<PAGE>

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

                                   FORM 10-K


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


              For the fiscal year ended    December 31, 1999
                                        -------------------------

              Commission file number       0-22734
                                    -----------------------------

                               KS BANCORP, INC.
                             --------------------
            (Exact name of registrant as specified in its charter)

<TABLE>
     <S>                                             <C>
             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 office)                     (Zip Code)
</TABLE>

Registrant's telephone number, including area code   (919) 284-4157
                                                   ----------------

      Securities Registered Pursuant to Section 12(b) of the Act:    None
                                                                 ------------

          Securities Registered Pursuant to Section 12(g) of the Act:

                          Common Stock, no par value
                  ------------------------------------------
                               (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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     X               No  _______
                                              -------

Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K.  [_]

State the aggregate market value of the voting stock held by non-affiliates of
the registrant.  The aggregate market value shall be 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 60 days prior to the date of filing:
$10,146,422 common stock, no par value, based on the closing price of such
            --------------------------------------------------------------
common stock on March 15, 2000.
-------------------------------

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
921,578 shares of common stock, no par value, outstanding at March 15, 2000.
-----------------------------------------------------------------------------
<PAGE>

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report of KS Bancorp, Inc. for the year ended December
31, 1999, are incorporated by reference into Part I, Part II and Part IV.

Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders of
KS Bancorp, Inc. to be held on May 2, 2000, are incorporated by reference into
Part III.

Portions of the Registration Statement of KS Bancorp, Inc. on Form S-1,
Registration No. 33-69522, dated September 25, 1993, as amended on November 3,
1993, are incorporated by reference into Part IV.

                                       2
<PAGE>

                                     PART I

ITEM 1.   BUSINESS

General

     Prior to December 29, 1993, KS Bank, Inc., formerly known as Kenly Savings
Bank, Inc., SSB, (the "Bank") 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
(the "Conversion").  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") which 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 (the "BHCA") 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 which 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 ("FHLB") system since 1936, and its deposits have been federally
insured since 1961.  The Bank's deposits are insured by the Savings Association
Insurance Fund (the "SAIF") 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 Administrator, Savings
Institutions Division, North Carolina Department of Commerce (the
"Administrator") and the FDIC.

     The Bank conducts business through six full service offices in Kenly (2),
Goldsboro, Wilson, Garner and Selma, North Carolina and a mortgage loan
production office in Clayton, North Carolina.  At December 31, 1999, the Company
had consolidated total assets of $138.9 million, consolidated net loans of
$116.4 million, consolidated deposits of $116.5 million and consolidated
stockholders' equity of $15.4 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 which 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 noninterest 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 Administrator, 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.

                                       3
<PAGE>

     At December 31, 1999, the Company and the Bank had a total of 43 full-time
employees and 1 part-time 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.
Accordingly, the discussion of the business which follows concerns the business
conducted by the Bank, unless otherwise indicated.

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 97% of the
Bank's gross loan portfolio is secured by real estate.  On December 31, 1999,
the Bank's largest single outstanding loan had a balance of approximately $1.5
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 $116.4 million at December 31, 1999, representing 83.7% of the
Bank's total assets.  Conventional first mortgage loans accounted for 72.7% of
the Bank's gross loan portfolio, before net items, on December 31, 1999.
Construction loans and equity line lines represented 12.4% and 8.4%,
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 1999 Annual Report to Stockholders.  As of December 31, 1999, 76.7% 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, 1999.  Fixed rate and adjustable rate
loans are shown as due in the period of contractual maturity.  Demand loans,
loans having no stated maturity and overdrafts are reported as due in one year
or less.  The table does not include prepayments or scheduled principal
repayments.  Prepayments and scheduled repayments in the loan portfolio totaled
$36.0 million, $33.0 million and $23.8 million in the fiscal years ended
December 31, 1999, 1998 and 1997, respectively.  Amounts in the table are net of
loans in process and are net of unamortized loan fees.

<TABLE>
<CAPTION>
                                                                   More Than  More Than
                                                         One Yr.   1 Year to   5 Years
                                                         Or Less    5 Years   ---------    Total
                                                        --------   ---------             ----------
          Mortgage Loans:                                             (In Thousands)
          <S>                                           <C>        <C>        <C>        <C>
          Fixed rate                                     $   803     $11,835    $15,780   $ 28,418
          Adjustable rate                                  1,978      29,158     38,877     70,013
          Equity Lines                                    10,314           -          -     10,314
                                                        --------     -------    -------   --------
                                                         $13,095     $40,993    $54,657   $108,745

          Other loans (includes consumer, commercial
           & share):                                       8,010           -          -      8,010
                                                        --------     -------    -------   --------
          Totals before allowance                        $21,105     $40,993    $54,657   $116,755

          Allowance                                         (392)          -          -       (392)
                                                                     -------    -------
                                                         $20,713     $40,493    $54,657   $116,363
                                                        ========     =======    =======   ========
</TABLE>

                                       4
<PAGE>

          The following table sets forth the dollar amount at December 31, 1999
of all loans maturing or repricing on or after December 31, 2000 which have
fixed or adjustable interest rates.

