<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 September 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
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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
incorporation or organization) Identification No.)
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 November 10, 1999 there were issued and outstanding 872,433 shares of the
Registrant's common stock, no par value.
<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, 1999 (Unaudited) and December 31, 1998 1-2
Consolidated statements of income for the three months ended
September 30, 1999 and September 30, 1998 (Unaudited)
Consolidated statements of income for the nine months ended
September 30, 1999 and September 30, 1998 (Unaudited) 3-4
Consolidated statements of cash flows for the nine months ended
September 30, 1999 and September 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
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
(Unaudited)
Cash and short-term cash investments:
Interest-bearing $ 6,056,615 $ 11,150,780
Noninterest-bearing 861,809 519,761
Investment securities:
Held to maturity, at cost 1,160,746 1,530,015
Available for sale, at fair value 11,154,462 7,590,856
FHLB stock and other nonmarketable equity securities 877,000 879,500
Loans receivable, net
Held for investment 113,370,043 105,335,147
Held for sale, at cost 95,000 855,500
Accrued interest receivable 878,095 716,796
Property and equipment, net 2,522,289 2,138,798
Prepaid expenses and other assets 285,399 175,327
-------------------------------------
Total Assets $ 137,261,458 $ 130,892,480
=====================================
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(Unaudited)
Liabilities:
Deposits $ 114,520,315 $ 107,934,224
Advances from Federal Home Loan Bank 6,000,000 6,000,000
Accounts payable and accrued expenses 309,161 284,295
Advance payments by borrowers for taxes and insurance 100,440 52,341
Deferred income taxes 676,180 905,897
Income taxes payable 11,667 --
-----------------------------------------
Total liabilities 121,617,763 115,176,757
-----------------------------------------
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 872,433 in 1999 and 888,633 in 1998 -- --
Additional paid-in capital 5,061,802 5,317,502
Unearned ESOP shares (195,000) (195,000)
Accumulated other comprehensive income 808,630 1,125,392
Retained earnings, substantially restricted 9,968,263 9,467,829
-----------------------------------------
Total stockholders' equity 15,643,695 15,715,723
-----------------------------------------
Total liabilities and stockholders' equity $ 137,261,458 $ 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 September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income:
Loans $ 2,391,491 $ 2,309,257
Investment securities 149,044 144,310
Mortgage-backed securities 36,720 19,229
Interest-bearing deposits 91,438 122,035
-------------------------------------
Total interest income 2,668,693 2,594,831
Interest expense:
Deposits 1,353,075 1,361,346
Borrowings 87,451 98,908
-------------------------------------
Total interest expense 1,440,526 1,460,254
-------------------------------------
Net interest income 1,228,167 1,134,577
Provision for loan losses -- 14,000
-------------------------------------
Net interest income after provision for loan losses 1,228,167 1,120,577
Other income 79,948 73,566
-------------------------------------
1,308,115 1,194,143
-------------------------------------
Noninterest expense:
Compensation and employee benefits 451,287 397,492
Occupancy 31,169 29,330
Equipment maintenance and expense 44,904 41,687
Data processing and outside service fees 76,572 56,436
Insurance 21,766 23,866
Other 114,798 84,595
-------------------------------------
740,496 633,406
-------------------------------------
Income before income taxes 567,619 560,737
-------------------------------------
Income taxes:
Current 203,451 208,564
Deferred (9,978) (321
-------------------------------------
193,473 208,243
-------------------------------------
Net income $ 374,146 $ 352,494
=====================================
Basic earnings per share $ 0.43 $ 0.41
=====================================
Diluted earnings per share $ 0.39 $ 0.37
=====================================
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)
Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest and dividend income:
Loans $ 7,065,995 $ 6,667,821
Investment securities 399,852 412,422
Mortgage-backed securities 111,279 58,583
Interest-bearing deposits 300,038 392,310
-------------------------------------
Total interest income 7,877,164 7,531,136
Interest expense:
Deposits 4,027,205 3,898,034
Borrowings 262,897 342,054
-------------------------------------
