<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996 Commission File Number 0-22734
OR
[___] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from____________________ to _________________________
Commission file number_________________________________________________________
KS BANCORP, INC.
(Exact name of registrant as specified in its charter)
North Carolina 56-1842707
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
207 West Second Street, Post Office Box 219
Kenly, North Carolina 27542
------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(919) 284-4157
----------------------------------------------------
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
--------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 1, 1997. Common Stock, no par value
- --- $9,938,568 (based on last sale price on such date).
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, no par value 663,263
- ---------------------------- -------------------------------
(Class) (Outstanding at March 20, 1997)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
1996 (the "Annual Report"), are incorporated by reference into Part I, Part II
and Part IV.
Portions of the Proxy Statement for the Annual Meeting of
Stockholders on May 6, 1997 (the "Proxy Statement"), are incorporated by
reference into Part III.
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<PAGE>
PART I
ITEM 1. BUSINESS
General
Prior to December 29, 1993, Kenly Savings Bank, Inc., SSB (the "Bank")
operated as a mutual North Carolina-chartered savings bank. On December 29,
1993, the Bank converted from a North Carolina-chartered mutual savings bank to
a North Carolina-chartered stock savings bank (the "Conversion"). In connection
with the Conversion, all of the issued and outstanding capital stock of the Bank
was acquired by KS Bancorp, Inc., a North Carolina corporation (the "Company")
which was organized to become the Bank's holding company. At that time, the
Company had an initial public offering of its common stock, no par value (the
"Common Stock").
The Company is a savings bank holding company registered with the Board
of Governors of the Federal Reserve System (the "Federal Reserve") under the
Bank Holding Company Act of 1956, as amended (the "BHCA") and the savings bank
holding company laws of North Carolina. The Company's executive offices are
located at 207 West Second Street, Kenly, North Carolina. The Company's
activities consist of owning the Bank and investing the proceeds of its initial
public offering which were retained at the holding company level. The Company's
principal sources of income are earnings on its investments. In addition, the
Company will receive any dividends which are declared and paid by the Bank on
its capital stock.
The Bank was organized as a North Carolina-chartered building and loan
association in 1924. The Bank has been a member of the Federal Home Loan Bank
("FHLB") system since 1936, and its deposits have been federally insured since
1961. The deposits of the Bank are insured by the Savings Association Insurance
Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC") to the
maximum extent permitted by law. As a North Carolina- chartered savings bank,
the Bank is regulated and examined by the Administrator, Savings Institutions
Division, North Carolina Department of Commerce (the "Administrator") and the
FDIC.
The Bank conducts business through its headquarters office and a branch
office in Kenly, its branch offices in Selma, Goldsboro and Wilson and a loan
production office in Clayton, North Carolina. On December 31, 1996, the Bank had
total assets of $100.8 million, net loans of $81.5 million, deposits of $82.3
million and stockholders' equity of $13.7 million.
The Bank is engaged primarily in the business of attracting deposits
from the general public and using such deposits, together with borrowings and
other funds, to make mortgage loans secured by residential real estate. The Bank
makes mortgage loans secured by owner occupied and non-owner occupied
residential real property, loans secured by non-residential real property,
construction loans, home equity line of credit loans and savings account loans
(loans secured by pledged deposit accounts). The Bank's primary source of
revenue is interest income from its real estate lending activities. The Bank's
other major sources of revenue are interest on other loans, interest income from
investments and mortgage-backed securities, interest income from its
interest-bearing deposit balances in other depository institutions and fee
income from its lending and deposit activities. The major expenses of the Bank
are interest on deposits and borrowings and non-interest expenses such as
salaries, employee benefits, federal deposit insurance premiums and branch
occupancy and related expenses.
2
<PAGE>
Market Area
The Bank's primary market area consists of Johnston, Wilson and Wayne
counties in North Carolina, the counties where it operates offices. This market
area is located approximately 40 miles east of Raleigh, North Carolina and near
North Carolina's Research Triangle Park. The economies in Johnston, Wilson and
Wayne counties are diversified, with employment spread among manufacturing,
agricultural, governmental and other non-manufacturing activities. Major
employers in the Bank's market area include Bridgestone/Firestone, Inc.,
Caterpillar, Inc., Champion Products, Inc., Channel Master, Bayer, Inc.,
Purolator Facete Servodyne, K. R. Edward Leaf Tobacco Co., Eaton Corporation,
Bunn Manufacturing Company, Johnson and Johnson Advance Materials Company,
Export Leaf Tobacco Company, Tobacco Processors, Inc., Wrangler and the United
States Department of Defense (Seymour Johnson Air Force Base). Consistent with
the Bank's emphasis on being a community-oriented financial institution,
management estimates that as of December 31, 1996, the vast majority of the
Bank's deposits were held by customers in its primary market area.
Lending Activities
General. The Bank's primary source of revenue is interest and fee
income from its real estate lending activities, consisting primarily of mortgage
loans for the purchase or refinancing of one-to-four family residential real
property located in its primary market area. The Bank also makes home equity and
home improvement loans, multi-family residential real estate loans, loans
secured by non-residential real estate, construction loans and savings account
loans (loans secured by pledged deposit accounts). Other than savings account
loans, the Bank generally does not make loans which are not secured by real
estate. As a result, at December 31, 1996, over 99% of the Bank's loan portfolio
was secured by real estate. On December 31, 1996, the Bank's largest single
outstanding loan had a balance of approximately $880,000. In addition to
interest earned on loans, the Bank receives fees in connection with loan
originations, loan modifications, late payments, loan assumptions and other
miscellaneous services.
Loan Portfolio Composition. The Bank's net loan portfolio totalled
approximately $81.5 million at December 31, 1996 representing 80.83% of the
Bank's total assets at such date. At December 31, 1996, 78.86% of the Bank's
loan portfolio, before net items, was composed of loans secured by one-to-four
family residential properties. Gross construction loans represented the second
largest component of the Bank's loan portfolio on such date with approximately
9.94% of the loan portfolio, before net items. Home equity loans follow,
representing 9.15% of the loan portfolio, before net items. In recent years, the
Bank's construction loan and home equity line of credit portfolios have
increased significantly.
The following table sets forth the composition of the Bank's loan
portfolio by type of loan at the dates indicated.
3
<PAGE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------
% of % of % of
Amount Total Amount Total Amount Total
--------- ------- --------- ------- --------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $64,277 78.86% $56,001 79.89% $51,713 81.12%
Residential multi-family 3,730 4.58% 4,005 5.71% 3,719 5.83%
Nonresidential real estate and other properties 2,421 2.97% 1,234 1.76% 955 1.50%
Home equity 7,457 9.15% 6,644 9.48% 5,393 8.46%
Construction 8,105 9.94% 5,225 7.45% 3,863 6.06%
------- ------- -------- ------- -------- ------
Total real estate loans 85,990 105.50% 73,109 104.29% 65,643 102.98%
------- ------ -------- ------ ------- ------
Other:
Savings account 194 0.24% 149 0.21% 228 0.36%
------- ------- -------- ------- -------- ------
Less:
Unearned fees and discounts 246 0.30% 200 0.29% 233 0.37%
Loans in process 4,125 5.06% 2,726 3.89% 1,670 2.62%
Allowance for losses 302 0.38% 233 0.32% 223 0.35%
------- ------- -------- ------- -------- ------
Total reductions 4,673 5.74% 3,159 4.50% 2,126 3.34%
------- ------- -------- ------- -------- ------
Total loans receivable, net $81,511 100.00% $70,099 100.00% $63,745 100.00%
======= ======= ======== ======= ======== ======
<CAPTION>
At December 31,
------------------------------------------------
1993 1992
------------------------------------------------
% of % of
Amount Total Amount Total
--------- ------- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $53,344 88.35% $54,627 89.83%
Residential multi-family 1,329 2.20% 962 1.58%
Nonresidential real estate and other properties 680 1.13% 720 1.18%
Home equity 4,729 7.83% 3,563 5.86%
Construction 881 1.46% 2,141 3.52%
------- ------- ------- ------
Total real estate loans 60,963 100.97% 62,013 101.97%
------- ------- ------- ------
Other:
Savings account 246 0.41% 278 0.46%
------- ------- ------- ------
Less:
Unearned fees and discounts 251 0.42% 283 0.47%
Loans in process 380 0.63% 1,056 1.74%
Allowance for losses 201 0.33% 140 0.22%
Total reductions 832 1.38% 1,479 2.43%
------- ------- ------- ------
Total loans receivable, net $60,377 100.00% $60,812 100.00%
======= ======= ======= ======
</TABLE>
4
<PAGE>
The following table sets forth the time to contractual maturity of the
Bank's loan portfolio at December 31, 1996. Fixed rate and adjustable rate loans
are shown as due in the period of contractual maturity. Demand loans, loans
having no stated maturity and overdrafts are reported as due in one year or
less. The table does not include prepayments or scheduled principal repayments.
Prepayments and scheduled repayments in the loan portfolio totaled $18.3
million, $15.0 million and $12.6 million in the fiscal years ended December 31,
1996, 1995 and 1994, respectively. Amounts in the table are net of loans in
process and are net of unamortized loan fees.
<TABLE>
<CAPTION>
At December 31, 1996
----------------------------------------------------------------------------
Over 1 Over 3 Over 5
One Yr. Year to Years to Years to Over 10
Or Less 3 Years 5 Years 10 Years Years Total
------- ------- ------- -------- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage Loans:
Fixed rate $ 724 $3,475 $1,512 $ 7,898 $ 7,336 $20,945
Adjustable rate 477 1,421 4,103 24,210 22,741 52,952
Adjustable home equity 7,722 -- -- -- -- 7,722
Other Loans 194 -- -- -- -- 194
Less:
Allowance for loan losses (302) -- -- -- -- (302)
------ ------ ------ ------- ------- -------
$8,815 $4,896 $5,615 $32,108 $30,077 $81,511
====== ====== ====== ======= ======= =======
</TABLE>
The following table sets forth the dollar amount at December 31, 1996
of all loans maturing or repricing on or after December 31, 1997 which have
fixed or adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Adjustable
Rates Rates
----- ----------
(Dollars in Thousands)
<S> <C> <C>
Mortgage loans $20,221 $52,475
Other loans -- --
------- -------
$20,221 $52,475
======= =======
</TABLE>
Origination and Sale of Loans. In recent years prior to 1994, the Bank
generally did not originate its loans with the intention that they would be sold
in the secondary market. Loans generally were not originated in conformity with
the purchase requirements of the Federal Home Loan Mortgage Corporation
("FHLMC") or Federal National Mortgage Association ("FNMA"). However, in January
1994 and October, 1994, the Bank opened a mortgage loan origination office in
Clayton, North Carolina and a mortgage loan origination office in Goldsboro,
North Carolina, respectively, and began originating loans in conformity with the
purchase requirements of the FHLMC and FNMA, so that they could be sold in the
secondary market if the Bank determined that such sales were prudent.
Nevertheless, the Bank continues to originate many loans which satisfy its
underwriting requirements which are tailored for its local community but do not
satisfy various requirements imposed by FHLMC and FNMA. Such loans are not
readily saleable in the secondary market and could be sold only after the Bank
incurred certain costs, such as costs for surveys and title insurance and/or
discounted the purchase price. The Bank has historically found that its
origination of nonconforming loans has not resulted in a high level of
nonperforming assets. See "-- Nonperforming Assets and Asset Classification." In
addition, these loans generally produce a higher yield than are produced by
loans which conform to the purchase requirements of FHLMC and FNMA.
5
<PAGE>
Also, the origination of construction and home equity loans has been
emphasized in an attempt to obtain loans that reprice with changes in interest
rates.
The table below sets forth the Bank's total loan origination, purchase
and sale activity and loan portfolio repayment experience during the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Loans receivable, net, beginning of period $70,099 $63,745 $60,377
Loan originations:
Residential 1-4 family 17,011 11,411 8,016
Residential multi-family 1,180 1,336 2,869
Nonresidential real estate 1,018 592 190
Construction 7,006 4,898 4,188
Home equity line and other 3,627 3,025 646
------- ------- --------
Total loan originations 29,842 21,262 15,909
Loans purchased -- 34 45
Principal repayments (18,314) (14,965) (12,582)
Other changes, net/(1)/ (116) 23 (4)
-------- --------- ----------
Increase in loans receivable 11,412 6,354 3,368
------- -------- --------
Loans receivable, net, end of period $81,511 $70,099 $63,745
======= ======= =======
</TABLE>
- -------------------------------------------------
/(1)/Includes changes in deferred loan fees and allowance for loan losses.
One-to-Four Family Residential Real Estate Lending. The Bank's primary
lending activity, which it intends to continue to emphasize, is the origination
of first mortgage loans to enable borrowers to purchase or refinance one-to-four
family residential real property. Consistent with the Bank's emphasis on being a
community-oriented financial institution, it is and has been the Bank's
strategy to focus its lending efforts in the North Carolina counties where it
has offices and in contiguous counties. On December 31, 1996, approximately
78.86% of the Bank's total real estate loan portfolio, before net items,
consisted of one-to-four family residential real estate loans. These include
both loans secured by detached single-family residences and condominiums and
loans secured by housing containing not more than four separate dwelling units.
Prior to 1991, the Bank had not originated significant amounts of
adjustable rate one-to-four family residential loans. Its fixed rate one-to-four
family residential loans had terms ranging to up to 20 years and did not exceed
80% of the value of the owner and non-owner occupied residential real property
securing them.
The Bank now originates fixed rate loans having a maximum term of 15
years in amounts of up to 95% of the value of owner occupied residential real
property collateral and fixed rate loans having a maximum term of 15 years in
amounts of up to 80% of the value of non-owner occupied two to four family
units. In addition, the Bank now originates adjustable rate mortgage loans with
rate adjustments every one, three or five years and having terms of up to 30
years in amounts of up to 95% of the value of owner occupied property. The Bank
also originates adjustable rate loans on non-owner occupied property whose rates
adjust at the end of three years and every three years thereafter having terms
of up to 20 years and having amounts of up to 80% of the value of the security
property.
6
<PAGE>
Substantially all of the fixed rate loans in the Bank's loan portfolio
contain a due-on-sale clause providing that the Bank may declare the unpaid
amount due and payable upon the sale or transfer of any interest in the property
securing the loan. The Bank has the ability to enforce these due-on-sale clauses
to the extent permitted by law.
Interest rates on most adjustable rate one-to-four family residential
mortgage loans are tied to the Treasury securities index adjusted to a constant
maturity of one, three or five years plus a margin. There are generally caps
which limit the amount of increases at one time and over the life of the loan.
The terms and conditions of the Bank's adjustable rate loans, including the
applicable index, margin and rate caps, may vary over time.
While one-to-four family residential loans are normally originated for
15 to 30 year terms, such loans customarily remain outstanding for substantially
shorter periods because borrowers often prepay their loans in full upon sale of
the property pledged as security or upon refinancing the original loan. Thus,
average loan maturity is a function of, among other factors, the level of
purchase and sale activity in the real estate market, prevailing interest rates,
and the interest rates payable on outstanding loans.
The Bank generally does not require title insurance for its one-to-four
family residential loans which are not originated for sale, but instead requires
an attorney's title opinion. The Bank also generally requires that fire and
extended coverage casualty insurance (and, if appropriate, flood insurance) be
maintained in an amount at least equal to the loan amount or replacement cost of
the improvements on the property securing the loans, whichever is greater. On
loans with loan-to-value ratios in excess of 80%, the Bank generally requires
that private mortgage insurance be obtained.
Construction Lending. The Bank makes various types of construction
loans primarily for the construction of single-family dwellings. On December 31,
1996, the aggregate gross outstanding balances of such loans had increased to
approximately $8.1 million, representing 9.94% of the Company's loan portfolio,
before net items. Some of these loans were made to investors who are
constructing properties on a speculative basis; others were made to persons who
are constructing properties for the purpose of occupying them. Loans made to
investors are generally "pure construction" loans which require the payment of
interest during the construction period and the payment of the principal in full
at the end of the construction period. Loans made to individual property owners
are both pure construction loans and "construction-permanent" loans which
generally provide for the payment of interest only during a construction period,
after which the loans convert to a permanent loan at fixed or adjustable
interest rates having terms similar to other one-to-four family residential
loans.
Construction loans which are due and payable at the end of the
construction period generally have a maximum loan-to-value ratio ranging from
75% to 80% of the appraised value of the property. Construction-permanent loans
have a maximum loan-to-value ratio of 80% of the appraised value of the
property.
Construction loans are generally considered to involve a higher degree
of risk than long-term financing secured by real estate which is already
occupied. A lender's risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at the
completion of construction and the estimated cost (including interest) of
construction. If the estimate of construction costs proves to be inaccurate, the
lender may be required to advance funds beyond the amount originally committed
in order to permit completion of construction. If the estimate of anticipated
value proves to be inaccurate, the lender may have security which has value
insufficient to assure full repayment. In addition, repayment of loans made to
investors to finance construction of properties is often dependent upon the
builder's ability to sell the property once construction is completed.
Home Equity Lines of Credit. From December 31, 1992 to December 31,
1996, the amount of home equity loans in the Bank's loan portfolio has increased
from approximately $3.6 million to approximately $7.5 million. At December 31,
1996, home equity loans comprised approximately 9.15% of the Bank's loan
portfolio, before net items. These loans are generally secured by subordinate
liens against residential dwellings. In many of these cases, the Bank holds the
first lien on the security. Home equity lines of credit have terms of up to 15
years and interest rates which are adjustable based upon prime rates. Because
these loans involve revolving lines of credit which can be drawn over a period
of time, the Bank faces additional risks associated with changes in the
borrower's financial condition. Because home equity loans have adjustable rates
with no rate caps (other than usury limitations), increased
7
<PAGE>
delinquencies could occur if interest rate increases occur and borrowers are
unable to satisfy higher payment requirements. Home equity loans are generally
limited so that the amount of such loans, along with any senior indebtedness,
does not exceed 80% of the value of the real estate security.
Multi-Family Residential Real Estate Lending. On December 31, 1996, the
Company had approximately $3.7 million in outstanding loans secured by
multi-family residential real estate, comprising approximately 4.58% of its loan
portfolio, before net items. These loans have both fixed and adjustable interest
rates. These loans generally do not exceed 80% of the appraised value of the
real estate securing the loans as determined by recent appraisals. Loans secured
by multi-family residential properties generally are larger than one-to-four
family residential loans and involve a greater degree of risk. Payments on these
loans depend to a large degree on results of operations and management of the
properties and may be affected to a greater extent by adverse conditions in the
real estate market or the economy in general.
Nonresidential Real Estate Lending. On December 31, 1996, the Company
had $2.4 million in outstanding loans secured by nonresidential real estate,
comprising approximately 2.97% of its loan portfolio, before net items. Most of
these loans are secured by office, retail and manufacturing properties or other
commercial real estate or church properties and have both fixed and adjustable
interest rates. These loans generally do not exceed 80% of the appraised value
of the real estate securing the loans as determined by recent appraisals. Loans
secured by commercial real estate and other non-residential real estate
generally are larger than one-to-four family residential loans and involve a
greater degree of risk. Payments on these loans depend to a large degree on
results of operations and management of the properties and may be affected to a
greater extent by adverse conditions in the real estate market or the economy in
general.
Savings Account Loans. The Bank also offers savings account loans,
which are loans secured by deposit accounts in the Bank. On December 31, 1996,
the Bank had $194,000 of these loans outstanding. The interest rates on these
loans is 2% above the interest rate being paid on the savings account serving as
collateral, and the maximum amounts of these loans is 90% of the related deposit
accounts.
Loan Solicitation, Processing and Underwriting. Loan originations are
derived from a number of sources such as referrals from real estate brokers,
direct solicitations by the Bank's loan officers, present depositors and
borrowers, builders, attorneys, walk-in customers and in some instances, other
lenders.
During its loan approval process, the Bank assesses the applicant's
ability to make principal and interest payments on the loan and the value of the
property securing the loan. The Bank obtains detailed written loan applications
to determine the borrower's ability to repay and verifies responses on the loan
application through the use of credit reports, financial statements, and other
confirmations. Under current practice, the responsible officer or loan officer
of the Bank analyzes the loan application and the property involved, and an
appraiser inspects and appraises the property. The Bank requires appraisals on
all real estate loans except for some home equity and property improvement loans
for which tax valuations are used. All of the Bank's appraisals are performed by
either James C. Woodard or Robert E. Fields, who are both members of the board
of directors of the Bank and the Company and are North Carolina-certified
appraisers. The Bank also obtains information concerning the income, financial
condition, employment and the credit history of the applicant. After this
review, loans are approved by either (i) the Bank's board of directors, (ii) the
loan review committee of the Bank's board of directors, which is composed of
four outside directors, or (iii) by an officer of the Bank who has loan approval
authority for loans of that size. Mr. Woodard and Mr. Fields abstain from loan
approval decisions involving properties they have appraised.
