savings exceeded all such requirements.
                                                                            
First Savings is also subject to limits on dividend payments. First Savings is
prohibited, under the North Carolina Business Corporation Act, from paying a
dividend if such payment would (i) cause First Savings to be unable to pay its
debts as they become due in the ordinary course of business or (ii) reduce First
Savings' total assets below the sum of First Savings' total liabilities plus any
amounts which would be needed, if First Savings were to be dissolved at the time
of distribution, to satisfy the preferential rights that are superior to holders
of the Common Stock.
                                                                            
Payment of dividends by the Bank subsidiary to the holding company is subject to
various restrictions. Under applicable banking regulations, the Bank may not
declare a cash dividend if the effect thereof would be to reduce its net worth
to an amount less than the minimum required by federal and state banking
regulations. In addition, for a period of five years after the consummation of
the Bank's stock conversion, which occurred on January 6, 1994, the Bank will be
required to obtain prior written approval from the Administrator of the Savings
Institutions Division, North Carolina Department of Commerce, before it can
declare a cash dividend in an amount in excess of one-half the greater of (i)
its net income for the most recent fiscal year or (ii) the average of its net
income after dividends for the most recent fiscal year and not more than two of
the immediately preceding fiscal years, as applicable, or repurchase any of its
common stock. A source of First Savings' funds are dividends received from the
Bank. In fiscal 1999, the amount of dividends that can be paid without prior
approval from regulators is approximately $2.0 million. These funds should be
adequate to cover First Savings' needs.

                                       7
<PAGE>

                                 MANAGEMENT'S
                             DISCUSSION & ANALYSIS

                       ACCOUNTING AND REGULATORY MATTERS

Management is not aware of any known trends, events, uncertainties or current
recommendations by regulatory authorities that will have or that are reasonably
likely to have a material effect on First Savings' liquidity, capital resources,
or other operations.

                          AVERAGE YIELD/COST ANALYSIS

THE FOLLOWING TABLE CONTAINS INFORMATION RELATING TO FIRST SAVINGS' AVERAGE
BALANCE SHEET AND REFLECTS THE AVERAGE YIELDS ON ASSETS AND AVERAGE COSTS OF
LIABILITIES FOR THE PERIODS INDICATED. SUCH YIELDS AND COSTS ARE DERIVED BY
DIVIDING INCOME OR EXPENSE BY THE AVERAGE BALANCES OF ASSETS OR LIABILITIES,
RESPECTIVELY, FOR THE PERIODS PRESENTED.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------

                                                                             YEARS ENDED JUNE 30,
                                           ----------------------------------------------------------------------------------------
                                                       1998                          1997                          1996
                                           ---------------------------      ------------------------      -------------------------
                                                               AVERAGE                       AVERAGE                       AVERAGE
                                           AVERAGE              YIELD/   AVERAGE              YIELD/   AVERAGE              YIELD/
                                           BALANCE   INTEREST    COST    BALANCE   INTEREST    COST    BALANCE   INTEREST    COST
                                           --------  --------  --------  --------  --------  --------  --------  --------  --------
                                                                            (Dollars in thousands)
<S>                                        <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
 
Interest-earning assets:
 Interest-earning deposits                 $  6,167   $   391     6.34%  $  7,623   $   449     5.89%  $  2,170   $   161     7.42%
 Investments, net, at cost                   77,009     5,222     6.78%    67,269     4,317     6.42%    75,155     4,690     6.24%
 Mortgage-backed securities                   9,143       668     7.31%     4,537       338     7.45%     3,842       293     7.63%
 Loans receivable, net                      199,776    16,262     8.14%   185,120    14,954     8.08%   168,579    13,406     7.95%
                                           --------   -------            --------   -------            --------   -------
  Total interest-earning assets             292,095    22,543     7.72%   264,549    20,058     7.58%   249,746    18,550     7.43%
                                                      -------                       -------                       -------
Non-interest-earning assets                   6,680                         5,734                         5,963
                                           --------                      --------                      --------
 
  Total assets                             $298,775                      $270,283                      $255,709
                                           ========                      ========                      ========
 
Interest-bearing liabilities:
 Passbooks savings                         $ 13,723   $   428     3.12%  $ 10,994   $   297     2.70%  $ 10,093   $   252     2.50%
 NOW and money market accounts               66,100     2,166     3.28%    63,199     2,108     3.34%    57,130     1,956     3.42%
 Certificates of deposit                    129,698     7,371     5.68%   122,761     7,091     5.78%   117,436     6,957     5.92%
 Borrowed funds                              17,786     1,118     6.29%     4,694       286     6.09%       845        50     5.92%
                                           --------   -------            --------   -------            --------   -------
  Total interest-bearing liabilities        227,307    11,083     4.88%   201,648     9,782     4.85%   185,504     9,215     4.97%
                                                      -------                       -------                       -------
Non-interest-bearing liabilities              2,672                         1,789                         3,272
                                           --------                      --------                      --------
  Total liabilities                         229,979                       203,437                       188,776
Shareholders' equity                         68,796                        66,846                        66,933
                                           --------                      --------                      --------
 
Total liabilities and shareholders' 
  equity                                   $298,775                      $270,283                      $255,709
                                           ========                      ========                      ========
 
Net interest income and interest rate
 spread                                               $11,460     2.84%             $10,276     2.73%             $ 9,335     2.46%
                                                      =======                       =======                       =======
 
Net interest-earning assets and net
 interest margin                           $ 64,788               3.92%  $ 62,901               3.88%  $ 64,242               3.74%
 
Percentage of average interest-earning
 assets to average interest-bearing
 liabilities                                                    128.50%                       131.19%                       134.63%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       8
<PAGE>
 
                                 MANAGEMENT'S
                             DISCUSSION & ANALYSIS

The table below provides information regarding changes in interest income and
interest expense for the periods indicatedGlenn HeplerFinancial Printing
GroupTHE TABLE BELOW PROVIDES INFORMATION REGARDING CHANGES IN INTEREST INCOME
AND INTEREST EXPENSE FOR THE PERIODS INDICATED. FOR EACH CATEGORY OF INTEREST-
EARNING ASSET AND INTEREST-BEARING LIABILITY, INFORMATION IS PROVIDED ON CHANGES
ATTRIBUTABLE TO (I) CHANGES IN VOLUME (CHANGES IN VOLUME MULTIPLIED BY THE PRIOR
PERIOD'S RATE); (II) CHANGES IN RATES (CHANGE IN RATE MULTIPLIED BY THE PRIOR
PERIOD'S VOLUME); (III) CHANGES IN RATE-VOLUME (CHANGES IN RATE MULTIPLIED BY
CHANGES IN VOLUME); AND (IV) NET CHANGE (THE SUM OF PREVIOUS COLUMNS.)

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------   
                                                               Years Ended June 30,                               
                               ---------------------------------------------------------------------------------  
                                              1998 vs. 1997                           1997 vs. 1996               
                                           INCREASE (DECREASE)                     Increase (Decrease)            
                                                 Due to                                   Due to                  
                               -----------------------------------------  --------------------------------------  
                                                      RATE/                                     Rate/             
                                Volume      RATE      VOLUME      TOTAL    Volume     Rate     Volume     Total   
                               ---------  --------   --------   --------  --------  -------   --------   -------        
                                                              (Dollars in thousands)                              
  <S>                          <C>        <C>        <C>        <C>        <C>      <C>       <C>        <C>      
  Interest income:                                                            
   Interest-earning deposits    $  (86)   $     34   $    (6)   $    (58)  $  405   $   (33)  $   (84)   $   288                  
   Investments (1)                 625         245        35         905     (492)      133       (14)      (373)                 
   Mortgage-backed securities      343          (6)       (7)        330       53        (7)       (1)        45                  
   Loan portfolio                1,184         115         9       1,308    1,315       212         21     1,548                  
                                ------    --------   -------    --------   ------   -------   --------   -------                  
     Total interest income       2,066         388        31       2,485    1,281       305       (78)     1,508                  
                                ------    --------   -------    --------   ------   -------   --------   -------                  
                                                                              
  Interest expense:                                                           
   Passbooks savings                74          46        11         131       22        21          2        45                  
   NOW and money market             97         (37)       (2)         58      208       (51)       (5)       152                  
    accounts                                                                  
   Certificates of deposit         400        (114)       (6)        280      315      (173)       (8)       134                  
   Borrowed funds                  798           9        25         832      228         1          7       236                  
                                ------    --------   -------    --------   ------   -------   --------   -------                  
     Total interest expense      1,369         (96)       28       1,301      773      (202)       (4)       567                  
                                ------    --------   -------    --------   ------   -------   --------   -------                  
                                                                              
  Net interest income           $  697    $    484   $     3    $  1,184   $  508   $   507   $   (74)   $   941                  
   (expense)                    ======    ========   =======    ========   ======   =======   ========   =======  
                                                                              
  (1) Includes investment securities and FHLB stock.                          
--------------------------------------------------------------------------------------------------------------------    
</TABLE>  

                          LOAN PORTFOLIO COMPOSITION
 
 First Savings' consolidated net loan portfolio totaled approximately $208.1
 million at June 30, 1998, representing 68.4% of First Savings' total assets. At
 June 30, 1998, approximately 82.1% of First Savings' net loan portfolio was
 composed of adjustable rate loans, and approximately 18.1% of First Savings'
 net loan portfolio was composed of fixed rate loans. At June 30, 1998,
 approximately $172.9 million, or 83.1%, of First Savings' net loan portfolio
 was composed of one-to-four family residential real estate loans. On such date,
 approximately $39.1 million, or 18.8%, of First Savings' net loan portfolio was
 composed of multi-family residential, commercial and other real estate loans.

                                       9
<PAGE>
 
                                 MANAGEMENT'S
                             DISCUSSION & ANALYSIS


THE FOLLOWING TABLE SETS FORTH THE COMPOSITION OF FIRST SAVINGS' LOAN PORTFOLIO
BY TYPE OF LOAN AT THE DATES INDICATED.
 
<TABLE> 
<CAPTION> 
                                                                             June 30,
                              -----------------------------------------------------------------------------------------------------
                                    1998                  1997                  1996                1995                1994
                              ----------------     -----------------    ------------------    ----------------   ------------------
                                         % OF                  % of                  % of                % of                % of
                              Amount     TOTAL     Amount      Total     Amount      Total     Amount   Total     Amount     Total
                             ---------  -------   ---------   -------   ---------   -------   --------  ------   --------   -------
                                                                       (Dollars in thousands)
<S>                          <C>        <C>       <C>         <C>       <C>         <C>       <C>       <C>      <C>        <C> 
Real estate loans:
 Residential 1-4 family       $172,915    83.09%   $162,620     84.59%   $151,934     85.63%  $137,855   86.28%  $124,751     87.37%

 Multi-family (5 or more         2,969     1.43%      2,601      1.35%      3,070      1.73%     2,272    1.42%     3,393      2.37%

  units)
 Construction                   10,592     5.09%     10,969      5.71%      8,123      4.58%     7,951    4.98%     5,263      3.69%

 Commercial real estate
  and other
  properties                    16,568     7.96%     13,285      6.91%     12,028      6.78%    11,844    7.41%    11,022      7.72%

 Home equity and property
  improvement                    8,970     4.31%      8,449      4.40%      5,607      3.16%     4,066    2.55%     2,852      2.00%

                              --------   ------    --------   -------    --------   -------   -------- -------   --------   -------
 
 Total real estate loans       212,014   101.88%    197,924    102.96%    180,762    101.88%   163,988  102.64%   147,281    103.15%

                              --------   ------    --------   -------    --------   -------   -------- -------   --------   -------
 
Other:
 Savings account loans             900     0.43%        909      0.47%        875      0.49%       703    0.44%       604      0.42%

 Installment loans                 797     0.38%        621      0.32%        351      0.20%       111    0.07%         -         -%

 Credit card loans               1,157     0.56%        951      0.50%        520      0.29%         -       -%         -         -%

                              --------   ------    --------   -------    --------   -------   -------- -------   --------   -------
 Total other loans               2,854     1.37%      2,481      1.29%      1,746      0.98%       814    0.51%       604      0.42%

                              --------   ------    --------   -------    --------   -------   -------- -------   --------   -------
 
Less:
 Unearned fees and                 547     0.26%        555      0.29%        509      0.29%       458    0.29%       369      0.26%

  discounts
 Loans in process                5,631     2.71%      7,008      3.65%      3,959      2.23%     3,958    2.48%     4,128      2.89%

 Allowance for loan losses         596     0.28%        604      0.31%        609      0.34%       609    0.38%       609      0.42%

                              --------   ------    --------   -------    --------   -------   -------- -------   --------   -------
 Total reductions                6,774     3.25%      8,167      4.25%      5,077      2.86%     5,025    3.15%     5,106      3.57%

                              --------   ------    --------   -------    --------   -------   -------- -------   --------   -------
 
Total loans receivable, net   $208,094   100.00%   $192,238    100.00%   $177,431    100.00%  $159,777  100.00%  $142,779    100.00%

                              ========   ======    ========   =======    ========   =======   ======== =======   ========   =======
 
</TABLE> 
 
                             NONPERFORMING ASSETS
 
The Bank's general policy is to place a loan on nonaccrual status when the loan
becomes 90 days delinquent. Interest on loans that are contractually 90 days or
more past due is reserved through an allowance account. The allowance is
established by a charge to interest income equal to all interest previously
accrued, and income is subsequently recognized only to the extent cash payments
are received, and in management's judgment, the borrower's ability to make
periodic interest and principal payments is back to normal, in which case the
loan is returned to accrual status.

