<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                             ----------------------

                                   FORM 10-KSB

                 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended: December 31, 2001
                                             -----------------

                        Commission file number: 000-21881
                                                ---------

                                KS BANCORP, INC.
                 (Name of small business issuer in its charter)

             North Carolina                              56-1842707
             --------------                              ----------
    (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

         207 West Second Street
             P. O. Box 219
         Kenly, North Carolina                             27542
         ----------------------                            -----
(Address of principal executive offices)                (Zip Code)

                                 (919) 284-4157
                                 --------------
                           (Issuer's telephone number)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

   Common Stock, no par value                          N/A
        (Title of class)            (Name of each exchange on which registered)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
  Yes   T      No ____
       ---

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_]

State issuer's revenues for its most recent fiscal year: $1,374,458.

State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: Common Stock, no par value -- $16.70 (based on the last price which the
stock was sold prior to March 13, 2002).

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:

   Common Stock, no par value                         1,139,213
   --------------------------
            (Class)                       (Outstanding at March 13, 2002)

                       DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
2001 (the "2001 Annual Report"), are incorporated by reference into Part I and
Part II.
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held on May 7, 2002 (the "Proxy Statement"), are incorporated by reference into
Part III.
Portions of the Registration Statement of KS Bancorp, Inc. on Form S-1,
Registration Statement No. 33-69522, dated September 25, 1993, as amended on
November 3, 1993,are incorporated by reference into Part III.

<PAGE>

Transitional Small Business Disclosure Format (Check one):  Yes ___  No  X
                                                                        ---

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

General

         Prior to December 29, 1993, KS Bank, Inc. (the "Bank"), formerly known
as Kenly Savings Bank, Inc., SSB, operated as a mutual North Carolina-chartered
savings bank. On December 29, 1993, the Bank converted from a North
Carolina-chartered mutual savings bank to a North Carolina-chartered stock
savings bank. In connection with the conversion, all of the issued and
outstanding capital stock of the Bank was acquired by KS Bancorp, Inc., a North
Carolina corporation (the "Company") that was organized to become the holding
company for the Bank. At that time, the Company had an initial public offering
of its common stock.

         The Company is a bank holding company registered with the Board of
Governors of the Federal Reserve System (the "Federal Reserve") under the Bank
Holding Company Act of 1956, as amended and the savings bank holding company
laws of North Carolina. The Company's executive office is located at 207 West
Second Street, Kenly, North Carolina. The Company's activities consist of owning
and operating the Bank, holding certain indebtedness outstanding from the Bank's
Employee Stock Ownership Plan (the "ESOP") and managing its investments. The
Company's principal sources of income are earnings on its investments and
interest payments received from the ESOP. In addition, the Company receives
dividends that are declared and paid by the Bank on its capital stock.

         The Bank was chartered in 1924. It has been a member of the Federal
Home Loan Bank system since 1936, and its deposits have been federally insured
since 1961. The Bank's deposits are insured by the Savings Association Insurance
Fund of the Federal Deposit Insurance Corporation (the "FDIC") to the maximum
extent permitted by law. As a North Carolina-chartered savings bank, the Bank is
regulated and examined by the Commissioner of Banks (the "Commissioner") and the
FDIC.

         The Bank conducts business through six offices in Kenly, Goldsboro,
Wilson, Garner, Clayton and Selma, North Carolina. At December 31, 2001, the
Company had consolidated total assets of $163.8 million, consolidated net loans
of $136.9 million, consolidated deposits of $128.8 million and consolidated
stockholders' equity of $16.7 million.

         The Bank is engaged primarily in the business of attracting retail
deposits from the general public and using such deposits to make mortgage loans
secured by real estate. The Bank makes mortgage loans secured by owner-occupied
and non-owner occupied residential real estate, loans secured by non-residential
properties, construction loans and equity line of credit loans. The Bank also
makes loans that are not secured by real property, such as loans secured by
pledged deposit accounts, and various types of secured and unsecured consumer
loans. The Bank's primary source of revenue is interest income from its lending
activities. The Bank's other major sources of revenue are interest and dividend
income from investments and mortgage-backed securities, interest income from its
interest-earning deposit balances in other depository institutions, and
transaction and fee income from its lending and deposit activities. The Bank's
major expenses are interest on deposits and borrowings and non-interest expenses
such as employee compensation and benefits, federal deposit insurance premiums,
data processing expenses and occupancy expenses.

         General economic conditions and related monetary and fiscal policies of
depository institution regulatory agencies, including the Federal Reserve, the
FDIC and the Commissioner, significantly influence the operations of depository
institutions, including the Bank. Interest rates on competing investments and
general market rates of interest influence deposit flow and the Bank's cost of
funds. The demand for financing of real estate and other types of loans, which
in turn are affected by the interest rates at which such financing may be
offered and other factors affecting local demand and availability of funds,
influence demand for the Bank's lending activities.

         At December 31, 2001, the Company and the Bank had a total of 52
full-time employees and 2 part-time

                                       2

<PAGE>

employees.

         The Company has no operations and conducts no business of its own other
than owning the Bank, holding the loan to the ESOP, and managing its
investments.

Lending Activities

         General. The Bank is engaged primarily in the business of attracting
deposits from the general public and using the deposits to make mortgage loans
secured by real estate. The Bank's primary source of revenue is interest and fee
income from its lending activities, consisting primarily of conventional first
mortgage loans secured by real property located in its primary market area. The
Bank also makes loans secured by multi-family and nonresidential properties,
construction loans, equity line loans, savings account loans and various types
of secured and unsecured consumer loans. Approximately 85% of the Bank's gross
loan portfolio is secured by real estate. On December 31, 2001, the Bank's
largest single outstanding loan had a balance of approximately $2.0 million. In
addition to interest earned on loans, the Bank receives fees in connection with
loan originations, loan servicing, loan modifications, late payments, loan
assumptions and other miscellaneous services.

         Loan Portfolio Composition. The Bank's net loan portfolio totaled
approximately $136.9 million at December 31, 2001, representing 84.0% of the
Bank's total assets. Conventional first mortgage loans accounted for 58.0% of
the Bank's gross loan portfolio, before net items, on December 31, 2001.
Construction loans and equity line loans represented 13.4% and 9.0%,
respectively, of the Bank's gross loan portfolio, before net items, on that
date. See Note 3 of the "Notes to Consolidated Financial Statements" in the
Company's 2001 Annual Report to Stockholders. As of December 31, 2001, 72.3% of
the loans in the Bank's gross loan portfolio, before net items, had adjustable
interest rates.

         The following table sets forth the time to contractual maturity of the
Bank's loan portfolio at December 31, 2001. Fixed rate loans are shown as due in
the period of contractual maturity. Loans with adjustable rates are shown as
being due at the end of the next upcoming adjustment period. Demand loans, loans
having no stated maturity and overdrafts are reported as due in one year or
less. Amounts in the table are net of loans in process and are net of
unamortized loan fees.

                                          More Than
                              One Yr.     1 Year to   More Than
                              Or Less      5 Years     5 Years      Total
                              -------      -------     -------      -----
                                             (In Thousands)

         Fixed rate           $  2,330    $ 14,108    $ 16,429    $ 32,867
         Adjustable rate        49,318      55,312          54     104,684

                              $ 51,648    $ 69,420    $ 16,483    $137,551

         The following table sets forth the dollar amount at December 31, 2001
of all loans maturing or repricing on or after December 31, 2002 that have fixed
or adjustable interest rates.

                              Fixed        Adjustable
                              Rates           Rates         Total
                              -----           -----         -----
                                        (In Thousands)

                            $30,537         $55,366       $85,903

         Although adjustable rate loans generally present less interest rate
risk to the Bank, they are generally considered to involve a greater degree of
credit risk than fixed rate loans because borrowers may have difficulty meeting
their payment obligations if interest rates and required payment amounts
increase substantially. Substantially all of the fixed-rate loans in the Bank's
mortgage loan portfolio have due on sale provisions allowing the Bank to declare
the unpaid balance due and payable in full upon the sale or transfer of an
interest in the property securing the loan.

