<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 25049
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
---------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_________________ to __________________
Commission File Number 0-22734
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KS BANCORP, INC.
----------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1842707
-------------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
207 West Second Street
P. O. Box 219
Kenly, North Carolina 27542
---------------------------
(Address of principal executive office) (Zip code)
(919)-284-4157
--------------
(Registrant's telephone number)
N/A
---
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check x whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and 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
------- -------
As of October 29, 1998 there were issued and outstanding 888,633
shares of the Registrant's common stock, no par value.
KS Bancorp, Inc. and Subsidiary
<PAGE>
KS Bancorp, Inc. and Subsidiary
CONTENTS
PART I - FINANCIAL INFORMATION Pages
-----
Item 1. Condensed Financial Statements
Consolidated statements of financial condition at September 30,
1998 (Unaudited) and December 31, 1997 1-2
Consolidated statements of income for the three months ended
September 30, 1998 and September 30, 1997 (Unaudited) 3
Consolidated statements of comprehensive income for the three months
ended September 30, 1998 and September 30, 1997 (Unaudited) 4
Consolidated statements of income for the nine months ended
September 30, 1998 and September 30, 1997 (Unaudited) 5
Consolidated statements of comprehensive income for the nine months
ended September 30, 1998 and September 30, 1997 (Unaudited) 6
Consolidated statements of cash flows for the nine months ended
September 30, 1998 and September 30, 1997 (Unaudited) 7-8
Notes to consolidated financial statements 9-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1998 and December 31, 1997
September 30, December 31,
ASSETS 1998 1997
- -----------------------------------------------------------------------------
(Unaudited)
Cash and short-term cash investments:
Interest-bearing 10,368,824 $ 4,781,687
Noninterest-bearing 644,073 851,102
Investment securities:
Held to maturity, at cost 2,050,883 3,104,261
Available for sale, at fair value 8,701,216 6,427,784
FHLB stock and other nonmarketable
equity securities 883,000 790,300
Loans receivable, net 102,701,962 95,002,402
Accrued interest receivable 797,372 689,427
Property and equipment, net 2,163,696 2,133,715
Refundable income taxes -- 78,066
Prepaid expenses and other assets 245,180 118,887
-----------------------------
Total Assets $128,556,206 $113,977,631
=============================
1
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ---------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Liabilities:
Deposits $ 106,065,647 $ 90,313,658
Advances from Federal Home Loan Bank 6,000,000 8,000,000
Accounts payable and accrued expenses 300,852 302,876
Advance payments by borrowers for taxes and insurance 103,653 48,446
Deferred income taxes 800,022 706,566
Income taxes payable 20,070 --
--------------------------------
Total liabilities 113,290,244 99,371,546
--------------------------------
Stockholders' equity:
Preferred stock, no par value, authorized
5,000,000 shares; none issued -- --
Common stock, no par value, authorized
20,000,000 shares; issued 888,633 in 1998
and 885,356 in 1997, respectively -- --
Additional paid-in capital 5,280,025 5,225,975
Note receivable, ESOP (234,000) (234,000)
Accumulated other comprehensive income, unrealized gain
on securities available for sale, net of tax effect 884,266 716,197
Retained earnings, substantially restricted 9,335,671 8,897,913
--------------------------------
Total stockholders' equity 15,265,962 14,606,085
--------------------------------
Total liabilities and stockholders' equity $ 128,556,206 $ 113,977,631
================================
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income:
Loans $ 2,309,257 $ 2,050,736
Investment securities 144,310 130,515
Mortgage-backed securities 19,229 24,524
Interest-bearing deposits 122,035 26,478
--------------------------
Total interest income 2,594,831 2,232,253
Interest expense:
Deposits 1,361,346 1,085,572
Borrowings 98,908 120,925
--------------------------
Total interest expense 1,460,254 1,206,497
--------------------------
Net interest income 1,134,577 1,025,756
Provision for loan losses 14,000 19,000
--------------------------
Net interest income after provision for loan losses 1,120,577 1,006,756
Other income 73,566 41,354
--------------------------
1,194,143 1,048,110
--------------------------
Noninterest expense:
Compensation and employee benefits 397,492 347,604
Occupancy 29,330 26,938
Equipment maintenance and expense 41,687 16,826
Data processing and outside service fees 56,436 40,912
Insurance 23,866 23,865
Other 84,595 89,796
--------------------------
633,406 545,941
--------------------------
Income before income taxes 560,737 502,169
--------------------------
Income taxes:
Current 208,564 209,451
Deferred (321) (3,641)
--------------------------
208,243 205,810
--------------------------
Net income $ 352,494 $ 296,359
==========================
Basic earnings per share $ 0.41 $ 0.35
==========================
Diluted earnings per share $ 0.37 $ 0.31
==========================
Dividends per share $ 0.20 $ 0.15
==========================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended September 30, 1998 and 1997
1998 1997
- --------------------------------------------------------------------------------
Net income $352,494 $296,359
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on available for sale
securities arising during the period 79,408 20,190
---------------------
Comprehensive income 431,902 316,549
=====================
See Notes to Consolidated Financial Statements.