Normally, upon approval of a residential loan application, the Bank
gives a commitment to the applicant that it will make the approved loan at a
stipulated rate at any time within a 45 to 90 day period from the date the
application is received. The loan is typically funded at a rate of interest and
on other terms which are based on market conditions existing as of the date of
the commitment. The Bank also issues loan commitments on homes under
construction in exchange for a fee which is applied to the closing costs of the
permanent loan when closed. The Bank also has outstanding commitments on its
home equity line of credit loans.
8
<PAGE>
Interest Rates, Terms, Points and Fees. Interest rates and fees charged
on the Bank's loans are affected primarily by the market demand for loans,
competition, the supply of money available for lending purposes and the Bank's
cost of funds. These factors are affected by, among other things, general
economic conditions and the policies of the federal government, including the
Federal Reserve, tax policies and governmental budgetary matters.
In addition to earning interest on loans, the Bank receives fees in
connection with originating loans and making loan commitments. The Bank also
charges fees for prepayments of loans, loan modifications, late payments, loan
assumptions and other miscellaneous services in connection with loans.
Nonperforming Assets and Asset Classification. When a borrower fails to
make a required payment on a loan and does not cure the delinquency promptly,
the loan is classified as delinquent. In this event, the normal procedure
followed by the Bank is to make contact with the borrower at prescribed
intervals in an effort to bring the loan to a current status. In most cases,
delinquencies are cured promptly. If a delinquency is not cured, the Bank
normally, subject to any required prior notice to the borrower, commences
foreclosure proceedings. If the loan is not reinstated within the time permitted
for reinstatement, or the property is not redeemed prior to sale, the property
may be sold at a foreclosure sale. In foreclosure sales, the Bank may acquire
title to the property through foreclosure, in which case the property so
acquired is offered for sale and may be financed by a loan involving terms more
favorable than those normally offered. Any property acquired as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until such time as it is sold or otherwise disposed of by the Bank to recover
its investment. As of December 31, 1996, the Bank had real estate acquired in
settlement of loans amounting to approximately $66,000. Real estate acquired
through, or in lieu of, loan foreclosure is initially recorded at fair value at
the date of foreclosure establishing a new cost basis. After foreclosure,
valuations of the property are periodically performed by management and the real
estate is carried at the lower of cost or fair value minus estimated costs to
sell. Costs relating to the development and improvement of the property are
capitalized, while holding costs of the property are charged to expense in the
period incurred.
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 and interest on loans to borrowers who have filed
bankruptcy proceedings is generally either charged off or reserved through an
allowance for uncollected interest. 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 until, in
management's judgment, the borrower's ability to make periodic interest and
principal payments is back to normal, in which case the loan is returned to
accrual status.
The following table sets forth information with respect to
nonperforming assets identified by the Bank, including nonaccrual loans, real
estate owned and nonperforming investments in real estate at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Total nonaccrual loans delinquent 90 days or more $ 274 $ 207 $ 127
Real estate owned 66 -- --
--------- ------- -------
Total non-performing assets $ 340 $ 207 $ 127
========= ======= =======
Non-performing loans to total loans 0.34% 0.30% 0.20%
Non-performing assets to total assets 0.34% 0.23% 0.15%
Total assets $100,840 $88,274 $82,310
Total loans $ 81,511 $70,099 $63,745
</TABLE>
9
<PAGE>
Applicable regulations require the Bank to "classify" its own assets on
a regular basis. In addition, in connection with examinations of savings
institutions, regulatory examiners have authority to identify problem assets
and, if appropriate, classify them. Problem assets are classified as
"substandard," "doubtful" or "loss," depending on the presence of certain
characteristics as discussed below.
An asset is considered "substandard" if not adequately protected by the
current net worth and paying capacity of the obligor or the collateral pledged,
if any. "Substandard" assets include those characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard" with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a loss reserve is not warranted.
As of December 31, 1996, the Bank had $174,937 of loans classified as
"substandard", no loans classified as "doubtful", and no loans classified as
"loss." Total classified assets as of December 31, 1995 and 1994 were $248,337
and $140,255, respectively.
In connection with the filing of periodic reports with regulatory
agencies, the Bank reports any assets which possess credit deficiencies or
potential weaknesses deserving close attention by management. These assets may
be considered "special mention" assets and do not yet warrant adverse
classification. At December 31, 1996, the Bank had $99,351 in loans in the
"special mention" category compared to $577,017 and $423,583 at December 31,
1995 and 1994, respectively.
When an insured institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. These allowances represent
loss allowances which have been established to recognize the inherent risk
associated with lending activities and the risks associated with particular
problem assets. When an insured institution classifies problem assets as "loss,"
it charges off the balance of the asset. The Bank's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the FDIC and the Administrator which can order the
establishment of additional loss allowances.
Allowance for Possible 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 possible loan
losses based on, among other things, the Bank's historical loan loss experience,
evaluation of economic conditions and regular reviews of delinquencies and loan
portfolio quality. Specific allowances are provided for individual loans when
ultimate collection is considered questionable by management after reviewing the
current status of loans which are contractually past due and considering the net
realizable value of the security for the loans.
The Bank's primary lending emphasis has and continues to be permanent,
one-to-four family residential real estate loans in its primary market area. In
recent years, management has increased the amount of its allowance for possible
loan losses to reflect the increasing size of the Bank's loan portfolio and the
increases in home equity and construction loans which are thought to have
greater inherent risk.
Management continues to actively monitor the Bank's asset quality, to
charge off loans against the allowance for loan losses when appropriate and to
provide specific loss reserves when necessary. Although management believes it
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ substantially from the economic conditions in the assumptions
used in making the initial determinations.
10
<PAGE>
The following table describes the activity related to the Bank's
allowance for possible loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $233 $223 $201 $140 $125
Provision for loan losses 69 10 22 61 15
Charge-offs -- -- -- -- --
Recoveries -- -- -- -- --
---- ---- ---- ---- ----
Balance, end of period $302 $233 $223 $201 $140
==== ==== ==== ==== ====
</TABLE>
The following table sets forth the composition of the allowance for
possible loan losses by type of loan at the dates indicated.
11
<PAGE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------ -------------------------
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 $200 74.58% $159 76.44% $166 78.51%
Residential multi-family 13 4.33% 11 5.47% 12 5.65%
Nonresidential real estate and other
property 6 2.81% 4 1.68% 3 1.45%
Home equity and property improvement 39 8.65% 33 9.07% 29 8.19%
Construction 44 9.40% 26 7.14% 13 5.86%
---- ------ ---- ------ ---- ------
Total real estate loans 302 99.77% 233 99.80% 223 99.65%
---- ------ ---- ------ ---- ------
Other:
Savings account -- 0.23% -- 0.20% -- 0.35%
---- ------ ---- ------ ---- ------
Total allowance for loan losses $302 100.00% $233 100.00% $223 100.00%
==== ====== ==== ====== ==== ======
<CAPTION>
----------------------------------------------------
1993 1992
------------------------ ------------------------
Amount of Amount of
Amount of Loans to Amount of Loans to
Allowance Gross Loans Allowance Gross Loans
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Real estate loans:
Residential 1-4 family $165 87.15% $101 87.70%
Residential multi-family 4 2.17% 2 1.54%
Nonresidential real estate and other
property 2 1.11% 2 1.16%
Home equity and property improvement 27 7.73% 24 5.72%
Construction 3 1.44% 11 3.43%
---- ------ ---- ------
Total real estate loans 201 99.60% 140 99.55%
---- ------ ---- ------
Other:
Savings account -- 0.40% -- 0.45%
---- ------ ---- ------
Total allowance for loan losses $201 100.00% $140 100.00%
==== ====== ==== ======
</TABLE>
12
<PAGE>
Investments and Mortgage-Backed Securities
Interest income from interest-bearing deposits and earnings on
investment securities generally provide the second largest source of income to
the Company after interest on loans. In addition, the Company receives interest
income from mortgage-backed securities. On December 31, 1996, the carrying value
of the Company's consolidated interest-bearing deposits and investment
securities portfolios totalled approximately $5.7 million and $9.0 million,
respectively. On December 31, 1996, the Company's consolidated investment
securities portfolio consisted primarily of U.S. government and agency
obligations, adjustable rate mortgage-backed securities mutual funds, FHLMC
stock, FHLB of Atlanta stock and corporate bonds.
On December 31, 1996, the Company's consolidated mortgage-backed
securities portfolio totalled approximately $1.4 million and consisted of
adjustable rate FNMA certificates.
The Company's accounting policies for investment securities are as
follows:
Securities held to maturity:
Debt securities and mortgage-backed securities classified as held to
maturity are carried at cost, adjusted for amortization of premiums and
accretion of discounts using the interest method. Such securities will
be held until their contractual maturities, and will not be available
to be sold even in response to certain conditions such as changes in
market interest rate, needs for liquidity, or changes in the
availability of and the yield on alternative investments.
Securities available for sale:
Debt securities and marketable equity securities classified as
available for sale are carried at market with unrealized holding gains
and losses excluded from earnings and reported net of income taxes in a
separate component of stockholders' equity until such time as the
securities are sold. Such securities may be sold in response to certain
conditions such as changes in market interest rates, needs for
liquidity, or changes in the availability of and the yield on
alternative investments, but are not bought and held principally for
the purpose of selling in the near term with the objective of
generating profits on short-term differences in price.
Securities held for trading:
Trading securities are held in anticipation of short-term market gains
and are carried at fair value with realized and unrealized gains and
losses included in earnings. The Company currently has no securities
which are classified as trading securities.
Equity securities such as the Bank's investment in stock of the FHLB of
Atlanta, which are considered nonmarketable are not subject to the above
classifications and are carried at cost. Gain or loss on sale of such securities
is recognized when realized and is based on the specific identification method.
As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's outstanding home loans or 5% of its outstanding advances from the FHLB of
Atlanta. As of December 31, 1996, the Bank's investment in stock of the FHLB of
Atlanta was approximately $721,000.
North Carolina regulations require the Bank to maintain a minimum
amount of liquid assets which may be invested in specified short-term
securities. See "Regulation of the Bank -- Liquidity." The Bank is also
permitted to make certain other securities investments. Investment decisions are
made by authorized officers of the Bank under policies established by the Board
of Directors. Such investments are managed in an effort to produce the highest
yield consistent with maintaining safety of principal and compliance with
regulations governing the savings industry.
The following table sets forth certain information regarding the
Company's consolidated cash investments and the amortized cost and market values
of the Company's consolidated mortgage-backed securities and investment
portfolio at the dates indicated.
13
<PAGE>
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------
1996 1995 1994
-------------------- --------------------- ---------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $ 5,680 $ 5,680 $ 3,707 $ 3,707 $ 2,352 $ 2,352
-------- -------- -------- -------- -------- --------
Mortgage-backed securities 1,393 1,429 1,876 1,882 2,269 2,196
-------- -------- -------- -------- -------- --------
Investment Securities:
Held to Maturity:
Federal agency securities 1,998 1,986 1,798 1,792 2,596 2,540
Corporate obligations 503 503 505 509 507 478
Available for sale:
US Treasury securities 2,992 3,005 4,485 4,528 6,223 6,055
Adjustable rate mortgage-backed securities mutual fund 2,000 1,988 2,000 1,992 2,000 1,942
Federal Home Loan Mortgage Corporation stock 27 759 27 574 27 347
Nonmarketable equity securities:
Federal Home Loan Bank stock 721 721 721 721 721 721
USL Savings Insurance Group stock -- -- 28 28 28 28
Central Service Corporation stock 3 3 3 3 3 3
------- ------- ------- ------- ------- -------
8,244 8,965 9,567 10,147 12,105 12,114
------- ------- ------- ------- ------- -------
Total $15,317 $16,074 $15,150 $15,736 $16,726 $16,662
======= ======= ======= ======= ======= =======
</TABLE>
The following table sets forth certain information regarding the
amortized cost, weighted average yields and contractual maturities of the
Company's consolidated mortgage-backed and investment securities portfolio as of
December 31, 1996.
14
<PAGE>
<TABLE>
<CAPTION>
After One Year After Five Years
One Year or Less Through Five Years Through Ten Years
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits $ 5,680 5.20% $ -- -- $ -- --
Mortgage-backed securities 1,393 7.70% -- -- -- --
Held to maturity:
Federal agency securities -- -- 1,998 6.06% -- --
Corporate obligations -- -- 503 6.63% -- --
Available for sale:
US Treasury securities 1,995 6.25% 997 5.89% -- --
Adjustable rate mortgage-backed securities
mutual fund 2,000 6.16% -- -- -- --
Federal Home Loan Mortgage Corporation stock -- -- -- -- -- --
Nonmarketable equity securities
Federal Home Loan Bank stock -- -- -- -- -- --
Central Service Corporation stock -- -- -- -- -- --
------- ----- ------ ----- ------- -------
Total $11,068 5.88% $3,498 6.09% $ -- --
======= ===== ====== ===== ======= =======
<CAPTION>
After Ten Years Total
---------------------- ----------------------
Weighted Weighted
Amortized Average Amortized Average
Cost Yield Cost Yield
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Interest-bearing deposits $ -- -- $ 5,680 5.20%
Mortgage-backed securities -- -- 1,393 7.70%
Held to maturity:
Federal agency securities -- -- 1,998 6.06%
Corporate obligations -- -- 503 6.63%
Available for sale:
US Treasury securities -- -- 2,992 6.13%
Adjustable rate mortgage-backed securities
mutual fund -- -- 2,000 6.16%
Federal Home Loan Mortgage Corporation stock 27 1.27% 27 1.27%
Nonmarketable equity securities
Federal Home Loan Bank stock 721 7.29% 721 7.29%
Central Service Corporation stock 3 -- 3 --
---- ----- ------- -----
Total $751 7.04% $15,317 5.98%
==== ===== ======= =====
</TABLE>
15
<PAGE>
Deposits and Borrowings
General. Deposits are the primary source of the Company's consolidated
funds for lending and other investment purposes. In addition to deposits, the
Company derives funds from loan principal repayments, interest payments,
investment income, interest from its own interest-bearing deposits, interest
income from mortgage-backed securities and otherwise from operations. Loan
repayments are a relatively stable source of funds while deposit inflows and
outflows may be significantly influenced by general interest rates and money
market conditions. Borrowings may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes.
Deposits. On December 31, 1996, 1995 and 1994, the Company's
consolidated deposits totaled $82.3 million, $70.7 million and $66.4 million,
respectively.
The following table sets forth information relating to deposit flows
during the periods shown and total deposits at the end of the periods shown.
<TABLE>
<CAPTION>
At or For The Year Ended
December 31,
--------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Total deposits at beginning of period $70,738 $66,363 $68,101
Net increase (decrease) before interest credited 8,386 1,603 (3,937)
Interest credited 3,222 2,772 2,199
-------- -------- --------
Total deposits at end of period $82,346 $70,738 $66,363
======= ======= =======
</TABLE>
The Bank attracts both short-term and long-term deposits from the
general public by offering a variety of accounts and rates. The Bank offers
savings accounts, checking accounts, money market accounts, and fixed interest
rate certificates with varying maturities. All deposit flows are greatly
influenced by economic conditions, the general level of interest rates,
competition, and other factors, including the restructuring of the thrift
industry. The Bank's savings deposits traditionally have been obtained primarily
from its primary market area. The Bank utilizes traditional marketing methods to
attract new customers and deposits, including print media advertising and direct
mailings. The Bank does not advertise for deposits outside of its local market
area or utilize the services of deposit brokers.
The following table sets forth certain information regarding the
Company's consolidated savings deposits at the dates indicated.
16
<PAGE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------
1996 1995 1994
---------------------------- ---------------------------- ---------------------------
Weighted Weighted Weighted
Average % of Average % of Average % of
Amount Rate Deposits Amount Rate Deposits Amount Rate Deposits
-------- --------- -------- -------- -------- -------- ------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand accounts:
Savings accounts $ 3,510 2.99% 4.26% $ 3,235 3.00% 4.57% $ 3,701 2.97% 5.58%
NOW accounts 4,489 2.58% 5.45% 2,912 2.56% 4.12% 3,068 2.82% 4.62%
Money market deposit accounts 4,869 3.65% 5.91% 3,727 3.11% 5.27% 3,496 3.46% 5.27%
Non-interest bearing accounts 3,390 -- 4.12% 2,611 -- 3.69% 1,709 -- 2.58%
------- ----- ------ ------ ----- ------ ------- ----- ------
Total demand deposits 16,258 2.45% 19.74% 12,485 2.30% 17.65% 11,974 2.65% 18.04%
------- ----- ------ ------ ----- ------ ------- ----- ------
Time deposits:
Certificate accounts with original
maturities of:
3 months or less 684 4.60% 0.83% 389 4.65% 0.54% 600 3.94% 0.90%
6 months 7,924 5.10% 9.62% 10,722 5.37% 15.16% 14,027 4.39% 21.14%
12 months 15,910 5.43% 19.32% 18,477 5.80% 26.12% 17,584 4.49% 26.50%
15 months 22,070 5.85% 26.80% 6,799 6.21% 9.61% -- -- --
18 months 6,417 5.66% 7.79% 6,005 5.64% 8.49% 7,195 4.67% 10.84%
24 months 4,732 5.95% 5.75% 6,583 5.75% 9.31% 7,089 5.09% 10.68%
30 months 1,965 5.77% 2.39% 2,066 5.45% 2.92% 2,417 4.83% 3.64%
36 months 4,510 6.06% 5.48% 5,341 5.86% 7.55% 3,800 5.39% 5.73%
48 months 1,859 5.87% 2.26% 1,857 5.86% 2.63% 1,664 5.64% 2.51%
------- ----- ------ ------ ----- ------ ------- ----- ------
Total certificates 66,071 5.65% 80.24% 58,239 5.73% 82.33% 54,376 4.67% 81.94%
------- ----- ------ ------ ----- ------ ------- ---- ------
Accrued interest 17 0.02% 14 0.02% 13 0.02%
------- ----- ------ ------ ----- ------ ------- ----- ------
Total deposits $82,346 5.01% 100.00% $70,738 5.13% 100.00% $66,363 4.31% 100.00%
======= ===== ====== ====== ===== ====== ====== ===== =======
</TABLE>
17
<PAGE>
The average balances and average rates paid on time deposits, the only
category of deposits exceeding 10% of total average deposits, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Average balance of time deposits outstanding $62,369,210 $56,448,979 $55,580,322
Average rate paid on time deposits 5.62% 5.47% 4.36%
</TABLE>
As of December 31, 1996, the aggregate amount outstanding of time
certificates of deposit in amounts greater than $100,000 was $14.0 million. Some
of these deposits were deposits of state and local governments which are subject
to rebidding from time to time and to securitization requirements. The following
table presents the maturity of these time certificates of deposit at the dates
indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1995
--------- --------
(Dollars in Thousands)
<S> <C> <C>
3 Months or less $2,771 $2,709
Over 3 months through 6 months 3,076 1,990
Over 6 months through 12 months 6,306 4,361
Over 12 months 1,842 1,814
------- -------
Total $13,995 $10,874
======= =======
</TABLE>
Borrowings. The Company's principal source of long-term borrowings are
advances from the FHLB of Atlanta. The FHLB system functions in a reserve credit
capacity for savings institutions. As a member, the Bank is required to own
capital stock in the FHLB of Atlanta and is authorized to apply for advances
from the FHLB of Atlanta on the security of that stock and a floating lien on
certain of its real estate secured loans and other assets. Each credit program
has its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based either on a fixed percentage of
an institution's net worth or on the FHLB of Atlanta's assessment of the
institution's creditworthiness.
The following table sets forth the amounts of the Company's
consolidated borrowings (all of which were from the FHLB of Atlanta) at the
dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------
Interest
Maturing at December 31, Rate 1996 1995 1994
------------------------ --------- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
1998 6.05% $2,000 $ -- $ --
1997 5.74% 2,000 -- --
1996 5.98% -- 3,000 --
1995 Variable -- -- 1,000
------ ------ -------
$4,000 $3,000 $1,000
====== ====== ======
</TABLE>
18
<PAGE>
Asset/Liability Management
The Company's asset/liability management, or interest rate risk
management, is focused primarily on evaluating and managing the Company's
consolidated net interest income given various risk criteria. Factors beyond the
Company's control, such as market interest rates and competition, may also have
an impact on the Company's management of interest rate risk.
