KS Bancorp, Inc. : Fourth 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: $305 MM HQ: SMITHFIELD, NC

CONTACT:

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

[phone]

4TH QUARTER HIGHLIGHTS: EPS: $0.12 VS. $0.10

THERE WAS A CREDIT FOR LOAN LOSSES VERSUS A PROVISION 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 January 30, 2014

* EPS are diluted.

Background
KS Bancorp, Inc. is a Smithfield, North Carolina-based, single bank holding company with approximately $305 million in assets as of December 31, 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 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."
Fourth Quarter Earnings Available to Common Stockholders Increased 21%
KS Bancorp reported solid results in the fourth quarter of 2013. Although earnings were a little below our projections, they were well above the year-ago figures and reflected progress in several areas. For example, there was a $60,000 credit for loan losses in the fourth quarter of 2013, versus a provision for loan losses of $82,000 in the year-ago quarter, reflecting ongoing progress in asset quality, as is discussed in more detail on the opposite page. Partly offsetting this favorable effect from the provision was a higher effective tax rate of 28% in 2013's fourth quarter, as compared to 11% in the year-ago quarter. Noninterest expense also reflected a drop from the year-ago quarter, though that was partly offset by softness in noninterest income. Several other accomplishments of the quarter were a sequential pick up in the balance sheet and improvement in the deposit mix. Reflecting the strong growth in earnings, KSBI stock has moved up 19% since our last report.

NET INTEREST INCOME WAS ESSENTIALLY UNCHANGED

NICE PROGRESS WAS MADE IN COST CONTAINMENT

THE EFFECTIVE TAX RATE WAS HIGHER VERSUS THE YEAR- AGO DATE

12 MONTHS HIGHLIGHTS: EPS: $0.60 VS. $0.41

Net income available to common shareholders in 2013's fourth quarter (after $66,000 in preferred dividends) was $153,000, or $0.12 per diluted share, up 21% from $126,000, or $0.10 per diluted share, in the year-ago quarter. Total revenues decreased compared to the year-ago quarter, although on a linked quarter basis, they increased. Reflecting stable margins, net interest income totaled
$2,470,000 in 2013's fourth quarter, which was essentially unchanged from $2,482,000 in the year-ago quarter and was up 4% from the third quarter of 2013. While net interest income was stable, core noninterest income reflected a slowdown in the mortgage area, and declined 20% to $603,000 in
2013's fourth quarter from $757,000 in the year-ago quarter. (We would note, however, that is was up
15% on a linked quarter basis.) Finally, progress was made in noninterest expense, which declined 4% in the fourth quarter of 2013 to $2,828,000 from $2,945,000 in the year-ago quarter. The majority of this decrease was from lower net foreclosed real estate costs.
Earnings Available to Common Stockholders for the Full Year 2013 Increased 48%
For the twelve months ended December 31, 2013, KS Bancorp reported net income available to common shareholders of $788,000, or $0.60 per diluted share, which was up 48% (46% on an EPS basis) from $531,000, or $0.41 per diluted share, in 2012. As was the case with the quarterly results, cost containment was evident in the yearly results, offsetting declines in total revenues. Net interest

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

LINKED QUARTER BASIS

NONINTEREST EXPENSE WAS DOWN 9%

BALANCE SHEET GROWTH IS LIKELY TO REMAIN MODEST

income in 2013 was down 2% to $9,619,000 from $9,830,000 in the year 2012, while noninterest income, excluding security gains, declined less than 1% to $2,177,000 from $2,183,000 over this period. Noninterest income was affected by softness in mortgage income (gains on presold mortgages were down 34% to $481,000 in 2013 from $730,000 in 2012), although solid increases in service charges and other income offset some of this softness. Finally, earnings benefitted from good cost containment, which was evidenced by a 9% drop in noninterest expense, as well as a lower provision for loan losses. The provision for loan losses was $161,000 in 2013, versus $207,000 in the year 2012, while noninterest expense was $10,459,000 in 2013, down approximately $1.0 million from
$11,479,000 in 2012.
Sequential Growth in Assets and Net Loans, Deposit Mix Improved

Most areas of the balance sheet had modest declines from December 31, 2012 to December 31, 2013, though encouragingly, both assets and net loans had modest sequential growth. While balance sheet growth is likely to remain modest, the

CORE DEPOSITS INCREASED AS A PERCENTAGE OF TOTAL DEPOSITS…

…WHILE HIGHER COST CDS DECLINED AS A PERCENTAGE

OF DEPOSITS

KS BANCORP DEPOSIT MIX ($MM)

Percentage of Total

12/31/12 12/31/13 12/31/12 12/31/13

Core Deposits 179.4 178.5 73.5% 77.6% CDs > $100k 64.6 51.6 26.5% 22.4%

Total Deposits 244.0 230.1 100.0% 100.0%

.

Company continues to do a good job lowering its funding costs by shifting the deposit mix to less expensive funding sources. For example, total certificates of deposit declined 16% over the past year, while Jumbo CDs (over $100,000) were down 20%. Moreover, CDs as a percentage of total deposits decreased to

EQUITY/ASSETS: 8.0%

46% at December 31, 2013 from 51% at December 31, 2012, while "core" deposits (i.e. savings,
checking and CDs less than $100,000) increased to 78% of total deposits from 74%, as can be seen in the adjacent table. From a capitalization standpoint, KS Bancorp remains in good shape, as shareholders' equity was $24.3 million, or 8.0% total assets, at December 31, 2013, unchanged from the year-ago date. Common equity to assets was 6.6% at December 31, 2013. All of KS Bancorp's (and the Bank's) regulatory capital ratios exceeded the minimums to qualify for "well capitalized" status at December 31, 2013.

NPAS WERE DOWN 77% FROM THE YEAR-AGO DATE AND 16% FROM SEPTEMBER

30, 2013

NPAS-TO-ASSETS: 2.51% RESERVES-TO-LOANS: 1.72%

NPAs Decreased 37%
Credit quality metrics are steadily improving. At the end of
2013, KS Bancorp's level of nonperforming assets totaled
$7.7 million, or 2.51% of total assets, which was down
37% from $12.1 million, or 3.86% of total assets, at the year-ago date and down 16% from $9.2 million, or 3.00% of total assets, at September 30, 2013. This NPAs-to-asset ratio was slightly better than the Company's Southeast savings institution peer group median of 2.63%. The majority of NPAs were nonaccrual loans, which were $4.7 million, with the remainder being OREO (totaling $2.9 million) at December 31, 2013. The allowance for loan losses was $3.4 million, or 1.72% of total loans, at year-end

15.0

12.0

9.0

6.0

3.0

0.0

NPAs + 90 Days Past Due ($MM)

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

2013, which was essentially unchanged from $3.4 million and 1.71% of total loans at the year-ago date.

EPS:

2012A: $0.41

2013A: $0.60

2014E: $0.62

Projections Lowered
Although there was solid earnings growth in the fourth quarter of 2013, we are lowering our EPS projection based on the weakness in the mortgage area and likely margin pressures. Specifically, we are projecting net income available to common shareholders of $816,000, or $0.62 per diluted share, in
2014, versus $0.74 per share projected previously. 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.