                                       3

<PAGE>

         Conventional First Mortgages. At December 31, 2001, 58.0% of the Bank's
gross loan portfolio, before net items, was composed of conventional first
mortgage loans. The Bank's primary lending activity, which it intends to
continue to emphasize, is the origination of conventional first mortgage loans
to enable borrowers to purchase or refinance one-to-four family residential real
property. The Bank also makes conventional first mortgage loans secured by
multi-family residential property and by nonresidential real property.
Consistent with the Bank's emphasis on being a community-oriented financial
institution, it is and has been the Bank's strategy to focus its lending efforts
in its primary market area. Loans secured by multi-family residential and
nonresidential properties generally are larger than one-to-four family
residential loans and involve a greater degree of risk. Payments on these loans
depend to a large degree on results of operations and management of the
properties and may be affected to a greater extent by adverse conditions in the
real estate market or the economy in general.

         Construction Lending. The Bank makes various types of construction
loans primarily for the construction of single-family dwellings. On December 31,
2001, the aggregate gross outstanding balances of construction loans was
approximately $19.3 million, representing 13.4% of the Company's gross loan
portfolio, before net items. Some of these loans were made to investors who are
constructing properties on a speculative basis; others were made to persons who
are constructing properties for the purpose of occupying them. Loans made to
investors are generally "pure construction" loans which require the payment of
interest during the construction period and the payment of the principal in full
at the end of the construction period. Loans made to individual property owners
are both pure construction loans and "construction-permanent" loans which
generally provide for the payment of interest only during a construction period,
after which the loans convert to a permanent loan at fixed or adjustable
interest rates having terms similar to other permanent loans.

         Construction loans are generally considered to involve a higher degree
of risk than long-term financing secured by real estate that is already
occupied. A lender's risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at the
completion of construction and the estimated cost (including interest) of
construction. If the estimate of construction costs proves to be inaccurate, the
lender may be required to advance funds beyond the amount originally committed
in order to permit completion of construction. If the estimate of anticipated
value proves to be inaccurate, the lender may have security that has value
insufficient to assure full repayment. In addition, repayment of loans made to
builders to finance construction of properties is often dependent upon the
builder's ability to sell the property once construction is completed.

         Home Equity Lines of Credit. At December 31, 2001, home equity loans
totaled $13.0 million and comprised approximately 9.0% of the Bank's gross loan
portfolio, before net items. These loans are generally secured by subordinate
liens against residential dwellings. In many of these cases, the Bank holds the
first lien on the security. Home equity lines of credit have terms of up to 15
years and interest rates that are adjustable based upon prime rates. Because
these loans involve revolving lines of credit that can be drawn over a period of
time, the Bank faces additional risks associated with changes in the borrower's
financial condition. Because home equity loans have adjustable rates with no
rate caps (other than usury limitations), increased delinquencies could occur if
interest rate increases occur and borrowers are unable to satisfy higher payment
requirements. Home equity loans are generally limited so that amount of such
loans, along with any senior indebtedness, does not exceed 80% of the value of
the real estate security.

         Consumer Loans. During 1997 the Bank began originating consumer loans
and had $4.4 million in such loans outstanding on December 31, 2001. The Bank
makes both secured and unsecured consumer loans. Some consumer loans have fixed
interest rates; others have adjustable interest rates. Secured consumer loans
have personal property, such as automobiles, or real property as collateral.
Fixed rate consumer loans generally have shorter terms than adjustable rate
loans. The Bank intends to increase the amount of consumer loans in its
portfolio in future years.

         Origination and Sale of Loans. In years prior to 1994, the Bank
generally did not originate its loans with the intention that they would be sold
in the secondary market. Loans generally were not originated in conformity with
the purchase requirements of the Federal Home Loan Mortgage Corporation
("FHLMC") or Federal National Mortgage Association ("FNMA"). However, in January
1994 and October, 1994, the Bank opened a mortgage loan origination office in
Clayton, North Carolina and a mortgage loan origination office in Goldsboro,
North Carolina, respectively, and began originating loans in conformity with the
purchase requirements of the FHLMC and FNMA,

                                       4

<PAGE>

so that they could be sold in the secondary market if the Bank determined that
such sales were prudent. Nevertheless, the Bank continues to originate many
loans which satisfy its underwriting requirements which are tailored for its
local community but do not satisfy various requirements imposed by FHLMC and
FNMA. Such loans are not readily saleable in the secondary market and could be
sold only after the Bank incurred certain costs, such as costs for surveys and
title insurance and/or discounted the purchase price. The Bank has historically
found that its origination of nonconforming loans has not resulted in a high
level of nonperforming assets. In addition, these loans generally produce a
higher yield than are produced by loans which conform to the purchase
requirements of FHLMC and FNMA.

         Nonperforming Assets. When a borrower fails to make a required payment
on a loan and does not cure the delinquency promptly, the loan is classified as
delinquent. In this event, the normal procedure followed by the Bank is to make
contact with the borrower at prescribed intervals in an effort to bring the loan
to a current status. In most cases, delinquencies are cured promptly. If a
delinquency is not cured, the Bank normally, subject to any required prior
notice to the borrower, commences foreclosure proceedings. If the loan is not
reinstated within the time permitted for reinstatement, or the property is not
redeemed prior to sale, the property may be sold at a foreclosure sale. In
foreclosure sales, the Bank may acquire title to the property through
foreclosure, in which case the property so acquired is offered for sale and may
be financed by a loan involving terms more favorable than those normally
offered. Any property acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned until such time as it is sold or
otherwise disposed of by the Bank to recover its investment. As of December 31,
2001, the Bank recorded no real estate acquired in settlement of loans.

         The Bank's general policy is to place a loan on nonaccrual status when
the loan becomes 90 days delinquent as it establishes reserves for uncollected
interest. Such interest when ultimately collected is credited to income in the
period received. Interest on loans considered to be impaired is treated
similarly. Loans delinquent more than 90 days amounted to $2,394,308 and
$1,524,800 on December 31, 2001 and 2000, respectively. See Note 3 to "Notes to
Consolidated Financial Statements" in the Company's 2001 Annual Report to
Stockholders.

         The following table sets forth information with respect to
nonperforming assets identified by the Bank, including nonaccrual loans, real
estate owned and nonperforming investments in real estate at the dates
indicated. There are no troubled debt restructurings in the years presented.

<TABLE>
<CAPTION>
                                                                   At December 31,
                                                          --------------------------------
                                                            2001        2000        1999
                                                            ----        ----        ----
                                                               (Dollars in Thousands)
<S>                                                       <C>         <C>         <C>
Total nonaccrual loans delinquent 90 days or more         $  2,394    $  1,525    $    393
Real estate owned                                               17                      --
                                                                                  --------
  Total non-performing assets                             $  2,411    $  1,525    $    393
                                                          ========    ========    ========
Non-performing loans to total loans                           1.76%       1.14%        .34%
Non-performing assets to total assets                         1.47%       1.00%        .28%
Total assets                                              $163,890    $152,297    $138,948
Total loans                                               $136,977    $133,312    $116,363
</TABLE>

         Allowance for Loan Losses. In originating loans, the Bank recognizes
that credit losses will be experienced and that the risk of loss will vary with,
among other things, general economic conditions, the types of loans being made,
the creditworthiness of borrowers over the terms of the loans and, in the case
of secured loans, the quality of the security for the loans. Management's policy
is to maintain an adequate allowance for loan losses based on, among other
things, the Bank's historical loan loss experience, evaluation of economic
conditions and regular reviews of delinquencies and loan portfolio quality.
Specific allowances are provided for individual loans

                                       5

<PAGE>

when management believes the uncollectibility of the loan balance is confirmed.
The Bank's level of allowances for loan losses at December 31, 2001, 2000 and
1999 was $575,000, $489,000, and $392,000 respectively.

         Management continues to monitor the Bank's asset quality, to charge off
loans against the allowance for loan losses when appropriate and to provide
specific loss reserves when necessary. Although management believes it uses the
best information available to make determinations regarding the allowance for
loan losses, future adjustments may be necessary if circumstances change. In
addition, regulatory examiners may require the Bank to recognize changes to the
allowance for loan losses based on their judgments about information available
to them at the time of their examination.

         The following table describes the activity related to the Bank's
allowance for possible loan losses for the periods indicated.