Total interest expense 4,290,102 4,240,088
-------------------------------------
Net interest income 3,587,062 3,291,048
Provision for loan losses 32,000 33,500
-------------------------------------
Net interest income after provision for loan losses 3,555,062 3,257,548
Other income 266,216 196,600
-------------------------------------
3,821,278 3,454,148
-------------------------------------
Noninterest expense:
Compensation and employee benefits 1,308,554 1,164,020
Occupancy 89,944 84,883
Equipment maintenance and expense 121,011 97,855
Data processing and outside service fees 222,700 181,456
Insurance 65,298 71,598
Other 390,602 320,438
-------------------------------------
2,198,109 1,920,250
-------------------------------------
Income before income taxes 1,623,169 1,533,898
-------------------------------------
Income taxes:
Current 640,048 590,349
Deferred (35,573) (9,553
-------------------------------------
604,475 580,796
-------------------------------------
Net income $ 1,018,694 $ 953,102
=====================================
Basic earnings per share $ 1.18 $ 1.11
=====================================
Diluted earnings per share $ 1.07 $ 1.00
=====================================
Dividends per share $ 0.60 $ 0.60
=====================================
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 1,018,694 $ 953,102
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 106,745 72,080
Amortization of net premiums (discounts) 19,816 1,914
Gain on sale of real estate acquired in settlement of loans (1,061)
Deferred income taxes (35,573) (9,553)
Provision for loan losses 32,000 33,500
ESOP compensation expense credited to paid-in capital 40,563 53,300
Originations of loans held for sale (95,000)
Issuance of shares for stock options credited to paid-in -- 750
capital
Proceeds from sale of loans held for sale 855,500 --
Changes in assets and liabilities:
(Increase) decrease in:
Accrued interest receivable (161,299) (107,945)
Prepaid expenses and other assets (110,072) (126,293)
Refundable income taxes -- 78,066
Increase (decrease) in:
Accrued expenses and other liabilities 24,866 (2,024)
Income taxes payable 11,667 20,070
----------------------------------------
Net cash provided by operating activities 1,706,846 966,967
----------------------------------------
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 -- 1,000,000
Repayments on mortgage-backed securities 504,030 49,110
Purchase of available for sale securities (5,229,089) (2,500,000)
(Purchase) sale of nonmarketable equity securities 2,500 (92,700)
Net change in loans receivable (8,148,025) (7,733,060)
Proceeds from sale of real estate acquired in settlement of loans 82,190
Purchase of property and equipment (490,236) (102,061)
----------------------------------------
Net cash used in investing activities (12,278,630) (8,878,711)
----------------------------------------
</TABLE>
5
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Financing Activities
Net increase in deposits $ 6,586,091 $ 15,751,989
Advance from Federal Home Loan Bank (2,000,000)
Increase in advance payments by borrowers
for taxes and insurance 48,099 55,207
Repurchase of common stock shares (296,263) --
Cash dividends paid (518,260) (515,344)
-----------------------------------
Net cash provided by financing activities 5,819,667 13,291,852
-----------------------------------
Net increase (decrease) in cash and cash equivalents (4,752,117) 5,380,108
Cash and cash equivalents:
Beginning 11,670,541 5,632,789
-----------------------------------
Ending $ 6,918,424 $ 11,012,897
===================================
Cash and cash equivalents:
Interest-bearing $ 6,056,615 $ 10,368,824
Noninterest-bearing 861,809 644,073
-----------------------------------
$ 6,918,424 $ 11,012,897
===================================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 4,305,963 $ 4,236,401
===================================
Taxes $ 632,817 $ 509,091
===================================
Supplemental Disclosures of Noncash Investing and Financial
Activities:
Change in unrealized gain (loss) on available for sale
securities, net of tax effect $ 316,762 $ 168,069
===================================
</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 nine month period ended September
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 $0 and $32,000 during the three and nine month periods ended
September 30, 1999. The provision for the same three and nine month periods
ended September 30, 1998 was $14,000 and $33,500, respectively. The Bank
incurred minimal loan charge-offs or recoveries during these periods. The
allowance at September 30, 1999 was $391,720 and the Bank's ratio of
nonperforming assets to total assets was .23%.
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.