In the absence of any other factors, the overall yield or return
associated with the Company's earning assets generally will increase from
existing levels when interest rates rise over an extended period of time, and
conversely interest income will decrease when interest rates decrease. In
general, interest expense will increase when interest rates rise over an
extended period of time, and conversely interest expense will decrease when
interest rates decrease. Therefore, by controlling the increases and decreases
in its interest income and interest expense which are brought about by changes
in market interest rates, the Company can influence its net interest income. As
a part of the Company's interest rate risk management policy, the Company
calculates an interest rate "gap". Interest rate "gap" analysis is a common,
though imperfect, measure of interest rate risk, which measures the relative
dollar amounts of interest-earning assets and interest-bearing liabilities which
reprice within a specific time period, either through maturity or rate
adjustment. The "gap" is the difference between the amounts of such assets and
liabilities that are subject to such repricing. A "negative" gap for a given
period means that the amount of interest-bearing liabilities maturing or
otherwise repricing within that period exceeds the amount of interest-earning
assets maturing or otherwise repricing within the same period. Accordingly, in a
declining interest rate environment, an institution with a negative gap would
generally be expected, absent the effects of other factors, to experience a
lower decrease in the yield of its assets relative to the cost of its
liabilities and its income should be positively affected. Conversely, the cost
of funds for an institution with a negative gap would generally be expected to
increase more quickly than the yield on its assets in a rising interest rate
environment and such institution's net interest income should be adversely
affected by rising interest rates. Changes in interest rates generally have the
opposite effect on an institution with a "positive" gap.
A static interest rate "gap" analysis may not be an accurate indicator
of how net interest income will react to changes in interest rates. Income
associated with interest-earning assets and costs associated with
interest-bearing liabilities may not react uniformly to changes in interest
rates. In addition, the magnitude and duration of changes in interest rates may
have a significant impact on net interest income. For example, although certain
assets and liabilities may have similar maturities or periods to repricing, they
may react in different degrees to changes in market interest rates. Interest
rates on certain types of assets and liabilities typically fluctuate in advance
of changes in general market interest rates, while interest rates on other types
may lag behind changes in general market rates. As an example, the indices on
which interest rate changes on most of the Bank's adjustable rate mortgage loans
are based, the Treasury securities index adjusted to a constant one year
maturity and the Treasury securities index adjusted to a constant three year
maturity, tend to lag behind changes in general market rates of interest and,
thus, react more slowly to such changes than does the Bank's actual cost of
funds. In addition, certain assets, such as adjustable rate mortgage loans, have
features (generally referred to as "interest rate caps") which limit changes in
interest rates on a short-term basis and over the life of the asset. The ability
of many borrowers to service their debt may also decrease in the event of an
interest rate increase.
The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1996, which are
projected to reprice or mature in each of the future time periods shown. The
computations were made without using certain common assumptions regarding loan
prepayments and deposit decay rates. Except as stated below, the amounts of
assets and liabilities shown which reprice or mature within a particular period
were determined in accordance with the contractual terms of the assets or
liabilities. In making the computations, all adjustable rate loans were
considered to be due at the end of the next upcoming adjustment period. Fixed
rate loans were considered to reprice at their contractual maturities with no
consideration given to prepayments. Liquid interest-earning investments with no
contractual maturities were assumed to be subject to immediate repricing, while
certain equity securities were assumed to reprice at the most distant repricing
date. savings accounts, money market deposit accounts, and negotiable order of
withdrawal and other transaction accounts were assumed to be subject to
immediate repricing. Fixed maturity interest-bearing liabilities were assumed to
reprice at their contractual maturities without consideration for early
withdrawals. In addition, the table does not reflect scheduled principal
payments which will be received throughout the lives of the loans. The interest
rate sensitivity of the Company's consolidated assets and liabilities
illustrated in the following table would vary substantially if different
assumptions were used or if actual experience differs from that indicated by
such assumptions.
19
<PAGE>
<TABLE>
<CAPTION>
Term to Repricing at December 31, 1996
----------------------------------------------------------------------------
More than More than More than More than
3 Mos 3 Mos to 1 Year to 3 Years to 5 Years to More than
Or Less 1 Year 3 Years 5 Years 10 Years 10 Years Total
------- -------- --------- --------- ---------- ---------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans:
Adjustable rate residential 1-4 family $ 967 $ 11,134 $ 38,149 $ 2,702 $ -- $ -- $ 52,952
Fixed rate residential 1-4 family 2 146 440 1,270 7,494 7,039 16,391
Nonresidential and other loans -- 577 3,035 242 404 296 4,554
Adjustable home equity loans 7,722 -- -- -- -- -- 7,722
Other loans 170 24 -- -- -- -- 194
--------- ---------- --------- --------- -------- --------- -------
Total mortgage loans 8,861 11,881 41,624 4,214 7,898 7,335 81,813
-------- -------- ------ ------- ------ ------- ------
Interest-bearing deposits 5,680 -- -- -- -- -- 5,680
Investment securities 2,500 1,495 2,498 1,000 -- 751 8,244
Mortgage-backed securities 1,393 -- -- -- -- -- 1,393
-------- ---------- --------- --------- -------- --------- -------
Total interest-earning assets $ 18,434 $ 13,376 $44,122 $ 5,214 $7,898 $ 8,086 $97,130
-------- ------- ------ ------ ----- ------ ------
Interest-bearing liabilities:
Deposits:
Fixed maturity deposits $ 16,780 $ 35,104 $14,134 $ 53 $ -- $ -- $66,071
NOW accounts 4,490 -- -- -- -- -- 4,489
Money market deposit accounts 4,869 -- -- -- -- -- 4,869
Savings accounts 3,510 -- -- -- -- -- 3,510
--------- ---------- --------- -------- --------- -------- -------
Total deposits 29,649 35,104 14,134 53 -- -- 78,939
-------- ------- ------ ------- --------- -------- ------
FHLB advances -- 2,000 2,000 -- -- -- 4,000
----------- -------- ------- -------- --------- -------- -------
Total interest-bearing liabilities $ 29,649 $ 37,104 $16,134 $ 53 $ -- $ -- $82,939
-------- ------- ------ ------- --------- -------- ------
Interest sensitivity gap per period $(11,215) $(23,728) $27,988 $ 5,161 $7,898 $ 8,086
======= ======= ====== ====== ====== ======
Cumulative interest sensitivity gap $(11,215) $(34,943) $(6,955) $(1,794) $6,104 $14,190
======= ======= ====== ====== ====== ======
Cumulative gap as a percentage of total
interest-earning assets(1) -11.55% -35.98% -7.16% -1.85% 6.28 14.61%
Cumulative interest-earning assets as a
percentage of interest-bearing liabilities 62.17% 47.65% 91.61% 97.84% 107.36 117.11%
</TABLE>
- ---------------------------------
(1) Assets and liabilities are classified in accordance with their
contractual maturities, except for deposit accounts with no stated
maturities. Such deposit accounts are subject to immediate repricing
and are placed in the shortest repricing period. No provision has been
made above to reflect scheduled principal repayments on loans
throughout their terms, or projected levels of prepayments of loans
prior to their contractual maturities.
20
<PAGE>
The Company's consolidated gap position has been heavily influenced by
the Bank's historical lending practices. The Bank did not begin making
adjustable rate loans until 1991. An important part of the Bank's business has
been the origination of nonconforming fixed rate mortgage loans. These
nonconforming loans are ones in which the borrowers may not meet the strict
underwriting standards required for sale in the secondary market, but whose
creditworthiness is established to the satisfaction of management.
As interest rates have fallen during recent years, the Bank's earnings
have strengthened as these fixed rate loans have not had automatic repricing
mechanisms, and repricing has occurred solely by means of payoffs and
refinancing and more slowly and to a lesser extent than repricing of deposits.
However, management has recognized that these lending practices could cause
adverse affects on the Company's consolidated net interest income in the event
that interest rates begin to increase once again. In order to mitigate the
future potential for adverse effects of material and prolonged increases or
decreases in interest rates on the Company's consolidated operations, management
has implemented an asset/liability management program designed to reduce the
Company's negative interest rate gap position. Such policy has consisted
primarily of (i) emphasizing the origination of adjustable rate mortgages
secured by single-family residences, (ii) emphasizing the origination of
adjustable rate home equity line of credit loans, (iii) emphasizing the
structuring of the investment portfolio to include investments with shorter
maturities and adjustable rates, and (iv) establishing a conventional loan
origination department which will originate fixed rate loans for sale in the
secondary market.
All of these strategies have been implemented; however, their benefits
will only be seen over time. The Bank began to originate adjustable rate
mortgages during the first quarter of fiscal 1991. Such loans did not begin to
comprise a substantial portion of loan originations until the 1992 fiscal year.
The first of these adjustable rate mortgages did not begin to reprice until the
first calendar quarter of 1994, at the end of their initial three year repricing
periods.
Capital Resources and Liquidity
The information contained under the section entitled "Capital Resources
and Liquidity" in the Annual Report is incorporated herein by reference.
Analysis of Net Interest Income
The information contained under the section entitled "Analysis of Net
Interest Income" in the Annual Report is incorporated herein by reference.
Rate/Volume Analysis
The information contained under the section entitled "Rate/Volume
Analysis" in the Annual Report is incorporated herein by reference.
Competition
The Bank faces strong competition both in attracting deposits and
making real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions and commercial
banks located in its primary market area, including large financial institutions
which have greater financial and marketing resources available to them. The Bank
has also faced additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. The ability of the Bank to attract and retain savings deposits
depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities. Based upon
comparative data as of June 30, 1996, the Bank had approximately 9.20% of the
deposits in Johnston County, North Carolina, approximately 1.90% of the deposits
in Wilson County, North Carolina, and approximately .20% of the deposits in
Wayne County, North Carolina.
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The Bank experiences strong competition for real estate loans from
other savings institutions, commercial banks, and mortgage banking companies.
The Bank competes for loans primarily through the interest rates and loan fees
it charges and the efficiency and quality of services it provides borrowers.
Competition may increase as a result of the continuing reduction of restrictions
on the interstate operations of financial institutions.
Employees
As of December 31, 1996, the Company and the Bank had 25 full-time
employees and one part-time employees. Employees are provided with a
comprehensive benefits program, including basic and major medical insurance,
life and disability insurance, sick leave, a defined contribution, money
purchase pension plan and a 401(k) contributory retirement plan. In addition, in
connection with the Conversion, the Bank established an Employee Stock Ownership
Plan (the "ESOP") for its employees, and the ESOP acquired 40,448 shares of the
Common Stock of the Company. These shares were purchased by the ESOP with funds
borrowed from the Company. Also, in connection with the Conversion, the
directors of the Bank and certain officers of the Bank were granted Common Stock
of the Company pursuant to a Management Recognition Plan adopted by the Bank,
and directors and officers of the Bank were granted options to purchase Common
Stock of the Company pursuant to stock option plans adopted by the Company. The
Bank has also adopted a bonus compensation plan whereby holders of unexercised
stock options receive bonuses if the Company declares and pays dividends to its
stockholders. Employees are not represented by any union or collective
bargaining group, and the Company considers its employee relations to be good.
Key Operating Ratios
The table below sets forth certain performance ratios for the Company
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Return on average assets (net income divided by average total
assets) 0.88% 1.22% 1.51%
Return on average equity (net income divided by average
equity) 6.01% 7.29% 8.66%
Average equity to average assets ratio (average equity divided
by average total assets) 14.63% 16.70% 17.40%
Interest rate spread for the period 3.31% 3.26% 3.61%
Average interest-earning assets to average interest-bearing
liabilities 113.38% 117.90% 118.42%
Net interest margin 3.91% 4.02% 4.24%
Loan loss allowance to nonperforming assets at period end 88.82% 112.56% 175.49%
</TABLE>
Federal Income Taxation
Thrift institutions are subject to provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), in the same general manner as other
corporations. Prior to recent legislation, institutions such as the Bank which
met certain definitional tests and other conditions prescribed by the Code
benefitted from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. For purposes of
the bad debt reserve deduction, loans were separated into "qualifying real
property loans," which generally are loans secured by certain interests in real
property, and "nonqualifying loans," which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans must be based on actual
loss experience. The amount of the bad debt reserve deduction with respect to
qualifying real property loans could be based upon (a) actual loss experience or
(b) a percentage of taxable income before such deduction.
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<PAGE>
The Bank, which files its federal income tax returns on a calendar year
basis, could generally elect to use the method which resulted in the greatest
deduction for federal income tax purposes, which generally was the percentage of
taxable income method.
Earnings appropriated to an institution's bad debt reserve and claimed
as a tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount was included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
Legislation recently signed by the President repealed the percentage of
taxable income method of calculating the bad debt reserve. Savings associations,
like the Bank, which have previously used that method are required to recapture
into taxable income post-1987 reserves in excess of the reserves calculated
under the experience method over a six-year period beginning with the first
taxable year beginning after December 31, 1995. The start of such recapture may
be delayed until the third taxable year beginning after December 31, 1995 if the
dollar amount of the institution's residential loan originations in each year is
not less than the average dollar amount of residential loans originated in each
of the six most recent years, disregarding the years with the highest and lowest
originations during such period. For purposes of this test, residential loan
originations would not include refinancings and home equity loans. The Bank has
provided deferred taxes for the amount of the recapture.
Beginning with the first taxable year beginning after December 31,
1995, savings institutions, such as the Bank, will be treated the same as
commercial banks. Institutions with $500 million or more in assets will only be
able to take a tax deduction when a loan is actually charged off. Institutions
with less than $500 million in assets will still be permitted to make deductible
bad debt additions to reserves, but only using the experience method.
The Bank's federal income tax returns have been audited through
December 31, 1993.
State and Local Taxation
Under North Carolina law, the corporate income tax for the 1996 fiscal
year was 7.75% of federal taxable income as computed under the Code, subject to
certain prescribed adjustments. An annual state franchise tax is imposed at a
rate of 0.15% applied to the greatest of the institutions (i) capital stock,
surplus and undivided profits, (ii) investment in tangible property in North
Carolina or (iii) appraised valuation of property in North Carolina.
Regulation of the Company
Bank holding companies and state savings banks are extensively
regulated under both federal and state law. The following is a brief summary of
certain statutes and rules and regulations that affect or will affect the
Company and the Bank. This summary is qualified in its entirety by reference to
the particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank. Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Company.
General. The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank to be issued in the Conversion. As
a savings bank holding company subject to the Bank Holding Company Act of 1956,
as amended ("BHCA"), the Company is subject to certain regulations of the
Federal Reserve. Under the BHCA, the Company's activities and those of its
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other
activity which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. The
BHCA prohibits the Company from acquiring direct or indirect control of more
than 5% of the outstanding voting stock or substantially all of the assets of
any bank or savings bank or merging or consolidating with another bank holding
company or savings bank holding company without prior approval of the Federal
Reserve.
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<PAGE>
Additionally, the BHCA prohibits the Company from engaging in, or
acquiring ownership or control of, more than 5% of the outstanding voting stock
of any company engaged in a nonbanking business unless such business is
determined by the Federal Reserve to be so closely related to banking as to be
properly incident thereto.
Similarly, Federal Reserve approval (or, in certain cases,
non-disapproval) must be obtained prior to any person acquiring control of the
Company. Control is conclusively presumed to exist if, among other things, a
person acquires more than 25% of any class of voting stock of the holding
company or controls in any manner the election of a majority of the directors of
the holding company. Control is presumed to exist if a person acquires more than
10% of any class of voting stock and the stock is registered under Section 12 of
the Exchange Act or the acquiror will be the largest shareholder after the
acquisition.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by law and
regulatory policy that are designed to minimize potential loss to the depositors
of such depository institutions and the FDIC insurance funds in the event the
depository institution becomes in danger of default or in default. For example,
to avoid receivership of an insured depository institution subsidiary, a bank
holding company is required to guarantee the compliance of any insured
depository institution subsidiary that may become "undercapitalized" with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized or (ii) the amount which is necessary (or would have been
necessary) to bring the institution into compliance with all acceptable capital
standards as of the time the institution fails to comply with such capital
restoration plan. Under a policy of the Federal Reserve with respect to bank
holding company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so absent such policy. The Federal Reserve under the BHCA also has the
authority to require a bank holding company to terminate any activity or to
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a
bank) upon the Federal Reserve's determination that such activity or control
constitutes a serious risk to the financial soundness and stability of any bank
subsidiary of the bank holding company.
In addition, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by either the SAIF or the
Bank Insurance Fund ("BIF") as a result of the default of a commonly controlled
insured depository institution or for any assistance provided by the FDIC to a
commonly controlled insured depository institution in danger of default. The
FDIC may decline to enforce the cross-guarantee provisions if it determines that
a waiver is in the best interest of the SAIF or the BIF or both. The FDIC's
claim for damages is superior to claims of stockholders of the insured
depository institution or its holding company but is subordinate to claims of
depositors, secured creditors and holders of subordinated debt (other than
affiliates) of the commonly controlled insured depository institutions.
Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing Common Stock in excess of ten
percent of its net worth during a rolling twelve-month period. As a result of
the Company's ownership of the Bank, the Company is registered under the savings
bank holding company laws of North Carolina. Accordingly, the Company is also
subject to regulation and supervision by the Administrator.
Capital Adequacy Guidelines for Holding Companies. The Federal Reserve
has adopted capital adequacy guidelines for bank holding companies and banks
that are members of the Federal Reserve system and have consolidated assets of
$150 million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.
Bank holding companies are required to comply with the Federal
Reserve's risk-based capital guidelines. Under these regulations, the minimum
ratio of total capital to risk-weighted assets (including certain off-balance
sheet activities, such as standby letters of credit) is 8%. At least half of the
total capital is required to be "Tier I capital," principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less certain goodwill
items. The remainder ("Tier II capital") may consist
24
<PAGE>
of a limited amount of subordinated debt, certain hybrid capital instruments and
other debt securities, perpetual preferred stock, and a limited amount of the
general loan loss allowance. In addition to the risk-based capital guidelines,
the Federal Reserve has adopted a minimum Tier I (leverage) capital ratio, under
which a bank holding company must maintain a minimum level of Tier I capital to
average total consolidated assets of at least 3% in the case of a bank holding
company which has the highest regulatory examination rating and is not
contemplating significant growth or expansion. All other bank holding companies
are expected to maintain a Tier I (leverage) capital ratio of at least 1% to 2%
above the stated minimum. At December 31, 1996, the Company complied with the
Federal Reserve's capital guidelines.
Capital Maintenance Agreement. In connection with the Administrator's
approval of the Company's application to acquire control of the Bank at the time
of the Conversion, the Company was required to execute a Capital Maintenance
Agreement whereby it has agreed to maintain the Bank's capital in an amount
sufficient to enable the Bank to satisfy all regulatory capital requirements.
Federal Securities Law. The Company has registered its Common Stock
with the Securities Exchange Commission ("SEC") pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). As a result,
the proxy and tender offer rules, insider trading reporting requirements and
restrictions, annual and periodic reporting and other requirements of the
Exchange Act are applicable to the Company.
Regulation of the Bank
General. Federal and state legislation and regulation have
significantly affected the operations of federally insured savings institutions
and other federally regulated financial institutions in the past several years
and have increased competition among savings institutions, commercial banks and
other providers of financial services. In addition, federal legislation has
imposed new limitations on investment authority, and higher insurance and
examination assessments on savings institutions and has made other changes that
may adversely affect the future operations and competitiveness of savings
institutions with other financial institutions, including commercial banks and
their holding companies. The operations of regulated depository institutions,
including the Bank, will continue to be subject to changes in applicable
statutes and regulations from time to time.
The Bank is a North Carolina-chartered savings bank, is a member of the
FHLB system, and its deposits are insured by the FDIC through the Savings
Association Insurance Fund (the "SAIF"). It is subject to examination and
regulation by the FDIC and the Administrator and to regulations governing such
matters as capital standards, mergers, establishment of branch offices,
subsidiary investments and activities, and general investment authority.
Generally, North Carolina state chartered savings banks whose deposits are
issued by the SAIF are subject to restrictions with respect to activities and
investments, transactions with affiliates and loans-to-one borrower similar to
those applicable to SAIF insured savings associations. Such examination and
regulation is intended primarily for the protection of depositors and the
federal deposit insurance funds.
The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As creditors of loans secured by real property and as owners
of real property, financial institutions, including the Bank, may be subject to
potential liability under various statutes and regulations applicable to
property owners generally, including statutes and regulations relating to the
environmental condition of real property.
The FDIC has extensive enforcement authority over North
Carolina-chartered savings banks, including the Bank. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist or removal orders and to initiate injunctive actions. In
general, these enforcement actions may be initiated in response to violations of
laws and regulations and unsafe or unsound practices.
25
<PAGE>
The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
Transactions with Affiliates. Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the savings bank.
Generally, subsidiaries of a bank, other than a bank subsidiary, and certain
other types of companies are not considered to be affiliates. Generally,
Sections 23A and 23B (i) limit the extent to which the Bank or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such the Bank's capital stock and surplus, and contain an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the Bank or the
subsidiary as those provided to a nonaffiliate. The term "covered transaction"
includes the making of loans or other extensions of credit to an affiliate, the
purchase of assets from an affiliate, the purchase of, or an investment in, the
securities of an affiliate, the acceptance of securities of an affiliate as
collateral for a loan or extension of credit to any person, or issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate.
