EX-13 3 dex13.txt ANNUAL REPORT KS BANCORP, INC AND SUBSIDIARY TABLE OF CONTENTS ================================================================================ SELECTED FINANCIAL DATA..................................................... 1 MANAGEMENT'S DISCUSSION AND ANALYSIS........................................ 2 INDEPENDENT AUDITORS' REPORT................................................ 9 CONSOLIDATED FINANCIAL STATEMENTS Financial condition at December 31, 2001 and 2000....................... 10 Income for years ended December 31, 2001 and 2000....................... 11 Stockholders' equity for years ended December 31, 2001 and 2000......... 12 Cash flows for years ended December 31, 2001 and 2000................... 13 Notes to consolidated financial statements.............................. 15 COMMON STOCK INFORMATION.................................................... 35 CORPORATE INFORMATION....................................................... 36
KS BANCORP INC AND SUBSIDIARY SELECTED FINANCIAL DATA ================================================================================
December 31, ------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------ ----------- ----------- ----------- ---------- (In Thousands, Except Per Share Amounts) Financial Condition Data: Total assets $ 163,890 $ 152,321 $ 138,948 $ 130,892 $ 113,978 Investments \\(1)\\ 20,738 14,120 17,142 21,151 15,104 Loans receivable, net 136,977 133,312 116,363 105,335 95,002 Deposits 128,825 120,073 116,514 107,934 90,314 Advances from Federal Home Loan Bank 16,800 15,800 6,000 6,000 8,000 Stockholders' equity 16,799 15,843 15,442 15,716 14,606 Book value per common share \\(2)(3)\\ 14.75 13.99 13.40 14.15 13.20 December 31, ------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------ ----------- ----------- ----------- ---------- (In Thousands, Except Per Share Amounts) Operating Data: Interest income $ 12,505 $ 12,029 $ 10,626 $ 10,149 $ 8,731 Interest expense 7,062 6,740 5,793 5,692 4,653 ------------ ----------- ----------- ----------- ---------- Net interest income 5,443 5,289 4,833 4,457 4,078 Provision for loan losses 224 113 36 34 24 Other income 1,209 1,705 310 241 158 Other expense 4,194 3,641 3,187 2,663 2,240 ------------ ----------- ----------- ----------- ---------- Income before income taxes 2,234 3,240 1,920 2,001 1,972 Income tax expense 860 1,247 757 743 751 ------------ ----------- ----------- ----------- ---------- Net income $ 1,374 $ 1,993 $ 1,163 $ 1,258 $ 1,221 ============ =========== =========== =========== ========== Selected Other Data: Basic earnings per share \\(2)(3)\\ $ 1.23 $ 1.78 $ 1.07 $ 1.17 $ 1.14 Diluted earnings per share \\(2)(3)\\ $ 1.20 $ 1.74 $ .98 $ 1.06 $ 1.04 Dividends per common share \\(2)(3)\\ $ .64 $ .64 $ .64 $ .64 $ .66 Dividend payout ratio 53% 37% 65% 61% 64% Return on average assets .85% 1.35% .86% .96% 1.15% Return on average equity 8.34% 12.81% 7.47% 8.08% 8.33% Average equity to average assets 10.18% 10.51% 11.46% 11.87% 13.76%
\\(1)\\ Includes interest-earning deposits, investment securities, and Federal Home Loan Bank stock. \\(2)\\ Restated for 4 for 3 stock split occurring during 1997. \\(3)\\ Restated for 25% stock split occurring during 2001. 1 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 of the ownership of the Bank and a loan to the Bank's Employee Stock Ownership Plan ("ESOP") for its purchase of the Company's common stock. The principal business of the Bank is accepting deposits from the general public and using those deposits and other sources of funds to make loans 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 and changes in financial position for the years ended December 31, 2001 and 2000, 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. 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 2001 and 2000, the Bank paid dividends of $600,000 and $1,100,000, respectively, to KS Bancorp. KS Bancorp declared and paid cash dividends of $728,829 and $729,251 during 2001 and 2000, respectively. 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. The Company repurchased and retired 21,766 shares of its common stock during 2000 for a total cost of approximately $379,000. Since the mutual to stock conversion, the Company has repurchased 187,501 shares for a total cost of approximately $3.3 million. 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. 2 KS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS =============================================================================== A significant liquidity source for the Bank is cash provided by operating activities. These operating activities generated cash of $2,344,709 and $915,738 for the years ended December 31, 2001 and 2000, 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, 2001 and 2000, deposits grew by $8,752,561 and $3,559,070, respectively. As of December 31, 2001 and 2000, the Bank had $16,800,000 and $15,800,000, respectively, in outstanding borrowings from the Federal Home Loan Bank ("FHLB"). Such borrowings were used primarily to fund increasing loan demand. During 2001 and 2000, the Bank used the cash provided by operations primarily to fund loan demand and liquid assets, including cash and due from banks, interest-earning deposits with banks, and investments in intermediate term 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. 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 2001 and 2000, loans outstanding increased by $3.7 million and $16.9 million, respectively. Liquid assets increased by $6.8 million, or 49.2%, from $13.9 million at December 31, 2000 to $20.7 million at December 31, 2001. Both the loan and liquid asset growth was funded by an increase in customer deposits of $8.8 million. Asset/Liability Management The Bank's asset/liability management, or interest rate risk management, program is focused primarily on evaluating and managing the composition of its assets and liabilities in view of various interest rate scenarios. Factors beyond the Bank's control, such as market interest rates and competition, may also have an impact on the Bank's interest income and interest expense. In the absence of other factors, the yield or return associated with the Bank'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 decline. 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 decline. Interest Rate Gap Analysis. As a part of its interest rate risk management policy, the Bank 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 repricing. A "negative" gap for a given period means that the amount of interest-bearing liabilities maturing or otherwise repricing within that period exceeds the amount of interest-earning assets maturing or otherwise repricing within the same period. Accordingly, in a declining interest rate environment, an institution with a negative gap would generally be expected, absent the effects of other factors, to experience a decrease in the cost of its liabilities greater than the decrease in the yield on its assets and its income should be positively affected. Conversely, the cost of funds for an institution with a negative gap would generally be expected to increase more quickly than the yield on its assets in a rising interest rate environment, and such institution's net interest income generally would be expected to be adversely affected by rising interest rates. Changes in interest rates generally have the opposite effect on an institution with a "positive gap." 3 KS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS ================================================================================ The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2001 which are projected to reprice or mature in each of the future time periods shown. 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. Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period. Money market deposit accounts and negotiable order of withdrawal or other transaction accounts are assumed to be subject to immediate repricing and depositor availability and have been placed in the shortest period. In making the gap computations, none of the assumptions sometimes made regarding prepayment rates and deposit decay rates have been used for any interest-earning assets or interest-bearing liabilities. 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 Bank's 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.
