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 September 30, 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 ¨
Transitional Small Business Disclosure Format: Yes ¨ No x
As of October 27, 2003, 1,164,700 shares of the issuer’s common stock, no par value, were outstanding.
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KS Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
| September 30, 2003 (Unaudited) | December 31, 2002* | |||||||
| ASSETS | (In thousands) | |||||||
Cash and due from banks: | ||||||||
Interest-earning | $ | 5,413 | $ | 6,746 | ||||
Noninterest-earning | 793 | 890 | ||||||
Time deposits | 100 | — | ||||||
Investment securities: | ||||||||
Available for sale, at fair value | 30,409 | 23,297 | ||||||
Held to maturity, at amortized cost | 51 | 64 | ||||||
Federal Home Loan Bank stock, at cost | 1,855 | 1,740 | ||||||
Presold mortgages in process of settlement | 585 | 1,419 | ||||||
Loans receivable, net | 148,601 | 150,839 | ||||||
Accrued interest receivable | 1,031 | 1,034 | ||||||
Foreclosed real estate, net | 1,307 | 420 | ||||||
Property and equipment, net | 5,660 | 3,948 | ||||||
Other assets | 748 | 662 | ||||||
TOTAL ASSETS | $ | 196,553 | $ | 191,059 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Deposits | $ | 140,604 | $ | 138,027 | ||||
Advances from Federal Home Loan Bank | 37,100 | 34,800 | ||||||
Accrued interest payable | 229 | 309 | ||||||
Accrued expenses and other liabilities | 533 | 413 | ||||||
TOTAL LIABILITIES | 178,466 | 173,549 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, authorized 5,000,000 shares; none issued | — | — | ||||||
Common stock, no par value, authorized 20,000,000 shares; issued and outstanding 1,164,700 in 2003 and 1,153,177 in 2002 | 5,086 | 4,962 | ||||||
Unearned ESOP shares | (39 | ) | (39 | ) | ||||
Retained earnings, substantially restricted | 13,051 | 12,455 | ||||||
Accumulated other comprehensive income (loss) | (11 | ) | 132 | |||||
TOTAL STOCKHOLDERS’ EQUITY | 18,087 | 17,510 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 196,553 | $ | 191,059 | ||||
* Derived from audited consolidated financial statements.
See accompanying notes.
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KS Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations (Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||
| September 30, | September 30, | ||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||
| (In thousands, except per share data) | |||||||||||||
INTEREST INCOME | |||||||||||||
Loans | $ | 2,545 | $ | 2,854 | $ | 8,000 | $ | 8,488 | |||||
Investment securities: | |||||||||||||
Taxable | 149 | 229 | 539 | 577 | |||||||||
Tax-exempt | 36 | 8 | 95 | 8 | |||||||||
Dividends | 13 | 18 | 52 | 48 | |||||||||
Interest-earning deposits | 10 | 16 | 39 | 43 | |||||||||
TOTAL INTEREST INCOME | 2,753 | 3,125 | 8,725 | 9,164 | |||||||||
INTEREST EXPENSE | |||||||||||||
Deposits | 742 | 1,003 | 2,458 | 3,124 | |||||||||
Advances from Federal Home Loan Bank | 275 | 306 | 864 | 796 | |||||||||
TOTAL INTEREST EXPENSE | 1,017 | 1,309 | 3,322 | 3,920 | |||||||||
NET INTEREST INCOME | 1,736 | 1,816 | 5,403 | 5,244 | |||||||||
PROVISION FOR LOAN LOSSES | — | 652 | 162 | 825 | |||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 1,736 | 1,164 | 5,241 | 4,419 | |||||||||
NON-INTEREST INCOME | |||||||||||||
Service charges on deposit accounts | 170 | 179 | 485 | 418 | |||||||||
Fees from presold mortgages | 95 | 61 | 283 | 171 | |||||||||
Gain (loss) on sale of foreclosed real estate | (16 | ) | — | 20 | — | ||||||||
Other income | 11 | 12 | 105 | 34 | |||||||||
TOTAL NON-INTEREST INCOME | 260 | 252 | 893 | 623 | |||||||||
NON-INTEREST EXPENSE | |||||||||||||
Compensation and benefits | 950 | 704 | 2,592 | 2,055 | |||||||||
Occupancy and equipment | 151 | 131 | 478 | 439 | |||||||||
Data processing and outside service fees | 130 | 141 | 380 | 336 | |||||||||
Insurance | 22 | 17 | 56 | 50 | |||||||||
Other | 259 | 178 | 746 | 603 | |||||||||
TOTAL NON-INTEREST EXPENSE | 1,512 | 1,171 | 4,252 | 3,483 | |||||||||