Further, current federal law has extended to savings banks the
restrictions contained in Section 22(h) of the Federal Reserve Act and its
implementing regulations with respect to loans to directors, executive officers
and principal stockholders. Under Section 22(h), loans to directors, executive
officers and stockholders who own more than 10% of a savings bank, and certain
affiliated entities of any of the foregoing, may not exceed, together with all
other outstanding loans to such person and affiliated entities, the savings
bank's loans-to-one borrower limit as established by federal law and all loans
to such persons may not exceed the institution's unimpaired capital and
unimpaired surplus. Section 22(h) also prohibits loans above amounts prescribed
by the appropriate federal banking agency to directors, executive officers and
stockholders who own more than 10% of a savings bank, and their respective
affiliates, unless such loan is approved in advance by a majority of the board
of directors of the savings bank. Any "interested" director may not participate
in the voting. The Federal Reserve has prescribed the loan amount (which
includes all other outstanding loans to such person), as to which such prior
board of director approval is required, as being the greater of $25,000 or 5% of
unimpaired capital and unimpaired surplus (up to $500,000). Further, pursuant to
Section 22(h) the Federal Reserve requires that loans to directors, executive
officers, and principal stockholders be made on terms substantially the same as
offered in comparable transactions to other persons and not involve more than
the normal risk of repayment or present other unfavorable features.
Deposit Insurance. The Bank is required to pay assessments based on a
percentage of its insured deposits to the FDIC for insurance of its deposits by
the SAIF. Under the FDIC's risk-based deposit insurance assessment system, the
assessment rate for an insured depository institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the institution's capital level and supervisory evaluations. Based on the
data reported to regulators for the date closest to the last day of the seventh
month preceding the semi-annual assessment period, institutions are assigned to
one of three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as in the prompt
corrective action regulations. See "-- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A consists of financially sound institutions with only
a few minor weaknesses. Subgroup B consists of institutions that demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the institution and increased risk of loss to the deposit insurance fund.
Subgroup C consists of institutions that pose a substantial probability of loss
to the deposit insurance fund unless effective corrective action is taken. The
assessment rate for SAIF members had ranged from 0.23% of deposits for well
capitalized institutions in Subgroup A to 0.31% of deposits for undercapitalized
institutions in Subgroup C while assessments for over 90% of the BIF members had
been the statutory minimum of $2,000. Recently enacted legislation provided for
a one-time
26
<PAGE>
assessment of 65.7 basis points of insured deposits as of March 31, 1995, that
fully capitalized the SAIF and had the effect of reducing future SAIF
assessments. Accordingly, although the special assessment resulted in a one-time
charge to the Bank of approximately $437,000 pre-tax, the recapitalization of
the SAIF had the effect of reducing the Bank's future deposit insurance premiums
to the SAIF. Under the recently enacted legislation, both BIF and SAIF members
will be assessed an amount for the Financing Corporation Bond payments. BIF
members will be assessed approximately 1.3 basis points while the SAIF rate will
be approximately 6.4 basis points until January 1, 2000. At that time, BIF and
SAIF members will begin pro rata sharing of the payment at an expected rate of
2.43 basis points.
Community Reinvestment Act. The Bank, like other financial
institutions, is subject to the Community Reinvestment Act ("CRA"). A purpose of
this Act is to encourage financial institutions to help meet the credit needs of
its entire community, including the needs of low- and moderate-income
neighborhoods. During the Bank' last compliance examination, the Bank received a
"satisfactory" rating with respect to CRA compliance. The Bank' rating with
respect to CRA compliance would be a factor to be considered by the Federal
Reserve and FDIC in considering applications submitted by the Bank, to acquire
branches or to acquire or combine with other financial institutions and take
other actions and could result in the denial of such applications.
The federal banking regulatory agencies have issued a rewrite of the
CRA regulations to implement a new evaluation system that rates institutions
based on their actual performance in meeting community credit needs. Under the
regulations, a savings bank will be evaluated and rated under three categories:
a lending test, an investment test and a service test. For each of these three
tests, the savings bank will be given a rating of either "outstanding," "high
satisfactory," "low satisfactory," "needs to improve" or "substantial
non-compliance." A set of criteria for each rating has been developed and is
included in the regulation. If an institution disagrees with a particular
rating, the institution has the burden of rebutting the presumption by clearly
establishing that the quantative measures do not accurately present its actual
performance, or that demographics, competitive conditions or economic or legal
limitations peculiar to the service area should be considered. The ratings
received under the three tests will be used to determine the overall composite
CRA rating. The composite ratings will be the same as those that are currently
given: "outstanding," "satisfactory," "needs to improve" or "substantial
non-compliance."
Capital Requirements Applicable To The Bank. The FDIC requires the Bank
to have a minimum leverage ratio of Tier I capital (principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, less certain intangible items,
goodwill items, identified losses and investments in securities subsidiaries) to
total assets of at least 3%; provided, however that all institutions, other than
those (i) receiving the highest rating during the examination process and (ii)
not anticipating or experiencing any significant growth, are required to
maintain a ratio of 1% or 2% above the stated minimum, with an absolute minimum
leverage ratio of not less than 4%. The FDIC also requires the Bank to have a
ratio of total capital to risk-weighted assets, including certain off-balance
sheet activities, such as standby letters of credit, of at least 8%. At least
half of the total capital is required to be Tier I capital. The remainder ("Tier
II capital") may consist of a limited amount of subordinated debt, certain
hybrid capital instruments, other debt securities, certain types of preferred
stock and a limited amount of loan loss allowance.
An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC. If the leverage ratio falls to 2% or less, the
bank may be deemed to be operating in an unsafe or unsound condition, allowing
the FDIC to take various enforcement actions, including possible termination of
insurance or placement of the institution in receivership.
The Administrator requires that net worth equal at least 5% of total
assets. Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement. At December 31, 1996, the Bank
complied with each of the capital requirements of the FDIC and the
Administrator.
Each federal banking agency is required to establish risk-based capital
standards that take adequate account of interest rate risk, concentration of
credit risk, and the risk of nontraditional activities, as well as reflect the
actual performance and expected risk of loss on multifamily mortgages. The
agencies approved a final rule in June 1995 amending the risk-based capital
standards to consider explicitly "a bank's exposure to declines in the economic
value
27
<PAGE>
of its capital due to changes in interest rates" when evaluating capital
adequacy. Also in June 1995, the agencies requested public comment on a proposed
Joint Agency Policy Statement regarding the measurement and assessment of
interest rate risk. Small banks would be exempted from the proposed Policy
Statement and associated reporting requirements in order to lessen regulatory
burden on small, well-managed banks. The Bank cannot assess at this point the
impact the final rule or the proposed policy statement will have on its capital
requirements.
Loans-To-One-Borrower. The Bank is subject to the Administrator's
loans-to-one-borrower limits. Under these limits, no loans and extensions of
credit to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the net worth of the savings bank.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth. These limits also authorize savings
banks to make loans-to-one-borrower, for any purpose, in an amount not to exceed
$500,000. A savings bank also is authorized to make loans-to-one-borrower to
develop domestic residential housing units, not to exceed the lesser of $30
million or 30% of the savings bank's net worth, provided that the purchase price
of each single-family dwelling in the development does not exceed $500,000 and
the aggregate amount of loans made under this authority does not exceed 150% of
net worth. These limits also authorize a savings bank to make loans-to-one-
borrower to finance the sale of real property acquired in satisfaction of debts
in an amount up to 50% of net worth. The Bank had no loans outstanding which
management believes violate the applicable loans-to-one-borrower limits.
Federal Home Loan Bank System. The FHLB system provides a central
credit facility for member institutions. As a member of the FHLB of Atlanta, the
Bank is required to own capital stock in the FHLB of Atlanta in an amount at
least equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On December 31, 1996, the Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock of $721,000.
Each FHLB is required to contribute at least 10% of its reserves and
undivided profits to fund the principal and a portion of the interest on certain
bonds and certain other obligations which are used to fund the resolution of
troubled savings institution cases and to transfer a percentage of its annual
net earnings to the Affordable Housing Program. These contributions continue to
reduce the FHLB of Atlanta's earnings and the Bank's dividends on its FHLB of
Atlanta stock.
Federal Reserve System. Federal Reserve regulations require savings
banks, not otherwise exempt from the regulations, to maintain reserves against
their transaction accounts (primarily negotiable order of withdrawal accounts)
and certain nonpersonal time deposits. The reserve requirements are subject to
adjustment by the Federal Reserve. As of December 31, 1996, the Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.
Restrictions on Acquisitions. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of a state savings bank without giving at least 60 days' written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition. Pursuant to regulations governing acquisitions of control,
control of an insured institution is conclusively deemed to have been acquired
by, among other things, the acquisition of more than 25% of any class of voting
stock. In addition, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of voting stock.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the insured institution or prejudice the interests of its
depositors; or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisitions of
control by such person.
Liquidity. The Bank is subject to the Administrator's requirement that
the ratio of liquid assets to total assets equal at least 10%. The computation
of liquidity under North Carolina regulation allows the inclusion of
mortgage-backed securities and investments which, in the judgment of the
Administrator, have a readily marketable
28
<PAGE>
value, including investments with maturities in excess of five years. On
December 31, 1996, the Bank was in compliance with such requirements.
Additional Limitations on Activities. Recent FDIC law and regulations
generally provide that the Bank may not engage as principal in any type of
activity, or in any activity in an amount, not permitted for national banks, or
directly acquire or retain any equity investment of a type or in an amount not
permitted for national banks. The FDIC has authority to grant exceptions from
these prohibitions (other than with respect to non-service corporation equity
investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the activity to be engaged in and if the Bank
is and continues to be in compliance with fully phased-in capital standards.
National banks are generally not permitted to hold equity investments other than
shares of service corporations and certain federal agency securities. Moreover,
the activities in which service corporations are permitted to engage are limited
to those of service corporations for national banks.
Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not of investment
grade (generally referred to as "junk bonds"). State savings banks are also
required to notify the FDIC at least 30 days prior to the establishment or
acquisition of any subsidiary, or at least 30 days prior to conducting any such
new activity. Any such activities must be conducted in accordance with the
regulations and orders of the FDIC and the Administrator.
Prompt Corrective Regulatory Action. Federal law provides the federal
banking agencies with broad powers to take corrective action to resolve problems
of insured depository institutions. The extent of these powers depends upon
whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized." Under the FDIC regulations applicable to the
Bank, an institution is considered "well capitalized" if it has (i) a total
risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital
ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not
subject to any order or written directive to meet and maintain a specific
capital level for any capital measure. An "adequately capitalized" institution
is defined as one that has (i) a total risk-based capital ratio of 8% or
greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a
leverage ratio of 4% or greater (or 3% or greater in the case of an institution
with the highest examination rating and which is not experiencing or
anticipating significant growth). An institution is considered (A)
"undercapitalized" if it has (i) a total risk-based capital ratio of less than
8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage
ratio of less than 4% (or 3% in the case of an institution with the highest
examination rating and which is not experiencing or anticipating significant
growth); (B) "significantly undercapitalized" if the institution has (i) a total
risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), effective September 29,
1995, permits adequately capitalized bank and savings bank holding companies to
acquire control of banks and savings banks in any state. The states may
specifically permit interstate acquisitions prior to September 29, 1995, by
enacting legislation that provides for such transactions. North Carolina adopted
nationwide reciprocal interstate acquisition legislation in 1994.
Such interstate acquisitions are subject to certain restrictions.
States may require the bank or savings bank being acquired to have been in
existence for a certain length of time but not in excess of five years. In
addition, no bank or saving bank may acquire more than 10% of the insured
deposits in the United States or more than 30% of the insured deposits in any
one state, unless the state has specifically legislated a higher deposit cap.
States are free to legislate stricter deposit caps.
The Interstate Banking Act also provides for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time. Unlike interstate acquisitions, a state may deny
interstate branching if it specifically elects to do so by June 1, 1997. States
may choose to allow interstate branching prior to June 1, 1997 by opting-in to a
group of states that permits these transactions. These states generally allow
interstate branching via a merger of an out-of-state
29
<PAGE>
bank with an in-state bank, or on a de novo basis. North Carolina has enacted
legislation permitting branching transactions.
It is anticipated that the Interstate Banking Act will increase
competition within the markets in which the Bank now operates, although the
extent to which such competition will increase in such markets or the timing of
such increase cannot be predicted.
Restrictions on Dividends and Other Capital Distributions. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. In
addition, the Bank, for a period of five years after its conversion from mutual
to stock form in December 1993, must obtain the written approval from the
Administrator before declaring or paying a cash dividend on its capital stock in
an amount in excess of one-half of the greater of (i) the institution's net
income for the most recent fiscal year end, or (ii) the average of the
institution's net income after dividends for the most recent fiscal year end and
not more than two of the immediately preceding fiscal year ends.
Also, without the prior written approval of the Administrator, the
Bank, for a period of five years after its conversion from mutual to stock form
in December 1993, may not repurchase any of its capital stock. The Administrator
will give approval to repurchase only upon a showing that the proposed
repurchase will not adversely affect the safety and soundness of the
institution.
In addition, the Bank is not permitted to declare or pay a cash
dividend on or repurchase any of its capital stock if the effect thereof would
be to cause its net worth to be reduced below the amount required for the
liquidation account established in connection with the Bank's conversion from
mutual to stock ownership.
Other North Carolina Regulations. As a North Carolina-chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
includes, but is not limited to, the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases, the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest. North Carolina law
requires that the Bank maintain federal deposit insurance as a condition of
doing business.
The Administrator conducts regular examinations of North
Carolina-chartered savings banks. The purpose of such examinations is to assure
that institutions are being operated in compliance with applicable North
Carolina law and regulations and in a safe and sound manner. These examinations
are usually conducted on a joint basis with the FDIC. In addition, the
Administrator is required to conduct an examination of any institution when he
has good reason to believe that the standing and responsibility of the
institution is of doubtful character or when he otherwise deems it prudent. The
Administrator is empowered to order the revocation of the license of an
institution if he finds that it has violated or is in violation of any North
Carolina law or regulation and that revocation is necessary in order to preserve
the assets of the institution and protect the interests of its depositors. The
Administrator has the power to issue cease and desist orders if any person or
institution is engaging in, or has engaged in, any unsafe or unsound practice or
unfair and discriminatory practice in the conduct of its business or in
violation of any other law, rule or regulation.
A North Carolina-chartered savings bank must maintain net worth,
computed in accordance with the Administrator's requirements, of 5% of total
assets and liquidity of 10% of total assets, as discussed above. Additionally, a
North Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.
30
<PAGE>
Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North Carolina-
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.
North Carolina law provides a procedure by which savings institutions
may consolidate or merge, subject to approval of the Administrator. The approval
is conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.
Future Requirements. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company and the Bank may be affected by such
statute or regulation.
ITEM 2. PROPERTIES
At December 31, 1996, the Company conducted its business from the
Bank's headquarters office and a branch office in Kenly, North Carolina, and its
branch offices in Selma, Goldsboro and Wilson, North Carolina. In addition, the
Bank had a loan origination office in Clayton, North Carolina. The following
table sets forth certain information regarding the Company's properties as of
December 31, 1996. See Note 6 to the Company's Consolidated Financial Statements
included in the Annual Report which is incorporated herein by reference.
31
<PAGE>
<TABLE>
<CAPTION>
Net Book
Value of
Address Property
------- --------
<S> <C>
Kenly
Corporate offices:
207 West Second Street
Kenly, North Carolina 27542 $ 245,007
Branch facility:
200 North Church Street
Kenly, North Carolina 27542 576,044
Selma
115 West Anderson Street
Selma, North Carolina 27576 90,851
Wilson
206 N. Ward Boulevard
Wilson, North Carolina 27893 483,166
Clayton
11440 Highway 70 West
Clayton, North Carolina 27520 (Leased)
Goldsboro
1112 E. Ashe Street
Goldsboro, North Carolina 27530 238,068
----------
$1,633,136
==========
</TABLE>
The total net book value of the Company's furniture and equipment on December
31, 1996 was $292,152.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, neither the Company nor the Bank is
involved in any pending legal proceedings other than routine, non-material
proceedings occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during
the quarter ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of March 15, 1997, the Company had 663,263 shares of Common Stock
outstanding which are held by approximately 349 holders of record, not including
the number of persons or entities whose stock is held in nominee or street name
through various brokerage firms or banks. Shares are traded on the Nasdaq
SmallCap Market under the symbol "KSAV." The high and low sales price
information for the Common Stock and dividend history for the
32
<PAGE>
Common Stock for the period since January 1, 1994 is set forth under the heading
"Corporate Information -- Common Stock" on pages 36 and 37 of the Annual Report
which is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the heading "Selected Consolidated
Financial Data" on page 1 of the Annual Report is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information contained on pages 2 through 22 of Item 1. BUSINESS
above and the information contained under the heading "Management's Discussion
and Analysis of Financial Condition and Results of Operations" on pages 4
through 7 of the Annual Report are incorporated herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the Company included
in the Annual Report are incorporated herein by reference:
<TABLE>
<CAPTION>
Annual Report
Page Number
-------------
<S> <C>
Independent Auditors' Report 11
Consolidated Statements of Financial Condition -
December 31, 1996 and 1995 12
Consolidated Statements of Income - Years ended
December 31, 1996, 1995 and 1994 13
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1996, 1995 and 1994 14
Consolidated Statements of Cash Flows - Years ended
December 31, 1996, 1995 and 1994 15-16
Notes to Financial Statements 17-35
</TABLE>
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth on pages 7 through 8 and page 11 of the Proxy
Statement is incorporated by reference.
33
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information set forth on pages 12 through 13 of the Proxy Statement
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in the section entitled "Security Ownership
of Certain Beneficial Owners" on pages 3 through 6 of the Proxy Statement is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the section entitled "Certain Indebtedness
and Transactions of Management" on page 21 of the Proxy Statement is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a)(1) Financial Statements
The following consolidated financial statements of the Company
are included in the Annual Report and are incorporated herein by
reference:
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report Exhibit 13, page 11
Consolidated Statements of Financial Condition -
December 31, 1996 and 1995 Exhibit 13, page 12
Consolidated Statements of Income - Years ended
December 31, 1996, 1995 and 1994 Exhibit 13, page 13
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1996, 1995 and 1994 Exhibit 13, page 14
Consolidated Statements of Cash Flows -
Years ended December 31, 1996, 1995 and 1994 Exhibit 13, pages 15-16
Notes to Consolidated Financial Statements Exhibit 13, pages 17-35
</TABLE>
(2) Financial Statement Schedules
All financial statement schedules are omitted because the
required information is either not applicable, is immaterial,
or is included in the consolidated financial statements of the
Company or notes thereto.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
three months ended December 31, 1996.
(c) Exhibits
A listing of the exhibits to this Report on Form 10-K is set
forth on the Index to Exhibits which immediately precedes such
exhibits and is incorporated herein by reference.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KS BANCORP, INC.
By: /s/ Harold T. Keen
--------------------------------------
Harold T. Keen
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Harold T. Keen President and Chief Executive March 28, 1997
- ------------------------------------ Officer and Director
Harold T. Keen
/s/ Helen B. Pollock Treasurer (Principal Financial March 28, 1997
- ------------------------------------ Officer)
Helen B. Pollock
/s/ Robert E. Fields Director March 28, 1997
- ------------------------------------
Robert E. Fields
/s/ R. Harold Hinnant Director March 28, 1997
- ------------------------------------
R. Harold Hinnant
/s/ James C. Parker Director March 28, 1997
- ------------------------------------
James C. Parker
/s/ R. Elton Parrish Director March 28, 1997
- ------------------------------------
R. Elton Parrish
/s/ Ralph Edward Scott, Jr. Director March 28, 1997
- ------------------------------------
Ralph Edward Scott, Jr.
/s/ H. Elwin Watson Director March 28, 1997
- ------------------------------------
H. Elwin Watson
/s/ J. Hayden Wiggs Director March 28, 1997
- ------------------------------------
J. Hayden Wiggs
/s/ James C. Woodard Director March 28, 1997
- ------------------------------------
James C. Woodard
</TABLE>
35
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
(3)(i) Certificate of Incorporation, incorporated herein by
reference to Exhibit 3.1 to the Registration Statement on
Form S-1, Registration No. 33-69522, dated September 25,
1993 and amended on November 3, 1993
(3)(ii) Bylaws, incorporated herein by reference to Exhibit 3.2 to
the Registration Statement on Form S-1, Registration
No. 33-69522, dated September 25, 1993 and amended on
November 3, 1993
(4) Specimen stock certificate, incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form S-1,
Registration No. 33-69522, dated September 25, 1993
and amended on November 3, 1993
(11) Statement Regarding Computation of Per Share Earnings
(12) Statement Regarding Computation of Ratios
(13) Portions of 1996 Annual Report to Stockholders
(21) Subsidiaries of the Registrant
(23) Consent of McGladrey & Pullen, LLP
(27) Financial Data Schedule
</TABLE>
<PAGE>
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
-----------------
<S> <C>
Net income for the year ended December 31, 1996 $ 825,317
========
Computation of weighted average shares outstanding:
Total weighted average shares outstanding for the year ended December 31, 1996 655,777
Less shares owned by the ESOP (40,448)
Plus shares owned by the ESOP which have been allocated or committed to be
allocated to participants in accordance with AICPA's SOP 93-6 13,148
Plus common stock equivalents associated with common stock options 55,234
--------
Total weighted average shares outstanding for EPS purposes 693,711
========
Earnings per share $ 1.19
========
</TABLE>
<PAGE>
STATEMENT REGARDING COMPUTATION OF RATIOS
The averages used in computing the performance ratios provided in Item
1. "BUSINESS - Key Operating Ratios" on page 22 of the Form 10-K represent
average daily balances. Information is not readily available to compute such
ratios using daily average balances; however, in the opinion of management, the
ratios presented are not materially different as a result of using monthly
average balances.