4
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine Months Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income:
Loans $ 6,667,821 $ 5,899,115
Investment securities 412,422 382,163
Mortgage-backed securities 58,583 74,138
Interest-bearing deposits 392,310 77,452
-----------------------------
Total interest income 7,531,136 6,432,868
Interest expense:
Deposits 3,898,034 3,155,019
Borrowings 342,054 255,086
-----------------------------
Total interest expense 4,240,088 3,410,105
-----------------------------
Net interest income 3,291,048 3,022,763
Provision for loan losses 33,500 19,000
-----------------------------
Net interest income after provision for loan losses 3,257,548 3,003,763
Other income 196,600 119,258
-----------------------------
3,454,148 3,123,021
-----------------------------
Noninterest expense:
Compensation and employee benefits 1,164,020 914,765
Occupancy 84,883 79,959
Equipment maintenance and expense 97,855 44,972
Data processing and outside service fees 181,456 125,701
Insurance 71,598 61,366
Other 320,438 296,216
-----------------------------
1,920,250 1,522,979
-----------------------------
Income before income taxes 1,533,898 1,600,042
-----------------------------
Income taxes:
Current 590,349 629,176
Deferred (9,553) 2,254
-----------------------------
580,796 631,430
-----------------------------
Net income $ 953,102 $ 968,612
=============================
Basic earnings per share $ 1.11 $ 1.14
=============================
Diluted earnings per share $ 1.00 $ 1.03
=============================
Dividends per share $ 0.60 $ 0.37
=============================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 953,102 $ 968,612
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on available for sale
securities arising during the period 168,069 141,194
--------------------------
Comprehensive income 1,121,171 1,109,806
==========================
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
KS BANCORP, INC. and subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 953,102 $ 968,612
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 72,080 77,064
Amortization of net premiums 1,914 --
Loss on sale of investment securities -- 5,905
Deferred income taxes (9,553) 2,254
Provision for loan losses 33,500 19,000
ESOP compensation expense credited to paid-in capital 53,300 36,238
Issuance of shares for stock options credited to paid-in capital 750 --
Changes in assets and liabilities:
(Increase) decrease in:
Accrued interest receivable (107,945) (140,907)
Prepaid expenses and other assets (126,293) (82,680)
Refundable income taxes 78,066 138,933
Increase (decrease) in:
Accrued expenses and other liabilities (2,024) 16,028
Income taxes payable 20,070 --
---------------------------
Net cash provided by operating activities 966,967 1,040,447
---------------------------
Cash Flows From Investing Activities
Proceeds from sales or maturities of available for sale securities 500,000 2,076,559
Proceeds from maturity of held to maturity securities 1,000,000 1,500,000
Purchase of available for sale securities (2,500,000) (3,311,616)
Purchase of nonmarketable equity securities (92,700) --
Net change in loans receivable (7,733,060) (11,135,396)
Principal repayments of mortgage backed securities 49,110 35,777
Purchase of property and equipment (102,061) (224,905)
---------------------------
Net cash used in investing activities (8,878,711) (11,059,581)
---------------------------
</TABLE>
7
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Financing Activities
Net increase in deposits $ 15,751,989 $ 4,116,059
Advance from Federal Home Loan Bank (2,000,000) 4,000,000
Increase in advance payments by borrowers
for taxes and insurance 55,207 45,099
Cash dividends paid (515,344) (319,286)
Issuance of common stock -- 8,740
Repurchase of common stock -- (2,640)
----------------------------
Net cash provided by financing activities 13,291,852 7,847,972
----------------------------
Net increase (decrease) in cash and cash equivalents 5,380,108 (2,171,162)
Cash and cash equivalents:
Beginning 5,632,789 6,160,236
----------------------------
Ending $ 11,012,897 $ 3,989,074
============================
Cash and cash equivalents:
Cash and short-term investments:
Interest-bearing $ 10,368,824 $ 3,546,616
Noninterest-bearing 644,073 442,458
----------------------------
$ 11,012,897 $ 3,989,074
============================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 4,236,401 $ 3,423,965
============================
Income taxes $ 509,091 $ 689,176
============================
Supplemental Disclosure of Noncash Investing and Financial
Activities
Change in unrealized gain on available for sale
securities, net of tax effect $ 168,069 $ 141,194
============================
</TABLE>
See Notes to Consolidated Financial Statements.