<TABLE>
<CAPTION>
                             Fixed    Adjustable
                             Rates      Rates
                            --------  ----------
                               (In Thousands)
          <S>               <C>       <C>
          Mortgage loans     $27,615     $68,035

          Other loans              -           -
                             -------     -------
                             $27,615     $68,035
                             =======     =======
</TABLE>

          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.

          Conventional First Mortgages.  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.  On December 31, 1999,
approximately 67.8% of the Bank's real estate loan portfolio, before net items,
consisted of one-to-four family residential real estate loans.  These include
both loans secured by detached single-family residences and condominiums and
loans secured by housing containing not more than four separate dwelling units.
On that date, approximately 6.4% of the Bank's loan portfolio, before net items,
consisted of conventional first mortgage loans secured by multi-family
residential and nonresidential properties.  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, 1999, the aggregate gross outstanding balances of construction loans had
increased to approximately $15.3 million, representing 12.4% 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 which 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

                                       5
<PAGE>

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 which 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, 1999, home equity loans
totaled $10.3 million and comprised approximately 8.4% of the Bank's gross loan
portfolio, before net items.  These loans are generally secured by subordinate
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 which are adjustable based upon prime rates. Because
these loans involve revolving lines of credit which 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 $2.2 million  in such loans outstanding on December 31, 1999.  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, so that they
could be sold in the secondary market if the Bank determined that such sales
were prudent.  The Bank originated and sold $2.5 million in loans during the
fiscal year ended December 31, 1999.  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 an/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, 1999, 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 $393,200 and $290,500
on December 31, 1999 and 1998, respectively. See Note 3 to "Notes to
Consolidated Financial Statements" in the Company's 1999 Annual Report to
Stockholders.

                                       6
<PAGE>

          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.

<TABLE>
<CAPTION>
                                                             At December 31,
                                                     ------------------------------
                                                       1999       1998       1997
                                                     ---------  --------   --------
                                                         (Dollars in Thousands)
<S>                                                  <C>        <C>        <C>
Total nonaccrual loans delinquent 90 days or more    $    393   $    291   $    533
Real estate owned                                           -          -          -
                                                     --------   --------   --------
  Total non-performing assets                        $    393   $    291   $    533
                                                     ========   ========   ========
Non-performing loans to total loans                       .34%       .28%       .50%
Non-performing assets to total assets                     .28%       .22%       .47%
Total assets                                         $138,948   $130,892   $113,978
Total loans                                          $116,363   $105,335   $ 95,002
</TABLE>

          Allowance for Possible 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 possible 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 when management considers ultimate collection is considered
questionable after reviewing the current status of loans which are contractually
past due and considering the net realizable value of the security for the loans.
The Bank's level of allowances for loan losses at December 31, 1999, 1998 and
1997 was $392,000, $359,000 and $325,000, 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.

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

<TABLE>
<CAPTION>
                                     Year Ended December 31,
                                ----------------------------------
                                 1999    1998   1997   1996   1995
                                ------  -----  -----  -----  -----
                                          (In Thousands)
<S>                             <C>     <C>    <C>    <C>    <C>
Balance, beginning of period    $ 359   $ 325  $ 302  $ 233  $ 223
Provision for loan losses          36      34     23     69     10
Charge-offs                        (3)      -      -      -      -
Recoveries                          -       -      -      -      -
                                -----   -----  -----  -----  -----
Balance, end of period          $ 392   $ 359  $ 325  $ 302  $ 233
                                =====   =====  =====  =====  =====
</TABLE>

                                       7
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                 At December 31,
                                                   -----------------------------------------------------------------------------
                                                            1998                       1999                       1997
                                                   -----------------------    -----------------------    -----------------------
                                                                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                                $ 218         55.61%       $ 197         54.78%       $ 212         65.02%
 Residential multi-family                                 10          2.55%          10          2.82%           8          2.53%
 Nonresidential real estate and other property            43         10.97%          21          5.78%           8          2.46%
 Home equity and property improvement                     52         13.27%          61         17.00%          49         15.20%
 Construction                                             45         11.48%          44         12.35%          43         13.17%
                                                       -----       -------        -----       -------        -----       -------

Total real estate loans                                $ 368         93.88%       $ 333         92.73%       $ 320         98.37%

Other loans                                               24          6.12%          26          7.27%           5          1.63%
                                                       -----       -------        -----       -------        -----       -------

Total allowance for loan losses                        $ 392        100.00%       $ 359        100.00%       $ 325        100.00%
                                                       =====       =======        =====       =======        =====       =======