<PAGE>
Selected Financial Data KS Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994 1993 1992
---------------------------------------------------
(In Thousands, Except Per Share Amounts)
Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets $100,840 $88,274 $82,310 $82,857 $73,351
Investment securities (1) 14,658 13,856 14,551 20,274 8,994
Loans receivable, net 81,511 70,099 63,745 60,377 60,812
Mortgage-backed securities 1,393 1,876 2,269 438 544
Deposits 82,346 70,738 66,363 68,101 66,035
Advances from the FHLB 4,000 3,000 1,000 -- 500
Stockholders' equity (2) 13,721 13,864 14,533 14,107 6,359
Book value per common share 20.69 20.29 19.15 17.44 --
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994 1993 1992
---------------------------------------------------
(In Thousands, Except Per Share Amounts)
Operating Data:
<S> <C> <C> <C> <C> <C>
Interest income $ 7,537 $6,843 $ 6,160 $6,087 $6,133
Interest expense 4,012 3,501 2,735 2,999 3,422
------------------------------------------------
Net interest income $ 3,525 $3,342 $ 3,425 $3,088 $2,711
Provision for loan losses 69 10 22 61 15
Other income 201 92 64 78 61
Other expense (4) 2,329 1,747 1,485 2,244 1,096
------------------------------------------------
Income before income taxes $ 1,328 $1,677 $ 1,982 $ 861 $1,661
Income tax expense 503 625 726 311 618
------------------------------------------------
Net income $ 825 $1,052 $ 1,256 $ 550 $1,043
================================================
Earnings per common share (3) $ 1.19 $ 1.41 $ 1.57 $ 0.68 $ --
Dividends per common share $ 1.20 $ 1.00 $ 0.25 $ -- $ --
Dividend payout ratio 100% 71% 16% -- --
Return on average assets (4) .88% 1.22% 1.51% .72% 1.48%
Return on average equity (4) 6.01% 7.29% 8.66% 7.83% 17.35%
Average equity to average assets 14.63% 16.70% 17.40% 9.20% 8.54%
</TABLE>
(1) Includes interest-bearing deposits, time deposits and investment
securities.
(2) In December 1993, Kenly Savings Bank, SSB amended and restated its charter
to effect its conversion from a North Carolina-chartered mutual savings
bank to a North Carolina-chartered stock savings bank and became a wholly-
owned subsidiary of KS Bancorp, Inc.
(3) Earnings per share in 1993 is computed as if the 808,963 shares of stock
issued on December 29, 1993 had been outstanding since January 1, 1993.
(4) Includes nonrecurring deposit insurance premium assessment of $436,548
during 1996.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYIS OF FINANCIAL CONDITON AND RESULTS OF
OPERATIONS
GENERAL
KS Bancorp, Inc., (KS Bancorp or the Company) is a savings bank holding company
which owns all of the common stock of Kenly Savings Bank, Inc., SSB (Kenly or
the Bank) a North Carolina-chartered capital stock savings bank. KS Bancorp's
principal business activities consist solely of the ownership of Kenly, a loan
to the ESOP for its purchase of common stock and the investment of its portion
of the proceeds received from Kenly's mutual to stock conversion. The principal
business of Kenly is accepting deposits from the general public and using those
deposits and other sources of funds to make mortgage loans secured by
residential real estate located in Kenly's primary market area of Johnston,
Wilson, Wayne and Wake counties.
Kenly's results of operations depend primarily on its net interest income, which
is the difference between interest income from interest-earning assets and
interest expense on interest-bearing liabilities. Kenly's operations are also
affected by non-interest income, such as miscellaneous income from loans,
customer deposit account service charges, and other sources of revenue. Kenly's
principal operating expenses, aside from interest expense, consist of
compensation and employee benefits, federal deposit insurance premiums, office
occupancy costs, and other general and administrative expenses.
The following discussion and analysis is intended to assist readers in
understanding the results of operations in 1996, 1995 and 1994, and changes in
financial position for the years ended December 31, 1996 and 1995, respectively.
The discussion contains certain forward-looking statements consisting of
estimates with respect to the financial condition, results of operations and
other business of the Company 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 the national, regional and
local market conditions, legislative and regulatory conditions, and an adverse
interest rate environment.
CAPITAL RESOURCES AND LIQUIDITY
KS Bancorp currently conducts no business other than holding the capital stock
of Kenly and the loan from the ESOP, and investing the portion of the net
proceeds of the conversion retained at the Holding Company level in order to
provide sufficient funds for future operations, payment of dividends, or
repurchases of its stock. KS Bancorp's primary source of funds, other than
income from its investments, is dividends from Kenly, which are subject to
regulatory restrictions as discussed in Note 17 to the consolidated financial
statements. During 1996, Kenly paid a $150,000 dividend to KS Bancorp as a
follow-up to its initial distribution since converting to stock form of $750,000
made in 1995. KS Bancorp declared and paid cash dividends of $766,155 and
$704,184 and $193,465 during 1996, 1995 and 1994, respectively. Dividends paid
by KS Bancorp during 1996 included a special dividend of $.60 a share paid
during the fourth quarter. Although the Company anticipates that it will
continue to declare cash dividends on a regular basis, the Board of Directors
will continue to review its policy on the payment of dividends on an ongoing
basis, and such payment will be subject to future earnings, cash flows, capital
needs, and regulatory restrictions.
KS Bancorp repurchased and retired 20,000 shares of it common stock for a total
cost of approximately $370,000 during 1996, bringing the total amount of common
stock repurchased since the mutual to stock conversion to 145,700 shares for a
total cost of $2.5 million. At December 31, 1996, the Company has not requested
or received authorization to repurchase additional shares of stock.
The objective of Kenly's liquidity management is to ensure the availability of
sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for expansion. Liquidity management addresses Kenly's ability to
meet deposit withdrawals either on demand or at contractual maturity, to repay
borrowings as they mature and to make new loans and investments as opportunities
arise.
A significant liquidity source for Kenly is cash provided by operating
activities. These operating activities generated cash of $790,028, $1,210,685
and $1,285,351 for the years ended December 31, 1996, 1995 and 1994,
respectively. Historically, in addition to cash provided by operating
activities, financing activities have provided Kenly with sources of funds for
asset growth and liquidity. For the years ended December 31, 1996 and 1995,
deposits grew by $11,608,089 and $4,374,391 respectively. During 1996, 1995 and
1994, Kenly obtained additional advances net of repayments from the FHLB of
Atlanta with whom they have a readily available source of credit, amounting to
$1,000,000, $2,000,000 and $1,000,000, respectively. Such funds were used
primarily to fund increasing loan demand. During 1994 Kenly used the cash
provided by operations and cash and short-term interest earning deposits on hand
to finance a deposit outflow of $1,737,228, to fund loan demand and to invest in
intermediate term investment securities. In the future, liquidity may be
supplemented by loan sales and securitization programs which the Bank may use to
facilitate the timely liquidation of assets if and when it is deemed desirable.
Approximately $52 million of the Bank's certificates of deposit mature in 1997;
however, management believes that substantially all of these deposits will be
renewed.
Cash provided by operating and financing activities is used by Kenly to
originate new loans to customers, to maintain Kenly's and KS Bancorp's liquid
investment portfolios, and to meet short term liquidity requirements. During
1996, 1995, and 1994, loans outstanding increased by $11,653,820, $6,419,161 and
$3,566,062, respectively. During 1996 and 1995, proceeds from sales and
maturities of investment securities exceeded purchases of such investments by
$1,364,862 and $2,528,125, respectively, and were used in part to fund dividends
and stock repurchases of KS Bancorp's stock. During 1994, purchases of
investment securities exceeded proceeds from sales and maturities by $3,492,269.
However, during 1994, these activities were funded principally by cash provided
by operating activities and a significant amount of cash on hand accumulated
from financing activities in 1994, which was not immediately invested at the
time of conversion.
As a North Carolina-chartered savings bank, Kenly is required to maintain liquid
assets equal to at least 10% of total assets. The computation of liquidity under
North Carolina regulation allows for the inclusion of mortgage-backed securities
and other investments with readily marketable values, including investments with
maturities in excess of five years. Kenly's liquidity ratio on December 31,
1996, as computed under North Carolina regulations, was approximately 15%.
Management believes that the Bank's liquidity and other sources of funds are
adequate to fund all outstanding commitments and other anticipated cash needs.
Asset/Liability Management
Kenly's asset/liability management, or interest rate risk management, is focused
primarily on evaluating and managing the Bank's net interest income given
various risk criteria. Factors beyond Kenly's control, such as the effects of
changes in market interest rates and competition, may also have an impact on
the management of interest rate risk.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
Asset/Liability Management (Continued)
In the absence of other factors, Kenly's overall yield on interest-earning
assets will increase as will its cost of funds on its interest-bearing
liabilities when market rates increase over an extended period of time.
Inversely, Kenly's yields and cost of funds will decrease when market rates
decline. Kenly is able to manage these swings to some extent by attempting to
control the maturities or rate adjustments of its interest-earning assets and
interest-bearing liabilities over given periods of time. Kenly's gap is
typically described as the difference between the amounts of such assets and
liabilities which reprice within a period of time. In a declining interest rate
environment a negative gap, or a situation where Kenly's interest-bearing
liabilities subject to repricing exceed the level of interest-earning assets
which will mature or reprice, has a favorable impact on Kenly's net interest
income. Conversely, an increase in general market rates will tend to adversely
affect Kenly's net interest income. At December 31, 1996, Kenly has a negative
gap position.
In order to minimize the potential effects of adverse material and prolonged
increases or decreases in market interest rates on Kenly's operations,
management has implemented an asset/liability program designed to improve
Kenly's interest rate gap. The program primarily emphasizes the origination of
adjustable rate mortgage loans which are held for investment purposes, the
origination of loans which meet secondary market requirements and can therefore
be sold if and when management deems such sales advisable, the investment of
excess cash in short or intermediate term interest-earning assets, and the
solicitation of checking or transaction deposit accounts which are less
sensitive to changes in interest rates and can be repriced rapidly.
Although Kenly's asset/liability management program has generally helped to
decrease the exposure of its earnings to interest rate increases, Kenly
continues to have a negative gap position which will be adversely impacted
during prolonged and sustained periods of rising interest rates and positively
affected during prolonged and sustained periods of interest rate declines.
Analysis of Net Interest Income
Net interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by the difference between yields on
interest-earning assets and rates paid on interest-bearing liabilities (interest
rate spread) and the relative amounts of interest-earning assets and interest-
bearing liabilities outstanding during the period.
The following table reflects the average yields on assets and average costs of
liabilities for the years ended December 31, 1996, 1995 and 1994. Such average
yields and costs are derived by dividing income or expense by the average
monthly balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods presented.
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------------
1995 1994 1993
----------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits $ 2,031 $ 108 5.32% $ 1,521 $ 87 5.72% $ 6,083 $ 236 3.88%
Investments, net, at cost 9,402 557 5.92% 11,201 659 5.88% 11,729 587 5.00%
Mortgage-backed securities 1,412 102 7.22% 2,176 112 5.15% 2,200 66 3.00%
Loans receivable 77,292 6,770 8.76% 68,317 5,985 8.76% 60,775 5,271 8.67%
------- ------ ------- ------ ------- ------
Total interest-earning assets 90,137 $7,537 8.36% 83,215 $6,843 8.22% 80,787 $6,160 7.62%
------ ------ ------
Non-interest-earning assets 3,744 3,207 2,528
------- ------- -------
Total $93,881 $86,422 $83,315
======= ======= =======
Liabilities and equity:
Interest-bearing liabilities:
Deposit accounts $75,998 $3,807 5.01% $68,082 $3,349 4.92% $68,222 $2,735 4.01%
FHLB advances 3,500 205 5.86% 2,500 152 6.08% - - -
------- ------ ------- ------ ------- ------
Total interest-bearing liabilities 79,498 $4,012 5.05% 70,582 $3,501 4.96% 68,222 $2,735 4.01%
------ ------ ------
Non-interest-bearing liabilities 644 1,405 594
Equity 13,739 14,435 14,499
------- ------- -------
Total $93,881 $86,422 $83,315
======= ======= =======
Net interest income and
interest rate spread (1) $3,525 3.31% $3,342 3.26% $3,425 3.61%
====== ====== ======
Net interest-earning assets
and net interest margin (2) $10,639 3.91% $12,633 4.02% $12,565 4.24%
======= ======= =======
Ratio of interest-earning
assets to interest-
bearing liabilities 113.38% 117.90% 118.42%
</TABLE>
(1) Interest rate spread represents the difference between the average yield on
interest-earnings assets and the average cost of interest-bearing
liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
Rate/Volume Analysis
The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and interest-
bearing liabilities. The table distinguishes between (i) changes attributable to
volume (changes in volume multiplied by the prior period's rate), (ii) changes
attributable to rate (changes in rate multiplied by the prior period's volume),
(iii) mixed change (changes in rate multiplied by changes in volume), and (iv)
net change (the sum of the previous columns).
6
<PAGE>
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, Year ended December 31,
1996 vs. 1995 1995 vs. 1994
----------------------------------- -----------------------------------
Increase (Decrease) Attributable to Increase (Decrease) Attributable to
----------------------------------- -----------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
----------------------------------- -----------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income on:
Interest-earning deposits $ 29 $ (6) $ (2) $ 21 $(177) $ 112 $ (84) $(149)
Investments, net, at cost (106) 5 (1) (102) (26) 103 (5) 72
Mortgage-backed securities (39) 45 (16) (10) (1) 48 (1) 46
Loans receivable 786 (1) - 785 654 53 7 714
----------------------------------- -----------------------------------
Total interest income on
interest-earning assets $ 670 $ 43 $ (19) $ 694 $ 450 $ 316 $ (83) $ 683
----------------------------------- -----------------------------------
Interest expense on:
Deposit accounts $ 389 $ 62 $ 7 $ 458 $ (6) $ 621 $ (1) $ 614
FHLB advances 61 (6) (2) 53 - - 152 152
----------------------------------- -----------------------------------
Total interest expense on
interest-bearing
liabilities $ 450 $ 56 $ 5 $ 511 $ (6) $ 621 $ 151 $ 766
----------------------------------- -----------------------------------
Increase (decrease) in net
interest income $ 220 $ (13) $ (24) $ 183 $ 456 $(305) $(234) $ (83)
=================================== ===================================
</TABLE>
- --------------------------------------------------------------------------------
Comparison of Financial Condition at December 31, 1996 and 1995
- --------------------------------------------------------------------------------
Changes in Financial Condition
Total consolidated assets of KS Bancorp increased by approximately $12.5 million
to $100.8 million at December 31, 1996 from $88.3 million at December 31, 1995.
Assets at December 31, 1995 increased by approximately $6.0 million from total
consolidated assets at December 31, 1994. The increases in assets in 1996 and
1995 were primarily attributable to strong loan demand in Kenly's primary
lending markets which was supported by the development and maintenance of
deposits within those markets.
Kenly's asset growth has been fueled in part by a series of facilities
renovations and replacements which has strengthened its presence in several of
its markets. During August, 1995, Kenly completed construction and opened a new
branch facility in Wilson, North Carolina which replaced an existing branch.
Management of the Bank feels that the replacement branch offers a location which
is much more visible and accessable for their customers and has contributed to
customer traffic. The old Wilson branch real estate was sold during 1996. In
addition, during 1996, Kenly completed the renovations begun in 1995 on a branch
facility in Goldsboro. On April 1, 1996, the newly renovated full service branch
facility was opened, increasing Kenly's presence in that market from a loan
origination office to a full service branch. Also during 1996, Kenly completed
the construction of a new branch office facility in Kenly which opened on
November 25, 1996. The new Kenly branch location, while in close proximity to
the home office, offers an updated and visible location for all banking traffic.
The old home office facility will be renovated in 1997 to serve as the corporate
and accounting headquarters.
Loans increased by $11.4 million and $6.4 million during 1996 and 1995,
respectively. These increases in 1996 and 1995 are attributable to across the
board increases in demand for residential mortgage loans, construction loans and
equity line loans resulting from the expansion of Kenly's lending area and
solidification of its market presence in Clayton, Goldsboro and Wilson.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND 1995 (CONTINUED)
Total investments and short-term interest earning deposits increased by $802,000
during 1996 after having decreased by $695,000 million during 1995. Investment
securities and short-term interest earning deposits amounted to $14.7 million at
December 31, 1996. The increase in 1996 supported the additional liquidity
necessary to maintain a larger deposit base. The decrease in 1995 was partially
attributable to funding needs by KS Bancorp for stock repurchases and dividends
to shareholders.
Savings deposits increased by $11.6 million during 1996 to $82.3 million at
December 31, 1996 from $70.7 million at December 31, 1995. The increase
resulted from management's decision to competively price its deposits in
relation to rates being offered in its market areas and was influenced in part
by Kenly's increased loan demand and efforts to establish and solidify its
market position in 1996. Savings deposits had increased by $4.4 million during
1995 for similar reasons. Kenly had outstanding borrowings from the FHLB of
Atlanta of $4,000,000 and $3,000,000 at December 31, 1996 and 1995 respectively.
Borrowings were obtained in order to support the increased loan demand.
Stockholder's equity decreased by approximately $143,000 during 1996 to $13.7
million at December 31, 1996 from $13.9 million at December 31, 1995. Net
income of $825,000 for 1996 was offset by the payment of approximately $766,000
in cash dividends to stockholders, and the repurchase of $20,000 shares of
outstanding common stock at a cost of approximately $370,000. Additionally,
during 1996 the Company reported an increase in net unrealized gains, net of tax
effect, of approximately $93,000 on its portfolio of available for sale
securities. Such gains were not recognized in income and are shown as a
separate component of stockholders' equity. Net income of $1.1 million for 1995
was offset by the payment of approximately $704,000 in cash dividends to
stockholders, and the repurchase of 75,700 shares of outstanding common stock at
a cost of approximately $1.4 million. Additionally, during 1995 the Company
also reported an increase in net unrealized gains, net of tax effect, of
approximately $302,000 on its portfolio of available for sale securities. At
December 31, 1996, Kenly's capital was substantially in excess of the regulatory
levels required by the FDIC and the North Carolina Administrator.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND
1994
NET INCOME
KS Bancorp's net income for the years ended December 31, 1996, 1995, and 1994
was $825,317, $1,051,812 and 1,256,370, respectively. Net income in 1996 would
have been approximately $271,000 higher ($.39 a share) than the earnings
reported excluding the $437,000 special assessment to recapitalize the Savings
Association Insurance Fund (SAIF). Net income in 1995 was lower than the
earnings reported in 1994 due to the decrease in Kenly's interest rate spread
and an increase in certain noninterest expenses, including compensation.
NET INTEREST INCOME
Net interest income increased $183,108 or 5.5% to $3,525,264 for the year ended
December 31, 1996 from $3,342,156 in net interest income reported in 1995. Net
interest income decreased $83,305 or 2.4% during 1995 from $3,425,461 reported
for 1994. During 1996 Kenly's interest rate spread of 3.31% was a slight
improvement over the spread of 3.26% in 1995. As market rates remained stable
to slightly lower for short-term rates during 1996, the mix and volume of
Kenly's interest-earning assets changed to favor higher yielding loans
receivable, creating a higher average yield on interest earning assets.
Although the interest rate sensitivity of Kenly's deposits would typically
provide for a positive impact on net interest income in a declining short-term
interest rate environment, the Bank's cost of funds actually increased slightly
during the year as certain special deposit types were offered to promote deposit
activity in conjunction with the Bank's new and relocated branches. However the
impact on net interest income of the increase in cost of interest bearing
liabilities was more than offset by the increase in the yield on interest
earning assets. The decrease in net interest income during 1995 from 1994 was
attributable to a decline in Kenly's interest rate spread which amounted to
3.26% in 1995 and 3.61% in 1994. The average balance of interest earning assets
increased significantly during 1994 primarily as a result of the stock
conversion which occurred in December 1993. The average balance of interest
bearing liabilities remained nearly constant because deposit declines, created
primarily due to deposit outflows to purchase conversion stock, were offset by
increased borrowings from the FHLB of Atlanta.
