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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1999
-------------------------
Commission file number 0-22734
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KS BANCORP, INC.
--------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
Registrant's telephone number, including area code (919) 284-4157
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Securities Registered Pursuant to Section 12(b) of the Act: None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, no par value
------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _______
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Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to
the price at which the stock was sold, or the average bid and asked prices of
such stock, as of a specified date within 60 days prior to the date of filing:
$10,146,422 common stock, no par value, based on the closing price of such
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common stock on March 15, 2000.
- -------------------------------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
921,578 shares of common stock, no par value, outstanding at March 15, 2000.
- -----------------------------------------------------------------------------
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report of KS Bancorp, Inc. for the year ended December
31, 1999, are incorporated by reference into Part I, Part II and Part IV.
Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders of
KS Bancorp, Inc. to be held on May 2, 2000, are incorporated by reference into
Part III.
Portions of the Registration Statement of KS Bancorp, Inc. on Form S-1,
Registration No. 33-69522, dated September 25, 1993, as amended on November 3,
1993, are incorporated by reference into Part IV.
2
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PART I
ITEM 1. BUSINESS
General
Prior to December 29, 1993, KS Bank, Inc., formerly known as Kenly Savings
Bank, Inc., SSB, (the "Bank") operated as a mutual North Carolina-chartered
savings bank. On December 29, 1993, the Bank converted from a North Carolina-
chartered mutual savings bank to a North Carolina-chartered stock savings bank
(the "Conversion"). In connection with the Conversion, all of the issued and
outstanding capital stock of the Bank was acquired by KS Bancorp, Inc., a North
Carolina corporation (the "Company") which was organized to become the holding
company for the Bank. At that time, the Company had an initial public offering
of its common stock.
The Company is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Company Act of 1956, as amended (the "BHCA") and the savings bank
holding company laws of North Carolina. The Company's executive office is
located at 207 West Second Street, Kenly, North Carolina. The Company's
activities consist of owning and operating the Bank, holding certain
indebtedness outstanding from the Bank's Employee Stock Ownership Plan (the
"ESOP") and managing its investments. The Company's principal sources of income
are earnings on its investments and interest payments received from the ESOP.
In addition, the Company receives dividends which are declared and paid by the
Bank on its capital stock.
The Bank was chartered in 1924. It has been a member of the Federal Home
Loan Bank ("FHLB") system since 1936, and its deposits have been federally
insured since 1961. The Bank's deposits are insured by the Savings Association
Insurance Fund (the "SAIF") of the Federal Deposit Insurance Corporation (the
"FDIC") to the maximum extent permitted by law. As a North Carolina-chartered
savings bank, the Bank is regulated and examined by the Administrator, Savings
Institutions Division, North Carolina Department of Commerce (the
"Administrator") and the FDIC.
The Bank conducts business through six full service offices in Kenly (2),
Goldsboro, Wilson, Garner and Selma, North Carolina and a mortgage loan
production office in Clayton, North Carolina. At December 31, 1999, the Company
had consolidated total assets of $138.9 million, consolidated net loans of
$116.4 million, consolidated deposits of $116.5 million and consolidated
stockholders' equity of $15.4 million.
The Bank is engaged primarily in the business of attracting retail deposits
from the general public and using such deposits to make mortgage loans secured
by real estate. The Bank makes mortgage loans secured by owner-occupied and
non-owner occupied residential real estate, loans secured by non-residential
properties, construction loans and equity line of credit loans. The Bank also
makes loans which are not secured by real property, such as loans secured by
pledged deposit accounts, and various types of secured and unsecured consumer
loans. The Bank's primary source of revenue is interest income from its
lending activities. The Bank's other major sources of revenue are interest and
dividend income from investments and mortgage-backed securities, interest income
from its interest-earning deposit balances in other depository institutions, and
transaction and fee income from its lending and deposit activities. The Bank's
major expenses are interest on deposits and borrowings and noninterest expenses
such as employee compensation and benefits, federal deposit insurance premiums,
data processing expenses and occupancy expenses.
General economic conditions and related monetary and fiscal policies of
depository institution regulatory agencies, including the Federal Reserve, the
FDIC and the Administrator, significantly influence the operations of depository
institutions, including the Bank. Interest rates on competing investments and
general market rates of interest influence deposit flow and the Bank's cost of
funds. The demand for financing of real estate and other types of loans, which
in turn are affected by the interest rates at which such financing may be
offered and other factors affecting local demand and availability of funds,
influence demand for the Bank's lending activities.
3
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At December 31, 1999, the Company and the Bank had a total of 43 full-time
employees and 1 part-time employees.
The Company has no operations and conducts no business of its own other
than owning the Bank, holding the loan to the ESOP and managing its investments.
Accordingly, the discussion of the business which follows concerns the business
conducted by the Bank, unless otherwise indicated.
Lending Activities
General. The Bank is engaged primarily in the business of attracting
deposits from the general public and using the deposits to make mortgage loans
secured by real estate. The Bank's primary source of revenue is interest and
fee income from its lending activities, consisting primarily of conventional
first mortgage loans secured by real property located in its primary market
area. The Bank also makes loans secured by multi-family and nonresidential
properties, construction loans, equity line loans, savings account loans and
various types of secured and unsecured consumer loans. Approximately 97% of the
Bank's gross loan portfolio is secured by real estate. On December 31, 1999,
the Bank's largest single outstanding loan had a balance of approximately $1.5
million. In addition to interest earned on loans, the Bank receives fees in
connection with loan originations, loan servicing, loan modifications, late
payments, loan assumptions and other miscellaneous services.
Loan Portfolio Composition. The Bank's net loan portfolio totaled
approximately $116.4 million at December 31, 1999, representing 83.7% of the
Bank's total assets. Conventional first mortgage loans accounted for 72.7% of
the Bank's gross loan portfolio, before net items, on December 31, 1999.
Construction loans and equity line lines represented 12.4% and 8.4%,
respectively, of the Bank's gross loan portfolio, before net items, on that
date. See Note 3 of the "Notes to Consolidated Financial Statements" in the
Company's 1999 Annual Report to Stockholders. As of December 31, 1999, 76.7% of
the loans in the Bank's gross loan portfolio, before net items, had adjustable
interest rates.
The following table sets forth the time to contractual maturity of the
Bank's loan portfolio at December 31, 1999. Fixed rate and adjustable rate
loans are shown as due in the period of contractual maturity. Demand loans,
loans having no stated maturity and overdrafts are reported as due in one year
or less. The table does not include prepayments or scheduled principal
repayments. Prepayments and scheduled repayments in the loan portfolio totaled
$36.0 million, $33.0 million and $23.8 million in the fiscal years ended
December 31, 1999, 1998 and 1997, respectively. Amounts in the table are net of
loans in process and are net of unamortized loan fees.
<TABLE>
<CAPTION>
More Than More Than
One Yr. 1 Year to 5 Years
Or Less 5 Years --------- Total
-------- --------- ----------
Mortgage Loans: (In Thousands)
<S> <C> <C> <C> <C>
Fixed rate $ 803 $11,835 $15,780 $ 28,418
Adjustable rate 1,978 29,158 38,877 70,013
Equity Lines 10,314 - - 10,314
-------- ------- ------- --------
$13,095 $40,993 $54,657 $108,745
Other loans (includes consumer, commercial
& share): 8,010 - - 8,010
-------- ------- ------- --------
Totals before allowance $21,105 $40,993 $54,657 $116,755
Allowance (392) - - (392)
------- -------
$20,713 $40,493 $54,657 $116,363
======== ======= ======= ========
</TABLE>
4
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The following table sets forth the dollar amount at December 31, 1999
of all loans maturing or repricing on or after December 31, 2000 which have
fixed or adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Adjustable
Rates Rates
-------- ----------
(In Thousands)
<S> <C> <C>
Mortgage loans $27,615 $68,035
Other loans - -
------- -------
$27,615 $68,035
======= =======
</TABLE>
Although adjustable rate loans generally present less interest rate
risk to the Bank, they are generally considered to involve a greater degree of
credit risk than fixed rate loans because borrowers may have difficulty meeting
their payment obligations if interest rates and required payment amounts
increase substantially. Substantially all of the fixed-rate loans in the Bank's
mortgage loan portfolio have due on sale provisions allowing the Bank to declare
the unpaid balance due and payable in full upon the sale or transfer of an
interest in the property securing the loan.
Conventional First Mortgages. The Bank's primary lending activity,
which it intends to continue to emphasize, is the origination of conventional
first mortgage loans to enable borrowers to purchase or refinance one-to-four
family residential real property. The Bank also makes conventional first
mortgage loans secured by multi-family residential property and by
nonresidential real property. Consistent with the Bank's emphasis on being a
community-oriented financial institution, it is and has been the Bank's strategy
to focus its lending efforts in its primary market area. On December 31, 1999,
approximately 67.8% of the Bank's real estate loan portfolio, before net items,
consisted of one-to-four family residential real estate loans. These include
both loans secured by detached single-family residences and condominiums and
loans secured by housing containing not more than four separate dwelling units.
On that date, approximately 6.4% of the Bank's loan portfolio, before net items,
consisted of conventional first mortgage loans secured by multi-family
residential and nonresidential properties. Loans secured by multi-family
residential and nonresidential properties generally are larger than one-to-four
family residential loans and involve a greater degree of risk. Payments on
these loans depend to a large degree on results of operations and management of
the properties and may be affected to a greater extent by adverse conditions in
the real estate market or the economy in general.
Construction Lending. The Bank makes various types of construction
loans primarily for the construction of single-family dwellings. On December
31, 1999, the aggregate gross outstanding balances of construction loans had
increased to approximately $15.3 million, representing 12.4% of the Company's
gross loan portfolio, before net items. Some of these loans were made to
investors who are constructing properties on a speculative basis; others were
made to persons who are constructing properties for the purpose of occupying
them. Loans made to investors are generally "pure construction" loans which
require the payment of interest during the construction period and the payment
of the principal in full at the end of the construction period. Loans made to
individual property owners are both pure construction loans and "construction-
permanent" loans which generally provide for the payment of interest only during
a construction period, after which the loans convert to a permanent loan at
fixed or adjustable interest rates having terms similar to other permanent
loans.
Construction loans are generally considered to involve a higher degree
of risk than long-term financing secured by real estate which is already
occupied. A lender's risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at the
completion of construction and the estimated cost (including interest) of
construction. If the estimate of construction costs proves to be inaccurate,
the lender may be required to
5
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advance funds beyond the amount originally committed in order to permit
completion of construction. If the estimate of anticipated value proves to be
inaccurate, the lender may have security which has value insufficient to assure
full repayment. In addition, repayment of loans made to builders to finance
construction of properties is often dependent upon the builder's ability to sell
the property once construction is completed.
Home Equity Lines of Credit. At December 31, 1999, home equity loans
totaled $10.3 million and comprised approximately 8.4% of the Bank's gross loan
portfolio, before net items. These loans are generally secured by subordinate
against residential dwellings. In many of these cases, the Bank holds the
first lien on the security. Home equity lines of credit have terms of up to 15
years and interest rates which are adjustable based upon prime rates. Because
these loans involve revolving lines of credit which can be drawn over a period
of time, the Bank faces additional risks associated with changes in the
borrower's financial condition. Because home equity loans have adjustable rates
with no rate caps (other than usury limitations), increased delinquencies could
occur if interest rate increases occur and borrowers are unable to satisfy
higher payment requirements. Home equity loans are generally limited so that
amount of such loans, along with any senior indebtedness, does not exceed 80% of
the value of the real estate security.
Consumer Loans. During 1997 the Bank began originating consumer loans
and had $2.2 million in such loans outstanding on December 31, 1999. The Bank
makes both secured and unsecured consumer loans. Some consumer loans have fixed
interest rates; others have adjustable interest rates. Secured consumer loans
have personal property, such as automobiles, or real property as collateral.
Fixed rate consumer loans generally have shorter terms than adjustable rate
loans. The Bank intends to increase the amount of consumer loans in its
portfolio in future years.
Origination and Sale of Loans. In years prior to 1994, the Bank
generally did not originate its loans with the intention that they would be sold
in the secondary market. Loans generally were not originated in conformity with
the purchase requirements of the Federal Home Loan Mortgage Corporation
("FHLMC") or Federal National Mortgage Association ("FNMA"). However, in
January 1994 and October, 1994, the Bank opened a mortgage loan origination
office in Clayton, North Carolina and a mortgage loan origination office in
Goldsboro, North Carolina, respectively, and began originating loans in
conformity with the purchase requirements of the FHLMC and FNMA, so that they
could be sold in the secondary market if the Bank determined that such sales
were prudent. The Bank originated and sold $2.5 million in loans during the
fiscal year ended December 31, 1999. Nevertheless, the Bank continues to
originate many loans which satisfy its underwriting requirements which are
tailored for its local community but do not satisfy various requirements imposed
by FHLMC and FNMA. Such loans are not readily saleable in the secondary market
and could be sold only after the Bank incurred certain costs, such as costs for
surveys and title insurance an/or discounted the purchase price. The Bank has
historically found that its origination of nonconforming loans has not resulted
in a high level of nonperforming assets. In addition, these loans generally
produce a higher yield than are produced by loans which conform to the purchase
requirements of FHLMC and FNMA.
Nonperforming Assets. When a borrower fails to make a required
payment on a loan and does not cure the delinquency promptly, the loan is
classified as delinquent. In this event, the normal procedure followed by the
Bank is to make contact with the borrower at prescribed intervals in an effort
to bring the loan to a current status. In most cases, delinquencies are cured
promptly. If a delinquency is not cured, the Bank normally, subject to any
required prior notice to the borrower, commences foreclosure proceedings. If
the loan is not reinstated within the time permitted for reinstatement, or the
property is not redeemed prior to sale, the property may be sold at a
foreclosure sale. In foreclosure sales, the Bank may acquire title to the
property through foreclosure, in which case the property so acquired is offered
for sale and may be financed by a loan involving terms more favorable than those
normally offered. Any property acquired as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned until such time as it
is sold or otherwise disposed of by the Bank to recover its investment. As of
December 31, 1999, the Bank recorded no real estate acquired in settlement of
loans.
The Bank's general policy is to place a loan on nonaccrual status when
the loan becomes 90 days delinquent as it establishes reserves for uncollected
interest. Such interest when ultimately collected is credited to income in the
period received. Interest on loans considered to be impaired is treated
similarly. Loans delinquent more than 90 days amounted to $393,200 and $290,500
on December 31, 1999 and 1998, respectively. See Note 3 to "Notes to
Consolidated Financial Statements" in the Company's 1999 Annual Report to
Stockholders.
6
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The following table sets forth information with respect to
nonperforming assets identified by the Bank, including nonaccrual loans, real
estate owned and nonperforming investments in real estate at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------
1999 1998 1997
--------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
Total nonaccrual loans delinquent 90 days or more $ 393 $ 291 $ 533
Real estate owned - - -
-------- -------- --------
Total non-performing assets $ 393 $ 291 $ 533
======== ======== ========
Non-performing loans to total loans .34% .28% .50%
Non-performing assets to total assets .28% .22% .47%
Total assets $138,948 $130,892 $113,978
Total loans $116,363 $105,335 $ 95,002
</TABLE>
Allowance for Possible Loan Losses. In originating loans, the Bank
recognizes that credit losses will be experienced and that the risk of loss will
vary with, among other things, general economic conditions, the types of loans
being made, the creditworthiness of borrowers over the terms of the loans and,
in the case of secured loans, the quality of the security for the loans.
Management's policy is to maintain an adequate allowance for possible loan
losses based on, among other things, the Bank's historical loan loss
experience, evaluation of economic conditions and regular reviews of
delinquencies and loan portfolio quality. Specific allowances are provided for
individual loans when management considers ultimate collection is considered
questionable after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loans.
The Bank's level of allowances for loan losses at December 31, 1999, 1998 and
1997 was $392,000, $359,000 and $325,000, respectively.
Management continues to monitor the Bank's asset quality, to charge
off loans against the allowance for loan losses when appropriate and to provide
specific loss reserves when necessary. Although management believes it uses the
best information available to make determinations regarding the allowance for
loan losses, future adjustments may be necessary if circumstances change.
The following table describes the activity related to the Bank's
allowance for possible loan losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997 1996 1995
------ ----- ----- ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period $ 359 $ 325 $ 302 $ 233 $ 223
Provision for loan losses 36 34 23 69 10
Charge-offs (3) - - - -
Recoveries - - - - -
----- ----- ----- ----- -----
Balance, end of period $ 392 $ 359 $ 325 $ 302 $ 233
===== ===== ===== ===== =====
</TABLE>
7
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The following table sets forth the composition of the allowance for
possible loan losses by type of loan at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------
1998 1999 1997
----------------------- ----------------------- -----------------------
Amount of Amount of Amount of
Amount of Loans to Amount of Loans to Amount of Loans to
Allowance Gross Loans Allowance Gross Loans Allowance Gross Loans
--------- ----------- --------- ----------- --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential 1-4 family $ 218 55.61% $ 197 54.78% $ 212 65.02%
Residential multi-family 10 2.55% 10 2.82% 8 2.53%
Nonresidential real estate and other property 43 10.97% 21 5.78% 8 2.46%
Home equity and property improvement 52 13.27% 61 17.00% 49 15.20%
Construction 45 11.48% 44 12.35% 43 13.17%
----- ------- ----- ------- ----- -------
Total real estate loans $ 368 93.88% $ 333 92.73% $ 320 98.37%
Other loans 24 6.12% 26 7.27% 5 1.63%
----- ------- ----- ------- ----- -------
Total allowance for loan losses $ 392 100.00% $ 359 100.00% $ 325 100.00%
===== ======= ===== ======= ===== =======
<CAPTION>
At December 31,
--------------------------------------------------
1996 1995
----------------------- -----------------------
Amount of Amount of
Amount of Loans to Amount of Loans to
Allowance Gross Loans Allowance Gross Loans
--------- ----------- --------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage loans:
Residential 1-4 family $ 200 74.58% $ 159 76.44%
Residential multi-family 13 4.33% 11 5.47%
Nonresidential real estate and other property 6 2.81% 4 1.68%
Home equity and property improvement 39 8.65% 33 9.07%
Construction 44 9.40% 26 7.14%
----- ------- ----- -------
Total real estate loans $ 302 99.77% $ 233 99.80%
Other loans -- 0.23% -- 0.20%
----- ------- ----- -------
Total allowance for loan losses $ 302 100.00% $ 233 100.00%
===== ======= ===== =======
</TABLE>
8
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Investment Securities
Interest and dividend income from investment securities, including
mortgage-backed securities, generally provides the Bank's second largest source
of income after interest on loans. At December 31, 1999, the Bank's investment
portfolio totaled approximately $12.8 million and consisted of U.S. government
and agency securities, mortgage-backed securities and stock of the FHLB of
Atlanta.