8
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements (except for the
statement of financial condition at December 31, 1997, which is audited) have
been prepared in accordance with generally accepted accounting principles for
interim financial information, with the instructions to Form 10-Q and Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (none of which were
other than normal recurring accruals) necessary for a fair presentation of the
financial position and results of operations for the periods presented have been
included. The results of operations for the three and nine month periods ended
September 30, 1998 are not necessarily indicative of the results of operations
that may be expected for the year ended December 31, 1998.
The accounting policies followed are as set forth in Note 1 of the Notes to
Consolidated Financial Statements in the 1997 KS Bancorp, Inc. annual report.
During the nine month period, the Bank adopted Statement of Financial Accounting
Standard ("SFAS") No. 130, "Reporting Comprehensive Income." This statement was
adopted effective January 1, 1998 as explained in Note 4 below.
Note 2. Allowance for Loan Losses
The Bank's allowance for loan losses increased by the related provision charged
to operations of $14,000 and $33,500 during the three and nine month periods
ended September 30, 1998 as compared to $19,000 during the same periods in 1997.
The Bank did not incur any loan charge-offs or recoveries during these periods.
The allowance at September 30, 1998 was $358,867 and the Bank's ratio of
nonperforming assets to total assets was .27%.
Note 3. Earnings Per Share (EPS)
The Bank adopted Statement of Financial Accounting Standard (SFAS) No. 128
during the year ended December 31, 1997. This statement requires dual
presentation of basic and diluted EPS with a reconciliation of the numerator and
denominator of the EPS computations. Basic earnings 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. There were no
adjustments required to net income for all periods presented in the computation
of diluted earnings per share. The basic and diluted weighted average shares
outstanding for the three and nine month periods are as follows:
9
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
Note 3. Earnings Per Share (Continued)
Three months:
1998 1997
----------------------
Weighted average outstanding shares used for basic EPS 861,333 852,856
Plus incremental shares from assumed issuance
of stock options 94,667 91,130
----------------------
Weighted average outstanding shares used for diluted EPS 956,000 943,986
======================
Nine months:
1998 1997
----------------------
Weighted average outstanding shares used for basic EPS 859,301 851,181
Plus incremental shares from assumed issuance
of stock options 97,381 88,203
----------------------
Weighted average outstanding shares used for diluted EPS 956,682 939,384
======================
Note 4. Adoption of SFAS Statement No. 130
The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting
Comprehensive Income", which the Bank was required to adopt as of January 1,
1998. The Statement requires the classification of items of other comprehensive
income by their nature in a financial statement and to display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. Other
comprehensive income refers to revenues, expenses, gains and losses that under
generally accepted accounting principles are included in comprehensive income
but excluded from net income, and are therefore included in changes in equity.
Other comprehensive income includes all such changes in equity other than those
resulting from investments by owners and distributions to owners.
SFAS No. 130 does not require a specific format for displaying comprehensive
income and its components in a financial statement, other than it must be
displayed with the same prominence as other financial statements that constitute
a full set of financial statements. The Bank has elected to display
comprehensive income in a separate statement of comprehensive income that begins
with net income. The only item of other comprehensive income that the Bank
currently has is associated with changes in unrealized gains and losses on
securities classified as available for sale.
10
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
This Form 10-Q contains certain forward-looking statements consisting of
estimates with respect to the financial condition, results of operations and
other business of KS Bancorp, Inc. 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 general and local market
conditions, legislative and regulatory conditions and an adverse interest rate
environment.
The following discussion and analysis is intended to assist readers in
understanding the results of operations and changes in financial position for
the three and nine month periods ended September 30, 1998 of KS Bancorp, Inc.
(the Corporation) and its wholly owned subsidiary, Kenly Savings Bank, SSB (the
Bank). This overview should be read in conjunction with the consolidated
financial statements.
Overview of 1998 Results:
Total assets increased by $14.6 million during the nine month period ended
September 30, 1998 primarily as result of an increase in the Bank's loan
portfolio which was funded primarily through increased deposits of $15.8 million
offset by repayments of short term FHLB advances of $2.0 million. Earnings for
the nine month period totaled approximately $953,000.