                                       10
<PAGE>
 
                                 MANAGEMENT'S
                             DISCUSSION & ANALYSIS


THE FOLLOWING TABLE SETS FORTH INFORMATION WITH RESPECT TO NONPERFORMING ASSETS
IDENTIFIED BY THE BANK, INCLUDING NONACCRUAL LOANS AND FORECLOSED REAL ESTATE,
AT THE DATES INDICATED.  DURING THE PERIODS SHOWN, FIRST SAVINGS HAD NO
"RESTRUCTURED LOANS" AS DEFINED BY STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
NO. 15.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------- 

                                                                                     JUNE 30,
                                                     --------------------------------------------------------------------------
                                                        1998             1997             1996            1995          1994
                                                     ----------       ----------       ----------      ----------    ----------
                                                                                  (Dollars in thousands)                   
    <S>                                              <C>              <C>              <C>             <C>           <C> 
    Loans accounted for on a nonaccrual basis:         
       Real estate:                                                                                    
        Residential                                  $       545      $      250       $      134      $      139    $      329
        Commercial                                             -               -                -             133             -
       Consumer                                                -               -                -               -             -
                                                     -----------      ----------       ----------      ----------    ---------- 
        Total                                                545             250              134             272           329
                                                     -----------      ----------       ----------      ----------    ----------
                                                                                                       
    Accruing loans which are contractually                                                                               
     past due 90 days or more:
       Real estate:                                                                                    
        Residential                                            -               -                -               -             -
        Commercial                                             -               -                -               -             -
       Consumer                                                -               -                -               -             -
                                                     -----------      ----------       ----------      ----------    ---------- 
        Total                                                  -               -                -               -             -
                                                     -----------      ----------       ----------      ----------    ---------- 
                                                                                                       
    Total of nonaccrual and 90 days past due                                                                                
     loans                                                   545             250              134             272           329
    Foreclosed real estate                                     -               -                -               -             -
    Other nonperforming assets                                 -               -                -               -             -
                                                     -----------      ----------       ----------      ----------    ----------
                                                                                                       
        Total nonperforming assets                   $       545      $      250       $      134      $      272    $      329
                                                     ===========      ==========       ==========      ==========    ========== 

    Total loans delinquent 90 days or more to
     net loans                                              0.26%           0.13%            0.08%           0.17%         0.23%
    Total loans delinquent 90 days or more to
     total assets                                           0.18%           0.08%            0.05%           0.11%         0.13% 
    Total nonperforming assets to total assets              0.18%           0.08%            0.05%           0.11%         0.13%
----------------------------------------------------------------------------------------------------------------------------------- 
</TABLE> 
 
                                                 
                           ALLOWANCE FOR LOAN LOSSES
                                                 
In originating loans, the Bank recognizes that credit losses will be experienced
and that the risk of loss will vary with, among other things, the type of loan
being made, the creditworthiness of the borrower over the term of the loan and,
in the case of a secured loan, the quality of the security for the loan, as well
as general economic conditions.

It is management's policy to maintain an adequate allowance for loan losses
based on, among other things, the Bank's historical loan loss experience,
evaluation of economic conditions and regular review of delinquencies and loan
portfolio quality. Specific allowances are provided for individual loans when
ultimate collection is considered questionable by management after reviewing the
current status of loans which are contractually past due and considering the net
realizable value of the security for the loans.

                                       11
<PAGE>
 
                                  MANAGEMENTS
                             DISCUSSION & ANALYSIS


After reviewing general economic conditions, industry standards and allowances
of comparable institutions in its peer group, the Bank did not increase the
allowance during fiscal 1998. Management continues to actively monitor First
Savings' asset quality, to charge off loans against the allowance for loan
losses when appropriate and to provide specific loss reserves when necessary.

Although management believes it uses the best information available to make
determinations with respect to the allowance for loan losses, future adjustments
may be necessary if economic conditions differ substantially from the economic
conditions in the assumptions used in making the initial determinations.


THE FOLLOWING TABLE DESCRIBES THE ACTIVITY RELATED TO THE BANK'S ALLOWANCE FOR
LOAN LOSSES FOR THE DATES INDICATED.

<TABLE> 
<CAPTION> 
------------------------------------------------------------------------------------------------------------------------------------

                                                                                      JUNE 30,
                                                    ---------------------------------------------------------------------------
                                                       1998              1997            1996             1995          1994
                                                    ----------        ----------      ----------       ----------    ---------- 
                                                                             (Dollars in thousands) 
<S>                                                 <C>               <C>             <C>              <C>           <C> 
Balance beginning of period                         $      604        $      609      $      609       $      609    $      630
Provision for loan losses and losses on             
 foreclosed real estate                                      -                 -               -                -             -
                                                    ----------        ----------      ----------       ----------    ---------- 
Charge-offs:                                                                                          
   Residential 1-4 family                                    -                 -               -               (4)          (21)
   Commercial real estate and other properties               -                 -               -                -             - 
   Home equity and property improvements                     -                 -               -                -             -
   Construction                                              -                 -               -                -             -
   Savings accounts                                          -                 -               -                -             -
   Other consumer                                           (8)               (5)              -                -             -
   Commercial                                                -                 -               -                -             -
                                                    ----------        ----------      ----------       ----------    ---------- 
                                                            (8)               (5)              -               (4)          (21)
                                                    ----------        ----------      ----------       ----------    ---------- 
Recoveries:                                                                                                              
   Residential 1-4 family                                    -                 -               -                4             -
   Commercial real estate and other properties               -                 -               -                -             -
   Construction                                              -                 -               -                -             -
   Savings accounts                                          -                 -               -                -             -
   Other consumer                                            -                 -               -                -             -
   Commercial                                                -                 -               -                -             -
                                                    ----------        ----------      ----------       ----------    ---------- 
                                                             -                 -               -                4             -
                                                    ----------        ----------      ----------       ----------    ---------- 
Balance at end of period                            $      596        $      604      $      609       $      609    $      609
                                                    ==========        ==========      ==========       ==========    ==========  
Ratio of net charge-offs during the period to                                                          
 average loans outstanding during the period              0.00%             0.00%           0.00%            0.00%         0.01%
                                                    ==========        ==========      ==========       ==========    ==========  
------------------------------------------------------------------------------------------------------------------------------------
</TABLE> 

THE FOLLOWING TABLE SETS FORTH THE COMPOSITION OF THE ALLOWANCE FOR LOAN LOSSES
BY TYPE OF LOAN AT THE DATES INDICATED.

<TABLE> 
<CAPTION> 
------------------------------------------------------------------------------------------------------------------------------------

                                                                                    JUNE 30,
                                               ------------------------------------------------------------------------------------
                                                         1998                          1997                         1996
                                               ------------------------       ------------------------      -----------------------
                                                              Amount of                     Amount of                   Amount of
                                               Amount of       Loans to       Amount of      Loans to       Amount of    Loans to
                                               Allowance    Gross Loans       Allowance    Gross Loans      Allowance   Gross Loans
                                               ---------    -----------       ---------    -----------      ---------   ----------- 

                                                                              (Dollars in thousands) 
<S>                                            <C>          <C>               <C>          <C>              <C>         <C>  
Real estate loans:                                                                                          
  Residential 1-4 family                       $     463          77.68%      $     400          66.23%     $     503         82.59%

  Commercial real estate and other property           64          10.74%             73          12.08%            50          8.21%

Home equity and property improvement                  16           2.68%             21           3.48%            17          2.79%

Construction                                           9           1.52%              7           1.16%            15          2.47%

                                               ---------    -----------       ---------    -----------      ---------   ----------- 

      Total real estate loans                        552          92.62%            501          82.95%           585         96.06%

                                                                                                            
Savings account loans                                  -              -%              -              -%             -             -%

Other consumer loans                                  44           7.38%            103          17.05%            24          3.94%

                                               ---------    -----------       ---------    -----------      ---------   ----------- 

      Total allowance for loan losses          $     596         100.00%      $     604         100.00%     $     609        100.00%

                                               =========    ===========       =========    ===========      =========   =========== 

------------------------------------------------------------------------------------------------------------------------------------

</TABLE>

                                       12
<PAGE>
 
                                  MANAGEMENTS
                             DISCUSSION & ANALYSIS

                           RESULTS OF OPERATIONS FOR
                            THE FISCAL YEARS ENDED
                                 JUNE 30, 1998
                                      AND
                                 JUNE 30, 1997
                                        
GENERAL

First Savings recorded net income of $5.3 million for the year ended June 30,
1998, an increase of 35.9% over the $3.9 million earned for the year ended June
30, 1997. Basic and fully diluted earnings per share were $1.42 and $1.30,
respectively, for the year ended June 30, 1998 compared to $1.05 and $0.98,
respectively, for the year ended June 30, 1997. During fiscal 1997, First
Savings paid a nonrecurring deposit insurance assessment to the Savings
Association Insurance Fund ("SAIF") of approximately $1.2 million. Net of income
taxes, this special assessment had the effect of reducing net income for the
year by approximately $700,000. Net income excluding this nonrecurring charge
was $4.6 million. Basic and fully diluted earnings per share for fiscal year
1997, excluding the nonrecurring SAIF assessment, were $1.24 and $1.16,
respectively. The primary factor contributing to First Savings core earnings
growth was a 12% increase in the Bank's net interest margin. Non-interest income
was higher in 1998 primarily due to increases in fees and service charges.

Nonperforming assets (loans 90 days or more delinquent and foreclosed real
estate owned) were $545,000 or 0.18% of total assets at June 30, 1998, compared
to $250,000 or .08% at June 30, 1997. First Savings did not have any real estate
owned at June 30, 1998 or June 30, 1997.

NET INTEREST INCOME

Net interest income for the years ended June 30, 1998 and 1997, was $11.5
million and $10.3 million, respectively. The primary reason for the increase in
net interest income during the fiscal year ended June 30, 1998 was due to a
higher interest rate spread. The average yield on interest-earning assets
increased by 14 basis points, and the average cost of interest-bearing
liabilities increased by 3 basis points for the year ended June 30, 1998,
increasing the Bank's interest rate spread to 2.84% compared to 2.73% for the
year ended June 30, 1997. The average balance of interest-earning assets and
interest-bearing liabilities during the fiscal year ended June 30, 1998 was
$292.1 million and $227.3 million, respectively, compared to $264.5 million and
$201.6 million, respectively, during the fiscal year ended June 30, 1997. The
Average Yield/Cost Analysis table reflects the average yields on assets and
average cost of liabilities for the years ended June 30, 1998, 1997, and 1996.
Such average yields and costs are derived by dividing income or expense by the
average balance of interest-earning assets or interest-bearing liabilities,
respectively, for the period presented.

INTEREST AND DIVIDEND INCOME

First Savings' total interest and dividend income for the fiscal year ended June
30, 1998 was $22.5 million as compared to $20.1 million for fiscal year 1997, an
increase of $2.4 million or 11.9%. This increase was due primarily to increases
in average interest-earning assets and their related yields.

INTEREST EXPENSE

Total interest expense for the year ended June 30, 1998 increased by $1.3
million or 13.3% when compared to the prior year. The Bank's cost of funds
increased from 4.85% in 1997 to 4.88% in 1998; and, average interest-bearing
liabilities increased 12.7% from $201.6 million at June 30, 1997 to $227.3
million at June 30, 1998.

Interest expense on borrowed funds increased $832,000 from $286,000 in 1997 to
$1,118,000 in 1998. This increase is the result of advances from the Federal
Home Loan Bank (FHLB) in 1998. The increase in borrowings was a result of
investment strategies implemented during the fourth quarter of fiscal 1997.
Average borrowings for the years ended June 30, 1998 and 1997 were $17.8 million
and $4.7 million, respectively.

ALLOWANCE FOR LOAN LOSSES

At June 30, 1997, the allowance for loan losses was $604,000. During fiscal year
1998, First Savings did not add to this reserve. With only $8,000 in charge-offs
during the current year, the allowance for loan losses at June 30, 1998
decreased slightly to $596,000. Management considers this level to be
appropriate based on lending volume, the current level of delinquencies, other
nonperforming assets and the overall economic conditions.

NON-INTEREST INCOME

Total non-interest income for the fiscal year ended June 30, 1998 was $616,000
as compared to $425,000 for the fiscal year ended June 30, 1997. The 44.9%
increase is primarily attributable to high levels of fees and service charges
during the year ended June 30, 1998.

                                       13
<PAGE>
 
                                  MANAGEMENTS
                             DISCUSSION & ANALYSIS

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for fiscal year ended June 30, 1998 were
$3.8 million compared to $4.6 million for the fiscal year ended June 30, 1997.
Excluding the nonrecurring SAIF assessment in fiscal 1997, general and
administrative expense would have been $3.5 million.

INCOME TAXES

Income tax expense increased for the fiscal year ended June 30, 1998 to $3.1
million, as compared to $2.2 million for the same period in 1997. The increase
in income taxes was attributed to the higher level of pre-tax income and to
increased state income taxes as a larger portion of the Bank's income was
subject to such taxes.

                           RESULTS OF OPERATIONS FOR
                            THE FISCAL YEARS ENDED
                                 JUNE 30, 1997
                                      AND
                                 JUNE 30, 1996
                                        
GENERAL

First Savings recorded net income of $3.9 million for each of the years ended
June 30, 1997 and 1996. During fiscal 1997, First Savings paid a nonrecurring
deposit insurance assessment to the Savings Association Insurance Fund ("SAIF")
of approximately $1.2 million. Net of income taxes, this special assessment had
the effect of reducing net income for the year by approximately $700,000. Net
income excluding this nonrecurring charge was $4.6 million, representing an
increase of 17.9% compared to the prior year. Earnings per share for fiscal
years 1997 and 1996 were $0.98. Earnings per share for fiscal year 1997,
excluding the nonrecurring SAIF assessment, were $1.16. The primary factor
contributing to First Savings' core earnings growth was an increase in the
Bank's net interest margin. Non-interest income was higher in 1997 primarily due
to increases in fees and service charges.

Nonperforming assets (loans 90 days or more delinquent and foreclosed real
estate owned) were $250,000 or .08% of total assets at June 30, 1997, compared
to $134,000 or .05% at June 30, 1996. First Savings did not have any real estate
owned at June 30, 1997 or June 30, 1996.

NET INTEREST INCOME

Net interest income for the years ended June 30, 1997 and 1996, was $10.3
million and $9.3 million, respectively. 

