KS Bancorp (KSBI) 10QSB 2003 Q1 Quarterly report (small business)

U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-QSB

x Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2003

¨ Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period ended                                        

Commission File Number 000-22734

KS BANCORP, INC.

(Exact name of small business issuer as specified in its charter)

NORTH CAROLINA	56-1842707
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

207 WEST SECOND STREET, KENLY, NC 27542

(Address of principal executive office)

(919) 284-4157

(Issuer’s telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes  x  No  ¨

As of April 9, 2003, 1,160,592 shares of the issuer’s common stock, no par value, were outstanding.

This report contains 13 pages.

		Page No.
Part I. FINANCIAL INFORMATION
Item 1—Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition March 31, 2003 and December 31, 2002	3
	Consolidated Statements of Operations Three Months Ended March 31, 2003 and 2002	4
	Consolidated Statements of Cash Flows Three Months Ended March 31, 2003 and 2002	5
	Notes to Consolidated Financial Statements	6
Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations		7
Item 3—Controls and Procedures		9
Part II. OTHER INFORMATION
Item 6—Exhibits and Reports on Form 8-K		10

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Part I. FINANCIAL INFORMATION

Item 1 – Financial Statements

KS Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

	March 31, 2003 (Unaudited)			December 31, 2002*
	(In thousands)
ASSETS
Cash and due from banks:
Interest-earning	$	9,017		$	6,746
Noninterest-earning		478			890
Investment securities:
Available for sale, at fair value		21,955			23,297
Held to maturity, at amortized cost		62			64
Federal Home Loan Bank stock, at cost		2,040			1,740
Presold mortgages in process of settlement		2,356			1,419
Loans receivable, net		151,502			150,839
Accrued interest receivable		938			1,034
Foreclosed assets, net		877			420
Property and equipment, net		4,407			3,948
Other assets		420			662
TOTAL ASSETS	$	194,052		$	191,059
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits	$	140,783		$	138,027
Advances from Federal Home Loan Bank		34,800			34,800
Accrued interest payable		282			309
Accrued expenses and other liabilities		436			413
TOTAL LIABILITIES		176,301			173,549
STOCKHOLDERS’ EQUITY
Preferred stock, no par value, 5,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, 20,000,000 shares authorized; 1,153,177 shares issued and outstanding in 2003 and 2002, respectively		4,980			4,962
Unearned ESOP shares		(39	)		(39	)
Retained earnings, substantially restricted		12,743			12,455
Accumulated other comprehensive income		67			132
TOTAL STOCKHOLDERS’ EQUITY		17,751			17,510
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	194,052		$	191,059

* Derived from audited financial statements

See accompanying notes.

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KS Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations (Unaudited)

	Three Months Ended March 31,
	2003		2002
	(In thousands, except per share data)
INTEREST INCOME
Loans	$	2,751	$	2,732
Investment securities:
Taxable		220		183
Tax-exempt		29		—
Dividends		19		16
Interest-earning deposits		14		18
TOTAL INTEREST INCOME		3,033		2,949
INTEREST EXPENSE
Deposits		878		1,116
Advances from Federal Home Loan Bank		322		236
TOTAL INTEREST EXPENSE		1,200		1,352
NET INTEREST INCOME		1,833		1,597
PROVISION FOR LOAN LOSSES		48		31
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,785		1,566
NON-INTEREST INCOME
Service charges on deposit accounts		151		100
Fees from presold mortgages		82		68
Other income		44		15
TOTAL NON-INTEREST INCOME		277		183
NON-INTEREST EXPENSE
Compensation and benefits		796		640
Occupancy and equipment		164		156
Data processing and outside service fees		122		100
Insurance		16		17
Other		198		175
TOTAL NON-INTEREST EXPENSE		1,296		1,088
INCOME BEFORE INCOME TAXES		766		661
INCOME TAXES		294		253
NET INCOME	$	472	$	408
NET INCOME PER COMMON SHARE
Basic	$	.41	$	.36
Diluted	$	.40	$	.35
DIVIDEND PER COMMON SHARE	$	.16	$	.16

See accompanying notes.