INTEREST INCOME
Total interest income increased by $695,036 to $7,537,692 for the year ended
December 31, 1996 from $6,842,656 in 1995. The 1996 increase followed an
increase of $682,349 for the year ended December 31, 1995 from $ 6,160,307 in
1994. During 1996 and 1995, increases in both the average balance of interest
earning assets and yields had a positive impact on interest income. KS Bancorp's
yield on interest earnings assets was 8.36% in 1996 as compared to 8.22% in
1995, and although a modest increase, its balance of average interest earning
assets increased by approximately $6.9 million during 1996. In 1995, the yield
on interest earning assets increased more sharply to 8.22% from 7.62% in 1994,
while the balance of average interest earning assets outstanding increased by
approximately $2.4 million. During both 1996 and 1995, the growth in interest
earning assets was due to an increase in Kenly's loan portfolio which typically
yields a much higher rate of return than the Bank's other interest-earning
assets. During 1994, interest income remained relatively stable as increased
levels of interest earning assets were offset by declining yields. The growth
in interest earning assets during 1994 was in short-term interest-earning
deposits and investment securities which typically yield a lower rate of return
than loans.
INTEREST EXPENSE
Total interest expense increased by $511,928 for the year ended December 31,
1996 to $4,012,428 following an increase of $765,654 to $3,500,500 for the year
ended December 31, 1995 from $2,734,846 for the year ended December 31, 1994.
Kenly's average balance of interest bearing liabilities increased by $8.9
million during 1996 and by $2.4 million during 1995, but remained fairly stable
in 1994. Kenly's cost of funds increased slightly to 5.05% in 1996 from 4.96% in
1995. The Bank's cost of funds rose by 95 basis points during 1995 from 4.01% in
1994. During 1996, the increase in Kenly's average interest bearing liabilities
contributed more to the increase in interest expense than did the modest
increase in the cost of funds, while during 1995, changes in Kenly's cost of
funds had a more significant impact on the increase in interest expense. During
1994, the Bank's interest expense declined by $264,899 and was attributable to a
39 basis point drop in its cost of funds. The Bank's cost of funds moved in
random with overall fluctuations in short-term market rates over the three year
period, with only minor variations due to local marketing considerations in the
pricing of deposits.
PROVISION FOR LOAN LOSSES
Kenly's provision for loan losses amounted to $69,000, $10,000, and $21,703 for
1996, 1995 and 1994, respectively. The provision which is charged to
operations, and the resulting loan loss allowances are amounts Kenly's
management believes will be adequate to absorb losses on existing loans what may
become uncollectible. Loans are charged off against the allowance when
management believes that collectibility is unlikely. The evaluation to increase
the provision and resulting allowances is based on factors, such as changes in
the nature and volume of the loan portfolio, overall portfolio quality, and
current economic conditions.
Kenly's level on non performing assets, defined as loans past due 90 days or
more and real estate acquired in foreclosure, have remained at low levels
throughout the three year period and amounted to .34%, .23%, and .17% as a
percentage of total assets at December 31, 1996, 1995 and 1994, respectively.
The larger provision in 1996 was attributable to the overall growth in Bank's
loan portfolio. The Bank has adopted policies which it believes provide for
prudent and adequate levels of loan loss allowances.
NON INTEREST EXPENSE
Operating expenses increased by $581,701 to $2,328,569 for the year ended
December 31, 1996 from $1,746,868 incurred in 1995 KS Bancorp's operating
expenses were $1,484,822 in 1994. The special SAIF assessment accounted for
$436,548 or 75% of the increase in noninterest expense during 1996. In
addition, during 1996 compensation and employee benefits increased by $121,942
primarily due to an increase in the number of employees associated with the
Bank's expanded operations. Disregarding compensation and employee benefit
expense increases in other noninterest expense categories would have been 10.7%
and 12.7% during 1995 and 1994, respectively. Compensation and employee
benefits increased by $190,099 in 1995 over amounts expensed in 1994. The
majority of such increase was attributable to the bonus compensation plan which
is compared based on the number of unexercised stock options and dividends
declared during the year as more fully explained in Note 18 to the consolidated
financial statements. Compensation and employee benefits increased during 1994
due to the Kenly's opening of a loan origination office in Goldsboro and the
need to add staffing in other departmental areas of the Bank as a result of
increased customer transaction volume. The increases during the three year
period in other noninterest expense also reflect additional data processing,
telecommunications, and insurance costs associated with an increased customer
base. Excluding the special assessment, federal insurance expense was less in
1996 than such amounts reported in 1995 and 1994 due to a refund of premiums in
the fourth quarter of 1996. The refund occurred after the FDIC was able to
determine that the special SAIF assessment had sufficiently recapitalized the
SAIF insurance fund. In addition, due to the special SAIF assessment, deposit
insurance premiums are expected to be less in future years and should have a
positive impact on future earnings.
INCOME TAXES
Income tax expense amounted $502,389, $624,860 and $726,432 in 1996, 1995 and
1994, respectively. KS Bancorp's effective income tax rates were 37.8%, 37.3%
and 36.6% for the years ended December 31, 1996, 1995, and 1994 respectively.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and accompanying footnotes have been prepared in
accordance with generally accepted accounting principles (GAAP), which require
the measurement of financial position and operating results in terms of
historical dollars without consideration for changes in the relative purchasing
power of money over time due to inflation. The assets and liabilities of KS
Bancorp are primarily monetary in nature and changes in interest rates have a
greater impact on KS Bancorp's performance than do the effects of inflation.
7
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditor's Report KS Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
[LETTERHEAD OF MCGLADREY & PULLEN, LLP APPEARS HERE]
TO THE BOARD OF DIRECTORS
KS BANCORP, INC.
KENLY, NORTH CAROLINA
We have audited the accompanying consolidated statements of financial condition
of KS Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of KS Bancorp, Inc. and subsidiary
as of December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1996, in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Raleigh, North Carolina
January 14, 1997
11
<PAGE>
Consolidated Statements of Financial Condition . December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
-------------------------------
<S> <C> <C>
Cash and short-term cash investments:
Interest-earning $ 5,680,182 $ 3,707,373
Noninterest-earning 480,054 376,041
Investment securities: (Note 3)
Held to maturity; market value $2,489,020;
$2,300,855 in 1995 2,501,080 2,302,701
Available for sale, at market value 5,751,745 7,093,610
FHLB stock and other nonmarketable equity
securities 724,700 752,200
Mortgage-backed securities, held to maturity,
market value $1,429,044 in 1996, $1,882,170 in
1995, (Note 4) 1,392,585 1,876,157
Loans receivable, net (Note 5) 81,510,872 70,098,830
Accrued interest receivable 559,305 497,927
Real estate acquired in settlement of loans 65,714 -
Property and equipment, net (Note 6) 1,925,973 1,254,374
Real estate held for sale (Note 6) - 214,647
Refundable income taxes 149,558 41,783
Prepaid expenses and other assets 98,268 58,582
-------------------------------
Total assets $100,840,036 $88,274,225
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 7) $ 82,345,925 $70,737,836
Advances from Federal Home Loan Bank (Note 8) 4,000,000 3,000,000
Accounts payable and accrued expenses 189,145 126,738
Advance payments by borrowers for taxes and
insurance 45,609 51,576
Deferred income taxes (Note 10) 538,318 494,357
-------------------------------
Total liabilities $ 87,118,997 $74,410,507
===============================
Commitments and contingencies (Notes 11, 13, 14,
15 and 18)
Stockholders' equity: (Note 17):
Preferred stock, authorized 5,000,000 shares;
none issued $ - $ -
Common stock, no par value, authorized
20,000,000 shares; issued and outstanding
663,263 shares in 1996 and 683,263 in 1995 - -
Additional paid-in capital 5,161,212 5,495,371
Note receivable, ESOP (Note 16) (273,000) (312,000)
Unrealized gain on securities available
for sale, net of tax 454,113 360,795
Retained earnings, substantially restricted
(Notes 10 and 17) 8,378,714 8,319,552
-------------------------------
Total stockholders' equity $ 13,721,039 $13,863,718
-------------------------------
$100,840,036 $88,274,225
===============================
</TABLE>
See notes to Consolidated Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Income . Years Ended December 31, 1996, 1995 and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Loans $6,771,028 5,984,415 $5,271,584
Investment securities 556,663 659,379 587,156
Mortgage-backed securities 102,089 111,566 165,869
Interest-bearing deposits 107,912 87,296 235,698
-------------------------------------
Total interest income $7,537,692 $6,842,656 $6,160,307
-------------------------------------
Interest expense:
Deposits (Note 7) $3,807,239 $3,349,121 $2,734,846
Advances from the FHLB 205,189 151,379 -
-------------------------------------
Total interest expense $4,012,428 $3,500,500 $2,734,846
-------------------------------------
Net interest income $3,525,264 $3,342,156 $3,425,461
-------------------------------------
Provision for loan losses (Note 5) 69,000 10,000 21,703
-------------------------------------
Net interest income after provision for loan losses $3,456,264 $3,332,156 $3,403,758
-------------------------------------
Noninterest income:
Gain (Loss) on sale of investment securities $ 16,019 $ (20,017) $ (20,307)
Other income 183,992 111,401 84,173
-------------------------------------
$ 200,011 $ 91,384 $ 63,866
-------------------------------------
Noninterest expense:
Compensation and benefits (Notes 12, 13, 14 and 16) $1,123,758 $1,001,816 $ 811,717
Occupancy 86,865 75,452 63,345
Special SAIF assessment (Note 9) 436,548 - -
Equipment maintenance and expense 72,974 171,841 58,337
Data processing and outside service fees 155,874 137,204 117,691
Insurance 156,236 188,721 187,460
Other 296,314 271,834 246,272
-------------------------------------
$2,328,569 $1,746,868 $1,484,822
-------------------------------------
Income before income taxes $1,327,706 $1,676,672 $1,982,802
-------------------------------------
Income taxes: (Note 10):
Currently payable $ 515,622 $ 559,005 $ 623,464
Deferred (13,233) 65,855 102,968
-------------------------------------
$ 502,389 $ 624,860 $ 726,432
-------------------------------------
Net income $ 825,317 $1,051,812 $1,256,370
=====================================
Earnings per common share (Note 1) $ 1.19 $ 1.41 $ 1.57
=====================================
Cash dividends paid per common share $ 1.20 $ 1.00 $ 0.25
=====================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Consolidated Statements of Stockholders' Equity . Years Ended December 31,
1996, 1995 and 1994
<TABLE>
<CAPTION>
Additional Note Net
Paid-in Retained Receivable Unrealized
Capital Earnings From ESOP Gain Total
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 7,588,381 $6,909,019 $(390,000) $ - $ 14,107,400
Cash dividends paid - (193,465) - - (193,465)
Repurchase of common stock,
50,000 shares (736,177) - - - (736,177)
Additional costs of conversion (10,059) - - - (10,059)
ESOP contribution 11,700 - - - 11,700
Repayment of ESOP note - - 39,000 - 39,000
Net unrealized gain on securities
available for sale - - - 58,441 58,441
Net income - 1,256,370 - - 1,256,370
-----------------------------------------------------------------
Balance, December 31, 1994 6,853,845 7,971,924 (351,000) 58,441 14,533,210
Cash dividends paid - (704,184) - - (704,184)
Repurchase of common stock,
75,700 shares (Note 17) (1,387,358) - - - (1,387,358)
ESOP contribution 28,884 - - - 28,884
Repayment of ESOP note - - 39,000 - 39,000
Net unrealized gain on securities
available for sale - - - 302,354 302,354
Net income - 1,051,812 - - 1,051,812
-----------------------------------------------------------------
Balance, December 31, 1995 5,495,371 8,319,552 (312,000) 360,795 13,863,718
Cash dividends paid - (766,155) - - (766,155)
Repurchase of common stock
20,000 shares (Note 17) (370,000) - - - (370,000)
ESOP contribution 35,841 - - - 35,841
Repayment of ESOP note - - 39,000 - 39,000
Net unrealized gain on securities
available for sale - - - 93,318 93,318
Net income - 825,317 - - 825,317
-----------------------------------------------------------------
Balance, December 31, 1996 $ 5,161,212 $8,378,714 $(273,000) $454,113 $ 13,721,039
=================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows . Years Ended December 31, 1996, 1995
and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 825,317 $ 1,051,812 $ 1,256,370
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 86,756 69,049 56,850
Amortization of net premiums (discounts) (8,157) 13,313 494
Deferred income taxes (13,233) 65,855 102,968
Provision for losses on loans 69,000 10,000 21,703
Recovery of allowance for losses on REO - - (10,000)
FHLB stock dividends - - (8,900)
Other gains and losses, net (43,046) (6,675) (3,938)
Gain on redemption of nonmarketable security (23,188) - -
Loss on sale of investment securities 7,169 20,017 20,307
ESOP compensation credited to paid-in capital 35,841 28,884 11,700
Changes in assets and liabilities:
(Increase) decrease in:
Prepaid expenses and other assets (39,685) (6,293) 5,393
Refundable income taxes (107,775) (37,843) 378,178
Accrued interest receivable (61,378) (9,898) (158,040)
Increase (decrease) in:
Accrued expenses and other liabilities 62,407 12,464 (387,734)
-------------------------------------------------
Net cash provided by operating activities $ 790,028 $ 1,210,685 $ 1,285,351
-------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales or maturity of available
for sale securities $ 2,997,500 $ 2,230,469 $ 1,984,219
Proceeds from maturity of held to maturity securities 800,000 1,800,000 1,845,000
Proceeds from redemption of nonmarketable
equity securities 50,688 - -
Purchase of available for sale securities (1,496,328) (502,344) (5,205,547)
Purchase of held to maturity securities (986,998) (1,000,000) (2,115,941)
Purchase of held to maturity MBS's - - (2,187,406)
Principal repayments on held to maturity MBS's 464,385 369,584 334,430
Net change in loans receivable (11,653,820) (6,419,161) (3,566,062)
Proceeds from sale of REO 112,814 63,325 236,323
Proceeds from sale of property and equipment 251,945 10,400 -
Purchase of property and equipment (758,359) (635,752) (236,370)
-------------------------------------------------
Net cash used in investing activities $(10,218,173) (4,083,479) $(8,911,354)
-------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 11,608,089 $ 4,374,391 $(1,737,228)
Increase (decrease) in advance payments
from borrowers for taxes and insurance (5,967) (4,251) 13,365
Advances from Federal Home Loan Bank 2,000,000 2,000,000 1,000,000
Principal payments for borrowed money (1,000,000) - -
Principal payment for ESOP debt 39,000 39,000 39,000
Cash dividends paid (766,155) (704,184) (193,465)
Repurchase of common stock (370,000) (1,387,358) (736,177)
Stock issuance costs incurred - - (10,059)
-------------------------------------------------
Net cash provided by (used in) financing activities $ 11,504,967 $ 4,317,598 $(1,624,564)
-------------------------------------------------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows . Years Ended December 31, 1996, 1995
and 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
Net increase (decrease) in
cash and short-term
cash investments $2,076,822 $1,444,804 $(9,250,567)
Cash and short-term cash
investments:
Beginning 4,083,414 2,638,510 11,889,077
---------------------------------------------
Ending $6,160,236 $4,083,314 $ 2,638,510
=============================================
Cash and short-term cash
investments:
Interest-bearing $5,680,182 $3,707,373 $ 2,351,701
Noninterest-bearing 480,054 376,041 286,809
---------------------------------------------
$6,160,236 $4,083,414 $ 2,638,510
=============================================
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<S> <C> <C> <C>
Cash payments for:
Interest $4,008,026 $3,484,010 $ 2,734,918
=============================================
Income taxes $ 624,995 $ 605,203 $ 261,741
=============================================
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
<S> <C> <C> <C>
Transfer from loans to real
estate acquired in
settlement of loans $ 172,778 $ 55,396 $ 176,555
=============================================
Change in unrealized gain
on available for sale
securities $ 93,318 $ 302,354 $ 58,441
=============================================
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements KS Bancorp, Inc.and Subsidiary
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Conversion and organization of holding company: In December 1993, pursuant to
a Plan of Conversion approved by its members and regulators, Kenly Savings Bank,
Inc., SSB (Kenly or the Bank) amended and restated its charter to effect its
conversion from a North Carolina-chartered mutual savings bank to a North
Carolina-chartered stock savings bank, and become a wholly-owned subsidiary of
KS Bancorp, Inc. (KS Bancorp or the Company) a holding company formed in
connection with the conversion. The Company's principal business activities
consist solely of the ownership of Kenly, a loan to the ESOP for its purchase of
common stock and the investment of its portion of the proceeds received from
Kenly's mutual to stock conversion.
The Bank primarily originates one-to-four family residential loans within its
primary lending area of Johnston, Wilson, Wayne and Wake counties. The Bank's
underwriting policies require such loans to generally be made at 80% loan-to-
value based upon appraised values. These loans are secured by the underlying
properties.
Principles of consolidation: The consolidated financial statements include the
accounts of KS Bancorp, Inc. and its wholly-owned subsidiary, Kenly Savings
Bank, Inc., SSB. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Basis of financial statement presentation: The accounting and reporting
policies of the Company conform to generally accepted accounting principles and
general practices within the financial services industry. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ from those estimates.
Cash and short-term cash investments: For purposes of reporting cash flows, the
Company considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents. At times, the Company
maintains deposits in correspondent banks in amounts that may be in excess of
the FDIC insurance limit.
Investments and mortgage-backed securities: Debt securities and mortgage-
backed securities (MBS's) classified as held to maturity are carried at cost,
adjusted for amortization of premiums and accretion of discounts using the
interest method. Such securities will be held until their contractual
maturities, and will not be available to be sold even in response to certain
conditions such as changes in market interest rate, needs for liquidity, or
changes in the availability of and the yield on alternative investments.
Debt securities and marketable equity securities classified as available for
sale are carried at market with unrealized holding gains and losses excluded
from earnings and reported net of income taxes in a separate component of
stockholders' equity until such time as the securities are sold. Such securities
may be sold in response to certain conditions such as changes in market interest
rates, needs for liquidity, or changes in the availability of and the yield on
alternative investments, but are not bought and held principally for the purpose
of selling in the near term with the objective of generating profits on short-
term differences in price. Gain or loss on sale of these securities is
recognized when realized and is based on the cost of specifically identified
securities.
Trading securities are held in anticipation of short-term market gains and are
carried at fair value with realized and unrealized gains and losses included in
earnings. The Company currently has no securities which are classified as
trading securities.
Equity securities which are considered nonmarketable are not subject to the
above classifications and are carried at cost.
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Loans receivable: Loans receivable are stated at unpaid principal balances,
less the allowance for loan losses and net deferred loan origination fees and
discounts.
The Bank's loan portfolio consists principally of long-term conventional loans
collateralized by first trust deeds on single-family residences, other
residential property, commercial property and land.
Loan fees: The Bank receives fees for originating and servicing loans. The Bank
defers all loan fees less certain direct costs as an adjustment to yield with
subsequent amortization into income over the life or first repricing period of
the related loan. The method of amortization used is the interest method.
Allowance for loan losses: 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.
SFAS No. 114, Accounting by Creditors for Impairment of a Loan, requires that
the Bank establish a specific loan loss allowances on impaired loans if it is
doubtful that all principal and interest due according to the loan terms will be
collected. An allowance on an impaired loan is required if the present value of
the future cash flows discounted using the loan's effective interest rate is
less than the carrying value of the loan. An impaired loan can also be valued
based upon its fair value in the market place or on the basis of its underlying
collateral if the loan is primarily collateral dependent. If foreclosure is
imminent, and the loan is collateral dependent, the loan must be valued based
upon the fair value of the underlying collateral. The Bank does not currently
have any loans which it considers impaired.
Interest income: The Bank does not accrue interest on loans delinquent 90 days
or more as it establishes reserves for uncollected interest. Such interest when
ultimately collected is credited to income in the period received. Interest on
loans which the Bank considers to be impaired is treated similarly.
Real estate acquired in settlement of loans: Real estate acquired through, or
in lieu of, loan foreclosure (REO) is initially recorded at fair value at the
date of foreclosure establishing a new cost basis. After foreclosure, valuations
of the property are periodically performed by management and the real estate is
carried at the lower of cost or fair value minus estimated costs to sell. Costs
relating to the development and improvement of the property are capitalized,
while holding costs of the property are charged to expense in the period
incurred.
Property and equipment: Property and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed generally by the straight-
line method.
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Advances from borrowers for taxes and insurance: Certain borrowers make
monthly payments, in addition to principal and interest, in order to accumulate
funds from which the Bank can pay the borrowers' property taxes and insurance
premiums.