                                                Year Ended December 31,
                                       ----------------------------------------
                                        2001     2000     1999     1998    1997
                                        ----     ----     ----     ----    ----
                                                   (In Thousands)
Balance, beginning of period           $ 489    $ 392    $ 359    $ 325   $ 302

Provision for loan losses                224      113       36       34      23

Charge-offs                             (138)     (10)      (3)       -       -
                                       -----    -----    -----    -----   -----
Balance, end of period                 $ 575    $ 489    $ 392    $ 359   $ 325
                                       =====    =====    =====    =====   =====

         The following table sets forth the composition of the allowance for
possible loan losses by type of loan at the dates indicated.

                                       6

<PAGE>

<TABLE>
<CAPTION>
                                                                        At December 31,
                                           -------------------------------------------------------------------------
                                                    2001                     2000                     1999
                                                    ----                     ----                     ----
                                                        Amount of                Amount of                Amount of
                                           Amount of    Loans to    Amount of    Loans to    Amount of     Loans to
                                           Allowance   Gross Loans  Allowance   Gross Loans  Allowance   Gross Loans
                                           ---------   -----------  ---------   -----------  ---------   -----------
                                                                  (Dollars in Thousands)
<S>                                        <C>         <C>          <C>         <C>          <C>         <C>
Mortgage loans:
  Residential 1-4 family                     $337         58.66%       $261        53.37%       $218        55.61%
  Residential multi-family                     20          3.45%         11         2.25%         10         2.55%
  Nonresidential real estate and other
     property                                  62         10.74%         56        11.45%         43        10.97%
  Home equity and property improvement         54          9.47%         65        13.29%         52        13.27%
  Construction                                 61         10.52%         49        10.03%         45        11.48%
                                             ----        -------       ----       -------       ----       -------

Total real estate loans                      $ 54         92.84%       $442        90.39%       $368        93.88%

Other loans                                    41          7.16%         47         9.61%         24         6.12%
                                             ----        -------       ----       -------       ----       -------

Total allowance for loan losses              $575        100.00%       $489       100.00%       $392       100.00%
                                             ====        =======       ====       =======       ====       =======

<CAPTION>
                                                    1998                     1997
                                                    ----                     ----
                                                        Amount of                Amount of
                                           Amount of    Loans to    Amount of    Loans to
                                           Allowance   Gross Loans  Allowance   Gross Loans
                                           ---------   -----------  ---------   -----------
<S>                                        <C>         <C>          <C>         <C>
Mortgage loans:
  Residential 1-4 family                     $197         54.78%       $212        65.02%
  Residential multi-family                     10          2.82%          8         2.53%
  Nonresidential real estate and other
     property                                  21          5.78%          8         2.46%
  Home equity and property improvement         61         17.00%         49        15.20%
  Construction                                 44         12.35%         43        13.17%
                                             ----        -------       ----       -------

Total real estate loans                      $333         92.73%       $320        98.37%

Other loans                                    26          7.27%          5         1.63%
                                             ----        -------       ----       -------

Total allowance for loan losses              $359        100.00%       $325       100.00%
                                             ====        =======       ====       =======
</TABLE>

                                       7

<PAGE>

Investment Securities

         Interest and dividend income from investment securities, including
mortgage-backed securities, generally provides the Bank's second largest source
of income after interest on loans. At December 31, 2001, the Bank's investment
portfolio totaled approximately $12.6 million and consisted of federal agency
securities, mortgage-backed securities and stock of the Federal Home Loan Bank
of Atlanta.

         As a member of the Federal Home Loan Bank of Atlanta, the Bank is
required to maintain an investment in stock of the Federal Home Loan Bank of
Atlanta equal to the greater of 1% of the Bank's outstanding home loans or 5% of
its outstanding advances from the Federal Home Loan Bank of Atlanta. No ready
market exists for such stock, which is carried at cost. As of December 31, 2001,
the Bank's investment in stock of the Federal Home Loan Bank of Atlanta was
$1,007,500.

         North Carolina regulations require the Bank to maintain a minimum
amount of liquid assets. The computation of liquidity allows the inclusion of
mortgage-backed securities and other instruments that are readily marketable,
including investments with maturities in excess of five years.

         See Note 2 of "Notes to Consolidated Financial Statements" in the
Company's 2001 Annual Report to Stockholders.

Deposits and Borrowings

         Deposits. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from loan principal repayments, interest payments, investment income and
principal repayments, interest from its own interest-earning deposits, advances
from the Federal Home Loan Bank of Atlanta and otherwise from its operations.
Loan repayments are a relatively stable source of funds while deposit inflows
and outflows may be significantly influenced by general interest rates and money
market conditions. On December 31, 2001, 2000 and 1999, the Bank's deposits
totaled $128.8, $120.1 million, and $116.5 million, respectively.

         The Bank attracts both short-term and long-term deposits from the
general public by offering a variety of accounts and rates. The Bank offers
savings accounts, negotiable order of withdrawal ("NOW") accounts, money market
demand accounts, non-interest-bearing accounts, and fixed interest rate
certificates with varying maturities. At December 31, 2001, 78.7% of the Bank's
deposits, consisted of certificate accounts, 3.4% consisted of regular savings
accounts, 7.3% consisted of NOW accounts, 6.1% consisted of money market
accounts and 4.4% consisted of noninterest-bearing transaction accounts. Of the
certificates of deposit described above, $32.0 million, or 25.0% had
denominations of $100,000 or greater. Deposit flows are greatly influenced by
economic conditions, the general level of interest rates, competition, and other
factors, including the restructuring of the thrift industry. The Bank's savings
deposits traditionally have been obtained primarily from its primary market
area. The Bank utilizes traditional marketing methods to attract new customers
and savings deposits, including print, television and radio media advertising
and direct mailings. The Bank does not advertise for deposits outside of its
local market area or utilize the services of deposit brokers.

         See Note 5 to the "Notes to Consolidated Financial Statements" in the
Company's 2001 Annual Report to Stockholders.

         Borrowings. Borrowings may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes. The Bank's principal
source of long-term borrowings are advances from the Federal Home Loan Bank of
Atlanta. The Federal Home Loan Bank system functions in a reserve credit
capacity for savings institutions. As a member, the Bank is required to own
capital stock in the Federal Home Loan Bank of Atlanta and is authorized to
apply for advances from the Federal Home Loan Bank of Atlanta on the security of
that stock and a floating lien on certain of its real estate secured loans and
other assets. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of an institution's net worth or on the
Federal Home Loan Bank of Atlanta's assessment of the institution's
creditworthiness. The Bank had $16.8 million outstanding borrowings at December
31, 2001.

                                       8

<PAGE>

Subsidiaries

         The Company has no subsidiaries other than the Bank. The Bank has no
subsidiaries.

Market Area

         The Bank's primary market area consists of Johnston, Wilson, Wayne and
Wake counties in North Carolina. This area includes a portion of the Raleigh,
North Carolina metropolitan area and areas south and west of Raleigh.

         Employment in the Bank's primary market area is diversified among
manufacturing, agricultural, retail and wholesale trade, government, services
and utilities. The economy in the primary market area is affected by the growth,
processing and sale of tobacco products. Legislative, regulatory and other
actions which negatively impact the demand for tobacco products could negatively
impact the Bank's performance.

Competition

         The Bank faces strong competition both in attracting deposits and
making real estate and other loans. Its most direct competition for deposits has
historically come from other savings institutions, credit unions and commercial
banks located in its primary market area, including large financial institutions
that have greater financial and marketing resources available to them. The Bank
has also faced additional significant competition for investors' funds from
short-term money market securities and other corporate and government
securities. The ability of the Bank to attract and retain savings deposits
depends on its ability to provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities. Based upon
comparative data as of June 30, 2001, the Bank had approximately 8.29% of the
deposits in Johnston County, North Carolina, approximately 1.73% of the deposits
in Wilson County, North Carolina, approximately 1.19% of the deposits in Wayne
County, North Carolina, and less than 1.0% of the deposits in Wake County, North
Carolina.

         The Bank experiences strong competition for real estate loans from
other savings institutions, commercial banks, and mortgage banking companies.
The Bank competes for loans primarily through the interest rates and loan fees
it charges and the efficiency and quality of services it provides borrowers.
Competition may increase as a result of the reduction of restrictions on the
interstate operations of financial institutions.

