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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
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Commission file number 0-22734
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KS BANCORP, INC.
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(Exact name of registrant as specified in its charter)
North Carolina 56-1842707
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
207 West Second Street 27542
P. O. Box 219 -----------
Kenly, North Carolina (Zip Code)
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(Address of principal executive office)
Registrant's telephone number, including area code (919) 284-4157
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Securities Registered Pursuant to Section 12(b) of the Act: None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(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
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Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing.
$18,592,476 common stock, no par value, based on the closing price of such
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common stock on March 16, 1998.
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date. 885,356 shares of common
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stock, no par value, outstanding at March 16, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report of KS Bancorp, Inc. for the year ended December
31, 1997, are incorporated by reference into Part I, Part II and Part IV.
Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders of
KS Bancorp, Inc. to be held on May 5, 1998, are incorporated by reference into
Part III.
Portions of the Registration Statement of KS Bancorp, Inc. on Form S-1,
Registration No. 33-69522, dated September 25, 1993, as amended on November 3,
1993, are incorporated by reference into Part IV.
2
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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 holding company for the Bank. At that time,
the Company had an initial public offering of its common stock, no par value
(the "Common Stock").
The Company is a 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 office is
located at 207 West Second Street, Kenly, North Carolina. The Company's
activities consist of investing the proceeds of its initial public offering
which were retained at the holding company level, holding certain indebtedness
outstanding from the Kenly Savings Bank, Inc., SSB Employee Stock Ownership Plan
(the "ESOP") and owning the Bank. The Company's principal sources of income are
earnings on its investments and interest payments received from the ESOP. In
addition, the Company receives dividends which are declared and paid by the Bank
on its capital stock.
The Bank was originally chartered in 1924. It has been a member of the
Federal Home Loan Bank ("FHLB") system since 1936, and its deposits have been
federally insured since 1961. The Bank's deposits are insured by the Savings
Association Insurance Fund (the "SAIF") of the Federal Deposit Insurance
Corporation (the "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 six full service offices in Kenly (2),
Goldsboro, Wilson, Garner and Selma, North Carolina and loan production offices
in Clayton and Knightdale, North Carolina. At December 31, 1997, the Bank had
total assets of $114.0 million, net loans of $95.0 million, deposits of $90.3
million and retained earnings of 14.6 million.
The Bank is engaged primarily in the business of attracting retail deposits
from the general public and using such deposits to make mortgage loans secured
by real estate. The Bank makes mortgage loans secured by owner-occupied and
non-owner occupied residential real estate, loans secured by non-residential,
construction loans and equity line of credit loans. The Bank also makes loans
which are not secured by real property, such as loans secured by pledged deposit
accounts, and during 1997 the Bank began originating various types of secured
and unsecured consumer loans. The Bank's primary source of revenue is interest
income from its lending activities. The Bank's other major sources of revenue
are interest and dividend income from investments and mortgage-backed
securities, interest income from its interest-earning deposit balances in other
depository institutions, and transaction and fee income from its lending and
deposit activities. The major expenses of the Bank are interest on deposits and
borrowings from the FHLB and noninterest expenses such as employee compensation
and benefits, federal deposit insurance premiums, data processing expenses and
occupancy expenses.
The operations of the Bank and depository institutions in general are
significantly influenced by general economic conditions and by related monetary
and fiscal policies of depository institution regulatory agencies, including the
Federal Reserve, the FDIC and the Administrator. Deposit flows and cost of
funds are influenced by interest rates on competing investments and general
market rates of interest. Lending activities are affected by the demand for
financing of real estate and other types of loans, which in turn are affected by
the interest rates at which such financing may be offered and other factors
affecting local demand and availability of funds.
3
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At December 31, 1997, the Company and the Bank had a total of 33 full-time
employees and no part-time employees.
The Company has no operations and conducts no business of its own other
than owning the Bank, investing its portion of the net proceeds received in the
Conversion and lending funds to the ESOP. Accordingly, the discussion of the
business which follows in the Form 10-K concerns the business conducted by the
Bank, unless otherwise indicated.
Lending Activities
General. The Bank is engaged primarily in the business of attracting
deposits from the general public and using such deposits to make mortgage loans
secured by real estate. The Bank's primary source of revenue is interest and
fee income from its lending activities, consisting primarily of conventional
first mortgage loans secured by real property located in its primary market
area. The Bank also makes loans secured by multi-family and nonresidential
properties, construction loans, equity line loans, savings account loans and
various types of secured and unsecured consumer loans. Approximately 99% of the
Bank's gross loan portfolio is secured by real estate. On December 31, 1997,
the Bank's largest single outstanding loan had a balance of approximately
$880,000. This loan was performing in accordance with its original terms. In
addition to interest earned on loans, the Bank receives fees in connection with
loan originations, loan servicing, loan modifications, late payments, loan
assumptions and other miscellaneous services.
Loan Portfolio Composition. The Bank's net loan portfolio totaled
approximately $95.0 million at December 31, 1997 representing 83.4% of the
Bank's total assets at such date. At December 31, 1997, 79.5% of the Bank's
gross loan portfolio, before net items, was composed of conventional first
mortgage loans. Construction loans and equity line lines represented 10.9% and
8.8%, respectively, of the Bank's gross loan portfolio, before net items, on
such date. As of December 31, 1997, 77.8% of the loans in the Bank's gross
loan portfolio, before net items, had adjustable interest rates. See Note 4 of
the "Notes to Consolidated Financial Statements" in the Company's 1997 Annual
Report to Stockholders.
The following table sets forth the time to contractual maturity of the
Bank's loan portfolio at December 31, 1997. 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
$23.8 million, $18.3 million and $15.0 million in the fiscal years ended
December 31, 1997, 1996 and 1995, respectively. Amounts in the table are net of
loans in process and are net of unamortized loan fees.
More Than
One Yr. 1 Year to More Than
Or Less 5 Years 5 Years Total
--------- --------- --------- ---------
Mortgage Loans: (In Thousands)
Fixed rate $ 822 $ 7,281 $13,662 $21,765
Adjustable rate 2,415 21,413 40,176 64,004
Equity Lines 8,750 -- -- 8,750
------- ------- ------- -------
$11,987 $28,694 $53,838 $94,519
Other loans (includes consumer & 808 -- -- 808
share): ------- ------- ------- -------
Totals before allowance $12,795 $28,694 $53,838 $95,327
Allowance (325) -- -- (325)
------- ------- ------- -------
$12,470 $28,694 $53,838 $95,002
======= ======= ======= =======
4
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The following table sets forth the dollar amount at December 31, 1997 of
all loans maturing or repricing on or after December 31, 1998 which have fixed
or adjustable interest rates.
Fixed Adjustable
Rates Rates
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(Dollars in Thousands)
Mortgage loans $20,943 $61,589
Other loans -- --
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$20,943 $61,589
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Although adjustable rate loans generally present less interest rate risk to
the Bank, they are generally considered to involve a greater degree of credit
risk than fixed rate loans because borrowers may have difficulty meeting their
payment obligations if interest rates and required payment amounts increase
substantially. Substantially all of the fixed-rate loans in the Bank's mortgage
loan portfolio have due on sale provisions allowing the Bank to declare the
unpaid balance due and payable in full upon the sale or transfer of an interest
in the property securing the loan.
Conventional First Mortgages. The Bank's primary lending activity, which
it intends to continue to emphasize, is the origination of conventional first
mortgage loans to enable borrowers to purchase or refinance one-to-four family
residential real property. The Bank also makes conventional first mortgage
loans secured by multi-family residential property and by nonresidential 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 its primary market area. On December 31, 1997, approximately
77.4% of the Bank's 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. On such date,
approximately 5.7% of the Bank's loan portfolio, before net items, consisted of
conventional first mortgage loans secured by multi-family residential and
nonresidential properties. Loans secured by multi-family residential and
nonresidential 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.
Construction Lending. The Bank makes various types of construction loans
primarily for the construction of single-family dwellings. On December 31,
1997, the aggregate gross outstanding balances of construction loans had
increased to approximately $10.9 million, representing 10.9% of the Company's
gross 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 permanent
loans.
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.
5
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Home Equity Lines of Credit. At December 31, 1997, home equity loans
totaled $8.7 million and comprised approximately 8.8% of the Bank's gross 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 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
amount of such loans, along with any senior indebtedness, does not exceed 80% of
the value of the real estate security.
Consumer Loans. During 1997, the Bank began originating consumer loans,
and at December 31, 1997, had $475,000 in such loans outstanding. The Bank's
consumer loans are both secured and unsecured and have both adjustable and fixed
rates. Secured consumer loans have personal property, such as automobiles, or
real property as collateral. Fixed rate consumer loans generally have shorter
terms than adjustable rate loans. The Bank intends to increase the amount of
consumer loans in its portfolio in future years.
Origination and Sale of Loans. In 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 an/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. In addition, these loans generally produce a higher yield
than are produced by loans which conform to the purchase requirements of FHLMC
and FNMA.
Nonperforming Assets. 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,
1997, the Bank had no real estate acquired in settlement of loans.
The Bank's general policy is to place a loan on nonaccrual status when the
loan becomes 90 days delinquent as it establishes reserves for uncollected
interest. Such interest when ultimately collected is credited to income in the
period received. Interest on loans considered to be impaired is treated
similarly. Loans delinquent more than 90 days amounted to $533,000 and $274,000
on December 31, 1997 and 1996, respectively. See Note 4 to "Notes to
Consolidated Financial Statements" in the Company's 1997 Annual Report to
Stockholders.
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.
6
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At December 31,
-----------------------------------
1997 1996 1995
---------- ----------- ----------
(Dollars in Thousands)
Total nonaccrual loans delinquent 90 days $ 533 $ 274 $ 207
or more
Real estate owned -- 66 --
-------- -------- -------
Total non-performing assets $ 533 $ 340 $ 207
======== ======== =======
Non-performing loans to total loans 0.56% 0.34% 0.30%
Non-performing assets to total assets 0.47% 0.34% 0.23%
Total assets $113,978 $100,840 $88,274
Total loans $ 95,002 $ 81,511 $70,099
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 level of allowances for loan losses at December 31, 1997, 1996 and
1995 was $325,000, $302,000 and $233,000, respectively.
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.
The following table describes the activity related to the Bank's allowance
for possible loan losses for the periods indicated.
Year Ended December 31,
---------------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
(Dollars in Thousands)
Balance, beginning of period $ 302 $ 233 $ 223 $ 201 $ 140
Provision for loan losses 23 69 10 22 61
Charge-offs -- -- -- -- --
Recoveries -- -- -- -- --
----- ----- ----- ----- -----
Balance, end of period $ 325 $ 302 $ 233 $ 223 $ 201
===== ===== ===== ===== =====
The following table sets forth the composition of the allowance for
possible loan losses by type of loan at the dates indicated.
7
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<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
------------------------ ----------------------- -----------------------
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
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Mortgage loans:
Residential 1-4 family $212 65.02% $200 74.58% $159 76.44%
Residential multi-family 8 2.53% 13 4.33% 11 5.47%
Nonresidential real
estate and other property 8 2.46% 6 2.81% 4 1.68%
Home equity and property 49 15.20% 39 8.65% 33 9.07%
improvement
Construction 43 13.17% 44 9.40% 26 7.14%
---- ------ ---- ------ ---- ------
Total real estate loans $320 98.37% $302 99.77% $233 99.80%
---- ------ ---- ------
Other loans 5 1.63% -- 0.23% -- 0.20%
---- ---- ------ ---- ------
Total allowance for loan $325 100.00% $302 100.00% $233 100.00%
losses ==== ==== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
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1994 1993
------------------------ ----------------------
Amount of Amount of
Amount of Loans to Amount of Loans to
Allowance Gross Loans Allowance Gross Loans
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Mortgage loans:
Residential 1-4 family $166 78.51% $165 87.15%
Residential multi-family 12 5.65% 4 2.17%
Nonresidential real
estate and other property 3 1.45% 2 1.11%
Home equity and property improvement 29 8.19% 27 7.73%
Construction 13 5.86% 3 1.44%
---- ------ ---- ------
Total real estate loans $223 99.65% $201 99.60%
---- ------ ---- ------
Other loans -- 0.35% -- 0.40%
---- ------ ---- ------
Total allowance for loan $223 100.00% $201 100.00%
losses ==== ====== ==== ======
</TABLE>
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Investment Securities
Interest and dividend income from investment securities including mortgage-
backed securities generally provides the second largest source of income to the
Bank after interest on loans. At December 31, 1997, the Bank's investment
portfolio totaled approximately $10.3 million and consisted of U.S. government
and agency securities, corporate securities, mortgage-backed securities and
stock of the FHLB of Atlanta.
As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's outstanding home loans or 5% of its outstanding advances from the FHLB of
Atlanta. No ready market exists for such stock, which is carried at cost. As
of December 31, 1997, the Bank's investment in stock of the FHLB of Atlanta was
$786,800.
North Carolina regulations require the Bank to maintain a minimum amount of
liquid assets. The computation of liquidity allows for the inclusion of
mortgage-backed securities and other instruments which are readily marketable,
including investments with maturities in excess of five years.
See Note 3 of "Notes to Consolidated Financial Statements" in the Company's
1997 Annual Report to Stockholders.
Deposits and Borrowings
Deposits. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments, interest payments, investment income and
principal repayments, interest from its own interest-earning deposits, advances
from the FHLB of Atlanta and otherwise from its operations. Loan repayments are
a relatively stable source of funds while deposit inflows and outflows may be
significantly influenced by general interest rates and money market conditions.