<CAPTION>
                                                                    At December 31,
                                                   --------------------------------------------------
                                                            1996                       1995
                                                   -----------------------    -----------------------
                                                                Amount of                  Amount of
                                                   Amount of    Loans to      Amount of    Loans to
                                                   Allowance   Gross Loans    Allowance   Gross Loans
                                                   ---------   -----------    ---------   -----------
                                                                  (Dollars in Thousands)
<S>                                                <C>         <C>            <C>         <C>
Mortgage loans:
  Residential 1-4 family                               $ 200         74.58%       $ 159         76.44%
  Residential multi-family                                13          4.33%          11          5.47%
  Nonresidential real estate and other property            6          2.81%           4          1.68%
  Home equity and property improvement                    39          8.65%          33          9.07%
  Construction                                            44          9.40%          26          7.14%
                                                       -----       -------        -----       -------

Total real estate loans                                $ 302         99.77%       $ 233         99.80%

Other loans                                               --          0.23%          --          0.20%
                                                       -----       -------        -----       -------

Total allowance for loan losses                        $ 302        100.00%       $ 233        100.00%
                                                       =====       =======        =====       =======
</TABLE>

                                       8
<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, 1999, the Bank's investment
portfolio totaled approximately $12.8 million and consisted of U.S. government
and agency securities, mortgage-backed securities and stock of the FHLB of
Atlanta.

     As a member of the FHLB of Atlanta, the Bank is required to maintain an
investment in stock of the FHLB of Atlanta equal to the greater of 1% of the
Bank's outstanding home loans or 5% of its outstanding advances from the FHLB of
Atlanta. No ready market exists for such stock, which is carried at cost. As of
December 31, 1999, the Bank's investment in stock of the FHLB of Atlanta was
$877,000.

     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 which 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
1999 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 FHLB 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, 1999, 1998 and 1997, the Bank's deposits totaled $116.5 million,
$107.9 million and $90.3 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 passbook
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, 1999, 82.9% of the Bank's
deposits, excluding accrued interest payable, consisted of certificate accounts,
3.5% consisted of regular savings accounts, 6.5% consisted of NOW accounts, 4.9%
consisted of money market accounts and 2.2% consisted of noninterest-bearing
transaction accounts. Of the certificates of deposit described above, $25.8
million, or 26.7% 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 1999 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 FHLB of Atlanta. The FHLB
system functions in a reserve credit capacity for savings institutions. As a
member, the Bank is required to own capital stock in the FHLB of Atlanta and is
authorized to apply for advances from the FHLB of Atlanta on the security of
that stock and a floating

                                       9
<PAGE>

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 FHLB of Atlanta's assessment
of the institution's creditworthiness. The Bank had $6.0 million outstanding
borrowings at December 31, 1999.

Subsidiaries

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

Results of Operations

     The Bank's results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its interest-
earning assets, such as loans and investments, and the cost of its interest-
bearing liabilities, consisting primarily of deposits and FHLB advances. Non-
interest income, such as transaction and service fee income, affects the Bank's
operations to a much lesser degree. The Bank's provisions for loan losses and
operating expenses also influence the Bank's net income. The Bank's principal
operating expenses, aside from interest expense, consist of compensation and
employee benefits, office occupancy costs, data processing expenses and federal
deposit insurance premiums. The Bank's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government legislation and
policies concerning monetary and fiscal affairs, housing and financial
institutions and the attendant actions of regulatory authorities.

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
which 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, 1999, the Bank had approximately 8.8% of the
deposits in Johnston County, North Carolina, approximately 2.1% of the deposits
in Wilson County, North Carolina, approximately 1.0% of the deposits in Wayne
County, North Carolina, and less than 1% 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.

                                       10
<PAGE>

Asset/Liability Management

     The Company's asset/liability management, or interest rate risk management,
is focused primarily on evaluating and managing the Company's consolidated net
interest income given various risk criteria. Factors beyond the Company's
control, such as market interest rates and competition, may also have an impact
on the Company's management of interest rate risk.

     In the absence of any other factors, the overall yield or return associated
with the Company's earning assets generally will increase from existing levels
when interest rates rise over an extended period of time, and conversely
interest income will decrease when interest rates decrease. In general, interest
expense will increase when interest rates rise over an extended period of time,
and conversely interest expense will decrease when interest rates decrease.
Therefore, by controlling the increases and decreases in its interest income and
interest expense which are brought about by changes in market interest rates,
the Company can influence its net interest income. As a part of the Company's
interest rate risk management policy, the Company calculates an interest rate
"gap". Interest rate "gap" analysis is a common, though imperfect, measure of
interest rate risk, which measures the relative dollar amounts of interest-
earning assets and interest-bearing liabilities which reprice within a specific
time period, either through maturity or rate adjustment. The "gap" is the
difference between the amounts of such assets and liabilities that are subject
to such repricing. A "positive" gap for a given period means that the amount of
interest earning assets maturing or otherwise repricing within that period
exceeds the amount of interest bearing liabilities maturing or otherwise
repricing within the same period. Accordingly, in a rising interest rate
environment, an institution with a positive gap would generally be expected,
absent the effects of other factors, to experience a higher increase in the
yield of its assets relative to the cost of its liabilities and its income
should be positively affected. Conversely, the cost of funds for an institution
with a positive gap would generally be expected to increase less quickly than
the yield on its assets in a falling interest rate environment and such
institution's net interest income should be adversely affected by falling
interest rates. Changes in interest rates generally have the opposite effect on
an institution with a "negative" gap. The Company has very little positive or
negative gap for the periods of one year or less and one to five years.