Terms to Repricing at December 31, 2001 More Than 1 Year 1 Year to More Than or Less 5 Years 5 Years Total --------- ------------- ----------- ------------ (Dollars in thousands) INTEREST-EARNING ASSETS: Loans: Fixed rates $ 2,330 $ 14,108 $ 16,429 $ 32,867 Variable rates 49,318 55,312 54 104,684 Interest-earning deposits with banks 7,041 - - 7,041 Investment securities 1,546 9,509 1,634 12,689 Federal Home Loan Bank stock - - 1,008 1,008 --------- ------------- ----------- ------------ Total interest-earning assets $ 60,235 $ 78,929 $ 19,125 $ 158,289 ========= ============= =========== ============ INTEREST-BEARING LIABILITIES: Deposits $ 114,204 $ 14,621 $ - $ 128,825 Advances from Federal Home Loan Bank - 6,000 10,800 16,800 --------- ------------- ----------- ------------ Total interest-bearing liabilities $ 114,204 $ 20,621 $ 10,800 $ 145,625 ========= ============= =========== ============ INTEREST SENSITIVITY GAP PER PERIOD $ (53,969) $ 58,308 $ 8,325 $ 12,664 CUMULATIVE INTEREST SENSITIVITY GAP $ (53,969) $ 4,339 $ 12,664 $ 12,664 CUMULATIVE GAP AS A PERCENTAGE OF TOTAL INTEREST-EARNING ASSETS (34.10)% 2.74% 8.00% 8.00% CUMULATIVE INTEREST-EARNING ASSETS AS A PERCENTAGE OF INTEREST-BEARING LIABILITIES 52.74 % 103.22% 108.70% 108.70%
4 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-earning 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, 2001 and 2000. Such average yields and costs are derived by dividing income or expense by the average monthly balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods presented.
Year Ended December 31, ------------------------------------------------------------- At December 31, 2001 2001 2000 -------------------- ---------------------------- ------------------------------ Actual Actual Yield/ Average Average Average Average Balance Cost Balance Interest Rate Balance Interest Rate ---------- ------- --------- -------- ------ ---------- -------- ------ (Dollars in Thousands) Interest-earning assets: Loans $ 136,977 7.67% $ 138,691 $ 11,596 8.36% $ 127,619 $ 11,092 8.69% Investment securities (1) 13,697 5.83% 13,186 798 6.05% 12,094 807 6.67% Interest-earning deposits 7,041 1.58% 4,133 111 2.69% 2,632 130 4.94% --------- --------- -------- ---------- -------- Total interest-earning assets 157,715 7.93% 156,010 12,505 8.02% 142,345 12,029 8.45% -------- -------- Other assets 6,175 5,732 5,662 --------- --------- ---------- Total assets $ 163,890 $ 161,742 $ 148,007 ========= ========= ========== Interest-bearing liabilities: Money market and NOW deposits $ 17,294 1.46% $ 16,535 344 2.08% $ 15,595 334 2.14% Savings 4,445 0.86% 4,228 67 1.58% 4,425 97 Time 101,415 4.71% 100,820 5,663 5.62% 95,339 5,534 FHLB advances 16,800 5.88% 17,473 988 5.65% 13,950 775 5.56% --------- --------- -------- ---------- -------- Total interest bearing liabilities 139,954 5.05% 139,056 7,062 5.08% 129,309 6,740 5.21% -------- -------- Noninterest-bearing deposits 5,671 2,962 2,228 Other liabilities 1,466 3,255 915 Stockholders' equity 16,799 16,469 15,555 --------- --------- ---------- Total liabilities and stockholders' equity $ 163,890 $ 161,742 $ 148,007 ========= ========= ========== Net interest income and interest rate spread (1) $ 5,443 2.94% $ 5,289 3.24% ======== ===== ======== ===== Net interest-earning assets and net interest margin (2) $ 16,954 3.49% $ 13,036 3.72% ========= ===== ========== ===== Ratio of average interest-earning assets to interest-bearing liabilities 112.19% 110.08% ========= ==========
(1) Includes investment securities and Federal Home Loan Bank stock (2) Includes non-accruing loans, which are considered immaterial for average balance purposes 5 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), and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) has been allocated equally to both the changes attributable to volume and the changes attributable to rate. 2001 vs. 2000 -------------------------------- Increase (Decrease) Due To -------------------------------- Volume Rate Total -------- -------- ------- (Dollars in Thousands) Interest income: Loans $ 944 $ (440) $ 504 Investments 69 (78) (9) Interest-earning deposits 57 (76) (19) -------- ------- ------- Total interest income 1,070 (594) 476 -------- ------- ------- Interest expense: Money market and NOW deposits 20 (10) 10 Savings (4) (26) (30) Time 313 (184) 129 FHLB advances 197 16 213 -------- ------- ------- Total interest expense 526 (204) 322 -------- ------- ------- Net interest income $ 544 $ (390) $ 154 ======== ======= ======= Comparison of Financial Condition at December 31, 2001 and 2000 Consolidated total assets increased by $11.6 million during the year ended December 31, 2001, from $152.3 million at December 31, 2000 to $163.9 million at December 31, 2001. During the year, the Company generated loan growth of $3.7 million, as loans increased to $137.0 million. This loan growth resulted primarily from an increase in construction loans, net of undisbursed portions, from $4.3 million at December 31, 2000 to $12.4 million at December 31, 2001. The emphasis that was placed on this part of our business during the year combined with an overall increase in new construction in 2001 enabled us to significantly grow this segment of our loan portfolio. In addition liquid assets (consisting of cash and cash equivalents and investment securities) increased by $6.8 million from $13.9 million at December 31, 2000 to $20.7 million at December 31, 2001. Both the loan and liquid asset growth was funded by an increase in customer deposits of $8.8 million and an increase in advances from the Federal Home Loan Bank of $1.0 million. The increase in deposits resulted from an increase in our core deposits, which grew from $21.0 million at December 31, 2000 to $27.4 million at December 31, 2001. These core deposits represent a more stable and less expensive source of funding than do certificates of deposit. 6 KS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS ================================================================================ Total stockholders' equity was $16.8 million at December 31, 2001 as compared with $15.8 million at December 31, 2000, an increase of $1,000,000. The increase is primarily due to net income of $1.4 million. Additionally, during the year, accumulated other comprehensive income, which consists of net unrealized gains and losses on available-for-sale investment securities, increased $174,000. The Company's earned ESOP compensation for the year ended December 31, 2001 was $54,000, which was credited to common stock. These increases were offset by dividends paid by the Company during the period of $729,000 or 0.16 per share. At December 31, 2001, the capital for both the Company and the Bank continued to exceed all applicable regulatory guidelines. Comparison of Results of Operations for the Years Ended December 31, 2001 and 2000 Net Income Net income for the year ended December 31, 2001 was $1.4 million, or $1.23 per share, as compared with net income of $2.0 million, or $1.78 per share, for the year ended December 31, 2000, a decrease of $619,000 or $0.55 per share. This decrease resulted primarily from a decrease in non-interest income and increases in non-interest expenses during 2001. These changes are discussed in the appropriate sections that follow. Net Interest Income Net interest income for the year December 31, 2001 was $5.4 million as compared with $5.3 million during the year ended December 31, 2000, an increase of $155,000. This increase resulted principally from an increased level of interest earning assets during the current year, primarily loans, which have higher yields than do other types of interest earning assets. In fact, our average net interest earning assets (average interest earning assets less average interest