Supervision and Regulation

         Bank holding companies and state savings banks are extensively
regulated under both federal and state law. The following is a brief summary of
certain statutes and rules and regulations that affect or will affect the
Company and the Bank. This summary is qualified in its entirety by reference to
the particular statute and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and the Bank. Supervision, regulation
and examination of the Company and the Bank by the regulatory agencies are
intended primarily for the protection of depositors rather than shareholders of
the Company.

         Supervision and Regulation of the Company

         General. The Company was organized for the purpose of acquiring and
holding all of the capital stock of the Bank to be issued in the conversion. As
a savings bank holding company subject to the Bank Holding Company Act of 1956,
as amended, the Company is subject to certain regulations of the Federal
Reserve. Under the Bank Holding Company Act, a bank holding company such as the
Company, which does not qualify as a financial holding company, is prohibited
from engaging in activities other than banking, managing or controlling banks or
other permissible subsidiaries, furnishing services to or performing services
for its subsidiaries or engaging in any other activity which the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The Bank Holding Company Act also prohibits
the Company from acquiring direct or indirect control of more than 5% of the
outstanding voting stock or substantially all of the assets of any bank or
savings bank or merging or consolidating with another bank holding company or
savings bank holding

                                       9

<PAGE>

company without prior approval of the Federal Reserve.

         Additionally, the Bank Holding Company Act prohibits the Company from
engaging in, or acquiring ownership or control of, more than 5% of the
outstanding voting stock of any company engaged in a non-banking business unless
such business is determined by the Federal Reserve to be so closely related to
banking as to be properly incident thereto. The Bank Holding Company Act does
not place territorial restrictions on the activities of such non-banking related
activities.

         Similarly, Federal Reserve approval (or, in certain cases,
non-objection) must be obtained prior to any person acquiring control of the
Company. Control is conclusively presumed to exist if, among other things, a
person owns, controls, or has the power to vote 25% or more of any class of
voting stock of the holding company or controls in any manner the election of a
majority of the directors of the holding company. Control is presumed to exist
if a person owns, controls, or has the power to vote more than 10% of any class
of voting stock and the stock is registered under Section 12 of the Securities
Exchange Act of 1934 or the acquiror will be the largest shareholder after the
acquisition.

         There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by law and
regulatory policy that are designed to minimize potential loss to the depositors
of such depository institutions and FDIC insurance funds in the event the
depository institution becomes in danger of default or is in default. For
example, to avoid receivership of an insured depository institution subsidiary,
a bank holding company is required to guarantee the compliance of any insured
depository institution subsidiary that has become "undercapitalized" with the
terms of any capital restoration plan filed by such subsidiary with its
appropriate federal banking agency up to the lesser of (i) an amount equal to 5%
of the institution's total assets at the time the institution became
undercapitalized, or (ii) the amount which is necessary to bring the institution
into compliance with all acceptable capital standards as of the time the
institution initially fails to comply with such capital restoration plan. Under
a policy of the Federal Reserve with respect to bank holding company operations,
a bank holding company is required to serve as a source of financial strength to
its subsidiary depository institutions and to commit resources to support such
institutions in circumstances where it might not do so absent such policy. The
Federal Reserve under the Bank Holding Company Act also has the authority to
require a bank holding company to terminate any activity or to relinquish
control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon
the Federal Reserve's determination that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary of
the bank holding company.

         In addition, the "cross-guarantee" provisions of the Federal Deposit
Insurance Act, as amended, require insured depository institutions under common
control to reimburse the FDIC for any loss suffered as a result of the default
of a commonly controlled insured depository institution or for any assistance
provided by the FDIC to a commonly controlled insured depository institution in
danger of default. The FDIC may decline to enforce the cross-guarantee
provisions if it determines that a waiver is in the best interest of the deposit
insurance funds. The FDIC's claim for damages is superior to claims of
stockholders of the insured depository institution or any affiliate but is
subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institutions.

         As a result of the Company's ownership of the Bank, the Company is
registered under the savings bank holding company laws of North Carolina.
Accordingly, the Company is also subject to regulation and supervision by the
Commissioner.

         Financial Services Modernization Legislation. The Gramm-Leach-Bliley
Act (the "GLB Act") was signed into law on November 12, 1999 to remove barriers
separating banking, securities and insurance firms and to make other reforms.
All provisions of the GLB are effective now.

         Financial Affiliations. Title I of the GLB Act facilitates affiliations
among banks, securities firms and insurance companies. Financial organizations
may structure new financial affiliations through a holding company structure, or
a financial subsidiary (with limitations on activities and appropriate
safeguards). A bank holding company may now qualify as a financial holding
company and expand into a wide variety of services that are financial in nature,
provided that its subsidiary depository institutions are well-managed,
well-capitalized and have received a "satisfactory" rating on their last
Community Reinvestment Act (the "CRA") examination. A bank

                                       10

<PAGE>

holding company which does not qualify as a financial holding company under the
GLB Act is generally limited in the types of activities in which it may engage
to those that the Federal Reserve had recognized as permissible for a bank
holding company prior to the date of enactment of the GLB Act.

         National banks remain limited in the scope of activities they may
exercise directly within the bank, but an eligible national bank may have a
financial subsidiary that exercises many of the expanded financial services
authorized for a financial holding company. A national bank cannot engage in
merchant banking either directly or through a subsidiary, but a financial
holding company is authorized to have an affiliate company that engages in
merchant banking.

         State banks may have financial subsidiaries that, upon meeting
eligibility criteria, can engage in activities permitted for financial
subsidiaries of national banks.

         Functional Regulation. The GLB Act designates the Federal Reserve as
the overall umbrella supervisor of the new financial services holding companies.
The GLB Act adopts a system of functional regulation where the primary regulator
is determined by the nature of activity rather than the type of institution.
Under this principle, securities activities are regulated by the SEC and other
securities regulators, insurance activities by the state insurance authorities,
and banking activities by the appropriate banking regulator.

         Insurance. The GLB Act reaffirms that states are the regulators for
insurance activities of all persons, including acting as the functional
regulator for the insurance activities of federally-chartered banks. However,
states may not prevent depository institutions and their affiliates from
conducting insurance activities.

         Privacy. The GLB Act imposes restrictions on the ability of financial
services firms to share customer information with nonaffiliated third parties.
The GLB Act: (i) requires financial services firms to establish privacy policies
and disclose them annually to customers, explaining how nonpublic personal
information is shared with affiliates and third parties; (ii) directs regulatory
agencies to adopt standards for sharing customer information; (iii) permits
customers to prohibit ("opt-out") of the disclosure of personal information to
nonaffiliated third parties; (iv) prohibits the sharing with marketers of credit
card and other account numbers; and, (v) prohibits "pretext" calling. The
privacy provisions do allow, however, a community bank to share information with
third parties that sell financial products, such as insurance companies or
securities firms. The privacy provisions became effective November 2000, and
full compliance was required by July 1, 2001.

         Other. The GLB Act reforms the Federal Home Loan Bank System to provide
small banks with greater access to funds for making loans to small business and
small farmers. Also, the GLB Act obligates operators of automated teller
machines to provide notices to customers regarding surcharge practices. The GLB
Act provides that CRA agreements between financial institutions and community
groups must be disclosed and reported to the public.

         Capital Adequacy Guidelines for Holding Companies. The Federal Reserve
has adopted capital adequacy guidelines for bank holding companies and banks
that are members of the Federal Reserve system and have consolidated assets of
$150 million or more. For bank holding companies with less than $150 million in
consolidated assets, the guidelines are applied on a bank-only basis unless the
parent bank holding company (i) is engaged in nonbank activity involving
significant leverage or (ii) has a significant amount of outstanding debt that
is held by the general public.