     A static interest rate "gap" analysis may not be an accurate indicator of
how net interest income will react to changes in interest rates. Income
associated with interest-earning assets and costs associated with interest-
bearing liabilities may not react uniformly to changes in interest rates. In
addition, the magnitude and duration of changes in interest rates may have a
significant impact on net interest income. For example, although certain assets
and liabilities may have similar maturities or periods to repricing, they may
react in different degrees to changes in market interest rates. Interest rates
on certain types of assets and liabilities typically fluctuate in advance of
changes in general market interest rates, while interest rates on other types
may lag behind changes in general market rates. As an example, the indices on
which interest rate changes on most of the Bank's adjustable rate mortgage loans
are based, the Treasury securities index adjusted to a constant one year
maturity and the Treasury securities index adjusted to a constant three year
maturity, tend to lag behind changes in general market rates of interest and,
thus, react more slowly to such changes than does the Bank's actual cost of
funds. In addition, certain assets, such as adjustable rate mortgage loans, have
features (generally referred to as "interest rate caps") which limit changes in
interest rates on a short-term basis and over the life of the asset. The ability
of many borrowers to service their debt may also decrease in the event of an
interest rate increase.

     The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1999, which are
projected to reprice or mature in each of the future time periods shown. The
computations were made without using certain common assumptions regarding loan
prepayments and deposit decay rates. Except as stated below, the amounts of
assets and liabilities shown which reprice or mature within a particular period
were determined in accordance with the contractual terms of the assets or
liabilities. In making the computations, all adjustable rate loans were
considered to be due at the end of the next upcoming adjustment period. Fixed
rate loans were considered to reprice at their contractual maturities with no
consideration given to prepayments. Liquid interest-earning investments with no
contractual maturities were assumed to be subject to immediate repricing, while
certain equity securities were assumed to reprice at the most distant repricing
date. Savings accounts, money market deposit accounts, and negotiable order of
withdrawal and other transaction accounts were assumed to be subject to
immediate

                                       11
<PAGE>

repricing. Fixed maturity interest-bearing liabilities were assumed to reprice
at their contractual maturities without consideration for early withdrawals. In
addition, the table does not reflect scheduled principal payments which will be
received throughout the lives of the loans. The interest rate sensitivity of the
Company's consolidated assets and liabilities illustrated in the following table
would vary substantially if different assumptions were used or if actual
experience differs from that indicated by such assumptions.

<TABLE>
<CAPTION>
                                                                             Term to Repricing at December 31, 1999
                                                                          --------------------------------------------
                                                                                     More than
                                                                           1 Year    1 Year to   More than
                                                                           Or Less    5 Years     5 Years      Total
                                                                          ---------  ----------  ----------  ---------
<S>                                                                       <C>        <C>         <C>         <C>
                                                                                     (Dollars in Thousands)
Interest-earning assets:
  Mortgage loans:
    Fixed rate                                                             $   803     $11,835     $15,780    $ 28,418
    Adjustable rate                                                         70,013           -           -      70,013
    Equity lines                                                            10,314           -           -      10,314
  Other loans                                                                8,010           -           -       8,010
                                                                           -------     -------     -------    --------
      Total loans                                                           89,140      11,835      15,780     116,755
  Interest-bearing deposits                                                  4,288           -           -       4,288
  Investment securities                                                      1,000       6,750       1,904       9,654
  Mortgage-backed securities                                                   131         661       1,359       2,151
                                                                           -------     -------     -------    --------
      Total interest-earning assets                                        $94,559     $19,246     $19,043    $132,848
                                                                           -------     -------     -------    --------
Interest-bearing liabilities:
  Deposits:
    Fixed maturity deposits                                                $72,516     $18,393     $ 5,662    $ 96,571
    NOW accounts                                                             7,604           -           -       7,604
    Money market deposit accounts                                            5,661           -           -       5,661
    Saving accounts                                                          4,082           -           -       4,082
                                                                           -------     -------     -------    --------
      Total deposits                                                        89,863      18,393       5,662     113,918
                                                                           -------     -------     -------    --------
  FHLB advances                                                              6,000           -           -       6,000
                                                                           -------     -------     -------    --------
      Total interest-bearing liabilities                                   $95,863     $18,393     $ 5,662    $119,918
                                                                           -------     -------     -------    --------

Interest gap per period                                                    $(1,304)    $   853     $13,381
                                                                           =======     =======     =======

Cumulative interest gap                                                    $(1,304)    $  (451)    $12,930
                                                                           =======     =======     =======
Cumulative gap as a percentage of total interest-earning assets               0.98%       0.34%       9.73%

Cumulative interest-earning assets as a percentage of interest-bearing       98.64%      99.61%     110.78%
 liabilities
</TABLE>

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.