On December 31, 1997, 1996 and 1995, the Bank's deposits totaled $90.3 million,
$82.3 million, and $70.7 million, respectively.
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 passbook
savings accounts, negotiable order of withdrawal ("NOW") accounts, money market
demand accounts, non-interest-bearing accounts, and fixed interest rate
certificates with varying maturities. At December 31, 1997, 81.3% of the Bank's
deposits, excluding accrued interest payable, consisted of certificate
accounts, 3.8% consisted of passbook savings accounts, 5.4% consisted of NOW
accounts, 6.0% consisted of money market accounts and 3.5% consisted of
noninterest-bearing transaction accounts. Of the certificates of deposit
described above, $17.6 million, or 24%, had denominations of $100,000 or
greater. 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 savings deposits,
including print, television and radio 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.
See Note 6 to the "Notes to Consolidated Financial Statements" in the
Company's 1997 Annual Report to Stockholders.
Borrowings. 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. The Bank'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 Bank had
$8.0 million outstanding borrowings from the FHLB of Atlanta at December 31,
1997.
9
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Subsidiaries
The Company has no subsidiaries other than the Bank. The Bank has no
subsidiaries.
Results of Operations
The Bank's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its interest-
earning assets, such as loans and investments, and the cost of its interest-
bearing liabilities, consisting primarily of deposits and FHLB advances. The
Bank's operations are affected to a much lesser degree by non-interest income,
such as transaction and service fee income. The Bank's net income is also
affected by, among other things, provisions for loan losses and operating
expenses. The Bank's principal operating expenses, aside from interest
expense, consist of compensation and employee benefits, office occupancy costs,
data processing expenses and federal deposit insurance premiums. The Bank's
results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government legislation and policies concerning monetary and fiscal affairs,
housing and financial institutions and the attendant actions of regulatory
authorities.
Market Area
The Bank's primary market area consists of Johnston, Wilson, Wayne and Wake
counties in North Carolina. This area includes a portion of the Raleigh, North
Carolina metropolitan area and areas south and west of Raleigh.
Employment in the Bank's primary market area is diversified among
manufacturing, agricultural, retail and wholesale trade, government, services
and utilities. The economy in the primary market area is affected by the
growth, processing and sale of tobacco products. Legislative, regulatory and
other actions which negatively impact the demand for tobacco products could
negatively impact the Bank's performance.
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 provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities. Based upon
comparative data as of June 30, 1997, the Bank had approximately 8.95% of the
deposits in Johnston County, North Carolina, approximately 1.85% of the deposits
in Wilson County, North Carolina, and approximately 0.62% of the deposits in
Wayne County, North Carolina.
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.
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
10
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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, 1997, 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.
11
<PAGE>
<TABLE>
<CAPTION>
Term to Repricing at December 31, 1997
----------------------------------------------------------------------
More than
1 Year 1 Year to More than
Or Less 5 Years 5 Years Total
-------- --------- --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans:
Fixed rate $ 822 $ 7,281 $ 13,662 $ 21,765
Adjustable rate 8,010 55,994 -- 64,004
Adjustable home equity loans 8,750 -- -- 8,750
Other loans 808 -- -- 808
------------ ------------ -------------- ----------
Total loans 18,390 63,275 13,662 95,327
------------ ------------ -------------- ----------
Interest-bearing deposits 4,782 -- -- 4,782
Investment securities 1,499 5,246 500 7,245
Mortgage-backed securities 1,105 -- -- 1,105
------------ ------------ -------------- ----------
Total interest-earning assets $ 25,776 $ 68,521 $ 14,162 $ 108,459
------------ ------------ -------------- ----------
Interest-bearing liabilities:
Deposits:
Fixed maturity deposits $ 62,121 $ 11,296 $ -- $ 73,417
NOW accounts 4,832 -- -- 4,832
Money market deposit accounts 5,441 -- -- 5,441
Passbook accounts 3,448 -- -- 3,448
------------ ------------ -------------- ----------
Total deposits 75,842 11,296 -- 87,138
------------ ------------ -------------- ----------
FHLB advances 4,000 4,000 -- 8,000
------------ ------------ -------------- ----------
Total interest-bearing liabilities $ 79,842 $ 15,296 -- $ 95,138
------------ ------------ -------------- ----------
Interest sensitivity gap per period $ (54,066) $ 53,225 $ 14,162
============ ============ ==============
Cumulative interest sensitivity gap $ (54,066) $ (841) $ 13,321
============ ============ ==============
Cumulative gap as a percentage of total
interest-earning assets/(1)/ -49.85% -0.78% 12.28%
Cumulative interest-earning assets as a percentage of
interest-bearing liabilities 32.28% 99.12% 114.00%
_________________________________
</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.
12
<PAGE>
Supervision and Regulation
Bank holding companies and state savings banks are extensively regulated
under both federal and state law. The following is a brief summary of certain
statutes and rules and regulations that affect or will affect the Company and
the Bank. This summary is qualified in its entirety by reference to the
particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank. Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Company.
General. The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank to be issued in the Conversion. As
a savings bank holding company subject to the Bank Holding Company Act of 1956,
as amended ("BHCA"), the Company is subject to certain regulations of the
Federal Reserve. Under the BHCA, the Company's activities and those of its
subsidiaries are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries or engaging in any other
activity which the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
The BHCA prohibits the Company from acquiring direct or indirect control of more
than 5% of the outstanding voting stock or substantially all of the assets of
any bank or savings bank or merging or consolidating with another bank holding
company or savings bank holding company without prior approval of the Federal
Reserve.
Additionally, the BHCA prohibits the Company from engaging in, or acquiring
ownership or control of, more than 5% of the outstanding voting stock of any
company engaged in a nonbanking business unless such business is determined by
the Federal Reserve to be so closely related to banking as to be properly
incident thereto.
Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of the Company. Control
is conclusively presumed to exist if, among other things, a person acquires more
than 25% of any class of voting stock of the holding company or controls in any
manner the election of a majority of the directors of the holding company.
Control is presumed to exist if a person acquires more than 10% of any class of
voting stock and the stock is registered under Section 12 of the Exchange Act or
the acquiror will be the largest shareholder after the acquisition.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default or in default. For example, to avoid
receivership of an insured depository institution subsidiary, a bank holding
company is required to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized" with the terms of any
capital restoration plan filed by such subsidiary with its appropriate federal
banking agency up to the lesser of (i) an amount equal to 5% of the
institution's total assets at the time the institution became undercapitalized
or (ii) the amount which is necessary (or would have been necessary) to bring
the institution into compliance with all 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 Savings
Association Insurance Fund ("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.
13
<PAGE>
Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing Common Stock in excess of ten
percent of its net worth during a rolling twelve month period.
As a result of the Company's ownership of the Bank, the Company is
registered under the savings bank holding company laws of North Carolina.
Accordingly, the Company is also subject to regulation and supervision by the
Administrator.
Capital Adequacy Guidelines for Holding Companies. The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies and banks that
are members of the Federal Reserve system and have consolidated assets of $150
million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.
Bank holding companies are required to comply with the Federal Reserve's
risk-based capital guidelines. Under these regulations, the minimum ratio of
total capital to risk-weighted assets (including certain off-balance sheet
activities, such as standby letters of credit) is 8%. At least half of the
total capital is required to be "Tier I capital," principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock, and a
limited amount of cumulative perpetual preferred stock, less certain goodwill
items. The remainder ("Tier II capital") may consist of a limited amount of
subordinated debt, certain hybrid capital instruments and other debt securities,
perpetual preferred stock, and a limited amount of the general loan loss
allowance. In addition to the risk-based capital guidelines, the Federal
Reserve has adopted a minimum Tier I capital (leverage) ratio, under which a
bank holding company must maintain a minimum level of Tier I capital to average
total consolidated assets of at least 3% in the case of a bank holding company
which has the highest regulatory examination rating and is not contemplating
significant growth or expansion. All other bank holding companies are expected
to maintain a Tier I capital (leverage) ratio of at least 1% to 2% above the
stated minimum.
Repurchase Limitations. The Company must obtain Federal Reserve approval
prior to repurchasing Common Stock for in excess of 10% of its net worth during
any twelve-month period unless the Company (i) both before and after the
redemption satisfies capital requirements for "well capitalized" state member
banks; (ii) received a one or two rating in its last examination; and (iii) is
not the subject of any unresolved supervisory issues.
Although the payment of dividends and repurchase of stock by the Company
are subject to certain notice requirements with the Administrator in addition to
other requirements and limitations of North Carolina corporate law, except as
set forth in this paragraph, neither the Administrator nor the FDIC have
promulgated any regulations specifically limiting the right of the Company to
pay dividends and repurchase shares. However, the ability of the Company to pay
dividends or repurchase shares may be dependent upon the Company's receipt of
dividends from the Bank. The Bank's ability to pay dividends is limited. See "
- -- Regulation of the Bank -- Restrictions on Dividends and Other Capital
Distributions."
Capital Maintenance Agreement. In connection with the Administrator's
approval of the Company's application to acquire control of the Bank, 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 SEC pursuant to Section 12(g) of the Exchange Act. As a result of such
registration, the proxy and tender offer rules, insider trading reporting
requirements, annual and periodic reporting and other requirements of the
Exchange Act are applicable to the Company.
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
14
<PAGE>
assessments on savings institutions and has made other changes that may
adversely affect the future operations and competitiveness of savings
institutions with other financial institutions, including commercial banks and
their holding companies. The operations of regulated depository institutions,
including the Bank, will continue to be subject to changes in applicable
statutes and regulations from time to time.
The Bank is a North Carolina-chartered savings bank, is a member of the
FHLB system, and its deposits are insured by the FDIC through the SAIF. It is
subject to examination and regulation by the FDIC and the Administrator and to
regulations governing such matters as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities, and general investment
authority. Generally, North Carolina state chartered savings banks whose
deposits are issued by the SAIF are subject to restrictions with respect to
activities and investments, transactions with affiliates and loans-to-one
borrower similar to those applicable to SAIF insured savings associations. Such
examination and regulation is intended primarily for the protection of
depositors and the federal deposit insurance funds.
The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As holders of loans secured by real property and as owners
of real property, financial institutions, including the Bank, may be subject to
potential liability under various statutes and regulations applicable to
property owners generally, including statutes and regulations relating to the
environmental condition of real property.
The FDIC has extensive enforcement authority over North Carolina-chartered
savings banks, including the Bank. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.
The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal 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. With certain exceptions, an affiliate of the Bank is any
company or entity that controls, is controlled by or is under common control
with the savings bank. The Company is an affiliate of the Bank. Generally,
Sections 23A and 23B (i) limit the extent to which the Bank or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such the Bank's capital stock and surplus, and contain an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the Bank or the
subsidiary as those provided to a nonaffiliate. The term "covered transaction"
includes the making of loans or other extensions of credit to an affiliate, the
purchase of assets from an affiliate, the purchase of, or an investment in, the
securities of an affiliate, the acceptance of securities of an affiliate as
collateral for a loan or extension of credit to any person, or issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate.
Further, current federal law has extended to savings banks the restrictions
contained in Section 22(h) of the Federal Reserve Act and its implementing
regulations with respect to loans to directors, executive officers and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who own more than 10% of a savings bank, and certain affiliated
entities of any of the foregoing, may not exceed, together with all other
outstanding loans to such person and affiliated entities, the savings bank's
loans-to-one borrower limit as established by federal law, and all loans to such
persons may not exceed the institution's unimpaired capital and unimpaired
surplus. Section 22(h) also prohibits loans above amounts prescribed by the
appropriate federal banking agency to directors, executive officers and
stockholders who own more than 10% of a savings bank, and their respective
affiliates, unless such loan is approved in advance by a majority of the
disinterested directors of the board of directors of the savings bank and the
Company. Any "interested" director may not participate in the voting. The
Federal Reserve has prescribed the loan amount (which
15
<PAGE>
includes all other outstanding loans to such person), as to which such prior
board of director approval is required, as being the greater of $25,000 or 5% of
unimpaired capital and unimpaired surplus (up to $500,000). Further, pursuant to
Section 22(h) the Federal Reserve requires that loans to directors, executive
officers, and principal stockholders be made on terms substantially the same as
offered in comparable transactions to other persons and not involve more than
the normal risk of repayment or present other unfavorable features. Section
22(h) also generally prohibits a depository institution from paying the
overdrafts of any of its executive officers or directors.
Deposit Insurance. The Bank's deposit accounts are insured by the FDIC
under the SAIF to the maximum extent permitted by law. The Bank pays deposit
insurance premiums to the FDIC based on a risk-based assessment system
established by the FDIC for all SAIF-member institutions. Under applicable
regulations, institutions are assigned to one of three capital groups that are
based solely on the level of an institution's capital ("well capitalized,"
"adequately capitalized" or "undercapitalized"), which are defined in the same
manner as the regulations establishing the prompt corrective action system
discussed below. The matrix so created results in nine assessment risk
classifications, with rates that, until September 30, 1996, ranged from 0.23%
for well capitalized, financially sound institutions with only a few minor
weaknesses to 0.31% for undercapitalized institutions that pose a substantial
risk to the SAIF unless effective corrective action is taken.