bearing liabilities) increased from $13.3 million in 2000 to $17.0 million in 2001. This increase in the volume of our net interest earnings assets offset the decline in interest rates that was experienced during 2001. The net interest rate spread decreased from 3.24% in 2000 to 2.94% in 2001, and the net interest margin likewise decreased from 3.72% in 2000 to 8.49% in 2001. Provision for Loan Losses The provision for loan losses was $224,000 and $113,000 for the years ended December 31, 2001 and 2000, respectively. There were net loan charge-offs of $138,000 during the year ended December 31, 2001 as compared with net charge-offs of $15,000 during the year ended December 31, 2000. At December 31, 2001, non-accrual loans aggregated $2.4 million versus $1.5 million at December 21,2000. The allowance for loan losses at the end of 2001 stood at $575,000 or .42% of loans versus $489,000 and .37% at the end of 2000. The aforementioned increase in the provision for loan losses was necessary to maintain the allowance at a level deemed adequate to absorb losses inherent in the loan portfolio and resulted from managements consideration of such factors as the financial condition of the borrower, past and expected loss experience, and other factors management feels deserve recognition in establishing an appropriate reserve. Although management attempts to maintain the allowance at a level deemed adequate, future additions to the allowance may be necessary based upon changes in market conditions. In addition, various regulatory agencies periodically review our allowance for loan losses. These agencies may require us to make additional provisions based upon their judgments about information available to them at the time of their examination. 7 KS BANCORP, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS ================================================================================ Non-interest Income Non-interest income for the year ended December 31, 2001 was $1.2 million as compared with $1.7 million for the same period in 2000. This decrease of approximately $496,000 resulted from two factors. First, year 2000 included a gain on the sale of investments of $1.3 million. There were no gains from the sale of investments in the current year. Secondly, other non-interest income for the year ended December 31, 2001 included a fee of $356,000 received by the Company related to an agreement to acquire another financial institution. This fee became payable to the Company when the target financial institution was acquired by a third party. The balance of the increase in non-interest income came from service charges on deposit accounts and income earned from the sale of mortgage loans. Non-interest Expense Non-interest expense increased to $4.2 million during the year ended December 31, 2001 as compared with $3.6 million for the year ended December 31, 2000. This increase resulted from overall increases in all but one major category of expense. These across the board expense increases are associated with the Company's continued growth and development of business in its market areas. The category of expense that did not increase was data processing and outside service fees, which decreased from $420,000 in 2000 to $396,000 in 2001. During 2001, the Company changed providers for its data processing systems resulting in a reduction in these costs. Also, a termination fee was paid to the former provider in December of 2000 which caused these costs to be higher than normal for that year. Provision for Income Taxes The provision for income taxes, as a percentage of income before income taxes, was 38.5% for each of the years ended December 31, 2001 and 2000, respectively. Impact of Inflation and Changing Prices A commercial bank has an asset and liability composition that is distinctly different from that of a company with substantial investments in plant and inventory because the major portion of its assets are monetary in nature. As a result, a bank's performance may be significantly influenced by changes in interest rates. Although the banking industry is more affected by changes in interest rates than by inflation in the prices of goods and services, inflation is a factor, which may influence interest rates. However, the frequency and magnitude of interest rate fluctuations do not necessarily coincide with changes in the general inflation rate. Inflation does affect operating expenses in that personnel expenses and the cost of supplies and outside services tend to increase more during periods of high inflation. Forward-looking Information This annual report to stockholders contains certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and other business of KS Bancorp 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 national, regional and local market conditions, legislative and regulatory conditions, and the interest rate environment. 8 [LOGO OF DIXON ODOM PLLC] Certified Public Accountants and Consultants INDEPENDENT AUDITORS' 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, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of KS Bancorp, Inc. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Dixon Odom PLLC Sanford, North Carolina January 17, 2002 9 KS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2001 and 2000 ================================================================================
ASSETS 2001 2000 ---------------- --------------- Cash and due from banks: Interest-earning $ 7,041,022 $ 1,694,157 Noninterest-earning 932,699 673,101 Investment securities: Available for sale 12,598,359 10,588,958 Held to maturity 90,774 894,825 Federal Home Loan Bank stock, at cost 1,007,500 942,500 Loans, net 136,976,742 133,312,224 Accrued interest receivable 1,001,316 1,152,067 Property and equipment, net 3,947,279 2,735,508 Other assets 294,653 327,755 ---------------- --------------- Total assets $ 163,890,344 $ 152,321,095 ================ =============== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ 128,825,401 $ 120,072,840 Advances from Federal Home Loan Bank 16,800,000 15,800,000 Accrued interest payable 496,590 116,863 Accrued expenses and other liabilities 969,040 488,818 ---------------- --------------- Total liabilities 147,091,031 136,478,521 ---------------- --------------- Commitments and contingencies (Note 8) Stockholders' Equity: Preferred stock, authorized 5,000,000 shares; none issued - - Common stock, no par value, authorized 20,000,000 shares; issued and outstanding 1,139,213 in 2001 and 905,598 in 2000 4,815,656 4,717,688 Unearned ESOP shares (78,000) (117,000) Retained earnings, substantially restricted 11,851,811 11,206,182 Accumulated other comprehensive income 209,846 35,704 ---------------- --------------- Total stockholders' equity 16,799,313 15,842,574 ---------------- --------------- $ 163,890,344 $ 152,321,095 ================ ===============
See Notes to Consolidated Financial Statements. 10 KS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2001 and 2000 ================================================================================