     Regulation of the Company

     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
("BHCA"), the Company is subject to certain regulations of the Federal Reserve.
Under the BHCA, the

                                       12
<PAGE>

Company's activities and those of its subsidiaries are limited to banking,
managing or controlling banks, 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 BHCA 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
company without prior approval of the Federal Reserve.

     Additionally, the BHCA limits the Company's ability to engage in, or
acquire ownership or control of, more than 5% of the outstanding voting stock of
any company engaged in a nonbanking business unless such business is determined
by the Federal Reserve to be so closely related to banking as to be properly
incident thereto.

     Similarly, Federal Reserve approval (or, in certain cases, non-disapproval)
must be obtained prior to any person acquiring control of the Company.  Control
is conclusively presumed to exist if, among other things, a person acquires more
than 25% 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 acquires more than 10% of any class of
voting stock and the stock is registered under Section 12 of the Exchange Act 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 the FDIC insurance funds in the event the depository
institution becomes in danger of default or 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 may 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 (or would have been necessary) to bring
the institution into compliance with all capital standards as of the time the
institution 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 BHCA 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, insured depository institutions under common control are
required to reimburse the FDIC for any loss suffered by either the Savings
Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF") 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 SAIF or the BIF or both.  The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.

     Federal regulations require that the Company must notify the Federal
Reserve Bank of Richmond prior to repurchasing common stock in excess of ten
percent of its net worth during a rolling twelve month period.

     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
Administrator.

                                       13
<PAGE>

     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.  The Company is not subject to the Federal
Reserve's capital adequacy guidelines.

     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,
noncumulative 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 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.

     Repurchase Limitations.   The Company must obtain Federal Reserve approval
prior to repurchasing common stock for in excess of 10% of its net worth during
any twelve-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 certain notice requirements with the Administrator in addition to
other requirements and limitations of North Carolina corporate law, except as
set forth in this paragraph, neither the Administrator nor the FDIC have
promulgated any regulations specifically limiting the right of the Company to
pay dividends and repurchase shares.  However, 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.  See "
-- Regulation of the Bank -- Restrictions on Dividends and Other Capital
Distributions."

     Capital Maintenance Agreement.  In connection with the Administrator's
approval of the Company's application 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 Law.  The Company has registered its Common Stock with
the SEC pursuant to Section 12(g) of the Exchange Act.  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
Exchange Act are applicable to the Company.

Regulation of the Bank

     Federal and state legislation and regulation have significantly affected
the operations of federally insured savings institutions and other federally
regulated financial institutions in the past several years and have increased
competition among savings institutions, commercial banks and other providers of
financial services.  In addition, federal legislation has imposed new
limitations on investment authority, and higher insurance and examination
assessments on savings institutions and has made other changes that may
adversely affect the future operations and competitiveness of savings
institutions with other financial institutions, including commercial banks and
their holding companies.  The operations of regulated depository institutions,
including the Bank, will continue to be subject to changes in applicable
statutes and regulations from time to time.

                                       14
<PAGE>

     The Bank is a North Carolina-chartered savings bank, is a member of the
FHLB system, and its deposits are insured by the FDIC through the SAIF.  It is
subject to examination and regulation by the FDIC and the Administrator and to
regulations governing such matters as capital standards, mergers, establishment
of branch offices, subsidiary investments and activities, and general investment
authority.  Generally, North Carolina state chartered savings banks whose
deposits are issued by the SAIF are subject to restrictions with respect to
activities and investments, transactions with affiliates and loans-to-one
borrower similar to those applicable to SAIF insured savings associations.  Such
examination and regulation is intended primarily for the protection of
depositors and the federal deposit insurance funds.

     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 (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD
(Truth in Savings).  As holders of loans secured by real property and as owners
of real property, financial institutions, including the Bank, may be subject to
potential liability under various statutes and regulations applicable to
property owners generally, including statutes and regulations relating to the
environmental condition of real property.

     The FDIC has extensive enforcement authority over North Carolina-chartered
savings banks, including the Bank.  This enforcement authority includes, among
other things, 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 unsafe or unsound practices.

     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.