The primary reason for the increase in net interest income during the fiscal
year ended June 30, 1997 was due to a higher interest rate spread. The average
yield on interest-earning assets increased by 15 basis points, and the average
cost of interest-bearing liabilities decreased by 12 basis points for the year
ended June 30, 1997, increasing the Bank's interest rate spread to 2.73%
compared to 2.46% for the year ended June 30, 1996. The average balance of
interest-earning assets and interest-bearing liabilities during the fiscal year
ended June 30, 1997 was $264.5 million and $201.6 million, respectively,
compared to $249.7 million and $185.5 million, respectively, during the fiscal
year ended June 30, 1996. The Average Yield/Cost Analysis table reflects the
average yields on assets and average cost of liabilities for the years ended
June 30, 1997 and 1996. Such average yields and costs are derived by dividing
income or expense by the average balance of interest-earning assets or 
interest-bearing liabilities, respectively, for the period presented.

INTEREST AND DIVIDEND INCOME

First Savings' total interest and dividend income for the fiscal year ended June
30, 1997 was $20.1 million as compared to $18.5 million for fiscal year 1996, an
increase of $1.6 million or 8.6%. This increase was due primarily to increases
in average interest-earning assets and their related yields.

INTEREST EXPENSE

Total interest expense for the year ended June 30, 1997 increased by $567,000 or
6.2% when compared to the prior year. The Bank's cost of funds decreased from
4.97% in 1996 to 4.85% in 1997; however, average interest-bearing liabilities
increased 8.7% from $185.5 million at June 30, 1996 to $201.6 million at June
30, 1997.

Interest expense on borrowed funds increased $236,000 from $50,000 in 1996 to
$286,000 in 1997. This increase is the result of advances from the Federal Home
Loan Bank (FHLB) in 1997. Borrowings comprised of an ESOP note payable at June
30, 1996, increased from $422,000 to $20.0 million at June 30, 1997 which
consisted of FHLB advances. The increase in borrowings was a result of
investment strategies implemented during the fourth quarter of fiscal 1997.
Average borrowings for the years ended June 30, 1997 and 1996 were $4.7 million
and $845,000, respectively.

                                       14
<PAGE>
 
                                  MANAGEMENTS
                             DISCUSSION & ANALYSIS

ALLOWANCE FOR LOAN LOSSES

At June 30, 1996, the allowance for loan losses was $609,000. During fiscal year
1997, First Savings did not add to this reserve. With only $5,000 in charge-offs
during the current year, the allowance for loan losses at June 30, 1997
decreased slightly to $604,000. Management considers this level to be
appropriate based on lending volume, the current level of delinquencies other
nonperforming assets and the overall economic conditions.

NON-INTEREST INCOME

Total non-interest income for the fiscal year ended June 30, 1997 was $425,000
as compared to $364,000 for fiscal year ended June 30, 1996. The increase is
primarily attributable to increases in fees and service charges of $59,000
during the year ended June 30, 1997.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for fiscal year ended June 30, 1997 were
$4.6 million compared to $3.7 million for the fiscal year ended June 30, 1996.
The increase was attributed to the nonrecurring charge of $1.2 million
associated with the SAIF assessment.

INCOME TAXES

Income tax expense increased slightly for the fiscal year ended June 30, 1997 to
$2.2 million, as compared to $2.1 million for the same period in 1996. The
increase in income taxes was attributed to the higher level of pre-tax income
and to increased state income taxes as a larger portion of the Bank's income was
subject to such taxes.

                    IMPACT OF INFLATION AND CHANGING PRICES
                                        
The financial statements and notes thereto presented herein have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of First Savings' operations. Unlike most industrial companies,
nearly all First Savings' assets and liabilities are monetary in nature. As a
result, interest rates have a greater impact on First Savings' performancethan
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.

                        RECENT ACCOUNTING PRONOUNCEMENTS
                                        
FASB STATEMENT ON REPORTING COMPREHENSIVE INCOME. In June 1997, the FASB issued
SFAS No. 130. This Statement establishes standards of reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. In addition to net income as has been historically
determined, comprehensive income for First Savings would include net unrealized
holding gains and losses on investment securities available for sale. This
Statement will be effective for First Savings' fiscal year ending June 30, 1999,
and First Savings does not intend to early adopt. Had First Savings early
adopted this Statement, it would have reported comprehensive income of
$5,351,989, $4,190,087 and $3,446,327 for the years ended June 30, 1998, 1997
and 1996, respectively.

FASB STATEMENT ON DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. In July 1997, the FASB issued SFAS No. 131, Disclosure About
Segments of an Enterprise and Related Information. SFAS No. 131 requires
disclosures for each segment that are similar to those required under current
standards with the addition of quarterly disclosure requirements and a finer
partitioning of geographic disclosures. It requires limited segment data on a
quarterly basis. It also requires geographic data by country, as opposed to
broader geographic regions as permitted under current standards. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted. As First Savings has only one operating segment, adoption
of SFAS No. 131 is not expected to have a significant impact on the consolidated
financial statements.

FASB STATEMENT ON EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT
BENEFITS. In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. SFAS No. 132 standardizes the
disclosure requirements of pensions and other postretirement benefits. It does
not change any measurement or recognition provisions, and thus will not
materially impact First Savings. SFAS No. 132 is effective for fiscal years
beginning after December 15, 1997.

                                       15
<PAGE>
 
                                  MANAGEMENTS
                             DISCUSSION & ANALYSIS

FASB STATEMENT ON ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts. Under this standard, entities are required to carry all
derivative instruments in the statement of financial condition at fair value.
The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
part of a hedging relationship and, if so, on the reason for holding it. If
certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposure to changes in fair values, cash flows, or
foreign currencies. If the hedged exposure is a fair value exposure, the gain or
loss on the derivative instrument is recognized in earnings in the period of
change together with the offsetting loss or gain on the hedged item attributable
to the risk being hedged. If the hedged exposure is a cash flow exposure, the
effective portion of the gain or loss on the derivative instrument is reported
initially as a component of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted transaction affects
earnings. Any amounts excluded from the assessment of hedge effectiveness as
well as the ineffective portion of the gain or loss are reported in earnings
immediately. Accounting for foreign currency hedges is similar to accounting for
fair value and cash flow hedges. If the derivative instrument is not designated
as a hedge, the gain or loss is recognized in earnings in the period of change.
Management anticipates that this statement will have no effect on its
consolidated financial statements.                                        

YEAR 2000 COMPLIANCE                    
                                        
The "Year 2000" issue confronting First Savings and its suppliers, customers,
customers' suppliers and competitors centers on the inability of computer
systems to recognize the Year 2000. Many existing computer programs and systems
were originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending new millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, First Savings and its operations may be
significantly affected by the Year 2000 issue due to its dependence on computer
generated financial information. Software, hardware, and equipment both within
and outside First Savings' direct control and with whom First Savings
electronically or operationally interfaces (e.g. third party vendors providing
data processing, information system management, maintenance of computer systems,
and credit bureau information) are likely to be affected. Furthermore, if
computer systems are not adequately changed to identify the Year 2000, many
computer applications could fail or create erroneous results. As a result, many
calculations which rely on date field information, such as interest, payment or
due dates and other operating functions, could generate results which are
significantly misstated, and First Savings could experience a temporary
inability to process transactions, prepare statements or engage in similar
normal business activities. In addition, under certain circumstances, failure to
adequately address the Year 2000 issue could adversely affect the viability of
First Savings' suppliers and creditors and the creditworthiness of its
borrowers. Thus, if not adequately addressed, the Year 2000 matter could result
in a significant adverse impact on products, services and the competitive
condition of First Savings.

Financial institution regulators have recently increased their focus upon Year
2000 compliance issues, issuing guidance concerning the responsibilities of
senior management and directors. The Federal Financial Institutions Examination
Council ("FFIEC") has issued several interagency statements on Year 2000 Project
Management Awareness. These statements require financial institutions to, among
other things, examine the Year 2000 implications of reliance on vendors, data
exchange and potential impact on customers, suppliers and borrowers. These
statements also require each federally regulated financial institution to survey
its exposure, measure its risk and prepare a plan in order to solve the Year
2000 issue. In addition, the federal banking regulators have issued safety and
soundness guidelines to be followed by insured depository institutions, such as
the Bank, to assure resolution of any Year 2000 problems. The federal banking
agencies have asserted that Year 2000 testing and certification is a key safety
and soundness issue in conjunction with regulatory exams, and thus an
institution's failure to address appropriately the Year 2000 issue could result
in supervisory action, including such enforcement actions as the reduction of
the institution's supervisory ratings, the denial of applications for approval
of a merger or acquisition, or the imposition of civil money penalties.

In order to address the Year 2000 issue and to minimize its potential adverse
impact, management is engaged in a process to identify areas that will be
affected by the Year 2000, assess their potential impact on operations, monitor

                                       16
<PAGE>
 
                                  MANAGEMENTS
                             DISCUSSION & ANALYSIS

the progress of third party software vendors in addressing the matter, test
changes provided by these vendors, and develop contingency plans for any
critical systems which are not effectively reprogrammed. The plan is divided
into the five phases: (1) awareness, (2) assessment, (3) renovations, (4)
validation, and (5) implementation.                                        

First Savings has substantially completed the first two phases of the plan and
is currently working internally and with external vendors on the final three
phases. First Savings outsources its item processing operations to a service
provider. First Savings' Year 2000 compliance is being closely coordinated with
that of the service provider.                                      

First Savings does not currently expect that the cost of its Year 2000
compliance program will be material to its financial condition or results of
operations, and expects that it will satisfy such compliance program without
material disruption of its operations. In the event that First Savings'
significant suppliers do not successfully and timely achieve Year 2000
compliance, First Savings' business, results of operations or financial
condition could be adversely affected.

                                       17
<PAGE>
 
                                   REPORT OF
                                  INDEPENDENT
                                   AUDITORS


Board of Directors and Shareholders
First Savings Bancorp, Inc.
Southern Pines, North Carolina


We have audited the consolidated statements of financial condition of First
Savings Bancorp, Inc. and subsidiary ("First Savings") as of June 30, 1998 and
1997, and the related consolidated statements of income, shareholders' equity
and cash flows for the years then ended.  These financial statements are the
responsibility of First Savings' management.  Our responsibility is to express
an opinion on these financial statements based on our audits.  The consolidated
financial statements of First Savings Bancorp, Inc. and subsidiary as of and for
the year ended June 30, 1996 were audited by other auditors whose report dated
August 16, 1996 expressed an unqualified opinion.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the 1998 and 1997 consolidated financial statements present
fairly, in all material respects, the financial position of First Savings
Bancorp, Inc. and subsidiary at June 30, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.



Southern Pines, North Carolina
August 13, 1998

                                       18
<PAGE>
 
                            CONSOLIDATED STATEMENTS
                            OF FINANCIAL CONDITION


<TABLE>
<CAPTION>
                                                                                                       June 30,                   
                                                                                             ----------------------------          
                                                                                                 1998           1997              
                                                                                             -------------  -------------          
<S>                                                                                          <C>            <C>                   
ASSETS                                                                                                                            
 Cash and due from banks                                                                     $  3,825,590   $  2,801,422          
 Interest-earning deposits with banks                                                           3,990,718      6,300,797          
 Investment securities available for sale, at fair value (amortized cost                                                          
  of $72,163,962 and $79,830,744 at June 30, 1998 and 1997,                                                                       
  respectively) (Note 2)                                                                       72,731,962     80,257,044          
 Investment securities held to maturity, at amortized cost (fair value                                                            
  of $9,821,460 and $6,672,096 at June 30, 1998 and 1997,                                                                         
  respectively) (Note 2)                                                                        9,737,212      6,572,162          
 Loans receivable, net (Note 3)                                                               208,094,461    192,237,609          
 Accrued interest receivable (Note 4)                                                           1,748,809      1,836,469          
 Premises and equipment, net (Note 5)                                                           1,935,927      1,967,690          
 Stock in the Federal Home Loan Bank of Atlanta, at cost                                        1,929,600      1,929,600          
 Prepaid expenses and other assets                                                                173,950        313,955          
                                                                                             ------------   ------------          
       TOTAL                                                                                 $304,168,229   $294,216,748          
                                                                                             ============   ============           
LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
 Deposits (Note 6)                                                                           $211,924,932   $204,316,774
 Borrowed funds (Note 7)                                                                       20,000,000     20,000,000
 Advances from borrowers for taxes and insurance                                                   90,217        101,766
 Accrued interest payable on deposits                                                             141,564        103,597
 Accrued expenses and other liabilities                                                         1,623,593      1,359,623
 Federal and state income taxes:                                                             
   Currently payable                                                                               38,102        371,618
   Deferred, net (Note 10)                                                                        828,616        768,438
                                                                                             ------------   ------------
       Total liabilities                                                                      234,647,024    227,021,816
                                                                                             ------------   ------------
COMMITMENTS (Notes 3, 13 and 14)

SHAREHOLDERS' EQUITY (Notes 10 and 11):
 Preferred stock, no par value, 5,000,000 shares authorized, none 
   issued and outstanding                                                                               -              -
 Common stock, no par value, 20,000,000 shares authorized;                                   
   3,710,820 shares issued and outstanding                                                   
   in 1998; 3,679,185 in 1997                                                                  35,536,799     35,236,973
 Unearned compensation related to ESOP note payable (Note 12)                                    (158,302)      (293,502)
 Net unrealized gain (loss) on securities available for sale                                      374,880        281,358
 Retained earnings                                                                             33,767,828     31,970,103
                                                                                             ------------   ------------
       Total shareholders' equity                                                              69,521,205     67,194,932
                                                                                             ------------   ------------
       TOTAL                                                                                 $304,168,229   $294,216,748
                                                                                             ============   ============
</TABLE>

See notes to consolidated financial statements.

