2 KS BANCORP, INC. – ANNUAL REPORT 2013 KS BANCORP, INC. – ANNUAL REPORT 2013 3

KS Bancorp, is the bank holding company for KS Bank, Inc., a state chartered savings bank headquartered in Smithfield, North Carolina. The Company’s stock is listed on the OTC Bulletin Board (www.otcbb.com) and the Pink Sheets (www.pinksheets.com) and trades under the symbol “KSBI”. KS Bancorp had 1,309,501 shares of common stock, which were held by approximately 188 stockholders of record, as of December 31, 2013. KS Bank was founded in 1924 in the Northeastern Johnston County Town of Kenly, North Carolina. Since its establishment in 1924, KS Bank has grown and evolved to meet the needs of the communities it serves. Currently, the Bank conducts its operations through nine full service branch offices that

The discussions included in this document and the documents referenced herein may contain forward looking statements within the meaning of the Private Securities Litigation Act of 1995, including Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. For the purposes of these discussions, any statements that are not statements of historical fact may be deemed to be forward looking statements. Such statements are often characterized by the use of qualifying words such as “expects,” “anticipates,” “believes,” “estimates,” “plans,” “projects,” or other statements concerning opinions or judgments of the Company and its management about future events. The accuracy of such forward looking statements could be affected by such factors as, including but not limited to, the financial success or changing conditions or strategies of the Company’s customers, fluctuations in interest rates, competitive product and pricing pressures within our markets, technological changes, changes in law and regulations, changes in fiscal, monetary, regulatory and tax policies, monetary fluctuations, actions of government regulators, the availability of capital and personnel and/or general economic or other conditions. You should not place undue reliance on forward looking statements. We undertake no obligation to revise or update these statements following the date of this report.

Contents Letter to Shareholders 3Financial Data 4 Community Involvement 6Retirees 8Leadership 9Board of Directors 9Shareholder Info 10Core Values &Mission Statement 11

are located in Kenly, Selma, Wilson, Clayton, Goldsboro, Garner, Smithfield, Wendell and Four Oaks, as well as a mortgage lending office located in Greenville, North Carolina. The Bank emphasizes being a community oriented financial institution that offers a broad range of traditional banking products and services, with personal service as its number one priority. KS Bank has been a member of the Federal Home Loan banking system since 1936. In addition, the Bank is a memberof the Federal Deposit Insurance Corporation, the American Bankers Association, the North Carolina Bankers Association, and the lndependent Community Bankers Association. At year-end 2013, KS Bankhad 88 employees.

Including the KS Mortgage Services location in Greenville, our offices can be found in five counties and ten communities.

Continuing to Help Our Customersand Communities Prosper and Grow

Dear Fellow Stockholders,

KS Bank was established April 28, 1924 when individuals who were to become Directors and Officers

of Kenly Building and Loan Association held their charter meeting. Throughout 2014 as we celebrate

and honor the past ninety years you will hear us use the line “…it all began with a home”. During

the early 1900s, banks did not make long term loans to provide funds for housing. In the fall of 1924

the Association had accumulated significant deposits to begin making home loans. Over the years the

business model has changed and expanded, but we are proud that, ninety years after those first efforts,

KS Bank is still supporting the growth of Johnston and surrounding counties.

KS Bancorp, Inc., the bank holding company for KS Bank, was established in late 1993 and has crossed the

twenty year mark on its journey. Journeys are marked by dates and accomplishments and, throughout

those ninety years, KS Bank has participated along with its customers in many achievements. The vision

and hard work by the men and women who nurtured KS Bank to this point continues today through

a bright motivated team who fully understand their responsibilities to both our customers and the

journey of KS Bank.

It’s doubtful that the original founders could have conceived of such coming advancements as space

flight or the iPhone. Likewise, they would not have dreamed that customers would deposit checks

through a computer sitting in their own office. Technology has changed many basic duties to accomplish

our day to day task, but it has not changed KS Bank’s core beliefs of trust, respect and honesty.

The entire team at KS Bank is committed to the responsibility of serving our customers in their journeys

toward sound financial growth. It has happened for ninety years, and you have our promise to continue

this journey with you and future generations.