Earnings per share: Earnings per share is calculated by dividing net income by
the weighted average number of shares of common stock and common stock
equivalents of dilutive stock options outstanding during the period. For
purposes of this computation, the number of shares purchased by the Bank's
employee stock ownership plan which have not been allocated to participant
accounts are not assumed to be outstanding. The earnings per share computation
is based on 693,711 and 747,241 and 799,858 weighted average shares of common
stock and common stock equivalents assumed outstanding for 1996, 1995 and 1994,
respectively.
Retirement plans: The Bank has an employee stock ownership plan (the ESOP) which
covers substantially all of its employees. Contributions to the plan are based
upon amounts necessary to the fund the amortization requirements of the ESOP's
debt to the Company, subject to compensation limitations, and are expensed based
on the AICPA's Statement of Position 93-6, Employers Accounting for Employee
Stock Ownership Plans. Additionally, the Bank has a defined contribution
retirement plan which covers substantially all of its employees. The annual
contribution to the plan is based on employee compensation and the Bank's policy
is to fund plan costs as they accrue. The plan is fully funded and there are no
accrued unfunded amounts.
The Bank also has a 401(k) retirement plan which is available to substantially
all employees. The Bank matches voluntary contributions by participating
employees.
Customer core deposit base: A customer deposit base was acquired through the
purchase of a branch in Wilson. The future net income streams attributable to
the customer deposit accounts assumed represent an identifiable customer core
deposit base intangible asset. This intangible asset is being amortized on a
straight-line basis over a range of 66 to 84 months.
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Off-balance-sheet risk: The Bank is a party to financial instruments with off-
balance-sheet risk such as commitments to extend credit and equity lines of
credit. Management assesses the risk related to these instruments for potential
loss.
Fair value of financial instruments: The estimated fair values required under
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
to develop the estimates of fair value. Accordingly, the estimates presented in
the accompanying Note 2 for the fair value of the Company's financial
instruments are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions or
estimation methodologies may have a material effect on the estimated fair value
amounts.
The fair value estimates presented in Note 2 are based on pertinent information
available to management as of December 31, 1996 and 1995, respectively.
Although management is not aware of any factors that would significantly affect
the estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein. The following methods and assumptions were used by the
Company in estimating its fair value disclosures for financial instruments:
Cash, short-term cash investments and accrued interest receivable: The
carrying amounts reported in the statement of financial condition for
these instruments approximates their fair values due to the short term
nature of these instruments.
Investment securities: Investment securities include stock in the
Federal Home Loan Bank of Atlanta, Central Service Corporation, and
the USL Savings Insurance Group. No ready market exists for these
stocks and they have no quoted market values. For disclosure purposes,
such stock is assumed to have a fair value which is equal to cost or
redemption value. All other debt, equity and mortgage-backed
securities are publicly traded and market values are based on quoted
market prices.
Loans receivable: The fair value for substantially all loans has been
estimated by discounting the projected future cash flows at December
31, 1996 and 1995, using the rate on that date at which similar loans
would be made to borrowers with similar credit ratings and for similar
maturities or repricing periods. The discount rate used has been
adjusted by an estimated credit risk factor to approximate the
adjustment that would be applied in the marketplace for any
nonperforming loans. Certain prepayment assumptions have also been
made depending upon the original contractual lives of the loans. For
certain loans which are indexed and adjust with prime, the carrying
basis is considered to approximate fair value.
Deposits: The fair value of deposits with no stated maturities,
including transaction accounts and passbook savings accounts is
estimated to be equal to the amount payable on demand as of December
31, 1996 and 1995. The fair value of certificates of deposit is based
upon the discounted value of future contractual cash flows. The
discount rate is estimated using the rates offered on December 31,
1996 and 1995 for deposits of similar remaining maturities.
Borrowings: Borrowed funds consist of fixed rate FHLB advances. The
fair value of these advances is based upon the discounted value using
current rates at which borrowings of similar maturity could be
obtained.
Off-balance-sheet commitments: Because the Bank's commitments, which
consist entirely of loan commitments, are either short-term in nature
or subject to immediate repricing, no fair value has been assigned to
these off-balance-sheet items.
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Note 2. Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1996 and 1995. See Note 1
for a description of the Company's accounting policies and the limitations of
its disclosures in reporting on the fair value of its financial instruments.
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------
Financial Assets:
<S> <C> <C> <C> <C>
Cash and short-term cash investments $ 6,160,236 $ 6,160,236 $ 4,083,414 $ 4,083,414
Accrued interest receivable 559,305 559,305 497,927 497,927
Investment securities:
Held to maturity 2,501,080 2,489,020 2,302,701 2,300,855
Available for sale 5,751,745 5,751,745 7,093,610 7,093,610
Nonmarketable equity securities 724,700 724,700 752,200 752,200
Mortgage-backed securities, held to maturity 1,392,585 1,429,044 1,876,157 1,882,170
Loans receivable 81,510,872 81,589,000 70,098,830 70,172,000
Financial Liabilities:
Deposits 82,345,925 82,699,000 70,737,836 71,027,000
Federal Home Loan Bank advances 4,000,000 3,994,000 3,000,000 3,005,000
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Note 3. Investment Securities
The amortized cost, estimated market value and gross unrealized gains and losses
of the Company's investment securities at December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION> 1996
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
Debt securities:
Federal agency securities $1,998,521 $ 310 $(13,206) $1,985,625
Corporate securities 502,559 836 - 503,395
-----------------------------------------------------
2,501,080 1,146 (13,206) 2,489,020
-----------------------------------------------------
Available for sale:
Debt securities:
US Treasury securities 2,992,374 14,012 (1,626) 3,004,760
Marketable equity securities:
Adjustable-rate mortgage-
backed securities fund 2,000,000 - (11,988) 1,988,012
Federal Home Loan
Mortgage Corporation stock 26,931 732,042 - 758,973
-----------------------------------------------------
5,019,305 746,054 (13,614) 5,751,745
-----------------------------------------------------
Nonmarketable equity securities:
Federal Home Loan Bank stock 721,200 - - 721,200
Central Service Corporation stock 3,500 - - 3,500
-----------------------------------------------------
724,700 - - 724,700
-----------------------------------------------------
$8,245,085 $747,200 $(26,820) $8,965,465
=====================================================
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
Debt securities:
Federal agency securities $1,797,828 $ 3,400 $ (9,133) $ 1,792,095
Corporate securities 504,873 3,887 - 508,760
------------------------------------------------------
2,302,701 7,287 (9,133) 2,300,855
------------------------------------------------------
Available for sale:
Debt securities:
US Treasury securities 4,484,750 46,795 (4,089) 4,527,456
Marketable equity securities:
Adjustable-rate mortgage-
backed securities
mutual fund 2,000,000 - (7,992) 1,992,008
Federal Home Loan
Mortgage Corporation stock 26,931 547,215 - 574,146
------------------------------------------------------
6,511,681 594,010 (12,081) 7,093,610
------------------------------------------------------
Nonmarketable equity securities:
Federal Home Loan Bank stock 721,200 - - 721,200
Central Service Corporation stock 3,500 - - 3,500
USL Savings Insurance Group stock 27,500 - - 27,500
------------------------------------------------------
752,200 - - 752,200
------------------------------------------------------
$9,566,582 $601,297 $(21,214) $10,146,665
======================================================
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1996 by contractual maturity are as shown below:
<TABLE>
<CAPTION>
1996
-------------------------------
Estimated
Amortized Market
Cost Value
-------------------------------
<S> <C> <C>
Held to maturity:
Due in one year through five years $2,501,080 $2,489,020
===============================
Available for sale:
Due in less than one year $1,995,629 $2,005,310
Due in one year through five years 996,745 999,450
-------------------------------
$2,992,374 $3,004,760
===============================
$5,493,454 $5,493,780
===============================
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Summarized below is the sales activity in available for sale investment
securities:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1996 1995 1994
----------------------------------------------
<S> <C> <C> <C>
Proceeds from sales of
available for sale
securities $497,500 $2,230,469 $1,484,219
Realized (gains) losses 7,169 20,017 20,307
----------------------------------------------
Cost of investment
securities sold $504,669 $2,250,486 $1,504,526
==============================================
</TABLE>
The change in net unrealized gains and losses shown as a separate component of
equity for the years ended December 31, 1996, 1995 and 1994 is shown below:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------
<S> <C> <C> <C>
Balance in equity component, beginning $360,795 $ 58,441 $ -
Change in net unrealized gains 150,511 487,670 94,259
Less change in deferred income taxes (57,193) (185,316) (35,818)
-------------------------------
Balance in equity component, ending $454,113 $ 360,795 $ 58,441
===============================
</TABLE>
The Bank, as a member of the Federal Home Loan Bank System, is required to
maintain an investment in capital stock of the Federal Home Loan Bank in an
amount equal to the greater of one percent of its outstanding residential
mortgage loans or one-twentieth of its outstanding advances. No ready market
exists for the stock, and it has no quoted market value. For disclosure
purposes, such stock is assumed to have a market value equal to its cost. The
Central Service Corporation stock is also of limited marketability and is
assumed to have a market value equal to its cost.
Certain investment securities carried at approximately $1,491,000 at December
31, 1996 were pledged to secure public deposits or were pledged in connection
with the Bank's depository relationship with the Federal Reserve.
Note 4. Mortgage-backed Securities
Mortgage-backed securities consist of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, Cost Gains Losses Value
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FNMA mortgage-
backed securities 1996 $ 1,392,585 $ 36,459 $ - $1,429,044
1995 $ 1,876,157 $ 6,013 $ - $1,882,170
</TABLE>
Mortgage-backed securities in 1996 and 1995 are considered held to maturity.
<PAGE>
- ---------------------------------------------------------------------------
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Note 5. Loans Receivable December 31,
------------------------------
Loans receivable consist of the following: 1996 1995
------------------------------
<S> <C> <C>
Mortgage loans:
Conventional first mortgage loans $70,427,354 $61,240,710
Construction loans 8,104,700 5,224,820
Equity-line loans 7,457,383 6,643,788
Loans on deposit accounts 194,225 148,656
------------------------------
86,183,662 73,257,974
------------------------------
Less:
Undisbursed portion of loans in process 4,124,737 2,726,642
Unamortized loan fees 246,186 199,635
Allowance for loan losses 301,867 232,867
------------------------------
4,672,790 3,159,144
------------------------------
$81,510,872 $70,098,830
==============================
</TABLE>
The weighted average yield of loans receivable was 8.62% and 8.64% at
December 31, 1996 and 1995, respectively.
The following summarizes transactions in the allowance for loan losses:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Balance, beginning $ 232,867 $ 222,867 $ 201,164
Provision for loan losses 69,000 10,000 21,703
Charge-offs -- -- --
Recoveries -- -- --
-----------------------------------------------------
Balance, ending $ 301,867 $ 232,867 $ 222,867
=====================================================
</TABLE>
Loans delinquent more than 90 days amounted to approximately $274,000 and
$207,000 at December 31, 1996 and 1995, respectively. These loans are primarily
collateral dependent and management has determined that the underlying
collateral is in excess of the carrying amounts. As a result, the Bank has
determined that specific allowances on these loans is not required. Interest
income that would have been recorded on nonaccrual loans totaled $8,241, $9,157
and $4,484 for the years ended December 31, 1996, 1995 and 1994, respectively.
The following summarizes transactions in the allowance for losses on real estate
acquired in settlement of loans:
<TABLE>
Years Ended December 31,
-----------------------------------------------------
1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C>
Balance, beginning $ -- $ -- $ 10,000
Provision (recovery) included
in income -- -- (10,000)
Charge-offs -- -- --
-----------------------------------------------------
Balance, ending $ 10,000
=====================================================
</TABLE>
Loans outstanding to the Company's officers and directors (including their
affiliates) are shown below. Originations in 1996 include existing principal
balances of a director appointed during 1996. In the opinion of management,
these loans were made at lending terms and rates available to the general public
and do not involve more than the normal risks of collectibility.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1996 1995
-----------------------------
<S> <C> <C>
Balance, beginning $ 228,000 $312,000
Originations 839,000 -
Repayments (48,000) (84,000)
-----------------------------
Balance, ending $1,019,000 $228,000
=============================
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Note 6. Property and Equipment
Premises and equipment is summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
-----------------------
<S> <C> <C>
Land $ 363,812 $ 345,812
Buildings 1,511,380 924,438
Furniture and equipment 672,722 515,348
Construction in progress 685 4,646
-----------------------
2,548,599 1,790,244
Accumulated depreciation (622,626) (535,870)
-----------------------
$1,925,973 $1,254,374
=======================
</TABLE>
During 1996, the Bank sold its former Wilson branch facility that was reported
as real estate held for sale at December 31, 1995. Proceeds from the sale
totaled $251,945 and resulted in a gain of $37,296. The Bank also completed
renovations to its Goldsboro full service branch facility, begun in 1995, and
placed the building in service on April 1, 1996. Additionally, a new full
service branch facility was constructed in Kenly which was opened on November
25, 1996. At December 31, 1996, construction in progress related to the planned
renovation of the old Kenly full service branch facility for exclusive use as
corporate and accounting offices. No contracts have been entered into for this
renovation, and the cost is not expected to exceed $25,000.
Note 7. Deposits
Deposits consist of the following at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1995
---------------------------
<S> <C> <C>
Passbook accounts, 3.00% (3.00% in 1995) $ 3,510,143 $ 3,235,156
NOW accounts, 2.25% to 2.90% (2.25% to 3.15%
in 1995) 4,489,501 2,911,680
Money market deposit accounts, 3.05% (3.05% to
3.30% in 1995) 4,868,957 3,726,412
Noninterest-bearing accounts 3,389,833 2,611,334
---------------------------
16,258,434 12,484,582
---------------------------
Certificates:
3.00%-4.50% 468,627 1,711,271
4.51%-6.50% 62,618,653 47,699,804
6.51%-8.50% 2,845,214 8,696,567
8.51%-9.15% 137,985 131,563
---------------------------
66,070,479 58,239,205
---------------------------
82,328,913 70,723,787
Accrued interest payable 17,012 14,049
---------------------------
$82,345,925 $70,737,836
===========================
Weighted average cost of funds 5.11% 5.22%
===========================
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements KS Bancorp, Inc.and Subsidiary
Note 7. Deposits (Continued)
Certificate accounts are summarized by maturity at December 31, 1996 as follows:
<TABLE>
<CAPTION>
1997 1998 1999 Thereafter Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3.00%--4.50% $ 468,627 $ - $ - $ - $ 468,627
4.51%--6.50% 50,464,120 10,858,647 1,243,114 52,772 62,618,653
6.51%--8.50% 813,376 1,709,841 321,997 - 2,845,214
8.51%--9.15% 137,985 - - - 137,985
----------------------------------------------------------------
$51,884,108 $12,568,488 $1,565,111 $52,772 $66,070,479
================================================================
</TABLE>
The aggregate amount of certificates of deposit included in the table above with
a denomination of $100,000 or greater is shown below:
<TABLE>
<CAPTION>
Maturity Amount
- --------------------------------------------------------------------------------
<S> <C>
Less than 3 months $ 2,770,634
3 to 6 months 3,075,940
6 to 12 months 6,305,876
More than 12 months 1,842,251
-------------
$ 13,994,701
=============
Interest expense on deposits is summarized below:
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1996 1995 1994
-------------------------------------------------
<S> <C> <C> <C>
Passbook accounts $ 99,743 $ 97,810 $ 111,106
NOW and MMDA accounts 210,535 189,343 205,690
Certificate accounts 3,504,973 3,086,523 2,425,410
-------------------------------------------------
3,815,251 3,373,676 2,742,206
Forfeitures (8,012) (24,555) (7,360)
-------------------------------------------------
$ 3,807,239 $ 3,349,121 $ 2,734,846
=================================================
</TABLE>
Note 8. Advances From Federal Home Loan Bank
Advances from the Federal Home Loan Bank consist of the following:
<TABLE>
<CAPTION>
December 31,
Maturing in Interest -------------------------------
Type Year Ending Rate 1996 1995
- -------------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Fixed 1997 5.74% $ 2,000,000 $ -
Fixed 1998 6.05% 2,000,000 -
Adjustable 1996 5.98% - 3,000,000
-------------------------------
$ 4,000,000 $ 3,000,000
===============================
</TABLE>
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
advances are secured by all stock in the FHLB and qualifying first mortgage
loans pledged in the form of a blanket floating lien.
<PAGE>
- --------------------------------------------------------------------------
Notes to Financial Statements KS Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------
Note 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 deposits. The
assessment required the Bank to pay an amount equal to approximately 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 December 31, 1996 of $436,548.
Note 10. Income Taxes
Under the Internal Revenue Code, the Bank is allowed a special bad debt
deduction related to additions to tax bad debt reserves established for the
purpose of absorbing losses. Through 1995, the provisions of the Code permitted
the Bank to deduct from taxable income an allowance for bad debts based on 8% of
taxable income before such deduction or actual loss experience. The Bank used
the percentage of taxable income method to compute its deductions in 1995 and
1994. Legislation passed in 1996 eliminates the percentage of taxable income
method as an option for computing bad debt deductions for 1996 and in all future
years. The Bank will still be permitted to take deductions for bad debts, but
will be required to compute such deductions using an experience method.
The Bank will also have to recapture its tax bad debt reserves which have
accumulated since 1987 amounting to approximately $748,000. The tax associated
with the recaptured reserves is approximately $284,000. The recapture is
scheduled to begin with the Bank's 1996 year, but can be delayed up to two years
if the Bank originates a certain level of residential mortgage loans over the
next two years. Deferred income taxes have been previously established for the
taxes associated with the recaptured reserves and the ultimate payment of the
taxes will not result in a charge to earnings. The Bank was eligible for the
deferral in 1996.
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Deferred taxes have been provided for certain increases in tax bad debt reserves
subsequent to December 31, 1987 which are in excess of additions to recorded
loan loss allowances. However, at December 31, 1996, retained earnings contain
certain historical additions to bad debt reserves for income tax purposes of
$1,221,000 for which no deferred taxes have been provided, because the Bank does
not intend to use these reserves for purposes other than to absorb losses. If
amounts which qualified as bad debt deductions are used for purposes other than
to absorb bad debt losses or adjustments arising from the carryback of net
operating losses, income taxes may be imposed at the then existing rates. In the
future, if the Bank does not meet the income tax requirements necessary to
permit the deduction of an allowance for bad debts, the Bank's effective tax
rate would be increased to the maximum percent under existing law. Unrecorded
deferred income taxes on pre 1988 tax bad debt reserves amounted to
approximately $465,000 at December 31, 1996.
<TABLE>
<CAPTION>
Deferred income taxes consist of the following:
December 31,
-----------------------------
1996 1995
-----------------------------
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 18,607 $ 27,153
Allowance for loan losses 114,709 88,489
Deferred compensation and directors' death benefits 32,157 16,791
-----------------------------
Total deferred tax assets 165,473 132,433
-----------------------------
Deferred tax liabilities:
Excess accumulated tax depreciation 58,062 37,894
Federal Home Loan Bank stock basis 83,334 83,334
Tax bad debt reserves 284,068 284,428
Unrealized net appreciation, investments 278,327 221,134
-----------------------------
Total deferred tax liabilities 703,791 626,790
-----------------------------
Net deferred tax liabilities $(538,318) $(494,357)
=============================
</TABLE>
Income tax expense differs from the federal statutory rate of 35% as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1996 1995 1994
-----------------------------------
<S> <C> <C> <C>
Income tax expense at statutory federal rate 35.00% 35.00% 35.00%
Increase (decrease) in income taxes resulting from:
Nondeductible expenses 2.62 0.31 0.42
State income taxes, net of federal benefit 3.17 2.82 2.48
Other, net (2.95) (0.86) (1.26)
----------------------------------
37.84% 37.27% 36.64%
==================================
</TABLE>
Note 11. Concentration of Credit Risk and Off-Balance-Sheet Risk
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 extend credit and equity lines of
credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet. The
contract or notional amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party, to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
A summary of the contract amount of the Bank's exposure to off-balance-sheet
risk, except for undisbursed construction loan funds, is as follows:
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
-------------------------
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit, mortgage loans $ 497,000 $ 1,318,000
Undisbursed equity lines of credit 5,506,000 4,850,000
</TABLE>
The Bank evaluates each customer's credit worthiness on a case-by-case basis.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The collateral obtained by the Bank upon
extension of credit is based on management's credit evaluation of the customer.
The collateral held is the underlying real estate.
Note 12. Retirement Plan
The Bank has a 401(k) retirement plan which contains provisions for specified
matching contributions by the Bank. The Bank funds contributions as they accrue
and 401(k) expense totaled $4,553, $5,949 and $4,166 for the years ended
December 31, 1996, 1995 and 1994, respectively.
