KS Bancorp, Inc. : Third Quarter 2013

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

www.equityresearch.com

SYMBOL: KSBI

TOTAL ASSETS: $304 MM HQ: SMITHFIELD, NC

CONTACT:

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

[phone]

3RD QUARTER HIGHLIGHTS:

EPS : $0.24 VS. $0.07

EPS WERE $0.14 AHEAD OF ESTIMATES

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 October 25, 2013

* EPS are diluted.

Background
KS Bancorp, Inc. is a Smithfield, North Carolina-based, single bank holding company with approximately $304 million in assets as of September 30, 2013. KS Bank, Inc., a state-chartered 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 servicing office in Greenville, NC. The Company emphasizes being a community-oriented financial institution and offers a broad range of traditional banking products and services. Currently, the Company's stock is traded on the over-the-counter bulletin board under the symbol "KSBI."
Third Quarter Earnings Exceeded Projections, Stock Price Has Begun Moving Up
KS Bancorp reported strong earnings growth for the third quarter of 2013, mainly due to excellent cost containment. Reflecting this earnings growth, profitability ratios increased significantly. Asset quality also continued to improve, and KS Bancorp's stock price, reflecting these positives, showed strength as well, increasing 18% since our last report. All in all, it was an excellent quarter.
In terms of specifics, net income available to common shareholders for the third quarter of 2013 was

$309,000, or $0.24 per diluted share, more than triple the earnings level of $91,000, or $0.07 per diluted share, in the year-ago quarter. (All figures are after approximately $65,000 in preferred dividend related charges.) We had expected the Company

NET INTEREST INCOME WAS ESSENTIALLY UNCHANGED

NONINTEREST INCOME GREW

8%, EXCLUDING SECURITIES GAINS

to report somewhat flat earnings of about $0.08 per share, mainly due to an assumption that expenses would remain fairly stable, as opposed to dropping as they did, so the results were well above expectations. Net interest income totaled $2,384,000 in 2013's third quarter, which was relatively unchanged compared to the year-ago quarter. Margins remained stable, and were 3.42% in 2013's third quarter, versus 3.43% in the year-ago quarter. Noninterest income (excluding minimal security gains in the year-ago quarter) was also lower in 2013's third quarter (it was down 8% to $525,000 in the third quarter

375

300

225

150

75

0

Net Income Available to Common

Shareholders ($Millions)

Q3 12 Q4 12 Q1 13 Q2 13 Q3 13

NONINTEREST EXPENSE WAS DOWN 18% FROM THE YEAR- AGO QUARTER AND 6% ON A

LINKED QUARTER BASIS

of 2013 from $568,000 in the year-ago quarter), mainly due to a drop in fees from presold mortgages. On the positive side, however, service charges, which accounted for 63% of noninterest income, increased 17% over this period.
As was mentioned in our opening comments, perhaps the most notable aspect of the quarter was the cost containment, as noninterest expense declined 18% to $2,382,000 in the third quarter of 2013 from
$2,911,000 in the year-ago quarter, and it also declined on a linked quarter basis by 6%. The majority of the expense decrease came from lower compensation and benefits, part of which related to the lower mortgage production alluded to earlier. This is one of the positive aspects of KS Bancorp's mortgage

NONINTEREST EXPENSE/AVERAGE ASSETS

operation, in that a good bit of the cost is variable. The drop in noninterest expense was particularly notable as a percentage of average assets, as total noninterest expense dropped to 3.10% (annualized) for the third quarter of 2013 from 3.71% in the year-ago quarter. Lastly, it was noteworthy that the Company achieved this increase in earnings despite an

ALSO IMPROVED

ALL OF THE KEY

unfavorable swing in the provision for loan losses,
which was $41,000 in the third quarter of 2013, versus a credit of $75,000 in the year-ago quarter. Pretax income before security gains, the provision and preferred dividend charges was $527,000 in 2013's third quarter, as compared to $56,000 in the third quarter of 2012. The strong improvement in earnings

PROFITABILITY RATIOS

Q3 12 Q3 13

ROAA (Bef. Pfd.) 0.20 0.49

ROAE (Bef. Pfd.) 2.53 6.07

ROACE (After Pfd.) 1.77 6.01

PROFITABILITY RATIOS IMPROVED

FIRST NINE MONTH

HIGHLIGHTS:

EPS: $0.48 VS. $0.31

NONINTEREST INCOME GREW

10% EXCLUDING SECURITY GAINS, WHILE NONINTEREST EXPENSE DECLINED 11%

led to notable increases in profitability ratios. Annualized return on average assets (before preferred charges) increased to 0.49% in the third quarter of 2013, up from 0.20% in the year-ago quarter, while annualized return on average total equity (before preferred charges) grew to 6.07% from 2.53% and annualized return on common equity (after preferred charges) increased to 6.01% from 1.77% over this period. All of these figures exceeded the peer group medians for the Company, which consisted of savings institutions in the Carolinas.
Earnings on a year-to-date basis were likewise excellent. Net income available to common shareholders increased 57% to $634,000, or $0.48 per diluted share, for the first nine months of 2013, compared to $405,000, or $0.31 per diluted share, in the year-ago period. This strong increase was achieved despite growth of 77% in the provision for loan losses. Net interest income increased 2%, noninterest income (excluding security gains) was up 10% and noninterest expense declined 11% over this period. Balance sheet growth has remained modest, which has helped the Bank to maintain a strong capital position. At September 30, 2013, shareholders' equity was $24.2 million, or 7.97% total assets, compared to 8.08% at September 30, 2012. All of KS Bancorp's (and the Bank's) regulatory capital ratios exceeded the minimums to qualify for "well capitalized" status at September 30, 2013.
NPAs Continue to Trend Downward
KS Bancorp's asset quality continues to improve, as can be seen from the adjacent chart. NPAs totaled

$9.2 million, or 3.0% of total assets, at September 30,

NPAS WERE DOWN 77%

FROM THE YEAR-AGO DATE AND 3% FROM JUNE 30, 2013

NPAS-TO-ASSETS: 3.0%

RESERVES-TO-LOANS: 1.78%

2013, which was down 77% from $15.0 million, or 4.6%
of total assets, at the year-ago date and down 3% from
$9.5 million, or 3.1% of total assets, at June 30, 2013. The majority of NPAs were nonaccrual loans, which totaled $4.7 million, followed by OREO, which was $4.4 million at September 30, 2013. The allowance for loan losses was $3.5 million, or 1.78% of total loans, at September 30, 2013, which was up from $3.4 million,
1.73% of total loans, at the year-ago date. This continued improvement in asset quality should have positive implications for charge-offs and the provision for loan losses in future quarters.

18.0

15.0

12.0

9.0

6.0

3.0

0.0

NPAs + 90 Days Past Due ($MM)

9-12 12-12 3-13 6-13 9-13

EPS:

2012A: $0.41

2013E: $0.68

2014E: $0.74

Projections Increased
Due to the strong third quarter results, we are increasing projections for the year 2013 to net income available to common shareholders of $820,000, or $0.68 per diluted share, and for the year 2014 we are estimating KS Bancorp to earn $968,000, or $0.74 per share. These projections could change substantially depending on the economic and other conditions. For more information about KS Bancorp, please visit the Company's web site at www.ksbankinc.com or go to www.equityresearchservices.com.

ADDITIONAL INFORMATION UPON REQUEST

Copyright © 2013 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.