Respectfully,

Harold T. Keen President/Chief Executive Officer

James C. Parker Chairman of the Board

To Our Shareholders, Customers and Friends

KS BANCORP, INC. – ANNUAL REPORT 2013 54 KS BANCORP, INC. – ANNUAL REPORT 2013

KS Bancorp, Inc. and Subsidiary Selected Financial Data

Financial Condition Data: Total assets Investments (1) Loans receivable, net Deposits FHLB advances/other borrowings Stockholders’ equity Book value per common share

Operating Data: Interest income Interest expense Net interest income Provision for loan losses Noninterest income Noninterest expense Income before income taxes Income tax (benefit) expense

Net (loss) income Dividends on preferred stock Accretion of discount on preferred stock Net Income available to common stockholders

Selected Other Data: Basic earnings (loss) per share Diluted earnings (loss) per share Dividends per share Return on avg assets Return on avg equity Avg equity to avg assets

Total risk based capital

2011

$322,932

98,000 195,370 246,464 50,181 24,316 $15.45

$15,057 4,850

10,207 1,483 1,574

10,461 (163) (573)

$410

(218) (38)

$154

$0.12 $0.12 $0.00 0.05%0.65%7.19%

15.94%

2010

$335,598

92,314 215,322 251,531 60,134 22,131 $13.78

$17,117 6,588

10,529 1,606 2,678

10,924 677

(516)

$1,193

(218) (35)

$940

$0.72 $0.72 $0.00 0.27%4.25%6.73%

14.72%

2009

$348,828

93,468 227,147 259,169

65,704 22,351 $14.00

$17,433 8,126 9,307 2,218 2,083

10,236 (1,064)

(854)

$(210)

(64) (12)

$(286)

$(0.22) $(0.22)

$0.06 -0.09%-1.42%6.15%

14.14%

(1) Includes interest-earning deposits, time deposits, investment securities, and Federal Home Loan Bank stock.

(In Thousands, Except Per Share Amounts)

2013

$305,395

92,082 193,642 230,083 48,463 24,338 $15.40

$12,585 2,965 9,620

161 2,315

10,459 1,315

266

$1,049

(218) (43)

$788

$0.60$0.60$0.00

0.26%3.18%8.04%

17.41%

2012

$314,939

94,079 196,855 243,996 43,404 25,322 $16.19

$13,676 3,846 9,830

207 2,620

11,479 764 (26)

$790

(218) (41)

$531

$0.41 $0.41 $0.00

0.17%2.12%7.90%

16.70%

Johnston Community College Small Business Center: Doug Cockrell, KS Bank Credit Analyst, teaches business and financial related classes offered by Johnston Community College’s Small Business Center. Doug has taught for the Small Business Center for several years. In 2013, he taught the classes entitled “So You Think You are Ready To Start Your Own Business” and “Financing Your Small Business”.

Smithfield Rescue Mission: Tracy McKinley (left), KS Bank Information Technology Manager, is pictured at the Smithfield Rescue Mission’sFun Run fundraiser. Tracy is a member of the Board of Directors and Technical Advisor for Smithfield Rescue Mission. The Smithfield Rescue Mission (SMR) was established in 1977 by Paul and Margie Olsen to extend a helping hand to homeless people. It is the only one of its kind in the Smithfield area reaching out to those in need from a physical, emotional, and spiritual approach. Pictured with Tracy is Andy Hale (center), Events Coordinator for the Mission, and Denise Elliott (right), KS Bank Executive Administrative Assistant, who also participated in the Fun Run.

Johnston Community College Foundation:Earl Worley, KS Bank COO(in middle), and Deb Pattison, KS Bank Director of Human Resources (far r ight) , are pictured with David Ford at the Neal Lancaster Golf Tournament and Auction benefitting the Johnston Community College Education Foundation. Mr. Worley and Ms. Pattison serve as members of the Board of Directors for the Foundation.

Kindness Shines Brightly Food Drive:Regina Smith (r ight), KS Bank Chief Financial Officer and Harbor House Board Member, is pictured with Ker i Chr i s tensen, Director of Harbor House, a domestic violence shelter for women and children. The bank gathered donations of food and clothing from employees and customers to give to several charitable organizations throughout our market areas. This event has become a tradition with the bank’s employees and is held during the holidays to help those in need.