As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's outstanding home loans or 5% of its outstanding advances from the FHLB of
Atlanta. No ready market exists for such stock, which is carried at cost. As of
December 31, 1999, the Bank's investment in stock of the FHLB of Atlanta was
$877,000.
North Carolina regulations require the Bank to maintain a minimum amount of
liquid assets. The computation of liquidity allows the inclusion of mortgage-
backed securities and other instruments which are readily marketable, including
investments with maturities in excess of five years.
See Note 2 of "Notes to Consolidated Financial Statements" in the Company's
1999 Annual Report to Stockholders.
Deposits and Borrowings
Deposits. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from loan principal repayments, interest payments, investment income and
principal repayments, interest from its own interest-earning deposits, advances
from the FHLB of Atlanta and otherwise from its operations. Loan repayments are
a relatively stable source of funds while deposit inflows and outflows may be
significantly influenced by general interest rates and money market conditions.
On December 31, 1999, 1998 and 1997, the Bank's deposits totaled $116.5 million,
$107.9 million and $90.3 million, respectively.
The Bank attracts both short-term and long-term deposits from the general
public by offering a variety of accounts and rates. The Bank offers passbook
savings accounts, negotiable order of withdrawal ("NOW") accounts, money market
demand accounts, non-interest-bearing accounts, and fixed interest rate
certificates with varying maturities. At December 31, 1999, 82.9% of the Bank's
deposits, excluding accrued interest payable, consisted of certificate accounts,
3.5% consisted of regular savings accounts, 6.5% consisted of NOW accounts, 4.9%
consisted of money market accounts and 2.2% consisted of noninterest-bearing
transaction accounts. Of the certificates of deposit described above, $25.8
million, or 26.7% had denominations of $100,000 or greater. Deposit flows are
greatly influenced by economic conditions, the general level of interest rates,
competition, and other factors, including the restructuring of the thrift
industry. The Bank's savings deposits traditionally have been obtained primarily
from its primary market area. The Bank utilizes traditional marketing methods to
attract new customers and savings deposits, including print, television and
radio media advertising and direct mailings. The Bank does not advertise for
deposits outside of its local market area or utilize the services of deposit
brokers.
See Note 5 to the "Notes to Consolidated Financial Statements" in the
Company's 1999 Annual Report to Stockholders.
Borrowings. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes. The Bank's principal
source of long-term borrowings are advances from the FHLB of Atlanta. The FHLB
system functions in a reserve credit capacity for savings institutions. As a
member, the Bank is required to own capital stock in the FHLB of Atlanta and is
authorized to apply for advances from the FHLB of Atlanta on the security of
that stock and a floating
9
<PAGE>
lien on certain of its real estate secured loans and other assets. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either on a fixed
percentage of an institution's net worth or on the FHLB of Atlanta's assessment
of the institution's creditworthiness. The Bank had $6.0 million outstanding
borrowings at December 31, 1999.
Subsidiaries
The Company has no subsidiaries other than the Bank. The Bank has no
subsidiaries.
Results of Operations
The Bank's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its interest-
earning assets, such as loans and investments, and the cost of its interest-
bearing liabilities, consisting primarily of deposits and FHLB advances. Non-
interest income, such as transaction and service fee income, affects the Bank's
operations to a much lesser degree. The Bank's provisions for loan losses and
operating expenses also influence the Bank's net income. The Bank's principal
operating expenses, aside from interest expense, consist of compensation and
employee benefits, office occupancy costs, data processing expenses and federal
deposit insurance premiums. The Bank's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government legislation and
policies concerning monetary and fiscal affairs, housing and financial
institutions and the attendant actions of regulatory authorities.
Market Area
The Bank's primary market area consists of Johnston, Wilson, Wayne and Wake
counties in North Carolina. This area includes a portion of the Raleigh, North
Carolina metropolitan area and areas south and west of Raleigh.
Employment in the Bank's primary market area is diversified among
manufacturing, agricultural, retail and wholesale trade, government, services
and utilities. The economy in the primary market area is affected by the growth,
processing and sale of tobacco products. Legislative, regulatory and other
actions which negatively impact the demand for tobacco products could negatively
impact the Bank's performance.
Competition
The Bank faces strong competition both in attracting deposits and making
real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions and commercial
banks located in its primary market area, including large financial institutions
which have greater financial and marketing resources available to them. The Bank
has also faced additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. The ability of the Bank to attract and retain savings deposits
depends on its ability to provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities. Based upon
comparative data as of June 30, 1999, the Bank had approximately 8.8% of the
deposits in Johnston County, North Carolina, approximately 2.1% of the deposits
in Wilson County, North Carolina, approximately 1.0% of the deposits in Wayne
County, North Carolina, and less than 1% of the deposits in Wake County, North
Carolina.
The Bank experiences strong competition for real estate loans from other
savings institutions, commercial banks, and mortgage banking companies. The Bank
competes for loans primarily through the interest rates and loan fees it charges
and the efficiency and quality of services it provides borrowers. Competition
may increase as a result of the reduction of restrictions on the interstate
operations of financial institutions.
10
<PAGE>
Asset/Liability Management
The Company's asset/liability management, or interest rate risk management,
is focused primarily on evaluating and managing the Company's consolidated net
interest income given various risk criteria. Factors beyond the Company's
control, such as market interest rates and competition, may also have an impact
on the Company's management of interest rate risk.
In the absence of any other factors, the overall yield or return associated
with the Company's earning assets generally will increase from existing levels
when interest rates rise over an extended period of time, and conversely
interest income will decrease when interest rates decrease. In general, interest
expense will increase when interest rates rise over an extended period of time,
and conversely interest expense will decrease when interest rates decrease.
Therefore, by controlling the increases and decreases in its interest income and
interest expense which are brought about by changes in market interest rates,
the Company can influence its net interest income. As a part of the Company's
interest rate risk management policy, the Company calculates an interest rate
"gap". Interest rate "gap" analysis is a common, though imperfect, measure of
interest rate risk, which measures the relative dollar amounts of interest-
earning assets and interest-bearing liabilities which reprice within a specific
time period, either through maturity or rate adjustment. The "gap" is the
difference between the amounts of such assets and liabilities that are subject
to such repricing. A "positive" gap for a given period means that the amount of
interest earning assets maturing or otherwise repricing within that period
exceeds the amount of interest bearing liabilities maturing or otherwise
repricing within the same period. Accordingly, in a rising interest rate
environment, an institution with a positive gap would generally be expected,
absent the effects of other factors, to experience a higher increase in the
yield of its assets relative to the cost of its liabilities and its income
should be positively affected. Conversely, the cost of funds for an institution
with a positive gap would generally be expected to increase less quickly than
the yield on its assets in a falling interest rate environment and such
institution's net interest income should be adversely affected by falling
interest rates. Changes in interest rates generally have the opposite effect on
an institution with a "negative" gap. The Company has very little positive or
negative gap for the periods of one year or less and one to five years.
A static interest rate "gap" analysis may not be an accurate indicator of
how net interest income will react to changes in interest rates. Income
associated with interest-earning assets and costs associated with interest-
bearing liabilities may not react uniformly to changes in interest rates. In
addition, the magnitude and duration of changes in interest rates may have a
significant impact on net interest income. For example, although certain assets
and liabilities may have similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates. Interest rates
on certain types of assets and liabilities typically fluctuate in advance of
changes in general market interest rates, while interest rates on other types
may lag behind changes in general market rates. As an example, the indices on
which interest rate changes on most of the Bank's adjustable rate mortgage loans
are based, the Treasury securities index adjusted to a constant one year
maturity and the Treasury securities index adjusted to a constant three year
maturity, tend to lag behind changes in general market rates of interest and,
thus, react more slowly to such changes than does the Bank's actual cost of
funds. In addition, certain assets, such as adjustable rate mortgage loans, have
features (generally referred to as "interest rate caps") which limit changes in
interest rates on a short-term basis and over the life of the asset. The ability
of many borrowers to service their debt may also decrease in the event of an
interest rate increase.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999, which are
projected to reprice or mature in each of the future time periods shown. The
computations were made without using certain common assumptions regarding loan
prepayments and deposit decay rates. Except as stated below, the amounts of
assets and liabilities shown which reprice or mature within a particular period
were determined in accordance with the contractual terms of the assets or
liabilities. In making the computations, all adjustable rate loans were
considered to be due at the end of the next upcoming adjustment period. Fixed
rate loans were considered to reprice at their contractual maturities with no
consideration given to prepayments. Liquid interest-earning investments with no
contractual maturities were assumed to be subject to immediate repricing, while
certain equity securities were assumed to reprice at the most distant repricing
date. Savings accounts, money market deposit accounts, and negotiable order of
withdrawal and other transaction accounts were assumed to be subject to
immediate
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<PAGE>
repricing. Fixed maturity interest-bearing liabilities were assumed to reprice
at their contractual maturities without consideration for early withdrawals. In
addition, the table does not reflect scheduled principal payments which will be
received throughout the lives of the loans. The interest rate sensitivity of the
Company's consolidated assets and liabilities illustrated in the following table
would vary substantially if different assumptions were used or if actual
experience differs from that indicated by such assumptions.
<TABLE>
<CAPTION>
Term to Repricing at December 31, 1999
--------------------------------------------
More than
1 Year 1 Year to More than
Or Less 5 Years 5 Years Total
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Mortgage loans:
Fixed rate $ 803 $11,835 $15,780 $ 28,418
Adjustable rate 70,013 - - 70,013
Equity lines 10,314 - - 10,314
Other loans 8,010 - - 8,010
------- ------- ------- --------
Total loans 89,140 11,835 15,780 116,755
Interest-bearing deposits 4,288 - - 4,288
Investment securities 1,000 6,750 1,904 9,654
Mortgage-backed securities 131 661 1,359 2,151
------- ------- ------- --------
Total interest-earning assets $94,559 $19,246 $19,043 $132,848
------- ------- ------- --------
Interest-bearing liabilities:
Deposits:
Fixed maturity deposits $72,516 $18,393 $ 5,662 $ 96,571
NOW accounts 7,604 - - 7,604
Money market deposit accounts 5,661 - - 5,661
Saving accounts 4,082 - - 4,082
------- ------- ------- --------
Total deposits 89,863 18,393 5,662 113,918
------- ------- ------- --------
FHLB advances 6,000 - - 6,000
------- ------- ------- --------
Total interest-bearing liabilities $95,863 $18,393 $ 5,662 $119,918
------- ------- ------- --------
Interest gap per period $(1,304) $ 853 $13,381
======= ======= =======
Cumulative interest gap $(1,304) $ (451) $12,930
======= ======= =======
Cumulative gap as a percentage of total interest-earning assets 0.98% 0.34% 9.73%
Cumulative interest-earning assets as a percentage of interest-bearing 98.64% 99.61% 110.78%
liabilities
</TABLE>
Supervision and Regulation
Bank holding companies and state savings banks are extensively regulated
under both federal and state law. The following is a brief summary of certain
statutes and rules and regulations that affect or will affect the Company and
the Bank. This summary is qualified in its entirety by reference to the
particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank. Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Company.
Regulation of the Company
The Company was organized for the purpose of acquiring and holding all of
the capital stock of the Bank to be issued in the Conversion. As a savings bank
holding company subject to the Bank Holding Company Act of 1956, as amended
("BHCA"), the Company is subject to certain regulations of the Federal Reserve.
Under the BHCA, the
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<PAGE>
Company's activities and those of its subsidiaries are limited to banking,
managing or controlling banks, furnishing services to or performing services for
its subsidiaries or engaging in any other activity which the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The BHCA prohibits the Company from
acquiring direct or indirect control of more than 5% of the outstanding voting
stock or substantially all of the assets of any bank or savings bank or merging
or consolidating with another bank holding company or savings bank holding
company without prior approval of the Federal Reserve.
Additionally, the BHCA limits the Company's ability to engage in, or
acquire ownership or control of, more than 5% of the outstanding voting stock of
any company engaged in a nonbanking business unless such business is determined
by the Federal Reserve to be so closely related to banking as to be properly
incident thereto.
Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of the Company. Control
is conclusively presumed to exist if, among other things, a person acquires more
than 25% of any class of voting stock of the holding company or controls in any
manner the election of a majority of the directors of the holding company.
Control is presumed to exist if a person acquires more than 10% of any class of
voting stock and the stock is registered under Section 12 of the Exchange Act or
the acquiror will be the largest shareholder after the acquisition.
There are a number of obligations and restrictions imposed on bank holding
companies and their depository institution subsidiaries by law and regulatory
policy that are designed to minimize potential loss to the depositors of such
depository institutions and the FDIC insurance funds in the event the depository
institution becomes in danger of default or in default. For example, to avoid
receivership of an insured depository institution subsidiary, a bank holding
company is required to guarantee the compliance of any insured depository
institution subsidiary that may become "undercapitalized" with the terms of any
capital restoration plan filed by such subsidiary with its appropriate federal
banking agency up to the lesser of (i) an amount equal to 5% of the
institution's total assets at the time the institution became undercapitalized
or (ii) the amount which is necessary (or would have been necessary) to bring
the institution into compliance with all capital standards as of the time the
institution fails to comply with such capital restoration plan. Under a policy
of the Federal Reserve with respect to bank holding company operations, a bank
holding company is required to serve as a source of financial strength to its
subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so absent such policy. The
Federal Reserve under the BHCA also has the authority to require a bank holding
company to terminate any activity or to relinquish control of a nonbank
subsidiary (other than a nonbank subsidiary of a bank) upon the Federal
Reserve's determination that such activity or control constitutes a serious risk
to the financial soundness and stability of any bank subsidiary of the bank
holding company.
In addition, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by either the Savings
Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF") as a
result of the default of a commonly controlled insured depository institution or
for any assistance provided by the FDIC to a commonly controlled insured
depository institution in danger of default. The FDIC may decline to enforce
the cross-guarantee provisions if it determines that a waiver is in the best
interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing common stock in excess of ten
percent of its net worth during a rolling twelve month period.
As a result of the Company's ownership of the Bank, the Company is
registered under the savings bank holding company laws of North Carolina.
Accordingly, the Company is also subject to regulation and supervision by the
Administrator.
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<PAGE>
Capital Adequacy Guidelines for Holding Companies. The Federal Reserve has
adopted capital adequacy guidelines for bank holding companies and banks that
are members of the Federal Reserve system and have consolidated assets of $150
million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public. The Company is not subject to the Federal
Reserve's capital adequacy guidelines.
Bank holding companies subject to the Federal Reserve's capital adequacy
guidelines are required to comply with the Federal Reserve's risk-based capital
guidelines. Under these regulations, the minimum ratio of total capital to risk-
weighted assets (including certain off-balance sheet activities, such as standby
letters of credit) is 8%. At least half of the total capital is required to be
"Tier I capital," principally consisting of common stockholders' equity,
noncumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less certain goodwill items. The remainder ("Tier II
capital") may consist of a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, perpetual preferred stock, and a
limited amount of the general loan loss allowance. In addition to the risk-
based capital guidelines, the Federal Reserve has adopted a minimum Tier I
capital (leverage) ratio, under which a bank holding company must maintain a
minimum level of Tier I capital to average total consolidated assets of at least
3% in the case of a bank holding company which has the highest regulatory
examination rating and is not contemplating significant growth or expansion.
All other bank holding companies are expected to maintain a Tier I capital
(leverage) ratio of at least 1% to 2% above the stated minimum.
Repurchase Limitations. The Company must obtain Federal Reserve approval
prior to repurchasing common stock for in excess of 10% of its net worth during
any twelve-month period unless the Company (i) both before and after the
redemption satisfies capital requirements for "well capitalized" state member
banks; (ii) received a one or two rating in its last examination; and (iii) is
not the subject of any unresolved supervisory issues.
Although the payment of dividends and repurchase of stock by the Company
are subject to certain notice requirements with the Administrator in addition to
other requirements and limitations of North Carolina corporate law, except as
set forth in this paragraph, neither the Administrator nor the FDIC have
promulgated any regulations specifically limiting the right of the Company to
pay dividends and repurchase shares. However, the ability of the Company to pay
dividends or repurchase shares may be dependent upon the Company's receipt of
dividends from the Bank. The Bank's ability to pay dividends is limited. See "
- -- Regulation of the Bank -- Restrictions on Dividends and Other Capital
Distributions."
Capital Maintenance Agreement. In connection with the Administrator's
approval of the Company's application to acquire control of the Bank, the
Company was required to execute a Capital Maintenance Agreement whereby it has
agreed to maintain the Bank's capital in an amount sufficient to enable the Bank
to satisfy all regulatory capital requirements.
Federal Securities Law. The Company has registered its Common Stock with
the SEC pursuant to Section 12(g) of the Exchange Act. As a result of such
registration, the proxy and tender offer rules, insider trading reporting
requirements, annual and periodic reporting and other requirements of the
Exchange Act are applicable to the Company.
Regulation of the Bank
Federal and state legislation and regulation have significantly affected
the operations of federally insured savings institutions and other federally
regulated financial institutions in the past several years and have increased
competition among savings institutions, commercial banks and other providers of
financial services. In addition, federal legislation has imposed new
limitations on investment authority, and higher insurance and examination
assessments on savings institutions and has made other changes that may
adversely affect the future operations and competitiveness of savings
institutions with other financial institutions, including commercial banks and
their holding companies. The operations of regulated depository institutions,
including the Bank, will continue to be subject to changes in applicable
statutes and regulations from time to time.