As a result of legislation enacted on September 30, 1996 (the "DIF Act"),
the FDIC imposed a special assessment on each depository institution with SAIF-
assessable deposits which resulted in the SAIF achieving its designated reserve
ratio. In connection therewith, the FDIC reduced the assessment schedule for
SAIF members, effective January 1, 1997, to a range of 0% to 0.27%, with most
institutions paying 0%. This assessment schedule is the same as that for the
BIF, which reached its designated reserve ratio in 1995. In addition, since
January 1, 1997, SAIF members are charged an assessment of 0.065% of SAIF-
assessable deposits for the purpose of paying interest on obligations issued in
the 1980s (the "FICO Bonds") to help fund the thrift industry cleanup. BIF-
assessable deposits will be charged an assessment to help pay interest on the
FICO bonds at a rate of approximately 0.013% until the earlier of December 31,
1999 or the date upon which the last savings association ceases to exist, after
which time the assessment will be the same for all insured deposits.
The above described legislation provides for the merger of the BIF and the
SAIF into the Deposit Insurance Fund on January 1, 1999, but only if no insured
depository institution is a savings association on that date. The DIF Act
contemplates the development of a common charter for all federally chartered
depository institutions and the abolition of separate charters for national
banks and federal savings associations. It is not known what form the common
charter may take and what effect, if any, the adoption of a new charter would
have on the operation of the Bank.
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines after a hearing that the institution has engaged or
is engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order or
any condition imposed by an agreement with the FDIC. It also may suspend
deposit insurance temporarily during the hearing process for the permanent
termination of insurance, if the institution has no tangible capital. If
insurance of accounts is terminated, the accounts at the institution at the time
of termination, less subsequent withdrawals, continue to be insured for a period
of six months to two years, as determined by the FDIC. Management is aware of
no existing circumstances that could result in termination of the deposit
insurance of the Bank.
Community Reinvestment Act. The Bank, like other financial institutions,
is subject to the Community Reinvestment Act, as amended ("CRA"). A purpose of
this Act is to encourage financial institutions to help meet the credit needs of
its entire community, including the needs of low- and moderate-income
neighborhoods. A savings bank is evaluated and rated under three categories: a
lending test, an investment test and a service test. For each of these three
tests, the savings bank is given a rating of either "outstanding," "high
satisfactory," "low satisfactory," "needs to improve" or "substantial non-
compliance." A set of criteria for each rating is included in the regulation.
If an institution disagrees with a particular rating, the institution has the
burden of rebutting the presumption by clearly establishing that the
quantitative measures do not accurately present its actual performance, or that
demographics, competitive conditions or economic or legal limitations peculiar
to the service area should be considered. The ratings received under the three
tests are used to determine the overall composite CRA rating of "outstanding,"
"satisfactory," "needs to improve" or "substantial non-compliance."
16
<PAGE>
During the Bank's last compliance examination, which was performed by the
FDIC under the new CRA regulations in April, 1995, the Bank received a
satisfactory rating with respect to CRA compliance. The Bank's rating with
respect to CRA compliance would be a factor to be considered by the Federal
Reserve and FDIC in considering applications submitted by the Bank to acquire
branches or to acquire or combine with other financial institutions and take
other actions and could result in the denial of such applications.
Capital Requirements Applicable To The Bank. The FDIC requires the Bank to
have a minimum leverage ratio of Tier I capital (principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, less certain intangible items,
goodwill items, identified losses and investments in securities subsidiaries) to
total assets of at least 3%; provided, however that all institutions, other than
those (i) receiving the highest rating during the examination process and (ii)
not anticipating or experiencing any significant growth, are required to
maintain a ratio of 1% or 2% above the stated minimum, with an absolute minimum
leverage ratio of not less than 4%. The FDIC also requires the Bank to have a
ratio of total capital to risk-weighted assets, including certain off-balance
sheet activities, such as standby letters of credit, of at least 8%. At least
half of the total capital is required to be Tier I capital. The remainder
("Tier II capital") may consist of a limited amount of subordinated debt,
certain hybrid capital instruments, other debt securities, certain types of
preferred stock and a limited amount of loan loss allowance.
An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC. If the leverage ratio falls to 2% or less, the
bank may be deemed to be operating in an unsafe or unsound condition, allowing
the FDIC to take various enforcement actions, including possible termination of
insurance or placement of the institution in receivership. At December 31, 1997,
the Bank had a leverage ratio of 9.18%, which substantially exceeded the other
FDIC capital requirements.
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, 1997, the Bank
complied with the capital requirement of the Administrator with capital of 7.23%
Each federal banking agency was required by law to revise its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk, and the risk of nontraditional
activities, as well as reflect the actual performance and expected risk of loss
on multi-family mortgages. On August 2, 1995, the federal banking agencies
issued a joint notice of adoption of final risk-based capital rules to take
account of interest rate risk. The final regulation required an assessment of
the need for additional capital on a case-by-case basis, considering both the
level of measured exposure and qualitative risk factors. The final rule also
stated an intent to, in the future, establish an explicit minimum capital charge
for interest rate risk based on the level of a bank's measured interest rate
risk exposure. The final regulation has not had a material impact on the Bank's
capital requirements.
Effective June 26, 1996, the federal banking agencies issued a joint policy
statement announcing the agencies' election not to adopt a standardized measure
and explicit capital charge for interest rate risk at that time. Rather, the
policy statement (i) identifies the main elements of sound interest rate risk
management, (ii) describes prudent principles and practices for each of those
elements, and (iii) describes the critical factors affecting the agencies'
evaluation of a bank's interest rate risk when making a determination of capital
adequacy. The joint policy statement is not expected to have a material impact
on the Bank's management of interest rate risk.
In December 1994, the FDIC adopted a final rule changing its risk-based
capital rules to recognize the effect of bilateral netting agreements in
reducing the credit risk of two types of financial derivatives - interest and
exchange rate contracts. Under the rule, savings banks are permitted to net
positive and negative mark-to-market values of rate contracts with the same
counterpart, subject to legally enforceable bilateral netting contracts that
meet certain criteria. This represents a change from the prior rules which
recognized only a very limited form of netting. The Bank does not anticipate
that this rule will have a material effect upon its financial condition or
results of operations.
Loans-To-One-Borrower. The Bank is subject to the Administrator's loans-
to-one-borrower limits. Under these limits, no loans and extensions of credit
to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the net worth of the savings bank.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of net worth. These limits also authorize
17
<PAGE>
savings banks to make loans to one borrower, for any purpose, in an amount not
to exceed $500,000. A savings bank also is authorized to make loans to one
borrower to develop domestic residential housing units, not to exceed the lesser
of $30 million or 30% of the savings bank's net worth, provided that the
purchase price of each single-family dwelling in the development does not exceed
$500,000 and the aggregate amount of loans made under this authority does not
exceed 150% of net worth. These limits also authorize a savings bank to make
loans to one borrower to finance the sale of real property acquired in
satisfaction of debts in an amount up to 50% of net worth.
As of December 31, 1997, the largest aggregate amount of loans which the
Bank had to any one borrower was $1,159,841. The Bank had no loans outstanding
which management believes violate the applicable loans-to-one-borrower limits.
The Bank does not believe that the loans-to-one-borrower limits will have a
significant impact on its business, operations and earnings.
Federal Home Loan Bank System. The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB of Atlanta, the Bank
is required to own capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On December 31, 1997, the Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock of $786,800.
Each FHLB is required to contribute at least 10% of its reserves and
undivided profits to fund the principal and a portion of the interest on certain
bonds and certain other obligations which are used to fund the resolution of
troubled savings association cases, and to transfer a percentage of its annual
net earnings to the Affordable Housing Program. These contributions continue to
reduce the FHLB of Atlanta's earnings and the Bank's dividends on its FHLB of
Atlanta stock.
Federal Reserve System. Federal Reserve regulations require savings banks,
not otherwise exempt from the regulations, to maintain reserves against their
transaction accounts (primarily negotiable order of withdrawal accounts) and
certain nonpersonal time deposits. The reserve requirements are subject to
adjustment by the Federal Reserve. As of December 31, 1997, 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 as a result of, among other things, the acquisition of more than 25% of
any class of voting stock. In addition, control is presumed to have been
acquired, subject to rebuttal, upon the acquisition of more than 10% of any
class of voting stock. Such acquisitions of control may be disapproved if it is
determined, among other things, that (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings bank or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisitions of control by such person.
Liquidity. The Bank is subject to the Administrator's requirement that the
ratio of liquid assets to total assets equal at least 10%. The computation of
liquidity under North Carolina regulation allows the inclusion of mortgage-
backed securities and investments which, in the judgment of the Administrator,
have a readily marketable value, including investments with maturities in excess
of five years. On December 31, 1997, the Bank's liquidity ratio, calculated in
accordance with North Carolina regulations, was approximately 14%.
Additional Limitations on Activities. FDIC law and regulations generally
provide that the Bank may not engage as principal in any type of activity, or in
any activity in an amount, not permitted for national banks, or directly acquire
or retain any equity investment of a type or in an amount not permitted for
national banks. The FDIC has authority to grant exceptions from these
prohibitions (other than with respect to non-service corporation equity
investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the
18
<PAGE>
activity to be engaged in and if the Bank is and continues to be in compliance
with capital standards. National banks are generally not permitted to hold
equity investments other than shares of service corporations and certain federal
agency securities. Moreover, service corporations of savings banks are permitted
to engage only in those activities which are permitted for service corporations
of 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%. As of December 31, 1997, the most
recent notification received by the Bank from the FDIC categorized the Bank as
well-capitalized.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), permits adequately
capitalized bank and savings bank holding companies to acquire control of banks
and savings banks in any state.
Such interstate acquisitions are subject to certain restrictions. States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years. In addition, no
bank or saving bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state, unless
the state has specifically legislated a higher deposit cap. States are free to
legislate stricter deposit caps.
The Interstate Banking Act also provides for interstate branching,
effective June 1, 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 elected to do so by June 1, 1997.
States were allowed to choose to permit interstate branching prior to June 1,
1997 by opting-in to a group of states that permits these transactions. These
states generally allow interstate branching via a merger of an out-of-state bank
with an in-state bank, or on a de novo basis. North Carolina has enacted
legislation permitting such branching transactions.
It is anticipated that the Interstate Banking Act will increase competition
within the markets in which the Bank now operates, although the extent to which
such competition will increase in such markets or the timing of such increase
cannot be predicted.
Restrictions on Dividends and Other Capital Distributions. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations. In
addition, a North Carolina-chartered stock savings bank, for a period of five
years after
19
<PAGE>
its conversion from mutual to stock form, must obtain the written approval from
the Administrator before declaring or paying a cash dividend on its capital
stock in an amount in excess of one-half of the greater of (i) the institution's
net income for the most recent fiscal year end, or (ii) the average of the
institution's net income after dividends for the most recent fiscal year end and
not more than two of the immediately preceding fiscal year ends.
Also, without the prior written approval of the Administrator, a North
Carolina-chartered stock savings bank, for a period of five years after its
conversion from mutual to stock form, may not repurchase any of its capital
stock. The Administrator will give approval to repurchase only upon a showing
that the proposed repurchase will not adversely affect the safety and soundness
of the institution.
In addition, the Bank is not permitted to declare or pay a cash dividend on
or repurchase any of its capital stock if the effect thereof would be to cause
its net worth to be reduced below the amount required for the liquidation
account established in connection with the Bank's conversion from mutual to
stock ownership.
Other North Carolina Regulations. As a North Carolina-chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
includes, but is not limited to, the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases; the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest. North Carolina
law requires that the Bank maintain federal deposit insurance as a condition of
doing business.
The Administrator conducts regular examinations of North Carolina-chartered
savings banks. The purpose of such examinations is to assure that institutions
are being operated in compliance with applicable North Carolina law and
regulations and in a safe and sound manner. These examinations are usually
conducted on a joint basis with the FDIC. In addition, the Administrator is
required to conduct an examination of any institution when he has good reason to
believe that the standing and responsibility of the institution is of doubtful
character or when he otherwise deems it prudent. The Administrator is empowered
to order the revocation of the license of an institution if he finds that it has
violated or is in violation of any North Carolina law or regulation and that
revocation is necessary in order to preserve the assets of the institution and
protect the interests of its depositors. The Administrator has the power to
issue cease and desist orders if any person or institution is engaging in, or
has engaged in, any unsafe or unsound practice or unfair and discriminatory
practice in the conduct of its business or in violation of any other law, rule
or regulation.
A North Carolina-chartered savings bank must maintain net worth, computed
in accordance with the Administrator's requirements, of 5% of total assets and
liquidity of 10% of total assets, as discussed above. Additionally, a North
Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.
Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North Carolina-
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.
North Carolina law provides a procedure by which savings institutions may
consolidate or merge, subject to approval of the Administrator. The approval is
conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.
20
<PAGE>
Future Requirements. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, operations 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, 1997, 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, Wilson and Garner, North Carolina. In addition,
the Bank had loan origination offices in Clayton and Knightdale, North Carolina.
The following table sets forth certain information regarding the Company's
properties as of December 31, 1997. See Note 5 to the Company's Consolidated
Financial Statements included in the Annual Report which is incorporated herein
by reference.