Loans increased by $1.6 million during the three month period ended September
30, 1998, building on the $6 million increase during the previous 2 quarters.
The increase resulted primarily from an increase in loan originations during the
quarter brought about by a continued strong loan demand in the Bank's primary
lending areas. The Bank originated these loans primarily for its portfolio.
Investment securities and short-term interest-bearing deposits, decreased by
approximately $745,000 during the third quarter and amounted to $22.0 million at
September 30, 1998. The market value of the Corporation's available for sale
securities increased by $129,000 during the quarter, primarily as a result of
movements in market interest rates.
The Corporation's annualized return on assets for the three and nine month
periods ended September 30, 1998 was 1.10% and 0.99%, respectively. For the same
periods in 1997, the annualized return was 1.08% and 1.17%, respectively. The
Corporation's return on equity for the three and nine month periods ended
September 30, 1998 was 9.40% and 8.48%, respectively, compared to 8.15% and
8.87% for the same periods in 1997.
During each of the quarters ended March 31, 1998, June 30, 1998 and September
30, 1998, the Corporation paid a cash dividend of $ .20, amounting to
approximately $171,000, $172,000 and $172,000 respectively. At September 30,
1998, the Corporation and the Bank's capital was significantly in excess of
regulatory capital requirements.
11
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Net income for the three and nine month periods ended September 30, 1998 was
$352,494 and $953,102, respectively. Net income for the comparable periods in
1997 was $296,359 and $968,162, respectively. Net interest income for the three
month period ended September 30, 1998 was approximately $109,000 higher than the
comparable period of 1997, while the net interest income for the nine month
period ended September 30, 1998 was approximately $268,000 higher than the
comparable period for 1997. The increase in net interest income is primarily
attributable to a small increase in the interest rate spread in effect during
the periods and a change in the mix of interest-earning assets favoring loans
receivable instead of investment securities. The yield on loans receivable is
typically higher than the yield on investment securities.
Noninterest expense increased by approximately $87,000 and $397,000 during the
three and nine month periods ended September 30, 1998 versus the comparable
period in 1997. The primary reason for the overall increase was due to increased
levels of compensation as a result of additional staffing and other expenses
associated with the operations of a new full-service branch in Garner opened
during the fourth quarter, 1997.
Asset Quality:
Nonperforming assets, which consist of nonaccrual loans and real estate acquired
through foreclosure, amounted to approximately $345,000 and $533,000 at
September 30, 1998 and December 31, 1997, respectively. The ratio of
nonperforming assets to total assets at September 30, 1998 and December 31, 1997
was .27% and .41%, respectively. Based on management's analysis of the adequacy
of its allowances at September 30, 1997, a provision for loan losses was made of
$14,000 and $33,500 during the three and nine months ended September 30, 1998.
Provisions which are charged to operations, and the resulting loan loss
allowances are amounts the Bank'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 or decrease the provision and resulting allowances is
based both on prior loan loss experience and other factors, such as changes in
the nature and volume of the loan portfolio, overall portfolio quality, and
current economic conditions.
The allowance for loan losses amounted to approximately $359,000 at September
30, 1998 and is considered adequate by management to absorb existing losses,
either known or as yet undetected.
Liquidity:
The term "liquidity" generally refers to an organization's ability to generate
adequate amounts of funds to meet its needs for cash. More specifically for
financial institutions, liquidity ensures that adequate funds are available to
meet deposit withdrawals, fund loan and capital expenditure commitments,
maintain reserve requirements, pay operating expenses, and provide funds for
debt service and other institutional commitments. Funds are primarily provided
through financial resources from operating activities, expansion of the deposit
base, borrowings, through the sale or maturity of investments, or maintenance of
shorter term interest-bearing deposits.
12
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
The Bank is required by regulations to maintain liquid assets, essentially cash,
short-term interest bearing deposits, substantially all investments, and
mortgage-backed securities, of at least 10% of total assets. A substantial
portion of the Bank's investment portfolio is classified as available for sale,
and liquidation of such portfolio, if need be, would not have accounting
implications on the Corporation's equity under SFAS No. 115. The Bank exceeded
its requirements at September 30, 1998 and management believes that the Bank's
liquidity is adequate to fund all outstanding commitments and other anticipated
cash needs.