14
<PAGE>
The Bank is a North Carolina-chartered savings bank, is a member of the
FHLB system, and its deposits are insured by the FDIC through the SAIF. It is
subject to examination and regulation by the FDIC and the Administrator and to
regulations governing such matters as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities, and general investment
authority. Generally, North Carolina state chartered savings banks whose
deposits are issued by the SAIF are subject to restrictions with respect to
activities and investments, transactions with affiliates and loans-to-one
borrower similar to those applicable to SAIF insured savings associations. Such
examination and regulation is intended primarily for the protection of
depositors and the federal deposit insurance funds.
The Bank is subject to various regulations promulgated by the Federal
Reserve including, without limitation, Regulation B (Equal Credit Opportunity),
Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O
(Loans to Executive Officers, Directors and Principal Shareholders), Regulation
Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings). As holders of loans secured by real property and as owners
of real property, financial institutions, including the Bank, may be subject to
potential liability under various statutes and regulations applicable to
property owners generally, including statutes and regulations relating to the
environmental condition of real property.
The FDIC has extensive enforcement authority over North Carolina-chartered
savings banks, including the Bank. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and unsafe or unsound practices.
The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.
Transactions with Affiliates. Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. With certain exceptions, an affiliate of the Bank is any
company or entity that controls, is controlled by or is under common control
with the savings bank. The Company is an affiliate of the Bank. Generally,
Sections 23A and 23B (i) establish certain collateral requirements for loans to
affiliates, (ii) limit the extent to which the Bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such the Bank's capital stock and surplus, and contain an aggregate limit
on all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus and (iii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the Bank or the
subsidiary as those provided to a nonaffiliate. The term "covered transaction"
includes the making of loans or other extensions of credit to an affiliate, the
purchase of assets from an affiliate, the purchase of, or an investment in, the
securities of an affiliate, the acceptance of securities of an affiliate as
collateral for a loan or extension of credit to any person, or issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate.
Further, current federal law has extended to savings banks the restrictions
contained in Section 22(h) of the Federal Reserve Act and its implementing
regulations with respect to loans to directors, executive officers and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who own more than 10% of a savings bank, and certain affiliated
entities of any of the foregoing, may not exceed, together with all other
outstanding loans to such person and affiliated entities, the savings bank's
loans-to-one borrower limit as established by federal law, and all loans to such
persons may not exceed the institution's unimpaired capital and unimpaired
surplus. Section 22(h) also prohibits loans above amounts prescribed by the
appropriate federal banking agency to directors, executive officers and
stockholders who own more than 10% of a savings bank, and their respective
affiliates, unless such loan is approved in advance by a majority of the
disinterested directors of the board of directors of the savings bank and the
Company. Any "interested" director may not participate in the voting. The
Federal Reserve has prescribed the loan amount (which
15
<PAGE>
includes all other outstanding loans to such person), as to which such prior
board of director approval is required, as being the greater of $25,000 or 5% of
unimpaired capital and unimpaired surplus (up to $500,000). Further, pursuant to
Section 22(h) the Federal Reserve requires that loans to directors, executive
officers, and principal stockholders be made on terms substantially the same as
offered in comparable transactions to other persons and not involve more than
the normal risk of repayment or present other unfavorable features. Section
22(h) also generally prohibits a depository institution from paying the
overdrafts of any of its executive officers or directors.
Deposit Insurance. The FDIC administers two separate deposit insurance
funds. The SAIF maintains a fund to insure the deposits of most savings
institutions, and the BIF maintains a fund to insure the deposits of most
commercial banks. The Bank is a member of the SAIF of the FDIC.
The Bank is required to pay assessments to the FDIC based on a percentage
of its insured deposits. Under the FDIC's risk-based deposit insurance
assessment system, the assessment rate for an insured depository institution
depends on the assessment risk classification assigned to the institution by the
FDIC, which is determined by the institution's capital level and supervisory
evaluations. Based on the data reported to regulators for the date closest to
the last day of the seventh month preceding the semi-annual assessment period,
institutions are assigned to one of three capital groups - well capitalized,
adequately capitalized or undercapitalized - using the same percentage criteria
as in the prompt corrective action regulations. See "- Prompt Corrective
Regulatory Action."
Within each capital group, institutions are assigned to one of three
subgroups on the basis of supervisory evaluations by the institution's primary
supervisory authority and such other information as the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. Subgroup A consists of financially sound institutions
with only a few minor weaknesses. Subgroup B consists of institutions that
demonstrate weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk of loss to the deposit
insurance fund. Subgroup C consists of institutions that pose a substantial
probability of loss to the deposit insurance fund unless effective corrective
action is taken.
The assessment rate for SAIF members had ranged from 0.23% of deposits for
well capitalized institutions in Subgroup A to 0.31% of deposits for
undercapitalized institutions in Subgroup C, while assessments for over 90% of
the BIF members had been the statutory minimum of $2,000. However, recently
enacted legislation provided for a one-time assessment equal to 65.7 basis
points times insured deposits as of March 31, 1995. This assessment fully
capitalized the SAIF. Accordingly, although the special assessment resulted in
a $437,000 one-time charge to the Bank during its fiscal year ended December 31,
1996, the recapitalization of the SAIF had the effect of reducing the Bank's
future deposit insurance premiums to the SAIF. Under the recently enacted
legislation, most BIF members were assessed approximately 1.3 basis points while
the rate for most SAIF members was approximately 6.4 basis points until January
1, 2000.
Community Reinvestment Act. The Bank, like other financial institutions,
is subject to the Community Reinvestment Act, as amended ("CRA"). A purpose of
this Act is to encourage financial institutions to help meet the credit needs of
its entire community, including the needs of low- and moderate-income
neighborhoods. A savings bank is evaluated and rated under three categories: a
lending test, an investment test and a service test. For each of these three
tests, the savings bank is given a rating of either "outstanding," "high
satisfactory," "low satisfactory," "needs to improve" or "substantial non-
compliance." A set of criteria for each rating is included in the regulation.
If an institution disagrees with a particular rating, the institution has the
burden of rebutting the presumption by clearly establishing that the
quantitative measures do not accurately present its actual performance, or that
demographics, competitive conditions or economic or legal limitations peculiar
to the service area should be considered. The ratings received under the three
tests are used to determine the overall composite CRA rating of "outstanding,"
"satisfactory," "needs to improve" or "substantial non-compliance."
16
<PAGE>
During the Bank's last compliance examination, which was performed by the
FDIC in April, 1998, the Bank received a satisfactory rating with respect to CRA
compliance. The Bank's rating with respect to CRA compliance would be a factor
to be considered by the Federal Reserve and FDIC in considering applications
submitted by the Bank to acquire branches or to acquire or combine with other
financial institutions and take other actions and could result in the denial of
such applications.
Capital Requirements Applicable To The Bank. The FDIC requires the Bank to
have a minimum leverage ratio of Tier I capital (principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, less certain intangible items,
goodwill items, identified losses and investments in securities subsidiaries) to
total assets of at least 3%; provided, however that all institutions, other than
those (i) receiving the highest rating during the examination process and (ii)
not anticipating or experiencing any significant growth, are required to
maintain a ratio of 1% or 2% above the stated minimum, with an absolute minimum
leverage ratio of not less than 4%. The FDIC also requires the Bank to have a
ratio of total capital to risk-weighted assets, including certain off-balance
sheet activities, such as standby letters of credit, of at least 8%. At least
half of the total capital is required to be Tier I capital. The remainder
("Tier II capital") may consist of a limited amount of subordinated debt,
certain hybrid capital instruments, other debt securities, certain types of
preferred stock and a limited amount of loan loss allowance.
An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC. If the leverage ratio falls to 2% or less, the
institution may be deemed to be operating in an unsafe or unsound condition,
allowing the FDIC to take various enforcement actions, including possible
termination of insurance or placement of the institution in receivership. At
December 31, 1999, the Bank had a leverage ratio of 10.55%, which substantially
exceeded the other FDIC capital requirements.
The Administrator requires that net worth equal at least 5% of total
assets. Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement. At December 31, 1999, the Bank
complied with the capital requirement of the Administrator with capital of
10.84%.
Each federal banking agency is required to establish risk-based capital
standards to take adequate account of interest rate risk, concentration of
credit risk, and the risk of nontraditional activities, as well as to reflect
the actual performance and expected risk of loss on multi-family mortgages.
On August 2, 1995, the federal banking agencies issued a joint notice of
adoption of final risk-based capital rules to take account of interest rate
risk. The final regulation required an assessment of the need for additional
capital on a case-by-case basis, considering both the level of measured exposure
and qualitative risk factors. The final rule also stated an intent to, in the
future, establish an explicit minimum capital charge for interest rate risk
based on the level of a bank's measured interest rate risk exposure.
Effective June 26, 1996, the federal banking agencies issued a joint policy
statement announcing the agencies' election not to adopt a standardized measure
and explicit capital charge for interest rate risk at that time. Rather, the
policy statement (i) identifies the main elements of sound interest rate risk
management, (ii) describes prudent principles and practices for each of those
elements, and (iii) describes the critical factors affecting the agencies'
evaluation of a bank's interest rate risk when making a determination of capital
adequacy.
Loans-To-One-Borrower. The Bank is subject to the Administrator's loans-
to-one-borrower limits. Under these limits, no loans and extensions of credit
to any borrower outstanding at one time and not fully secured by readily
marketable collateral shall exceed 15% of the net worth of the Bank. Loans and
extensions of credit fully secured by readily marketable collateral may comprise
an additional 10% of net worth. These limits also authorize savings banks to
make loans to one borrower, for any purpose, in an amount not to exceed
$500,000. The Bank also is authorized to make loans to one borrower to develop
domestic residential housing units, not to exceed the lesser of $30 million or
30%
17
<PAGE>
of the Bank's net worth, provided that the purchase price of each single-family
dwelling in the development does not exceed $500,000 and the aggregate amount of
loans made under this authority does not exceed 150% of net worth. These limits
also authorize the Bank to make loans to one borrower to finance the sale of
real property acquired in satisfaction of debts in an amount up to 50% of net
worth.
As of December 31, 1999, the largest aggregate amount of loans which the
Bank had to any one borrower was $2,138,189. The Bank had no loans outstanding
which management believes violate the applicable loans-to-one-borrower limits.
The Bank does not believe that the loans-to-one-borrower limits will have a
significant impact on its business, operations and earnings.
Federal Home Loan Bank System. The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB of Atlanta, the Bank
is required to own capital stock in the FHLB of Atlanta in an amount at least
equal to the greater of 1% of the aggregate principal amount of its unpaid
residential mortgage loans, home purchase contracts and similar obligations at
the end of each calendar year, or 5% of its outstanding advances (borrowings)
from the FHLB of Atlanta. On December 31, 1999, the Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock of $877,000.
Each FHLB is required to contribute at least 10% of its reserves and
undivided profits to fund the principal and a portion of the interest on certain
bonds and certain other obligations which are used to fund the resolution of
troubled savings association cases, and to transfer a percentage of its annual
net earnings to the Affordable Housing Program. These contributions continue to
reduce the FHLB of Atlanta's earnings and the Bank's dividends on its FHLB of
Atlanta stock.
Federal Reserve System. Federal Reserve regulations require savings banks,
not otherwise exempt from the regulations, to maintain reserves against their
transaction accounts (primarily negotiable order of withdrawal accounts) and
certain nonpersonal time deposits. The reserve requirements are subject to
adjustment by the Federal Reserve. As of December 31, 1999, the Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.
Restrictions on Acquisitions. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of a state savings bank without giving at least 60 days' written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition. Pursuant to regulations governing acquisitions of
control, control of an insured institution is conclusively deemed to have been
acquired as a result of, among other things, the acquisition of more than 25% of
any class of voting stock. In addition, control is presumed to have been
acquired, subject to rebuttal, upon the acquisition of more than 10% of any
class of voting stock. Such acquisitions of control may be disapproved if it is
determined, among other things, that (i) the acquisition would substantially
lessen competition; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings bank or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisitions of control by such person.
Liquidity. The Bank is subject to the Administrator's requirement that the
ratio of liquid assets to total assets equal at least 10%. The computation of
liquidity under North Carolina regulation allows the inclusion of mortgage-
backed securities and investments which, in the judgment of the Administrator,
have a readily marketable value, including investments with maturities in excess
of five years. On December 31, 1999, the Bank's liquidity ratio, calculated in
accordance with North Carolina regulations, was approximately 15%.
Additional Limitations on Activities. FDIC law and regulations generally
provide that the Bank may not engage as principal in any type of activity, or in
any activity in an amount, not permitted for national banks, or directly acquire
or retain any equity investment of a type or in an amount not permitted for
national banks. The FDIC has authority to grant exceptions from these
prohibitions (other than with respect to non-service corporation equity
18
<PAGE>
investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the activity to be engaged in and if the Bank
is and continues to be in compliance with capital standards. National banks are
generally not permitted to hold equity investments other than shares of service
corporations and certain federal agency securities. Moreover, service
corporations of savings banks are permitted to engage only in those activities
which are permitted for service corporations of national banks.
Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not of investment
grade (generally referred to as "junk bonds"). State savings banks are also
required to notify the FDIC at least 30 days prior to the establishment or
acquisition of any subsidiary, or at least 30 days prior to conducting any such
new activity. Any such activities must be conducted in accordance with the
regulations and orders of the FDIC and the Administrator.
Prompt Corrective Regulatory Action. Federal law provides the federal
banking agencies with broad powers to take corrective action to resolve problems
of insured depository institutions. The extent of these powers depends upon
whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized." Under the FDIC regulations applicable to the
Bank, an institution is considered "well capitalized" if it has (i) a total
risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital
ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not
subject to any order or written directive to meet and maintain a specific
capital level for any capital measure. An "adequately capitalized" institution
is defined as one that has (i) a total risk-based capital ratio of 8% or
greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a
leverage ratio of 4% or greater (or 3% or greater in the case of an institution
with the highest examination rating and which is not experiencing or
anticipating significant growth). An institution is considered (A)
"undercapitalized" if it has (i) a total risk-based capital ratio of less than
8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage
ratio of less than 4% (or 3% in the case of an institution with the highest
examination rating and which is not experiencing or anticipating significant
growth); (B) "significantly undercapitalized" if the institution has (i) a total
risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), permits adequately
capitalized bank and savings bank holding companies to acquire control of banks
and savings banks in any state.
Such interstate acquisitions are subject to certain restrictions. States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years. In addition, no
bank or saving bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state, unless
the state has specifically legislated a higher deposit cap. States are free to
legislate stricter deposit caps.
The Interstate Banking Act also provided for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time. Unlike interstate acquisitions, a state could
deny interstate branching if it specifically elected to do so by June 1, 1997.
States were allowed to choose to permit interstate branching prior to June 1,
1997 by opting-in to a group of states that permits these transactions. These
states generally allow interstate branching via a merger of an out-of-state bank
with an in-state bank, or on a de novo basis. North Carolina enacted
legislation permitting interstate branching transactions prior to June 1, 1997
and did not adopt legislation electing to deny interstate branching.
It is anticipated that the Interstate Banking Act will increase competition
within the markets in which the Bank now operates, although the extent to which
such competition will increase in such markets or the timing of such increase
cannot be predicted.
19
<PAGE>
Restrictions on Dividends and Other Capital Distributions. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations.
In addition, the Bank is not permitted to declare or pay a cash dividend on
or repurchase any of its capital stock if the effect thereof would be to cause
its net worth to be reduced below the amount required for the liquidation
account established in connection with the Bank's conversion from mutual to
stock ownership.
Other North Carolina Regulations. As a North Carolina-chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator. The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions. The regulatory authority of the Administrator
includes, but is not limited to, the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases; the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest. North Carolina
law requires that the Bank maintain federal deposit insurance as a condition of
doing business.
The Administrator conducts regular examinations of North Carolina-chartered
savings banks. The purpose of such examinations is to assure that institutions
are being operated in compliance with applicable North Carolina law and
regulations and in a safe and sound manner. These examinations are usually
conducted on a joint basis with the FDIC. In addition, the Administrator is
required to conduct an examination of any institution when he has good reason to
believe that the standing and responsibility of the institution is of doubtful
character or when he otherwise deems it prudent. The Administrator is empowered
to order the revocation of the license of an institution if he finds that it has
violated or is in violation of any North Carolina law or regulation and that
revocation is necessary in order to preserve the assets of the institution and
protect the interests of its depositors. The Administrator has the power to
issue cease and desist orders if any person or institution is engaging in, or
has engaged in, any unsafe or unsound practice or unfair and discriminatory
practice in the conduct of its business or in violation of any other law, rule
or regulation.
A North Carolina-chartered savings bank must maintain net worth, computed
in accordance with the Administrator's requirements, of 5% of total assets and
liquidity of 10% of total assets, as discussed above. Additionally, a North
Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.
Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted to federally chartered institutions. However, a North Carolina-
chartered savings bank cannot invest more than 15% of its total assets in
business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a FHLB; (v) savings accounts of any savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North Carolina or of the United States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.
North Carolina law provides a procedure by which savings institutions may
consolidate or merge, subject to approval of the Administrator. The approval is
conditioned upon findings by the Administrator that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
supervisory mergers conducted by the Administrator.
20
<PAGE>
Future Requirements. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, operations and
competitive relationships of financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company and the Bank may be affected by such
statute or regulation.
Gramm - Leach - Bliley Act
On November 12, 1999, the President signed into law the Gramm - Leach -
Bliley Act. This statute contains several provisions that may affect how the
Company does business or the nature of the competition that it faces. The act
permits banks, insurance companies, and securities firms to affiliate within a
single corporate structure, now known as a financial holding company. Using the
financial holding company structure, insurance companies and securities firms
may acquire bank holding companies, such as the Company, and bank holding
companies may acquire insurance companies and securities firms. A bank holding
company that wishes to become a financial holding company must satisfy a number
of conditions, including that all of the insured depository institution
subsidiaries of the bank holding company have at least a "satisfactory"
Community Reinvestment Act rating. In addition, a financial holding company may
not commence a new financial activity or acquire control of a company engaged in
such activities without satisfying this Community Reinvestment Act requirement.
