<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
----------------------------
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
-------
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 3 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 August 10, 1999 there were issued and outstanding 886,733 shares of the
Registrant's common stock, no par value.
<PAGE>
KS Bancorp, Inc. and Subsidiary
CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Pages
-----
<S> <C>
Item 1. Condensed Financial Statements
Consolidated statements of financial condition at June 30, 1999
(Unaudited) and December 31, 1998 1-2
Consolidated statements of income for the six months ended
June 30, 1999 and June 30, 1998 (Unaudited) 3-4
Consolidated statements of cash flows for the six months ended
June 30, 1999 and June 30, 1998 (Unaudited) 5-6
Notes to consolidated financial statements 7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
- ---------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Cash and short-term cash investments:
Interest-bearing $ 8,411,072 $ 11,150,780
Noninterest-bearing 735,569 519,761
Investment securities:
Held to maturity, at cost 1,166,645 1,530,015
Available for sale, at fair value 10,886,005 7,590,856
FHLB stock and other nonmarketable equity securities 877,000 879,500
Loans receivable, net
Held for investment 109,794,608 105,335,147
Held for sale, at cost 70,000 855,500
Accrued interest receivable 827,394 716,796
Property and equipment, net 2,473,084 2,138,798
Prepaid expenses and other assets 359,502 175,327
---------------------------------------
Total Assets $ 135,600,879 $ 130,892,480
=======================================
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- ------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Liabilities:
Deposits $ 112,726,599 $ 107,934,224
Advances from Federal Home Loan Bank 6,000,000 6,000,000
Accounts payable and accrued expenses 244,226 284,295
Advance payments by borrowers for taxes and insurance 86,615 52,341
Deferred income taxes 745,841 905,897
Income taxes payable 19,266
----------------------------------------
Total liabilities 119,822,547 115,176,757
----------------------------------------
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 and outstanding 886,733 in 1999 and 888,633 in 1998
Additional paid-in capital 5,308,002 5,317,502
Unearned ESOP shares (195,000) (195,000)
Accumulated other comprehensive income 898,486 1,125,392
Retained earnings, substantially restricted 9,766,844 9,467,829
----------------------------------------
Total stockholders' equity 15,778,332 15,715,723
----------------------------------------
Total liabilities and stockholders' equity $ 135,600,879 $ 130,892,480
========================================
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income:
Loans $ 2,364,475 $ 2,200,532
Investment securities 134,529 145,418
Mortgage-backed securities 40,803 19,569
Interest-bearing deposits 93,022 164,510
---------------------------------
Total interest income 2,632,829 2,530,029
Interest expense:
Deposits 1,342,326 1,332,405
Borrowings 88,208 121,573
---------------------------------
Total interest expense 1,430,534 1,453,978
---------------------------------
Net interest income 1,202,295 1,076,051
Provision for loan losses 20,000 5,000
---------------------------------
Net interest income after provision for loan losses 1,182,295 1,071,051
Other income 94,403 66,370
---------------------------------
1,276,698 1,137,421
---------------------------------
Noninterest expense:
Compensation and employee benefits 441,510 374,123
Occupancy 28,010 29,161
Equipment maintenance and expense 36,344 27,352
Data processing and outside service fees 71,863 61,537
Insurance 21,766 23,866
Other 147,178 110,361
---------------------------------
746,671 626,400
---------------------------------
Income before income taxes 530,027 511,021
---------------------------------
Income taxes:
Current 218,004 189,481
Deferred (14,252) (4,104)
---------------------------------
203,752 185,377
---------------------------------
Net income $ 326,275 $ 325,644
=================================
Basic earnings per share $ 0.38 $ 0.38
=================================
Diluted earnings per share $ 0.34 $ 0.34
=================================
Dividends per share $ 0.20 $ 0.20
=================================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income:
Loans $ 4,674,504 $ 4,358,564
Investment securities 250,808 268,112
Mortgage-backed securities 74,559 39,354
Interest-bearing deposits 208,600 270,275
---------------------------------------------
Total interest income 5,208,471 4,936,305
Interest expense:
Deposits 2,674,130 2,536,688
Borrowings 175,446 243,146
---------------------------------------------
Total interest expense 2,849,576 2,779,834
---------------------------------------------