     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.  With certain exceptions, 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 is an affiliate of the Bank.  Generally,
Sections 23A and 23B (i) establish certain collateral requirements for loans to
affiliates, (ii) 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 (iii) 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 and its implementing
regulations with respect to loans to directors, executive officers and principal
stockholders.  Under Section 22(h), loans to directors, executive officers and
stockholders who own more than 10% 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, and all loans to such
persons may not exceed the institution's unimpaired capital and unimpaired
surplus.  Section 22(h) also prohibits loans above amounts prescribed by the
appropriate federal banking agency to directors, executive officers and
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

                                       15
<PAGE>

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 generally prohibits a depository institution from paying the
overdrafts of any of its executive officers or directors.

     Deposit Insurance.  The FDIC administers two separate deposit insurance
funds. The SAIF maintains a fund to insure the deposits of most savings
institutions, and the BIF maintains a fund to insure the deposits of most
commercial banks.  The Bank is a member of the SAIF of the FDIC.

     The Bank is required to pay assessments to the FDIC based on a percentage
of its insured deposits.  Under the FDIC's risk-based deposit insurance
assessment system, the assessment rate for an insured depository institution
depends on the assessment risk classification assigned to the institution by the
FDIC, which is determined by the institution's capital level and supervisory
evaluations.  Based on the data reported to regulators for the date closest to
the last day of the seventh month preceding the semi-annual assessment period,
institutions are assigned to one of three capital groups - well capitalized,
adequately capitalized or undercapitalized - using the same percentage criteria
as in the prompt corrective action regulations.  See "- Prompt Corrective
Regulatory Action."

     Within each capital group, institutions are assigned to one of three
subgroups on the basis of supervisory evaluations by the institution's primary
supervisory authority and such other information as the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance fund.  Subgroup A consists of financially sound institutions
with only a few minor weaknesses.  Subgroup B consists of institutions that
demonstrate weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk of loss to the deposit
insurance fund.  Subgroup C consists of institutions that pose a substantial
probability of loss to the deposit insurance fund unless effective corrective
action is taken.

     The assessment rate for SAIF members had ranged from 0.23% of deposits for
well capitalized institutions in Subgroup A to 0.31% of deposits for
undercapitalized institutions in Subgroup C, while assessments for over 90% of
the BIF members had been the statutory minimum of $2,000.  However, recently
enacted legislation provided for a one-time assessment equal to 65.7 basis
points times insured deposits as of March 31, 1995.  This assessment fully
capitalized the SAIF.  Accordingly, although the special assessment resulted in
a $437,000 one-time charge to the Bank during its fiscal year ended December 31,
1996, the recapitalization of the SAIF had the effect of reducing the Bank's
future deposit insurance premiums to the SAIF. Under the recently enacted
legislation, most BIF members were assessed approximately 1.3 basis points while
the rate for most SAIF members was approximately 6.4 basis points until January
1, 2000.

     Community Reinvestment Act.  The Bank, like other financial institutions,
is subject to the Community Reinvestment Act, as amended ("CRA"). A purpose of
this Act is to encourage financial institutions to help meet the credit needs of
its entire community, including the needs of low- and moderate-income
neighborhoods.  A savings bank is evaluated and rated under three categories: a
lending test, an investment test and a service test.  For each of these three
tests, the savings bank is given a rating of either "outstanding," "high
satisfactory," "low satisfactory," "needs to improve" or "substantial non-
compliance."  A set of criteria for each rating is included in the regulation.
If an institution disagrees with a particular rating, the institution has the
burden of rebutting the presumption by clearly establishing that the
quantitative measures do not accurately present its actual performance, or that
demographics, competitive conditions or economic or legal limitations peculiar
to the service area should be considered.  The ratings received under the three
tests are used to determine the overall composite CRA rating of "outstanding,"
"satisfactory," "needs to improve" or "substantial non-compliance."

                                       16
<PAGE>

     During the Bank's last compliance examination, which was performed by the
FDIC in April, 1998, the Bank received a satisfactory rating with respect to CRA
compliance.  The Bank's rating with respect to CRA compliance would be a factor
to be considered by the Federal Reserve and FDIC in considering applications
submitted by the Bank to acquire branches or to acquire or combine with other
financial institutions and take other actions and could result in the denial of
such applications.

     Capital Requirements Applicable To The Bank.  The FDIC requires the Bank to
have a minimum leverage ratio of Tier I capital (principally consisting of
common stockholders' equity, noncumulative perpetual preferred stock and
minority interests in consolidated subsidiaries, less certain intangible items,
goodwill items, identified losses and investments in securities subsidiaries) to
total assets of at least 3%; provided, however that all institutions, other than
those (i) receiving the highest rating during the examination process and (ii)
not anticipating or experiencing any significant growth, are required to
maintain a ratio of 1% or 2% above the stated minimum, with an absolute minimum
leverage ratio of not less than 4%.  The FDIC also requires the Bank to have a
ratio of total capital to risk-weighted assets, including certain off-balance
sheet activities, such as standby letters of credit, of at least 8%. At least
half of the total capital is required to be Tier I capital.  The remainder
("Tier II capital") may consist of a limited amount of subordinated debt,
certain hybrid capital instruments, other debt securities, certain types of
preferred stock and a limited amount of loan loss allowance.