Capital Resources and Adequacy:
KS Bancorp, Inc's stockholders' equity was $15.3 million, or 11.9% of total
assets at September 30, 1998. As a state chartered stock savings bank, the Bank
is required to meet three separate capital standards as established by the
Federal Deposit Insurance Corporation and an additional capital requirement
established by the State Administrator of the Savings Institutions Division. The
Bank was substantially in excess of all such capital requirements at September
30, 1998.
Year 2000 Issue
The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer systems
will be unable to interpret dates beyond the year 1999, which could cause a
system failure or other computer errors, leading to disruptions in the Bank's
operation. The Year 2000 date problem is a reality and the date for completion
of this project cannot be changed. The Bank identifies Year 2000 as among the
largest challenge that it has to face in moving into the next decade. In 1997,
the Bank developed a three-phase program for Y2K information systems compliance.
Phase I (Identification):
In this Phase, which was completed in early 1998, the Bank identified those
systems with which the Bank has its largest exposure to Y2K issues. The Bank
performed an inventory of all services and computer products that involved micro
processors in their operation. The Bank identified that it's service bureau was
it's major provider of financial data processing and it's most vulnerable link
to the Y2K event. The Bank further identified that it had 32 individual PC
workstations using DOS, Windows 3.1 and Windows 95 operating systems that may or
may not be vulnerable.
Phase II (Development and implementation of action plans):
In this Phase, the Bank has developed action plans to insure that the Bank is
compliant in all areas by late 1998. Financial software providers have been
contacted and new software updates have been received that are Y2K compliant.
The Bank is currently working in this phase. The Bank's data service provider is
currently approximately 75% complete in its renovation phase.
13
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Phase III (Testing):
The Bank is currently scheduled to test PC operation systems, financial software
systems and it's data processing services provider in November and December of
1998. This phase will enable the Bank to identify those areas that need further
research and testing to become Y2K compliant. In the financial and information
system area, a number of applications have been identified as being Y2K
compliant due to their recent implementation. The Bank's core financial and
reporting systems are not Y2K compliant, but are on schedule to be so by
December.
The Bank believes that it's expense will be minimal in making it's core service
Y2K compliant due to it's contract with the service provider to provide Y2K
compliant services and the Bank's having updated it's computer operations to
individual PC units within the past four years. The Bank has reviewed third
party relationships and has identified only a few relationships that will affect
it's operation. Most relationships are with consumers and small business
operators who state that they are or will be Y2K compliant. The Bank is
currently meeting the time line that the FFIEC has mandated and management is
confident that all of it's systems will be verified Year 2000 compliant and that
the bank will be able to process without interruption through the next
millennium.
Quantitative and Qualitative Disclosures About Market Risk
The Bank has not experienced any substantive change in it's portfolio risk
during the 3 month period ended September 30, 1998.
14
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not engaged in any legal proceedings at the
present time. From time to time, the Bank is a party to legal
proceedings within the normal course of business wherein it
enforces its security interest in loans made by it, and other
matters of a like kind.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed for the period covered
by this report.
15
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Dated October 29, 1998 By: /s/ Harold T. Keen
-------------------------- ------------------------
Harold T. Keen
President and CEO
Dated October 29, 1998 By: /s/ Helen B. Pollock
-------------------------- ------------------------
Helen B. Pollock
Treasurer
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 644,073
<INT-BEARING-DEPOSITS> 10,368,824
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
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<INVESTMENTS-CARRYING> 2,933,883
<INVESTMENTS-MARKET> 2,987,763
<LOANS> 103,060,829
<ALLOWANCE> 358,867
<TOTAL-ASSETS> 128,556,206
<DEPOSITS> 106,065,647
<SHORT-TERM> 6,000,000
<LIABILITIES-OTHER> 1,224,597
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 15,265,962
<TOTAL-LIABILITIES-AND-EQUITY> 128,556,206
<INTEREST-LOAN> 2,309,257
<INTEREST-INVEST> 144,310
<INTEREST-OTHER> 141,264
<INTEREST-TOTAL> 2,594,831
<INTEREST-DEPOSIT> 1,361,346
<INTEREST-EXPENSE> 1,460,254
<INTEREST-INCOME-NET> 1,134,577
<LOAN-LOSSES> 14,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 633,406
<INCOME-PRETAX> 560,737
<INCOME-PRE-EXTRAORDINARY> 560,737
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 352,494
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.37
<YIELD-ACTUAL> 3.62
<LOANS-NON> 345,451
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 344,867
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 358,867
<ALLOWANCE-DOMESTIC> 358,867
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
