KS Bancorp : First Quarter 2016, March 31, 2016

Microsoft Word - KSBI Q1 2016 BH 1 Regina

E Q U I T Y

R E S E A R C H S E R V I C E S

5003 Falls of Neuse Road

Raleigh North Carolina

27609

919-876-8868 ph

919-876-8839 fax

www.equityresearch.com

SYMBOL: KSBI

TOTAL ASSETS: $346 MM HQ: SMITHFIELD, NC CONTACT:

HAROLD T. KEEN, PRES. EARL W. WORLEY, JR., COO REGINA J. SMITH, CFO

[phone]

I N V E S T O R R E L A T I O N S R E P O R T

AVAILABLE ON THE WEB AT www.equityresearch.com

KS Bancorp, Inc. (KSBI - OTC BB) John A. Howard, CFA April 25, 2016

Price:	$12.05	EPS*	2014A:	$0.76	P/E 2014A:	15.9 x
52 Wk. Range:	$11.53 - $13.00	(FY: DEC)	2015A:	$1.08	2015A:	11.2 x
Div/Div Yld:	$0.08 / 0.7%	2016E:	$1.18	2016E:	10.2 x
Shrs/Mkt Cap:	1.3 mm / $16 mm	Book Value:	$18.09	Price/Book Value:	0.67 x

* EPS are diluted.

Background

KS Bancorp, Inc. is a Smithfield, North Carolina-based, single bank holding company with approximately $346 million in assets as of March 31, 2016. KS Bank, Inc., a state-chartered savings bank, is KS Bancorp's sole subsidiary. The Bank conducts its operations through nine full service branch offices that are located in Kenly, Goldsboro, Wilson, Garner, Selma, Clayton, Wendell, Four Oaks and Smithfield, North Carolina, as well as a mortgage origination office in Greenville, NC. The Company emphasizes being a community-oriented financial institution and offers a broad range of personal and business banking products and services, mortgage products and wealth management. KS Personal Services offers a complete suite of deposit and loan products that are tailored to specific needs, while KS Business Services includes not only deposit and loan products but also payroll services (through Flex Pay), merchant card services, cash management and remote deposit. KS Mortgage Services offers competitive mortgage products through a responsive team of mortgage specialists. Finally, KS Wealth Management Services offers a broad array of services to help clients manage, protect and build upon their financial resources. Selected wealth management services include investments, college savings programs, lifetime charitable giving, business succession planning, insurance and risk management. In addition, the Company recently launched a Trust Services Division (which has an office in Asheboro and a presence in Waynesville and Wilmington), through which it offers a complete line of trust services, such as money management, IRAs, trust administration and estate administration. Currently, the Company's stock is traded on the over-the- counter bulletin board under the symbol "KSBI."

1ST

QUARTER HIGHLIGHTS:

First Quarter Results Were Excellent

KS Bancorp reported first quarter results that were well above our projections and that easily topped the year-ago figures. If there was one overarching reason for the better than expected results, we would point to the recently added Trust Services Division, which contributed meaningfully to

EARNINGS AGAIN EXCEEDED OUR PROJECTIONS

EPS: $0.33 VS. $0.25

ONE OF THE BIGGEST CONTRIBUTORS TO THE STRENGTH WAS TRUST INCOME DIVISION

NET INTEREST INCOME BENEFITTED FROM AVERAGE EARNING ASSET GROWTH AND WAS UP 7%

noninterest income in the current quarter. Fundamentally, it was also a good quarter in most other areas of the Bank: asset quality continued to improve, loan growth was positive and expense control was good. Based on the strength of the results, we are increasing our earnings projection for the year.

Net income for the first quarter of 2016 was $435,000, or $0.33 per diluted share, an increase of 35% (32% on an EPS basis) from $322,000, or $0.25 per diluted share, in 2015's first quarter. Net interest income growth was encouraging. Specifically, it increased 7% to $2,744,000 in the first quarter of 2016 from $2,563,000 in the year-ago quarter. Although margins were below the level from the year- ago quarter, they have recently been holding up fairly well, and remained in the 3.30% to 3.40% range over the past several quarters. Reflecting the favorable asset quality trends, the provision was essentially zero in both periods. As we discussed above, one of the areas of notable strength was noninterest income, which increased 47% to roughly $650,000 in 2016's first quarter, which was up from $444,000 in the year-ago quarter. While positive comparisons were evident in service charges and fees on presold mortgages, the majority of the improvement came from the addition of Trust Services income, which accounted for nearly a quarter of total noninterest income. As can be seen in