Johnston County Economic Forum:Each February, participants at the Johnston County Economic Forum receive a forecast from the experts of what they think the upcoming year will bring in the housing industry. Pictured from left to right are Bernard Helm, Market Opportunity Research Enterprises; Harold Keen, KS Bank President/CEO; Donald Byrd, Johnston County Association of Realtors President; Sherry Penney-Phillips, Executive Director of the Johnston County Home Builders Association;Rick Hester, Johnston County Manager; and Ted Abernathy, Southern Growth Policies Board member.

Kindness Shines Brightly Food Drive:Each KS Bank department and branch collected nonperishable food before the holidays to donate to the local organization of their choice. In Goldsboro, Community Soup Kitchen received the food donations. Doricia Bention (third from the left) with the Community Soup Kitchen is pictured with the Goldsboro staff (left to right) including Karrie King, KS Bank Customer Service Representative; Dawn Skelton, KS Bank Financial Counselor; and Felicia Carter, KS Bank Customer Service Representative.

Johnston County Education Foundation:KS Bank sponsored a team in the Spelling Bee again this year benefitting the Johnston County Education Foundation. This year’s team dressed as the KS Bank Correction Facility “Chain Gang”. In support of their fel low co-workers, KS Bank employees contributed over $400 to the Foundation to help fund grants to Johnston County teachers for projects that enhance the students’ education. KS Bank employees pictured left to right are Denise Drewry, Customer Service Representative (Smithfield); Brandy Ward, e-Banking Team Leader; Susan Narron, Financial Counselor (Smithfield); and Cassy Massengill, Customer Service Representative (Selma). Harold T. Keen, President/CEO, of KS Bank (not pictured) serves on the Board of Directors for the Education Foundation.

Breakfast Before Business:KS Bank was among the sponsors for the Breakfast Before Business event in February 2013 hosted by Johnston Community College and Johnston County Chambers. The Johnston Community College Foundation recognized 37 individuals, businesses, and industries who contributed to the 30 for 30 fundraising campaign in celebration of the Foundation’s 30th Anniversary. Pictured (left to right) are Bill Clarke, KS Bank Commercial Relationship Manager (Smithfield); Ken Jones, KS Bank Board of Directors member; Kelly Aycock, KS Bank Relationship Manager (Selma); Sarah Moss, Clayton Office Manager; and Tammy Mitchell, KS Bank Business Development Officer.

Wilson County Farm City Week Breakfast:KS Bank was a sponsor of the Wilson County Farm City Week Breakfast in November. The bank honored Carroll Coleman with its sponsorship. Mr. Coleman retired in 2013 as a member of the KS Bank Board of Directors. Dr. Randy Woodson (on right), North Carolina State University Chancellor, spoke to the group of farmers, extention agents, and business representatives. In addition to his chancellor duties, Dr. Woodson is an internationally renowned plant molecular biologist specializing in reproductive processes in agricultural crops. Pictured with Dr. Woodson is Justin Keene, KS Bank Relationship Manager in Wilson.

Johnston County Festival of Trees: Smithfield branch staff designed and decorated a Christmas tree for Johnston County’s Festival of Trees event. Our theme this year was “An old fashioned Christmas” featuring rustic decorations. Bill Clarke, KS Bank Commercial Lender, is pictured decorating KS Bank’s tree. The Festival of Trees is a fundraiser benefitting Keep Johnston County Beautiful, a non-profit organization. Numerous trees are decorated and displayed prior to Christmas at the Medical Mall in Smithfield.

Wendell Rotary Club Food Drive:Wendell retail office teamed up with Wendell Rotary to collect nonperishable food to donate to local food banks. The Wendell Rotary Club set a goal to collect 1000 pounds of food and KS Bank employees and customers donated a significant portion of that goal. Pictured with Stacy Bradfield, KS Bank Financial Counselor, is Bruce Lynch, member of Wendell Rotary Club. The food drive is a continual project for the Wendell Rotary Club and for Wendell KS Bank.