<TABLE>
<CAPTION>
Net Book Value
Address of Property
------- ---------------
<S> <C> <C>
Kenly
Corporate offices:
207 West Second Street
Kenly, North Carolina 27542 $ 266,874
Branch facility:
200 North Church Street
Kenly, North Carolina 27542 $ 569,053
Selma
115 West Anderson Street
Selma, North Carolina 27576 $ 93,463
Wilson
206 N. Ward Boulevard
Wilson, North Carolina 27893 $ 472,865
Clayton
11440 Highway 70 West
Clayton, North Carolina 27520 (Leased)
Goldsboro
1112 E. Ashe Street
Goldsboro, North Carolina 27530 $ 232,040
Garner
920 7th Avenue
Garner, North Carolina 27529 (Leased)
Knightdale
106 N. First Street
Suite D
Knightdale, North Carolina 27545 (Leased)
$1,634,295
==========
</TABLE>
The total net book value of the Company's furniture and equipment on December
31, 1997 was $499,420.
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.
21
<PAGE>
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, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
See the information under the section captioned "Common Stock" on pages 36
and 37 in the Company's 1997 Annual Report, which section is incorporated herein
by reference. See "Item 1. BUSINESS--Regulation of the Bank--Restrictions on
Dividends and Other Capital Distributions" above for regulatory restrictions
which limit the ability of the Bank to pay dividends to the Company.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in the table captioned
"Selected Financial Data" on page 1 of the Company's 1997 Annual Report which is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
See the information set forth under Item 1 above and the information set
forth under the section captioned "Management's Discussion and Analysis" on
pages 3 through 10 in the Company's 1997 Annual Report, which section is
incorporated herein by reference.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pages 4 and 5 of the Company's 1997 Annual Report to Stockholders are
herein incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and supplementary data
set forth on pages 12 through 35 of the Company's 1997 Annual Report are
incorporated herein by reference.
ITEM 9. CHANGES 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 required by this Item regarding directors and executive
officers of the Company is set forth under the sections captioned "Proposal 1 -
Election of Directors - Nominees" on page 8 of the Proxy Statement of the 1998
Annual Meeting of Stockholders (the "Proxy Statement") and "Proposal 1 -
Election of Directors - Executive Officers" on pages 11 and 12 of the Proxy
Statement, which sections are incorporated herein by reference.
22
<PAGE>
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on
page 6 of the Proxy Statement, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Directors' Compensation" on
pages 10 and 11 and " - "Management Compensation" on pages 12 through 20 of the
Proxy Statement, which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners" on pages 3
through 6 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the section captioned "Proposal 1 - Election of Directors - Certain
Indebtedness and Transactions of Management" on page 21 of the Proxy Statement,
which section is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(a)1 Consolidated Financial Statements (contained in the Bank's 1997
Annual Report attached hereto as Exhibit (13) and incorporated herein
by reference)
(a) Independent Auditors' Report
(b) Consolidated Statements of Financial Condition -- December 31,
1997 and 1996
(c) Consolidated Statements of Income -- Years Ended December 31,
1997, 1996 and 1995
(d) Consolidated Statements of Stockholder's Equity -- Years Ended
December 31, 1997, 1996 and 1995
(e) Consolidated Statements of Cash Flows -- Years Ended December 31,
1997, 1996 and 1995
(f) Notes to Consolidated Financial Statements
14(a)2 Financial Statement Schedules
All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial
Statements.
14(a)3 Exhibits
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.
14(b) The Company filed no reports on Form 8-K during the last quarter of
the fiscal year ended December 31, 1997.
23
<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.
Date: March 24, 1998 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 24, 1998
- ----------------------------- Officer and Director
Harold T. Keen
/s/ Helen B. Pollock Treasurer (Principal March 24, 1998
- ----------------------------- Financial
Helen B. Pollock Officer)
/s/ Robert E. Fields Director March 24, 1998
- -----------------------------
Robert E. Fields
/s/ R. Harold Hinnant Director March 24, 1998
- -----------------------------
R. Harold Hinnant
/s/ James C. Parker Director March 24, 1998
- -----------------------------
James C. Parker
/s/ R. Elton Parrish Director March 24, 1998
- -----------------------------
R. Elton Parrish
/s/ Ralph Edward Scott, Jr. Director March 24, 1998
- -----------------------------
Ralph Edward Scott, Jr.
/s/ H. Elwin Watson Director March 24, 1998
- -----------------------------
H. Elwin Watson
/s/ J. Hayden Wiggs Director March 24, 1998
- -----------------------------
J. Hayden Wiggs
/s/ James C. Woodard Director March 24, 1998
- -----------------------------
James C. Woodard
</TABLE>
24
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
Exhibit (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
Exhibit (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
(13) Portions of 1997 Annual Report to Stockholders
(21) Subsidiaries of the Registrant
(23) Consent of McGladrey & Pullen, LLP
(27) Financial Data Schedule and Restated Financial Data
Schedules
25
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Selected Financial Data......................................... 1
Report to Stockholders.......................................... 2
Management's Discussion and Analysis............................ 3-10
Independent Auditor's Report.................................... 11
Consolidated Financial Statements of:
Financial Condition at December 31, 1997 and 1996............. 12
Income for Years Ended December 31, 1997, 1996 and 1995....... 13
Stockholders' Equity for Years Ended December 31, 1997,
1996 and 1995............................................... 14
Cash Flow for the Years Ended December 31, 1997, 1996
and 1995.................................................... 15-16
Notes to Financial Statements................................... 17-35
Directors and Officers.......................................... 36
Corporate Information........................................... 36
Common Stock Information........................................ Cover
</TABLE>
<PAGE>
Selected Financial Data KS Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
December 31,
1997 1996 1995 1994 1993
---------------------------------------------------
(In Thousand, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Financial Condition Data:
Total assets $113,978 $100,840 $88,274 $82,310 $82,857
Investments (1) 15,104 16,051 15,732 16,820 20,712
Loans receivable, net 95,002 81,511 70,099 63,745 60,377
Deposits 90,314 82,346 70,738 66,363 68,101
Advances from the FHLB 8,000 4,000 3,000 1,000 -
Stockholders' equity (2) 14,606 13,721 13,864 14,533 14,107
Book value per
common share (5) 16.50 15.52 15.22 14.36 13.08
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995 1994 1993
---------------------------------------------------
(In Thousand, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Operating Data:
Interest income $8,731 $7,537 $6,843 $6,160 $6,087
Interest expense 4,653 4,012 3,501 2,735 2,999
---------------------------------------------------
Net interest income $4,078 $3,525 $3,342 $3,425 $3,088
Provision for loan losses $ 24 $ 69 $ 10 $ 22 $ 61
Other income 158 201 92 64 78
Other expense (4) 2,240 2,329 1,747 1,485 2,244
---------------------------------------------------
Income before income taxes $1,972 $1,328 $1,677 $1,982 $ 861
Income tax expense 751 503 625 726 311
---------------------------------------------------
Net income $1,221 $ 825 $1,052 $1,256 $ 550
===================================================
Basic earnings per share (3) (4) (5) $ 1.43 $ 0.97 $ 1.13 $ 1.23 $ 0.51
Diluted earnings per share (3) (4) (5) $ 1.30 $ 0.89 $ 1.06 $ 1.18 $ 0.51
Dividends per common share (5) $ 0.83 $ 0.90 $ 0.75 $ 0.19 $ -
Dividend payout ratio 64% 100% 71% 16% -
Return on average assets (4) 1.15% .88% 1.22% 1.51% .72%
Return on average equity (4) 8.33% 6.01% 7.29% 8.66% 7.83%
Average equity to average assets 13.76% 14.63% 16.70% 17.40% 9.20%
</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 a 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.
(5) Restated for 4 for 3 stock split occurring during 1997.
1
<PAGE>
Management's Discussion and Analysis of Financial Condition 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 noninterest 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, data processing expenses and other general and administrative
expenses.
The following discussion and analysis is intended to assist readers in
understanding the results of operations in 1997, 1996 and 1995, and changes in
financial position for the years ended December 31, 1997 and 1996, 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 to 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 14 to the consolidated financial statements.
During 1997 and 1996, Kenly paid dividends of $300,000 and $150,000 to KS
Bancorp as follow-ups to its initial distribution since converting to stock form
of $750,000 made in 1995. KS Bancorp declared and paid cash dividends of
$701,901, $766,155 and $704,184 during 1997, 1996 and 1995, respectively.
Dividends paid by KS Bancorp during 1997 included a special dividend of $.30 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 its 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. No additional shares were repurchased during 1997.
3
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
CAPITAL RESOURCES AND LIQUIDITY (CONTINUED)
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 $1,470,417, $790,028,
and $1,210,685 for the years ended December 31, 1997, 1996 and 1995,
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, 1997 and 1996,
deposits grew by $7,967,733 and $11,608,089 respectively. During 1997, 1996 and
1995, Kenly obtained additional advances net of repayments from the FHLB of
Atlanta with whom they have a readily available source of credit, amounting to
$4,000,000, $1,000,000 and $2,000,000, respectively. Such funds were used
primarily to fund increasing loan demand. During 1997, Kenly used the cash
provided by operations primarily 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 $62 million of the Bank's certificates of deposit mature in 1998;
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
1997, 1996 and 1995, loans outstanding increased by $13,578,287, $11,653,820 and
$6,419,161, respectively. During 1997 and 1996, proceeds from sales and
maturities of investment securities exceeded purchases of such investments by
$455,768 and $1,829,247, respectively, and were used in part to fund dividends
and loans and, during 1996, repurchases of KS Bancorp's stock.
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,
1997, as computed under North Carolina regulations, was approximately 14%.
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.
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.
4
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
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.
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.
The following market risk analysis table reflects maturities of interest rates
sensitive assets and liabilities over the next five years.
MARKET RISK ANALYSIS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Expected Maturity Date
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 1999 2000 2001 2002 Thereafter Total
Assets:
Loans-fixed:
Balance $ 821,555 $ 4,613,763 $ 625,376 $ 771,156 $1,270,898 $13,941,410 $22,044,410
Interest rate 8.90% 9.51% 9.81% 10.03% 9.41% 9.42% 9.45%
Loans-variable (1):
Balance 21,380,181 24,488,464 26,430,275 5,076,600 - - 77,375,520
Interest rate 9.05% 8.39% 8.58% 8.18% - - 8.62%
Investments (2)
Balance 6,281,036 1,995,697 500,000 500,000 2,250,000 2,422,142 13,948,875
Interest rate 5.63% 5.95% 6.40% 6.31% 6.42% 7.26% 6.14%
Liabilities:
Deposits (3):
Balance 16,897,058 - - - - - 16,897,058
Interest rate 2.33% - - - - - 2.33%
Deposits-certificates:
Balance 62,120,563 9,596,475 1,493,531 206,031 - - 73,416,600
Interest rate 5.55% 5.56% 5.51% 5.51% - - 5.55%
FHLB advances:
Balance 4,000,000 4,000,000 - - - - 8,000,000
Interest rate 5.99% 6.30% - - - - 6.14%
<CAPTION>
Fair Value
<S> <C>
Assets:
Loans-fixed:
Balance $ 22,380,210
Interest rate -
Loans-variable (1):
Balance 77,375,520
Interest rate -
Investments (2)
Balance 15,138,019
Interest rate -
Liabilities:
Deposits (3):
Balance 16,897,058
Interest rate -
Deposits-certificates:
Balance 73,707,898
Interest rate -
FHLB advances:
Balance 8,006,752
Interest rate -
</TABLE>
(1) Includes Line of Credit loans and Overdraft Protection, which have no
stated maturity
(2) Includes deposits and investment securities at carrying value
(3) Includes passbook accounts and money market accounts
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.
5
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations (continued)
The following table reflects the average yields on assets and average costs of
liabilities for the years ended December 31, 1997, 1996 and 1995. 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.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
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 $ 2,318 $ 124 5.35% $ 2,031 $ 108 5.32% $ 1,521 $ 87 5.72%
Investment securities 10,575 596 5.64% 10,814 659 6.09% 13,377 771 5.76%
Loans receivable (3) 90,192 8,012 8.88% 77,292 6,770 8.76% 68,317 5,985 8.76%
-------- ------- -------- ------- -------
Total interest-earning assets 103,085 $ 8,732 8.47% 90,137 $ 7,537 8.36% 83,215 $ 6,843 8.22%
-------- ------- -------- ------- -------
Non-interest-earning assets 3,422 3,744 3,207
-------- -------- -------
Total $106,507 $ 93,881 $86,422
======== ======== =======
Liabilities and equity:
Interest-bearing
liabilities:
Deposit accounts $ 85,030 $ 4,276 5.03% $75,998 $ 3,807 5.01% $68,082 $ 3,349 4.92%
FHLB advances 6,333 378 5.97% 3,500 205 5.86% 2,500 152 6.08%
------- ------- ------- -------
Total interest-bearing
liabilities 91,363 $ 4,654 5.09% 79,498 $ 4,012 5.05% 70,582 $ 3,501 4.96%
------- ------- -------
Non-interest-bearing
liabilities 494 644 1,405
Equity 14,650 13,739 14,435
-------- -------- -------
Total $106,507 $93,881 $86,422
======== ======== =======
Net interest income and
interest rate spread (1) $ 4,078 3.38% $ 3,525 3.31% $ 3,342 3.26%
======= ======= =======
Net interest-earning assets
and net interest
margin (2) $ 11,722 3.96% $10,639 3.91% $12,633 4.02%
======== ======= =======
Ratio of interest-earning
assets to interest-bearing
liabilities 112.83% 113.38% 117.90%
</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.