NONINTEREST INCOME, EXCLUDING SECURITY GAINS, INCREASED 46%

NONINTEREST EXPENSE WAS UP 7%, MAINLY DUE TO THE ADDITION OF TRUST SERVICE

OFFICERS

ROAE: 7.5%, UP FROM 5.8% ROAA: 0.51%, UP FROM 0.40%

FROM 3/31/15 TO 3/31/16:

GROSS LOANS GREW 12% DEPOSITS WERE UP 7% ASSETS INCREASED 6%

EQUITY/ASSETS: 6.85%

THE ANNUAL CASH DIVIDEND INCREASED 33% TO $0.08 PER SHARE

NPAS-TO-ASSETS: 0.92%

LONG-TERM TREND IS FAVORABLE AS WELL

RESERVES-TO-LOANS: 1.40%

EPS:

2014A: $0.76

2015A: $1.08

2016E: $1.18

Breakdownof Noninterest Income ($000s)

800

600

400

200

0

Q1 15 Q2 15 Q3 15 Q4 15 Q1 16

the adjacent chart, Trust Income has been building and has been a large contributor to the favorable trends in noninterest income this year.

Trust Income Other Income Presold Mortgages

Service Charges

Noninterest expense was up 7% to $2,736,000 in 2016's first quarter, up from $2,550,000 in the year-ago quarter, with a good deal of that increase relating to the hiring of Trust Service officers in the last half of 2015. Finally, we would note that the profitability measures are continuing to improve for the Company. Annualized return on average equity was roughly 7.5% in 2016's first quarter, up from 5.8% in the year-ago quarter, while annualized

return on average assets was approximately 0.51% in 2016's first quarter, up from 0.40% in the year- ago quarter.

From a balance sheet standpoint, loans have continued to increase rapidly, growing 12% over the past year to $255 million at March 31, 2016 from $228 million at the year-ago date, while assets increased 6% and deposits grew 7%. KS Bancorp continues to have a sizable amount of funds in cash and securities (22% of total assets), so some of the loan demand is being funded through a shifting of earning assets. The Company remains well capitalized, with shareholders' equity of $23.6 million, or 6.85% of total assets, at March 31, 2016.

Annual Cash Dividend Increased 33%

Reflecting the strong results of the Company, KS Bancorp's Board of Directors increased the annual cash dividend to $0.08 per share, up 33% from a previous level of $0.06 per share. The dividend was paid on February 12, 2016 to shareholders of record on January 29, 2016. Although the higher dividend represents a modest yield of about 0.7%, we would note that the payout ratio (the dividend as a percent of earnings) is quite low at about 7%. That conservative percentage should provide some cushion for increases in future years.

Asset Quality Continues to Improve

NPAs+90 Days Past Due ($MM)

8.5

6.8

5.1

3.4

1.7

0.0

3/14 9/14 3/15 9/15 3/16

KS Bancorp continues to do an excellent job reducing its problem assets. At March 31, 2016, total nonperforming assets ("NPAs") were $3.2 million, or 0.92% of assets, down from $3.3 million, or 0.97% of total assets, at year- end 2015, and $4.9 million, or 1.54% of total assets, at the year-ago date. The long-term trend is also particularly favorable. NPAs at March 31, 2016 consisted mainly of nonaccrual loans of $2.5 million and OREO of $620,000. The allowance for loan losses totaled $3.6 million, or 1.40% of total loans at March 31, 2016, essentially unchanged from $3.5 million, or 1.51% of total loans, at December 31, 2014.

Projections Increased

Due to the solid first quarter results, we are again increasing our earnings projections for 2016 to $1.5 million, or $1.18 per diluted share, up from our previous estimate of $1.4 million, or $1.10 per share. Earnings in 2015 included about $0.06 per share (after tax) relating to gains in foreclosed real estate, whereas there are nominal gains in our 2016 projections. These projections do not include any preferred dividends and could vary widely based on changing economic conditions.

ADDITIONAL INFORMATION UPON REQUEST

Copyright © 2016 Equity Research Services, Inc. All rights reserved. This material is for your information only and is not a solicitation, or an offer, to buy or sell securities mentioned. Equity Research Services, Inc. ("ERS") is a firm involved in financial advisory, equity research, valuation and investor relations services. All reports generated by ERS for the purpose of investor relations are designated "Investor Relations Report," and ERS receives a fee (from the company whose securities are described) for producing such reports. ERS may also act in a financial advisory role to the company. The information contained herein has been obtained from sources we believe reliable but in no way is guaranteed by us. Furthermore, this report contains forward-looking statements and projections that are based on certain assumptions and expectations. Accordingly, actual results may differ considerably from those reflected in this report due to such factors as those which are listed in the Company's SEC filings. Any non-factual information in the report is our opinion and is subject to change without notice.