                                       19
<PAGE>
 
                            CONSOLIDATED STATEMENTS
                                   OF INCOME


<TABLE>
<CAPTION>
                                                                                                   Years Ended June 30,
                                                                                         -----------------------------------------
                                                                                           1998           1997           1996
                                                                                         ---------      --------      ------------
<S>                                                                                      <C>            <C>           <C>
INTEREST AND DIVIDEND INCOME:
  Interest on loans receivable                                                           $16,262,488   $14,954,452     $13,406,157
  Interest on investment securities available for sale                                     5,077,872     4,177,307       4,549,718
  Interest on investment securities held to maturity                                         668,469       337,717         293,452
  Dividends on equity securities                                                             143,199       139,703         140,089
  Other                                                                                      391,465       449,184         160,551
                                                                                         -----------   -----------   -------------
   Total interest and dividend income                                                     22,543,493    20,058,363      18,549,967
                                                                                         -----------   -----------   -------------
INTEREST EXPENSE:
  Deposits (Note 6)                                                                        9,965,356     9,496,129       9,165,030
  Borrowed funds (Note 7)                                                                  1,118,002       286,280          50,324
                                                                                         -----------   -----------   -------------
   Total interest expense                                                                 11,083,358     9,782,409       9,215,354
                                                                                         -----------   -----------   -------------
  Net interest income                                                                     11,460,135    10,275,954       9,334,613
  Provision for loan losses (Note 3)                                                               -             -               -
                                                                                         -----------   -----------   -------------
   Net interest income after provision for loan losses                                    11,460,135    10,275,954       9,334,613
                                                                                         -----------   -----------   -------------
NON-INTEREST INCOME:
  Fees and service charges                                                                   542,206       370,795         311,462
  Income from real estate operations                                                           7,514         7,964           7,230
  Rent on safe deposit boxes                                                                  33,648        33,450          32,801
  Other, net                                                                                  32,531        12,949          12,429
                                                                                         -----------   -----------   -------------
   Total non-interest income, net                                                            615,899       425,158         363,922
                                                                                         -----------   -----------   -------------
GENERAL AND ADMINISTRATIVE EXPENSES:
  Compensation and fringe benefits (Note 12)                                               2,102,433     2,002,924       2,038,817
  Occupancy and building (Note 13)                                                           210,623       207,089         227,831
  Premiums and assessments                                                                   131,512     1,326,809         416,491
  Computer services                                                                          355,216       300,905         281,394
  Other                                                                                      957,783       799,732         728,247
                                                                                         -----------   -----------   -------------
   Total general and administrative expenses                                               3,757,567     4,637,459       3,692,780
                                                                                         -----------   -----------   -------------
INCOME BEFORE INCOME TAXES                                                                 8,318,467     6,063,653       6,005,755
INCOME TAX EXPENSE (Note 10)                                                               3,060,000     2,155,000       2,085,000
                                                                                         -----------   -----------   -------------
NET INCOME                                                                               $ 5,258,467   $ 3,908,653   $   3,920,755
                                                                                         ===========   ===========   =============
NET INCOME PER COMMON SHARE
  Basic                                                                                  $      1.42   $      1.05   $        1.05
                                                                                         ===========   ===========   =============
  Diluted                                                                                $      1.30   $      0.98   $        0.98
                                                                                         ===========   ===========   =============
AVERAGE COMMON SHARES OUTSTANDING
  Basic                                                                                    3,698,197     3,706,704       3,744,000
  Diluted                                                                                  4,021,954     3,970,306       3,993,070
</TABLE> 
 

See notes to consolidated financial statements.
 

                                       20
<PAGE>
 
                            CONSOLIDATED STATEMENTS
                            OF SHAREHOLDERS' EQUITY

<TABLE> 
<CAPTION>  
                                                                   YEARS ENDED JUNE 30, 1998, 1997 AND 1996
                                             ------------------------------------------------------------------------------------
                                                                                      NET UNREALIZED
                                                                                      GAIN (LOSS) ON
                                                                                        SECURITIES
                                                  COMMON STOCK           UNEARNED     AVAILABLE FOR    RETAINED      SHAREHOLDERS'
                                             -----------------------
                                              SHARES       AMOUNT      COMPENSATION        SALE         EARNINGS         EQUITY
                                             ---------   -----------   ------------   --------------   -----------   -------------
<S>                                          <C>         <C>           <C>            <C>              <C>           <C>   
BALANCE, JULY 1, 1995                        3,744,000   $36,351,616      $(542,880)       $ 474,352   $29,228,029     $65,511,117
 
 Earned ESOP compensation                            -        99,945        120,928                -             -         220,873
 
 Change in net unrealized gain (loss)
  on available for sale securities, net
  of income taxes of $244,401                        -             -              -         (474,428)            -        (474,428)
 
 Net income for year                                 -             -              -                -     3,920,755       3,920,755
 
 Cash dividends declared
  ($.64 per share)                                   -             -              -                -    (2,366,931)     (2,366,931)
                                             ---------   -----------      ---------   --------------   -----------   -------------
 
BALANCE, JUNE 30, 1996                       3,744,000    36,451,561       (421,952)             (76)   30,781,853      66,811,386
 
 Stock repurchase                              (76,500)   (1,395,532)             -                -             -      (1,395,532)
 
 Proceeds from exercise of stock
  options                                       11,685        65,019              -                -             -          65,019
 
 Earned ESOP compensation                            -       115,925        128,450                -             -         244,375
 
 Change in net unrealized gain (loss)
  on available for sale securities, net
  of income taxes of $144,979                        -             -              -          281,434             -         281,434
 
 Net income for year                                 -             -              -                -     3,908,653       3,908,653
 
 Cash dividends declared
  ($.74 per share)                                   -             -              -                -    (2,720,403)     (2,720,403)
                                             ---------   -----------      ---------   --------------   -----------   -------------
 
BALANCE, JUNE 30, 1997                       3,679,185    35,236,973       (293,502)         281,358    31,970,103      67,194,932
 
 Proceeds from exercise of stock
  options                                       31,635       120,424              -                -             -         120,424
 
 Earned ESOP compensation                            -       179,402        135,200                -             -         314,602
 
 Change in net unrealized gain (loss)
  on available for sale securities, net
  of income taxes of $48,178                         -             -              -           93,522             -          93,522
 
 Net income for year                                 -             -              -                -     5,258,467       5,258,467
 
 Cash dividends declared
 ($0.94 per share)                                   -             -              -                -    (3,460,742)     (3,460,742)
                                             ---------   -----------      ---------   --------------   -----------   -------------
 
BALANCE, JUNE 30, 1998                       3,710,820   $35,536,799      $(158,302)       $ 374,880   $33,767,828     $69,521,205
                                             =========   ===========      =========   ==============   ===========   =============
</TABLE>

See notes to consolidated financial statements.

                                       21
<PAGE>
 
                            CONSOLIDATED STATEMENTS
                                 OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                YEARS ENDED JUNE 30,
                                                               ---------------------------------------------------
                                                                       1998               1997           1996
                                                               ---------------------  -------------  -------------
<S>                                                            <C>                    <C>            <C>
OPERATING ACTIVITIES:
  Net income                                                           $  5,258,467    $  3,908,653   $  3,920,755
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation of premises and equipment                                   97,115          94,055        120,433
    Issuance of ESOP shares                                                 314,602         244,375        220,873
    Net amortization on investments                                         125,638         512,067        617,085
    Deferred income taxes                                                    12,000          (7,000)       (18,600)
    Loan origination fees and costs deferred, net of
     current amortization                                                    (8,381)         46,139         51,455
    Gain on sale of real estate                                             (21,065)         (8,531)             -
    Gain on sale of premises and equipment                                   (7,045)              -              -
  Changes in:
    Accrued interest receivable                                              87,660        (214,430)       139,276
    Prepaid expenses and other assets                                         9,375         (81,231)       (46,129)
    Accrued interest payable on deposits                                     37,967          (9,554)         8,614
    Accrued expenses and other liabilities                                   95,708         194,613        (81,382)
    Taxes payable                                                          (333,516)        242,040        129,578
                                                                       ------------    ------------   ------------
 
      Net cash provided by operating activities                           5,668,525       4,921,196      5,061,958
                                                                       ------------    ------------   ------------
 
INVESTING ACTIVITIES:
  Net (increase) decrease in interest-earning deposits
   with banks                                                             2,310,079      (5,587,822)       356,376
  Proceeds from maturities of certificates of deposit                             -       7,000,000              -
  Purchases of certificates of deposit                                            -      (7,000,000)             -
  Purchases of:
    Available for sale investment securities                            (24,050,075)    (31,251,432)             -
    Held to maturity investment securities                               (4,801,336)              -              -
  Proceeds from maturities and calls of:
    Available for sale investment securities                             31,500,000      11,700,000     11,000,000
    Held to maturity investment securities                                1,727,505       1,670,878      1,487,573
  Proceeds from sale of real estate                                         188,073         102,000              -
  Proceeds from sale of premises and equipment                               13,011               -              -
  Loan originations, net of repayments and net fees                     (15,848,471)    (14,940,293)   (17,704,972)
  Purchases of premises and equipment                                       (71,318)        (43,014)       (74,326)
  Improvement costs on real estate                                          (36,378)         (6,196)             -
                                                                       ------------    ------------   ------------
 
      Net cash used in investing activities                              (9,068,910)    (38,355,879)    (4,935,349)
                                                                       ------------    ------------   ------------
</TABLE> 
 
                                       22
<PAGE>
 
                            CONSOLIDATED STATEMENTS
                                 OF CASH FLOWS

<TABLE> 
<CAPTION> 
                                                                                            YEARS ENDED JUNE 30,
                                                                       -------------------------------------------------------------
                                                                           1998                     1997                    1996
                                                                       ------------             ------------            ------------
<S>                                                                    <C>                      <C>                    <C>   
FINANCING ACTIVITIES:
  Net increase in deposits                                             $  7,608,158             $ 16,892,550           $  4,343,882
  Increase (decrease) in advances from borrowers
   for taxes and insurance                                                  (11,549)                  17,210                 16,306
  Net increase (decrease) in borrowed funds                                       -               19,578,048               (120,928)

  Net proceeds from exercise of stock options                               120,424                   65,019                      -
  Repurchases of common stock                                                     -               (1,395,532)                     -
  Cash dividends paid                                                    (3,292,480)              (2,926,437)            (2,500,773)

                                                                       ------------             ------------           ------------
 
      Net cash provided by financing activities                           4,424,553               32,230,858              1,738,487
                                                                       ------------             ------------           ------------
 
INCREASE (DECREASE) IN CASH
 AND DUE FROM BANKS                                                       1,024,168               (1,203,825)             1,865,096
 
CASH AND DUE FROM BANKS,
 BEGINNING OF YEAR                                                        2,801,422                4,005,247              2,140,151
                                                                       ------------             ------------           ------------
 
CASH AND DUE FROM BANKS,
 END OF YEAR                                                           $  3,825,590             $  2,801,422           $  4,005,247
                                                                       ============             ============           ============
 
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
 INFORMATION
  Cash paid for:
    Interest on deposits                                               $  9,927,389             $  9,505,683           $  9,173,644
    Interest on borrowed funds                                            1,145,718                  208,888                 51,952
    Income taxes                                                          2,685,000                1,963,036              1,971,500
 
SUPPLEMENTAL SCHEDULE OF NONCASH
 INVESTING ACTIVITIES
  Loans receivable transferred to foreclosed real estate               $          -             $     87,273           $          -
 
  Unrealized gain (loss) on investment securities available
   for sale, net of deferred income taxes                                    93,522                  281,434               (474,428)

 
  Declared but unpaid dividends                                             927,705                  740,137                636,480
 </TABLE>

See notes to consolidated financial statements.

                                       23
<PAGE>
 
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS


1.  BASIS OF PRESENTATION AND ACCOUNTING POLICIES

    BASIS OF PRESENTATION - The accompanying consolidated financial statements
    include the accounts of First Savings Bancorp, Inc. and its wholly-owned
    subsidiary, First Savings Bank of Moore County, Inc., SSB (the "Bank"),
    together referred to as "First Savings." All significant intercompany
    balances and transactions have been eliminated in consolidation.

    SIGNIFICANT ACCOUNTING POLICIES - The significant accounting policies of
    First Savings are summarized below:

    a. Cash Equivalents - For the purpose of presentation in the consolidated
       statements of cash flows, cash and cash equivalents are defined as those
       amounts included in the balance sheet caption "cash and due from banks."

    b. Investments in Securities - First Savings' investments in securities are
       classified in two categories and accounted for as follows:

       .  Securities to be Held to Maturity - Bonds, notes and debentures for
          which First Savings has the positive intent and ability to hold to
          maturity are reported at cost, adjusted for premiums and discounts
          that are recognized in interest income using the interest method over
          the period to maturity.

       .  Securities Available for Sale - Securities available for sale are
          carried at fair value and consist of bonds, notes, debentures, and
          certain equity securities not classified as trading securities or as
          securities to be held to maturity.

       Declines in the fair value of individual held-to-maturity and available-
       for-sale securities below their cost that are considered to be other than
       temporary would result in write-downs of the individual securities to
       their fair value. The related write-downs would be included in earnings
       as realized losses.

       Unrealized holding gains and losses, net of tax, on securities available
       for sale are reported as a net amount in a separate component of
       shareholders' equity until realized.

       Gains and losses on the sale of securities available for sale are
       determined using the specific-identification method.

    c. Loans Receivable - Loans receivable that management has the intent and
       ability to hold for the foreseeable future or until maturity or payoff
       are reported at their outstanding principal balances, less the allowance
       for loan losses and net deferred loan-origination fees and discounts.

       Interest on loans is recorded as borrowers' monthly payments become due.
       Accrual of interest on past due loans is discontinued after 90 days.

       The Bank defers loan origination fees net of certain direct loan
       origination costs. Such net fees and costs are recognized as an
       adjustment to yield over the lives of the related loans.