INCOME BEFORE INCOME TAXES | 484 | 245 | 1,882 | 1,559 | |||||||||
INCOME TAXES | 187 | 94 | 730 | 602 | |||||||||
NET INCOME | $ | 297 | $ | 151 | $ | 1,152 | $ | 957 | |||||
NET INCOME PER COMMON SHARE | |||||||||||||
Basic | $ | 0.26 | $ | 0.13 | $ | 1.00 | $ | 0.85 | |||||
Diluted | $ | 0.25 | $ | 0.13 | $ | 0.98 | $ | 0.83 | |||||
DIVIDENDS PER COMMON SHARE | $ | 0.16 | $ | 0.16 | $ | 0.48 | $ | 0.48 | |||||
See accompanying notes.
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KS Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2003 | 2002 | |||||||
| (In thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 1,152 | $ | 957 | ||||
Adjustments to reconcile net income to net cash provided (used) by operating activities: | ||||||||
Depreciation | 219 | 227 | ||||||
Amortization, net | 146 | 1 | ||||||
Release of ESOP shares | 55 | 48 | ||||||
Provision for loan losses | 162 | 825 | ||||||
Gain on sale of foreclosed real estate | (19 | ) | — | |||||
Change in assets and liabilities: | ||||||||
(Increase) decrease in presold mortgages in process of settlement | 834 | (1,315 | ) | |||||
(Increase) decrease in accrued interest receivable | 3 | (117 | ) | |||||
(Increase) decrease in other assets | 3 | (94 | ) | |||||
Increase (decrease) in accrued interest payable | (80 | ) | 46 | |||||
Increase (decrease) in accrued expenses and other liabilities | 120 | (679 | ) | |||||
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES | 2,595 | (101 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Net investment in time deposits | (100 | ) | — | |||||
Purchases of: | ||||||||
Available for sale investment securities | (22,309 | ) | (19,416 | ) | ||||
Proceeds from sales, maturities and calls of: | ||||||||
Available for sale investment securities | 14,819 | 8,092 | ||||||
Held to maturity investment securities | 13 | 21 | ||||||
Purchase of Federal Home Loan Bank stock | (115 | ) | (733 | ) | ||||
Net (increase) decrease in loans | 934 | (16,513 | ) | |||||
Proceeds from sales of foreclosed real estate | 274 | 15 | ||||||
Purchase of property and equipment | (1,931 | ) | (162 | ) | ||||
NET CASH USED BY INVESTING ACTIVITIES | (8,415 | ) | (28,696 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Net increase in deposits | 2,577 | 8,266 | ||||||
Advances from Federal Home Loan Bank | 19,500 | 20,000 | ||||||
Principal payments – Federal Home Loan Bank advances | (17,200 | ) | (2,000 | ) | ||||
Cash dividends paid | (556 | ) | (547 | ) | ||||
Proceeds from exercise of stock options | 69 | 77 | ||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 4,390 | 25,796 | ||||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (1,430 | ) | (3,001 | ) | ||||
CASH AND CASH EQUIVALENTS, BEGINNING | 7,636 | 7,974 | ||||||
CASH AND CASH EQUIVALENTS, ENDING | $ | 6,206 | $ | 4,973 | ||||
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Transfer from loans to real estate acquired in settlement of loans | $ | 1,142 | $ | 124 | ||||
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 and nine month periods ended September 30, 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 and nine month periods ended September 30, 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 is 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 | Nine Months Ended | |||||||
| September 30, | September 30, | |||||||
| 2003 | 2002 | 2003 | 2002 | |||||
Weighted average number of common shares used in computing basic net income per share | 1,159,479 | 1,136,817 | 1,154,758 | 1,131,843 | ||||
Effect of dilutive stock options | 19,215 | 25,635 | 20,321 | 27,015 | ||||
Weighted average number of common shares and dilutive potential common shares used in computing diluted net income per share | 1,178,694 | 1,162,452 | 1,175,079 | 1,158,858 | ||||
NOTE C—COMPREHENSIVE INCOME
For the quarter ended September 30, 2003 and 2002, total comprehensive income, consisting of net income and unrealized securities gains and losses, net of taxes, was $98,000 and $155,000, respectively.