First 2000 Days – Early Investment A LIFETIME OF RESULTS: KS Bank, along with Johnston Community College, Johnston County Schools and The Partnership for Children sponsored a Business Briefing In May 2013. The briefing focused on the direct correlation between a child’s first years of life and the contributions he or she will make to society later as an adult. Pictured left to right are Regina Smith, KS Bank CFO/Partnership For Children Board Member; Lisa Brogdon, KS Bank Board of Directors member/Partnership For Children Board Chairman; Ted Abernathy, Southern Growth Policies Board and keynote speaker for the Business Briefing; Earl Worley, KS Bank COO; and Dwight Morris, Director of Partnership for Children of Johnston County.

Garner Chamber of Commerce Business Expo:KS Bank Garner staff participated in the Garner Chamber of Commerce Business Expo in June. Pictured left to right are Katie Leburg, KS Bank Customer Service Representative, and Jennifer Rogowski, Garner Office Manager.

Smithfield-Selma CWBN:Debra Morgan (second from the left), WRAL-TV news anchor, emceed a luncheon sponsored by the Smithfield-Selma Chamber Women’s Business Network (CWBN). Deb Pattison (not pictured), KS Bank Human Resources Director, is a member of the planning committee for CWBN. CWBN provides scholarships for women who want to further their education in a business field. Fundraisers include events for women like this luncheon featuring a forum of professional women. They discussed how they “take care of business” during the good times and the struggles, through all the positives and negatives that come with being a businesswoman. At this luncheon, the CWBN announced that they established a scholarship in honor of Earl Worley, KS Bank COO, in recognition of his service to the Chamber and CWBN as Chamber President in 2013. Pictured with Ms. Morgan is (left to right) Ashley Davis, KS Bank Credit Analyst; Tracie Worley, KS Bank Mortgage Lending Manager; and Denise Elliott, KS Bank Executive Administrator Assistant.

6 KS BANCORP, INC. – ANNUAL REPORT 2013 KS BANCORP, INC. – ANNUAL REPORT 2013 7

Community Involvement

KS BANCORP, INC. – ANNUAL REPORT 2013 98 KS BANCORP, INC. – ANNUAL REPORT 2013

Executive Management StaffSeated (left to right): Harold T. Keen, President/CEO; Earl W. Worley, Jr., Chief Operating OfficerStanding (left to right): Deborah A. Pattison, Director of Human Resources; H. Geoffery Kokiko,

Senior Retail Officer; Timothy N. Taylor, Chief Credit Officer; Regina J. Smith, Chief Financial Officer

Board of DirectorsSeated (left to right): Earl W. Worley, Jr., Director; Gordon C. Woodruff, Vice-Chairman;

James C. Parker, Chairman; Lisa H. Brogdon, DirectorStanding (left to right): Directors, B. Kenneth Jones II; Eugene D. Jackson; Sidney E. Sauls;

R. Edward Scott Jr.; Harold T. Keen

A Tribute to Our New Retirees Leadership

Kevin Joseph Jorgenson Kevin J. Jorgenson retired from KS Bank in January of 2013 after twenty years of service to our bank. Some of the most memorable events that Kevin was involved with during his tenure are establishing the bank as part of the secondary market for mortgages, setting the company up on a computer based system for employees, coordinating the conversion of our computers over to accommodate year 2000 changes, and setting the bank up on the internet. Kevin started his banking career in 1972 after serving four years in the Army where he reached the rank of Captain. He started his career at Raleigh Federal where he worked in several capacities and ultimately became responsible for twelve branches in Wake County. He served in various capacities at KS Bank including Branch Manager, Loan Department Manager, Compliance Officer, Computer Network Administrator, Mortgage Banking Manager, and Senior Lending Officer. Kevin’s greatest wish for KS Bank is” to remain independent, competitive, and profitable”. He stresses that our size is one of our best strengths because “we can adjust to fix something that’s broken”. His relationship with fellow employees is what he misses the most. “They are the greatest bunch to work with … caring, loving and hardworking. They are what I miss!” said Kevin recently. Time spent with family and friends, exercising at the local gym, and playing golf is what Kevin is enjoying in his retirement. He has five grandchildren with whom he loves to send time and for whom he decorates his yard with life-size Christmas decorations each year. Kevin admits that one of the best parts of his Christmas is seeing kids’ faces light up when they see his decorations!