       The allowance for loan losses is established through a provision for loan
       losses charged to operations. Loans are charged off against the allowance
       when management believes that collectibility is unlikely. The allowance
       is an amount that management believes will be adequate to absorb losses
       on existing loans that may become uncollectible based on evaluations of
       the collectibility of loans and prior loan loss experience. The
       evaluations take into account such factors as changes in the nature and
       volume of the loan portfolio, overall portfolio quality, review of
       specific problem loans and current economic conditions that may affect
       the borrowers' ability to pay. While management uses the best information
       available to make evaluations, future adjustments may be necessary if
       economic or other conditions differ substantially from the assumptions
       used.

                                       24
<PAGE>
 
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS


       Effective July 1, 1995, the Bank adopted Statement of Financial
       Accounting Standards No. 114, Accounting by Creditors for Impairment of a
       Loan ("SFAS 114"), and Statement of Financial Accounting Standards No.
       118, Accounting by Creditors for Impairment of a Loan - Income
       Recognition and Disclosures ("SFAS 118"). SFAS 114 requires that the
       carrying value of an impaired loan be based on the present value of
       expected future cash flows discounted at the loan's effective interest
       rate or, as a practical expedient, at the loan's observable market price
       or the fair value of the collateral, if the loan is collateral dependent.
       Under SFAS 114, a loan is considered impaired when, based on current
       information, it is probable that the borrower will be unable to pay
       contractual interest or principal payments as scheduled in the loan
       agreement. SFAS 114 applies to all loans except one-to-four family
       residential mortgage loans and small balance homogeneous consumer loans
       that are collectively evaluated for impairment. The Bank does not
       currently have any loans which are considered to be impaired.

       Adoption of the new standard had no impact on the level of the overall
       allowance for loan losses or on operating results and does not affect the
       Bank's policies regarding write-offs, recoveries, or income recognition.

    d. Foreclosed Real Estate - Foreclosed real estate is recorded initially at
       the lower of the loan balance plus unpaid accrued interest or the
       estimated fair value of the property at the date of foreclosure, and
       subsequently reduced by additional allowances which are charged to
       earnings if the estimated fair value of the property declines below its
       initial value. Costs related to the improvement of the property are
       capitalized, whereas those related to holding the property are expensed.
       Such properties are held for sale and, accordingly, no depreciation or
       amortization expense is recognized.

    e. Premises and Equipment - Premises and equipment are stated at cost.
       Depreciation is computed by the straight-line method over the estimated
       useful lives of the various classes of assets. The cost of leasehold
       improvements is amortized by the straight-line method over the lesser of
       the lives of the improvements or the terms of the lease. Estimated useful
       lives are as follows:

                Office buildings and improvements    8 to 50 years
                Furniture, fixtures and equipment    3 to 10 years
                Motor vehicles                             4 years

    f. Investment in Federal Home Loan Bank Stock - As a requirement for
       membership, the Bank invests in stock of the Federal Home Loan Bank of
       Atlanta ("FHLB"). This investment is carried at cost.

    g. Deferred Income Taxes - Deferred income taxes (benefits) are provided on
       temporary differences between the financial statement carrying values and
       the tax bases of assets and liabilities.

    h. Insurance of Accounts - Eligible savings accounts are insured up to
       $100,000 by the Savings Association Insurance Fund ("SAIF"), which is
       administered by the Federal Deposit Insurance Corporation ("FDIC").

    i. Earnings Per Share - Effective July 1, 1997, First Savings adopted the
       provisions of Statement of Financial Accounting Standards No. 128,
       Earnings Per Share ("SFAS 128"), which establishes standards for
       computing and presenting earnings per share (EPS) data. SFAS 128
       simplifies the standards for computing EPS previously found in APB
       Opinion No. 15, "Earnings Per Share," and makes them comparable to
       international EPS standards. Under SFAS 128, basic EPS replaces the
       former presentation of primary EPS. Also, a dual presentation of basic
       and diluted EPS is required on the face of the income statement for all
       entitites with complex capital structures, and a reconciliation must be
       provided of the numerator and denominator of the basic EPS computation to
       the numerator and denominator of the diluted EPS computation. In
       accordance with SFAS 128, all prior period EPS data have been restated.

       Basic net income per share, or basic EPS, is computed by dividing net
       income by the weighted average number of common shares outstanding for
       the period. Diluted EPS reflects the potential dilution that could occur
       if First Savings' dilutive stock options were exercised. The numerator of
       the basic EPS computation is the same as the numerator of the diluted EPS
       computation for all periods presented. A reconciliation of the
       denominators of the basic and diluted EPS computations is as follows:

<TABLE>
<CAPTION>
                                                                                    1998               1997             1996
                                                                             ---------------      -------------    --------------
               <S>                                                           <C>                  <C>              <C>   
               Basic EPS denominator - weighted average number
                of common shares outstanding                                       3,698,197          3,706,704         3,744,000
               Dilutive share effect arising from assumed exercise
                of stock options                                                     323,757            263,602           249,070
                                                                                   ---------          ---------         ---------
               Diluted EPS denominator                                             4,021,954          3,970,306         3,993,070
                                                                                   =========          =========         =========
 </TABLE>

                                       25
<PAGE>
 
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS


    j. Stock Options - Effective July 1, 1997, First Savings adopted Statement
       of Financial Accounting Standards No. 123, Accounting for Stock-Based
       Compensation ("SFAS 123"), which requires either (i) the fair value of
       employee stock-based compensation plans be recorded as a component of
       compensation expense in the statement of income as of the date of grant
       of awards related to such plans or (ii) the impact of such fair value on
       net income and earnings per share be disclosed in a footnote to financial
       statements for awards granted after December 15, 1994, if the accounting
       for such awards continues to be in accordance with APB Opinion No. 25,
       "Accounting for Stock Issued to Employees." Since the adoption of SFAS
       123, First Savings has not granted any options.


    k. Cash Dividends - On June 18, 1998, First Savings declared a $.25 per
       share cash dividend to shareholders of record on June 30, 1998, payable
       on July 20, 1998.

    l. Use of Estimates - The preparation of financial statements in conformity
       with generally accepted accounting principles requires management to make
       estimates and assumptions that affect the reported amounts of assets and
       liabilities and disclosure of contingent assets and liabilities at the
       date of the financial statements and the reported amounts of revenues and
       expenses during the reporting period. Actual results could differ from
       those estimates.

       Material estimates that are particularly sensitive to significant change
       relate to the determination of the allowance for losses on loans and the
       valuation of real estate acquired in connection with foreclosures or in
       satisfaction of loans. In connection with the determination of the
       allowances for losses on loans and foreclosed real estate, management
       obtains independent appraisals for significant properties.

       A majority of the Bank's loan portfolio consists of single-family
       residential loans in its market area. The regional economy is currently
       stable and consists of various types of industry. Real estate prices in
       this market are also stable; however, the ultimate collectibility of a
       substantial portion of the Bank's loan portfolio is susceptible to
       changes in local market conditions.

       While management uses available information to recognize losses on loans
       and foreclosed real estate, future additions to the allowances may be
       necessary based on changes in local economic conditions. In addition,
       regulatory agencies, as an integral part of their examination process,
       periodically review the Bank's allowances for losses on loans and
       foreclosed real estate. Such agencies may require the Bank to recognize
       additions to the allowances based on their judgments about information
       available to them at the time of their examination. Because of these
       factors, it is reasonably possible that the allowances for losses on
       loans and foreclosed real estate may change materially in the near term.

    m. Reclassifications - Certain consolidated financial statement amounts for
       1997 and 1996 have been reclassified to conform to the 1998 presentation.

    n. Recent Accounting Pronouncements:

       FASB STATEMENT ON REPORTING COMPREHENSIVE INCOME. In June 1997, the FASB
       issued SFAS No. 130. This Statement establishes standards of reporting
       and display of comprehensive income and its components in a full set of
       general-purpose financial statements. In addition to net income as has
       been historically determined, comprehensive income for First Savings
       would include net unrealized holding gains and losses on investment
       securities available for sale. This Statement will be effective for First
       Savings' fiscal year ending June 30, 1999, and First Savings does not
       intend to early adopt. Had First Savings early adopted this Statement, it
       would have reported comprehensive income of $5,351,989, $4,190,087 and
       $3,446,327 for the years ended June 30, 1998, 1997 and 1996,
       respectively.

       FASB STATEMENT ON DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
       INFORMATION. In July 1997, the FASB issued SFAS No. 131, Disclosure About
       Segments of an Enterprise and Related Information. SFAS No. 131 requires
       disclosures for each segment that are similar to those required under
       current standards with the addition of quarterly disclosure requirements
       and a finer partitioning of geographic disclosures. It requires limited
       segment data on a quarterly basis. It also requires geographic data by
       country, as opposed to broader geographic regions as permitted under
       current standards. SFAS No. 131 is effective for fiscal years beginning
       after December 15, 1997, with earlier application permitted. As First
       Savings has only one operating segment, adoption of SFAS No. 131 is not
       expected to have a significant impact on the consolidated financial
       statements.

                                       26
<PAGE>

                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS

       FASB STATEMENT ON EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
       POSTRETIREMENT BENEFITS. In February 1998, the FASB issued SFAS No. 132,
       Employers' Disclosures about Pensions and Other Postretirement Benefits.
       SFAS No. 132 standardizes the disclosure requirements of pensions and
       other postretirement benefits. It does not change any measurement or
       recognition provisions, and thus will not materially impact First
       Savings. SFAS No. 132 is effective for fiscal years beginning after
       December 15, 1997.

       FASB Statement on Accounting for Derivative Instruments and Hedging
       Activities. In June 1998, the FASB issued SFAS No. 133, Accounting for
       Derivative Instruments and Hedging Activities. This Statement
       standardizes the accounting for derivative instruments, including certain
       derivative instruments embedded in other contracts. Under this standard,
       entities are required to carry all derivative instruments in the
       statement of financial condition at fair value. The accounting for
       changes in the fair value (i.e., gains or losses) of a derivative
       instrument depends on whether it has been designated and qualifies as
       part of a hedging relationship and, if so, on the reason for holding it.
       If certain conditions are met, entities may elect to designate a
       derivative instrument as a hedge of exposure to changes in fair values,
       cash flows, or foreign currencies. If the hedged exposure is a fair value
       exposure, the gain or loss on the derivative instrument is recognized in
       earnings in the period of change together with the offsetting loss or
       gain on the hedged item attributable to the risk being hedged. If the
       hedged exposure is a cash flow exposure, the effective portion of the
       gain or loss on the derivative instrument is reported initially as a
       component of other comprehensive income (outside earnings) and
       subsequently reclassified into earnings when the forecasted transaction
       affects earnings. Any amounts excluded from the assessment of hedge
       effectiveness as well as the ineffective portion of the gain or loss are
       reported in earnings immediately. Accounting for foreign currency hedges
       is similar to accounting for fair value and cash flow hedges. If the
       derivative instrument is not designated as a hedge, the gain or loss is
       recognized in earnings in the period of change. Management anticipates
       that this statement will have no effect on its consolidated financial
       statements.


2. SECURITIES

   THE CARRYING AMOUNTS AND FAIR VALUES OF FIRST SAVINGS' SECURITIES AT JUNE 30
ARE SUMMARIZED AS FOLLOWS:

<TABLE>
<CAPTION>
                                                              GROSS       GROSS
                                                AMORTIZED   UNREALIZED  UNREALIZED     FAIR
                                                  COST        GAINS       LOSSES       VALUE
                                               -----------  ----------  ----------  -----------
<S>                                            <C>          <C>         <C>         <C>
    Available for sale:
     June 30, 1998:
      U.S. government and agency securities    $71,163,888    $556,735    $ 25,243  $71,695,380
      N.C. state and municipal obligations         950,000      36,508           -      986,508
      The Bankers Bank stock                        50,074           -           -       50,074
                                               -----------    --------    --------  -----------
          Total                                $72,163,962    $593,243    $ 25,243  $72,731,962
                                               ===========    ========    ========  ===========
    To be held to maturity:
     June 30, 1998:
      Mortgage-backed securities               $ 9,737,212    $ 95,709    $ 11,461  $ 9,821,460
                                               ===========    ========    ========  ===========
    Available for sale:
     June 30, 1997:
      U.S. government and agency securities    $78,880,744    $565,687    $164,068  $79,282,363
      N.C. state and municipal obligations         950,000      24,681           -      974,681
                                               -----------    --------    --------  -----------
     Total                                     $79,830,744    $590,368    $164,068  $80,257,044
                                               ===========    ========    ========  ===========
    To be held to maturity:
     June 30, 1997:
      Mortgage-backed securities               $ 6,572,162    $ 99,934    $      -  $ 6,672,096
                                               ===========    ========    ========  ===========
</TABLE>

    There were no sales of securities for the years ended June 30, 1998 and
    1997.

                                       27
<PAGE>
 
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS

    THE SCHEDULED MATURITIES OF SECURITIES AT JUNE 30, 1998 ARE SUMMARIZED AS
    FOLLOWS:

<TABLE>
<CAPTION>
                                                     SECURITIES            SECURITIES TO BE
                                                 AVAILABLE FOR SALE        HELD TO MATURITY
                                              ------------------------  ----------------------
                                               Amortized      Fair      AMORTIZED      FAIR
                                                 Cost         VALUE        COST       VALUE
                                              -----------  -----------  ----------  ----------
    <S>                                       <C>          <C>          <C>         <C>
    Due in one year or less                   $26,129,635  $26,248,780  $        -  $        -
    Due after one year through five years      21,094,168   21,454,574           -           -
    Due after five years through ten years     13,940,159   14,013,915           -           -
    Due after ten years                        11,000,000   11,014,693           -           -
                                              -----------  -----------  ----------  ----------
                                               72,163,962   72,731,962           -           -
    Mortgage-backed securities                          -            -   9,737,212   9,821,460
                                              -----------  -----------  ----------  ----------
 
    Total                                     $72,163,962  $72,731,962  $9,737,212  $9,821,460
                                              ===========  ===========  ==========  ==========
</TABLE>

    Expected maturities of mortgage-backed securities will differ from
    contractual maturities because borrowers may have the right to call or
    prepay obligations with or without call or prepayment penalties.