As a result of this new act, the Company may face increased competition from
more and larger financial institutions. The act allows increased activity in
the insurance and securities underwriting businesses, to be conducted through a
subsidiary of a financial holding company and would involve both additional risk
and regulatory burdens.
The act also contains several provisions respecting customer privacy. The
extent of the Bank's obligations in this regard will not be known until the
Federal Reserve and the other federal banking agencies issue rules applicable to
financial institutions. However, the Bank will be required to disclose a
privacy policy to its customers on an annual basis. In addition, if the Bank
provides nonpublic personal information about customers to third parties for use
in the marketing of third party products, it must first disclose this fact to
its customers and provide them an opportunity to opt out of the arrangement.
ITEM 2. PROPERTIES
At December 31, 1999, the Company conducted its business from the Bank's
headquarters office and a branch office in Kenly, North Carolina, and its branch
offices in Selma, Goldsboro, Wilson and Garner, North Carolina. In addition,
the Bank had a loan origination office in Clayton, North Carolina. The
following table sets forth certain information regarding the Company's
properties as of December 31, 1999. See Note 4 to the Company's Consolidated
Financial Statements included in the 1999 Annual Report which is incorporated
herein by reference.
21
<PAGE>
Net Book Value
Address Of Property
------- --------------
Kenly
Corporate offices:
207 West Second Street
Kenly, North Carolina 27542 $ 384,923
Branch facility:
200 North Church Street
Kenly, North Carolina 27542 $ 472,214
Selma
115 West Anderson Street
Selma, North Carolina 27576 $ 116,460
Wilson
206 N. Ward Boulevard
Wilson, North Carolina 27893 $ 453,244
Clayton
11440 Highway 70 West
Clayton, North Carolina 27520 (Leased)
Goldsboro
1112 E. Ash Street
Goldsboro, North Carolina 27530 $ 219,985
Garner
920 7th Avenue
Garner, North Carolina 27529 (Leased)
$1,646,826
==========
The total net book value of the Company's furniture and equipment on December
31, 1999 was $781,480.
ITEM 3. LEGAL PROCEEDINGS
In the opinion of management, neither the Company nor the Bank is involved
in any pending legal proceedings other than routine, non-material proceedings
occurring in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during the
quarter ended December 31, 1999.
22
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
See the information under the sections captioned "Common Stock Information"
on Page 41 and "Common Stock" on page 42 in the Company's 1999 Annual Report,
which sections are incorporated herein by reference. See "Item 1. BUSINESS--
Regulation of the Bank--Restrictions on Dividends and Other Capital
Distributions" above for regulatory restrictions which limit the ability of the
Bank to pay dividends to the Company.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in the table captioned
"Selected Financial Data" on page 1 of the Company's 1999 Annual Report which is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
See the information set forth under Item 1 above and the information set
forth under the section captioned "Management's Discussion and Analysis" on
pages 3 through 12 in the Company's 1999 Annual Report, which section is
incorporated herein by reference.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pages 5 and 6 of the Company's 1999 Annual Report to Stockholders are
herein incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and supplementary data
set forth on pages 13 through 40 of the Company's 1999 Annual Report are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 16, 2000, KS Bancorp, Inc. (the "Company") informed McGladrey &
Pullen, LLP that it would not be selected to serve as the Company's independent
auditor for the year ended December 31, 2000. McGladrey & Pullen, LLP was the
Company's independent auditor for the year ended December 31, 1999.
Dixon Odom PLLC has been selected as the Company's independent auditor for
the 2000 fiscal year. Such selection will be submitted to the Company's
shareholders for ratification at the 2000 annual meeting of shareholders. The
decision to change independent auditors was based on several factors, including
location and cost, and was approved by the Audit Committee. McGladrey & Pullen,
LLP's report on the Company's financial statements for the fiscal years ended
December 31, 1999 and 1998 did not contain an adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles. During such years and the subsequent interim period
through the date hereof; there were no disagreements between the Company and
McGladrey & Pullen, LLP on any matter of accounting principles or practice,
financial statement disclosure or auditing scope or procedure which, if not
resolved to the satisfaction of such auditor, would have caused it to make
reference to the subject of such disagreement in connection with its reports.
During its two most recent fiscal years and the subsequent interim period
23
<PAGE>
through the date hereof, the Company has not consulted Dixon Odom PLLC, with
regard to either: (i) the application of accounting principles to a specified
transaction, either completed or proposed; or the type of audit opinion that
might be rendered on the Company's financial statements, or (ii) any matter that
was either the subject of a disagreement or a reportable event.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item regarding directors and executive
officers of the Company is set forth under the sections captioned "Proposal 1 -
Election of Directors - Nominees and Continuing Directors" on page 8 of the
Proxy Statement for the 2000 Annual Meeting of Stockholders (the "Proxy
Statement") and "Proposal 1 - Election of Directors - Executive Officers" on
page 12 of the Proxy Statement, which sections are incorporated herein by
reference.
The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on
page 6 of the Proxy Statement, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Directors' Compensation" on
pages 10 and 11 and " - "Management Compensation" on pages 12 through 20 of the
Proxy Statement, which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
section captioned "Security Ownership of Certain Beneficial Owners" on pages 3
through 6 of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the section captioned "Proposal 1 - Election of Directors - Certain
Indebtedness and Transactions of Management" on page 20 of the Proxy Statement,
which section is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
14(a)1 Consolidated Financial Statements (contained in the Company's 1999
Annual Report attached hereto as Exhibit (13) and incorporated herein
by reference)
(a) Independent Auditor's Report
(b) Consolidated Statements of Financial Condition -- December 31,
1999 and 1998
(c) Consolidated Statements of Income -- Years Ended December 31,
1999, 1998 and 1997
24
<PAGE>
(d) Consolidated Statements of Stockholder's Equity -- Years Ended
December 31, 1999, 1998 and 1997
(e) Consolidated Statements of Cash Flows -- Years Ended December 31,
1999, 1998 and 1997
(f) Notes to Consolidated Financial Statements
14(a)2 Financial Statement Schedules
All schedules have been omitted as the required information is either
inapplicable or included in the Notes to Consolidated Financial
Statements.
14(a)3 Exhibits
A listing of the exhibits to this Report on Form 10-K is set forth on
the Index to Exhibits which immediately precedes such exhibits and is
incorporated herein by reference.
14(b) The Company filed no reports on Form 8-K during the last quarter of
the fiscal year ended December 31, 1999.
25
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
KS BANCORP, INC.
Date: March 29, 2000 By: /s/ Harold T. Keen
--------------------------------------
Harold T. Keen
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------- ------------------------------ --------------
<S> <C> <C>
/s/ Harold T. Keen President and Chief Executive March 29, 2000
- ----------------------------- Officer and Director
Harold T. Keen
/s/ Helen B. Pollock Treasurer (Principal Financial March 29, 2000
- ----------------------------- Officer)
Helen B. Pollock
/s/ A. Carroll Coleman Director March 29, 2000
- -----------------------------
A. Carroll Coleman
/s/ Robert E. Fields Director March 29, 2000
- -----------------------------
Robert E. Fields
/s/ R. Harold Hinnant Director March 29, 2000
- -----------------------------
R. Harold Hinnant
/s/ James C. Parker Director March 29, 2000
- -----------------------------
James C. Parker
/s/ R. Elton Parrish Director March 29, 2000
- -----------------------------
R. Elton Parrish
/s/ Ralph Edward Scott, Jr. Director March 29, 2000
- -----------------------------
Ralph Edward Scott, Jr.
/s/ James C. Woodard Director March 29, 2000
- -----------------------------
James C. Woodard
/s/ Gordon C. Woodruff Director March 29, 2000
- -----------------------------
Gordon C. Woodruff
</TABLE>
26
<PAGE>
INDEX TO EXHIBITS
Exhibit No. Description
- ----------- -----------
Exhibit (3)(i) Certificate of Incorporation, incorporated herein by
reference to Exhibit 3.1 to the Registration Statement on
Form S-1, Registration No. 33-69522, dated September 25,
1993, and amended on November 3, 1993
Exhibit (3)(ii) Bylaws, incorporated herein by reference to Exhibit 3.2 to
the Registration Statement on Form S-1, Registration No. 33-
69522, dated September 25, 1993 and amended on November 3,
1993.
(4) Specimen Stock Certificate, incorporated by reference to
Exhibit 4.1 to the Registration Statement on Form S-1,
Registration No. 33-69522, dated September 25, 1993, and
amended on November 3, 1993
(13) 1999 Annual Report to Stockholders (excluding p. 2, the
Report to Stockholders)
(21) Subsidiaries of the Registrant
(23) Consent of McGladrey & Pullen, LLP
(27) Financial Data Schedule
27
<PAGE>
KS Bancorp, Inc.
===============================
A Holding Company for KS Bank
1999
Annual Report
===============================
<PAGE>
KS BANCORP,INC.AND SUBSIDIARY
Contents
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
SELECTED FINANCIAL DATA 1
- --------------------------------------------------------------------------------
REPORT TO STOCKHOLDERS 2
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS 3 - 12
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 13
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
Financial condition at December 31, 1999 and 1998 14
Income for years ended December 31, 1999, 1998 and 1997 15
Stockholders' equity for years ended December 31, 1999, 1998 and 1997 16
Cash flows for the years ended December 31, 1999, 1998 and 1997 17 - 18
Notes to the consolidated financial statements 19 - 40
- --------------------------------------------------------------------------------
COMMON STOCK INFORMATION 41
- --------------------------------------------------------------------------------
CORPORATE INFORMATION 42
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
KS BANCORP, INC. AND SUBSIDIARY
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------
Financial Condition Data: (In Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Total assets $ 138,948 $ 130,892 $ 113,978 $ 100,840 $ 88,274
Investments (1) 17,142 21,151 15,104 16,051 15,732
Loans receivable, net 116,363 105,335 95,002 81,511 70,099
Deposits 116,537 107,934 90,314 82,346 70,738
Advances from the FHLB 6,000 6,000 8,000 4,000 3,000
Stockholders' equity 15,442 15,716 14,606 13,721 13,864
Book value per common share (3) 16.76 17.69 16.50 15.52 15.22
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------
Operating Data: (Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Interest income $ 10,626 $ 10,149 $ 8,731 $ 7,537 $ 6,843
Interest expense 5,793 5,692 4,653 4,012 3,501
-----------------------------------------------------------------------
Net interest income 4,833 4,457 4,078 3,525 3,342
Provision for loan losses 36 34 24 69 10
Other income 310 241 158 201 92
Other expense (2) 3,187 2,663 2,240 2,329 1,747
-----------------------------------------------------------------------
Income before income taxes 1,920 2,001 1,972 1,328 1,677
Income tax expense 757 743 751 503 625
-----------------------------------------------------------------------
Net income $ 1,163 $ 1,258 $ 1,221 $ 825 $ 1,052
=======================================================================
Selected Other Data:
Basic earnings per share (2) (3) $ 1.34 $ 1.46 $ 1.43 $ 0.97 $ 1.13
Diluted earnings per share (2)(3) $ 1.23 $ 1.32 $ 1.30 $ 0.89 $ 1.06
Dividends per common share (3) $ 0.80 $ 0.80 $ 0.83 $ 0.90 $ 0.75
Dividend payout ratio 65% 61% 64% 100% 71%
Return on average assets (2) .86% .96% 1.15% .88% 1.22%
Return on average equity (2) 7.47% 8.08% 8.33% 6.01% 7.29%
Average equity to average assets 11.46% 11.87% 13.76% 14.63% 16.70%
</TABLE>
(1) Includes interest-bearing deposits, time deposits, and investment
securities
(2) Includes nonrecurring deposit insurance premium assessment
of $436,548 during 1996.
(3) Restated for 4 for 3 stock split occurring during 1997.
2
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
General
KS Bancorp, Inc. ("KS Bancorp" or the "Company") is a savings bank holding
company which owns all of the common stock of KS Bank, Inc. (the "Bank"), a
North Carolina-chartered capital stock savings bank. KS Bancorp's principal
business activities consist solely of the ownership of the Bank, a loan to the
Bank's Employee Stock Ownership Plan ("ESOP") for its purchase of common stock
and the investment of its portion of the proceeds received from the Bank's
mutual to stock conversion. The principal business of the Bank is accepting
deposits from the general public and using those deposits and other sources of
funds to make mortgage loans secured by residential real estate located in the
Bank's primary market area of Johnston, Wilson, Wayne and Wake counties.
The Bank's results of operations depend primarily on its net interest income,
which is the difference between interest income from interest-earning assets and
interest expense on interest-bearing liabilities. The Bank's operations are also
affected by noninterest income, such as miscellaneous income from loans,
customer deposit account service charges, and other sources of revenue. The
Bank's principal operating expenses, aside from interest expense, consist of
compensation and employee benefits, federal deposit insurance premiums, office
occupancy costs, data processing expenses, and other general and administrative
expenses.
The following discussion and analysis is intended to assist readers in
understanding the results of operations in 1999, 1998 and 1997, and changes in
financial position for the years ended December 31, 1999 and 1998, respectively.
The discussion contains certain forward-looking statements consisting of
estimates with respect to the financial condition, results of operations and
other business of the Company that are subject to various factors which could
cause actual results to differ materially from those estimates. Factors which
could influence the estimates include changes in the national, regional and
local market conditions, legislative and regulatory conditions, and an adverse
interest rate environment.
Capital Resources and Liquidity
KS Bancorp currently conducts no business other than holding the capital stock
of the Bank and the loan from the ESOP, and investing the portion of the net
proceeds of the conversion retained at the holding company level in order to
provide sufficient funds for future operations, payment of dividends, or
repurchases of its stock. KS Bancorp's primary source of funds, other than
income from its investments, is dividends from the Bank, which are subject to
regulatory restrictions as discussed in Note 12 to the consolidated financial
statements. During 1999, 1998 and 1997, the Bank paid dividends of $950,000,
$500,000 and $300,000, respectively, to KS Bancorp. KS Bancorp declared and paid
cash dividends of $688,835, $688,527, and $701,901 during 1999, 1998 and 1997,
respectively. Dividends paid by KS Bancorp during 1997 included a special
dividend of $0.30 a share paid during the fourth quarter. Although the Company
anticipates that it will continue to declare cash dividends on a regular basis,
the Board of Directors will continue to review its policy on the payment of
dividends on an ongoing basis, and such payment will be subject to future
earnings, cash flows, capital needs, and regulatory restrictions.
KS Bancorp repurchased and retired 20,035 shares of its common stock for a total
cost of approximately $367,000 during 1999, bringing the total amount of common
stock
3
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
repurchased since the mutual to stock conversion to 165,735 shares for a total
cost of approximately $2.9 million. No shares were repurchased during 1998 and
1997.
The objective of the Bank's liquidity management is to ensure the availability
of sufficient cash flows to meet all financial commitments and to capitalize on
opportunities for expansion. Liquidity management addresses the Bank's ability
to meet deposit withdrawals either on demand or at contractual maturity, to
repay borrowings as they mature and to make new loans and investments as
opportunities arise.
A significant liquidity source for the Bank is cash provided by operating
activities. These operating activities generated cash of $2,117,813, $639,572,
and $1,509,417 for the years ended December 31, 1999, 1998 and 1997,
respectively. Historically, in addition to cash provided by operating
activities, financing activities have provided the Bank with sources of funds
for asset growth and liquidity. For the years ended December 31, 1999 and 1998,
deposits grew by $8,602,625 and $17,620,566, respectively. As of December 31,
1999 and 1998, the Bank had $6,000,000 and $6,000,000, respectively, in
outstanding borrowings from the Federal Home Loan Bank ("FHLB"). Such borrowings
were used primarily to fund increasing loan demand. During 1999 and 1998, the
Bank used the cash provided by operations primarily to fund loan demand and to
invest in intermediate term investment securities. In the future, liquidity may
be supplemented by loan sales and securitization programs which the Bank may use
to facilitate the timely liquidation of assets if and when it is deemed
desirable. Approximately $73 million of the Bank's certificates of deposit
mature in 2000; however, management believes that substantially all of these
deposits will be renewed.
Cash provided by operating and financing activities is used by the Bank to
originate new loans to customers, to maintain the Bank's and KS Bancorp's liquid
investment portfolios, and to meet short term liquidity requirements. During
1999, 1998, and 1997, loans outstanding increased by $11,145,117, $10,411,030,
and $13,578,287, respectively. During 1999, purchases of investment securities
exceeded proceeds from sales and maturities of such investments by $3,616,468.
During 1998, proceeds from sales and maturities of investment securities
exceeded purchases of such investments by $975,785 and were used in part to fund
dividends and loans.
As a North Carolina-chartered savings bank, the Bank is required to maintain
liquid assets equal to at least 10% of total assets. The computation of
liquidity under North Carolina regulation allows for the inclusion of
mortgage-backed securities and other investments with readily marketable values,
including investments with maturities in excess of five years. The Bank's
liquidity ratio on December 31, 1999, as computed under North Carolina
regulations, was approximately 15%. Management believes that the Bank's
liquidity and other sources of funds are adequate to fund all outstanding
commitments and other anticipated cash needs.
4
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Asset/Liability Management
The Bank's asset/liability management, or interest rate risk management, is
focused primarily on evaluating and managing the Bank's net interest income
given various risk criteria. Factors beyond the Bank's control, such as the
effects of changes in market interest rates and competition, may also have an
impact on the management of interest rate risk.
In the absence of other factors, the Bank's overall yield on interest-earning
assets will increase as will its cost of funds on its interest-bearing
liabilities when market rates increase over an extended period of time.
