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: $312 MM HQ: SMITHFIELD, NC
CONTACT:
HAROLD T. KEEN, PRES. EARL W. WORLEY, JR., COO REGINA J. SMITH, CFO
(919) 938-3101
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 24, 2014
* EPS are diluted.
Background
KS Bancorp, Inc. is a Smithfield, North Carolina-based, single bank holding company with approximately $312 million in assets as of September 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."
3RD QUARTER HIGHLIGHTS:
RESULTS WERE MUCH BETTER THAN EXPECTED
EPS: $0.25 VS. $0.24
Third Quarter Earnings Exceeded Projections by $0.15 Per Share
KS Bancorp reported strong third quarter results. Although earnings posted a fairly modest increase over the year-ago figures, we had expected earnings to track somewhat closer to the first half levels, which implied an EPS of about $0.12. Instead, EPS came in at $0.25 per share. In addition to earnings being better than we had modeled, it was also a good quarter in that overall profitability ratios (such as ROAE) improved and that loan and deposit growth were good. Finally, we would note that the Company paid off about $2.2 million of the preferred stock from its Capital Purchase Program ("CPP"), which the Company had taken in August 2009. Given the relatively high cost of these funds, we viewed that as a clear positive as well.
In terms of profitability, net income available to common shareholders for the third quarter of 2014 was $331,000, or $0.25 per diluted share, up 7% from $309,000, or $0.24 per diluted share, in the year- ago quarter. (All figures are after preferred dividend related
NET INTEREST INCOME INCREASED 8%
NONINTEREST INCOME WAS IMPACTED BY LOWER FEES FROM PRESOLD MORTGAGES
NONINTEREST EXPENSE HAS DECLINED FOR THREE
charges of $83,000 in the third quarter of 2014 and $66,000 in the year-ago quarter.) Net interest income totaled
$2,584,000 in the third quarter of 2014, which was up 8% from $2,384,000 in the year-ago quarter, due both to improvement in margins and to higher average earning assets. Noninterest income (excluding security gains in
2014's third quarter) totaled $480,000, which was down from $525,000 in the year-ago quarter, with the drop being mainly due to a decline in fees from presold mortgages. On the expense side of things, noninterest expense grew a modest 4% to $2,483,000 in the third quarter of 2014 from
3.0
2 .5
2.0
1.5
1.0
0 .5
0.0
Noninte re s t Expe ns e ($M illions )Q3 13 Q4 13 Q1 14 Q2 14 Q3 14
CONSECUTIVE QUARTERS
$2,382,000 in the year-ago quarter. Moreover, noninterest expense was significantly lower than we
had projected and declined 5% on a linked quarter basis, a good deal of which has come from lower compensation and benefits, which has dropped for the past three consecutive quarters. Some of this improvement has been the result of lower commission income from the slowdown in the mortgage area. Lastly, we would note that KS Bancorp achieved the solid earnings growth despite an increase in the provision for loan losses to $59,000 in 2014's third quarter, from $41,000 in the year-ago quarter.
NINE MONTHS HIGHLIGHTS: EPS: $0.45 VS. $0.48
NET INTEREST INCOME INCREASED 4%
FROM SEPTEMBER 30, 2013
TO SEPTEMBER 30, 2014:
For the first nine months of 2014, net income available to common shareholders totaled $591,000, or
$0.45 per diluted share, versus $634,000, or $0.48 per diluted share, in the year-ago period. (Results are after preferred dividend related charges of $213,000 year-to-date for 2014 and $196,000 year-to- date for 2013.) Net interest income grew 4%, while noninterest income, excluding security gains, was down 12% and noninterest expense was up a modest 2%.
Net Loans Increased 13%, Deposit Composition Improved
Balance sheet growth was led by loans, which increased 13% from September 30, 2013 to September
30, 2014, while deposits were up 2% and total assets grew 3% over this period. The growth in loans was particularly encouraging, and reflects the
NET LOANS GREW 13%, DEPOSITS GREW 2% AND TOTAL ASSETS WERE UP 3%
HIGHER COST CDS DECLINED
AS A PERCENTAGE OF TOTAL DEPOSITS
9/30/13 9/30/14
Core Deposits * 52.5 57.1
Total CDs 47.6 42.9
* Includes savings and demand deposits
continuation of a rebound that began at the beginning of the year. It is also worth noting that KS Bancorp's deposit composition continues to improve, favoring lower cost core deposits. Specifically, core deposits increased 11% from September 30, 2013 to September
30, 2014, while higher cost certificates of deposit decreased 8% over this period. Moreover, as a
8% OVER THE PAST YEAR AND DECREASED AS A
PERCENTAGE OF TOTAL DEPOSITS
THE ROAE WAS BETTER THAN THE SE SAVINGS INSTITUTION PEER GROUP
MEDIAN
BASED ON THE DISCOUNT TO BOOK VALUE, THAT LEVEL OF ROACE IMPLIES AN ANNUAL RETURN OF NEARLY 12%
NPAS-TO-ASSETS: 2.48% RESERVES-TO-LOANS: 1.57%
EPS:
2013A: $0.60
2014E: $0.70
2015E: $0.80
percentage of total deposits, core deposits increased to 57% at September 30, 2014 from 52% at the
year-ago date, while CDs declined to 43% from 48% over this period. Shareholders' equity totaled
$23.1 million, or 7.40% of total assets, at September 30, 2014, and all of the Bank's regulatory capital ratios exceed "well capitalized" minimums.
KS Bancorp's ROACE and Discount to Book Value Could Lead to Compelling Returns Annualized return on average assets (before preferred charges) was 0.53% in the third quarter of 2014, while annualized return on average common equity (after preferred charges) was approximately
6.31%. There are two things we would note about these performance metrics. First, KS Bancorp's
return and average common equity (ROACE) was better than the median of 3.69% for the Company's peer group of Southeast savings institutions. Second, and perhaps more importantly from an investor's perspective, if the Company were to maintain an ROACE at this level and assuming the stock should ultimately trade close to book value, the implied annual return to shareholders at the current discount of 53% of book value is nearly 12% (6.31% divided by 0.53). Assuming the stock price returned to a premium to book value, the annual return could obviously be much higher.
NPAs Decreased 16% from the Year-Ago Date
Nonperforming assets continued to trend lower at September 30, 2014, with NPAs being substantially lower compared to the year-ago date and inching down slightly compared to June 30, 2014. NPAs totaled $7.7 million, or 2.48% of total assets, at September 30, 2014, which was down 16% from $9.2 million, or 3.00%, at September 30, 2013 and $7.8 million, or 2.52% of total assets, at June 30, 2014. NPAs consisted mostly of nonaccrual loans ($5.5 million) followed by OREO ($2.2 million). The allowance for loan losses was $3.5 million, or 1.57% of total loans at September 30, 2014, compared to
$3.5 million, or 1.78% of total loans, at the year-ago date.
Projections Increased
Due to the solid third quarter results, we are increasing our projections for 2014 to net income available to common shareholders of $911,000, or $0.70 per diluted share, up from our previous estimate of $0.40 per diluted share. For the year 2015, we are projecting earnings available to common shareholders' of approximately $1,045,000, or $0.80 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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