    Available for sale securities with carrying and fair values of $6,091,450
    and $7,246,579 at June 30, 1998 and 1997, respectively, were pledged to
    secure public monies on deposit as required by law.


3.  LOANS RECEIVABLE

    THE LOAN PORTFOLIO AT JUNE 30 CONSISTS OF THE VARIOUS TYPES OF LOANS MADE
    PRINCIPALLY TO BORROWERS LOCATED IN MOORE COUNTY, NORTH CAROLINA, AND ARE
    CLASSIFIED BY MAJOR TYPE AS FOLLOWS:

<TABLE>
<CAPTION>
                                                    1998          1997
                                                ------------  ------------
          <S>                                   <C>           <C>
          Mortgage loans:
          First mortgage loans                  $201,000,679  $187,293,870
          First mortgage loan participations       2,043,873     2,268,368
          Property improvement loans                       -         2,239
          Equity line loans                        8,969,553     8,360,529
                                                ------------  ------------
                                                 212,014,105   197,925,006
         Less:
          Loans in process                         5,630,585     7,007,956
          Net deferred loan fees                     546,767       555,148
                                                ------------  ------------
 
         Total mortgage loans                    205,836,753   190,361,902
 
         Savings account loans                       899,699       908,515
         Installment loans                           797,138       620,742
         Credit card loans                         1,156,686       950,637
                                                ------------  ------------
 
         Total mortgage and other loans          208,690,276   192,841,796
 
         Less allowance for loan losses              595,815       604,187
                                                ------------  ------------
 
         Loans receivable, net                  $208,094,461  $192,237,609
                                                ============  ============
</TABLE>

                                       28
<PAGE>
 
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS


    At June 30, 1998, the Bank had mortgage loan commitments of approximately
    $12,798,000 and pre-approved but unused lines of credit totaling
    $16,875,000.  In management's opinion, these commitments, and undisbursed
    proceeds on construction loans in process above, represent no more than
    normal lending risk to the Bank and will be funded from normal sources of
    liquidity.

    AT JUNE 30, 1998, THE COMPOSITION OF LOANS BY FIXED AND ADJUSTABLE RATES WAS
    AS FOLLOWS:

<TABLE>
<CAPTION>
                                         FIXED RATE                         ADJUSTABLE RATE       
                              ----------------------------------   -------------------------------
                                 TERM TO        BOOK VALUE            TERM TO          BOOK VALUE 
                                MATURITY      (IN THOUSANDS)        ADJUSTMENT       (IN THOUSANDS)
                              ------------    ------------------   --------------    --------------- 
                              <S>             <C>                  <C>               <C>          
                              1 mo. - 1 yr.       $   350             1 mo. - 1 yr.      $ 48,457                          
                              1 yr. - 3 yr.         1,649             1 yr. - 3 yr.        49,612                                   

                              3 yr. - 5 yr.         3,268             3 yr. - 5 yr.        21,805                                   

                              5 yr. - 10 yr.       12,356            5 yr. - 10 yr.        47,538                                   

                              10 yr. and over      20,176            10 yr. and over        3,479                                   
                                                  -------                                --------                                   

                              Total               $37,799                 Total          $170,891                                   
                                                  =======                                ========                            
</TABLE>

    The adjustable rate mortgage loans have interest rate adjustment limitations
    and are generally indexed to the weekly average yield on United States
    Treasury securities adjusted to a constant maturity one-year, three-year, or
    five-year as made available by the Federal Reserve Board.  Future market
    factors may affect the correlation of the interest rate adjustment with the
    rates the Bank pays on the short-term deposits that primarily have been
    utilized to fund these loans.

    The Bank, through its normal lending activity, originates and maintains
    loans which are substantially concentrated in Moore County, North Carolina.

    At June 30, 1998 and 1997, loans to directors and officers were
    approximately $800,520 and $776,000, respectively.  Such loans are made on
    the same terms as those offered to other customers.

    The Bank's lending policy calls for collateral or other forms of repayment
    assurance to be received from the borrower at the time of loan origination.
    Such collateral or other form of repayment assurance is subject to changes
    in economic value due to various factors beyond the control of the Bank and
    such changes could be significant.

    The Bank is subject to numerous lending-related regulations.  For example,
    the Bank may not make real estate loans to one borrower in excess of 15% of
    its unimpaired capital and surplus, except for loans not to exceed $500,000.
    This 15% limitation results in a dollar limitation of approximately
    $10,428,000 at June 30, 1998.  The Bank was in compliance with the
    limitation as of June 30, 1998.

    CHANGES IN THE ALLOWANCE FOR LOAN LOSSES FOR THE YEARS ENDED JUNE 30 ARE
    SUMMARIZED AS FOLLOWS:

<TABLE>
<CAPTION>
                                            1998        1997       1996
                                         ----------  ----------  ---------
         <S>                             <C>         <C>         <C>
         Balance at beginning of year     $604,187    $608,739    $608,739
         Provision for loan losses               -           -           -
         Charge-offs                        (8,372)     (4,552)          -
         Recoveries                              -           -           -
                                          --------    --------    --------
 
         Balance at end of year           $595,815    $604,187    $608,739
                                          ========    ========    ========
</TABLE>

    In conformity with SFAS 114, as amended by SFAS 118, none of the Bank's
    loans are considered to be impaired.

                                       29
<PAGE>
 
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS


4.  ACCRUED INTEREST RECEIVABLE

    ACCRUED INTEREST RECEIVABLE AT JUNE 30 IS SUMMARIZED AS FOLLOWS:

<TABLE>
<CAPTION>
                                                              1998        1997      
                                                           ----------  ----------
<S>                                                        <C>         <C>       
                                                                                 
         Loans receivable                                  $  410,978  $  145,185
         Mortgage-backed securities                            76,316      80,503
         Securities                                         1,225,434   1,575,903
         Other                                                 36,081      34,878
                                                           ----------  ----------
                                                                                 
         Total                                             $1,748,809  $1,836,469
                                                           ==========  ========== 
</TABLE>

5.  PREMISES AND EQUIPMENT

    PREMISES AND EQUIPMENT AT JUNE 30, WHICH ARE STATED AT COST, ARE SUMMARIZED
    AS FOLLOWS:

<TABLE>
<CAPTION>
                                                              1998        1997   
                                                           ----------  ----------
<S>                                                        <C>         <C>       
         Land                                              $  379,306  $  379,306
         Office buildings and improvements                  2,269,486   2,233,113
         Furniture, fixtures and equipment                    660,643     645,140
         Motor vehicles                                        37,856      39,838
                                                           ----------  ----------
                                                                                 
         Total                                              3,347,291   3,297,397
                                                                                 
         Less allowance for depreciation                    1,411,364   1,329,707
                                                           ----------  ----------
                                                                                 
         Premises and equipment, net                       $1,935,927  $1,967,690
                                                           ==========  ========== 
</TABLE>

6.  DEPOSITS

    Deposits at June 30 are summarized as follows:

<TABLE>
<CAPTION>
                                                               1998          1997    
                                                           ------------  ------------
<S>                                                        <C>           <C>         
         NOW accounts                                      $ 23,429,916  $ 19,776,505
         Money market deposits                               42,567,590    41,668,099
         Passbook savings                                    14,035,680    13,070,907
         Certificates of deposit                            131,891,746   129,801,263
                                                           ------------  ------------
                                                                                     
         Total                                             $211,924,932  $204,316,774
                                                           ============  ============ 
</TABLE>

    The aggregate amounts of certificates of deposit with a minimum denomination
    of $100,000 were approximately $28,915,000 and $25,465,000 in 1998 and 1997,
    respectively.

                                       30
<PAGE>
 
                            NOTES TO CONSOLIDATED 
                             FINANCIAL STATEMENTS

    AT JUNE 30, 1998, THE SCHEDULED MATURITIES OF CERTIFICATES OF DEPOSIT ARE AS
    FOLLOWS:
 
                                                            (In thousands)
 
              1999                                               $ 96,633
              2000                                                 24,945
              2001 and thereafter                                  10,314
                                                                 --------
 
                                                                 $131,892
                                                                 ========

    Included in deposits are non-interest-bearing balances totaling $4,028,120
    and $1,556,535 as of June 30, 1998 and 1997, respectively.

7.  BORROWED FUNDS

    Borrowed funds at June 30, 1998 and 1997 consist of advances from the
    Federal Home Loan Bank (FHLB).  These advances, with weighted average rates,
    are as follows:

              6.25% due on or before June 30, 1999      $20,000,000
                                                        ===========

    The above advances have been made against a $52.0 million line of credit
    secured by a blanket floating lien on the Bank's one-to-four family
    residential mortgage loans.

8.  INTEREST RATE RISK

    First Savings is engaged principally in providing first mortgage loans to
    individuals and commercial enterprises.  At June 30, 1998, First Savings'
    interest-earning assets consisted of assets that earn interest at both fixed
    and adjustable rates.  Those assets were funded primarily with short-term
    liabilities that have interest rates that vary with market rates over time.

    At June 30, 1998, First Savings had interest-earning assets of $296,511,768
    having a weighted-average effective yield of 7.67% and interest-bearing
    liabilities of $216,114,359 having a weighted-average effective interest
    rate of 4.82%.

9.  SPECIAL SAIF ASSESSMENT

    On September 30, 1996, the Deposit Insurance Funds Act of 1996 was signed
    into law.  The legislation included a special assessment to recapitalize the
    SAIF insurance fund up to its statutory goal of 1.25% of insured funds.  The
    assessment required the Bank to pay an amount equal to 65.7 basis points of
    its SAIF-assessable deposit base as of March 31, 1995, which resulted in a
    charge to income during the year ended June 30, 1997 of $1.2 million.

10. INCOME TAXES

    First Savings uses the asset and liability method to account for income
    taxes.  Under the asset and liability method, deferred income taxes are
    recognized for the tax consequences of "temporary differences," by applying
    enacted statutory tax rates applicable to future years to differences
    between the financial statement carrying amounts and the tax bases of
    existing assets and liabilities.

    THE COMPONENTS OF INCOME TAX EXPENSE FOR THE YEARS ENDED JUNE 30 ARE
    SUMMARIZED AS FOLLOWS:

<TABLE>
<CAPTION>
                                      1998        1997         1996
                                   ----------  -----------  -----------
         <S>                       <C>         <C>          <C> 
         Current tax provision     $3,048,000  $2,162,000   $2,103,600
         Deferred tax provision        12,000      (7,000)     (18,600)
                                   ----------  ----------   ----------
 
         Total                     $3,060,000  $2,155,000   $2,085,000
                                   ==========  ==========   ==========
</TABLE>

                                       31
<PAGE>
 
                            NOTES TO CONSOLIDATED 
                             FINANCIAL STATEMENTS

    A RECONCILIATION OF INCOME TAXES COMPUTED FOR THE YEARS ENDED JUNE 30 AT THE
    STATUTORY FEDERAL INCOME TAX RATE (34%) TO THE PROVISION FOR INCOME TAXES IS
    AS FOLLOWS:

<TABLE>
<CAPTION>
                                                                                  1998         1997         1996                  
                                                                               -----------  -----------  -----------               
         <S>                                                                   <C>          <C>          <C> 
         Income taxes at the statutory federal rate                            $2,828,279   $2,061,642   $2,041,957               
         Increases (decreases) resulting from:                                                                                    
          Tax exempt interest - net                                               (15,036)     (10,833)     (29,091)               
          State income taxes - net of federal benefit                             235,702      101,319       70,150               
         Other, net                                                                11,055        2,872        1,984               
                                                                               ----------   ----------   ----------               
                                                                                                                                  
         Income tax expense                                                    $3,060,000   $2,155,000   $2,085,000               
                                                                               ==========   ==========   ==========                
</TABLE> 

    Deferred taxes arising from each type of temporary difference at June 30 
    are summarized as follows:

<TABLE> 
<CAPTION> 
                                                                                               1998         1997               
                                                                                            ----------   ----------               
         <S>                                                                                <C>          <C>                      
         Deferred tax assets:                                                                                                     
          Loan fees and costs                                                               $  213,870   $  218,176               
                                                                                            ----------   ----------               
                                                                                                                                  
         Deferred tax liabilities:                                                                                                
          Federal Home Loan Bank stock dividends                                               329,029      329,029               
          Depreciation                                                                         230,357      222,663               
          Bad debt reserve                                                                     289,980      289,980               
          Unrealized gain on securities available for sale                                     193,120      144,942               
                                                                                            ----------   ----------               
                                                                                                                                  
         Total                                                                               1,042,486      986,614               
                                                                                            ----------   ----------               
                                                                                                                                  
         Net deferred tax liability                                                         $  828,616   $  768,438               
                                                                                            ==========   ==========                
</TABLE>

Retained earnings at June 30, 1998 includes approximately $5,300,000 for which
no deferred income tax liability has been recognized. This amount represents an
allocation of income to bad debt deductions for income tax purposes only.
Reductions of the amount so allocated for purposes other than tax bad debt
losses or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then current
corporate income tax rate.

During 1996, Congress enacted certain tax legislation that exempted thrift
institutions from being taxed on these pre-1987 bad debt reserves. Further, the
use of the reserve method is now required for all thrifts. The Bank will be
recapturing $1,300,000 of its tax bad debt reserve created subsequent to 1986 by
using the percentage of taxable income method, requiring payment of additional
income taxes of approximately $500,000. Deferred income taxes have been
previously established for the taxes arising from the reserve recapture, and
thus the ultimate payment of the taxes will not result in a charge to earnings.