         Bank holding companies subject to the Federal Reserve's capital
adequacy guidelines are required to comply with the Federal Reserve's risk-based
capital guidelines. Under these regulations, the minimum ratio of total capital
to risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) is 8%. At least half of the total capital is required
to be "Tier I capital," principally consisting of common stockholders' equity,
non-cumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less certain goodwill items. The remainder ("Tier II
capital") may consist of a limited amount of subordinated debt, certain hybrid
capital instruments and other debt securities, perpetual preferred stock, and a
limited amount of the general loan loss allowance. In addition to the risk-based
capital guidelines, the Federal Reserve has adopted a minimum Tier I capital
(leverage) ratio, under which a bank holding company must maintain a minimum
level of Tier I capital to average total consolidated assets of at least 3% in
the case of a bank holding company which has the

                                       11

<PAGE>

highest regulatory examination rating and is not contemplating significant
growth or expansion. All other bank holding companies are expected to maintain a
Tier I capital (leverage) ratio of at least 1% to 2% above the stated minimum.

         Dividend and Repurchase Limitations. The Company must obtain Federal
Reserve approval in order to use more than 10% of its net worth to make stock
repurchases during any 12 month period unless the Company (i) both before and
after the redemption satisfies capital requirements for "well capitalized" state
member banks; (ii) received a one or two rating in its last examination; and
(iii) is not the subject of any unresolved supervisory issues. Although the
payment of dividends and repurchase of stock by the Company are subject to the
requirements and limitations of North Carolina corporate law, except as set
forth in this paragraph, neither the Commissioner nor the FDIC have promulgated
any regulations specifically limiting the right of the Company to pay dividends
and repurchase shares. The ability of the Company to pay dividends or repurchase
shares may be dependent upon the Company's receipt of dividends from the Bank.
The Bank's ability to pay dividends is limited.

         Capital Maintenance Agreement. In order to acquire control of the Bank,
the Company was required to execute a capital maintenance agreement whereby it
has agreed to maintain the Bank's capital in an amount sufficient to enable the
Bank to satisfy all regulatory capital requirements.

         Federal Securities Laws. The Company has registered its common stock
with the Securities Exchange Commission pursuant to Section 12(g) of the
Securities Exchange Act of 1934. As a result of such registration, the proxy and
tender offer rules, insider trading reporting requirements, annual and periodic
reporting and other requirements of the Securities Exchange Act of 1934, as
amended, are applicable to the Company.

         Supervision and Regulation of the Bank

         The following is a summary of certain statutes and regulations
applicable to the Bank but is not intended to be exhaustive and is qualified in
its entirety by reference to all particular statutory or regulatory provisions.
The business of state savings banks is subject to extensive regulation and
supervision under both federal state law.

         General. The Bank is an insured North Carolina-chartered savings bank
that is a member of the Federal Home Loan Bank system. Its deposits are insured
through the Savings Association Insurance Fund of the FDIC, and it is subject to
supervision and examination by and the regulations and reporting requirements of
the FDIC and the Commissioner, which are its primary federal and state banking
regulators respectively.

         As an insured institution, the Bank is prohibited from engaging as
principal in any activity, or acquiring or retaining any equity investment of a
type or in an amount, that is not permitted for national banks unless (i) the
FDIC determines that the activity or investment would pose no significant risk
to the Savings Association Insurance Fund, and (ii) the Bank is, and continues
to be, in compliance with all applicable capital standards. A savings bank
generally is prohibited from investing more than 15% of its total assets in
business, commercial, corporate and agricultural loans and from directly or
indirectly acquiring or retaining any corporate debt security that is not of
investment grade (generally referred to as "junk bonds").

         Subject to limitation by the Commissioner, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity that is
permitted to federally-chartered institutions. However, a North
Carolina-chartered savings bank cannot invest more than 15% of its total assets
in business, commercial, corporate and agricultural loans. In addition to such
lending authority, North Carolina-chartered savings banks are authorized to
invest funds, in excess of loan demand, in certain statutorily permitted
investments, including but not limited to (i) obligations of the United States,
or those guaranteed by it; (ii) obligations of the State of North Carolina;
(iii) bank demand or time deposits; (iv) stock or obligations of the federal
deposit insurance fund or a Federal Home Loan Bank; (v) savings accounts of any
savings institution as approved by the board of directors; and (vi) stock or
obligations of any agency of the State of North Carolina or of the United States
or of any corporation doing business in North Carolina whose principal business
is to make education loans.

         In addition, the Bank is subject to various regulations promulgated by
the Federal Reserve including, without limitation, Regulation B (Equal Credit
Opportunity), Regulation D (Reserves), Regulation E (Electronic Fund Transfers),
Regulation O (Loans to Executive Officers, Directors and Principal
Shareholders), Regulation Z

                                       12

<PAGE>

(Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings).

         The FDIC and the Commissioner have broad powers to enforce laws and
regulations applicable to the Bank. Among others, these powers include the
ability to assess civil money penalties, to issue cease and desist or removal
orders, and to initiate injunctive actions. In general, these enforcement
actions may be initiated in response to violations of laws and regulations and
the conduct of unsafe and unsound practices.

         Transactions with Affiliates. Under current federal law, transactions
between the Bank and any affiliate are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of the Bank is any company or entity that
controls, is controlled by or is under common control with the savings bank. The
Company and the Bank are affiliates of each other. Generally, Sections 23A and
23B (i) limit the extent to which the Bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
the Bank's capital stock and surplus, and contain an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the Bank or the subsidiary
as those provided to a nonaffiliate. The term "covered transaction" includes the
making of loans or other extensions of credit to an affiliate, the purchase of
assets from an affiliate, the purchase of, or an investment in, the securities
of an affiliate, the acceptance of securities of an affiliate as collateral for
a loan or extension of credit to any person, or issuance of a guarantee,
acceptance or letter of credit on behalf of an affiliate.

         Further, current federal law has extended to savings banks the
restrictions contained in Section 22(h) of the Federal Reserve Act with respect
to loans to directors, executive officers and principal stockholders. Under
Section 22(h), loans to directors, executive officers and stockholders who,
directly or indirectly, own more than 10% of any class of voting securities of a
savings bank, and certain affiliated entities of any of the foregoing, may not
exceed, together with all other outstanding loans to such person and affiliated
entities, the savings bank's loans-to-one borrower limit as established by
federal law (as discussed below). Section 22(h) also prohibits loans above
amounts prescribed by the appropriate federal banking agency to directors,
executive officers or stockholders who own more than 10% of a savings bank, and
their respective affiliates, unless such loan is approved in advance by a
majority of the disinterested directors of the board of directors of the savings
bank and the Company. Any "interested" director may not participate in the
voting. The Federal Reserve has prescribed the loan amount (which includes all
other outstanding loans to such person), as to which such prior board of
director approval is required, as being the greater of $25,000 or 5% of
unimpaired capital and unimpaired surplus (up to $500,000). Further, pursuant to
Section 22(h) the Federal Reserve requires that loans to directors, executive
officers, and principal stockholders be made on terms substantially the same as
offered in comparable transactions to other persons and not involve more than
the normal risk of repayment or present other unfavorable features. Section
22(h) also imposes additional limits on amounts a savings bank can loan to an
executive officer or director.

         FDIC Insurance Assessments. The Bank is also subject to insurance
assessments imposed by the FDIC. The FDIC currently uses a risk-based assessment
system that takes into account the risks attributable to different categories
and concentrations of assets and liabilities for purposes of calculating deposit
insurance assessments payable by insured depository institutions. The risk-based
assessment system categorizes institutions as "well capitalized," "adequately
capitalized" or "undercapitalized." These three categories are substantially
similar to the prompt corrective action categories (see "-Prompt Corrective
Action"), with the "undercapitalized" category including institutions that are
"undercapitalized," "significantly undercapitalized" and "critically
undercapitalized" for prompt corrective action purposes. Institutions also are
assigned by the FDIC to one of three supervisory subgroups within each capital
group. The particular supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal banking regulator and information which the FDIC determines to
be relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. An institution's insurance assessment rate then is
determined based on the capital category and supervisory subgroup to which it is
assigned. Under the risk-based assessment system, there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates (ranging from zero to 31 basis points) are
applied. In addition, the Bank pays premiums assessed against all banks based on
their deposit levels to service debt on bonds issued to recapitalize the deposit
insurance funds.

         An institution's deposit insurance may be terminated by the FDIC upon a
finding that the institution has

                                       13

<PAGE>

engaged in unsafe and unsound practices, is in an unsafe or unsound condition,
or has violated any applicable law, regulation, rule, order, or condition
imposed by the FDIC.