(3) Includes non-accruing loans, which are considered immaterial for average
balance purposes.
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,
1997 vs. 1996 1996 vs. 1995
------------------------------------- ----------------------------------------
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 $ 15 $ 1 $ - $ 16 $ 29 $ (6) $ (2) $ 21
Investment securities (15) (50) 1 (64) (148) 44 (8) (112)
Loans receivable 1,130 96 16 1,242 786 (1) - 785
------------------------------------- ----------------------------------------
Total interest income on
interest-earning assets $1,130 $ 47 $ 17 $ 1,194 $ 667 $ 37 $ (10) $ 694
------------------------------------- ----------------------------------------
Interest expense on:
Deposit accounts $ 452 $ 15 $ 2 $ 469 $ 389 $ 61 $ 7 $ 457
FHLB advances 166 4 3 173 61 (6) (2) 53
------------------------------------- ----------------------------------------
Total interest expense on
interest-bearing
liabilities $ 618 $ 19 $ 5 $642 $ 450 $ 55 $ 5 $ 510
------------------------------------- ----------------------------------------
Increase (decrease) in net
interest income $ 512 $ 28 $ 12 $552 $ 217 $(18) $ (15) $ 184
===================================== ========================================
</TABLE>
Comparison of Financial Condition at December 31, 1997 and 1996
CHANGES IN FINANCIAL CONDITION
Total consolidated assets of KS Bancorp increased by approximately $13.2 million
to $114.0 million at December 31, 1997 from $100.8 million at December 31, 1996.
Assets at December 31, 1996 increased by approximately $12.5 million from total
consolidated assets at December 31, 1995. The increases in assets in 1997 and
1996 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 1997, Kenly completed renovation of it's home office which
now serves as the corporate and accounting headquarters. Continuing the
expansion of recent years, Kenly opened its fifth full service branch in Garner
on December 15, 1997. Also, during 1997, a Loan Production Office was opened in
Knightdale and automated teller machines (ATM's) were placed into service at the
Garner and Kenly branch locations. During 1996, Kenly completed renovations 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. During 1996, Kenly completed
the construction of a new branch office facility. The new Kenly branch location,
while in close proximity to the home office, offers an updated and visible
location for all banking traffic. During August, 1995, Kenly completed
construction and opened a new branch facility in Wilson, North Carolina
replacing an existing branch, which was sold.
Loans increased by $13,491,350 and $11,412,042 during 1997 and 1996,
respectively. These increases 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, Wilson and Garner.
7
<PAGE>
Comparison of Financial Condition at December 31, 1997 and 1996 (Continued)
Total investments and short-term interest-earning deposits decreased by $946,260
during 1997 after having increased by $802,000 during 1996. Investments
securities and short-term interest-earning deposits amounted to $15.1 million at
December 31, 1997. The decrease in 1997 was primarily attributable to funding
needed to support loan demand and for dividends to shareholders. The increase in
1996 supported the additional liquidity necessary to maintain a larger deposit
base.
Savings deposits increased by $7,967,733 during 1997. 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 1997. Savings deposits had increased by $11,608,089 during 1996 for similar
reasons. Kenly had borrowings from the FHLB of Atlanta of $8,000,000 and
$4,000,000 at December 31, 1997 and 1996, respectively. Borrowings were obtained
in order to support the increased loan demand.
Stockholders' equity increased by $885,046 during 1997 to $14,606,085 at
December 31, 1997 from $13,721,039 at December 31, 1996. Net income of
$1,221,100 for 1997 was offset by the payment of $701,901 in cash dividends to
stockholders. Additionally, during 1997 the Company reported an increase in net
unrealized gains, net of tax effect, of $262,084 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 $825,317 for 1996 was
offset by the payment of $766,155 in cash dividends to stockholders, and the
repurchase of 20,000 shares of outstanding common stock at a cost of $370,000.
Additionally, during 1996 the Company also reported an increase in net
unrealized gains, net of tax effect, of approximately $93,318 on its portfolio
of available for sale securities. At December 31, 1997, Kenly's capital was
substantially in excess of the regulatory levels required by the FDIC and the
North Carolina Administrator.
Comparison Of Operating Result For The Years Ended December 31, 1997, 1996 And
1995
NET INCOME
KS Bancorp's net income for the years ended December 31, 1997, 1996, and 1995
was $1,221,100, $825,317 and $1,051,812, respectively. Net income during 1997
was positively affected by an increase in the interest rate spread and a change
in the mix of interest-bearing assets towards higher yielding loans. Net income
in 1996 would have been approximately $271,000 higher ($.29 a diluted share)
than the earnings reported excluding the $436,548 special assessment to
recapitalize the Savings Association Insurance Fund (SAIF).
NET INTEREST INCOME
Net interest income increased $552,582 or 15.7% during 1997 to $4,077,846 for
the year ended December 31, 1997 from $3,525,264 reported for 1996. Net interest
income in 1996 increased $183,108 or 5.5% from $3,342,156 in net interest income
reported in 1995. During 1997, Kenly's interest rate spread of 3.38% was a
slight improvement over the spread of 3.31% in 1996. As market rates remained
stable to slightly lower for short-term rates during 1997, 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 average balance of interest-earning assets increased
significantly during
8
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1997, 1996 and
1995 (Continued)
1997, primarily a result of the increase in loan demand. The average balance of
interest-bearing liabilities increased roughly in proportion to interest-
earnings assets, primarily as a result of increases in deposits and borrowings
from the FHLB of Atlanta needed to fund loan demand.
INTEREST INCOME
Total interest income increased by $1,193,698 to $8,731,390 for the year ended
December 31, 1997 from $7,537,692 in 1996. The 1997 increase followed an
increase of $695,036 for the year ended December 31, 1996 from $6,842,656 in
1995. During 1997 and 1996, 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-earning assets was 8.47% in 1997 as compared to 8.36% in 1996,
and its balance of average interest-earning assets increased by approximately
$12,948,000 during 1997. In 1996, the yield on interest-earning assets
increased slightly, to 8.36% from 8.22% in 1995. However, the balance of average
interest-earning assets outstanding increased significantly during 1996, by
approximately $6,922,000. During both 1997 and 1996, 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.
INTEREST EXPENSE
Total interest expense increased by $641,116 for the year ended December 31,
1997 to $4,653,544 following an increase of $511,928 to $4,012,428 for the year
ended December 31, 1996 from $3,500,500 for the year ended December 31, 1995.
Kenly's average balance of interest-bearing liabilities increased by
approximately $11,865,000, $8,916,000, and $2,360,000 during 1997, 1996, and
1995, respectively. Kenly's cost of funds increased by 4 basis points to 5.09%
in 1997 from 5.05% in 1996. The Bank's cost of funds increased slightly during
1996 from 4.96% in 1995. During 1997 and 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. During 1995, the
Bank's interest expense increased by $765,654 and was attributable to a 95 basis
point increase in its cost of funds. The Bank's cost of funds moved in tandem
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 $23,500, $69,000, and $10,000 for
1997, 1996 and 1995, 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 that 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 of nonperforming 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 .41%, .34%, and .23% as a percentage of
total assets at December 31, 1997, 1996 and 1995, respectively. The larger
provision in 1996 was attributable to the overall growth in the Bank's loan
portfolio. The Bank has adopted policies which it believes provide for prudent
and adequate levels of loan loss allowances.
9
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1997, 1996 and
1995 (Continued)
NONINTEREST EXPENSE
Operating expenses decreased by $88,761 to $2,239,808 for the year ended
December 31, 1997 from $2,328,569 incurred in 1996. KS Bancorp's operating
expenses were $1,746,868 in 1995. The decrease in 1997 was primarily
attributable to a decline in SAIF insurance premiums as compared to 1996 as a
result of the special assessment charged in 1996. The special SAIF assessment
accounted for $436,548 or 75% of the increase in noninterest expense during
1996. The decrease during 1997 was partially offset by an increase in
compensation and employee benefits of $216,972, primarily due to an increase in
the number of employees associated with the Bank's expanded operations. During
1996, compensation and employee benefits increased by $121,942 for the same
reason. Disregarding compensation and employee benefit expense and SAIF premiums
and assessment, increases in other noninterest expense categories would have
been 17.0% and 3.1% during 1997 and 1996, respectively. The largest component of
the increase for 1997 was an increase in advertising of approximately $41,000.
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 computed based on the number of unexercised stock
options and dividends declared during the year as more fully explained in Note
16 to the consolidated financial statements. 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. Federal insurance expense, excluding the special SAIF assessment, was less
in 1996 than such amounts reported in 1995 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 have a positive
impact on future earnings, as was shown during 1997.
INCOME TAXES
Income tax expense amounted to $751,223, $502,389 and $624,860 in 1997, 1996 and
1995, respectively. KS Bancorp's effective income tax rates were 38.1%, 37.8%
and 37.3% for the years ended December 31, 1997, 1996, and 1995, 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.
YEAR 2000 ISSUE
The Year 2000 Issue relates to whether computer systems will properly recognize
and process date sensitive information on or after January 1, 2000. Systems that
do not properly recognize such information could generate erroneous data or
fail. The Bank is heavily dependent on computer systems in the conduct of
substantially all of its business activities. Substantially all of the data
processing functions of the Bank which could be effected by this problem are
provided by an outside third party service bureau. That service bureau has
advised the Bank that they expect to have resolved this issue before the year
2000. However, if the service bureau is unable to modify their computer systems
to become Year 2000 compliant before that time, the Bank would likely experience
significant data processing delays, mistakes, or failures. These delays,
mistakes, or failures could have a material adverse impact on the financial
condition, liquidity and results of operations of the Bank. Additionally, costs
incurred with the resolution of the Year 2000 issue must be expensed. Based upon
current assessments and information provided by the service bureau, management
does not believe that such costs will be material to the Bank's financial
statements.
10
<PAGE>
Independent Auditor's Report KS Bancorp, Inc. and Subsidiary
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1997, in conformity with generally accepted accounting principles.
Raleigh, North Carolina
January 23, 1998
11
<PAGE>
Consolidated Statements of Financial Condition . December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
----------------------------
<S> <C> <C>
Cash and cash equivalents:
Interest-earning $ 4,781,687 $ 5,680,182
Noninterest-earning 851,102 480,054
Investment securities: (Note 3)
Held to maturity; market value, $3,138,248 ($3,918,064 in 1996) 3,104,261 3,893,665
Available for sale, at market value 6,427,784 5,751,745
FHLB stock and other nonmarketable equity securities 790,300 724,700
Loans receivable, net (Note 4) 95,002,402 81,510,872
Accrued interest receivable 689,427 559,305
Real estate acquired in settlement of loans - 265,714
Property and equipment, net (Note 5) 2,133,715 1,925,973
Refundable income taxes 178,066 149,558
Prepaid expenses and other assets 118,887 298,268
--------------------------
Total assets $113,977,631 $100,840,036
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits (Note 6) $ 90,313,658 $ 82,345,925
Advances from Federal Home Loan Bank (Note 7) 8,000,000 4,000,000
Accounts payable and accrued expenses 302,876 189,145
Advance payments by borrowers for taxes and insurance 48,446 45,609
Deferred income taxes (Note 9) 706,566 538,318
--------------------------
Total liabilities $ 99,371,546 $ 87,118,997
--------------------------
Commitments and contingencies (Notes 10, 12, and 13)
Stockholders' equity (Notes 3, 9, 13, 14, 15 and 16):
Preferred stock, authorized 5,000,000 shares; none issued $ - $ -
Common stock, no par value, authorized
20,000,000 shares; issued and outstanding 885,356
shares in 1997 and 884,191
in 1996 - -
Additional paid-in capital 5,225,975 5,161,212
Note receivable, ESOP (234,000) (273,000)
Unrealized gain on securities available for sale, net
of tax 716,197 454,113
--------------------------
Retained earnings, substantially restricted 8,897,913 8,378,714
--------------------------
Total stockholders' equity $ 14,606,085 $ 13,721,039
--------------------------
$113,977,631 $100,840,036
==========================
</TABLE>
See Notes to Consolidated Financial Statements.