Net interest income 2,358,895 2,156,471
Provision for loan losses 32,000 19,500
---------------------------------------------
Net interest income after provision for loan losses 2,326,895 2,136,971
Other income 186,268 123,034
---------------------------------------------
2,513,163 2,260,005
---------------------------------------------
Noninterest expense:
Compensation and employee benefits 857,267 766,528
Occupancy 58,775 55,553
Equipment maintenance and expense 76,107 56,168
Data processing and outside service fees 146,128 125,020
Insurance 43,532 47,732
Other 275,804 235,843
---------------------------------------------
1,457,613 1,286,844
---------------------------------------------
Income before income taxes 1,055,550 973,161
---------------------------------------------
Income taxes:
Current 436,597 381,785
Deferred (25,595) (9,232)
---------------------------------------------
411,002 372,553
---------------------------------------------
Net income $ 644,548 $ 600,608
=============================================
Basic earnings per share $ 0.75 $ 0.70
=============================================
Diluted earnings per share $ 0.68 $ 0.63
=============================================
Dividends per share $ 0.40 $ 0.40
=============================================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 644,548 $ 600,608
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 56,007 48,856
Amortization of net premiums (discounts) 9,522 1,298
Gain on sale of real estate acquired in settlement of loans (1,061)
Deferred income taxes (25,595) (9,232)
Provision for loan losses 32,000 19,500
ESOP compensation expense credited to paid-in capital 26,000 39,650
Originations of loans held for sale (70,000)
Proceeds from sale of loans held for sale 855,500
Changes in assets and liabilities:
(Increase) decrease in:
Accrued interest receivable (110,598) (52,035)
Prepaid expenses and other assets (183,874) (340,627)
Refundable income taxes 78,066
Increase (decrease) in:
Accrued expenses and other liabilities (40,069) (38,227)
Income taxes payable 19,266 10,505
------------------------------------------
Net cash provided by operating activities 1,211,646 358,362
------------------------------------------
Cash Flows From Investing Activities
Proceeds from sales or maturity of available for sale securities 1,000,000 500,000
Proceeds from maturity of held to maturity securities 1,027,616
Repayments on mortgage-backed securities 426,421
Purchase of available for sale securities (4,729,089) (2,500,000)
(Purchase) sale of nonmarketable equity securities 2,500 (92,700)
Net change in loans receivable (4,572,590) (6,103,348)
Proceeds from sale of real estate acquired in settlement of loans 82,190
Purchase of property and equipment (390,294) (90,454)
------------------------------------------
Net cash used in investing activities (8,180,862) (7,258,886)
------------------------------------------
</TABLE>
5
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six months ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Financing Activities
Net increase in deposits $ 4,792,375 $ 13,756,479
Increase in advance payments by borrowers
for taxes and insurance 34,274 42,873
Repurchase of common stock shares (35,500)
Cash dividends paid (345,833) (343,078)
-------------------------------------------
Net cash provided by financing activities 4,445,316 13,456,274
-------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,523,900) 6,555,750
Cash and cash equivalents:
Beginning 11,670,541 5,632,789
-------------------------------------------
Ending $ 9,146,641 $ 12,188,539
===========================================
Cash and cash equivalents:
Interest-bearing $ 8,411,072 $ 11,219,725
Noninterest-bearing 735,569 968,814
-------------------------------------------
$ 9,146,641 $ 12,188,539
===========================================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 2,851,535 $ 2,772,307
===========================================
Taxes $ 418,817 $ 310,091
===========================================
Supplemental Disclosures of Noncash Investing and Financial
Activities:
Transfer from loans to real estate acquired in settlement
of loans $ 81,129 $ -
===========================================
Change in unrealized gain (loss) on available for sale
securities, net of tax effect $ (226,906) $ 88,661
===========================================
</TABLE>
See Notes to Consolidated Financial Statements.
6
<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, 1998, 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 six month period ended June 30, 1999
are not necessarily indicative of the results of operations that may be expected
for the year ended December 31, 1999.
The accounting policies followed are as set forth in Note 1 of the Notes to
Consolidated Financial Statements in the 1998 KS Bancorp, Inc. annual report.