Carolyn Morris Talton After 20 years of service to KS Bank, and 24 years in the banking industry, Carolyn M. Talton retired in January of 2013. As a Customer Service Representative, and ultimately Head Teller, for KS Bank, Carolyn saw many changes throughout the years. She started with KS Bank “just as we were switching over to computers and suddenly information was at your fingertips!” recalls Carolyn. She remembers how thrilled customers were to have their balances printed on the passbooks they used to track their savings accounts. When asked “What would you tell younger tellers today who are just starting their careers?”, she quickly responds with “have a lot of patience with older customers, be ready for change, be patient with your career, learn all you can, and banking is a wonderful opportunity for the future.” Her wish for KS Bank is to add more branches, but stay the community bank that cares about their customers’ financial needs. In her retirement, Carolyn stills maintains the friendships she established with current employees as well as former employees because “They are family!” She also enjoys spending more time with her family including her three boys and her five grandchildren. She says that being “grandma” is the best job she has ever had!

Ted Gilbert Godwin In December of 1971 when Ted G. Godwin started his banking career at First Union in Wilson, NC, he had no idea that forty-one years later he would finish his banking career in April of 2013 as City Executive for KS Bank in the same town of Wilson, NC. In between, he served the communities of Southern Pines, New Bern, Smithfield and Kenly as a banking professional and “enjoyed every minute of it”. Ted recalls many changes throughout his time as a banker. He describes changes in technology used by banks as “both good and bad”; regulatory requirements as “always increasing and growing more detailed”; and customers as “relying more heavily on electronic banking methods than coming into the bank to develop relationships with their bankers”. Ted may have retired from his banking career, but he has hardly retired from being busy! Hunting in Alaska, Colorado and Ohio as well as serving his first term as Johnston County Commissioner and spending time at his mountain home has filled his time since retirement. Although he loves having more time to spend with his wife, sons and four grandchildren, Ted misses his customers and staff at KS Bank and the opportunity to be a part of their lives on a regular basis. His wish for the bank is for “markets to normalize, profits to grow stronger and the bank to continue to thrive as a strong community bank.”

A. Carroll Coleman, Director Emeritus Carroll Coleman retired from KS Bank Board of Directors after twenty-two years of service to the Bank. In 1998, Mr. Coleman became a member of the Board after serving seven years as an advisory board member for the Wilson Branch. He grew up in the Rock Ridge community of Wilson County and retired as director and President of P.L. Woodard in Wilson. In his retirement, Mr. Coleman has managed farm land in six different counties for landowners who live from New York to California. He keeps his own farms maintained and rides the trails near his Rock Ridge home on his Kawasaki “Mule”, a retirement gift for himself. In addition, he enjoys reading books and trade magazines and spending time with his wife, children and grandchildren. Instilling a love for “farming” and the land in his grandchildren is important to him and his family. In a 2009 interview, Mr. Coleman said “I believe there will always be a place in the financial industry for community banks. As long as we maintain a cautious, but positive attitude toward the growth of the bank, I believe KS Bank will remain strong well into the future.”

KS BANCORP, INC. – ANNUAL REPORT 2013 1110 KS BANCORP, INC. – ANNUAL REPORT 2013

Local FocusAlthough the Company is publicly traded, we want to continue to be owned and controlled by local shareholders who share the Company’s commitment to the community.

Create Win-Win for Customer & BankWe build and maintain personal relationships that are mutually beneficial. Through honesty and integrity, we earn the trust of our customers. We know our customers’ names and understand what is really important to them.

Learn for LifeAlthough employees are important for any business, this is especially true in community banking. Our success is dependent on the experience and expertise of our employees. We provide many opportunities for growth and personal development to staff members who are committed to serving our customers.

Make a Difference at Work & In Our CommunitiesWe invest our time and resources, both individually and organizationally, in the local community. We are committed to helping our communities grow and improving the quality of life for local residents.

Always Do The Right ThingOur success is dependent upon our ability to work together as a team. We value cooperation and collaboration. Our commitment to trust, relationships and personal service must extend to our interactions with each other.

Work with Focus & 100% EngagementWe want to develop existing relationships and continue to expand our locations and services into more communities. In order to do this, we need to recognize and adapt to the changing needs of our customers and communities.

ProfitabilityIn order for us to fulfill our commitment to each of the preceding values, we must continue to increase our profitability. This goal will require a focus on efficiency and innovation.

