KS Bancorp : Fourth Quarter 2015-January 29, 2016

Microsoft Word - KSBI Q4 2015 BH 1 Final a

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: $337 MM HQ: SMITHFIELD, NC CONTACT:

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

[phone]

4TH QUARTER HIGHLIGHTS:

RESULTS WERE BETTER THAN EXPECTED

EARNINGS WERE $0.10 ABOVE PROJECTIONS

EPS: $0.32 VS. $0.31

NET INTEREST INCOME WAS UP 2% DUE TO AVERAGE EARNING ASSET GROWTH

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 January 29, 2016

Price:	$13.00	EPS*	2014A:	$0.76	P/E 2014A:	17.1 x
52 Wk. Range:	$11.00 - $14.00	(FY: DEC)	2015A:	$1.08	2015A:	12.0 x
Div/Div Yld:	$0.06 / 0.5%	2016E:	$1.10	2016E:	11.8 x
Shrs/Mkt Cap:	1.3 mm / $17.1 mm	Book Value:	$17.49	Price/Book Value:	0.74 x

* EPS are diluted.

Background

KS Bancorp, Inc. is a Smithfield, North Carolina-based, single bank holding company with approximately $337 million in assets as of December 31, 2015. 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."

Fourth Quarter Results Were Well Above Expectations

For the fourth quarter of 2015, KS Bancorp reported results that significantly exceeded our projections, with solid growth/improvement in net income, balance sheet and asset quality. Actual earnings per share were $0.10 above projections and, based on the strength of the solid fourth quarter performance, we are increasing our earnings projection for 2016. We were also particularly impressed with the Company's loan growth, the momentum of which began improving in mid-2015. Finally, the deposit mix improved, and nonperforming assets continued to decline. All in all, it was an excellent quarter.

Net income available to common shareholders for the fourth quarter of 2015 was $417,000, or $0.32 per diluted share, which was up 3% from $404,000, or $0.31 per diluted share, in the year-ago quarter. There were several items that affected the net income comparisons. For example, the fourth quarter of 2014 included $62,000 in preferred dividend related charges, which were absent in the current quarter, and there was a provision for loan losses of $114,000 in 2015's fourth quarter versus a credit for loan losses of $59,000 in 2014's fourth quarter. Finally, there was a favorable swing of $211,000 in foreclosed real estate (there was a net gain in 2015's fourth quarter of $147,000, versus a loss/expense of $64,000 in the year-ago quarter). But bottom line, the quarter reflected solid operating metrics that were principally driven by higher revenues, particularly from noninterest income. Net interest income grew 2% to $2,706,000 in the fourth quarter of 2015 from $2,659,000 in the year-ago quarter, with the growth primarily coming from higher average earning assets. Noninterest income, excluding security

NONINTEREST INCOME, EXCLUDING SECURITY GAINS, INCREASED 21%

NONINTEREST EXPENSE DECLINED

TWELVE MONTHS

HIGHLIGHTS:

EPS: $1.08 VS. $0.76

FROM 12/31/14 TO 12/31/15: DEPOSITS GREW 3%

ASSETS GREW 6%

NET LOANS GREW 12%

THE DEPOSIT COMPOSITION IMPROVED

EQUITY/ASSETS: 6.79%

NPAS-TO-ASSETS: 0.97%

NPAS WERE DOWN 50%

FROM THE YEAR-AGO DATE

RESERVES-TO-LOANS: 1.41%

EPS:

2014A: $0.76

2015A: $1.08

2016E: $1.10

gains (of which there were none in the current quarter) had stronger growth of 21% to $615,000 in the fourth quarter of 2015 from $509,000 in the year-ago quarter, and it had linked quarter growth of 14% from $538,000 in the third quarter of 2015. The increase in noninterest income was mainly due to higher service charges on deposits, which grew 7% from the year-ago quarter. In terms of noninterest expense, it totaled $2,543,000 in 2015's fourth quarter, which was down from $2,555,000 in the year- ago quarter, with much of that improvement due to the aforementioned favorable swing in net foreclosed real estate.

Earnings for the Year 2015 Increased 42%

For the twelve months ended December 31, 2015, net income available to common shareholders was

$1,416,000, or $1.08 per diluted share, up 42% from $994,000, or $0.76 per diluted share (after

$276,000 in dividend related charges) in the year-ago period. Net interest income was up 4%, while noninterest income excluding security gains increased 10% and noninterest expense was up less than 1%. Return on average equity for the past year was roughly 6.3%, while return on average assets was approximately 0.43%.

Loan Growth Continues to Build Momentum

Balance sheet growth from December 31, 2014 to December 31, 2015 was solid, with loans continuing to gain momentum, as can be seen from the adjacent chart.

Net Loans ($MM)

275

220

165

110

55

0

12/14 3/15 6/15 9/15 12/15

Deposits (where the Bank has focused more on mix than growth) expanded 3%, while total assets increased 6% and net loans grew 12% over this period. As was stated earlier, we were pleased to see the continued acceleration in loan growth that started mid-year 2015, particularly given how essential loan growth is for a bank's long-term earnings. The mix of deposits improved as well, as jumbo CDs (over

$100,000), which are typically a higher cost source of funds, decreased 23% from the year-ago date, and dropped to 19% of total deposits from 25% over this period. The Company continues to remain well capitalized, with shareholders'

equity of $23 million, or 6.79% of total assets, at December 31, 2015.

NPAs+90 Days Past Due ($MM)

8.5

6.8

5.1

3.4

1.7

0.0

12/14 3/15 6/15 9/15 12/15

Nonperforming Assets Declined Substantially at Year-End At December 31, 2015, KS Bancorp's nonperforming assets reached the lowest they have been in several years. Specifically, NPAs at year-end 2015 were $3.3 million, or 0.97% of total assets, which was down 35% from $5.1 million, or 1.55% of total assets, at September 30, 2015, and down 50% from $6.5 million, or 2.03% of total assets, at the year-ago date. NPAs consisted mainly of nonaccrual loans, which declined 42% from the year-ago date, and OREO, which was down 65%. The allowance for loan losses totaled

$3.5 million, or 1.41% of total loans at December 31, 2015, essentially unchanged from $3.5 million, or 1.56% of total loans, at December 31, 2014.

Projections Increased

Due to the solid fourth quarter results, we are increasing our earnings projections for 2016 to $1.4 million, or $1.10 per diluted share. Although this increase in earnings appears modest, it should be noted that 2015 earnings included about $0.06 per share (after tax) relating to gains in foreclosed real estate, whereas we have not included any 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 © 2015 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.