Note 2. Allowance for Loan Losses
The Bank's allowance for loan losses increased by the related provision charged
to operations of $20,000 and $12,000 during the three and six month periods
ended June 30, 1999. The provision for the same three and six month periods
ended June 30, 1998 was $5,000 and $19,500, respectively. The Bank did not incur
any loan charge-offs or recoveries during these periods. The allowance at June
30, 1999 was $390,867 and the Bank's ratio of nonperforming assets to total
assets was .47%.
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 six month periods are as follows:
<TABLE>
<CAPTION>
Three months ended:
1999 1998
----------------------------
<S> <C> <C>
Weighted average outstanding shares used for basic EPS 864,811 859,966
Plus incremental shares from assumed issuance
of stock options 85,463 101,365
----------------------------
Weighted average outstanding shares used for diluted EPS 950,274 961,331
----------------------------
</TABLE>
7
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
Note 3. Earnings Per Share (EPS) (Continued)
<TABLE>
<CAPTION>
Six months ended:
1999 1998
----------------------------
<S> <C> <C>
Weighted average outstanding shares used for basic EPS 864,374 858,268
Plus incremental shares from assumed issuance
of stock options 85,474 100,912
----------------------------
Weighted average outstanding shares used for diluted EPS 949,848 959,180
============================
</TABLE>
Note 3. Consolidated Statements of Comprehensive Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 and 1998
1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 326,275 $ 325,644
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on available for sale
securities arising during the period (71,308) (10,935)
-------------------------------
Comprehensive income $ 254,967 $ 314,709
===============================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 and 1998
1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 644,548 $ 600,608
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on available for sale
securities arising during the period (226,906) 88,661
------------------------------
Comprehensive income $ 417,642 $ 689,269
==============================
</TABLE>
8
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
Note 5. Stock Repurchase Plan
On February 24, 1999, the Company's Board of Directors adopted an amended and
restated stock repurchase plan. Under the plan, the Company will be able to
repurchase shares of its outstanding common stock in the open market or in
privately negotiated transactions.
9
<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 quarter and six months ended June 30, 1999 of KS Bancorp, Inc. (the
Corporation) and its wholly owned subsidiary, KS Bank, Inc. (the Bank). This
overview should be read in conjunction with the consolidated financial
statements.
Overview of Results
Total assets increased by $4.8 million during the six month period ended June
30, 1999 primarily as a result of an increase in the Bank's loan portfolio which
was funded primarily through increased deposits of $4.8 million. Earnings for
the period totaled approximately $645,000.
Loans increased by $1.4 million during the three month period ended June 30,
1999, primarily as a result of 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 for its portfolio. In addition,
the Bank began originating loans to be sold on the secondary market during 1998.
At December 31, 1998 there was $855,500 in loans held for sale. During the
second quarter of 1999, the Bank sold all of those loans and held $70,000 for
sale at June 30, 1999.
Investment securities and short-term interest-bearing deposits, increased
slightly during the second quarter and amounted to $21.3 million at June 30,
1999. The market value of the Corporation's available for sale securities
decreased by approximately $71,000 during the quarter, primarily as a result of
movements in market interest rates. At June 30, 1999, the Corporation's
available for sale portfolio had securities with unrealized gains of
approximately $1,449,000. During the quarter, the Corporation received proceeds
from sales and maturities of investments totaling $731,000, and purchased
investments totaling approximately $3.0 million.
The Corporation's annualized return on assets for the three and six month
periods ended, June 30, 1999 was .96% and .95%, respectively. For the same
periods in 1998, the annualized return was 1.02% and .94%, respectively. The
Corporation's annualized return on equity for the three and six month periods
ended June 30, 1999 was 8.27% and 8.17%, respectively, compared to 8.69% and
8.01% for the same periods in 1998.
During the second quarter, the Corporation paid a cash dividend of $.20 a share,
amounting to approximately $173,000. At June 30, 1999, the Corporation and the
Bank's capital was significantly in excess of regulatory capital requirements.
10
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Net income for the three and six month periods ended June 30, 1999 was $326,275
($.34 per share fully-diluted ) and $644,548 ($.68 per share fully-diluted),
respectively. Net interest income for the three month period ended June 30, 1999
was approximately $126,000 higher than the comparable period of 1998. For the
six months period ended June 30, 1999, net interest income amounted to
approximately $2,359,000, an increase of $203,000 from the approximately
$2,156,000 reported for the six months ended June 30, 1998. 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 $120,000 during the three month
period ended June 30, 1999 versus the comparable period in 1998. For the six
months period ended June 30, 1999, noninterest expense amounted to approximately
$1,458,000, an increase of $171,000 from the approximately $1,287,000 reported
for the six months ended June 30, 1998. The primary reason for the overall
increase was due to increased levels of compensation and other expenses
associated with the operations of the new loan production office and
full-service branch.