         Community Reinvestment Act. Under the Community Reinvestment Act as
implemented by regulations of the FDIC, an insured institution has a continuing
and affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The Community Reinvestment Act does not establish specific
lending requirements or programs for financial institutions, nor does it limit
an institution's discretion to develop, consistent with the Community
Reinvestment Act, the types of products and services that it believes are best
suited to its particular community. The Community Reinvestment Act requires the
federal banking regulators, in connection with their examinations of insured
institutions, to assess the institutions' records of meeting the credit needs of
their communities, using the ratings of "outstanding," "satisfactory," "needs to
improve," or "substantial noncompliance," and to take that record into account
in its evaluation of certain applications by those institutions. All
institutions are required to make public disclosure of their Community
Reinvestment Act performance ratings. The Bank received a "satisfactory" rating
in its last Community Reinvestment Act examination.

         Net Worth and Capital Adequacy Requirements Applicable to the Bank. The
Bank is required to comply with the capital adequacy standards established by
state and federal laws and regulations. The Commissioner requires that savings
banks maintain net worth not less than 5% of its total assets. Intangible assets
must be deducted from net worth and assets when computing compliance with this
requirement. The Bank complied with the net worth requirements as of December
31, 2001.

         In addition, the FDIC has promulgated risk-based capital and leverage
capital guidelines for determining the adequacy of a bank's capital, and all
applicable capital standards must be satisfied for the Bank to be considered in
compliance with the FDIC's requirements. Under the FDIC's risk-based capital
measure, the minimum ratio ("Total Risk-Based Capital Ratio") of a bank's total
capital to its risk-weighted assets (including certain off-balance-sheet items,
such as standby letters of credit) is 8.0%. At least half of total capital must
be composed of common equity, undivided profits, minority interests in the
equity accounts of consolidated subsidiaries, qualifying non-cumulative
perpetual preferred stock, and a limited amount of cumulative perpetual
preferred stock, less goodwill and certain other intangible assets ("Tier 1
Capital"). The remainder may consist of certain subordinated debt, certain
hybrid capital instruments and other qualifying preferred stock, a limited
amount of loan loss reserves, and net unrealized holding gains on equity
securities ("Tier 2 Capital"). At December 31, 2001, the Bank's Total Risk-Based
Capital Ratio and its ratio of Tier 1 Capital to risk-weighted assets ("Tier 1
Risk-Based Capital Ratio") were 16.06% and 15.51%, respectively, which were well
above the FDIC's minimum risk-based capital guidelines.

         Under the FDIC's leverage capital measure, the minimum ratio (the
"Leverage Capital Ratio") of Tier 1 Capital to total assets is 3.0% for banks
that meet certain specified criteria, including having the highest regulatory
rating. All other banks generally are required to maintain an additional cushion
of 100 to 200 basis points above the stated minimum. The FDIC's guidelines also
provide that banks experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
levels without significant reliance on intangible assets, and the FDIC has
indicated that it will consider a bank's "Tangible Leverage Ratio" (deducting
all intangible assets) and other indicia of capital strength in evaluating
proposals for expansion or new activities. At December 31, 2001, the Bank's
Leverage Capital Ratio was 9.96% which was well above the FDIC's minimum
leverage capital guidelines.

         Failure to meet the FDIC's capital guidelines could subject a bank to a
variety of enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking of
brokered deposits, and certain other restrictions on its business. As described
below, substantial additional restrictions can be imposed upon FDIC-insured
depository institutions that fail to meet applicable capital requirements. See
"- Prompt Corrective Action." The FDIC also considers interest rate risk
(arising when the interest rate sensitivity of an institution's assets does not
match the sensitivity of its liabilities or its off-balance-sheet position) in
the evaluation of a bank's capital adequacy. Banks with excessive interest rate
risk exposure may be required to maintain higher levels of capital to protect
them against that exposure.

         Loans-To-One-Borrower.  The Bank is subject to the Commissioner's
loans-to-one-borrower limits. Under these limits, no loans and extensions of
credit to any borrower outstanding at one time and not fully secured

                                       14

<PAGE>

by readily marketable collateral shall exceed 15% of the net worth of the
savings bank. Loans and extensions of credit fully secured by readily marketable
collateral may comprise an additional 10% of net worth. These limits also
authorize savings banks to make loans-to-one-borrower, for any purpose, in an
amount not to exceed $500,000. A savings bank also is authorized to make
loans-to-one-borrower to develop domestic residential housing units, not to
exceed the lesser of $30 million or 30% of the savings bank's net worth,
provided that the purchase price of each single-family dwelling in the
development does not exceed $500,000 and the aggregate amount of loans made
pursuant to this authority does not exceed 150% of the savings bank's net worth.
These limits also authorize a savings bank to make loans-to-one-borrower to
finance the sale of real property acquired in satisfaction of debts in an amount
up to 50% of the savings bank's net worth.

         As of December 31, 2001, the largest aggregate amount of loans that the
Bank had to any one borrower was $2,270,000. The Bank does not believe that the
loans-to-one-borrower limits will have a significant impact on its business,
operations and earnings.

         Limits on Rates Paid on Deposits and Brokered Deposits. Regulations
promulgated by the FDIC place limitations on the ability of insured depository
institutions to accept, renew or roll-over deposits by offering rates of
interest which are significantly higher than the prevailing rates of interest on
deposits offered by other insured depository institutions in the depository
institution's normal market area. Under these regulations, "well capitalized"
depository institutions may accept, renew or roll-over such deposits without
restriction, "adequately capitalized" depository institutions may accept, renew
or roll-over such deposits with a waiver from the FDIC (subject to certain
restrictions on payments of rates) and "undercapitalized" depository
institutions may not accept, renew, or roll-over such deposits. The regulations
contemplate that the definitions of "well capitalized," "adequately capitalized"
and "undercapitalized" will be the same as the definitions adopted by the FDIC
to implement the corrective action provisions discussed below. See "-Prompt
Corrective Action." As of December 31, 2001, the Bank was considered "well
capitalized," and, thus, was not subject to the limitations on rates payable on
its deposits.

         Federal Home Loan Bank System. The Federal Home Loan Bank system
provides a central credit facility for member institutions. As a member of the
Federal Home Loan Bank of Atlanta, the Bank is required to own capital stock in
the Federal Home Loan Bank of Atlanta in an amount at least equal to the greater
of 1% of the aggregate principal amount of its unpaid residential mortgage
loans, home purchase contracts and similar obligations at the end of each
calendar year, or 5% of its outstanding advances (borrowings) from the Federal
Home Loan Bank of Atlanta. On December 31, 2001, the Bank was in compliance with
this requirement, with an investment in Federal Home Loan Bank of Atlanta of
$1,007,500.

         Reserve Requirements. Pursuant to regulations of the Federal Reserve
Board, all FDIC-insured depository institutions must maintain average daily
reserves against their transaction accounts equal to specified percentages of
the balances of such accounts. These percentages are subject to adjustment by
the Federal Reserve Board. Because the Bank's reserves are required to be
maintained in the form of vault cash or in a non-interest-bearing account at a
Federal Reserve Bank, one effect of the reserve requirement is to reduce the
amount of the Bank's interest-earning assets. At December 31, 2001, the Bank met
FDIC reserve requirements.

         Restrictions on Acquisitions. Federal law generally provides that no
"person," acting directly or indirectly or through or in concert with one or
more other persons, may acquire "control," as that term is defined in FDIC
regulations, of a state savings bank without giving at least 60 days written
notice to the FDIC and providing the FDIC an opportunity to disapprove the
proposed acquisition. Pursuant to regulations governing acquisitions of control,
control of an insured institution is conclusively deemed to have been acquired
by, among other things, the acquisition of more than 25% of any class of voting
stock. In addition, control is presumed to have been acquired, subject to
rebuttal, upon the acquisition of more than 10% of any class of voting stock.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings bank or prejudice the interests of its depositors; or
(iii) the competency, experience or integrity of the acquiring person or the
proposed management personnel indicates that it would not be in the interest of
the depositors or the public to permit the acquisitions of control by such
person.