     An institution which fails to meet minimum capital requirements may be
subject to a capital directive which is enforceable in the same manner and to
the same extent as a final cease and desist order, and must submit a capital
plan within 60 days to the FDIC.  If the leverage ratio falls to 2% or less, the
institution may be deemed to be operating in an unsafe or unsound condition,
allowing the FDIC to take various enforcement actions, including possible
termination of insurance or placement of the institution in receivership. At
December 31, 1999, the Bank had a leverage ratio of 10.55%, which substantially
exceeded the other FDIC capital requirements.

     The Administrator requires that net worth equal at least 5% of total
assets.  Intangible assets must be deducted from net worth and assets when
computing compliance with this requirement.  At December 31, 1999, the Bank
complied with the capital requirement of the Administrator with capital of
10.84%.

     Each federal banking agency is required to establish risk-based capital
standards to take adequate account of interest rate risk, concentration of
credit risk, and the risk of nontraditional activities, as well as to reflect
the actual performance and expected risk of loss on multi-family mortgages.

     On August 2, 1995, the federal banking agencies issued a joint notice of
adoption of final risk-based capital rules to take account of interest rate
risk.  The final regulation required an assessment of the need for additional
capital on a case-by-case basis, considering both the level of measured exposure
and qualitative risk factors.  The final rule also stated an intent to, in the
future, establish an explicit minimum capital charge for interest rate risk
based on the level of a bank's measured interest rate risk exposure.

     Effective June 26, 1996, the federal banking agencies issued a joint policy
statement announcing the agencies' election not to adopt a standardized measure
and explicit capital charge for interest rate risk at that time.  Rather, the
policy statement (i) identifies the main elements of sound interest rate risk
management, (ii) describes prudent principles and practices for each of those
elements, and (iii) describes the critical factors affecting the agencies'
evaluation of a bank's interest rate risk when making a determination of capital
adequacy.

     Loans-To-One-Borrower.  The Bank is subject to the Administrator'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 by readily
marketable collateral shall exceed 15% of the net worth of the 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.  The 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%

                                       17
<PAGE>

of the 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 under this authority does not exceed 150% of net worth. These limits
also authorize the 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 net
worth.

     As of December 31, 1999, the largest aggregate amount of loans which the
Bank had to any one borrower was $2,138,189. The Bank had no loans outstanding
which management believes violate the applicable loans-to-one-borrower limits.
The Bank does not believe that the loans-to-one-borrower limits will have a
significant impact on its business, operations and earnings.

     Federal Home Loan Bank System.  The FHLB system provides a central credit
facility for member institutions. As a member of the FHLB of Atlanta, the Bank
is required to own capital stock in the FHLB 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 FHLB of Atlanta.  On December 31, 1999, the Bank was in compliance with
this requirement with an investment in FHLB of Atlanta stock of $877,000.

     Each FHLB is required to contribute at least 10% of its reserves and
undivided profits to fund the principal and a portion of the interest on certain
bonds and certain other obligations which are used to fund the resolution of
troubled savings association cases, and to transfer a percentage of its annual
net earnings to the Affordable Housing Program. These contributions continue to
reduce the FHLB of Atlanta's earnings and the Bank's dividends on its FHLB of
Atlanta stock.

     Federal Reserve System.  Federal Reserve regulations require savings banks,
not otherwise exempt from the regulations, to maintain reserves against their
transaction accounts (primarily negotiable order of withdrawal accounts) and
certain nonpersonal time deposits.  The reserve requirements are subject to
adjustment by the Federal Reserve. As of December 31, 1999, the Bank was in
compliance with the applicable reserve requirements of the Federal Reserve.

     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 as a result of, 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.

     Liquidity.  The Bank is subject to the Administrator's requirement that the
ratio of liquid assets to total assets equal at least 10%.  The computation of
liquidity under North Carolina regulation allows the inclusion of mortgage-
backed securities and investments which, in the judgment of the Administrator,
have a readily marketable value, including investments with maturities in excess
of five years.  On December 31, 1999, the Bank's liquidity ratio, calculated in
accordance with North Carolina regulations, was approximately 15%.

     Additional Limitations on Activities.  FDIC law and regulations generally
provide that the Bank may not engage as principal in any type of activity, or in
any activity in an amount, not permitted for national banks, or directly acquire
or retain any equity investment of a type or in an amount not permitted for
national banks.  The FDIC has authority to grant exceptions from these
prohibitions (other than with respect to non-service corporation equity

                                       18
<PAGE>

investments) if it determines no significant risk to the insurance fund is posed
by the amount of the investment or the activity to be engaged in and if the Bank
is and continues to be in compliance with capital standards. National banks are
generally not permitted to hold equity investments other than shares of service
corporations and certain federal agency securities. Moreover, service
corporations of savings banks are permitted to engage only in those activities
which are permitted for service corporations of national banks.