Asset Quality
Nonperforming assets, which consist of nonaccrual loans, amounted to
approximately $640,000 and $291,000 at June 30, 1999 and December 31, 1998,
respectively. The ratio of nonperforming assets to total assets at June 30, 1999
and December 31, 1998 was .47% and .22%, respectively. Based on management's
analysis of the adequacy of its allowances at June 30, 1999, a provision for
loan losses was made of $32,000 during the six months ended June 30, 1999.
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 $391,000 at June 30,
1999 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.
11
<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
such requirements at June 30, 1999 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 $15.8 million, or 11.64% of total
assets at June 30, 1999. 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 June 30, 1999.
Year 2000 Problem. The "Year 2000 Problem" centers on the inability of computer
systems to recognize the Year 2000. Many existing computer programs and systems
were originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Bank and its operations may be affected by
the Year 2000 Problem due to the nature of financial information. Software,
hardware, and equipment both within and outside the Bank's direct control and
with whom the Bank electronically or operationally interfaces (e.g. third party
vendors providing data processing, information system management, maintenance of
computer systems, and credit bureau information) are likely to be affected.
Furthermore, if computer systems are not adequately changed to identify the Year
2000, many computer applications could fail or create erroneous results. As a
result, many calculations which rely on the date field information, such as
interest, payment or due dates and other operating functions, will generate
results which could be significantly misstated, and the Bank could experience a
temporary inability to process transactions, send invoices or engage in similar
normal business activities.
In addition, non-information technology systems, such as telephones and copiers
may also contain embedded technology which controls its operation and which may
be affected by the Year 2000 Problem. When the Year 2000 arrives, systems,
including some of those with embedded chips, may not work properly because of
the way they store date information. They may not be able to deal with the date
01/01/00 and may not be able to deal with operational 'cycles' such as 'do X
every 100 days'. Thus, even non-information technology systems may affect the
normal operations of the Bank upon the arrival of the Year 2000.
Under certain circumstances, failure to adequately address the Year 2000 Problem
could adversely affect the viability of the Bank's suppliers and creditors and
the creditworthiness of its borrowers. Thus, if not adequately addressed, the
Year 2000 Problem could result in a significant adverse impact on the Bank's
products, services and competitive condition.
12
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Year 2000 Problem (Continued)
In order to address the Year 2000 Problem and to minimize its potential adverse
impact, management has begun a process to identify areas that will be affected
by the Year 2000 Problem, assess its potential impact on the operations of the
Bank, monitor the progress of third party software vendors in addressing the
matter, test changes provided by these vendors, and develop contingency plans
for any critical systems which are not effectively reprogrammed. A committee of
senior officers of the Bank has been formed to evaluate the effects that the
upcoming Year 2000 could have on computer programs utilized by the Bank. The
Bank's plan is divided into the five phases:
(1) Awareness. Define the problem, obtain executive level support and
develop an overall strategy. This phase was completed April 1998.
(2) Assessment. Identify all systems and the criticality of the systems.
This phase was completed April 1998.
(3) Renovation. Program enhancements, hardware and software upgrades,
system replacements, and vendor certifications. This phase was
completed May 1999.
(4) Validation. Test and verify system changes and coordinate with outside
parties. This phase was completed June 1999.
(5) Implementation. Components certified as Year 2000 compliant and moved
to production. This phase was completed July 1999.
Third party vendors provide the majority of software used by the Bank. All of
the Bank's vendors are aware of the Year 2000 situation, and each has assured
the Bank that it is currently working to have its software compliant by July
1999, and testing for the critical applications began in April 1998. This will
enable the Bank to devote substantial time to the testing to the upgraded
systems prior to the arrival of the millennium. The Bank utilizes the service of
a third party vendor to provide the software which is used to process and
maintain most mortgage and deposit customer-related accounts. This vendor has
provided the Bank with a software version which has been certified to be Year
2000 compliant. Testing by the Bank is underway to verify compliance for its
application and usage. The Bank presently believes that with modifications to
existing software and conversions to new software, the Year 2000 Problem will be
mitigated without causing an adverse impact on the operations of the Bank.