Inversely, the Bank's yields and cost of funds will decrease when market rates
decline. The Bank is able to manage these swings to some extent by attempting to
control the maturities or rate adjustments of its interest-earning assets and
interest-bearing liabilities over given periods of time. The Bank's "gap" is
typically described as the difference between the amounts of such assets and
liabilities which reprice within a period of time. The Bank's cumulative gap
during near term periods is generally negative. In a declining interest rate
environment a negative gap, or a situation where the Bank's interest-bearing
liabilities subject to repricing exceed the level of interest-earning assets
which will mature or reprice, would generally be expected to have a favorable
impact on the Bank's net interest income. Conversely, an increase in general
market rates would generally be expected to adversely affect the Bank's net
interest income.
In order to minimize the potential effects of adverse material and prolonged
increases or decreases in market interest rates on the Bank's operations,
management has implemented an asset/liability program designed to reduce the
Bank's interest rate gap. The program primarily emphasizes the origination of
adjustable rate mortgage loans which are held for investment purposes, the
origination of loans which meet secondary market requirements and can therefore
be sold if and when management deems such sales advisable, the investment of
excess cash in short or intermediate term interest-earning assets, and the
solicitation of checking or transaction deposit accounts which are less
sensitive to changes in interest rates and can be repriced rapidly.
The Market Risk Analysis table on the next page reflects maturities of interest
rate sensitive assets and liabilities over the next five years.
5
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARKET RISK ANALYSIS (4)
December 31, 1999
<TABLE>
<CAPTION>
Expected Maturity Date
---------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans-fixed:
Balance $ 802,690 $ 8,167,715 $ 2,895,949 $ 361,158 $ 410,261 $ 16,062,860
Interest rate 9.32% 8.93% 8.99% 9.74% 10.02% 9.56%
Loans-variable (1):
Balance 94,620,297 - - - - -
Interest rate 8.25% 0.00% 0.00% 0.00% 0.00% 0.00%
Investments in U.S.
agency securities (2):
Balance 5,287,873 500,000 3,250,000 1,500,000 1,500,000 1,000,000
Interest rate 5,71% 6.31% 4.45% 6.32% 5.85% 7.06%
Investments in mortgage-
backed securities and
other equity securities
Balance 130,545 151,255 160,367 170,028 180,271 2,262,985
Interest rate 5.86% 5.86% 5.86% 5.86% 5.86% 6.34%
Liabilities:
Deposits (3):
Balance 17,346,606 - - - - -
Interest rate 2.26% 0.00% 0.00% 0.00% 0.00% 0.00%
Deposits-certificates:
Balance 72,515,642 18,392,503 - 5,662,144 - -
Interest rate 5.36% 5.35% 0.00% 5.51% 0.00% 0.00%
FHLB advances:
Balance 6,000,000 - - - - -
Interest rate 5.46% 0.00% 0.00% 0.00% 0.00% 0.00%
<CAPTION>
(Carrying Value)
-------------------------------------------------
Total Fair Value
- ------------------------------------------------------------------
<S> <C> <C>
Assets:
Loans-fixed:
Balance $ 28,700,633 $ 30,553,490
Interest rate 9.33% -
Loans-variable (1):
Balance 94,620,297 94,620,297
Interest rate 8.25% -
Investments in U.S.
agency securities (2):
Balance 13,037,873 12,868,501
Interest rate 5.61% -
Investments in mortgage
backed securities and
other equity securities
Balance 3,055,451 4,299,742
Interest rate 6.21% -
Liabilities:
Deposits (3):
Balance 17,346,606 17,346,606
Interest rate 2.26% -
Deposits-certificates:
Balance 96,570,289 96,788,661
Interest rate 5.37% -
FHLB advances:
Balance 6,000,000 5,957,937
Interest rate 5.46% -
</TABLE>
(1) Includes Line of Credit loans and Overdraft Protection, which have no
stated maturity.
(2) Includes interest bearing deposits and U.S. agency securities with a stated
maturity at carrying value.
(3) Includes regular savings accounts and money market accounts.
(4) Prior year market risk exposures are quantitatively consistent with
amounts presented for the current year.
6
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Analysis of Net Interest Income
Net interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by the difference between yields
on interest-earning assets and rates paid on interest-bearing liabilities
("interest rate spread") and the relative amounts of interest-earning assets
and interest-bearing liabilities outstanding during the period.
The following table reflects the average yields on assets and average costs of
liabilities for the years ended December 31, 1999, 1998 and 1997. Such average
yields and costs are derived by dividing income or expense by the average
monthly balance of interest-earning or interest-bearing liabilities,
respectively, for the periods presented.
AVERAGE BALANCE
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
At December 31, 1999 1999 1998
--------------------- --------------------------------- -------------------------------
Actual Average Average
Actual Yield/ Average Yield/ Average Yield/
Balance Cost Balance Interest Rate Balance Interest Rate
--------------------- --------------------------------------------------------------------
(Dollars in Thousand)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning
deposits $ 4,288 5.00% $ 8,185 $ 373 4.56% $ 9,904 $ 522 5.27%
Investment securities 12,854 5.45% 12,386 700 5.65% 10,583 614 5.80%
Loans receivable (3) 116,363 8.21% 111,137 9,553 8.60% 104.048 9,013 8.66%
-------- -------- ------- -------- -------
Total interest-earning assets 133,505 7.84% 131,708 $10,626 8.07% 124,535 $10,149 8.15%
------- -------
Non-interest-earning assets 5,443 4,039 6,578
-------- -------- --------
Total $138,948 $135,748 $131,113
======== ======== ========
Liabilities and equity:
Interest-bearing liabilities:
Deposit accounts 116,537 4.92% 111,397 $ 5,443 4.89% $103,279 $ 5,257 5.09%
FHLB advances 6,000 5.46% 6,000 349 5.82% 7,000 435 6.21%
-------- -------- ------- -------- -------
Total interest-bearing
liabilities 122,537 4.95% 117,397 $ 5,792 4.93% 110,279 $ 5,692 5.16%
------- -------
Non-interest-bearing
liabilities 969 2,791 5,268
Equity 15,442 15,560 15,566
-------- -------- --------
Total $138,948 $135,748 $131,113
======== ======== ========
Net interest Income and
interest rate spread (1) 2.89% $ 4,834 3.14% $ 4,457 2.99%
======= =======
Net interest-earning assets
and net interest
margin (2) 3.62% $ 14,312 3.67% $ 14,256 3.58%
======== ========
Ratio of interest-earning
assets to interest-bearing
liabilities 108.95% 112.19% 112.93%
<CAPTION>
-----------------------------------
1997
-----------------------------------
Average
Average Yield/
Balance Interest Rate
-----------------------------------
<S> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning
deposits $ 2,318 $ 124 5.35%
Investment securities 10,575 596 5.64%
Loans receivable (3) 90,192 8,012 8.88%
-------- -------
Total interest-earning assets 103,085 $ 8,732 8.47%
-------
Non-interest-earning assets 3,422
--------
Total $106,507
--------
Liabilities and equity:
Interest-bearing liabilities:
Deposits accounts $ 85,030 $ 4,276 5.03%
FHLB advances 6,333 378 5.97%
-------- -------
Total interest-bearing
liabilities 91,363 $ 4,654 5.09%
Non-interest-bearing -------
liabilities 494
Equity 14,650
--------
Total $106,507
========
Net interest Income and
interest rate spread (1) $ 4,078 3.38%
=======
Net interest-earning assets
and net interest
margin (2) $ 11,722 3.96%
========
Ratio of interest-earning
assets to interest-bearing
liabilities 112.83%
</TABLE>
(1) Interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of interest-
bearing liabilities.
(2) Net interest margin represents net interest income divided by average
interest-earning assets.
(3) Includes non-accruing loans, which are considered immaterial for
average balance purposes.
7
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Rate/Volume Analysis
The following table analyzes the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. The table distinguishes between (i) changes
attributable to volume (changes in volume multiplied by the prior period's
rate), (ii) changes attributable to rate (changes in rate multiplied by the
prior period's volume), (iii) mixed change (changes in rate multiplied by
changes in volume), and (iv) net change (the sum of the previous columns).
RATE/VOLUME
<TABLE>
<CAPTION>
Year ended December 31, Year ended December 31,
1999 vs. 1998 1998 vs. 1997
-------------------------------------- ------------------------------------------
Increase (Decrease) Attributable to Increase (Decrease) Attributable to
-------------------------------------- ------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
-------------------------------------- ------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income on:
Interest-earning deposits $ (91) (71) 12 (150) 406 (2) (6) 398
Investment securities 105 (16) (3) 86 - 18 - 18
Loans receivable 614 (69) (5) 540 1,231 (199) (31) 1,001
-------------------------------------- ------------------------------------------
Total interest income on
interest-earning assets $ 628 (156) 4 476 1,637 (183) (37) 1,417
-------------------------------------- ------------------------------------------
Interest expense on:
Deposit accounts $ 413 (211) (17) 185 918 52 11 981
FHLB advances (62) (28) 4 (86) 40 16 2 58
-------------------------------------- ------------------------------------------
Total interest expense
on interest-bearing
liabilities $ 351 (239) (13) 99 958 68 13 1,039
-------------------------------------- ------------------------------------------
Increase (decrease) in
net interest income $ 277 83 17 377 679 (251) (50) 378
====================================== ==========================================
</TABLE>
8
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Comparison of Financial Condition at December 31, 1999 and 1998
Changes in Financial Condition
Total consolidated assets of KS Bancorp increased by approximately $8 million to
$138.9 million at December 31, 1999 from $130.9 million at December 31, 1998.
Assets at December 31, 1998 increased by approximately $16.9 million from total
consolidated assets at December 31, 1997. The increases in assets in 1999 and
1998 were primarily attributable to strong loan demand in the Bank's primary
lending markets which was supported by the development and maintenance of
deposits within those markets.
The Bank's asset growth has been fueled in part by a series of facilities
renovations and replacements which has strengthened its presence in several of
its markets. During 1997, the Bank completed renovation of its home office which
now serves as the corporate and accounting headquarters. Continuing the
expansion of recent years, the Bank opened its fifth full service branch in
Garner on December 15, 1997. Also, during 1997, automated teller machines
(ATM's) were placed into service at the Garner and Kenly branch locations.
Loans increased by $11,145,117 and $10,411,030 during 1999 and 1998,
respectively. These increases are attributable to across the board increases in
demand for residential mortgage loans, construction loans and equity line loans
resulting from the expansion of the Bank's lending area and solidification of
its market presence in Clayton, Goldsboro, Wilson, and Garner.
Total investments and short-term interest-earning deposits decreased by
$4,009,065 during 1999 after having increased by $6,047,119 during 1998.
Investments securities and short-term interest-earning deposits amounted to
$17,142,086 and $21,151,151 million at December 31, 1999 and 1998, respectively.
The decrease in 1999 was primarily attributable to funding needed to support
loan demand and for dividends to shareholders. The increase in 1998 supported
the additional liquidity necessary to maintain a larger deposit base.
Savings deposits increased by $8,662,625 during 1999. The increase resulted from
management's decision to competitively price its deposits in relation to rates
being offered in its market areas and was influenced in part by the Bank's
increased loan demand and efforts to establish and solidify its market position.
Savings deposits had increased by $17,620,566 during 1998 for similar reasons.
The Bank had borrowings from the FHLB of Atlanta of $6,000,000 and $6,000,000 at
December 31, 1999 and 1998, respectively. Borrowings were obtained in order to
support the increased loan demand.
Stockholders' equity decreased by $273,798 during 1999 to $15,441,925 at
December 31, 1999 from $15,715,723 at December 31, 1998. Net income of
$1,163,327 for 1999 was reduced by the payment of $688,835 in cash dividends to
stockholders. Additionally, during 1999 the Company reported a decrease in net
unrealized gains, net of tax effect, of $475,160 on its portfolio of available
for sale securities. Net income of $1,258,443 for 1998 was reduced by the
payment of $688,527 in cash dividends to stockholders. Additionally, during 1998
the Company reported an increase in net unrealized gains, net of tax effect, of
$409,195 on its portfolio of available for sale securities. Such gains were not
recognized in income in either 1999 or 1998, and are shown as a separate
component of stockholders' equity. At December 31, 1999, the Bank's capital was
substantially in excess of the regulatory levels required by the FDIC and the
North Carolina Administrator.
9
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Comparison of Operating Results For The Years Ended December 31, 1999, 1998 and
1997
Net Income
KS Bancorp's net income for the years ended December 31, 1999, 1998, and 1997
was $1,163,327, 1,258,443, and $1,221,100, respectively. Net income during 1999
and 1998 was positively affected by increases in interest-earning assets.
Net Interest Income
Net interest income increased $375,756 or 8.4% during 1999 to $4,833,229 for the
year ended December 31, 1999 from $4,457,473 reported for 1998. Net interest
income in 1998 increased $379,627 or 9.3% from $4,077,846 in net interest income
reported in 1997. During 1999, the Bank's interest rate spread of 3.14% was an
increase from the spread of 2.99% in 1998. The spread in 1998 was a decrease
from the spread of 3.38% in 1997. The decline in 1998 was due to the decline in
the average yield on loans, which are the majority of interest-earning assets.
The increase in 1999 was due to the decline in the average rate paid on
deposits, which are the majority of interest bearing liabilities.
The increase in net interest income in 1999 and 1998 was due primarily to
increases in the volume of interest-earning assets, which exceeded increases in
interest-bearing liabilities. The increase in net interest income during 1998
would have been even greater if there had not been a 39 point decrease in the
interest rate spread, which was primarily the result of a 32 basis point
decrease in the average yield on interest-earning assets.
Interest Income
Total interest income increased by $476,405 to $10,625,578 for the year ended
December 31, 1999 from $10,149,173 in 1998. The 1999 increase followed an
increase of $1,417,783 for the year ended December 31, 1998 from $8,731,390 in
1997. During 1999 and 1998, the increase in the average balance of
interest-earning assets had a positive impact on interest income. KS Bancorp's
yield on interest-earning assets was 8.07% in 1999 as compared to 8.15% in 1998,
and its balance of average interest-earning assets increased by approximately
$7,173,000 during 1999. In 1998, the yield on interest-earning assets decreased
to 8.15% from 8.47% in 1997. During both 1999 and 1998, the growth in
interest-earning assets was mostly due to an increase in the Bank's loan
portfolio which typically yields a much higher rate of return than the Bank's
other interest-earning assets.
10
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Interest Expense
Total interest expense increased by $100,649 for the year ended December 31,
1999 to $5,792,349 following an increase of $1,038,156 to $5,691,700 for the
year ended December 31, 1998 from $4,653,544 for the year ended December 31,
1997. The Bank's average balance of interest-bearing liabilities increased by
approximately $7,118,000, $18,916,000 and $11,865,000 during 1999, 1998, and
1997, respectively. The Bank's cost of funds decreased by 23 basis points to
4.93% in 1999 from 5.16% in 1998. The Bank's cost of funds increased by 7 basis
points during 1998 from 5.09% in 1997. During 1999 and 1998, the increase in the
Bank's average interest-bearing liabilities contributed more to the increase in
interest expense than did the modest changes in the cost of funds
Provision For Loan Losses
The Bank's provision for loan losses amounted to $36,200, $33,500 and $23,500
for 1999, 1998 and 1997, respectively. The provision, which is 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 decision to increase
the provision and resulting allowances is based on several factors, such as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, and current economic conditions.
The Bank's level of nonperforming assets, defined as loans past due 90 days or
more and real estate acquired in foreclosure, have remained at low levels
throughout the three year period and amounted to .28%, .22%, and .41% as a
percentage of total assets at December 31, 1999, 1998 and 1997, respectively.
The Bank has adopted policies which it believes provide for prudent and adequate
levels of loan loss allowances.
Noninterest Expense
Operating expenses increased by $523,982 to $3,187,390 for the year ended
December 31, 1999 from $2,663,408 incurred in 1998. KS Bancorp's operating
expenses were $2,239,808 in 1997. The increase in 1999 and 1998 was primarily
attributable to additional data processing expense in preparation for the Year
2000, and additional compensation and employee benefits due to an increase in
the number of employees associated with the Bank's continued expanded
operations.
Income Taxes
Income tax expense amounted to $756,497, $743,059, and $751,223 in 1999, 1998,
and 1997, respectively. KS Bancorp's effective income tax rates were 39.4%,
37.1%, and 38.1% for the years ended December 31, 1999, 1998 and 1997,
respectively.
11
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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.
Year 2000 Issue
The year 2000 (Y2K) issue related to whether computer systems would properly
recognize and process date-sensitive information after the year changed to 2000.
Systems that do not properly recognize such information could generate erroneous
data or possibly fail. The Bank is heavily dependent on computer processing in
the conduct of substantially all of its business activities.
The Bank developed a plan for Y2K information systems compliance, including its
core processing system maintained by a service center. Phases of the plan
included: awareness, which is management's knowledge and recognition of the Y2K
issue and appointment of project team to address the impact on the Bank;
assessment, which involved management's determination of the magnitude that the
Y2K issue could have had on the Bank, including an inventory of systems and
assessments with customers and other third parties; resolution, which involved
the process of reprogramming or replacement of all existing systems which were
not Y2K compliant; validation, which was the testing phase; and implementation,
which was the final phase that involved the placing of revised and tested
systems into operation.
Management believes that the Bank's core systems are Y2K compliant due to its
contract with an outside service bureau and that the Bank is Y2K compliant.
Additionally, the Bank has not suffered any major setbacks due to the Y2K issue.
12
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
KS Bancorp, Inc.