2001 2000 ---------------- --------------- Interest income: Loans $ 11,596,102 $ 11,092,320 Investment securities 798,224 806,711 Interest-bearing deposits 110,799 129,756 ---------------- --------------- Total interest income 12,505,125 12,028,787 ---------------- --------------- Interest expense: Deposits 6,073,622 5,965,337 Advances from Federal Home Loan Bank 988,099 774,717 ---------------- --------------- Total interest expense 7,061,721 6,740,054 ---------------- --------------- Net interest income 5,443,404 5,288,733 Provision for loan losses 223,723 112,936 ---------------- --------------- Net interest income after provision for loan losses 5,219,681 5,175,797 ---------------- --------------- Noninterest income: Gain on sale of investment securities - 1,261,673 Fees and commissions 554,489 357,313 Other income 653,987 85,855 ---------------- --------------- Total noninterest income 1,208,476 1,704,841 ---------------- --------------- Noninterest expenses: Compensation and benefits 2,454,475 2,221,607 Occupancy 327,515 289,591 Equipment maintenance and expense 307,159 272,337 Data processing and outside service fees 395,719 419,659 Insurance 82,098 60,144 Other 626,738 377,523 ---------------- --------------- Total noninterest expenses 4,193,704 3,640,861 ---------------- --------------- Income before income taxes 2,234,453 3,239,777 Income tax expense 859,995 1,246,665 ---------------- --------------- Net income $ 1,374,458 $ 1,993,112 ================ =============== Basic earnings per share $ 1.23 $ 1.78 ================ =============== Diluted earnings per share $ 1.20 $ 1.74 ================ =============== Dividends paid per share $ 0.64 $ 0.64 ================ ===============
See Notes to Consolidated Financial Statements. 11 KS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 2001 and 2000 ================================================================================
Accumulated Shares of Common Unearned Other Common Stock Retained ESOP Comprehensive Stock Amount Earnings Shares Income Total -------- ----------- ------------ ----------- ----------- ----------- Balance, December 31, 1999 921,578 $ 5,005,372 $ 9,942,321 $ (156,000) $ 650,232 $ 15,441,925 Comprehensive income: Net income - - 1,993,112 - - 1,993,112 Other comprehensive income, net of taxes: Net decrease in fair value of securities available for sale - - - - (614,528) (614,528) ------------ Total comprehensive income 1,378,584 ------------ Common stock issued pursuant to: Stock options exercised 5,786 43,395 - - - 43,395 Repurchase of common stock (21,766) (378,583) - - - (378,583) Compensation - 47,504 - - - 47,504 Release of unearned shares - - - 39,000 - 39,000 Cash dividends paid - - (729,251) - - (729,251) --------- ----------- ------------ ----------- ----------- ------------ Balance, December 31, 2000 905,598 4,717,688 11,206,182 (117,000) 35,704 15,842,574 Comprehensive income: Net income - - 1,374,458 - - 1,374,458 Other comprehensive income, net of taxes: Net increase in fair value of securities available for sale - - - - 174,142 174,142 ------------ Total comprehensive income 1,548,600 ------------ Common stock issued pursuant to: Stock options exercised 7,345 44,070 - - - 44,070 25% stock split in the form of a dividend 226,270 - - - - - Compensation - 53,898 - - - 53,898 Release of unearned shares - - - 39,000 - 39,000 Cash dividends paid - - (728,829) - - (728,829) --------- ----------- ------------ ----------- ----------- ------------ Balance, December 31, 2001 1,139,213 $ 4,815,656 $ 11,851,811 $ (78,000) $ 209,846 $ 16,799,313 ========= =========== ============ =========== =========== ============
See Notes to Consolidated Financial Statements. 12 KS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2001 and 2000 ================================================================================
2001 2000 ---------------- ------------- Cash Flows From Operating Activities: Net income $ 1,374,458 $ 1,993,112 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 332,854 295,030 Amortization of net premiums 5,934 8,100 Deferred income taxes (84,942) (86,444) Provision for losses on loans 223,723 112,936 Realized gain on sale of available for sale securities - (1,261,673) Other gains, net (39,471) (1,128) Shares allocated to ESOP contribution 92,898 86,504 Changes in assets and liabilities: (Increase) decrease in: Loans held for sale (265,000) - Other assets (301,004) (32,240) Accrued interest receivable 150,751 (272,024) Increase (decrease) in: Accrued interest payable 379,727 93,784 Accrued expenses and other liabilities 474,781 (20,219) ---------------- ------------- Net cash provided by operating activities 2,344,709 915,738 ---------------- ------------- Cash Flows From Investing Activities: Proceeds from sales of available-for-sale securities - 1,288,604 Proceeds from maturities, prepayments, and calls of available-for-sale securities 4,017,285 1,207,788 Proceeds from maturity and calls of held-to-maturity securities 802,304 255,948 Purchase of available for sale securities (5,750,000) (2,000,000) Purchase of Federal Home Loan Bank stock (65,000) (65,500) Net change in loans receivable (3,447,499) (17,062,225) Proceeds from sale of foreclosed real estate 197,835 - Proceeds from sale of property and equipment - 22,482 Purchase of property and equipment (1,544,625) (623,586) ---------------- ------------- Net cash used by investing activities (5,789,700) (16,976,489) ---------------- -------------
13 KS BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2001 and 2000 ================================================================================
2001 2000 ------------ ------------ Cash Flows From Financing Activities: Net increase in deposits $ 8,752,561 $ 3,559,070 Increase (decrease) in advance payments from borrowers for taxes and insurance (16,348) 6,246 Advances from Federal Home Loan Bank 5,000,000 18,500,000 Principal payments - Federal Home Loan Bank advances (4,000,000) (8,700,000) Cash dividends paid (728,829) (729,251) Repurchase of common stock - (378,583) Proceeds from exercise of stock options 44,070 43,395 ------------ ------------ Net cash provided by financing activities 9,051,454 12,300,877 ------------ ------------ Net increase (decrease) in cash and cash equivalents 5,606,463 (3,759,874) Cash and cash equivalents: Beginning 2,367,258 6,127,132 ------------ ------------ Ending $ 7,973,721 $ 2,367,258 ============ ============ Supplemental Disclosure of Cash Flow Information: Cash payments for: Interest $ 6,891,994 $ 6,646,270 ============ ============ Income taxes $ 540,000 $ 1,380,190 ============ ============ Supplemental Disclosure of Noncash Investing and Financing Activities: Transfer from loans to real estate acquired in settlement of loans $ 175,742 $ - ============ ============ Change in unrealized gains (losses) on available for sale securities $ 174,142 $ (614,528) ============ ============ Increase in loans receivable through sale of foreclosed real estate $ 197,835 $ - ============ ============
See Notes to Consolidated Financial Statements. 14 KS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Note 1. Nature of Business and Significant Accounting Policies Organization and operations 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 of the ownership of the Bank and a loan to the ESOP for its purchase of the Company's common stock. The Bank originates mortgage, commercial and consumer loans within its primary lending area of Johnston, Wilson, Wayne and Wake counties. 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 the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks. Investment securities Debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. Equity securities which are considered nonmarketable are not subject to the above classifications and are carried at cost. 15 KS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Note 1. Nature of Business and Significant Accounting Policies (Continued) Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Allowance for loan losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory examiners may require the Bank to recognize changes to the allowance for loan losses based on their judgments about information available to them at the time of their examination. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures. 16 KS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Note 1. Nature of Business and Significant Accounting Policies (Continued) Loans held for sale Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Foreclosed real estate Real estate acquired through, or in lieu of, loan foreclosure 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 cost 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. Federal Home Loan Bank Stock As a requirement for membership, the Bank invests in stock of the Federal Home Loan Bank of Atlanta ("FHLB"). This investment is carried at cost. 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. 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. Additionally, the Bank has a Supplemental Executive Retirement Plan covering senior executives. The Bank finances the future anticipated benefits to be provided under this plan through contributions to whole life insurance policies. 17 KS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Note 1. Nature of Business and Significant Accounting Policies (Continued) Earnings per share Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. On July 9, 2001, the Board of Directors of KS Bancorp, Inc. declared a 25% stock split payable on August 6, 2001 to stockholders of record on July 24, 2001. All per share amounts have been restated to include the effects of this stock split. The basic and diluted weighted average shares outstanding are as follows:
2001 2000 --------- --------- Weighted average shares outstanding 1,135,506 1,142,005 Less weighted average unallocated ESOP shares 15,960 22,473 --------- --------- Weighted average outstanding shares used for basic EPS 1,119,546 1,119,532 Plus incremental shares from assumed exercise of stock options 26,726 29,029 --------- --------- Weighted average outstanding shares used for diluted EPS 1,146,272 1,148,561 ========= =========
There were no adjustments required to be made to net income in the computation of diluted earnings per share. Comprehensive income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The components of other comprehensive income and related tax effects are as follows:
2001 2000 --------- --------- Unrealized holding gains on available for sale securities $ 280,874 $ 270,498 Reclassification adjustment for gains realized in income - 1,261,673) ---------- ---------- Net unrealized gains (losses) 280,874 (991,175) Tax effect (106,732) 376,647 ---------- ---------- Net of tax amount $ 174,142 $ (614,528) ========== ==========
18 KS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Note 1. Nature of Business and Significant Accounting Policies (Continued) 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 Statement of Financial Accounting Standards ("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. The fair value estimates presented in Note 14 are based on pertinent information available to management as of December 31, 2001 and 2000, 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 and due from banks and accrued interest receivable The carrying amounts reported in the statement of financial condition for these instruments approximate 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 The fair value for substantially all loans has been estimated by discounting the projected future cash flows at December 31, 2001 and 2000, 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, 2001 and 2000. 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, 2001 and 2000 for deposits of similar remaining maturities. 19 KS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Note 1. Nature of Business and Significant Accounting Policies (Continued) Advances from the Federal Home Loan Bank The fair value of these advances is based upon the discounted value using current rates at which borrowings of similar maturity could be obtained. Accrued interest payable The carrying amounts of accrued interest payable approximate their fair value. 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. Derivative financial instruments On January 1, 2001, the Company adopted ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. The Company has no derivative financial instruments and does not engage in any hedging activities; accordingly, the adoption of the statement did not affect the Company's financial statements. Recent accounting pronouncements In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method. SFAS No. 142 changes the accounting for goodwill and certain other intangible assets from an amortization method to an impairment only approach. Since the Company does not have goodwill or other intangible assets, the adoption of SFAS Nos. 141 and 142 on January 1, 2002 is not expected to significantly affect the Company's financial statements. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, and in July 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 143 requires that obligations associated with the retirement of tangible long-lived assets be recorded as a liability when those obligations are incurred, with the amount of liability initially measured at fair value. SFAS No. 143 will be effective for financial statements for fiscal years beginning after June 15, 2002, though early adoption is encouraged. The application of this statement is not expected to have a material impact on the Company's financial statements. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. SFAS No. 144 applies to all long-lived assets including discontinued operations, and amends Accounting Principles Board Opinion No. 30, Reporting the Results of Operations - Reporting Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. SFAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book or fair value less cost to sell. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and its provisions are generally expected to be applied prospectively. The application of this statement is not expected to have a material impact on the Company's financial statements. 20 KS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Note 1. Nature of Business and Significant Accounting Policies (Continued) Reclassifications Certain amounts in the 2000 financial statements have been reclassified to conform to the 2001 presentation. The reclassifications had no effect on net income or stockholders' equity as previously reported. Note 2. Investment Securities Investment securities consist of the following:
2001 ------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value -------------- -------------- ------------- ---------------- Held to maturity: Debt securities: Mortgage-backed securities $ 90,774 $ 5,993 $ - $ 96,767 ============== ============= ============= =============== Available for sale: Debt securities: Mortgage-backed securities $ 1,011,586 $ 20,666 $ - $ 1,032,252 Federal agency securities 11,248,313 320,203 (2,409) 11,566,107 -------------- ------------- ------------- --------------- $ 12,259,899 $ 340,869 $ (2,409) $ 12,598,359 ============== ============= ============= =============== 2000 ------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value -------------- -------------- ------------- ---------------- Held to maturity: Debt securities: Federal agency securities $ 500,000 $ - $ - $ 500,000 Mortgage-backed securities 394,825 13,175 - 408,000 -------------- ------------- ------------- --------------- $ 894,825 $ 13,175 $ - 908,000 ============== ============= ============= =============== Available for sale: Debt securities: Mortgage-backed securities $ 1,283,664 $ - $ (4,863) $ 1,278,801 Federal agency securities 9,247,707 62,450 - 9,310,157 -------------- ------------- ------------- --------------- $ 10,531,371 $ 62,450 $ (4,863) $ 10,588,958 ============== ============= ============= ===============
21 KS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Note 2. Investment Securities (Continued) The amortized cost and estimated market value of debt securities at December 31, 2001 by contractual maturity are as shown below.