                                       32
<PAGE>
 
                            NOTES TO CONSOLIDATED 
                             FINANCIAL STATEMENTS

11. REGULATORY RESTRICTIONS

    Federal banking regulations require that bank holding companies and their
    bank subsidiaries meet various regulatory capital requirements administered
    by the federal banking agencies. Failure to meet minimum capital
    requirements can initiate certain mandatory, and possibly additional
    discretionary actions by regulators that, if undertaken, could have a direct
    material effect on First Savings' financial statements. Under capital
    adequacy guidelines and the regulatory framework for prompt corrective
    action, First Savings must meet specific capital guidelines that involve
    quantitative measures of First Savings' assets, liabilities, and certain 
    off-balance sheet items as calculated under regulatory accounting practices.
    First Savings' capital amounts and classification are also subject to
    qualitative judgments by the regulators about components, risk weightings,
    and other factors.

    Quantitative measures established by regulation to ensure capital adequacy
    require First Savings to maintain minimum amounts and ratios of total and
    Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average
    assets.

    As of December 31, 1997, the most recent notification from the FDIC
    categorized the Bank as well capitalized under the regulatory framework for
    prompt corrective action.  To be categorized as well capitalized, the Bank
    must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
    leverage ratios as set forth in the table.  There are no conditions or
    events since that notification that management believes have changed the
    category.

    REGULATORY CAPITAL AMOUNTS AND RATIOS FOR FIRST SAVINGS AND THE BANK ARE
    PRESENTED IN THE TABLE BELOW:

<TABLE>
<CAPTION>
                                                                                        FOR CAPITAL                            
                                                            ACTUAL                    ADEQUACY PURPOSES                        
                                                     -------------------       --------------------------------                
                                                       AMOUNT     RATIO         AMOUNT                 RATIO                   
                                                     -----------  ------       -----------            ---------                
<S>                                                  <C>          <C>          <C>                    <C>                      
    AS OF JUNE 30, 1998:                                                                                                            

      Total Capital (to Risk Weighted Assets):                                                                                      

       Consolidated                                  $69,742,140  48.67%       $11,464,080  greater than or Equal to   8.0%     

       First Savings Bank of Moore Co., Inc., SSB    $54,933,352  38.34%       $11,461,920  greater than or Equal to   8.0%         

      Tier 1 Capital (to Risk Weighted Assets):                                                                                     

       Consolidated                                  $69,146,325  48.25%       $ 5,732,040  greater than or Equal to   4.0%         

       First Savings Bank of Moore Co., Inc., SSB    $54,337,537  37.93%       $ 5,730,960  greater than or Equal to   4.0%         

      Tier 1 Capital (to Average Assets):                                                                                           

       Consolidated                                  $69,146,325  23.05%       $11,997,160  greater than or Equal to   4.0%         

       First Savings Bank of Moore Co., Inc., SSB    $54,337,537  18.67%       $11,641,120  greater than or Equal to   4.0%         

    As of June 30, 1997:                                                                                                            

      Total Capital (to Risk Weighted Assets):                                                                                      

       Consolidated                                  $67,517,761  52.15%       $10,358,080  greater than or Equal to   8.0%         

       First Savings Bank of Moore Co., Inc., SSB    $49,692,461  38.38%       $10,356,880  greater than or Equal to   8.0%         

      Tier 1 Capital (to Risk Weighted Assets):                                                                                     

       Consolidated                                  $66,913,574  51.68%       $ 5,179,040  greater than or Equal to   4.0%    

       First Savings Bank of Moore Co., Inc., SSB    $49,088,274  37.92%       $ 5,178,440  greater than or Equal to   4.0%    

      Tier 1 Capital (to Average Assets):                                                                                           

       Consolidated                                  $66,913,574  24.71%       $10,927,600  greater than or Equal to   4.0%    

       First Savings Bank of Moore Co., Inc., SSB    $49,088,274  19.08%       $10,290,120  greater than or Equal to   4.0%    

                                                                                                 TO BE WELL      
                                                                                              Capitalized Under  
                                                                                              Prompt Corrective  
                                                                                              ACTION PROVISIONS  
                                                                                            -------------------  
                                                                                              AMOUNT     RATIO   
                                                                                            -----------  ------   
                                                                                                 
    AS OF JUNE 30, 1998:                                                                         
                                                                                                 
      Total Capital (to Risk Weighted Assets):                                                                      
       Consolidated                                                                  N/A                                N/A   
       First Savings Bank of Moore Co., Inc., SSB                            $14,327,400    greater than or Equal to  10.0%

      Tier 1 Capital (to Risk Weighted Assets):                                                                             
       Consolidated                                                                  N/A                                N/A  
       First Savings Bank of Moore Co., Inc., SSB                            $ 8,596,440    greater than or Equal to   6.0% 
                                                                                                                            
      Tier 1 Capital (to Average Assets):                                                                                   
       Consolidated                                                                  N/A                                N/A  
       First Savings Bank of Moore Co., Inc., SSB                            $14,551,400    greater than or Equal to   5.0% 
                                                                                                                            
    As of June 30, 1997:                                                                                                    
                                                                                                                            
      Total Capital (to Risk Weighted Assets):                                                                              
       Consolidated                                                                  N/A                                N/A  
       First Savings Bank of Moore Co., Inc., SSB                            $12,946,100    greater than or Equal to  10.0% 
                                                                                                                            
      Tier 1 Capital (to Risk Weighted Assets):                                                                             
       Consolidated                                                                  N/A                                N/A  
       First Savings Bank of Moore Co., Inc., SSB                            $ 7,767,660    greater than or Equal to   6.0% 
                                                                                                                            
      Tier 1 Capital (to Average Assets):                                                                                   
       Consolidated                                                                  N/A                                N/A  
       First Savings Bank of Moore Co., Inc., SSB                            $12,862,650    greater than or Equal to   5.0% 
</TABLE> 

                                       33
<PAGE>
 
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS

    In addition federal regulatory requirements, the Bank is subject to a North
    Carolina savings bank capital requirement of at least 5% of total assets. At
    June 30, 1998 and 1997, the Bank's capital ratio under the North Carolina
    requirement was 18.74% and 17.54%, respectively.

    At June 30, 1998 and 1997, First Savings and the Bank exceeded all capital
                                                              
    First Savings is also subject to limits on dividend payments. First Savings
    is prohibited under the North Carolina Business Corporation Act, from paying
    a dividend if such payment would (i) cause First Savings to be unable to pay
    its debts as they become due in the ordinary course of business or (ii)
    reduce First Savings' total assets below the sum of First Savings' total
    liabilities plus any amounts which would be needed, if First Savings were to
    be dissolved at the time of distribution, to satisfy the preferential rights
    that are superior to holders of the Common Stock.

    Payment of dividends by the Bank subsidiary to the holding company is
    subject to various restrictions. Under applicable banking regulations, the
    Bank may not declare a cash dividend if the effect thereof would be to
    reduce its net worth to an amount less than the minimum required by federal
    and state banking regulations. In addition, for a period of five years after
    the consummation of the Bank's stock conversion, which occurred on January
    6, 1994, the Bank will be required to obtain prior written approval from the
    Administrator of the Savings Institutions Division, North Carolina
    Department of Commerce, before it can declare a cash dividend in an amount
    in excess of one-half the greater of (i) its net income for the most recent
    fiscal year or (ii) the average of its net income after dividends for the
    most recent fiscal year and not more than two of the immediately preceding
    fiscal years, as applicable, or repurchase any of its common stock. A source
    of First Savings' funds are dividends received from the Bank. In fiscal
    1999, the amount of dividends that can be paid without prior approval from
    regulators is approximately $2.0 million. These funds should be adequate to
    cover First Savings' needs.

    During the year ended June 30, 1997, First Savings repurchased and retired
    76,500 shares of its common stock in accordance with a stock repurchase
    plan. At June 30, 1998, First Savings' Board has authorized the purchase of
    297,900 additional shares under the plan.

12. COMPENSATION PLANS

    First Savings maintains an employee profit sharing plan covering all
    eligible employees.  Contributions to the plan for the years ended June 30,
    1998, 1997 and 1996 were $112,910, $97,539 and $93,402, respectively.

    Upon the Bank's conversion to stock form, the First Savings Bank of Moore
    County, Inc., SSB Employee Stock Ownership Plan ("ESOP") became effective.
    As part of the conversion, the ESOP borrowed $648,000 and the Bank
    contributed $72,000 in order to purchase 72,000 shares at $10 per share of
    common stock issued in the conversion. (See Note 7.) The ESOP note payable
    is to be paid over a period not to exceed ten years, principally from the
    Bank's discretionary contributions to the ESOP. Dividends paid on shares
    held by the ESOP may also be used to reduce the note. ESOP expense of
    $314,602, $244,375 and $220,873, has been incurred during the years ended
    June 30, 1998, 1997 and 1996, respectively, including $179,402, $115,925,
    and $99,945, respectively, which represents the difference between the fair
    market value of the shares which have been released or committed to be
    released to participants and the cost of these shares to the ESOP. These
    amounts have been credited to common stock and charged to compensation
    expense in accordance with the provisions of AICPA Statement of Position 93-
    6.

    First Savings has also adopted an Employee Stock Option Plan ("Employee
    Plan") for officers and a Nonqualified Stock Option Plan for Directors (the
    "Directors Plan") for nonemployee directors.  The options have an original
    term of ten years.  The option exercise price is the market price of the
    common stock on the date the option is granted.  During the year ended June
    30, 1994, 270,000 and 360,000 options were granted under the Employee Plan
    and Directors Plan, respectively, at an exercise price of $10 per share.
    Under both plans, participants may exercise options by exchanging, at fair
    value, shares of common stock which they already own.  At June 30, 1998,
    options for 90,000 shares of common stock were reserved for future issuance
    for the Employee Plan.  As of June 30, 1998, 61,714 options have been
    exercised under the Employee Plan.  No options had been exercised under the
    Directors' Plan as of June 30, 1998.

                                       34
<PAGE>
 
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS

13. LEASES

    Rentals under a long-term operating lease for First Savings' branch office
    building in Pinehurst totaled $9,000 for each of the years ended June 30,
    1998, 1997 and 1996.  The lease, which has a term of 15 years, contains an
    escalation provision for a $100 per month increase at the end of five and
    ten years.

    AT JUNE 30, 1998, THE MINIMUM RENTAL COMMITMENTS REQUIRED UNDER THIS
    NONCANCELABLE LEASE ARE AS FOLLOWS:

 
          Year Ending
             1999                              $10,200  
             2000                               10,200  
             2001                               10,200  
             2002                               10,200  
             2003                                7,650  
                                               -------  
                                                        
             Total                             $48,450  
                                               =======   
14. CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK

    The Bank generally originates single-family residential loans within its
    primary lending area of Moore County.  The Bank's underwriting policies
    require such loans to be made at no greater than 80% loan-to-value based
    upon appraised values unless private mortgage insurance is obtained.  These
    loans are secured by the underlying properties.

    The Bank is a party to financial instruments with off-balance sheet risk in
    the normal course of business to meet the financing needs of its customers.
    These financial instruments include commitments to fund loans, standby
    letters of credit and lines of credit.  Those instruments involve, to
    varying degrees, elements of credit and interest rate risk in excess of the
    amount recognized in the statements of financial condition.  The contract or
    notional amounts of those instruments reflect the extent of involvement the
    Bank has in particular classes of financial instruments.

    A summary of the contract amount of the Bank's exposure to off-balance sheet
    risk as of June 30, 1998 is as follows:

         Financial instruments whose contract amounts represent credit risk:

          Commitments to extend credit, mortgage loans    $ 7,167,000
          Undisbursed construction loans                    5,631,000
          Undisbursed lines of credit                      16,875,000

15. FAIR VALUE OF FINANCIAL INSTRUMENTS

    The following disclosure of the estimated fair value of financial
    instruments is made in accordance with the requirements of SFAS No. 107,
    Disclosures About Fair Value of Financial Instruments. The estimated fair
    value amounts have been determined by First Savings using available market
    information and appropriate valuation methodologies. However, considerable
    judgment is required to interpret market data to develop the estimates of
    fair value. Accordingly, the estimates presented herein are not necessarily
    indicative of the amounts First Savings could realize in a current market
    exchange. The use of different market assumptions and/or estimation
    methodologies may have a material effect on the estimated fair value
    amounts.

    The following methods and assumptions were used to estimate the fair value
    of each class of financial instruments for which it is practical to estimate
    that value.

    Cash and Due From Banks and Interest-Earning Deposits With Banks
    ----------------------------------------------------------------

    The carrying amounts for cash and interest-earning deposits with banks
    approximate fair value because of the short maturities of those instruments.

                                       35
<PAGE>
 
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS


    Securities and Mortgage-Backed Securities
    -----------------------------------------

    For securities held as investments, fair value equals quoted market price,
    if available.  If a quoted market price is not available, fair value is
    estimated using quoted market prices for similar securities.

    Loans Receivable
    ----------------

    For mortgage loans receivable, fair value is estimated using the quoted
    market prices for securities backed by similar loans, adjusted for
    differences in loan characteristics.  The fair value of other types of loans
    is estimated by discounting the future cash flows using the current rates at
    which similar loans would be made to borrowers with similar credit ratings
    and for the same remaining maturities.

    Deposits
    --------

    The fair value of NOW accounts, savings accounts, and money market deposits
    is the amount payable on demand at the reporting date.  The fair value of
    fixed-maturity certificates of deposit is estimated using the rates
    currently offered for deposits of similar remaining maturities.

    Borrowed Funds
    --------------

    The fair value of borrowed funds is based upon the discounted value using
    current rates at which borrowings of similar maturity could be obtained.