For the nine months ended September 30, 2003 and 2002, total comprehensive income, consisting of net income and unrealized securities gains and losses, net of taxes, was $1,009,000 and $878,00, 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
September 30, 2003 and December 31, 2002
Consolidated total assets increased by $5.5 million during the nine months ended September 30, 2003, from $191.1 million at December 31, 2002 to $196.6 million at September 30, 2003. The increase is primarily due to an increase in investment securities from $23.3 million to $30.4 million. In addition, property and equipment continues to increase due to the construction of the Company’s new main office and a new branch. Funding for the growth was provided by an increase in customer deposits of $2.6 million. In addition, advances from the Federal Home Loan Bank totaling $2.3 million provided funding for this growth.
Total stockholders’ equity increased $577,000 from $17.5 million at December 31, 2002 to $18.1 million at September 30, 2003. This increase resulted principally from net income during the nine months of $1.2 net of the Company’s regular quarterly dividends during the nine months totaling $556,000, or $.48 per share.
Comparison of Results of Operations for the
Three months ended September 30, 2003 and 2002
Net Income. Net income for the quarter ended September 30, 2003 was $297,000, or $.26 per basic share, as compared with net income of $151,000, or $.13 per basic share, for the three months ended September 30, 2002, a increase of $146,000, or $.13 per share. This increase in our earnings resulted primarily from a decrease in our provision for loan losses. 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 decreased $80,000 to $1,736,000 during the quarter ended September 30, 2003 in comparison to the same period in 2002. This decrease resulted primarily from a decrease in the interest rates for our interest-earning assets.
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Provision for Loan Losses. There was no provision for loan losses recorded during the quarter ended September 30, 2003 while during the 2002 quarter, a provision of $652,000 was recorded. The level of the provision for loan losses in the third quarter of 2002 resulted from changes in the methodology used to calculate the allowance that were suggested by the Bank’s regulators. These changes primarily involved the criteria used to classify loans. Since this change in methodology in 2002, the Bank’s allowance, expressed as a percentage of loans, has remained relatively stable. The allowance was .83% and .84% of loans at September 30, 2003 and December 31, 2002, respectively. There were net loan charge-offs of $163,000 and $55,000 during the quarters ended September 30, 2003 and 2002, respectively. At September 30, 2003, nonaccrual loans aggregated $1.2 million, a $300,000 decrease from the level of nonaccrual loans at December 31, 2002 of $1.5 million. Management believes that the allowance is adequate to absorb losses inherent in the loan portfolio as of September 30, 2003.
Non-Interest Income. Non-interest income totaled $260,000 for the three months ended September 30, 2003 as compared with $252,000 for the three months ended September 30, 2002, an increase of $8,000. The increase in non-interest income was primarily attributable to fees from presold mortgages of $34,000 net of losses on the sale of foreclosed real estate totaling $16,000 during the nine months ended September 30, 2003.
Non-Interest Expenses. Non-interest expenses increased to $1.5 million during the quarter ended September 30, 2003 as compared with $1.2 million for the quarter ended September 30, 2002, an increase of $341,000. The increase resulted primarily from an increase in salaries and employee benefits of $246,000. Additionally, during the three months ended September 30, 2003 the Bank incurred expenses related to retaining and sustaining foreclosed assets totaling $27,000 as compared to $3,000 for the quarter ended September 30, 2002. The remainder of the increase was attributable to the continued overall growth and development of business in its market areas.
Provision for Income Taxes. The provision for income taxes, as a percentage of income before income taxes, was 38.6% and 38.4% for the three months ended September 30, 2003 and 2002, respectively.