In addition, the Bank has established a defined contribution retirement plan
which covers substantially all employees. Contributions to the plan are
discretionary and determined annually by the Bank's Board of Directors. The Bank
funds contributions as they accrue and retirement expense amounted to $38,529,
$34,496, and $26,974 for the years ended December 31, 1996, 1995 and 1994,
respectively.
The accounting and reporting aspects of the Bank's ESOP plan are described in
Note 16.
Note 13. Deferred Compensation for Directors
The Bank has enacted a deferred compensation plan for its directors to be paid
in the form of death benefits. The death benefits vest to each director in
amounts ranging from $4,000 to a maximum of $20,000 for each year of service to
the Bank beginning with the first year of service to the fifth year. At December
31, 1996 and 1995, the Bank had accrued $63,866 and $27,411, respectively, which
represents the present value of the death benefits based on directors' life
expectancies. Expense associated with the plan amounted to $36,455, $12,000 and
$11,324 for 1996, 1995 and 1994, respectively. During 1995 and 1994, the Bank
paid benefits of $20,000 and $10,000, respectively, under the plan. No benefits
were paid in 1996.
Note 14. Deferred Compensation for Officer
The Bank has entered into a deferred compensation agreement with a key executive
officer to ensure a stable and competent management base. The agreement was
entered into in 1990 and provides for the monthly payment of $1,250 for a
period of ten years commencing with the first business day following the
employee's retirement. Without the consent of the Board of Directors, retirement
may not occur earlier than the last day of the month preceding the month in
which the employee reaches his 65th birthday.
If the officer's employment is terminated without cause prior to reaching
retirement age, the employee is entitled to receive a vested percentage of the
accrued retirement benefits. Should the employee die prior to receiving the
benefits under the agreement, the officer's beneficiary will be entitled to
receive the specified benefits. The Plan also allows the Board of Directors the
option of accelerating the payments under certain situations. The Bank has
purchased a life insurance policy on the officer's life which will ultimately
fund the payments. The Bank's deferred compensation expense amounted to $3,982,
$3,757 and $3,544 for the years ended December 31, 1996, 1995, and 1994,
respectively.
30
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Note 15. Employment Agreements
The Bank has entered into an employment contract with a key executive officer to
ensure a stable and competent management base. The agreement provides for a
three-year term, but upon each anniversary, the agreement automatically extends
so that the remaining term shall always be three years. In the event the
executive covered under the contract is terminated other than for cause or if
the officer is terminated in connection with or within twenty-four months after
a change in control of the Bank, or if the nature of the officer's compensation
or duties is diminished after a change in control of the Bank, the executive is
entitled to receive compensation equal to 2.99 times his average annual
compensation for income tax purposes for the most recent five tax years. The
employment contract may also be terminated by the Board of Directors at their
discretion, subject to vested rights.
In addition, the Bank has entered into special termination agreements with other
key employees which provide for severance pay benefits in the event of a change
in control of the Bank which results in the termination of such employees or
diminished compensation, duties or benefits within 2 years of a change in
control. The employees covered under the agreements are entitled to a cash
payment equal to one and one-half times his or her average annual compensation
for income tax purposes for the most recent five tax years prior to the change
in control. The agreements were originally scheduled to expire on December 29,
1996, but have been extended for an additional three year term.
Note 16. Employee Stock Ownership Plan
The Bank has established an employee stock ownership plan (the ESOP) to benefit
employees with 1,000 hours of annual service and who have attained age 21. The
ESOP is funded by contributions made by the Bank.
The ESOP borrowed funds from the Company to partially finance its purchase of 5%
of the common stock of the Company sold during the Bank's mutual to stock
conversion. The loan bears interest at 7.5% and matures December 29, 2003. The
loan will be repaid by the ESOP with contributions made by the Bank and earnings
on the ESOP's assets. At December 31, 1996 and 1995, the outstanding balance of
the loan receivable from the ESOP was $273,000 and $312,000 respectively, which
is presented as a reduction of stockholders' equity. Shares purchased by the
ESOP are held in suspense for allocation among participants as the loan is
repaid. The ESOP originally purchased 40,448 shares of common stock. At December
31, 1996 and 1995, 27,300 and 31,200 shares, respectively, had not been
allocated. Based upon the market value of the Company's stock at December 31,
1996 and 1995, the fair value of the unallocated shares amounted to
approximately $543,000 and $546,000 at December 31, 1996 and 1995, respectively.
Dividends on unallocated shares are used by the ESOP to repay the debt to the
Company and are not reported as dividends in the financial statements. Dividends
on allocated or committed to be allocated shares are credited to the accounts of
the participants and reported as dividends in the financial statements.
Contributions are allocated among participants on the basis of compensation in
the year of allocation. Benefits become 100% vested after five years of credited
service. Forfeitures of nonvested benefits will be reallocated among remaining
participating employees in the same proportion as contributions.
The Bank has charged expense for $74,841, $67,884 and $50,700 for years ended
December 31, 1996, 1995 and 1994 respectively in connection with the ESOP. The
expense for 1996 and 1995 includes, in addition to the cash contribution
necessary to fund the ESOP's annual principal and interest installment on the
loan to the Company, $35,841, $28,884 and $11,700, respectively, which
represents the difference between the fair market value of the shares which have
been committed to be released to participants, and the cost of these shares to
the ESOP. The Bank has credited this amount to paid-in capital in accordance
with the provisions of AICPA Statement of Position 93-6.
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Note 17. Stockholders' Equity
The Bank is subject to the capital requirements of the FDIC and the
Administrator of the North Carolina Savings Institutions Division.
The FDIC requires the Bank to have a minimum leverage ratio of Tier I Capital
(principally consisting of retained earnings and common stockholders' equity,
less any intangible assets) to total assets of 3%. The FDIC also requires the
Bank to have a ratio of total capital to risk-weighted assets of 8%, of which at
least 4% must be in the form of Tier I capital. The North Carolina Administrator
requires a net worth equal to at least 5% of total assets. At December 31, 1996,
the Bank complied with all the capital requirements as shown below:
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------
Leverage Tier I NC
Ratio of Risk- Risk- Savings
Tier I Adjusted Based Bank
Capital Capital Capital Capital
----------------------------------------------------------
<S> <C> <C> <C> <C>
Consolidated stockholders' equity at
December 31, 1996 $ 13,721,039 $13,721,039 $13,721,039 $13,721,039
Unrealized gain on securities 454,113 454,113 454,113 454,113
Holding company's equity
at December 31, 1996 (656,535) (656,535) (656,535) (656,535)
Core deposit intangible (10,352) (10,352) (10,352) (10,352)
Loan loss allowances -- -- 301,867 301,867
----------------------------------------------------------
Regulatory capital 12,600,039 12,600,039 12,901,906 12,901,906
Minimum capital requirement 2,925,570 1,945,809 3,891,617 5,014,370
----------------------------------------------------------
$ 9,674,469 $10,654,230 $ 9,010,289 $ 7,887,536
==========================================================
Total tangible Bank only assets
at December 31, 1996 $100,287,399
Average tangible Bank only assets
December 31, 1996 quarter $ 97,518,991
Risk-weighted Bank only assets at
December 31, 1996 $ 48,645,214 $48,645,214
Capital as a percentage of assets:
Actual 12.92% 25.90% 26.52% 12.86%
Required 3.00% 4.00% 8.00% 5.00%
----------------------------------------------------------
Excess 9.92% 21.90% 18.52% 7.86%
==========================================================
</TABLE>
Under the FDIC prompt corrective action regulations, a savings institution is
considered to be well capitalized if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I capital to risk-weighted assets is
at least 6.0%, and its ratio of Tier I capital to total average assets is at
least 5.0%. The Bank meets all of the above requirements at December 31, 1996
and is considered to be well capitalized under the prompt corrective action
regulations.
At the time of its conversion from a mutual to a stock charter, the Bank
established a liquidation account in an amount equal to its net worth as of
September 30, 1993 for the benefit of all holders of deposit accounts with an
aggregate balance in excess of $50 on March 31, 1993. In the unlikely event of a
complete liquidation of the Bank (and only in such event), each eligible account
holder will be entitled to his or her interest in the liquidation account prior
to any payments to holders of common stock. An eligible account holder's
interest in the liquidation account will be computed on December 31 each year
and is reduced by or
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
will cease to exist if the funds in the related deposit account are withdrawn.
The interest of an eligible account holder in the liquidation account will never
be increased, even if there is an increase in the related deposit account after
March 31, 1993.
Subject to applicable law, the Board of Directors of Kenly and KS Bancorp, Inc.
may each provide for the payment of dividends. Future declarations of cash
dividends, if any, by the Company may depend upon dividend payments by the Bank
to the Company. Subject to regulations promulgated by the NC Administrator, the
Bank will not be permitted to pay dividends on its common stock if its
stockholders' equity would be reduced below the amount required for the
liquidation account or its capital requirement. For a period of five years after
its conversion from mutual to stock form, Kenly Savings Bank must obtain the
written approval from the NC Administrator before declaring or paying a cash
dividend to KS Bancorp on its capital stock in an amount in excess of one-half
of the greater of (i) the institution's net income for the most recent fiscal
year end or (ii) the average of the institution's net income after dividends for
the most recent fiscal year-end and not more than two of the immediately
preceding fiscal year ends. In practice, the NC Administrator requires that a
savings bank request approval before paying any dividends. During 1996 and 1995,
the Bank paid dividends to KS Bancorp of $150,000 and $750,000, respectively.
During 1996 and 1995, KS Bancorp repurchased and retired 20,000 and 75,700
shares, respectively, of its common stock in accordance with a stock repurchase
plan. At December 31, 1996, KS Bancorp has not requested or received
authorization to repurchase additional shares of stock.
Note 18. Stock Option and Bonus Compensation Plan
The Company has an Employee Stock Option Plan which provides for the granting of
options to purchase shares of the Company's common stock to certain key
employees, and a Nonqualified Stock Option Plan which provides for the granting
of options to purchase shares of the Company's common stock to nonemployee
directors. An aggregate of 80,896 and 40,446 shares of common stock have been
reserved under the plans. The exercise price of the options is not less than
100% of the fair value of the common stock on the date the option was granted
and pursuant to the plan, options may not be exercised until specified time
restrictions have lapsed and option periods may not exceed ten (10) years. At
December 31, 1996, 92,932 options were exercisable. At December 31, 1996, the
exercise price of all options was $10, whether exercisable or currently
unexercisable.
<TABLE>
<CAPTION>
Stock option activity was as follows Employee Nonqualified
Stock Option Stock Option
Plan Shares Plan Shares
---------------------------
<S> <C> <C>
Options outstanding at December 31, 1993 80,896 40,446
Options granted during 1994 - -
Options expired or forfeited (5,177) -
Options exercised - -
---------------------------
Options outstanding at December 31, 1994 75,719 40,446
Options granted during 1995 - -
Options expired or forfeited - -
Options exercised - -
---------------------------
Options outstanding at December 31, 1995 75,719 40,446
Options granted during 1996 - -
Options expired or forfeited - -
Options exercised - -
---------------------------
Options outstanding at December 31, 1996 75,719 40,446
===========================
</TABLE>
The options are all exercisable at an option price of $10 per share and expire
in December, 2003. The Company uses the accounting methods prescribed in APB
Opinion No. 25 Accounting for Stock Issued to Employees to value the
compensation cost associated with the stock options. The stock options were
issued in 1993 at an option price equal to the fair value of the Company's
common stock and therefore no compensation expense has been reported in
earnings.
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Additionally, the Company has a bonus compensation plan which provides that
incentive compensation will be payable annually to those directors and employees
who hold unexercised options issued pursuant to the Employee Stock Option Plan
and the Nonqualified Stock Option Plan for Directors. Incentive compensation
will be paid annually equal to the number of unexercised options granted under
the plans times the amount of dividends declared per common share outstanding.
Compensation expense amounted to $128,720, $111,716 and $29,041 in connection
with the plan during 1996, 1995 and 1994, respectively.
Note 19. Parent Company Financial Data
The following is a summary of the condensed financial statements for KS Bancorp,
Inc. as of and for the year ended December 31, 1996:
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31, 1996 and 1995
1996 1995
-----------------------------
<S> <C> <C>
Assets:
Cash $ 126,695 $ 491,416
Investment securities available for sale 500,235 1,003,100
Investment in Kenly Savings Bank, SSB 13,064,504 12,291,621
Accrued interest receivable 4,752 28,855
Other assets 42,739 64,709
-----------------------------
$13,738,925 $13,879,701
=============================
Liabilities and Stockholders' Equity:
Liabilities:
Other liabilities $ 17,886 $ 15,982
Stockholders' Equity:
Common stock, no par value,
20,000,000 shares authorized,
issued and outstanding 663,263
shares (683,263 in 1995) -- --
Additional paid-in capital 12,070,232 12,404,391
Note receivable--ESOP
Unrealized gain on securities (273,000) (312,000)
available for sale, net of tax 454,113 360,795
Retained earnings, substantially
restricted 1,469,694 1,410,533
-----------------------------
$13,738,925 $13,879,701
=============================
<CAPTION>
Condensed Statements of Income
Years Ended December 31, 1996 and 1995
1996 1995
------------------------------
<S> <C> <C>
Investment income $ 76,302 $ 146,584
Interest expense -- (42,364)
Equity in earnings of Kenly Savings Bank, SSB 791,269 993,009
Amortization of organization costs (1,810) (1,810)
Loss on sale of investment - (7,864)
Other expense (24,114) (20,635)
Income tax expense (16,330) (15,108)
------------------------------
$825,317 $1,015,812
==============================
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Note 19. Parent Company Financial Data (Continued)
Condensed Statement of Cash Flows
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
-----------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 825,317 $ 1,051,812
Noncash items included in net income:
Amortization of organization costs
and discounts (11,117) 1,140
Loss on sale of investment - 7,864
Equity in earnings of Kenly Savings Bank (791,269) (993,009)
Change in assets and liabilities:
Decrease in accrued interest 24,103 52,456
Decrease (increase) in other assets 20,161 (20,218)
Decrease in net amount due
from/to Kenly Savings Bank, SSB - (350,000)
Increase (decrease) in other liabilities 3,410 (26,733)
-----------------------------
Net cash provided by (used
in) operating activities 70,605 276,688
-----------------------------
Cash Flows from Investing Activities:
Purchase of available for sale securities (501,172) -
Purchase of held to maturity securities (486,998) -
Proceeds from sale of available for sale
securities - 1,742,656
Proceeds from maturities of available for
sale securities 500,000 -
Proceeds from maturities of held to maturity
investment securities 1,000,000 300,000
Upstream dividend received from Kenly
Savings Bank 150,000 750,000
-----------------------------
Net cash provided by investing activities 661,830 2,792,656
-----------------------------
Cash Flows from Financing Activities:
Cash dividends paid (766,156) (704,184)
Repayment of ESOP debt 39,000 39,000
Purchase of common stock for retirement (370,000) (1,387,358)
-----------------------------
Net cash used in financing activities (1,097,156) (2,052,542)
-----------------------------
Net increase in cash $ (364,721) $ 463,426
Cash--beginning 491,416 27,990
-----------------------------
Cash--ending $ 126,695 $ 491,416
=============================
Supplemental Disclosures of Cash Flow Information
Cash Payments for interest $ - $ 42,364
Cash payments for taxes $ - $ 49,324
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
Corporate Information KS Bancorp, Inc.
- --------------------------------------------------------------------------------
Board of Directors Directors and Officers
H. Elwin Watson R. Harold Hinnant R. Elton Parrish
Chairman of the Board President President
Owner and President Kenly Motors and Parrish Funeral Home
Watson Hardware & Parts, Inc. Selma, NC
Oil Company Kenly, NC
Kenly, NC
Harold T. Keen Ralph Edward Scott, Jr.
J. Hayden Wiggs President, CEO Self-employed Farmer
Vice Chairman of the Board KS BANCORP, INC and Kenly, NC
Retired Kenly Savings Bank,
Owner, Wiggs Dry Cleaners Inc., SSB James C. Woodard
Selma, NC Kenly, NC Owner, F. & J.
Appraisal, Inc.
Robert E. Fields James C. Parker Selma, NC
Owner, Fields Appraisal, Partner, Parker and
Inc. Parker PA
Kenly, NC Goldsboro, NC
Executive Officers
Harold T. Keen William C. Clarke Helen B. Pollock
President and CEO Senior Vice President Treasurer and Assistant
Secretary
Kevin J. Jorgenson
Senior Vice President
================================================================================
Corporate Office Independent Certified Form 10-K
Public Accountants
P.O. Box 219 A copy of Form 10-K as
207 West Second Street McGladrey & Pullen, LLP filed with the Securities
Kenly, NC 27542 2418 Blue Ridge Road and Exchange Commission
(919) 284-4157 P.O. Box 10366 will be furnished without
Raleigh, NC 27605 charge to shareholders
upon written request to
Stock Transfer Agent Annual Meeting Harold T. Keen, President,
KS Bancorp, P.O. Box 219,
First Citizens Bank & The 1997 Annual Meeting Kenly, NC 27542.
Trust of shareholders of
Corporate Trust Department KS Bancorp, Inc., will
P.O. Box 29522 be held at 7:00 p.m. on
Raleigh, NC 27626 May 6, 1997 in the Common Stock
Corporate Office, 207
West Second Street, The Company had 663,263
Special Legal Counsel Kenly, North Carolina. shares of Common Stock
outstanding at February 3,
Brooks, Pierce, McLendon, 1997 which are held by
Humphrey & Leonard, LLP approximately 349 holders
P.O. Box 26000 of record (excluding shares
Greensboro, NC 27420 held in street name).
Shares are traded on the
NASDAQ Small Cap Market
System. Trading began on
December 29, 1993.
<PAGE>
- --------------------------------------------------------------------------------
KS Bancorp, Inc.
- --------------------------------------------------------------------------------
The table below reflects the stock trading and dividend payment frequency of the
Company for the two-year period ended December 31, 1996. For further information
regarding the Company's dividend policy and restrictions on dividends paid by
the Bank to the Company, please refer to note 17 of the notes to consolidated
financial statements. Stock prices reflect bid prices between broker-dealers,
prior to any mark-ups, mark-downs or commissions, and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
Dividends Stock Price
------------------- ------------------
Regular Special High Low
------------------- ------------------
<S> <C> <C> <C> <C>
1996:
First Quarter $ 0.15 $ - $ 19 1/4 $ 17 1/2
Second Quarter 0.15 - 19 1/4 17 1/4
Third Quarter 0.15 - 20 18
Fourth Quarter 0.15 0.60 21 18 3/4
1995:
First Quarter $ 0.10 $ - $ 15 7/8 $ 14
Second Quarter 0.10 - 16 1/4 15
Third Quarter 0.15 - 22 16 1/4
Fourth Quarter 0.15 0.50 21 17 1/2
</TABLE>
Disclaimer
This statement has not been reviewed, or confirmed for accuracy or relevance, by
the Federal Deposit Insurance Corporation.
<PAGE>
SUBSIDIARY OF THE REGISTRANT
The Registrant has one subsidiary, Kenly Savings Bank, Inc., SSB, a
North Carolina corporation. The subsidiary does business under its corporate
name and under the name "Kenly Savings Bank" and "Kenly Savings Bank, SSB."
<PAGE>
[LETTERHEAD OF McGLADREY & PULLEN, LLP]
Certified Public Accountants and Consultants
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference into the 1996 Form 10-K of
KS Bancorp, Inc. of our report dated January 14, 1997, relating to the
consolidated financial statements of KS Bancorp, Inc. and subsidiary, which
report appears in the Company's 1996 annual report to stockholders.
/s/ McGladrey & Pullen, LLP
Raleigh, North Carolina
March 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 480,054
<INT-BEARING-DEPOSITS> 5,680,182
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 3,893,665
<INVESTMENTS-MARKET> 3,918,064
<LOANS> 81,812,739
<ALLOWANCE> 301,867
<TOTAL-ASSETS> 100,840,036
<DEPOSITS> 82,345,925
<SHORT-TERM> 4,000,000
<LIABILITIES-OTHER> 773,072
<LONG-TERM> 0
0
0
<COMMON> 5,161,212
<OTHER-SE> 8,559,827
<TOTAL-LIABILITIES-AND-EQUITY> 100,840,036
<INTEREST-LOAN> 6,771,028
<INTEREST-INVEST> 556,663
<INTEREST-OTHER> 210,001
<INTEREST-TOTAL> 7,537,692
<INTEREST-DEPOSIT> 3,807,239
<INTEREST-EXPENSE> 4,012,428
<INTEREST-INCOME-NET> 3,525,264
<LOAN-LOSSES> 69,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,328,569
<INCOME-PRETAX> 1,327,706
<INCOME-PRE-EXTRAORDINARY> 1,327,706
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 825,317
<EPS-PRIMARY> 1.19
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.91
<LOANS-NON> 274,000
<LOANS-PAST> 0
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<ALLOWANCE-CLOSE> 301,867
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<ALLOWANCE-FOREIGN> 0
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</TABLE>