However, if such modifications and conversions are not made, or are not
completed in a timely manner, the Year 2000 Problem could have an impact on the
operations of the Bank. As a result, a contingency plan has been developed. As
part of that plan, the Bank has developed and tested two different potential
situations, operating without electricity and operating with electricity without
computers. The Bank has created forms and run tests assuming the above and feels
they can operate for 5 days without electricity and 30 days with electricity but
without computers.
13
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Year 2000 Problem (Continued)
In addition, implementing, monitoring and managing the Year 2000 project will
result in additional direct and indirect costs to the Bank. Direct costs include
potential charges by third party software vendors for product enhancements,
costs involved in testing software products for Year 2000 compliance, and any
resulting costs for developing and implementing contingency plans. Indirect
costs will principally consist of the time devoted by existing employees in
monitoring software vendor progress, testing enhanced software products and
implementing any necessary contingency plans. The Bank has spent approximately
$31,000 on Year 2000 related costs to date and estimates that it will spend an
additional $4,000 for Year 2000 compliance. Both direct and indirect costs of
addressing the Year 2000 Problem will be charged to earnings as incurred. The
Bank does not believe that such costs will have a material effect on results of
operations. However, there can be no guarantee that the systems of other
companies on which the Bank's systems rely will be timely converted, or that a
failure to convert by another company or a conversion that is incompatible with
the Bank's systems, would not have material adverse effect on the Bank.
The costs of the project and the date on which the Bank plans to complete the
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ from those plans. Specific factors that
might cause such differences include, but are not limited to, the availability
and cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, and similar uncertainties.
Impact of Inflation and Changing Prices
The financial statements and accompanying footnotes have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without 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.
14
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The Bank has not experienced any substantive change in it's portfolio risk
during the six month period ended June 30, 1999.
15
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not engaged in any material 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
On May 4, 1999, the annual meeting of stockholders was held to
consider and vote upon the election of three directors of the
Company, and to ratify the appointment of McGladrey & Pullen,
LLP as independent auditors for the Company for the fiscal
year ending December 31, 1999. All items were approved by the
stockholders as shown below:
Vote concerning the election of directors of the Company:
For Withheld Total
-----------------------------------
Harold T. Keen 745,513 1,941 747,454
Ralph Scott, Jr. 740,313 7,141 747,454
Gordon Woodruff 744,980 2,474 747,454
Vote concerning ratification of McGladrey & Pullen, LLP as
independent auditors for the year ended December 31, 1999:
For Withheld Total
-----------------------------------
746,312 1,142 747,454
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.
16
<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 8-12-99 By: /s/ Harold T. Keen
---------- --------------------------
Harold T. Keen
President and CEO
Dated 8-12-99 By: /s/ Helen B. Pollock
---------- --------------------------
Helen B. Pollock
Treasurer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 735,569
<INT-BEARING-DEPOSITS> 8,411,072
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,886,005
<INVESTMENTS-CARRYING> 2,043,645
<INVESTMENTS-MARKET> 2,045,112
<LOANS> 110,255,475
<ALLOWANCE> 390,867
<TOTAL-ASSETS> 135,600,879
<DEPOSITS> 112,726,599
<SHORT-TERM> 6,000,000
<LIABILITIES-OTHER> 1,095,948
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 15,778,332
<TOTAL-LIABILITIES-AND-EQUITY> 135,600,879
<INTEREST-LOAN> 4,674,504
<INTEREST-INVEST> 325,367
<INTEREST-OTHER> 208,600
<INTEREST-TOTAL> 5,208,471
<INTEREST-DEPOSIT> 2,674,130
<INTEREST-EXPENSE> 2,849,576
<INTEREST-INCOME-NET> 2,358,895
<LOAN-LOSSES> 32,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,457,613
<INCOME-PRETAX> 1,055,550
<INCOME-PRE-EXTRAORDINARY> 1,055,550
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 644,548
<EPS-BASIC> 0.38
<EPS-DILUTED> 0.34
<YIELD-ACTUAL> 3.6
<LOANS-NON> 639,908
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 370,867
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 390,867
<ALLOWANCE-DOMESTIC> 390,867
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