Kenly, North Carolina
We have audited the accompanying consolidated statements of financial condition
of KS Bancorp, Inc. and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three year period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of KS Bancorp, Inc. and subsidiary
as of December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the years in the three year period ended December 31,
1999, in conformity with generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Raleigh, North Carolina
January 27, 2000
13
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and cash equivalents:
Interest-earning $ 4,287,873 $ 11,150,780
Noninterest-earning 1,839,259 519,761
Investment securities:
Held to maturity 1,150,162 1,530,015
Available for sale 10,827,051 7,590,856
FHLB stock and other nonmarketable equity securities 877,000 879,500
Loans receivable, net
Held for investment 116,362,935 105,335,147
Held for sale, at cost, estimated 1998 fair value $855,500 - 855,500
Accrued interest receivable 880,043 716,796
Property and equipment, net 2,428,306 2,138,798
Refundable income taxes 68,027 -
Prepaid expenses and other assets 227,488 175,327
-------------------------------------
Total assets $ 138,948,144 $ 130,892,480
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 116,536,849 $ 107,934,224
Advances from Federal Home Loan Bank 6,000,000 6,000,000
Accounts payable and accrued expenses 324,241 284,295
Advance payments by borrowers for taxes and insurance 50,318 52,341
Deferred income taxes 594,811 905,897
-------------------------------------
Total liabilities 123,506,219 115,176,757
-------------------------------------
Commitments and contingencies
Stockholders' Equity:
Preferred stock, authorized 5,000,000 shares; none issued $ - $ -
Common stock, no par value, authorized 20,000,000 shares;
issued and outstanding 921,578 in 1999 and 888,633 in 1998 - -
Additional paid-in capital 5,005,372 5,317,502
Unearned ESOP shares (156,000) (195,000)
Accumulated other comprehensive income 650,232 1,125,392
Retained earnings, substantially restricted 9,942,321 9,467,829
-------------------------------------
Total stockholders' equity 15,441,925 15,715,723
-------------------------------------
$ 138,948,144 $ 130,892,480
=====================================
</TABLE>
See Notes to Consolidated Financial Statements.
14
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Loans $ 9,552,564 $ 9,013,141 $ 8,011,909
Investment securities 553,859 537,001 501,115
Mortgage-backed securities 146,483 77,348 94,292
Interest-bearing deposits 372,672 521,683 124,074
------------------------------------------------------
Total interest income 10,625,578 10,149,173 8,731,390
------------------------------------------------------
Interest expense:
Deposits 5,443,152 5,256,981 4,275,930
Advances from the FHLB 349,197 434,719 377,614
------------------------------------------------------
Total interest expense 5,792,349 5,691,700 4,653,544
------------------------------------------------------
Net interest income 4,833,229 4,457,473 4,077,846
Provision for loan losses 36,200 33,500 23,500
------------------------------------------------------
Net interest income after
provision for loan losses 4,797,029 4,423,973 4,054,346
------------------------------------------------------
Noninterest income:
Gain (loss) on sale of investment securities - - (5,994)
Other income 310,185 240,937 163,779
------------------------------------------------------
310,185 240,937 157,785
------------------------------------------------------
Noninterest expense:
Compensation and benefits 1,872,707 1,549,916 1,340,730
Occupancy 156,387 80,261 114,134
Equipment maintenance and expense 305,508 208,822 100,908
Data processing and outside service fees 294,750 246,884 171,347
Insurance 75,284 123,290 103,008
Other 482,754 454,235 409,681
------------------------------------------------------
3,187,390 2,663,408 2,239,808
------------------------------------------------------
Income before income taxes 1,919,824 2,001,502 1,972,323
------------------------------------------------------
Income taxes:
Current 776,356 794,524 743,608
Deferred (19,859) (51,465) 7,615
------------------------------------------------------
756,497 743,059 751,223
------------------------------------------------------
Net income $ 1,163,327 $ 1,258,443 $ 1,221,100
======================================================
Basic earnings per share $ 1.34 $ 1.46 $ 1.43
======================================================
Diluted earnings per share $ 1.23 $ 1.32 $ 1.30
======================================================
Dividends paid per share $ 0.80 $ 0.80 $ 0.83
======================================================
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Additional Unearned Other
Paid-in Retained ESOP Comprehensive
Capital Earnings Shares Income Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 5,161,212 $ 8,378,714 $ (273,000) $ 454,113 $ 13,721,039
Comprehensive income:
Net income - 1,221,100 - - 1,221,100
Change in unrealized gain (loss) on securities
available for sale, net of taxes - - - 262,084 262,084
-------------
Total comprehensive income 1,483,184
-------------
Cash dividends paid - (701,901) - - (701,901)
Compensation 58,663 - - - 58,663
Release of unearned shares - - 39,000 - 39,000
Stock options exercised 8,740 - - - 8,740
Cash payment for fractional shares in stock split (2,640) - - - (2,640)
--------------------------------------------------------------------------
Balance, December 31, 1997 5,225,975 8,897,913 (234,000) 716,197 14,606,085
Comprehensive income:
Net income - 1,258,443 - - 1,258,443
Change in unrealized gain (loss) on securities
available for sale, net of taxes - - - 409,195 409,195
-------------
Total comprehensive income 1,667,638
-------------
Cash dividends paid - (688,527) - - (688,527)
Compensation 66,950 - - - 66,950
Release of unearned shares - - 39,000 - 39,000
Stock options exercised 24,577 - - - 24,577
--------------------------------------------------------------------------
Balance, December 31, 1998 5,317,502 9,467,829 (195,000) 1,125,392 15,715,723
Comprehensive income:
Net income - 1,163,327 - - 1,163,327
Change in unrealized gain (loss) on securities
available for sale, net of taxes - - - (475,160) (475,160)
-------------
Total comprehensive income 688,167
-------------
Cash dividends paid - (688,835) - - (688,835)
Compensation 54,619 - - - 54,619
Repurchase of common stock (366,760) - - - (366,760)
Release of unearned shares - - 39,000 - 39,000
Stock options exercised 11 - - - 11
------------------------------------------------------------------------------
Balance, December 31, 1999 $ 5,005,372 $ 9,942,321 $ (156,000) $ 650,232 $ 15,441,925
==============================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,163,327 $ 1,258,443 $ 1,221,100
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 251,602 175,701 115,685
Amortization of net premiums (discounts) (6,119) 2,680 8,720
Deferred income taxes (17,501) (51,465) 7,615
Provision for losses on loans 36,200 33,500 23,500
(Gains) and losses, net (15,326) (8,913) 652
Shares allocated to ESOP contribution 93,619 105,950 97,663
Origination of loans held for sale (2,537,475) (5,247,200) -
Proceeds from sale of loans held for sale 3,392,975 4,391,700 -
Changes in assets and liabilities:
(Increase) decrease in:
Prepaid expenses and other assets (52,161) (52,940) (20,619)
Refundable income taxes (68,027) 78,066 71,492
Accrued interest receivable (163,247) (27,369) (130,122)
Increase (decrease) in:
Accrued expenses and other liabilities 39,946 (18,581) 113,731
-----------------------------------------------------
Net cash provided by operating activities 2,117,813 639,572 1,509,417
-----------------------------------------------------
Cash Flows From Investing Activities
Proceeds from sales or maturity of
available-for-sale securities 2,229,916 2,500,000 3,494,006
Proceeds from maturity and calls of
held-to-maturity securities 380,205 1,568,485 777,362
Proceeds from sale of non-marketable
equitable securities 2,500 - -
Purchase of available for sale securities (6,229,089) (3,000,000) (3,750,000)
Purchase of nonmarketable equity securities - (92,700) (65,600)
Net change in loans receivable (11,145,117) (10,411,030) (13,578,287)
Proceeds from sale of real estate 97,412 53,698 134,204
Proceeds from sale of property and equipment 16,800 - 16,750
Purchase of property and equipment (558,867) (180,784) (340,068)
-----------------------------------------------------
Net cash used in investing activities (15,206,240) (9,562,331) (13,311,633)
-----------------------------------------------------
</TABLE>
17
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities
Net increase in deposits $ 8,602,625 $ 17,620,566 $ 7,967,733
Increase (decrease) in advance payments from
borrowers for taxes and insurance (2,023) 3,895 2,837
Advances from Federal Home Loan Bank 4,000,000 2,000,000 12,000,000
Principal payments for borrowed money (4,000,000) (4,000,000) (8,000,000)
Cash dividends paid (688,835) (688,527) (701,901)
Redemption of common stock (366,760) - -
Payments received on exercised options, 100
shares (3,277 in 1998) 11 24,577 8,740
Cash paid in lieu of fractional shares on stock split - - (2,640)
-----------------------------------------------------
Net cash provided by financing activities 7,545,018 14,960,511 11,274,769
-----------------------------------------------------
Net increase (decrease) in cash and cash equivalents (5,543,409) 6,037,752 (527,447)
Cash and cash equivalents:
Beginning 11,670,541 5,632,789 6,160,236
-----------------------------------------------------
Ending $ 6,127,132 $ 11,670,541 $ 5,632,789
=====================================================
Cash and cash equivalents:
Interest-bearing $ 4,287,873 $ 11,150,780 $ 4,781,687
Noninterest-bearing 1,839,259 519,761 851,102
-----------------------------------------------------
$ 6,127,132 $ 11,670,541 $ 5,632,789
=====================================================
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest $ 5,793,616 $ 5,685,974 $ 4,651,936
=====================================================
Income taxes $ 846,817 $ 724,091 $ 694,825
=====================================================
Supplemental Disclosure of Noncash Investing
and Financing Activities:
Transfer from loans to real estate
acquired in settlement of loans $ 90,242 $ 44,785 $ 63,257
=====================================================
Change in unrealized gain on available
for sale securities $ (475,160) $ 409,195 $ 262,084
=====================================================
</TABLE>
See Notes to Consolidated Financial Statements.
18
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Conversion and organization of holding company: In December 1993, pursuant to a
- ----------------------------------------------
Plan of Conversion approved by its members and regulators, Kenly Savings Bank,
Inc., SSB amended and restated its charter to effect its conversion from a North
Carolina-chartered mutual savings bank to a North Carolina-chartered stock
savings bank, and became a wholly-owned subsidiary of KS Bancorp, Inc. ("KS
Bancorp" or the "Company") a holding company formed in connection with the
conversion. On January 1, 1999, Kenly Savings Bank, Inc., SSB changed its name
to KS Bank, Inc. (the "Bank"). The Company's principal business activities
consist solely of the ownership of the Bank, a loan to the ESOP for its purchase
of common stock and the investment of its portion of the proceeds received from
the Bank's mutual to stock conversion.
The Bank primarily originates one-to-four family residential loans within its
primary lending area of Johnston, Wilson, Wayne and Wake counties. The Bank's
underwriting policies require such loans to generally be made at 80%
loan-to-value based upon appraised values. These loans are secured by the
underlying properties.
Principles of consolidation: The consolidated financial statements include the
- ---------------------------
accounts of KS Bancorp and its wholly-owned subsidiary, the Bank. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Basis of financial statement presentation: The accounting and reporting
- -----------------------------------------
policies of the Company conform to generally accepted accounting principles and
general practices within the financial services industry. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period and disclosures of
contingent assets and liabilities. Actual results could differ from those
estimates.
Cash and cash equivalents: For purposes of reporting cash flows, the Company
- -------------------------
considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents. At times, the Company maintains
deposits in correspondent banks in amounts that may be in excess of the FDIC
insurance limit.
Investment securities: Debt securities and mortgage-backed securities (MBS's)
- ---------------------
classified as held to maturity are carried at cost, adjusted for amortization of
premiums and accretion of discounts using the interest method. Such securities
will be held until their contractual maturities, and will not be available to be
sold even in response to certain conditions such as changes in market interest
rate, needs for liquidity, or changes in the ability of and the yield on
alternative investments.
Debt securities and marketable equity securities classified as available for
sale are carried at market with unrealized holding gains and losses excluded
from earnings and reported net of income taxes in a separate component of
accumulated other comprehensive income until such time as the securities are
sold. Such securities may be sold in response to certain conditions such as
changes in market interest rates, needs for liquidity, or changes in the
availability of and the yield on alternative investments, but are not bought and
held principally for the purpose of selling in the near term with the objective
of generating profits on short-term differences in price. Gain or loss on sale
of these securities is recognized when realized and is based on the cost of
specifically identified securities.
19
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Trading securities are held in anticipation of short-term market gains and are
carried at fair value with realized and unrealized gains and losses included in
earnings. The Company currently has no securities which are classified as
trading securities.
Equity securities which are considered nonmarketable are not subject to the
above classifications and are carried at cost.
Loans receivable: Loans receivable are stated at unpaid principal balances,
- ----------------
less the allowance for loan losses and net deferred loan origination fees and
discounts.
The Bank's loan portfolio consists principally of long-term conventional loans
collateralized by first trust deeds on single-family residences, other
residential property, commercial property and land.
Loan fees: The Bank receives fees for originating and servicing loans. The Bank
- ---------
defers all loan fees, less certain direct costs as an adjustment to yield with
subsequent amortization into income over the life or first repricing period of
the related loan.
Allowance for loan losses: The allowance for loan losses is established through
- -------------------------
a provision for loan losses charged to operations. Loans are charged off against
the allowance when management believes that collectibility is unlikely. The
allowance is an amount that management believes will be adequate to absorb
losses on existing loans that may become uncollectible based on evaluations of
the collectibility of loans and prior loan loss experience. The evaluations take
into account such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans and
current economic conditions that may affect the borrowers' ability to pay. While
management uses the best information available to make evaluations, future
adjustments may be necessary if economic or other conditions differ
substantially from the assumptions used.
The Bank establishes specific loan loss allowances on impaired loans if it is
doubtful that all principal and interest due according to the loan terms will be
collected. An allowance on an impaired loan is required if the present value of
the future cash flows, discounted using the loan's effective interest rate, is
less than the carrying value of the loan. An impaired loan can also be valued
based upon its fair value in the market place or on the basis of its underlying
collateral, if the loan is primarily collateral dependent. If foreclosure is
imminent, and the loan is collateral dependent, the loan must be valued based
upon the fair value of the underlying collateral. The Bank does not currently
have any loans which it considers impaired.
The Bank does not accrue interest on loans delinquent 90 days or more and it
establishes reserves for uncollected interest. All interest accrued but not
collected, for loans that are placed on nonaccrual status or charged off, is
reversed against interest income. Interest on these loans is accounted for on
the cash-basis or cost-recovery method until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
20
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Loans Held for Sale: Mortgage loans originated and intended for sale in the
- -------------------
secondary market are carried at the lower of cost or estimated market value in
the aggregate.
Real estate acquired in settlement of loans: Real estate acquired through, or
- -------------------------------------------
in lieu of, loan foreclosure (REO) is initially recorded at fair value at the
date of foreclosure establishing a new cost basis. After foreclosure, valuations
of the property are periodically performed by management and the real estate is
carried at the lower of cost or fair value minus estimated costs to sell.
Revenue and expenses from operations and changes in the valuation allowance are
included in net expenses from foreclosed assets.
Property and equipment: Property and equipment are stated at cost, less
- ----------------------
accumulated depreciation. Depreciation is computed generally by the
straight-line method.
Income taxes: Deferred taxes are provided on a liability method whereby
- ------------
deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets
and liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment.
Advances from borrowers for taxes and insurance: Certain borrowers make monthly
- -----------------------------------------------
payments, in addition to principal and interest, in order to accumulate funds
from which the Bank can pay the borrowers' property taxes and insurance
premiums.
Retirement plans: The Bank's employee stock ownership plan (the "ESOP") covers
- ----------------
substantially all of its employees. Contributions to the plan are based upon
amounts necessary to fund the amortization requirements of the ESOP's debt to
the Company, subject to compensation limitations, and are charged to expense.
The Bank has a defined contribution retirement plan which covers substantially
all of its employees. The annual contribution to the plan is based on employee
compensation and the Bank's policy is to fund plan costs as they accrue. The
plan is fully funded and there are no accrued unfunded amounts.
The Bank also has a 401(k) retirement plan which is available to substantially
all employees. The Bank matches voluntary contributions by participating
employees.
21
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Earnings per share: Basic per share amounts are based on the weighted average
- ------------------
shares of common stock outstanding. Diluted earnings per share assume the
conversion, exercise or issuance of all potential common stock instruments such
as options, warrants and convertible securities, unless the effect is to reduce
a loss or increase earnings per share. The basic and diluted weighted average
shares outstanding are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------
<S> <C> <C> <C>
Weighted average shares outstanding 892,864 888,078 885,069
Less weighted average unallocated ESOP shares 22,737 27,937 33,138
-----------------------------
Weighted average outstanding shares used for basic EPS 870,127 860,141 851,931
Plus incremental shares from assumed issuance of stock options 78,377 96,845 90,544
-----------------------------
Weighted average outstanding shares used for diluted EPS 948,504 956,986 942,475
=============================
</TABLE>
There were no adjustments required to be made to net income in the computation
of diluted earnings per share.
Off-balance-sheet risk: In the ordinary course of business, the Bank has
- ----------------------
entered into commitments to extend credit, including commitments under credit
card arrangements and equity lines of credit. Such financial instruments are
recorded when they are funded.
Fair value of financial instruments: The estimated fair values required under
- -----------------------------------
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
to develop the estimates of fair value. Accordingly, the estimates presented in
the accompanying Note 14 for the fair value of the Company's financial
instruments are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions or
estimation methodologies may have a material effect on the estimated fair value
amounts.
22
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies (Continued)
The fair value estimates presented in Note 14 are based on pertinent information
available to management as of December 31, 1999 and 1998, respectively. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since those dates, and
therefore, current estimates of fair value may differ significantly from the
amounts presented herein. The following methods and assumptions were used by the
Company in estimating its fair value disclosures for financial instruments:
Cash, short-term cash investments, loans held for sale and accrued interest
---------------------------------------------------------------------------
receivable: The carrying amounts reported in the statement of financial
----------
condition for these instruments approximates their fair values due to the
short term nature of these instruments.
Investment securities: Investment securities include stock in the Federal
---------------------
Home Loan Bank of Atlanta. No ready market exists for these stocks and they
have no quoted market values. For disclosure purposes, such stock is
assumed to have a fair value which is equal to cost or redemption value.
All other debt, equity and mortgage-backed securities are publicly traded
and market values are based on quoted market prices.