12
<PAGE>
Consolidated Statements of Income . Years Ended December 31, 1997, 1996 and
1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Loans $8,011,909 $6,771,028 5,984,415
Investment securities 501,115 556,663 659,379
Mortgage-backed securities 194,292 102,089 111,566
Interest-bearing deposits 124,074 107,912 187,296
-------------------------------------
Total interest income $8,731,390 $7,537,692 $6,842,656
-------------------------------------
Interest expense:
Deposits (Note 6) $4,275,930 $3,807,239 $3,349,121
Advances from the FHLB 377,614 205,189 151,379
-------------------------------------
Total interest expense $4,653,544 $4,012,428 $3,500,500
-------------------------------------
Net interest income $4,077,846 $3,525,264 $3,342,156
-------------------------------------
Provision for loan losses (Note 4) 23,500 69,000 10,000
-------------------------------------
Net interest income after provision for loan losses $4,054,346 $3,456,264 $3,332,156
-------------------------------------
Noninterest income:
Gain (Loss) on sale of investment securities $ (5,994) $ 16,019 $ (20,017)
Other income 163,779 183,992 111,401
-------------------------------------
$ 157,785 $ 200,011 $ 191,384
-------------------------------------
Noninterest expense:
Compensation and benefits (Notes 11, 12, 13 and 16) $1,340,730 $1,123,758 $1,001,816
Occupancy 114,134 86,865 75,452
Special SAIF assessment (Note 8) - 436,548 -
Equipment maintenance and expense 100,908 72,974 71,841
Data processing and outside service fees 171,347 155,874 137,204
Insurance 103,008 156,236 188,721
Other 409,681 296,314 271,834
-------------------------------------
$2,239,808 $2,328,569 $1,746,868
-------------------------------------
Income before income taxes $1,972,323 $1,327,706 $1,676,672
-------------------------------------
Income taxes: (Note 9):
Current $ 743,608 $ 515,622 $ 559,005
Deferred 7,615 (13,233) 65,855
-------------------------------------
$ 751,223 $ 502,389 $ 624,860
-------------------------------------
Net income $1,221,100 $ ,825,317 $1,051,812
=====================================
Basic earnings per share $ 1.43 $ 0.97 $ 1.13
=====================================
Diluted earnings per share $ 1.30 $ 0.89 $ 1.06
=====================================
Dividends paid per share $ 0.83 $ 0.90 $ 0.75
=====================================
</TABLE>
See Notes to Consolidated Financial Statements.
13
<PAGE>
Consolidated Statements of Stockholders' Equity . Years Ended December 31,
1997, 1996 and 1995
<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, 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 (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 (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
Cash dividends paid -- (701,901) -- -- (701,901)
ESOP contribution 58,663 -- -- -- 58,663
Repayment of ESOP note -- -- 39,000 -- 39,000
Stock options exercised 8,740 -- -- -- 8,740
Cash payment for fractional shares
in stock split (2,640) -- -- -- (2,640)
Net unrealized gain on securities
available for sale -- -- -- 262,084 262,084
Net income -- 1,221,100 -- -- 1,221,100
------------------------------------------------------------------------------
Balance, December 31, 1997 $ 5,225,975 $ 8,897,913 $ (234,000) $ 716,197 $ 14,606,085
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
14
<PAGE>
Consolidated Statements of Cash Flows . Years Ended December 31, 1997, 1996
and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,221,100 $ 825,317 $ 1,051,812
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 115,685 86,756 69,049
Amortization of net premiums (discounts) 8,720 (8,157) 13,313
Deferred income taxes 7,615 (13,233) 65,855
Provision for losses on loans 23,500 69,000 10,000
Other gains and losses, net (5,342) (43,046) (6,675)
Gain on redemption of nonmarketable security -- (23,188) --
Loss on sale of investment securities 5,994 7,169 20,017
ESOP compensation credited to paid-in capital 58,663 35,841 28,884
Changes in assets and liabilities:
(Increase) decrease in:
Prepaid expenses and other assets (20,619) (39,685) (6,293)
Refundable income taxes 71,492 (107,775) (37,843)
Accrued interest receivable (130,122) (61,378) (9,898)
Increase in:
Accrued expenses and other liabilities 113,731 62,407 12,464
------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,470,417 $ 790,028 $ 1,210,685
------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales or maturity of available for sale securities $ 3,494,006 $ 2,997,500 $ 2,230,469
Proceeds from maturity of held to maturity securities 777,362 1,264,385 2,169,584
Proceeds from redemption of nonmarketable equity securities -- 50,688 --
Purchase of available for sale securities (3,750,000) (1,496,328) (502,344)
Purchase of held to maturity securities -- (986,998) (1,000,000)
Purchase of nonmarketable equity securities (65,600) -- --
Net change in loans receivable (13,578,287) (11,653,820) (6,419,161)
Proceeds from sale of real estate 134,204 112,814 63,325
Proceeds from sale of property and equipment 16,750 251,945 10,400
Purchase of property and equipment (340,068) (758,359) (635,752)
------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES $ (13,311,633) $ (10,218,173) $ (4,083,479)
------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 7,967,733 $ 11,608,089 $ 4,374,391
Increase (decrease) in advance payments from borrowers
for taxes and insurance 2,837 (5,967) (4,251)
Advances from Federal Home Loan Bank 12,000,000 2,000,000 2,000,000
Principal payments for borrowed money (8,000,000) (1,000,000) --
Principal payment for ESOP debt 39,000 39,000 39,000
Cash dividends paid (701,901) (766,155) (704,184)
Repurchase of common stock -- (370,000) (1,387,358)
Payments received on exercised options, 1165 shares 8,740 -- --
Cash paid in lieu of fractional shares on stock split (2,640) -- --
------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 11,313,769 $ 11,504,967 $ 4,317,598
------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (527,447) 2,076,822 1,444,804
Cash and cash equivalents:
Beginning 6,160,236 4,083,414 2,638,510
------------------------------------------------------
Ending $ 5,632,789 $ 6,160,236 $ 4,083,314
======================================================
</TABLE>
15
<PAGE>
Consolidated Statements of Cash Flows . Years Ended December 31, 1997, 1996
and 1995
(CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents:
Interest-bearing $ 4,781,687 $ 5,680,182 $ 3,707,373
Noninterest-bearing 851,102 480,054 376,041
-------------------------------------
$ 5,632,789 $ 6,160,236 $ 4,083,414
=====================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 4,651,936 $ 4,008,026 $ 3,484,010
=====================================
Income taxes $ 694,825 $ 624,995 $ 605,203
=====================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Transfer from loans to real estate acquired
in settlement of loans $ 63,257 $ 172,778 $ 55,396
=====================================
Change in unrealized gain on available for sale securities $ 262,084 $ 93,318 $ 302,354
=====================================
</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. 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 and disclosures of
contingent asset and liabilities. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS: 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.
INVESTMENT 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 ability 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 specially 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.
LOANS RECEIVABLE: Loans receivable are stated at unpaid principal balances,
less the allowance for loan losses and net deferred loan origination fees and
discounts.
17
<PAGE>
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
The Bank establishes 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.
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 temporary 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.
18
<PAGE>
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
RETIREMENT PLANS: The Bank's employee stock ownership plan (the "ESOP") covers
substantially all of its employees. Contributions to the plan are based upon
amounts necessary to fund the amortization requirements of the ESOP's debt to
the Company, subject to compensation limitations, and are charged to expense.
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.
EARNINGS PER SHARE: The Bank adopted statement of Financial Accounting Standards
No. 128 during the year ended December 31, 1997. This statement requires dual
presentation of basic and diluted earnings per share (EPS) with a reconciliation
of the numerator and denominator of the EPS computations. Basic per share
amounts are based on the weighted average shares of common stock outstanding.
Diluted earnings per share assume the conversion, exercise or issuance of all
potential common stock instruments such as options, warrants and convertible
securities, unless the effect is to reduce a loss or increase earnings per
share. Accordingly, this presentation has been adopted for all periods
presented. The basic and diluted weighted average shares outstanding are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------
<S> <C> <C> <C>
Weighted average shares outstanding 885,069 889,640 976,504
Less weighted average unallocated ESOP shares 33,138 38,337 43,537
-------------------------
Weighted average outstanding shares used for basic EPS 851,931 851,303 932,967
Plus incremental shares from assumed issuance of stock options 90,544 73,645 63,354
-------------------------
Weighted average outstanding shares used for diluted EPS 942,475 924,948 996,321
=========================
</TABLE>
There were no adjustments required to be made to net income in the computation
of diluted earnings per share.
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.
19
<PAGE>
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
The fair value estimates presented in Note 2 are based on pertinent information
available to management as of December 31, 1997 and 1996, 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,
1997 and 1996, 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 for any nonperforming loans. contractual lives of the loans. risk
factor to approximate the Certain prepayment assumptions For certain loans
which are adjustment that would be applied have also been made depending
indexed and adjust with prime, in the marketplace upon the original 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 value
of certificates of deposit is estimated using the rates equal to the amount
payable on is based upon the discounted offered on December 31, 1997 demand
as of December 31, 1997 value of future contractual cash and 1996 for
deposits of and 1996. The fair flows. The discount rate 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.
FUTURE REPORTING REQUIREMENTS: The Company is required to adopt SFAS No. 130,
"Reporting Comprehensive Income" in 1998.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. The Statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Statement does not
require a specific format for that financial statement, but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement. It is not expected that this statement will
materially affect the presentation of the Company's financial statement
20
<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, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 5,632,789 $ 5,632,789 $ 6,160,236 $ 6,160,236
Accrued interest receivable 689,427 689,427 559,305 559,305
Investment securities:
Held to maturity 3,104,261 3,138,248 3,893,665 3,918,064
Available for sale 6,427,784 6,427,784 5,751,745 5,751,745
Nonmarketable equity securities 790,300 790,300 724,700 724,700
Loans receivable 95,002,402 95,338,445 81,510,872 81,589,000
Financial Liabilities:
Deposits 90,313,658 90,604,956 82,345,925 82,699,000
Federal Home Loan Bank advances 8,000,000 8,006,752 4,000,000 3,994,000
</TABLE>
21
<PAGE>
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
NOTE 3. INVESTMENT SECURITIES
Investment securities consist of the following:
<TABLE>
<CAPTION>
1997
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
Debt securities:
Federal agency securities $1,499,250 $ 780 $ (2,845) $ 1,497,185
Corporate securities 1,500,099 - (19) 1,500,080
Mortgage-backed securities 1,104,912 36,071 - 1,140,983
------------------------------------------------------
3,104,261 36,851 (2,864) 3,138,248
------------------------------------------------------
Available for sale:
Debt securities:
US Treasury securities 1,995,696 10,084 - 2,005,780
Federal agency securities 3,250,000 18,945 (390) 3,268,555
Marketable equity securities:
Federal Home Loan Mortgage
Corporation stock 26,931 1,126,518 - 1,153,449
------------------------------------------------------
5,272,627 1,155,547 (390) 6,427,784
------------------------------------------------------
Nonmarketable equity securities:
Federal Home Loan Bank stock 786,800 - - 786,800
Central Service Corporation stock 3,500 - - 3,500
------------------------------------------------------
790,300 - - 790,300
------------------------------------------------------
$9,167,188 $1,192,398 $ (3,254) $10,356,332
======================================================
</TABLE>
22
<PAGE>
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
<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
Mortgage-backed securities 1,392,585 36,459 - 1,429,044
------------------------------------------------------
3,893,665 37,605 (13,206) 3,918,064
------------------------------------------------------
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
mutual 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
------------------------------------------------------
$ 9,637,670 $ 783,659 $ (26,820) $ 10,394,509
======================================================
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1997 by contractual maturity are as shown below:
<TABLE>
<CAPTION>
1997
--------------------------
Estimated
Amortized Market
Cost Value
--------------------------
<S> <C> <C>
Held to maturity:
Due in less than one year $ 999,349 $ 996,875
Due in one year through five years $1,000,000 $1,000,390
--------------------------
$1,999,349 $1,997,265
==========================
Available for sale:
Due in less than one year $ 500,000 $ 500,000
Due in one year through five years 4,245,696 4,265,585
Due in greater than five years 500,000 508,750
--------------------------
$5,245,696 $5,274,335
==========================
$7,245,045 $7,271,600
==========================
</TABLE>
23
<PAGE>
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
The amortized cost and estimated market value of mortgage-backed securities by
contractual maturities are not reported because the underlying loans may be
prepaid without penalty and the actual maturities may and often are
significantly different from contractual maturities.
Summarized below is the sales activity in available for sale investment
securities:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Cost of investment securities sold $ 2,000,000 $ 504,669 $ 2,250,486
Proceeds from sales of available for sale securities $ (1,994,006) $ (497,500) (2,230,469)
--------------------------------------------------
Realized losses $ 5,994 $ 7,169 $ 20,017
==================================================
</TABLE>
The change in net unrealized gains and losses shown as a separate component of
equity for the years ended December 31, 1997, 1996 and 1995 is shown below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Balance in equity component, beginning $ 454,113 $ 360,795 $ 58,441
Change in net unrealized gains 422,717 150,511 487,670
Less change in deferred income taxes (160,633) (57,193) (185,316)
--------------------------------------------------
Balance in equity component, ending $ 716,197 $ 454,113 $ 360,795
==================================================
</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 Company stock is also of limited marketability and is assumed to
have a market value equal to its cost.
Certain investment securities with amortized costs of $2,997,782 and market
values of $3,015,310 at December 31, 1997 were pledged to secure public deposits
or were pledged in connection with the Bank's depository relationship with the
Federal Reserve.
NOTE 4. LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
---------------------------
<S> <C> <C>
Mortgage loans:
Conventional first mortgage loans $79,000,713 $70,427,354
Construction loans 10,860,702 8,104,700
Equity-line loans 8,749,923 7,457,383
Loans on deposit accounts 333,834 194,225
Consumer loans 474,506 -
---------------------------
99,419,678 86,183,662
---------------------------
Less:
Undisbursed portion of loans in process 3,812,112 4,124,737
Unamortized loan fees 279,797 246,186
Allowance for loan losses 325,367 301,867
---------------------------
4,417,276 4,672,790
---------------------------
$95,002,402 $81,510,872
===========================
Weighted average yield 8.76% 8.62%
</TABLE>
24
<PAGE>
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
NOTE 4. LOANS RECEIVABLE (CONTINUED)
The following summarizes transactions in the allowance for loan losses:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------
1997 1996 1995
-------------------------------------------------
<S> <C> <C> <C>
Balance, beginning $ 301,867 $ 232,867 $ 222,867
Provision for loan losses 23,500 69,000 10,000
-------------------------------------------------
Balance, ending $ 325,367 $ 301,867 $ 232,867
=================================================
</TABLE>
Loans delinquent more than 90 days amounted to approximately $533,000 and
$274,000 at December 31, 1997 and 1996, 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 $15,061, $8,241
and $9,157 for the years ended December 31, 1997, 1996 and 1995, respectively.