Core Values OurMissionWe are a community bank that:

• builds personal relationships by providing exceptional customer service

• sustains profitable growth that creates value for our shareholders

• contributes to the development of the communities we serve

• fosters a culture of professional growth and personal fulfillment for our employees

OurVisionEvery customer refers a new customer

Annual MeetingThe Annual Shareholder’s Meeting will be held on May 22, 2014 at 7:00 PM in the Corporate Office at 1031 North Brightleaf Blvd inSmithfield, North Carolina.

Corporate Information1031 N Brightleaf BlvdSmithfield, NC 27577919-938-3101 919-938-2681 (Fax)http://www.ksbankinc.com

Annual ReportA copy of KS Bancorp’s AnnualReport can be furnished withouta charge by writing to:Regina J. Smith, CFO/SVPKS Bank, Inc. P.O. Box 661 Smithfield, NC 27577

Common StockThe Company had 1,309,501 shares of Common Stock outstanding, which were held by approximately 188 holders of record (excluding shares held in street name), as of December 31, 2013. The Common Stock was listed for quotation on the OTC Bulletin Board and the “Pink Sheets” at www.pinksheets.com and trades under the symbol KSBI.

Stock Transfer AgentShareholders needing information on stock-transfer requirement and lost certificates may write to:Broadridge Corporate Issuer Solutions Inc1717 Arch Street Suite 1300Philadelphia PA 19103

Independent Certified PublicAccountants for 2013:Dixon Hughes Goodman, LLC1003 Red Banks RdP.O. Drawer 20157Greenville, NC 27858

Special Legal CounselBrooks, Pierce, McLendon, Humphrey & Leonard, LLPP.O. Box 26000Greensboro, NC 27420

Photography Credit:Hardison Fine PortraitsPine Level, NCPhotos By Tracy McKinleySmithfield, NC

Graphic Design & Layout:CHO Design StudiosClint OverbyFour Oaks, NC

President/CEOHarold T. Keen

Chief Operating OfficerEarl W. Worley, Jr.

Chief Financial OfficerRegina J. Smith

Corporate SecretaryJoy B. WatsonDenise W. Elliott

Executive ManagementH. Geoffrey KokikoDeborah A. PattisonTimothy N. Taylor

BRANCH PERSONNELClayton BranchCharles MarcomSarah MossCarlene WilkinsTina Willis

Four Oaks Branch Chris Howell Gail McLambShelia BarefootMichelle Pearce

Garner BranchJohn KerrJennifer Rogowski Mary HumphriesStephanie Ryan

Goldsboro BranchDavid Barber Dawn SkeltonSheri BroughtonFelicia CarterKarrie King

Kenly BranchSarah Coley Melissa CurryKaren DavisShannon Kirby

Selma BranchKelly Aycock Emily LawhornCarolyn AllenCassy MassengillVicky Wall

Smithfield BranchBill ClarkeAshley DavisSusan NarronDenise DrewryAshley RodriguezJennifer Smith

Wendell BranchJeff Eddins Stacy BradfieldJulie CarrollMartha Strickland

Wilson BranchJustin Keene Kimberly ArizpeAlyshia WardTynisha Woodard

Roving TellersGladys LeeBrianna McMillianBrandy NorrisKaye Wood

MORTGAGE BANKINGTracie Worley Sarah Caldwell

Greenville OfficeChad AldridgeGreg Fader

ADMINISTRATIONAccountingRegina Smith Helen PollockDiana Whitehurst

Business DevelopmentTammy Mitchell

Credit AdministrationTimothy N. Taylor Doug CockrellGreta EdwardsBlair HesterTammy OldhamJohn Parker

Director of Operations Linda Holloman

Deposit OperationsWendy Langston Peggy FitzgeraldCandy JohnsonTed MorganElisabeth RhoadesMack WardDeborah Whaley

E-Banking Brandy Ward

Loan OperationsKaren AycockCandace BennettCrystal BoswellConnie BrownWanda DanielsTessa FoisterJessica MacDougallEmily Rhodes

Executive AdministratorDenise Elliott

Human ResourcesDeborah A. PattisonAngela HollandHeidi WatkinsJoy Watson

Information TechnologyTracy McKinley Cheryl CainGary Langston

Internal Auditor and ComplianceMarilyn Logan

MarketingMichele Grady