Loans receivable: The fair value for substantially all loans has been
----------------
estimated by discounting the projected future cash flows at December 31,
1999 and 1998, using the rate on that date at which similar loans would be
made to borrowers with similar credit ratings and for similar maturities or
repricing periods. The discount rate used has been adjusted by an estimated
credit risk factor to approximate the adjustment that would be applied in
the marketplace for any nonperforming loans. Certain prepayment assumptions
have also been made depending upon the original contractual lives of the
loans. For certain loans which are indexed and adjust with prime, the
carrying basis is considered to approximate fair value.
Deposits: The fair value of deposits with no stated maturities, including
--------
transaction accounts and passbook savings accounts is estimated to be equal
to the amount payable on demand as of December 31, 1999 and 1998. The fair
value of certificates of deposit is based upon the discounted value of
future contractual cash flows. The discount rate is estimated using the
rates offered on December 31, 1999 and 1998 for deposits of similar
remaining maturities.
Borrowings: Borrowed funds consist of fixed rate FHLB advances. The fair
----------
value of these advances is based upon the discounted value using current
rates at which borrowings of similar maturity could be obtained.
Off-balance-sheet commitments: Because the Bank's commitments, which
-----------------------------
consist entirely of loan commitments, are either short-term in nature or
subject to immediate repricing, no fair value has been assigned to these
off-balance-sheet items.
23
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Investment Securities
Investment securities consist of the following:
<TABLE>
<CAPTION>
1999
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Held to maturity: Cost Gains Losses Value
---------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities:
Federal agency securities $ 500,000 $ - $ (4,063) $ 495,937
Mortgage-backed securities 650,162 30,220 - 680,382
---------------------------------------------------------
1,150,162 30,220 (4,063) 1,176,319
---------------------------------------------------------
Available for sale:
Debt securities:
Mortgage-backed securities 1,501,358 - (53,391) 1,447,967
Federal agency securities 8,250,000 - (165,309) 8,084,691
Marketable equity securities:
Federal Home Loan Mortgage
Corporation stock 26,931 1,267,462 - 1,294,393
---------------------------------------------------------
9,778,289 1,267,462 (218,700) 10,827,051
---------------------------------------------------------
Nonmarketable equity securities:
Federal Home Loan Bank Stock 877,000 - - 877,000
---------------------------------------------------------
$ 11,805,451 $ 1,297,682 $ (222,763) $ 12,880,370
=========================================================
</TABLE>
24
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Investment Securities (Continued)
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity
Debt securities:
Federal agency securities $ 500,000 $ 5,000 $ - $ 505,000
Mortgage-backed securities 1,030,015 32,093 - 1,062,108
-------------------------------------------------------------------
1,530,015 37,093 - 1,567,108
-------------------------------------------------------------------
Available for sale:
Debt securities:
US Treasury securities 1,498,777 10,813 - 1,509,590
Federal agency securities 4,250,000 58,908 - 4,308,908
Marketable equity securities:
Federal Home Loan Mortgage
Corporation stock 26,931 1,745,427 - 1,772,358
-------------------------------------------------------------------
5,775,708 1,815,148 - 7,590,856
-------------------------------------------------------------------
Nonmarketable equity securities:
Federal Home Loan Bank Stock 879,500 - - 879,500
-------------------------------------------------------------------
$ 8,185,223 $ 1,852,241 $ - $ 10,037,464
===================================================================
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1999 by contractual maturity are as shown below. Mortgage backed securities are
not included because they have no stated maturity.
<TABLE>
<CAPTION>
Weighted Estimated
Average Amortized Market
Yield Cost Value
-------------- ---------------------------------
<S> <C> <C> <C>
Held to maturity:
Due in one year through five years 6.31% $ 500,000 $ 495,937
=================================
Available for sale:
Due in less than one year 5.24% $ 1,000,000 $ 992,501
Due in one year through five years 6.11% 6,250,000 6,109,377
Due in greater than five years 7.06% 1,000,000 982,813
---------------------------------
$ 8,250,000 $ 8,084,691
=================================
$ 8,750,000 $ 8,580,628
=================================
</TABLE>
25
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 2. Investment Securities (Continued)
The amortized cost and estimated market value of mortgage-backed securities by
contractual maturities are not reported because the actual maturities may and
often are significantly different from contractual maturities.
Summarized below is the sales activity in available for sale investment
securities:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Cost of investment securities sold $ - $ - $ 2,000,000
Proceeds from sales of available for
sale securities - - (1,994,006)
---------------------------------------------------
Realized losses $ - $ - $ 5,994
===================================================
</TABLE>
The change in net unrealized gains and losses shown as a separate component of
equity for the years ended December 31, 1999, 1998 and 1997 is shown below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------
<S> <C> <C> <C>
Balance in equity component, beginning $ 1,125,392 $ 716,197 $ 454,113
Change in net unrealized gains (loss) (766,387) 659,991 422,717
Less change in deferred income taxes 291,227 (250,796) (160,633)
---------------------------------------------------
Balance in equity component, ending $ 650,232 $ 1,125,392 $ 716,197
===================================================
</TABLE>
The Bank, as a member of the Federal Home Loan Bank system, is required to
maintain an investment in capital stock of the Federal Home Loan Bank in an
amount equal to the greater of one percent of its outstanding residential
mortgage loans or one-twentieth of its outstanding advances. No ready market
exists for the stock, and it has no quoted market value. For disclosure
purposes, such stock is assumed to have a market value equal to its cost.
Certain investment securities with amortized costs of $3,000,000 and market
values of $2,928,907 at December 31, 1999 were pledged to secure public deposits
or were pledged in connection with the Bank's depository relationship with the
Federal Reserve Bank.
26
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Loans Receivable
Loans receivable consist of the following:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------
<S> <C> <C>
Mortgage loans:
Conventional first mortgage loans $ 89,700,116 $ 84,486,015
Construction loans 15,296,931 12,197,467
Equity-line loans 10,314,359 9,234,655
Loans on deposit accounts 203,082 262,139
Consumer loans 2,226,505 941,588
Commercial loans 5,579,937 3,016,880
-------------------------------------
123,320,930 110,138,744
-------------------------------------
Less:
Undisbursed portion of loans in process 6,283,693 4,167,318
Unamortized loan fees 282,582 277,412
Allowance for loan losses 391,720 358,867
-------------------------------------
6,957,995 4,803,597
-------------------------------------
$ 116,362,935 $ 105,335,147
=====================================
Weighted average yield 8.36% 8.49%
=====================================
</TABLE>
The following summarizes transactions in the allowance for loan losses:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1999 1998 1997
--------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning $ 358,867 $ 325,367 $ 301,867
Provision for loan losses 36,200 33,500 23,500
Charge-offs, net (3,347) - -
--------------------------------------------------------
Balance, ending $ 391,720 $ 358,867 $ 325,367
========================================================
</TABLE>
Loans delinquent more than 90 days amounted to approximately $393,200 and
$290,500 at December 31, 1999 and 1998, respectively. These loans are primarily
collateral dependent and management has determined that the underlying
collateral is in excess of the carrying amounts. As a result, the Bank has
determined that specific allowances on these loans is not required. Interest
income that would have been recorded on nonaccrual loans totaled $12,729,
$27,608 and $15,061 for the years ended December 31, 1999, 1998 and 1997,
respectively.
27
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 3. Loans Receivable (Continued)
Loans outstanding to the Company's officers and directors (including their
affiliates) are shown below. In the opinion of management, these loans were made
at lending terms and rates available to the general public and do not involve
more than the normal risks of collectibility.
1999 1998
-----------------------------------
Balance, beginning $ 1,195,000 $ 1,222,000
Originations 612,000 175,000
Repayments (556,000) (202,000)
-----------------------------------
Balance, ending $ 1,251,000 $ 1,195,000
===================================
Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Corporation, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Corporation does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Note 4. Property and Equipment
Property and equipment consists of the following:
1999 1998
-----------------------------------
Land $ 363,812 $ 363,812
Buildings 1,678,037 1,578,595
Furniture and equipment 1,461,180 1,030,489
-----------------------------------
3,503,029 $ 2,972,896
Accumulated depreciation (1,074,723) (834,098)
-----------------------------------
$ 2,428,306 2,138,798
===================================
Depreciation expense for the years ended December 31, 1999, 1998 and 1997
amounted to $251,602, $175,701 and $115,685, respectively.
28
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 5. Deposits
Deposits consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------
<S> <C> <C>
Regular savings accounts, 3.00% $ 4,081,971 $ 3,894,724
NOW accounts, 0.75% to 2.00% 7,604,120 7,005,268
Money market deposit accounts, 3.00% to 4.10% 5,660,515 6,150,842
Noninterest-bearing accounts 2,596,875 2,398,938
--------------------------------------
19,943,481 19,449,772
--------------------------------------
Certificates:
3.00% - 4.50% 7,402,104 4,904,706
4.51% - 6.50% 89,168,185 83,222,163
6.51% - 8.50% - 333,237
--------------------------------------
96,570,289 88,460,106
--------------------------------------
116,513,770 107,909,878
Accrued interest payable 23,079 24,346
--------------------------------------
$ 116,536,849 $ 107,934,224
======================================
Weighted average cost of funds 4.92% 5.10%
======================================
</TABLE>
Certificate accounts are summarized by maturity at December 31, 1999 as follows:
<TABLE>
<CAPTION>
2000 2001 2002 Thereafter Total
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
3.00% - 4.50% $ 5,809,758 $ 1,592,346 $ - $ - $ 7,402,104
4.51% - 6.50% 66,705,884 16,800,157 - 5,662,144 89,168,185
-------------------------------------------------------------------------------------------------
$ 72,515,642 $ 18,392,503 $ - $ 5,662,144 $ 96,570,289
=================================================================================================
</TABLE>
The aggregate amount of certificates of deposit included in the table above with
a denomination of $100,000 or greater is shown below:
Maturity Amount
- -------------------------------------------------------------------------------
Less than 3 months $ 7,402,497
3 to 6 months 4,929,612
6 to 12 months 8,142,784
More than 12 months 5,314,795
------------------
$ 25,789,688
==================
29
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 5. Deposits (Continued)
Interest expense on deposits is summarized below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1999 1998 1997
------------------------------------------------------
<S> <C> <C> <C>
Regular savings accounts $ 122,470 $ 109,225 $ 104,214
NOW and money market accounts 354,932 400,561 283,988
Certificates 4,972,476 4,754,711 3,896,358
------------------------------------------------------
5,449,878 5,264,497 4,284,560
Forfeitures (6,726) (7,516) (8,630)
------------------------------------------------------
$ 5,443,152 $ 5,256,981 $ 4,275,930
======================================================
</TABLE>
Note 6. Advances From Federal Home Loan Bank
Advances from the Federal Home Loan Bank consist of the following:
<TABLE>
<CAPTION>
Maturing in Interest December 31,
--------------------------------------
Type Year Ending Rate 1999 1998
- --------------------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
Fixed 1999 6.31% $ - $ 2,000,000
Fixed 1999 6.28% - 2,000,000
Fixed 2000 5.10% 2,000,000 2,000,000
Fixed 2000 5.82% 2,000,000 -
Variable 2000 FHLB 2,000,000 -
overnight plus
.30%
--------------------------------------
$ 6,000,000 $ 6,000,000
======================================
</TABLE>
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
advances are secured by all stock in the FHLB and qualifying first mortgage
loans pledged in the form of a blanket floating lien. Book value of qualifying
loans is in excess of outstanding borrowings.
30
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7. Income Taxes
Under the Internal Revenue Code, the Bank was allowed a special bad debt
deduction related to additions to tax bad debt reserves established for the
purpose of absorbing losses. Through 1995, the provisions of the Code permitted
the Bank to deduct from taxable income an allowance for bad debts based on 8% of
taxable income before such deduction or actual loss experience. The Bank used
the percentage of taxable income method to compute its deductions through 1995.
Legislation passed in 1996 eliminated the percentage of taxable income method as
an option for computing bad debt deductions. The Bank is still permitted to take
deductions for bad debts, but is required to compute such deductions using an
experience method. The Bank will also have to recapture its tax bad debt
reserves which have accumulated since 1987 amounting to approximately $748,000
over a six year period. The tax associated with the recaptured reserves was
approximately $284,000. The recapture began in 1998 since the Bank was eligible
to defer recapture in 1997 and 1996. Deferred income taxes have been previously
established for the taxes associated with the recaptured reserves and the
ultimate payment of the taxes will not result in a charge to earnings. The
balance of deferred income taxes associated with the recaptured reserve is
approximately $189,000 at December 31, 1999.
At December 31, 1999, retained earnings contain certain historical additions to
bad debt reserves for income tax purposes of $1,221,000 for which no deferred
taxes have been provided, because the Bank does not intend to use these reserves
for purposes other than to absorb losses. If amounts which qualified as bad debt
deductions are used for purposes other than to absorb bad debt losses or
adjustments arising from the carryback of net operating losses, income taxes may
be imposed at the then existing rates. In the future, if the Bank does not meet
the income tax requirements necessary to permit the deduction of an allowance
for bad debts, the Bank's effective tax rate would be increased to the maximum
percent under existing law. Unrecorded deferred income taxes on pre 1988 tax bad
debt reserves amounted to approximately $465,000 at December 31, 1999.
Deferred income taxes consist of the following :
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
--------------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 7,795 $ 15,581
Allowance for loan losses 148,853 136,369
Deferred compensation and directors' death benefits 40,564 36,650
--------------------------------------
Total deferred tax assets 197,212 188,600
--------------------------------------
Deferred tax liabilities:
Excess accumulated tax depreciation 120,781 84,683
Federal Home Loan Bank stock basis 83,334 83,334
Tax bad debt reserves 189,379 236,724
Unrealized net appreciation, investments 398,529 689,756
--------------------------------------
Total deferred tax liabilities 792,023 1,094,497
--------------------------------------
Net deferred tax liabilities $ (594,811) $ (905,897)
======================================
</TABLE>
31
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 7. Income Taxes (Continued)
Income tax expense differs from the federal statutory rate of 35% as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
Income tax expense at statutory federal rate 35.00 % 35.00 % 35.00 %
Increase (decrease) in income taxes
resulting from:
Nondeductible expenses 2.15 1.23 1.06
State income taxes, net of federal benefit 2.45 1.66 3.43
Other, net (0.20) (0.76) (1.40)
---------------------------------------------------------
39.40 % 37.13 % 38.09 %
=========================================================
</TABLE>
Note 8. Concentration of Credit Risk, Off-Balance-Sheet Risk and Commitments
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and equity lines of
credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the statement of
financial condition. The contract or notional amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party, to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
A summary of the contract amount of the Bank's exposure to off-balance-sheet
risk is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
--------------------------------------
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit, mortgage loans $ 1,068,100 $ 1,491,000
Undisbursed equity lines of credit 7,439,741 7,325,000
</TABLE>
The Bank evaluates each customer's credit worthiness on a case-by-case basis.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The collateral obtained by the Bank upon
extension of credit is based on management's credit evaluation of the customer.
The collateral held is the underlying real estate.
32
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9. Retirement Plans
The Bank has a 401(k) retirement plan which contains provisions for specified
matching contributions by the Bank. The Bank funds contributions as they accrue
and 401(k) expense totaled $8,431, $6,152 and $5,184 for the years ended
December 31, 1999, 1998 and 1997, respectively.
In addition, the Bank has established a defined contribution retirement plan
which covers substantially all employees. Contributions to the plan are
discretionary and determined annually by the Bank's Board of Directors. The Bank
funds contributions as they accrue and retirement expense amounted to $76,573,
$62,266 and $49,052 for the years ended December 31, 1999, 1998 and 1997,
respectively.
The accounting and reporting aspects of the Bank's ESOP plan are described in
Note 11.
Note 10. Deferred Compensation for Directors
The Bank has a deferred compensation plan for its directors to be paid in the
form of death benefits. The death benefits vest to each director in amounts
ranging from $2,000 to a maximum of $20,000 for each year of service to the Bank
beginning with the first year of service to the fifth year. At December 31, 1999
and 1998, the Bank had accrued $72,551 and $69,868, respectively, which
represents the present value of the death benefits based on directors' life
expectancies. Expense associated with the plan amounted to $2,683, $3,127 and
$2,875 for 1999, 1998 and 1997, respectively.
Note 11. Employee Stock Ownership Plan
The Bank has an employee stock ownership plan (the "ESOP") to benefit employees
with 1,000 hours of annual service and who have attained age 21. The ESOP is
funded by contributions made by the Bank.
The ESOP borrowed funds from the Company to partially finance its purchase of
the common stock of the Company. The loan bears interest at 7.5% and matures
December 29, 2003. The loan will be repaid by the ESOP with contributions made
by the Bank and earnings on the ESOP's assets. At December 31, 1999 and 1998,
the outstanding balance of the loan receivable from the ESOP was $156,000 and
$195,000 respectively, which is presented as a reduction of stockholders'
equity. Shares purchased by the ESOP are held in suspense for allocation among
participants as the loan is repaid. The ESOP originally purchased 53,927 shares
of common stock. At December 31, 1999 and 1998, 20,800 and 26,000 shares,
respectively, had not been allocated. Based upon the market value of the
Company's stock at December 31, 1999 and 1998, the fair value of the unallocated
shares amounted to approximately $375,700 and $468,000 at December 31, 1999 and
1998, respectively.
Dividends on unallocated shares may be used by the ESOP to repay the debt to the
Company and are not reported as dividends in the financial statements. Dividends
on allocated or committed to be allocated shares are credited to the accounts of
the participants and reported as dividends in the financial statements.
Contributions are allocated among participants on the basis of compensation in
the year of allocation. Benefits become 100% vested after five years of credited
service. Forfeitures of nonvested benefits will be reallocated among remaining
participating employees in the same proportion as contributions.
33
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 11. Employee Stock Ownership Plan (Continued)
The Company has the obligation to redeem the holdings of plan participants in
the event the participants request the Company to do so upon their retirement
and if shares cannot be sold through the open market. The market value of the
ESOP shares less the principal balance on the ESOP loan is approximately
$800,000.
