KS BANCORP, INC. 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: $309 MM HQ: SMITHFIELD, NC
CONTACT:
HAROLD T. KEEN, PRES. EARL W. WORLEY, JR., COO REGINA J. SMITH, CFO
(919) 938-3101
2ND QUARTER HIGHLIGHTS:
RESULTS WERE BETTER THAN EXPECTED
EPS: $0.12 VS. $0.15
THERE WAS NO PROVISION IN THE QUARTER VERSUS A PROVISION OF $95,000 IN THE YEAR-AGO QUARTER
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 July 24, 2014
* EPS are diluted.
Background
KS Bancorp, Inc. is a Smithfield, North Carolina-based, single bank holding company with approximately $309 million in assets as of June 30, 2014. 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 traditional banking products and services. Currently, the Company's stock is traded on the over-the- counter bulletin board under the symbol "KSBI."
Second Quarter Results Were a Good Deal Better Than Expected
Although reported earnings were lower in the second quarter of 2014 than in the year-ago quarter, they were actually a good deal better than we had anticipated. Moreover, most of the earnings shortfall relative to the year-ago figures was due to the slowdown in the mortgage area, and we do not see much more earnings pressure from this area going forward. Relative to our earnings estimate, the better than expected results came from several areas: net interest income was higher than we had modeled, there was no provision for loan losses (versus our projection of $25,000), and noninterest income and expense were both better than we had estimated. While we were gratified that the income statement items were stronger than anticipated, there were other trends that were equally encouraging, one of the most significant being the improvement in loan growth. Finally, we would note that asset quality remained stable and that the Company's capital position inched up, reflecting the positive earnings but also an improvement in accumulated other comprehensive income (mainly comprised of unrealized gains/losses on available for sale securities).
Net income available to common shareholders in 2014's second quarter (after $66,000 in preferred dividends) was $158,000, or $0.12 per diluted share, versus $200,000, or $0.15 per diluted share, in the year-ago quarter. While net income available to common shareholders dropped 21%, it is important to note that the Company had a much higher effective tax
A HIGHER THAN NORMAL TAX RATE NEGATIVELY IMPACTED EPS; PRETAX INCOME ACTUALLY INCREASED
NET INTEREST INCOME
rate this quarter than in the year-ago quarter (29% versus 15%). In fact, pretax income in 2014's second quarter actually increased from the year-ago quarter, which we considered an achievement given the drop off that has occurred in the mortgage area, as shown in the adjacent chart. Net interest income rebounded from both the year-ago and preceding quarter, part of
300
250
200
150
100
50
Fees From Presold Mortgages ($000s)INCREASED 3%
which came from a drop in interest expense. KS
Bancorp has done an excellent job reducing its cost of funding, as interest expense has dropped on a linked quarter basis for the past consecutive 18 quarters.
0
Q4
'11
Q2
'12
Q4
'12
Q2
'13
Q4
'13
Q2
'14
While interest income has likewise been under pressure, the Bank has been growing average earning
NONINTEREST INCOME WAS DOWN 16% EXCLUDING SECURITY GAINS
NONINTEREST EXPENSE INCREASED 3% FROM THE YEAR-AGO QUARTER
FIRST HALF HIGHLIGHTS: EPS: $0.20 VS. $0.25
THE DROP IN MORTGAGE FEE INCOME MORE THAN OFFSET THE DROP IN THE PROVISION FOR LOAN LOSSES
LOAN GROWTH CONTINUES TO PICK UP
CAPITAL RATIOS ARE STRONG AND EXCEED PRE-CREDIT CRISIS LEVELS
assets to combat the yield pressures. The net result was that the Company achieved a 3% increase in net interest income to $2,466,000 in 2014's second quarter from $2,392,000 in the year-ago quarter. Also contributing to the earnings growth was the absence of a provision for loan losses, whereas the year-ago quarter included a provision of $95,000. The one area that was noticeably weak was noninterest income, which as was mentioned previously, continues to experience negative headwinds from the industry-wide slowdown in the mortgage area. The "good news" is that comparisons are going to become much easier in this area going forward. Finally, noninterest expense was $2,617,000 in the second quarter of 2014, up 3% from $2,532,000 in the year-ago quarter but down 2% from
$2,660,000 in the first quarter of 2014.
Earnings for the first half of the year likewise were better than expected but were affected by the slowdown in the mortgage area. Net income available to common shareholders was $259,000, or
$0.20 per diluted share, in the first half of 2014, versus $325,000, or $0.25 per diluted share, in 2013's first half. Although the provision for loan losses was much lower (zero in 2014's first half versus
$180,000 in 2013's first half), the drop in fees from presold mortgages was even more significant, leading to a slight decline in pretax earnings. As was the case with the quarterly earnings, a higher effective tax rate in 2014's first half contributed to the earnings decline.
Loan Growth Continues to Advance
As we mentioned earlier in this report, one of the more encouraging aspects of the quarterly performance was the ongoing pickup in loan growth. Specifically, gross loans increased 7% to $209 million from the year-ago level and were actually up 6% from the level at year-end 2013. Overall asset growth has been somewhat more subdued, reflecting that much of the loan growth has been funded through redeploying other earning assets, most notably investment securities, which obviously has favorable implications for yields. Deposits declined over the past year, reflecting management's decision to allow higher cost funds to roll off the books, though we expect future deposit trends to be flat to positive. The Company remains in excellent financial shape to maintain this growth, as KS Bancorp's equity-to-assets ratio was 8.1% at June 30, 2014, versus 7.9% at the year-ago date. (The tangible common equity-to-assets ratio was 6.7% versus 6.6% for the same respective dates.) For comparison purposes, before the credit crisis, KS Bancorp's common equity-to-assets ratio was around
5.5% to 6.0%.
NPAS REMAINED FAIRLY STABLE BUT IMPROVED FROM THE YEAR-AGO LEVEL
NPAS-TO-ASSETS: 2.52%
RESERVES-TO-LOANS: 1.62%
Asset Quality Has Been Holding Up Well
Asset quality has been relatively stable for the past few linked quarters, though year-over-year trends clearly remain favorable. Nonperforming assets ("NPAs") were
$7.8 million, or 2.52% of assets, at June 30, 2014, versus
$7.9 million, or 2.57% of total assets, at March 31, 2014 and $9.5 million, or 3.06% of total assets, at June 30,
2013. Although not shown on the graph, NPAs peaked in
late 2011 at more than $22 million, nearly three times the current level. KS Bancorp's reserve position also remains strong, as evidenced by the Company foregoing a provision this quarter. Specifically, the allowance for loan losses was $3.4 million, or 1.62% of total loans, at
18.0
15.0
12.0
9.0
6.0
3.0
0.0
NPAs + 90 Days Past Due ($MM)
Q4 12 Q2 13 Q4 13 Q2 14
June 30, 2014, versus $3.4 million (1.77% of loans) at June 30, 2013.
EPS:
2012A: $0.41
2013A: $0.60
2014E: $0.40
Projections Maintained
Even though second quarter earnings were better than expected, we are leaving our earnings projections for 2014 unchanged. Specifically, we are projecting net income available to common shareholders of $528,000, or $0.40 per diluted share. 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 © 2014 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.
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