                                       15

<PAGE>

         Liquidity. The Bank is subject to the liquidity requirements
established by the Commissioner. North Carolina law requires savings banks to
maintain cash and readily marketable investments of not less that 10% of the
savings bank's total assets. The computation of liquidity under North Carolina
regulation allows the inclusion of mortgage-backed securities and investments
that, in the judgment of the Commissioner, have a readily marketable value,
including investments with maturities in excess of five years. On December 31,
2001, the Bank's liquidity ratio, calculated in accordance with North Carolina
regulations, was approximately 12.6%.

         Prompt Corrective Action. Current federal law establishes a system of
prompt corrective action to resolve the problems of undercapitalized
institutions. Under this system, the FDIC has established five capital
categories ("well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized"). The FDIC
is required to take certain mandatory supervisory actions and is authorized to
take other discretionary actions with respect to institutions in the three
undercapitalized categories. The severity of any action taken will depend upon
the capital category in which an institution is placed. Generally, subject to a
narrow exception, current federal law requires the FDIC to appoint a receiver or
conservator for an institution that is critically undercapitalized.

         Under the FDIC's rules implementing the prompt corrective action
provisions, an insured, state-chartered savings bank that (i) has a Total
Risk-Based Capital Ratio of 10.0% or greater, a Tier 1 Risk-Based Capital Ratio
of 6.0% or greater, and a Leverage Capital Ratio of 5.0% or greater, and (ii) is
not subject to any written agreement, order, capital directive, or prompt
corrective action directive issued by the FDIC, is deemed to be "well
capitalized." A savings bank with a Total Risk-Based Capital Ratio of 8.0% or
greater, a Tier 1 Risk-Based Capital Ratio of 4.0% or greater, and a Leverage
Capital Ratio of 4.0%" or greater, is considered to be "adequately capitalized."
A savings bank that has a Total Risk-Based Capital Ratio of less than 8.0%, a
Tier 1 Risk-Based Capital Ratio of less than 4.0%, or a Leverage Capital Ratio
of less than 4.0%, is considered to be "undercapitalized." A bank that has a
Total Risk-Based Capital Ratio of less than 6.0%, a Tier 1 Risk-Based Capital
Ratio of less than 3.0%, or a Leverage Capital Ratio of less than 3.0%, is
considered to be "significantly undercapitalized," and a savings bank that has a
ratio of tangible equity capital to assets equal to or less than 2.0% is deemed
to be "critically undercapitalized." For purposes of these rules, the term
"tangible equity" includes core capital elements counted as Tier 1 Capital for
purposes of the risk-based capital standards (see "- Net Worth and Capital
Adequacy Requirements of the Bank"), plus the amount of outstanding cumulative
perpetual preferred stock (including related surplus), minus all intangible
assets (with certain exceptions). A savings bank may be deemed to be in a
capitalization category lower than indicated by its actual capital position if
it receives an unsatisfactory examination rating.

         A savings bank that is categorized as "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized," is required
to submit an acceptable capital restoration plan to the FDIC. An
"undercapitalized" savings bank also is generally prohibited from increasing its
average total assets, making acquisitions, establishing any branches, or
engaging in any new line of business, except in accordance with an accepted
capital restoration plan or with the approval of the FDIC. In addition, the FDIC
is given authority with respect to any "undercapitalized" savings bank to take
any of the actions it is required to or may take with respect to a
"significantly undercapitalized" savings bank if it determines that those
actions are necessary to carry out the purpose of the law.

         At December 31, 2001, the Bank had the requisite capital levels to
qualify as "well capitalized."

         Interstate Banking. The Bank Holding Company Act, as amended by the
interstate banking provisions of the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, permits adequately capitalized and managed
bank holding companies to acquire control of the assets of banks in any state.
Acquisitions are subject to antitrust provisions that cap at 10% the portion of
the total deposits of insured depository institutions in the United States that
a single bank holding company may control and generally cap at 30% the portion
of the total deposits of insured depository institutions in a state that a
single bank holding company may control. Under certain circumstances, states
have the authority to increase or decrease the 30% cap, and states may set
minimum age requirements of up to five years on target banks within their
borders.

                                       16

<PAGE>

         Subject to certain conditions and the states' right to opt out of
certain provisions, the interstate banking laws also permit interstate branching
by allowing a bank in one state to merge with a bank located in a different
state. Each state was allowed to accelerate the effective date for interstate
mergers by adopting a law authorizing merger transactions prior to June 1, 1997,
or it could "opt out" and thereby prohibit interstate branching by enacting
legislation to that effect prior to that date. The interstate banking laws also
permit banks to establish branches in other states by opening new branches or
acquiring existing branches of other banks, provided the laws of those other
states specifically permit that form of interstate branching. North Carolina has
adopted statutes which, under certain conditions, authorize out-of-state bank
holding companies and banks to acquire or merge with North Carolina banks and to
establish or acquire branches in North Carolina.

         Restrictions on Dividends and Other Capital Distributions. A North
Carolina-chartered stock savings bank may not declare or pay a cash dividend on,
or repurchase any of, its capital stock if the effect of such transaction would
be to reduce the net worth of the institution to an amount which is less than
the minimum amount required by applicable federal and state regulations.

         In addition, the Bank is not permitted to declare or pay a cash
dividend or repurchase any of its capital stock if the effect thereof would be
to cause its net worth to be reduced below the amount required for the
liquidation account established in connection with the Bank's mutual to stock
conversion.

         Other Federal and North Carolina Regulations. The federal banking
agencies, including the FDIC, have developed joint regulations requiring
disclosure of contingent assets and liabilities and, to the extent feasible and
practicable, supplemental disclosure of the estimated fair market value of
assets and liabilities. Additional joint regulations require annual examinations
of all insured depository institutions by the appropriate federal banking
agency, with some exceptions for small, well-capitalized institutions and
state-chartered institutions examined by state regulators, and establish
operational and managerial, asset quality, earnings and stock valuation
standards for insured depository institutions, as well as compensation standards
when such compensation would endanger the insured depository institution or
would constitute an unsafe practice.

         The grounds for appointment of a conservator or receiver for a North
Carolina savings bank on the basis of an institution's financial condition
include: (i) insolvency, in that the assets of the savings bank are less than
its liabilities to depositors and others; (ii) substantial dissipation of assets
or earnings through violations of law or unsafe or unsound practices; (iii)
existence of an unsafe or unsound condition to transact business; (iv)
likelihood that the savings bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of business; and (v)
insufficient capital or the incurring or likely incurring of losses that will
deplete substantially all of the institution's capital with no reasonable
prospect of replenishment of capital without federal assistance.

         North Carolina law provides a procedure by which savings institutions
may consolidate or merge, subject to approval of the Commissioner. The approval
is conditioned upon findings by the Commissioner that, among other things, such
merger or consolidation will promote the best interests of the members or
stockholders of the merging institutions. North Carolina law also provides for
simultaneous mergers and conversions and for supervisory mergers conducted by
the Administrator.

         Future Requirements. Statutes and regulations which contain
wide-ranging proposals for altering the structures, regulations and competitive
relationships of financial institutions are introduced regularly. Neither the
Company nor the Bank can predict whether or in what form any proposed statute or
regulation will be adopted or the extent to which the business of the Company
and the Bank may be affected by such statute or regulation.

                                       17

<PAGE>

ITEM 2.     PROPERTIES

       At December 31, 2001, the Company conducted its business from the Bank's
headquarters office and a branch office in Kenly, North Carolina, and its branch
offices in Selma, Goldsboro, Wilson, Clayton and Garner, North Carolina. In
addition, on June 27, 2001, the Company acquired two lots of real property in
Smithfield, North Carolina, and in late 2002, the Bank plans to open a new
branch there. Furthermore, the Board of Directors has approved the Smithfield
location as the site of the Bank's new headquarters office when construction of
the branch is completed. The following table sets forth certain information
regarding the Company's properties as of December 31, 2001. See Note 4 to the
Company's Consolidated Financial Statements included in the 2001 Annual Report
which is incorporated herein by reference. In the opinion of management, all
properties are in good condition and are adequate for their purpose.