The Bank has charged expense for $93,619, $105,950 and $97,662 for years ended
December 31, 1999, 1998 and 1997 respectively in connection with the ESOP. The
expense for 1999, 1998 and 1997 includes, in addition to the cash contribution
necessary to fund the ESOP's annual principal and interest installment on the
loan to the Company, $54,619, $66,950 and $58,662, respectively, which
represents the difference between the fair market value of the shares which have
been committed to be released to participants, and the cost of these shares to
the ESOP.
Note 12. Regulatory Matters
The Bank is subject to the capital requirements of the FDIC and the
Administrator of the North Carolina Savings Institutions Division.
The FDIC requires the Bank to have a minimum leverage ratio of Tier I Capital
(principally consisting of retained earnings and common stockholders' equity,
less any intangible assets) to total assets of 3%. The FDIC also requires the
Bank to have a ratio of total capital to risk-weighted assets of 8%, of which at
least 4% must be in the form of Tier I capital. The North Carolina Administrator
requires a net worth equal to at least 5% of total assets.
At December 31, 1999 and 1998, the Bank complied with all the capital
requirements as shown below:
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------------------
Leverage Tier 1 NC
Ratio of Risk- Risk- Savings
Tier 1 Adjusted Based Bank
Capital Capital Capital Capital
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consolidated stockholders' equity
at December 31, 1999 $ 15,441,925 $ 15,441,925 $ 15,441,925 $ 15,441,925
Unrealized gain on securities (650,232) (650,232) (1,267,462) (1,267,462)
Holding company's equity at
December 31, 1999 (139,966) (139,966) (139,966) (139,966)
Loan loss allowances - - 391,720 391,720
-------------------------------------------------------------------------
Regulatory capital 14,651,727 14,651,727 14,426,217 14,426,217
Minimum capital requirement 4,164,772 3,320,938 6,641,876 6,939,319
-------------------------------------------------------------------------
$ 10,486,955 $ 11,330,789 $ 7,784,341 $ 7,486,898
=========================================================================
Total tangible Bank only assets at
December 31, 1999 $ - $ - $ - $ 138,786,385
Average tangible Bank only assets
December 31, 1999 quarter 138,825,729 - - -
Risk-weighted Bank only assets at
December 31, 1999 - 79,249,195 79,249,195 -
Capital as a percentage of assets:
Actual 10.55% 18.49% 18.98% 10.84%
Required 3.00% 4.00% 8.00% 5.00%
-------------------------------------------------------------------------
Excess 7.55% 14.49% 10.98% 5.84%
=========================================================================
</TABLE>
34
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12. Regulatory Matters (Continued)
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------------------
Leverage Tier 1 NC
Ratio of Risk- Risk- Savings
Tier 1 Adjusted Based Bank
Capital Capital Capital Capital
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Consolidated stockholders' equity
at December 31, 1998 $ 15,715,723 $ 15,715,723 $ 15,715,723 $ 15,715,723
Unrealized gain on securities (1,125,392) (1,125,392) (1,125,392) (1,125,392)
Holding company's equity at
December 31, 1998 (193,608) (193,608) (193,608) (193,608)
Loan loss allowances - - 358,867 358,867
-------------------------------------------------------------------------
Regulatory capital 14,396,723 14,396,723 14,755,590 14,755,590
Minimum capital requirement 3,890,580 2,898,257 5,796,514 6,534,438
-------------------------------------------------------------------------
$ 10,506,143 $ 11,498,466 $ 8,959,076 $ 8,221,152
=========================================================================
Total tangible Bank only assets at
December 31, 1998 $ - $ - $ - $ 130,688,760
Average tangible Bank only assets
December 31, 1998 quarter 129,686,016 - - -
Risk-weighted Bank only assets at
December 31, 1998 - 72,456,424 72,456,424 -
Capital as a percentage of assets:
Actual 11.10% 19.87% 20.36% 11.29%
Required 3.00% 4.00% 8.00% 5.00%
-------------------------------------------------------------------------
Excess 8.10% 15.87% 12.36% 6.29%
=========================================================================
</TABLE>
35
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 12. Regulatory Matters (Continued)
Under the FDIC prompt corrective action regulations, a savings institution is
considered to be well capitalized if its ratio of total capital to risk-weighted
assets is at least 10%, its ratio of Tier I capital to risk-weighted assets is
at least 6.0%, and its ratio of Tier I capital to total average assets is at
least 5.0%.
The Bank meets all of the above requirements at December 31, 1999 and is
considered to be well capitalized under the prompt corrective action
regulations.
At the time of its conversion from a mutual to a stock charter, the Bank
established a liquidation account in an amount equal to its net worth as of
September 30, 1993 for the benefit of all holders of deposit accounts with an
aggregate balance in excess of $50 on March 31, 1993. In the unlikely event of a
complete liquidation of the Bank (and only in such event), each eligible account
holder will be entitled to his or her interest in the liquidation account prior
to any payments to holders of common stock. An eligible account holder's
interest in the liquidation account will be computed on December 31 each year
and is reduced by or will cease to exist if the funds in the related deposit
account are withdrawn. The interest of an eligible account holder in the
liquidation account will never be increased, even if there is an increase in the
related deposit account after March 31, 1993.
Subject to applicable law, the Board of Directors of the Company and the Bank
may each provide for the payment of dividends. Future declarations of cash
dividends, if any, by the Company may depend upon dividend payments by the Bank
to the Company. The Bank paid dividends of $950,000 and $500,000 to the Company
during 1999 and 1998, respectively. The Company declared and paid dividends of
$688,835 and $688,527 to stockholders during 1999 and 1998, respectively.
Subject to regulations promulgated by the NC Administrator, the Bank will not be
permitted to pay dividends on its common stock, if its stockholders' equity
would be reduced below the amount required for the liquidation account or its
capital requirement.
As a North Carolina-chartered savings bank, the Bank is required to maintain
liquid assets equal to at least 10% of total assets. The computation of
liquidity under North Carolina regulation allows for the inclusion of
mortgage-backed securities and other investments with readily marketable values,
including investments with maturities in excess of five years. The Bank's
liquidity ratio on December 31, 1999, as computed under North Carolina
regulations, was approximately 15%.
Note 13. Stock Option and Bonus Compensation Plan
The Company has an Employee Stock Option Plan which provides for the granting of
options to purchase shares of the Company's common stock to certain key
employees, and a Nonqualified Stock Option Plan which provides for the granting
of options to purchase shares of the Company's common stock to nonemployee
directors. An aggregate of 10,750 and 49,385 shares, respectively, of common
stock were reserved under the plans. The exercise price of the options is not
less than 100% of the fair value of the common stock on the date the option was
granted and pursuant to the plan, options may not be exercised until specified
time restrictions have lapsed and option periods may not exceed ten (10) years.
36
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 13. Stock Option and Bonus Compensation Plan (Continued)
A summary of activity in the plans for the years ended December 31, 1999 and
1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------- -------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 150,441 $ 7.50 153,718 $ 7.50
Granted - - - -
Exercised (90,306) 7.50 (3,277) 7.50
Forfeited - - - -
------------------------------- -------------------------------
Outstanding at end of year 60,135 $ 7.50 150,441 $ 7.50
=============================== ===============================
</TABLE>
The options under the Nonqualified Stock Option Plan were all exercisable at
December 31, 1999 and 1998 and expire in December, 2003. At December 31, 1999
and 1998, 49,385 and 49,485 options were outstanding under this plan,
respectively.
The options under the Employee Stock Option Plan were all exercisable at
December 31, 1999 and 1998 and expire in 2003. At December 31, 1999 and 1998,
10,750 and 100,956 options, respectively were outstanding under the Plan.
The Company uses the accounting methods prescribed in Accounting Principles
Board (APB) Opinion No. 25 Accounting for Stock Issued to Employees to value the
compensation cost associated with the stock options. The stock options were
issued in 1993 at an option price equal to the fair value of the Company's
common stock and therefore no compensation expense has been reported in
earnings.
The Company has not issued any stock options or stock-based compensation since
the enactment of FASB Statement No. 123, Accounting for Stock-Based Compensation
which encourages the expensing of the fair value of options issued or,
alternatively, the disclosure of the impact such an issuance would have on the
net income and earnings per share of an entity.
Additionally, the Company has a bonus compensation plan which provides that
incentive compensation will be payable annually to those directors and employees
who hold unexercised options issued pursuant to the Employee Stock Option Plan
and the Nonqualified Stock Option Plan for Directors. Incentive compensation is
paid annually equal to the number of unexercised options granted under the plans
times the amount of dividends declared per common share outstanding. Pursuant to
Board approval, effective January 1, 1999, only outstanding options under the
Nonqualified Stock Option Plan for Directors are eligible for the annual
incentive compensation. Expense amounted to $26,197, $112,640 and $117,992 in
connection with the bonus compensation plan during 1999, 1998 and 1997,
respectively.
37
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 14. Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 6,127,132 $ 6,127,132 $ 11,670,541 $ 11,670,541
Accrued interest receivable 880,043 880,043 716,796 716,796
Investment securities:
Held to maturity 1,150,162 1,176,319 1,530,015 1,567,108
Available for sale 10,827,051 10,827,051 7,590,856 7,590,856
Nonmarketable equity
securities 877,000 877,000 879,500 879,500
Loans receivable 116,362,935 116,696,471 105,335,147 106,569,681
Loans held for sale - - 855,500 855,500
Financial liabilities:
Deposits 116,536,849 116,732,142 107,934,224 108,494,521
FHLB advances 6,000,000 5,957,937 6,000,000 6,020,028
</TABLE>
38
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15. Parent Company Financial Data
The following is a summary of the condensed financial statements of KS Bancorp,
Inc. as of and for the years ended December 31, 1999 and 1998:
Condensed Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash $ 6,640 $ 129,651
Investment in KS Bank, Inc. 15,301,959 15,522,116
Other assets 155,119 74,069
----------------------------------
$ 15,463,718 $ 15,725,836
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other liabilities $ 21,793 $ 10,112
Stockholders' equity:
Common stock, no par value, 20,000,000 shares authorized,
issued and outstanding 921,578 in 1999 and 888,633 in 1998 - -
Additional paid-in capital 11,914,391 12,226,522
Unearned ESOP shares (156,000) (195,000)
Accumulated other comprehensive income 650,232 1,125,392
Retained earnings, substantially restricted 3,033,302 2,558,810
----------------------------------
$ 15,463,718 $ 15,725,836
==================================
<CAPTION>
Condensed Statements of Income
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment income $ 19,599 $ 22,409 $ 45,936
Equity in earnings of KS Bank, Inc. 1,150,385 1,247,194 1,214,045
Amortization of organization costs - (1,809) (1,811)
Other expense (4,488) (7,572) (34,438)
Income tax expense (2,169) (1,779) (2,632)
----------------------------------------------
$ 1,163,327 $ 1,258,443 $ 1,221,100
==============================================
</TABLE>
39
<PAGE>
KS BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 15. Parent Company Financial Data (Continued)
Condensed Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income $ 1,163,327 $ 1,258,443 $ 1,221,100
Noncash items included in net income:
Amortization of organization costs and discounts - - 2,883
Equity in earnings of KS Bank (1,150,385) (1,247,194) (1,214,045)
Change in assets and liabilities:
Decrease in accrued interest - - 4,751
Decrease (increase) in other assets (81,050) (13,492) (19,645)
Increase (decrease) in other liabilities 11,681 559 (8,653)
-------------------------------------------------
Net cash used in operating activities (56,427) (1,684) (13,609)
-------------------------------------------------
Cash Flows from Investing Activities:
Proceeds from maturities of available for sale
securities - - 500,000
Upstream dividend received from KS Bank 950,000 500,000 300,000
-------------------------------------------------
Net cash provided by investing activities 950,000 500,000 800,000
-------------------------------------------------
Cash Flows from Financing Activities:
Cash dividends paid (688,835) (688,527) (701,901)
Repayment of ESOP debt 39,000 39,000 39,000
Purchase of common stock for retirement (366,760) - -
Payout for fractional common stock shares - - (2,640)
Exercise of stock options 11 24,577 8,740
-------------------------------------------------
Net cash used in financing activities (1,016,584) (624,950) (656,801)
-------------------------------------------------
Net increase in cash $ (123,011) $ (126,634) $ 129,590
Cash - beginning 129,651 256,285 126,695
-------------------------------------------------
Cash - ending $ 6,640 $ 129,651 $ 256,285
=================================================
Supplemental Disclosure of Cash Flow Information
Cash payments for taxes $ 600 $ 2,000 $ 800
=================================================
</TABLE>
40
<PAGE>
COMMON STOCK INFORMATION
The table below reflects the stock trading and dividend payment frequency of the
Company for the two-year period ended December 31, 1999. For further information
regarding the Company's dividend policy and restrictions on dividends paid by
the Bank to the Company, please refer to note 12 of the notes to the
consolidated financial statements. Stock prices reflect bid prices between
broker-dealers, prior to any mark-ups, mark-downs or commissions, and may not
necessarily represent actual transactions.
Dividends Stock Price
-------------------------------------------
Regular Special High Low
-------------------------------------------
1999:
First Quarter $ 0.20 $ - $ 18 1/4 $ 17
Second Quarter 0.20 - 17 3/4 17
Third Quarter 0.20 - 18 3/8 17 1/4
Fourth Quarter 0.20 - 18 7/8 18 1/8
1998:
First Quarter $ 0.20 $ - $ 24 3/4 $ 21
Second Quarter 0.20 - 24 21 1/2
Third Quarter 0.20 - 22 3/4 18
Fourth Quarter 0.20 - 18 1/2 17 1/2
41
<PAGE>
<TABLE>
<CAPTION>
CORPORATE INFORMATION
===========================================================================================
<S> <C> <C>
EXECUTIVE OFFICERS
William C. Clarke Harold T. Keen Kevin J. Jorgenson
Senior Vice President President & CEO Senior Vice President
Earl W. Worley, Jr. Ted G. Godwin
Chief Financial Officer Senior Vice President
DIRECTORS
Ralph Edward Scott, Jr. R. Harold Hinnant R. Elton Parrish
Farmer Chairman of the Board Funeral Director
Owner of Scott Farms, Inc Retired Business Owner Owner of Parrish Funeral Home
Harold T. Keen A. Carroll Coleman James C. Parker
President, CEO President and Manager Vice Chrmn. of the Board
KS BANCORP, INC and P.L. Woodard & Co. Certified Public Accountant
KS Bank, Inc. Partner, Parker and Parker PA
Gordon C. Woodruff James C. Woodard Robert E. Fields
Attorney At Law Appraiser Retired Business Owner
Owner, J. & J. Appraisal, Inc.
=========================================================================================
STOCK TRANSFER AGENT INDEPENDENT AUDITORS SPECIAL LEGAL COUNSEL
First Citizens Bank & Trust McGladrey & Pullen, LLP Brooks, Pierce, McLendon,
Corporate Trust Department 2418 Blue Ridge Road Humphrey & Leonard, LLP
100 East Tryon Road P. O. Box 10366 P. O. Box 26000
Raleigh, NC 27603 Raleigh, NC 27605 Greensboro, NC 27420
CORPORATE OFFICE
P. O. Box 219
207 West Second Street
Kenly, North Carolina 27542
(919) 284-4157
FORM 10-K
A copy of Form 10-K as filed with the Securities and Exchange Commission will be furnished
without charge to the shareholders upon written request to Harold T. Keen, President, KS
Bancorp, Inc., P. O. Box 219, Kenly, North Carolina 27542.
ANNUAL MEETING
The 1999 annual meeting of shareholders of KS Bancorp, Inc. will be held at 7:00 pm on May
2, 2000 in the Corporate Office, 207 West Second Street, Kenly, North Carolina.
COMMON STOCK
The Company had 921,578 shares of Common Stock outstanding which were held by approximately
351 holders of record (excluding shares held in street name) as of January 28, 2000. The
Common Stock is listed for quotation on the OTC Bulletin Board.
===========================================================================================
</TABLE>
42
<PAGE>
EXHIBIT 21
SUBSIDIARY OF THE REGISTRANT
The Registrant has one subsidiary, KS Bank, Inc., a North Carolina
corporation. The subsidiary does business under its corporate name and under the
name "KS Bank." The subsidiary previously had the name of Kenly Savings Bank,
Inc., SSB, and did business under its corporate name and under the names "Kenly
Savings Bank" and "Kenly Savings Bank, SSB."
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent auditors, we hereby consent to the incorporation of our report,
dated January 27, 2000, incorporated by reference in this annual report of KS
Bancorp, Inc. and Subsidiary on Form 10-K, into the Company's previously filed
Form S-8 Registration Statement File No. 333-46287.
/s/ McGladrey & Pullen, LLP
------------------------------------------
Raleigh, North Carolina
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,839,259
<INT-BEARING-DEPOSITS> 4,287,873
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,827,051
<INVESTMENTS-CARRYING> 1,150,162
<INVESTMENTS-MARKET> 1,176,319
<LOANS> 116,754,655
<ALLOWANCE> 391,720
<TOTAL-ASSETS> 138,948,144
<DEPOSITS> 116,536,849
<SHORT-TERM> 6,000,000
<LIABILITIES-OTHER> 969,370
<LONG-TERM> 0
0
0
<COMMON> 5,005,372
<OTHER-SE> 10,436,553
<TOTAL-LIABILITIES-AND-EQUITY> 138,948,144
<INTEREST-LOAN> 9,552,564
<INTEREST-INVEST> 553,859
<INTEREST-OTHER> 519,155
<INTEREST-TOTAL> 10,625,578
<INTEREST-DEPOSIT> 5,443,152
<INTEREST-EXPENSE> 5,792,349
<INTEREST-INCOME-NET> 4,833,229
<LOAN-LOSSES> 36,200
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,187,390
<INCOME-PRETAX> 1,919,824
<INCOME-PRE-EXTRAORDINARY> 1,163,327
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,163,327
<EPS-BASIC> 1.34
<EPS-DILUTED> 1.23
<YIELD-ACTUAL> 3.67
<LOANS-NON> 393,200
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 358,867
<CHARGE-OFFS> 3,347
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 391,720
<ALLOWANCE-DOMESTIC> 391,720
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