7
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
Note 3. Earnings Per Share (EPS) (Continued)
The basic and diluted weighted average shares outstanding for the three and nine
month periods are as follows:
Three months ended:
<TABLE>
<CAPTION>
1999 1998
-----------------------------
<S> <C> <C>
Weighted average outstanding shares used for basic EPS 860,568 861,333
Plus incremental shares from assumed issuance
of stock options 87,413 94,667
-----------------------------
Weighted average outstanding shares used for diluted EPS 947,981 956,000
=============================
<CAPTION>
Nine months ended:
1999 1998
-----------------------------
<S> <C> <C>
Weighted average outstanding shares used for basic EPS 863,092 859,301
Plus incremental shares from assumed issuance
of stock options 86,122 97,381
-----------------------------
Weighted average outstanding shares used for diluted EPS 949,214 956,682
=============================
</TABLE>
Note 4. Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 374,146 $ 352,494
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on available for sale
securities arising during the period (89,856) 79,408
---------------------------------
Comprehensive income $ 284,290 $ 431,902
=================================
</TABLE>
8
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
Note 4. Consolidated Statements of Comprehensive Income (Unaudited)
(Continued)
Nine Months Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 1,018,694 $ 953,102
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on available for sale
securities arising during the period (316,762) 168,069
-------------------------------------
Comprehensive income $ 701,932 $ 1,121,171
=====================================
</TABLE>
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 nine months ended September 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 $6.4 million during the nine month period ended
September 30, 1999 primarily as a result of an increase in the Bank's loan
portfolio which was funded primarily through increased deposits of $6.6 million.
Earnings for the nine month period totaled approximately $1,019,000.
Loans increased by $3.6 million during the three month period ended September
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 1999,
the Bank sold all of those loans and held $95,000 for sale at September 30,
1999.
Investment securities and short-term interest-bearing deposits, decreased
slightly during the third quarter and amounted to $19.3 million at September 30,
1999. The market value of the Corporation's available for sale securities
decreased by approximately $90,000 during the quarter, primarily as a result of
movements in market interest rates. At September 30, 1999, the Corporation's
available for sale portfolio had securities with unrealized gains of
approximately $1,336,000. During the quarter, the Corporation received
proceeds from sales and maturities of investments totaling $78,000, and
purchased investments totaling approximately $500,000.
The Corporation's annualized return on assets for the three and nine month
periods ended, September 30, 1999 was 1.09% and .99%, respectively. For the same
periods in 1998, the annualized return was 1.10% and .99%, respectively. The
Corporation's annualized return on equity for the three and nine month periods
ended September 30, 1999 was 9.49% and 8.61%, respectively, compared to 9.40%
and 8.48% for the same periods in 1998.
During each of the quarters ended March 31, 1999, June 30, 1999 and September
30, 1999, the Corporation paid a cash dividend of $.20 a share, amounting to
approximately $173,000, respectively. At September 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 nine month periods ended September 30, 1999 was
$374,146 ($.39 per share fully-diluted ) and $1,018,694 ($1.07 per share fully-
diluted), respectively. Net interest income for the three month period ended
September 30, 1999 was approximately $94,000 higher than the comparable period
of 1998. For the nine months period ended September 30, 1999, net interest
income amounted to approximately $3,587,000, an increase of $296,000 from the
approximately $3,291,000 reported for the nine months ended September 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 $107,000 during the three month
period ended September 30, 1999 versus the comparable period in 1998. For the
nine months period ended September 30, 1999, noninterest expense amounted to
approximately $2,198,000, an increase of $278,000 from the approximately
$1,920,000 reported for the nine months ended September 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 full-service branch.
Asset Quality
Nonperforming assets, which consist of nonaccrual loans, amounted to
approximately $309,000 and $291,000 at September 30, 1999 and December 31, 1998,
respectively. The ratio of nonperforming assets to total assets at September
30, 1999 and December 31, 1998 was .23% and .22%, respectively. Based on
management's analysis of the adequacy of its allowances at September 30, 1999, a
provision for loan losses was made of $32,000 during the nine months ended
September 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 $392,000 at September
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 September 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 $15.6 million, or 11.40% of total
assets at September 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
September 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.
12
<PAGE>
KS BANCORP,INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Year 2000 Problem (Continued)
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.
In order to address the Year 2000 Problem and to minimize its potential adverse
impact, management has completed 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 evaluated the effects that the upcoming
Year 2000 could have on computer programs utilized by the Bank. The Bank's plan
was 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 Year 2000 compliant. 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 has been performed 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 developed and tested two different potential situations,
operating without electricity, and operating with electricity, but without
computers. The Bank has
13
<PAGE>
KS BANCORP,INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Year 2000 Problem (Continued)
created forms and run tests assuming the above and believes they can operate for
5 days without electricity and 30 days with electricity, but without computers.
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 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
$33,000 on Year 2000 related costs to date and estimates that it will spend an
additional $2,000 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 nine month period ended September 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
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.
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 11-10-99 By: /s/ Harold T. Keen
-------------- --------------------------------
Harold T. Keen
President and CEO
Dated 11-10-99 By: /s/ Helen B. Pollock
-------------- --------------------------------
Helen B. Pollock
Treasurer
17
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<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
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