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 normal risks of collectibility.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1996
------------------------------
<S> <C> <C>
Balance, beginning $ 1,019,000 $ 228,000
Originations 263,000 839,000
Repayments (60,000) (48,000)
------------------------------
Balance, ending $ 1,222,000 $ 1,019,000
==============================
</TABLE>
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1996
------------------------------
<S> <C> <C>
Land $ 363,812 $ 363,812
Buildings 1,559,966 1,511,380
Furniture and equipment 868,334 672,722
Construction in progress - 685
------------------------------
2,792,112 2,548,599
Accumulated depreciation (658,397) (622,626)
------------------------------
$ 2,133,715 $ 1,925,973
==============================
</TABLE>
25
<PAGE>
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
NOTE 6. DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
---------------------------
<S> <C> <C>
Passbook accounts, 3.00% $ 3,448,166 $ 3,510,143
NOW accounts, 2.25% to 2.90% 4,832,320 4,489,501
Money market deposit accounts, 3.05% 5,440,958 4,868,957
Noninterest-bearing accounts 3,156,994 3,389,833
---------------------------
16,878,438 16,258,434
---------------------------
Certificates:
3.00%-4.50% 978,679 468,627
4.51%-6.50% 70,068,355 62,618,653
6.51%-8.50% 2,369,566 2,845,214
8.51%-9.15% - 137,985
---------------------------
73,416,600 66,070,479
---------------------------
90,295,038 82,328,913
Accrued interest payable 18,620 17,012
---------------------------
$ 90,313,658 $82,345,925
===========================
Weighted average cost of funds 5.20% 5.11%
===========================
</TABLE>
26
<PAGE>
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
NOTE 6. DEPOSITS (CONTINUED)
Certificate accounts are summarized by maturity at December 31, 1997 as follows:
<TABLE>
<CAPTION>
1998 1999 2000 Thereafter Total
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3.00%--4.50% $ 884,327 $ 94,352 $ - $ - $ 978,679
4.51%--6.50% 59,194,088 9,174,705 1,493,531 206,031 70,068,355
6.51%--8.50% 2,042,148 327,418 - - 2,369,566
-------------------------------------------------------------------------
$ 62,120,563 $ 9,596,475 $ 1,493,531 $ 206,031 $ 73,416,600
=========================================================================
</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 $ 4,707,230
3 to 6 months 4,377,739
6 to 12 months 5,754,406
More than 12 months 2,782,113
-------------
$ 17,621,488
=============
</TABLE>
Interest expense on deposits is summarized below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1997 1996 1995
------------------------------------------------
<S> <C> <C> <C>
Passbook accounts $ 104,214 $ 99,743 $ 97,810
NOW and money market accounts 283,988 210,535 189,343
Certificates 3,896,358 3,504,973 3,086,523
------------------------------------------------
4,284,560 3,815,251 3,373,676
Forfeitures (8,630) (8,012) (24,555)
------------------------------------------------
$ 4,275,930 $ 3,807,239 $ 3,349,121
================================================
</TABLE>
NOTE 7. ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consist of the following:
<TABLE>
<CAPTION>
Maturing in Interest
Type Year Ending Rate
- ---------------------------------------------
<S> <C> <C>
Fixed 1997 5.74%
Fixed 1998 6.05%
Fixed 1998 5.93%
Fixed 1999 6.31%
Fixed 1999 6.28%
</TABLE>
<TABLE>
<CAPTION>
December 31,
- ----------------------------------
1997 1996
- ----------------------------------
<S> <C>
$ - $ 2,000,000
2,000,000 2,000,000
2,000,000 -
2,000,000 -
2,000,000 -
- ----------------------------------
$ 8,000,000 $ 4,000,000
==================================
</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. Book value of qualifying
loans is in excess of outstanding borrowings.
27
<PAGE>
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
NOTE 8. SPECIAL 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
Savings Association Insurance Fund (SAIF) 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 9. INCOME TAXES
Under the Internal Revenue Code, the Bank was allowed a special bad debt
deduction related to additions to tax bad debt reserves established for the
purpose of absorbing losses in 1996. 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 1996.
Legislation passed in 1996 eliminates the percentage of taxable income method as
an option for computing bad debt deductions. 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 was 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. The Bank was eligible for
deferral in 1997 and 1996. 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.
28
<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, 1997, 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 decution 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, 1997.
Deferred income taxes consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
----------------------
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 15,162 $ 18,607
Allowance for loan losses 123,639 114,709
Deferred compensation and directors' death benefits 34,854 32,157
----------------------
Total deferred tax assets 173,655 165,473
----------------------
Deferred tax liabilities:
Excess accumulated tax depreciation 73,859 58,062
Federal Home Loan Bank stock basis 83,334 83,334
Tax bad debt reserves 284,068 284,068
Unrealized net appreciation, investments 438,960 278,327
----------------------
Total deferred tax liabilities 880,221 703,791
----------------------
Net deferred tax liabilities $(706,566) $(538,318)
======================
</TABLE>
Income tax expense differs from the federal statutory rate of 35% as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1996 1995
------------------------------
<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 1.06 2.62 0.31
State income taxes, net of federal benefit 3.43 3.17 2.82
Other, net (1.40) (2.95) (0.86)
------------------------------
38.09% 37.84% 37.27%
==============================
</TABLE>
NOTE 10. 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 statement of
financial condition. The contract or notional amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments.
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.
29
<PAGE>
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
A summary of the contract amount of the Bank's exposure to off-balance-sheet
risk is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
--------------------------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit, mortgage loans $ 459,000 $ 497,000
Undisbursed equity lines of credit 6,248,000 5,506,000
</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 11. RETIREMENT PLANS
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 $5,184, $4,553 and $5,949 for the years ended
December 31, 1997, 1996 and 1995, 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 $49,052,
$38,529 and $34,496 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The accounting and reporting aspects of the Bank's ESOP plan are described in
Note 13.
NOTE 12. 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 $2,000 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, 1997 and 1996, the Bank had accrued $66,741 and $63,866, respectively, which
represents the present value of the death benefits based on directors' life
expectancies. Expense associated with the plan amounted to $2,875, $36,455 and
$12,000 for 1997, 1996 and 1995, respectively.
NOTE 13. 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, 1997 and 1996 the outstanding balance of
the loan receivable from the ESOP was $234,000 and $273,000 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 53,931 shares of common stock. At December
31, 1997 and 1996, 31,200 and 36,400 shares, respectively, had not been
allocated. Based upon the market value of the Company's stock at December 31,
1997 and 1996, the fair value of the unallocated shares amounted to
approximately $772,200 and $543,000 at December 31, 1997 and 1996, respectively.
30
<PAGE>
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
Dividends on unallocated shares may be 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 Company has the obligation to redeem the holdings of plan participants in
the event participants request the Company to do so upon their retirement and if
shares cannot be sold through the open market. The market value of the ESOP
shares less the principal balance on the ESOP loan is approximately $1.1
million.
The Bank has charged expense for $97,662, $74,842 and $67,884 for years ended
December 31, 1997, 1996 and 1995 respectively in connection with the ESOP. The
expense for 1997, 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, $58,663, $35,841 and $28,884, 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.
31
<PAGE>
Notes to Financial Statements KS Bancorp, Inc. and Subsidiary
NOTE 14. REGULATORY MATTERS
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, 1997,
the Bank complied with all the capital requirements as shown below:
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------
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, 1997 $ 14,606,085 $ 14,606,085 $14,606,085 $ 14,606,085
Unrealized gain on securities (716,197) (716,197) (716,197) (716,197)
Holding company's equity
at December 31, 1997 (307,309) (307,309) (307,309) (307,309)
Core deposit intangible (2,972) (2,972) (2,972) (2,972)
Loan loss allowances - - 325,367 325,367
---------------------------------------------------------------
Regulatory capital 13,579,607 13,579,607 13,904,974 13,904,974
Minimum capital requirement 3,345,365 2,316,455 4,632,911 5,682,890
---------------------------------------------------------------
$ 10,234,242 $ 11,263,152 $ 9,272,063 $ 8,222,084
===============================================================
Total tangible Bank only assets
at December 31, 1997 $113,657,799
Average tangible Bank only assets
December 31, 1997 quarter $111,512,161
Risk-weighted Bank only assets at
December 31, 1997 $ 57,911,381 $57,911,381
Capital as a percentage of assets:
Actual 12.18% 23.45% 24.01% 12.23%
Required 3.00% 4.00% 8.00% 5.00%
---------------------------------------------------------------
Excess 9.18% 19.45% 16.01% 7.23%
===============================================================
</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, 1997
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
32
<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 1997 and 1996,
the Bank paid dividends to KS Bancorp of $300,000 and $150,000, respectively.
As a North Carolina-chartered savings bank, the Bank 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. The Bank's
liquidity ratio on December 31, 1997, as computed under North Carolina
regulations, was approximately 14%.
NOTE 15. STOCK DIVIDEND
On June 25, 1997, the Bank effected a four for three stock dividend for
shareholders of record on June 10, 1997. As a result of the stock dividend, the
Bank issued 221,219 shares of common stock and all prior period share
information included in the financial statements has been restated.
NOTE 16. 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 107,681 and 53,928 shares of common stock were
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.
There were no stock option transactions during 1995 and 1996. During 1997, 1,165
options were exercised under the Nonqualified Stock Option Plan. Remaining
options outstanding at December 31, 1997 were 100,956 and 52,762 for the
Employee Stock Option Plan and the Nonqualified Stock Option Plan, respectively.
At December 31, 1997, all 153,718 options were exercisable.
The options are all exercisable at an option price of $7.50 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.
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 $117,992, $128,720, and $111,716 in connection
with the plan during 1997, 1996 and 1995, respectively.
33
<PAGE>
Notes to Financial Statements KS Bancorp, Inc. and Subsidiary
NOTE 17. 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, 1997:
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
--------------- -------------
<S> <C> <C>
Assets:
Cash $ 256,285 $ 126,695
Investment securities available for sale - 500,235
Investment in Kenly Savings Bank, SSB 14,298,776 13,064,504
Accrued interest receivable - 4,752
Other assets 60,575 42,739
-------------------------------
$14,615,636 $13,738,925
==============================
Liabilities and Stockholders' Equity:
Liabilities:
Other liabilities $ 9,551 $ 17,886
Stockholders' Equity:
Common stock, no par value, 20,000,000 shares authorized,
issued and outstanding 885,356 in 1997 and 884,191 in 1996 - -
Additional paid-in capital 12,134,995 12,070,232
receivable --ESOP (234,000) (273,000)
Unrealized gain on securities available for sale, net of tax 716,197 454,113
Retained earnings, substantially restricted 1,988,893 1,469,694
-------------------------------
$14,615,636 $13,738,925
===============================
</TABLE>
CONDENSED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-----------------------
<S> <C> <C>
Investment income $ 45,936 $ 76,302
Equity in earnings of Kenly Savings Bank, SSB 1,214,045 791,269
Amortization of organization costs (1,811) (1,810)
Other expense (34,438) (24,114)
Income tax expense (2,632) (16,330)
-----------------------
$1,221,100 $ 825,317
=======================
</TABLE>
34
<PAGE>
Notes to Consolidated Financial Statements KS Bancorp, Inc. and Subsidiary
NOTE 17. PARENT COMPANY FINANCIAL DATA (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,221,100 $ 825,317
Noncash items included in net income:
Amortization of organization costs and discounts 2,883 (11,117)
Loss on sale of investment
Equity in earnings of Kenly Savings Bank (1,214,045) (791,269)
Change in assets and liabilities:
Decrease in accrued interest 4,751 24,103
Decrease (increase) in other assets (19,645) 20,161
Decrease in net amount due from/to Kenly Savings Bank, SSB - -
Increase (decrease) in other liabilities (8,653) 3,410
------------------------------------
Net cash provided by (used in) operating activities (13,609) 70,605
------------------------------------
Cash Flows from Investing Activities:
Purchase of available for sale securities - (501,172)
Purchase of held to maturity securities - (486,998)
Proceeds from maturities of available for sale securities 500,000 500,000
Proceeds from maturities of held to maturity investment securities - 1,000,000
Upstream dividend received from Kenly Savings Bank 300,000 150,000
-----------------------------------
Net cash provided by investing activities 800,000 661,830
-----------------------------------
Cash Flows from Financing Activities:
Cash dividends paid (701,901) (766,156)
Repayment of ESOP debt 39,000 39,000
Purchase of common stock for retirement - (370,000)
Payout for fractional common stock shares (2,640) -
Exercise of stock options 8,740 -
-----------------------------------
Net cash used in financing activities $ (656,801) $(1,097,156)
-----------------------------------
Net increase in cash $ 129,590 $ (364,721)
Cash--beginning 126,695 491,416
-----------------------------------
Cash--ending $ 256,285 $ 126,695
===================================
Supplemental Disclosures of Cash Flow Information
Cash payments for taxes $ 800 $ -
</TABLE>
35
<PAGE>
Corporate Information KS Bancorp, Inc. and Subsidiary
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
H. ELWIN WATSON
Chairman of the Board
Retired
Watson Hardware & Oil Company
Kenly, NC
J. HAYDEN WIGGS
Vice Chairman of the Board
Retired
Owner, Wiggs Dry Cleaners
Selma, NC
ROBERT E. FIELDS
Owner, Fields Appraisal, Inc.