Comparison of Results of Operations for the
Nine months ended September 30, 2003 and 2002
Net Income. Net income for the nine months ended September 30, 2003 was $1,152,000, or $1.00 per basic share, as compared with net income of $957,000, or $.85 per basic share, for the nine months ended September 30, 2002, an increase of $195,000, or $.15 per share. This overall improvement in our earnings resulted primarily from a reduction in the provision for loan losses of $663,000 in the first nine months of 2003 as compared to the 2002 period. The 2002 provision for loan losses reflected changes in the methodology used to calculate the allowance. In addition, increases in our net interest income and non-interest income contributed to the increase in our earnings as compared to the first nine months of 2002.
Net Interest Income. Net interest income increased $159,000 to $5.4 million during the nine months ended September 30, 2003 in comparison to the $5.2 million earned during the same period in 2002. In comparing these two periods, even though the decline in interest rates for our interest-earning assets exceeded the reduction in interest rates we pay for our interest-bearing liabilities, reductions of .92 basis points and .82 basis points, respectively, the increase in our average net interest earning assets resulted in an overall increase in our net interest income.
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Provision for Loan Losses. The provision for loan losses was $162,000 and $825,000 for the nine months ended September 30, 2003 and 2002, respectively, while net loan charge-offs totaled $184,000 and $94,000 during the 2003 and 2002 periods, respectively. The relationship between the provision for loan losses recorded in the current year and that recorded in the prior year is explained fully in the Provision for Loan Losses section of the Comparison of Results of Operations for the Three Months Ended September 30, 2003 and 2002.
Non-Interest Income. Non-interest income totaled $893,000 for the nine months ended September 30, 2003 as compared with $623,000 for the nine months ended September 30, 2002, an increase of $270,000. 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 $67,000 and $112,000, respectively. Also contributing to this increase were gains on the sale of foreclosed assets totaling $20,000 and a one time gain on the sale of the Bank’s consumer credit card line totaling $49,000, which occurred during the second quarter of 2003.
Non-Interest Expenses. Non-interest expenses increased to $4.3 million during the nine months ended September 30, 2003 as compared with $3.5 million for the nine months ended September 30, 2002, an increase of $769,000. The increase resulted primarily from an increase in salaries and employee benefits plus data processing fees of $537,000 and $44,000, respectively, for the first nine months of 2003 as compared to 2002. During the nine months ended September 30, 2003 the bank has added additional key positions and has staffed a new branch. Additionally, during the nine months ended September 30, 2003 the Bank incurred expenses related to retaining and sustaining foreclosed real estate totaling $73,000 as compared to $3,500 for the quarter ended September 30, 2002. 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 38.8% and 38.6% for the nine months ended September 30, 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 September 30, 2003, liquid assets (cash and due from banks, interest-earning deposits with banks, time deposits, and investment securities) comprised 18.7% of total assets and 26.1% 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 September 30, 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
The Company maintains a system of internal controls and procedures designed to provide reasonable assurance as to the reliability of our published financial statements and other disclosures included in this report. The Company’s Board of Directors, operating through its audit committee which is composed entirely of independent outside directors, provides oversight to the Company’s financial reporting process.
The Company’s management, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer of the Company (its principal executive officer and principal financial officer, respectively), have concluded based on their evaluation as of the end of the period covered by this quarterly report that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer of the Company, as appropriate to allow timely decisions regarding required disclosure.
There have been no significant changes in internal control over financial reporting during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Item 6. Exhibits and Reports on Form 8-K
| (a) | Exhibits: |
| Exhibit # | Description | |
| 31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) | |
| 32.1 | Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| (b) | Reports on Form 8-K. |
The Company filed a Form 8-K on July 29, 2003, announcing the Company’s second quarter 2003 earnings result.
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SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| KS BANCORP, INC. | ||||
Date: November 11, 2003 | By: | /s/ HAROLD T. KEEN | ||
Harold T. Keen | ||||
President and Chief Executive Officer | ||||
Date: November 11, 2003 | By: | /s/ EARL W. WORLEY, JR. | ||
Earl W. Worley, Jr. | ||||
Chief Financial Officer | ||||
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