Weighted Estimated Average Amortized Market Yield Cost Value ------- ----------- ------------ Available for sale: Due in less than one year 5.78% $ 1,500,000 $ 1,545,625 Due in one year through five years 6.00% 9,248,313 9,509,388 Due in five through ten years 6.13% 500,000 511,094 ----------- ------------ $11,248,313 $ 11,566,107 =========== ============
The amortized cost and estimated market value of mortgage-backed securities by contractual maturities are not reported because the actual maturities may be and often are significantly different from contractual maturities. For the years ended December 31, 2001 and 2000, proceeds from sales of securities available for sale amounted to $0 and $1,288,604, respectively. Gross realized gains amounted to $0 and $1,261,673, respectively. There were no realized losses on sales of securities during either of the years ended December 31, 2001 or 2000. Certain investment securities with amortized costs of $4,050,000 and market values of $4,149,750 at December 31, 2001 were pledged to secure public deposits or were pledged in connection with the Bank's depository relationship with the Federal Reserve Bank. Note 3. Loans Loans consist of the following:
2001 2000 -------------- -------------- Conventional first mortgage loans $ 84,112,335 $ 90,720,092 Loans held for sale 265,000 - Construction loans 19,389,667 10,412,137 Equity-line loans 13,021,393 12,217,180 Loans on deposit accounts 286,565 327,770 Consumer loans 4,466,422 4,553,211 Commercial loans 23,221,580 21,982,311 -------------- -------------- 144,762,962 140,212,701 -------------- -------------- Less: Undisbursed portion of loans in process 6,968,467 6,148,201 Unamortized loan fees 243,058 263,035 Allowance for loan losses 574,695 489,241 -------------- -------------- 7,786,220 6,900,477 -------------- -------------- $ 136,976,742 $ 133,312,224 ============== ============== Weighted average yield 7.67% 8.81% ============== ==============
22 KS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Note 3. Loans (Continued) The following summarizes transactions in the allowance for loan losses: Years Ended December 31, ---------------------------- 2001 2000 ----------- ----------- Balance, beginning $ 489,241 $ 391,720 Provision for loan losses 223,723 112,935 Charge-offs, net (138,269) (15,414) ----------- ----------- Balance, ending $ 574,695 $ 489,241 =========== =========== Loans delinquent more than 90 days amounted to approximately $2,394,308 and $1,524,800 at December 31, 2001 and 2000, respectively. Interest income that would have been recorded on nonaccrual loans totaled $45,653 and $25,294 for the years ended December 31, 2001 and 2000, respectively. 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. 2001 2000 ------------ ------------- Balance, beginning $ 1,207,000 $ 1,251,000 Originations 102,000 26,000 Repayments (170,000) (70,000) ------------ ------------- Balance, ending $ 1,139,000 $ 1,207,000 ============ ============= Note 4. Property and Equipment Property and equipment consists of the following: 2001 2000 ------------ ----------- Land $ 586,428 $ 586,428 Buildings 2,302,422 1,819,384 Furniture and equipment 2,003,713 1,534,633 Construction in process 745,974 152,427 ------------ ------------ 5,638,537 4,092,872 Accumulated depreciation (1,691,258) (1,357,364) ------------ ------------ $ 3,947,279 $ 2,735,508 ============ ============ Depreciation expense for the years ended December 31, 2001 and 2000 amounted to $332,854 and $295,030, respectively. 23 KS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Note 5. Deposits Deposits consist of the following:
2001 2000 ---------------- --------------- Regular savings accounts, 1.50% $ 4,444,513 $ 4,157,960 NOW accounts, 0.50% to 1.26% 9,428,371 8,660,064 Money market deposit accounts, 1.25% to 1.77% 7,865,807 4,855,235 Noninterest-bearing accounts 5,672,181 3,306,755 ---------------- --------------- 27,410,872 20,980,014 ---------------- --------------- Certificates: 0.00% - 2.99% 15,133,827 2,528,335 3.00% - 4.50% 38,736,765 181,119 4.51% - 6.50% 33,450,282 60,058,337 6.51% and above 14,093,655 36,325,035 ---------------- --------------- 101,414,529 99,092,826 ---------------- --------------- $ 128,825,401 $ 120,072,840 ================ =============== Weighted average cost of funds 4.11% 4.97% ================ ===============
Certificate accounts are summarized by maturity at December 31, 2001 as follows:
2002 2003 2004 2005 2006 Total ------------ ------------ ------------ ------------ ------------ ------------ 0.00% - 2.99% $ 14,274,566 $ 859,261 $ - $ - $ - $ 15,133,827 3.00% - 4.50% 32,293,404 4,763,108 932,625 707,628 40,000 38,736,765 4.51% - 6.50% 28,493,722 3,151,321 1,259,417 545,822 - 33,450,282 6.51% and above 11,731,268 2,207,865 154,522 - - 14,093,655 ------------ ------------ ------------ ------------ ------------ ------------ $ 86,792,960 $ 10,981,555 $ 2,346,564 $ 1,253,450 $ 40,000 $101,414,529 ============ ============ ============ ============ ============ ============
The aggregate amount of certificates of deposit included in the table above with a denomination of $100,000 or greater is shown below: Amount -------------- Maturity Less than 3 months $ 12,529,991 3 to 6 months 5,494,692 6 to 12 months 10,524,889 More than 12 months 3,465,388 -------------- $ 32,014,960 ============== 24 KS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Note 5. Deposits (Continued) Interest expense on deposits is summarized below:
Years Ended December 31, ------------------------------- 2001 2000 ------------- ------------- Regular savings accounts $ 73,687 $ 104,431 NOW and money market accounts 336,377 327,686 Certificates 5,677,142 5,545,653 ------------- ------------- 6,087,206 5,977,770 Forfeitures (13,584) (12,433) ------------- ------------- $ 6,073,622 $ 5,965,337 ============= =============
Note 6. Advances From Federal Home Loan Bank Advances from the Federal Home Loan Bank consist of the following:
December 31, Maturing in Interest ------------------------------ Type Year Ending Rate 2001 2000 ---------- ----------------- ------------- -------------- ------------- Variable 2001 FHLB overnight + .3% $ - $ 1,000,000 Fixed 2003 6.41% 6,000,000 6,000,000 Fixed 2010 5.57% 5,000,000 5,000,000 Fixed 2011 4.83% 1,800,000 1,800,000 Fixed 2011 4.98% 2,000,000 2,000,000 Fixed 2011 4.67% 2,000,000 - -------------- ------------- $ 16,800,000 $ 15,800,000 ============== =============
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. 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. 25 KS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Note 7. Income Taxes (Continued) 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 is estimated to be 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 $95,000 at December 31, 2001. At December 31, 2001, 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, 2001. Deferred income taxes consist of the following:
December 31, ----------------------------- 2001 2000 ------------ ------------ Deferred tax assets: Allowance for loan losses $ 218,384 $ 185,912 Deferred compensation and directors' death benefits 62,779 47,035 Other 18,878 14,427 ------------ ------------ Total deferred tax assets 300,041 247,374 ------------ ------------ Deferred tax liabilities: Excess accumulated tax depreciation 146,914 131,844 Federal Home Loan Bank stock basis 83,334 83,334 Tax bad debt reserves 94,689 142,034 Unrealized net appreciation, investments 128,615 21,883 ------------ ------------ Total deferred tax liabilities 453,552 379,095 ------------ ------------ Net deferred tax liabilities $ (153,511) $ (131,721) ============ ============
26 KS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Note 7. Income Taxes (Continued) Allocation of income taxes between current and deferred portions is as follows: Years Ended December 31, ------------------------------ 2001 2000 -------------- ------------- Current tax provision $ 944,937 $ 1,333,109 Deferred tax benefit (84,942) (86,444) -------------- ------------- $ 859,995 $ 1,246,665 ============== ============= Income tax expense is reconciled to the amount computed by applying the federal statutory tax rate of 34% to income before income taxes as follows: 2001 2000 -------------- ------------- Expense computed at statutory rate of 34% $ 759,714 $ 1,101,524 Effect of state income taxes 101,668 147,410 Other, net (1,387) (2,269) -------------- ------------- $ 859,995 $ 1,246,665 ============== ============= 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:
