KS Bancorp : Second Quarter 2016, July 22,2016

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

www.equityresearch.com

SYMBOL: KSBI

TOTAL ASSETS: $352 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 July 22, 2016

Price:	$13.56	EPS*	2014A:	$0.76	P/E 2014A:	17.8 x
52 Wk. Range:	$11.53 - $15.25	(FY: DEC)	2015A:	$1.08	2015A:	12.6 x
Div/Div Yld:	$0.08 / 0.6%	2016E:	$1.24	2016E:	10.9 x
Shrs/Mkt Cap:	1.3 mm / $18 mm	Book Value:	$18.76	Price/Book Value:	0.72 x

* EPS are diluted.

Background

KS Bancorp, Inc. is a Smithfield, North Carolina-based, single bank holding company with approximately $352 million in assets as of June 30, 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."

2ND

QUARTER HIGHLIGHTS:

Second Quarter Earnings Increased 61% and Exceeded Projections

Net Income ($000s)

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KS Bancorp reported excellent results for the second quarter of 2016. Earnings per share were well above our projections and net income increased 61% compared to the year-ago

EARNINGS SIGNIFICANTLY EXCEEDED OUR PROJECTIONS

EPS: $0.40 VS. $0.25

NET INTEREST INCOME GREW

7%

NONINTEREST INCOME INCREASED 44%, PARTLY DUE TO THE TRUST SERVICES DIVISION

quarter. Based on that strength, we are again increasing our earnings projections for the year 2016. Revenue growth was strong, especially noninterest income, and expenses were well contained. Moreover, asset quality continued to improve, maintaining a consistent and favorable trend that has existed for a couple of years. Not surprisingly, the Company's stock reflected this strong performance and is up 13% since our last report.

Net income was $527,000, or $0.40 per diluted share, in the second quarter of 2016, up from $327,000, or $0.25 per diluted share, in the year-ago quarter. Net interest income increased 7% to $2,773,000 in 2016's second quarter, compared to $2,596,000 in the year-ago quarter, essentially all of which was due to growth in average earning assets. Noninterest income had strong growth of 44% to $701,000 in the second quarter of 2016 from $486,000 in the year-ago quarter, with the majority of that growth

THE TREND IN NONINTEREST INCOME HAS BEEN QUITE IMPRESSIVE

COST CONTAINMENT HAS BEEN GOOD AS WELL

FIRST HALF HIGHLIGHTS:

EPS: $0.73 VS. 0.50

NONINTEREST INCOME INCREASED 45%, EXCLUDING MINIMAL SECURITY GAINS

FROM 6/30/15 TO 6/30/16: LOANS INCREASED 12%,

WHILE ASSETS AND DEPOSITS GREW 9%

EQUITY/ASSETS: 6.97%

ASSET QUALITY CONTINUES TO IMPROVE

NPAS-TO-ASSETS: 0.65% VS. 1.14% AT YEAR-AGO DATE

RESERVES-TO-LOANS: 1.39%

EPS:

2014A: $0.76

2015A: $1.08

2016E: $1.24

Trust Income Other Income

Presold Mortgages

Service Charges

Breakdownof Noninterest Income ($000s)

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coming from the Trust Services Division. As can be seen from the adjacent chart, which we are updating from our last report, KS Bancorp has done an excellent job building its sources of fee income over the past year. As was mentioned above, earnings also benefitted from excellent cost containment, as noninterest expense increased less than 1% to

$2,622,000 in the second quarter of 2016 from

$2,619,000 in the year-ago quarter. Reflecting the continued improvement in asset quality, there was no provision for loan losses in either quarter.

Earnings for the First Half of 2016 Increased 48%

For the first six months of 2016, KS Bancorp had net income of $962,000, or $0.73 per diluted share, which was up 48% from $649,000, or $0.50 per diluted share, in the year-ago period. Net interest income increased 7% to $5,517,000 in the first half of 2016 from $5,159,000 in the year-ago period, while noninterest income, excluding minimal securities gains, was up a solid 45% to $1,351,000 from

$930,000 over this period. Noninterest expense increased a modest 4% to $5,358,000 in the first six months of 2016 from $5,169,000 in the year-ago period. There was a modest provision of $5,000 in the first half of 2016, versus no provision in the first half of 2015.

Balance Sheet Growth Was Good and Was Led by Loans, Which Increased 12%

Balance sheet growth was led by loans, which increased a strong 12% from June 30, 2015 to June 30, 2016. Total assets and deposits also had solid growth, increasing 9% from the year-ago date. Shareholders' equity was $24.6 million, or 7.0% of total assets, at June 30, 2016, which was up from

$22.2 million, or 6.9% of total assets, at the year-ago date. One thing that is helping to sustain the capital ratios is the improving return on average equity. In the most recent quarter, ROAE was 8.74%, up from 5.87% in the year-ago quarter.

Nonperforming Assets Decreased 38% From the Year-Ago Date

Nonperforming assets continue to decline, as can be seen in the adjacent chart. As of June 30, 2016,

NPAs+90 Days Past Due ($MM)

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NPAs totaled $2.3 million, or 0.65% of total assets, which was down 28% from $3.2 million, or 0.92% of assets, at March 31, 2016 and down 38% from $3.7 million, or 1.14% of total assets, at June 30, 2015. The majority of NPAs were nonaccrual loans ($2.1 million, down 28% from the year-ago date), followed by other real estate owned ($0.2 million, down 75% from the year-ago date). The allowance for loan losses totaled $3.6 million, or 1.39% of total loans as of June 30, 2016, which was essentially unchanged compared to $3.5 million, or 1.53% of total loans, as of June 30, 2015.

Projections Increased

In reflection of the excellent second quarter results, we are increasing our earnings projections for 2016. Specifically, we are estimating KS Bancorp will to earn $1.6 million, or $1.24 per diluted share, which is up from our previous estimate of $1.5 million, or $1.18 per share. Earnings in 2015 included about $0.06 per share (after tax) relating to gains in foreclosed real estate, whereas about $0.08 per share in OREO gains are included in our 2016 projections. These projections 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.