    THE ESTIMATED FAIR VALUES OF THE BANK'S FINANCIAL INSTRUMENTS AT JUNE 30 ARE
    AS FOLLOWS:

<TABLE>
<CAPTION>
                                             1998                             1997             
                                    --------------------------       --------------------------
                                      Carrying        Fair             Carrying        Fair    
                                       Amount        Value              Amount        Value    
                                    ------------  ------------       ------------  ------------
<S>                                 <C>           <C>                <C>           <C>         
    Financial assets:                                                                          
     Cash and due from banks and    $  7,816,308  $  7,816,308       $  9,102,219  $  9,102,219
      interest-earning deposits                                                                
     Securities                       84,398,774    84,483,022         88,758,806    88,858,740
     Loans receivable                208,094,461   209,610,186        192,237,609   195,970,477
                                    ------------  ------------       ------------  ------------
                                                                                               
                                    $300,309,543  $301,909,516       $290,098,634  $293,931,436
                                    ============  ============       ============  ============
                                                                                               
    Financial liabilities:                                                                     
     Deposits                       $211,924,932  $210,824,998       $204,316,774  $203,716,128
     Borrowed funds                   20,000,000    19,975,856         20,000,000    19,994,635
                                    ------------  ------------       ------------  ------------
                                                                                               
                                    $231,924,932  $230,800,854       $224,316,774  $223,710,763
                                    ============  ============       ============  ============ 
</TABLE>

    The fair value estimates presented herein are based on pertinent information
    available to management at June 30, 1998 and 1997, respectively.  Although
    management is not aware of any factors that would significantly affect the
    estimated fair value amounts, such amounts have not been significantly
    revalued for purposes of these financial statements since that date and,
    therefore, current estimates of fair value may differ significantly from the
    amounts presented herein.

                                      36
<PAGE>
 
                             NOTES TO CONSOLIDATED
                             FINANCIAL STATEMENTS

16.  QUARTERLY FINANCIAL DATA (UNAUDITED)

     QUARTERLY OPERATING DATA FOR THE YEARS ENDED JUNE 30 IS SUMMARIZED AS
     FOLLOWS:

<TABLE>
<CAPTION>
                                                 FIRST             SECOND           THIRD            FOURTH         
                                                QUARTER           QUARTER          QUARTER          QUARTER         
                                               ----------        ----------       ----------       ----------       
                                                               (In thousands, except per share)
<S>                                            <C>               <C>              <C>              <C>              
    1998                                                                                                            
    Total interest and dividend income         $    5,597        $    5,664       $    5,661       $    5,621       
    Total interest expense                          2,793             2,817            2,752            2,721       
                                               ----------        ----------       ----------       ----------       
    Net interest income                             2,804             2,847            2,909            2,900       
    Provision for loan losses                           -                 -                -                -       
                                               ----------        ----------       ----------       ----------       
    Net interest income after provision for                                                                         
    loan losses                                     2,804             2,847            2,909            2,900       
    Other expense, net                                784               790              757              811       
                                               ----------        ----------       ----------       ----------       
    Income before income taxes                      2,020             2,057            2,152            2,089       
    Income tax expense                                744               759              798              759       
                                               ----------        ----------       ----------       ----------       
    Net income                                 $    1,276        $    1,298       $    1,354       $    1,330       
                                               ==========        ==========       ==========       ==========       
                                                                                                                    
    NET INCOME PER COMMON SHARE                                                                                     
     Basic                                     $     0.35        $     0.35       $     0.36       $     0.36       
     Diluted                                   $     0.32        $     0.32       $     0.34       $     0.33       
                                                                                                                    
    AVERAGE COMMON SHARES OUTSTANDING                                                                               
     Basic                                      3,682,500         3,674,737        3,704,823        3,710,490       
     Diluted                                    3,984,737         4,016,668        4,035,403        4,028,537       
                                                                                                                    
                                                                                                                    
    1997                                                                                                            
    Total interest and dividend income         $    4,796        $    4,863       $    4,953       $    5,446       
    Total interest expense                          2,311        $    2,369            2,377            2,725       
                                               ----------        ----------       ----------       ----------       
    Net interest income                             2,485             2,494            2,576            2,721       
    Provision for loan losses                           -                 -                -                -       
                                               ----------        ----------       ----------       ----------       
    Net interest income after provision for                                                                         
    loan losses                                     2,485             2,494            2,576            2,721       
    Other expense, net                              2,010 *             737              756              709       
                                               ----------        ----------       ----------       ----------       
    Income before income taxes                        475             1,757            1,820            2,012       
    Income tax expense                                173               586              656              740       
                                               ----------        ----------       ----------       ----------       
    Net income                                 $      302        $    1,171       $    1,164       $    1,272       
                                               ==========        ==========       ==========       ==========       
                                                                                                                    
    Net income per common share                                                                                     
     Basic                                     $     0.08        $     0.32       $     0.32       $     0.35       
     Diluted                                   $     0.08        $     0.30       $     0.29       $     0.32       
                                                                                                                    
    Average common shares outstanding                                                                               
     Basic                                      3,744,000         3,703,176        3,692,481        3,686,789       
     Diluted                                    3,974,368         3,948,720        3,961,840        3,976,525        
</TABLE>     

    * Includes nonrecurring charge associated with the SAIF assessment.
                                                                  
                                      37
<PAGE>
 
                            NOTES TO CONSOLIDATED 
                             FINANCIAL STATEMENTS


17. PARENT COMPANY FINANCIAL INFORMATION

    Condensed financial information of First Savings Bancorp, Inc., the parent
    company, at June 30, 1998 and 1997 and for the years ended June 30, 1998 and
    1997 is presented below:

<TABLE>
<CAPTION>
                                                           1998         1997
                                                        -----------  -----------
         <S>                                            <C>          <C> 
         ASSETS
          Interest-earning deposits with subsidiary     $ 3,841,153  $ 7,481,196
          Securities at market value                     10,126,516   10,246,855
          Investment in subsidiary                       54,675,457   49,322,904
          Other assets                                    1,825,074      653,180
                                                        -----------  -----------
 
          Total assets                                  $70,468,200  $67,704,135
                                                        ===========  ===========
 
         LIABILITIES AND SHAREHOLDERS' EQUITY
          Accrued expenses and other liabilities        $   946,995  $   509,203
          Shareholders' equity                           69,521,205   67,194,932
                                                        -----------  -----------
 
          Total liabilities and shareholders' equity    $70,468,200  $67,704,135
                                                        ===========  ===========
 
         CONDENSED STATEMENTS OF INCOME
          Interest on securities                        $   670,874  $   670,595
          Earnings of subsidiary                          4,934,659    3,538,555
                                                        -----------  -----------
                                                          5,605,533    4,209,150
          Other expenses                                    175,066      108,497
                                                        -----------  -----------
          Income before income tax                        5,430,467    4,100,653
          Income tax expense                                172,000      192,000
                                                        -----------  -----------
 
          Net income                                    $ 5,258,467  $ 3,908,653
                                                        ===========  ===========
</TABLE>

    For the year ended June 30, 1998, the Bank subsidiary did not pay cash
    dividends to the parent.

                                       38
<PAGE>
 
                              DIRECTORS, OFFICERS
                             AND OFFICE LOCATIONS


                          FIRST SAVINGS BANCORP, INC.
                              BOARD OF DIRECTORS
                                        

                      J. E. CAUSEY, Chairman of the Board
                         Causey Construction & Realty

<TABLE> 
<CAPTION> 
<S>                                                             <C>     
WILLIAM E. SAMUELS, President                                                             JOHN F. BURNS, Secretary 
Chief Executive Officer                                                                   Executive Vice President 
First Savings Bank of Moore County, Inc., SSB                                          First Savings Bank of Moore 
County, Inc., SSB                                                                                                  
                                                                                                                   
JOE MONTESANTI, JR.                                                                                  H. A. CLAYTON 
Retired Pharmacist                                                                                Retired Merchant 
                                                                                                                   
H. DAVID BRUTON, M.D.                                                                                              
Secretary of North Carolina Department                                                          THOMAS F. PHILLIPS 
of Health and Human Services                                                       Owner of Phillips Motor Company 
                                                                                                                   
                                                                                                                   
DR. W. HARRELL JOHNSON                                                                          FRANK G. HARDISTER 
Retired Dentist                                                                   President of Powell Funeral Home 
                                                                                                                   
VIRGINIA C. BRANDT                                                                                 FELTON J. CAPEL  
Certified Public Accountant                                          Owner of Century Associates of North Carolina
Holden, Brandt,                                                     
& Longfellow, P.C.

                           FIRST SAVINGS BANK STAFF


      SOUTHERN PINES OFFICE                                                     PINEHURST OFFICE                   
   William E. Samuels, President                                      Doris B. Andrews, Vice President         
John F. Burns, Executive Vice President                            Teresa T. Cole, Assistant Vice President           
          and Secretary                                         Lynette F. Williams, Assistant Vice President           
                                                                               Nancy L. Howle               
                                                                             Deborah H. Williams            

                                    
               Vice Presidents
S. Allan Beck                 Michael F. McMillan                                     CARTHAGE OFFICE   
Timothy S. Maples                 Donna B. Morgan                         Patricia W. Jackson, Vice President     
                Sherry B. Yow                                                          Patsy M. Salmon  
                                                                                      Carol M. Williams  
 
              Assistant Vice Presidents
                                                                                      SEVEN LAKES OFFICE
Carol F. Allred             Margaret V. Hightower                                Kim Y. Bailey, Vice President 
Sandra G. Blake                     Wanda M. Ring                                      Sherry S. Blake     
                  Joel H. Salmon                                                      Shirley M. Puckett           
                                                                                       Sharon W. Styers            
                                                                                       Paula M. Taggart
                    Staff
Tammy O. Barnett                Marian E. Lauffer                                   PINECREST PLAZA OFFICE  
Shelia C. Brown               Caroline M. Lemmond
Dianna B. Bullard                  Betty K. Lomax                             William A. Roberts, Vice President 
Kimberly O. Hedrick            Angel J. McKeithan                         Patsy M. McDonald, Assistant Vice President 
Derinda F. Hobson                 Audra W. McLean                                      Susanna C. Hunley 
Betty S. Kramer                 Barbara W. Ussery                                      Martha M. Lunday   
                Pamela C. Wase                                                       Amanda L. VandeReit
</TABLE>

                                       39
<PAGE>
 
                             CORPORATE INFORMATION

<TABLE> 
<CAPTION> 
    <S>                                                                    <C>       
               CORPORATE HEADQUARTERS                                                    INDEPENDENT ACCOUNTANTS          
            First Savings Bancorp, Inc.                                                       Dixon Odom pllc             
     205 SE Broad Street, Post Office Box 1657                                                6 Tunberry Wood             
       Southern Pines, North Carolina  28388                                               Post Office Box 1655           
                  (910) 692-6222                                                     Southern Pines, North Carolina 28387 


              SPECIAL COUNSEL                                                                  FORM 10-K                          
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P.                       COPIES OF THE FIRST SAVINGS BANCORP, INC. FORM 10-K    
             230 North Elm Street                                          MAY BE OBTAINED BY SHAREHOLDERS WITHOUT CHARGE BY       
             Post Office Box 26000                                         WRITING TO MARGARET V. HIGHTOWER AT THE  CORPORATE      
       Greensboro, North Carolina  27420                                                    HEADQUARTERS ADDRESS.                  

                TRANSFER AGENT                                                             ADDITIONAL INFORMATION     
    Wachovia Bank of North Carolina, N.A.                                        For additional information, please contact 
Corporate Trust Department, Post Office Box 3001                                    John F. Burns, Timothy S. Maples, or          
       Winston-Salem, North Carolina  27102                                                William E. Samuels at         
                1-800-633-4236                                                                (910) 692-6222. 

                                                  ANNUAL MEETING
                                     The 1998 Annual Meeting of Shareholders of
                                   First Savings Bancorp, Inc. will be held at the 
                                      Holiday Inn, US#1, Southern Pines, NC on  
                                          October 29, 1998 at 10:00 a.m.  
                                  All shareholders are cordially invited to attend.       
</TABLE> 

                                 CAPITAL STOCK

First Savings' common stock is traded on the NASDAQ National Market System under
the symbol "SOPN." As of June 30, 1998, there were 3,710,820 shares outstanding
and 1,016 shareholders of record, not including the number of persons or
entities whose stock is held in nominee or street name through various brokerage
firms or banks.  Payment of dividends by the Bank subsidiary to the holding
company is subject to various restrictions.  Under applicable banking
regulations, the Bank may not declare a cash dividend if the effect thereof
would be to reduce its net worth to an amount less than the minimum required by
federal and state banking regulations.  In addition, for a period of five years
after the consummation of the Bank's stock conversion, which occurred on January
6, 1994, the Bank will be required to obtain prior written approval from the
Administrator of the Savings Institutions Division, North Carolina Department of
Commerce, before it can declare a cash dividend in an amount in excess of one-
half the greater of (i) its net income for the most recent fiscal year or (ii)
the average of its net income after dividends for the most recent fiscal year
and not more than two of the immediately preceding fiscal years, as applicable.

           QUARTERLY COMMON STOCK PERFORMANCE AND DIVIDENDS DECLARED
<TABLE>
<CAPTION>
                                                                               Dividends                     
                                                 Stock Price              DECLARED, PER SHARE                  
                                         ---------------------------  ----------------------------      
                                            High             LOW        REGULAR         SPECIAL          
                                         -----------      ----------  ------------     -----------      
<S>                                      <C>              <C>         <C>              <C>          
For the Year Ended June 30, 1998:                                                                       
    First Quarter Ending September 30     $    23.88        $  20.00     $   0.22         N/A             
    Second Quarter Ending December 31     $    25.50        $  22.00     $   0.22         N/A             
    Third Quarter Ending March 31         $    26.00        $  22.19     $   0.25         N/A             
    Fourth Quarter Ending June 30         $    25.75        $  22.25     $   0.25         N/A             

For the Year Ended June 30, 1997:                                                                         
    First Quarter Ending September 30     $    18.81        $  16.75     $   0.17         N/A             
    Second Quarter Ending December 31     $    19.00        $  17.25     $   0.17         N/A             
    Third Quarter Ending March 31         $    20.25        $  17.88     $   0.20         N/A             
    Fourth Quarter Ending June 30         $    24.50        $  19.38     $   0.20         N/A             
</TABLE>

THIS ANNUAL REPORT HAS NOT BEEN REVIEWED OR CONFIRMED FOR ACCURACY OR RELEVANCE
                 BY THE FEDERAL DEPOSIT INSURANCE CORPORATION.
                                        

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