December 31, -------------------------------- 2001 2000 --------------- -------------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $ 2,233,450 $ 890,973 Undisbursed lines of credit 18,463,697 8,400,392 Standby letters of credit 90,000 -
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. 27 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 $13,568 and $11,593 for the years ended December 31, 2001 and 2000, 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 $143,234 and $108,028 for the years ended December 31, 2001 and 2000, respectively. During 2001, the Bank adopted a Supplemental Executive Retirement Plan (SERP). Senior executives are eligible to participate in the Plan and are considered vested upon attainment of age 65. The retirement benefit is equal to 25% of the average salary during the last five year's employment for eligible employees. For the fiscal year ended December 31, 2001, expense attributable to this Plan amounted to $32,137. 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 depending upon years of service. At December 31, 2001 and 2000, the Bank had accrued $96,551 and $84,551, respectively, which represents the present value of the death benefits based on directors' life expectancies. Expense associated with the plan amounted to $36,103 and $12,000 for the years ended December 31, 2001 and 2000, 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, 2001 and 2000, the outstanding balance of the loan receivable from the ESOP was $78,000 and $117,000 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. Through December 31, 2001, the ESOP had purchased 80,497 shares of the Company's common stock. At December 31, 2001 and 2000, 13,000 and 19,500 shares, respectively, had not been allocated. Based upon the market value of the Company's stock at December 31, 2001 and 2000, the fair value of the unallocated shares amounted to approximately $198,000 and $257,600 at December 31, 2001 and 2000, 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. 28 KS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Note 11. Employee Stock Ownership Plan (Continued) 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 noninvested benefits will be reallocated among remaining participating employees in the same proportion as contributions. The Company has the obligation to redeem the holdings of plan participants in the event 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 $1,146,000 at December 31, 2001. The Bank has charged expense for $101,673 and $98,204 for years ended December 31, 2001 and 2000 respectively, in connection with the ESOP. The expense for 2001 and 2000 includes, in addition to the cash contribution necessary to fund the ESOP's annual principal and interest installment on the loan to the Company, $53,898 and $47,504, 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, 2001 and 2000, the Bank complied with all the capital requirements as shown below:
2001 ----------------------------------------------------------------- Leverage Tier 1 NC Ratio of Risk- Risk- Savings Tier 1 Adjusted Based Bank Capital Capital Capital Capital --------------- ---------------- ---------------- --------------- Consolidated stockholders' equity at December 31, 2001 $ 16,799,313 $ 16,799,313 $ 16,799,313 $ 16,799,313 Unrealized gains on investment securities (209,846) (209,846) (209,846) (209,846) Holding company's equity at December 31, 2001 (361,588) (361,588) (361,588) (361,588) Loan loss allowances - - 574,695 574,695 -------------- --------------- --------------- -------------- Regulatory capital 16,227,879 16,227,879 16,802,574 16,802,574 Minimum capital requirement 4,889,220 4,185,480 8,370,960 8,173,500 -------------- --------------- --------------- -------------- Excess $ 11,338,659 $ 12,042,399 $ 8,431,614 $ 8,629,074 ============== =============== =============== ==============
29 KS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Note 12. Regulatory Matters (Continued)
2001 ------------------------------------------------------------ Leverage Tier 1 NC Ratio of Risk- Risk- Savings Tier 1 Adjusted Based Bank Capital Capital Capital Capital ------------- ------------- ------------- ------------- Total tangible Bank only assets at December 31, 2001 $ - $ - $ - $163,470,000 Average tangible Bank only assets December 31, 2001 quarter 162,974,000 - - - Risk-weighted Bank only assets at December 31, 2001 - 104,637,000 104,637,000 - Capital as a percentage of assets: Actual 9.96% 15.51% 16.06% 10.28% Required 3.00% 4.00% 8.00% 5.00% ------------ ------------ ------------ ------------ Excess 6.96% 11.51% 8.06% 5.28% ============ ============ ============ ============ 2000 ------------------------------------------------------------------ Leverage Tier 1 NC Ratio of Risk- Risk- Savings Tier 1 Adjusted Based Bank Capital Capital Capital Capital --------------- -------------- -------------- -------------- Consolidated stockholders' equity at December 31, 2000 $ 15,842,574 $ 15,842,574 $ 15,842,574 $ 15,842,574 Unrealized gains on investment securities (35,704) (35,704) (35,704) (35,704) Holding company's equity at December 31, 2000 (228,891) (228,891) (228,891) (228,891) Loan loss allowances - - 489,241 489,241 ------------- ------------- ------------- ------------- Regulatory capital 15,577,979 15,577,979 16,067,220 16,067,220 Minimum capital requirement 4,532,460 3,770,120 7,540,240 7,615,702 ------------- ------------- ------------- ------------- Excess $ 11,045,519 $ 11,807,859 $ 8,526,980 $ 8,451,518 ============= ============= ============= ============= Total tangible Bank only assets at December 31, 2000 $ - $ - $ - $ 152,314,040 Average tangible Bank only assets December 31, 2000 quarter 151,082,000 - - - Risk-weighted Bank only assets at December 31, 2000 - 94,253,000 94,253,000 - Capital as a percentage of assets: Actual 10.31% 16.53% 17.05% 10.55% Required 3.00% 4.00% 8.00% 5.00% ------------- ------------- ------------- ------------- Excess 8.31% 12.53% 9.05% 5.55% ============= ============= ============= =============
30 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, 2001 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 $600,000 and $1,100,000 to the Company during 2001 and 2000, respectively. The Company declared and paid dividends of $728,829 and $729,251 to stockholders during 2001 and 2000, respectively. Subject to regulations promulgated by the North Carolina 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. 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 non-employee directors. An aggregate of 134,827 and 67,414 shares, respectively, of common stock was 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 options were 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. 31 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, 2001 and 2000 is as follows:
2001 2000 --------------------------- ------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------------ ------------ ----------- ----------- Outstanding at beginning of year 67,937 $ 6.00 75,169 $ 6.00 Granted - - - - Exercised (7,345) 6.00 (7,232) 6.00 Forfeited - - - - ------------ ------------ ----------- ----------- Outstanding at end of year 60,592 $ 6.00 67,937 $ 6.00 ============ ============ =========== ===========
The options under the Nonqualified Stock Option Plan were all exercisable at December 31, 2001 and 2000 and expire in December, 2003. At December 31, 2001 and 2000, 48,179 and 54,999 options were outstanding under this plan, respectively. The options under the Employee Stock Option Plan were all exercisable at December 31, 2001 and 2000 and expire in 2003. At December 31, 2001 and 2000, 12,413 and 12,938 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 $18,614 and $21,135 in connection with the bonus compensation plan during 2001 and 2000, respectively. 32 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, 2001 and 2000.