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KS Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended March 31,
	2003			2002
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	472		$	408
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		71			73
Amortization, net		36			(1	)
Release of ESOP shares		18			15
Provision for loan losses		48			31
Change in assets and liabilities:
(Increase) decrease in presold mortgages in process of settlement		(937	)		50
(Increase) decrease in accrued interest receivable		96			(57	)
(Increase) decrease in other assets		282			(13	)
Decrease in accrued interest payable		(27	)		(103	)
Increase (decrease) in accrued expenses and other liabilities		23			(239	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		82			164
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of:
Available for sale investment securities		(3,422	)		—
Proceeds from sales, maturities and calls of:
Available for sale investment securities		4,623			1,078
Held to maturity investment securities		2			4
Purchase of Federal Home Loan Bank stock		(300	)		—
Net increase in loans		(1,213	)		(3,512	)
Proceeds from sales of foreclosed assets		45			—
Purchase of property and equipment		(530	)		(27	)
NET CASH USED BY INVESTING ACTIVITIES		(795	)		(2,457	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits		2,756			1,609
Cash dividends paid		(184	)		(182	)
NET CASH PROVIDED BY FINANCING ACTIVITIES		2,572			1,427
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,859			(866	)
CASH AND CASH EQUIVALENTS, BEGINNING		7,636			7,974
CASH AND CASH EQUIVALENTS, ENDING	$	9,495		$	7,108
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Transfer from loans to real estate acquired in settlement of loans	$	502		$	—

See accompanying notes.

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KS Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

NOTE A—BASIS OF PRESENTATION

In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three month periods ended March 31, 2003 and 2002, in conformity with accounting principles generally accepted in the United States of America. The financial statements include the accounts of KS Bancorp, Inc. (the “Company”) and its wholly-owned subsidiary, KS Bank, Inc. Operating results for the three month period ended March 31, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2003.

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the consolidated financial statements filed as part of the Company’s 2002 annual report on Form 10-KSB. This quarterly report should be read in conjunction with such annual report.

NOTE B—NET INCOME PER SHARE

Net income per common share has been computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period. In accordance with generally accepted accounting principles, employee stock ownership plan shares are only considered outstanding for the basic earnings per share calculations when they are earned or committed to be released.

The weighted average number of shares outstanding or assumed to be outstanding are summarized below:

	Three months ended March 31,
	2003	2002
Weighted average number of common shares used in computing basic net Income per share	1,147,761	1,127,297
Effect of dilutive stock options	22,338	27,670
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share	1,170,099	1,154,967

NOTE C—COMPREHENSIVE INCOME

For the three months ended March 31, 2003 and 2002, total comprehensive income, consisting of net income and unrealized securities gains and losses, net of taxes, was $407,000 and $331,000, respectively.

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Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-QSB may contain certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services.

Comparison of Financial Condition at

March 31, 2003 and December 31, 2002

Consolidated total assets increased by $3.0 million during the three months ended March 31, 2003, from $191.1 million at December 31, 2002 to $194.1 million at March 31, 2003. This growth in the Company’s total assets resulted from increases in our loan portfolio, presold mortgages in process of settlement, and liquid assets (consisting of cash and due from banks and investment securities) of $660,000, $937,000, and $515,000, respectively, during the three months ended March 31, 2003. Funding for this growth was provided primarily from increases in customer deposits of $2.8 million.

Total stockholders’ equity increased $241,000 from $17.5 million at December 31, 2002 to $17.8 million at March 31, 2003. This increase resulted principally from net income of $472,000 for the three months, net of unrealized losses on available for sale investment securities during the period of $65,000 and net of the Company’s regular quarterly dividends during the three months totaling $184,000, or $.16 per share.

Comparison of Results of Operations for the

Three months ended March 31, 2003 and 2002

Net Income.    Net income for the quarter ended March 31, 2003 was $472,000, or $.41 per share, as compared with net income of $408,000, or $.36 per share, for the three months ended March 31, 2002, an increase of $64,000, or $.05 per share. This improvement in our earnings resulted primarily from increases in our net interest income and non-interest income, which were partially offset by growth in our non-interest expenses. All of these factors are addressed in the discussion that follows.

Net Interest Income.    Like most financial institutions, the primary component of earnings for the Company is net interest income. Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by levels of non-interest-bearing liabilities and capital.

Net interest income increased $236,000 to $1.8 million during the quarter ended March 31, 2003 in comparison to the $1.6 million earned during the same period in 2002. While the interest rates for our interest-earning assets dropped approximately 80 basis points during the first quarter of 2003 compared to the first quarter of 2002, the interest rates we pay for our interest-bearing liabilities decreased by approximately 83 basis points. The declining level of interest rates combined with an increase in our average net interest earning assets resulted in increases in our net interest rate spread, from 3.69% in the 2002 quarter to 3.72% in the current year quarter, and in our net yield on average interest-earning assets, from 3.95% in the 2002 quarter to 3.97% in the current year.