Kenly, NC
R. HAROLD HINNANT
President
Kenly Motors and Parts, Inc.
Kenly, NC
HAROLD T. KEEN
President, CEO
KS BANCORP, INC and
Kenly Savings Bank, Inc., SSB
Kenly, NC
JAMES C. PARKER
Partner, Parker and Parker PA
Goldsboro, NC
R. ELTON PARRISH
President
Parrish Funeral Home
Selma, NC
RALPH EDWARD SCOTT, JR.
Self-employed Farmer
Kenly, NC
JAMES C. WOODARD
Owner, J. & J. Appraisal, Inc.
Selma, NC
EXECUTIVE OFFICERS
HAROLD T. KEEN
President and CEO
WILLIAM C. CLARKE
Senior Vice President
KEVIN J. JORGENSON
Senior Vice President
HELEN B. POLLOCK
Treasurer and Assistant Secretary
CORPORATE OFFICE
P.O. Box 219
207 West Second Street
Kenly, NC 27542
(919) 284-4157
STOCK TRANSFER AGENT
First Citizens Bank & Trust
Corporate Trust Department
P.O. Box 29522
Raleigh, NC 27626
SPECIAL LEGAL COUNSEL
Brooks, Pierce, McLendon, Humphrey & Leonard, LLP
P.O. Box 26000
Greensboro, NC 27420
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
MCGLADREY & PULLEN, LLP
2418 Blue Ridge Road
P.O. Box 10366
Raleigh, NC 27605
ANNUAL MEETING
The 1998 Annual Meeting of shareholders of KS Bancorp, Inc., will be held at
7:00 p.m. on May 5, 1998 in the Corporate Office, 207 West Second Street, Kenly,
North Carolina.
FORM 10-K
A COPY OF FORM 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WILL BE
FURNISHED WITHOUT CHARGE TO SHAREHOLDERS UPON WRITTEN REQUEST TO HAROLD T. KEEN,
PRESIDENT, KS BANCORP, P.O. BOX 219, KENLY, NC 27542.
COMMON STOCK
The Company had 885,356 shares of Common Stock outstanding which were held by
approximately 347 holders of record (excluding shares held in street name) as of
January 28, 1998. Transactions in the pink sheets of the National Quotation
Bureau, Inc.
36
<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, 1997. For further information
regarding the Company's dividend policy and restrictions on dividends paid by
the Bank to the Company, please refer to note 14 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>
1997:
First Quarter (1) $0.11 $ - $16 1/8 $14 7/8
Second Quarter (1) 0.12 - 19 1/8 14 3/8
Third Quarter 0.15 - 18 1/2 17
Fourth Quarter 0.15 0.30 25 1/2 18
1996:
First Quarter (1) $0.11 $ - $ 14 1/2 $13 1/8
Second Quarter (1) 0.11 - 14 1/2 13
Third Quarter (1) 0.11 - 15 13 1/2
Fourth Quarter (1) 0.12 0.45 15 3/4 14
</TABLE>
(1) Restated for 4 for 3 stock split occurring during 1997.
DISCLAIMER
This statement has not been reviewed, or confirmed for accuracy or relevance, by
the Federal Deposit Insurance Corporation.
37
<PAGE>
KS Bancorp, Inc. and Subsidiary
OFFICE LOCATIONS
CORPORATE OFFICE
207 WEST SECOND STREET
KENLY, NC 27542
KENLY SAVINGS BANK
FULL-SERVICE BRANCH OFFICES
Kenly Selma Wilson
200 North Church Street 115 West Anderson Street 2846 Ward Blvd.
Kenly, NC 27542 Selma, NC 27576 Wilson, NC 27893
Manager Manager Manager
Mark M. Shore Earl W. Worley, Jr. Guy C. Dixon
Garner Goldsboro
920 Seventh Ave. 1112 East Ash Street
Garner, NC 27529 Goldsboro, NC 27530
Manager Manager
Tom B. Fry John H. Metz, Jr.
MORTGAGE LOAN ORIGINATION OFFICES
Clayton Knightdale
11444 Hwy. 70 West 106 N. First St., Suite D
Clayton, NC 27520 Knightdale, NC 27545
Manager Manager
William C. Clarke Ted G. Godwin
<PAGE>
EXHIBIT 21
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>
EXHIBIT 23
[LETTERHEAD OF MCGLADREY & PULLEN, LLP]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference into the Registration
Statement on Form S-8 of KS Bancorp, Inc. filed February 13, 1998, of our report
dated January _____, 1998, relating to the consolidated financial statements of
KS Bancorp, Inc. and subsidiary, which report appears in the Company's 1997
annual report to stockholders.
/s/ McGladrey & Pullen, LLP
------------------------------------------
Raleigh, North Carolina
March _____, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 851,102
<INT-BEARING-DEPOSITS> 4,781,687
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,427,784
<INVESTMENTS-CARRYING> 3,104,261
<INVESTMENTS-MARKET> 3,138,248
<LOANS> 95,327,769
<ALLOWANCE> 325,367
<TOTAL-ASSETS> 113,977,631
<DEPOSITS> 90,313,658
<SHORT-TERM> 8,000,000
<LIABILITIES-OTHER> 1,057,888
<LONG-TERM> 0
0
0
<COMMON> 5,225,975
<OTHER-SE> 9,380,110
<TOTAL-LIABILITIES-AND-EQUITY> 113,977,631
<INTEREST-LOAN> 8,011,909
<INTEREST-INVEST> 501,115
<INTEREST-OTHER> 218,366
<INTEREST-TOTAL> 8,731,390
<INTEREST-DEPOSIT> 4,275,930
<INTEREST-EXPENSE> 4,653,544
<INTEREST-INCOME-NET> 4,077,846
<LOAN-LOSSES> 23,500
<SECURITIES-GAINS> (5,994)
<EXPENSE-OTHER> 2,239,808
<INCOME-PRETAX> 1,972,323
<INCOME-PRE-EXTRAORDINARY> 1,972,323
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,972,323
<EPS-PRIMARY> 1.43
<EPS-DILUTED> 1.30
<YIELD-ACTUAL> 3.96
<LOANS-NON> 533,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 301,867
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 325,367
<ALLOWANCE-DOMESTIC> 325,367
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 435,691
<INT-BEARING-DEPOSITS> 2,307,393
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 2,000,657
<INVESTMENTS-MARKET> 0
<LOANS> 85,414,510
<ALLOWANCE> 301,867
<TOTAL-ASSETS> 100,754,366
<DEPOSITS> 82,010,083
<SHORT-TERM> 4,000,000
<LIABILITIES-OTHER> 814,331
<LONG-TERM> 0
0
0
<COMMON> 5,171,450
<OTHER-SE> 8,758,502
<TOTAL-LIABILITIES-AND-EQUITY> 100,754,366
<INTEREST-LOAN> 1,856,363
<INTEREST-INVEST> 122,721
<INTEREST-OTHER> 57,273
<INTEREST-TOTAL> 2,036,357
<INTEREST-DEPOSIT> 1,017,192
<INTEREST-EXPENSE> 1,075,728
<INTEREST-INCOME-NET> 960,629
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 488,876
<INCOME-PRETAX> 512,892
<INCOME-PRE-EXTRAORDINARY> 512,892
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 312,841
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.45
<YIELD-ACTUAL> 8.35
<LOANS-NON> 428,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 301,867
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 301,867
<ALLOWANCE-DOMESTIC> 301,867
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 412,821
<INT-BEARING-DEPOSITS> 2,290,684
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,986,925
<INVESTMENTS-CARRYING> 3,370,486
<INVESTMENTS-MARKET> 3,410,205
<LOANS> 90,535,772
<ALLOWANCE> 301,867
<TOTAL-ASSETS> 106,121,301
<DEPOSITS> 83,837,056
<SHORT-TERM> 7,000,000
<LIABILITIES-OTHER> 932,618
<LONG-TERM> 0
0
0
<COMMON> 5,189,900
<OTHER-SE> 9,161,727
<TOTAL-LIABILITIES-AND-EQUITY> 106,121,301
<INTEREST-LOAN> 3,848,379
<INTEREST-INVEST> 251,648
<INTEREST-OTHER> 100,588
<INTEREST-TOTAL> 4,200,615
<INTEREST-DEPOSIT> 2,069,447
<INTEREST-EXPENSE> 2,203,608
<INTEREST-INCOME-NET> 1,997,007
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 997,038
<INCOME-PRETAX> 1,097,873
<INCOME-PRE-EXTRAORDINARY> 1,097,873
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 672,253
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.72
<YIELD-ACTUAL> 9.80
<LOANS-NON> 375,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 301,867
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 301,867
<ALLOWANCE-DOMESTIC> 301,867
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 442,458
<INT-BEARING-DEPOSITS> 3,546,616
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,216,681
<INVESTMENTS-CARRYING> 4,140,709
<INVESTMENTS-MARKET> 4,191,341
<LOANS> 92,948,135
<ALLOWANCE> 320,867
<TOTAL-ASSETS> 109,937,198
<DEPOSITS> 86,461,984
<SHORT-TERM> 8,000,000
<LIABILITIES-OTHER> 921,317
<LONG-TERM> 0
0
0
<COMMON> 5,203,550
<OTHER-SE> 9,350,347
<TOTAL-LIABILITIES-AND-EQUITY> 109,937,198
<INTEREST-LOAN> 5,899,115
<INTEREST-INVEST> 382,163
<INTEREST-OTHER> 151,590
<INTEREST-TOTAL> 6,423,868
<INTEREST-DEPOSIT> 3,155,019
<INTEREST-EXPENSE> 3,410,105
<INTEREST-INCOME-NET> 3,022,763
<LOAN-LOSSES> 19,000
<SECURITIES-GAINS> (5,905)
<EXPENSE-OTHER> 1,522,979
<INCOME-PRETAX> 1,600,042
<INCOME-PRE-EXTRAORDINARY> 1,600,042
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 968,612
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 3.76
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 320,867
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 320,867
<ALLOWANCE-DOMESTIC> 320,867
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<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> 0.97
<EPS-DILUTED> 0.89
<YIELD-ACTUAL> 3.91
<LOANS-NON> 274,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 232,867
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 301,867
<ALLOWANCE-DOMESTIC> 301,867
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 483,011
<INT-BEARING-DEPOSITS> 3,596,132
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 10,295,721
<INVESTMENTS-MARKET> 10,305,609
<LOANS> 79,058,874
<ALLOWANCE> 295,367
<TOTAL-ASSETS> 96,150,246
<DEPOSITS> 77,123,181
<SHORT-TERM> 4,000,000
<LIABILITIES-OTHER> 1,212,101
<LONG-TERM> 0
0
0
<COMMON> 5,151,579
<OTHER-SE> 8,663,385
<TOTAL-LIABILITIES-AND-EQUITY> 96,150,246
<INTEREST-LOAN> 4,969,223
<INTEREST-INVEST> 423,465
<INTEREST-OTHER> 146,521
<INTEREST-TOTAL> 5,539,209
<INTEREST-DEPOSIT> 2,800,031
<INTEREST-EXPENSE> 2,946,294
<INTEREST-INCOME-NET> 2,592,915
<LOAN-LOSSES> 62,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,787,129
<INCOME-PRETAX> 851,050
<INCOME-PRE-EXTRAORDINARY> 551,789
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 551,789
<EPS-PRIMARY> 0.86
<EPS-DILUTED> 0.80
<YIELD-ACTUAL> 0
<LOANS-NON> 533,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 232,867
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 295,367
<ALLOWANCE-DOMESTIC> 295,367
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 448,281
<INT-BEARING-DEPOSITS> 3,448,064
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 4,046,797
<INVESTMENTS-MARKET> 4,041,191
<LOANS> 76,728,459
<ALLOWANCE> 274,867
<TOTAL-ASSETS> 93,536,052
<DEPOSITS> 75,989,574
<SHORT-TERM> 3,000,000
<LIABILITIES-OTHER> 711,151
<LONG-TERM> 0
0
0
<COMMON> 5,142,190
<OTHER-SE> 8,693,137
<TOTAL-LIABILITIES-AND-EQUITY> 93,536,052
<INTEREST-LOAN> 3,247,655
<INTEREST-INVEST> 345,331
<INTEREST-OTHER> 47,804
<INTEREST-TOTAL> 3,640,790
<INTEREST-DEPOSIT> 1,834,179
<INTEREST-EXPENSE> 1,927,964
<INTEREST-INCOME-NET> 1,712,826
<LOAN-LOSSES> 42,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 903,947
<INCOME-PRETAX> 833,849
<INCOME-PRE-EXTRAORDINARY> 833,849
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 540,433
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.78
<YIELD-ACTUAL> 8.27
<LOANS-NON> 487,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 232,867
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 274,867
<ALLOWANCE-DOMESTIC> 274,867
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