2001 2000 ------------------------------- ------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value -------------- -------------- -------------- -------------- Financial assets: Cash and cash equivalents $ 7,973,721 $ 7,973,721 $ 2,367,258 $ 2,367,258 Accrued interest receivable 1,001,316 1,001,316 1,152,067 1,152,067 Investment securities: Held to maturity 90,774 96,767 894,825 908,001 Available for sale 12,598,359 12,598,359 10,588,958 10,588,958 Federal Home Loan Bank Stock 1,007,500 1,007,500 942,500 942,500 Loans receivable 136,976,742 138,402,000 133,312,224 134,091,000 Financial liabilities: Deposits 128,825,401 127,973,000 120,072,840 120,741,000 Advances from Federal Home Loan Bank 16,800,000 17,117,000 15,800,000 15,369,000
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, 2001 and 2000: Condensed Balance Sheets December 31, 2001 and 2000 2001 2000 ---------- ---------- (dollars in thousands) Assets Cash and due from banks $ 411 $ 130 Investment in Subsidiary 16,438 15,614 Other assets 103 102 ---------- ---------- $ 16,952 $ 15,846 ========== ========== Liabilities and Stockholders' Equity Liabilities: Accrued expenses and other liabilities $ 152 $ 3 Stockholders' equity: Common stock 4,816 4,718 Unearned ESOP shares (78) (117) Accumulated other comprehensive income 210 36 Retained earnings, substantially restricted 11,852 11,206 ---------- ---------- $ 16,952 $ 15,846 ========== ========== 33 KS BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Note 15. Parent Company Financial Data (Continued) Condensed Statements of Income Years Ended December 31, 2001 and 2000 2001 2000 ----------- ----------- (dollars in thousands) Equity in earnings of subsidiary $ 1,196 $ 1,978 Interest income 16 18 Other income 356 - Other expense (64) (3) Income taxes (130) - ---------- ----------- Net income $ 1,374 $ 1,993 ========== =========== Condensed Statements of Cash Flows Years Ended December 31, 2001 and 2000 2001 2000 -------- ------- (dollars in thousands) Cash Flows from Operating Activities: Net income $ 1,374 $ 1,993 Noncash items included in net income: Equity in earnings of KS Bank (1,196) (1,978) Change in assets and liabilities: (Increase) decrease in other assets (1) 53 Increase (decrease) in accrued expenses and other liabilities 149 (19) ------- ------- Net cash provided by in operating activities 326 49 ------- ------- Cash Flows from Investing Activities: Upstream dividend received from KS Bank 600 1,100 ------- ------- Net cash provided by investing activities 600 1,100 ------- ------- Cash Flows from Financing Activities: Cash dividends paid (728) (729) Repayment of ESOP debt 39 39 Purchase of common stock for retirement - (379) Exercise of stock options 44 43 ------- ------- Net cash used in financing activities (645) (1,026) ------- ------- Net increase in cash: 281 123 Beginning 130 7 ------- ------- Ending $ 411 $ 130 ======= ======= 34 KS BANCORP, INC. AND SUBSIDIARY 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, 2001. 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 High Low --------- ------- -------- 2001: First Quarter $ 0.16 $ 14.60 $ 12.10 Second Quarter 0.16 14.40 12.00 Third Quarter 0.16 18.00 12.00 Fourth Quarter 0.16 18.00 14.85 2000: First Quarter $ 0.16 $ 14.45 $ 14.30 Second Quarter 0.16 14.40 10.80 Third Quarter 0.16 12.80 10.80 Fourth Quarter 0.16 13.80 11.20 The dividends and stock prices presented above have been restated to reflect the 25% stock split in 2001. 35 KS BANCORP, INC. AND SUBSIDIARY CORPORATE INFORMATION ================================================================================
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 President, Scott Farms, Inc. Retired Business Owner President, Parrish Funeral Home, Inc. Harold T. Keen Gordon C. Woodruff James C. Parker President, CEO Attorney At Law Vice Chrmn. of the Board KS BANCORP, INC and Woodruff, Reece & Fortner Certified Public Accountant KS Bank, Inc. Partner, Parker and Parker PA A. Carroll Coleman Sidney E. Sauls Robert E. Fields President and Manager Insurance Agent Retired Business Owner P.L. Woodard & Co. North Carolina Farm Bureau Mutual Insurance Company ------------------------------------------------------------------------------------------------------ STOCK TRANSFER AGENT INDEPENDENT AUDITORS SPECIAL LEGAL COUNSEL First Citizens Bank & Trust Dixon Odom PLLC Brooks, Pierce, McLendon, Corporate Trust Department 408 Summit Drive Humphrey & Leonard, LLP 100 East Tryon Road P.O. Box 70 P. 0. Box 26000 Raleigh, NC 27603 Sanford, NC 27331 Greensboro, NC 27420 CORPORATE OFFICE P. 0. Box 219 207 West Second Street Kenly, North Carolina 27542 (919) 284-4157
FORM 10-KSB A copy of Form 10-KSB 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. 0. Box 219, Kenly, North Carolina 27542. ANNUAL MEETING The annual meeting of shareholders of KS Bancorp, Inc. will be held at 7:00 p.m. on May 7, 2002 in the Corporate Office, 207 West Second Street, Kenly, North Carolina. COMMON STOCK The Company had 1,139,213 shares of Common Stock outstanding which were held by approximately 339 holders of record (excluding shares held in street name) as of December 31, 2001. The Common Stock is listed for quotation on the OTC Bulletin Board. -------------------------------------------------------------------------------- 36