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Provision for Loan Losses. The provision for loan losses was $48,000 and $31,000 for the quarters ended March 31, 2003 and 2002, respectively. There were net loan charge-offs of $14,000 and $55,000 during the quarters ended March 31, 2003 and 2002, respectively. At March 31, 2003, nonaccrual loans aggregated $1.2 million, while the allowance for loan losses stood at $1.3 million or .86% of total loans. At December 31, 2002, nonaccrual loans aggregated $1.5 million while the allowance was $1.3 or .84% of total loans. Management believes that the allowance is adequate to absorb losses inherent in the loan portfolio.

Non-Interest Income. Non-interest income totaled $277,000 for the three months ended March 31, 2003 as compared with $183,000 for the three months ended March 31, 2002, an increase of $94,000. The increase in non-interest income was primarily attributable to volume related increases in service charges on deposit accounts and fees from presold mortgages of $51,000 and $14,000, respectively.

Non-Interest Expenses. Non-interest expenses increased to $1.3 million during the quarter ended March 31, 2003 as compared with $1.1 million for the quarter ended March 31, 2002, an increase of $208,000. The increase resulted primarily from an increase in salaries and employee benefits and data processing fees of $156,000 and $22,000, respectively. The remainder of the increase was attributable to the continued overall growth of the Company.

Provision for Income Taxes. The provision for income taxes, as a percentage of income before income taxes, was 38.4% and 38.3% for the three months ended March 31, 2003 and 2002, respectively.

Liquidity and Capital Resources

The objective of the Company’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 KS Bank’s ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.

The primary sources of internally generated funds are principal and interest payments on loans receivable and cash flows generated from operations. External sources of funds include increases in deposits and advances from the FHLB of Atlanta.

At March 31, 2003, liquid assets (cash and due from banks, interest-earning deposits with banks, and investment securities) comprised 16.2% of total assets and 22.4% of total deposits. Management believes that it will have sufficient funds available to meet its anticipated future loan commitments as well as other liquidity needs.

As a North Carolina-chartered savings bank, KS Bank is subject to the capital requirements of the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Administrator of Savings Institutions (“N. C. Administrator”). The FDIC requires state-chartered savings banks to have a minimum leverage ratio of Tier I capital (principally consisting of common shareholders’ equity, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less certain intangible assets) to total assets of at least 3%; provided, however, that all institutions, other than those (i) receiving the highest rating during the examination process and (ii) not anticipating or experiencing any significant growth, are required to maintain a ratio of 1% or 2% above the stated minimum. The FDIC also requires KS Bank to have a ratio of total capital to risk-weighted assets of at least 8%, of which at least 4% must be comprised of Tier I capital. The N. C. Administrator requires a net worth equal to at least 5% of total assets. At March 31, 2003, KS Bank exceeded the capital requirements of both the FDIC and the N. C. Administrator.

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Item 3—Controls and Procedures

Within the 90 days prior to the date of this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC Filings. There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

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Part II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

99.1 Certification of Periodic Financial Report Pursuant to 18 U.S.C. Section 1350

(b) Reports on Form 8-K.

No reports on Form 8-K were filed by the Company during the quarter ended March 31, 2003.

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SIGNATURES

Under the requirements of the Securities Exchange Act of 1934, the Bank has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	KS BANCORP, INC.
Date: April 29, 2003	By:	/s/    HAROLD T. KEEN
		Harold T. Keen President and Chief Executive Officer
Date: April 29, 2003	By:	/s/    EARL W. WORLEY, JR.
		Earl W. Worley, Jr. Chief Financial Officer

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CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Harold T. Keen, certify that:

(1) I have reviewed this quarterly report on Form 10-QSB of KS Bancorp, Inc., a North Carolina bank (the “registrant”);

(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

(3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

(6) The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: April 29, 2003	By:	/s/    HAROLD T. KEEN
		Harold T. Keen President and Chief Executive Officer

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CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Earl W. Worley, Jr., certify that:

(1) I have reviewed this quarterly report on Form 10-QSB of KS Bancorp, Inc., a North Carolina bank (the “registrant”);

(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

(3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

(4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(5) The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

(6) The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: April 29, 2003	By:	/s/    EARL W. WORLEY, JR.
		Earl W. Worley, Jr. Chief Financial Officer

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