<TABLE>
<CAPTION>
                                                          Net Book Value   Owned or
                                                          --------------   --------
          Address                                           of Property      Leased
          -------                                          ------------     -------
<S>                                                       <C>              <C>
          Kenly
                   Corporate offices:
                   207 West Second Street
                   Kenly, North Carolina 27542               $287,021        Owned

                   Branch facility:
                   200 North Church Street
                   Kenly, North Carolina 27542               $515,539        Owned
          Selma
                   115 West Anderson Street
                   Selma, North Carolina 27576               $118,634        Owned
          Wilson
                   206 N. Ward Boulevard
                   Wilson, North Carolina 27893              $432,423        Owned
          Clayton
                   11591 Highway 70 West                                     Owned
                   Clayton, North Carolina 27250             $779,448
          Goldsboro
                   1112 E. Ash Street
                   Goldsboro, North Carolina 27530           $221,356        Owned
          Garner
                   920 7th Avenue
                   Garner, North Carolina 27529              $      0        Leased
          Smithfield (Lot)
                   1017 North Brightleaf Blvd.
                   Smithfield, North Carolina 27577          $728,052        Owned
</TABLE>

       The total net book value of the Company's furniture and equipment on
December 31, 2001 was $580,461.

ITEM 3.     LEGAL PROCEEDINGS

       In the opinion of management, neither the Company nor the Bank is
involved in any pending legal proceedings other than routine, non-material
proceedings occurring in the ordinary course of business.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

       No matter was submitted to a vote of the Company's stockholders during
the quarter ended December 31, 2001.

                                       18

<PAGE>

                                     PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

       See the information under the sections captioned "Common Stock
Information" on Page 36 in the Company's 2001 Annual Report, which sections are
incorporated herein by reference. See "Item 1. BUSINESS--Supervision and
Regulation of the Bank-- Restrictions on Dividends and Other Capital
Distributions" above for regulatory restrictions that limit the ability of the
Bank to pay dividends to the Company.

ITEM 6.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

       See the information set forth under Item 1 above and the information set
forth under the section captioned "Management's Discussion and Analysis" on
pages 3 through 9 in the Company's 2002 Annual Report, which section is
incorporated herein by reference.

ITEM 7.    FINANCIAL STATEMENTS

       The consolidated financial statements of the Company set forth on pages
11 through 35 of the Company's 2001 Annual Report are incorporated herein by
reference.

ITEM 8.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

       On March 16, 2000, KS Bancorp, Inc. (the "Company") informed McGladrey &
Pullen, LLP that it would not be selected to serve as the Company's independent
auditor for the year ended December 31, 2000. McGladrey & Pullen, LLP was the
Company's independent auditor for the year ended December 31, 1999.

       Dixon Odom PLLC was selected as the Company's independent auditor for the
2000 fiscal year. Such selection was submitted to the Company's shareholders at
the 2000 annual meeting of shareholders and was ratified. The decision to change
independent auditors was based on several factors, including location and cost,
and was approved by the Audit Committee. McGladrey & Pullen, LLP's report on the
Company's financial statements for the fiscal years ended December 31, 1999 and
1998 did not contain an adverse opinion or disclaimer of opinion and was not
qualified or modified as to uncertainty, audit scope or accounting principles.
During such years and the subsequent interim period through the date of the
Company's Form 10-KSB for the year ended December 31, 1999, there were no
disagreements between the Company and McGladrey & Pullen, LLP on any matter of
accounting principles or practice, financial statement disclosure or auditing
scope or procedure which, if not resolved to the satisfaction of such auditor,
would have caused it to make reference to the subject of such disagreement in
connection with its reports. During the fiscal years ended December 31, 1999 and
1998 and the subsequent interim period through the date of the Company's Form
10-K for the year ended December 31, 1999, the Company did not consult Dixon
Odom PLLC, with regard to either: (i) the application of accounting principles
to a specified transaction, either completed or proposed; or the type of audit
opinion that might be rendered on the Company's financial statements, or (ii)
any matter that was either the subject of a disagreement or a reportable event.

                                    PART III

ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
           COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934.

       The information required by this Item regarding directors and executive
officers of the Company is set forth under the sections captioned "Proposal 1 -
Election of Directors - Nominees and Continuing Directors" on pages 7 and 8 of
the Proxy Statement for the 2002 Annual Meeting of Stockholders (the "Proxy
Statement") and "Proposal 1 - Election of Directors - Executive Officers" on
page 12 of the Proxy Statement, which sections are

                                       19

<PAGE>

incorporated herein by reference.

       The information required by this Item regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 is set forth under the section
captioned "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on
page 6 of the Proxy Statement, which is incorporated herein by reference.

ITEM 10.    EXECUTIVE COMPENSATION

       The information required by this Item is set forth under the sections
captioned "Proposal 1 - Election of Directors - Directors' Compensation" on
pages 10 and 11 and " - "Management Compensation" on pages 13 through 18 of the
Proxy Statement, which sections are incorporated herein by reference.

ITEM 11.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

       The information required by this Item is incorporated by reference from
the section captioned "Security Ownership of Certain Beneficial Owners" on pages
4 through 6 of the Proxy Statement.

ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

       See the section captioned "Proposal 1 - Election of Directors - Certain
Indebtedness and Transactions of Management" on pages 18 and 19 of the Proxy
Statement, which section is incorporated herein by reference.

ITEM 13.    EXHIBITS AND REPORTS ON FORM 8-K

13(a)       Exhibits

            A listing of the exhibits to this Report on Form 10-KSB is set forth
            on the Index to Exhibits which immediately precedes such exhibits
            and is incorporated herein by reference.

13(b)       The Company filed no reports on Form 8-K during the last quarter of
            the fiscal year ended December 31, 2001.

                                       20

<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                           KS BANCORP, INC.



Date: March 15, 2002                 By:   /s/ Harold T. Keen
                                           ------------------
                                           Harold T. Keen
                                           President and Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
               Signature                      Title                        Date
               ---------                      -----                        ----
<S>                               <C>                                 <C>
/s/ Harold T. Keen                President and Chief Executive       March 22, 2002
------------------                Officer and Director
Harold T. Keen
/s/ Earl W. Worley, Jr.           Senior Vice President and           March 22, 2002
-----------------------           Chief Financial Officer
Earl W. Worley
/s/ A. Carroll Coleman            Director                            March 22, 2002
----------------------
A. Carroll Coleman
/s/ Robert E. Fields              Director                            March 22, 2002
--------------------
Robert E. Fields
/s/ R. Harold Hinnant             Director                            March 22, 2002
--------------------
R. Harold Hinnant
/s/ James C. Parker               Director                            March 22, 2002
-------------------
James C. Parker
/s/ R. Elton Parrish              Director                            March 22, 2002
--------------------
R. Elton Parrish
/s/ Ralph Edward Scott, Jr.       Director                            March 22, 2002
---------------------------
Ralph Edward Scott, Jr.
/s/ Sidney E. Sauls               Director                            March 22, 2002
---------------------
Sidney E. Sauls
/s/ Gordon C. Woodruff            Director                            March 22, 2002
----------------------
Gordon C. Woodruff
</TABLE>

                                       21

<PAGE>

                                INDEX TO EXHIBITS


Exhibit No.        Description
-----------        -----------
Exhibit (3)(i)     Certificate of Incorporation, incorporated herein by
                   reference to Exhibit 3.1 to the Registration Statement on
                   Form S-1, Registration No. 33-69522, dated September 25,
                   1993, and amended on November 3, 1993

(3)(ii)            Bylaws, incorporated herein by reference to Exhibit 3.2 to
                   the Registration Statement on Form S-1, Registration No.
                   33-69522, dated September 25, 1993 and amended on November
                   3, 1993.

(4)                Specimen Stock Certificate, incorporated by reference to
                   Exhibit 4.1 to the Registration Statement on Form S-1,
                   Registration No. 33-69522, dated September 25, 1993, and
                   amended on November 3, 1993

(11)               See Note 1 to Consolidated Financial Statements set forth on
                   pages 16 through 22 of the Company's 2001 Annual Report to
                   Stockholders attached hereto as Exhibit 13.

(13)               2001 Annual Report (excluding page 2, the Report to
                   Stockholders from President)

(16)               Report on change in certifying accountant, incorporated
                   herein by reference to the Form 8-Ks dated March 22, 2000
                   and March 24, 2000.

(21)               See Item 1 "- Description of Business - Subsidiaries."

(23)(i)            Consent of Dixon Odom PLLC

                                       22