     Savings banks are also generally prohibited from directly or indirectly
acquiring or retaining any corporate debt security that is not of investment
grade (generally referred to as "junk bonds").  State savings banks are also
required to notify the FDIC at least 30 days prior to the establishment or
acquisition of any subsidiary, or at least 30 days prior to conducting any such
new activity.  Any such activities must be conducted in accordance with the
regulations and orders of the FDIC and the Administrator.

     Prompt Corrective Regulatory Action.  Federal law provides the federal
banking agencies with broad powers to take corrective action to resolve problems
of insured depository institutions.  The extent of these powers depends upon
whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized."  Under the FDIC regulations applicable to the
Bank, an institution is considered "well capitalized" if it has (i) a total
risk-based capital ratio of 10% or greater, (ii) a Tier I risk-based capital
ratio of 6% or greater, (iii) a leverage ratio of 5% or greater and (iv) is not
subject to any order or written directive to meet and maintain a specific
capital level for any capital measure.  An "adequately capitalized" institution
is defined as one that has (i) a total risk-based capital ratio of 8% or
greater, (ii) a Tier I risk-based capital ratio of 4% or greater and (iii) a
leverage ratio of 4% or greater (or 3% or greater in the case of an institution
with the highest examination rating and which is not experiencing or
anticipating significant growth).  An institution is considered (A)
"undercapitalized" if it has (i) a total risk-based capital ratio of less than
8%, (ii) a Tier I risk-based capital ratio of less than 4% or (iii) a leverage
ratio of less than 4% (or 3% in the case of an institution with the highest
examination rating and which is not experiencing or anticipating significant
growth); (B) "significantly undercapitalized" if the institution has (i) a total
risk-based capital ratio of less than 6%, or (ii) a Tier I risk-based capital
ratio of less than 3% or (iii) a leverage ratio of less than 3% and (C)
"critically undercapitalized" if the institution has a ratio of tangible equity
to total assets equal to or less than 2%.

     Interstate Banking.   The Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act"), permits adequately
capitalized bank and savings bank holding companies to acquire control of banks
and savings banks in any state.

     Such interstate acquisitions are subject to certain restrictions.  States
may require the bank or savings bank being acquired to have been in existence
for a certain length of time but not in excess of five years. In addition, no
bank or saving bank may acquire more than 10% of the insured deposits in the
United States or more than 30% of the insured deposits in any one state, unless
the state has specifically legislated a higher deposit cap. States are free to
legislate stricter deposit caps.

     The Interstate Banking Act also provided for interstate branching,
effective June 1, 1997, allowing interstate branching in all states, provided
that a particular state has not specifically denied interstate branching by
legislation prior to such time.  Unlike interstate acquisitions, a state could
deny interstate branching if it specifically elected to do so by June 1, 1997.
States were allowed to choose to permit interstate branching prior to June 1,
1997 by opting-in to a group of states that permits these transactions.  These
states generally allow interstate branching via a merger of an out-of-state bank
with an in-state bank, or on a de novo basis.  North Carolina enacted
legislation permitting interstate branching transactions prior to June 1, 1997
and did not adopt legislation electing to deny interstate branching.

     It is anticipated that the Interstate Banking Act will increase competition
within the markets in which the Bank now operates, although the extent to which
such competition will increase in such markets or the timing of such increase
cannot be predicted.

                                       19
<PAGE>

     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 on
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 conversion from mutual to
stock ownership.

     Other North Carolina Regulations.  As a North Carolina-chartered savings
bank, the Bank derives its authority from, and is regulated by, the
Administrator.  The Administrator has the right to promulgate rules and
regulations necessary for the supervision and regulation of North Carolina
savings banks under his jurisdiction and for the protection of the public
investing in such institutions.  The regulatory authority of the Administrator
includes, but is not limited to, the establishment of reserve requirements; the
regulation of the payment of dividends; the regulation of stock repurchases; the
regulation of incorporators, stockholders, directors, officers and employees;
the establishment of permitted types of withdrawable accounts and types of
contracts for savings programs, loans and investments; and the regulation of the
conduct and management of savings banks, chartering and branching of
institutions, mergers, conversions and conflicts of interest.  North Carolina
law requires that the Bank maintain federal deposit insurance as a condition of
doing business.

     The Administrator conducts regular examinations of North Carolina-chartered
savings banks. The purpose of such examinations is to assure that institutions
are being operated in compliance with applicable North Carolina law and
regulations and in a safe and sound manner. These examinations are usually
conducted on a joint basis with the FDIC. In addition, the Administrator is
required to conduct an examination of any institution when he has good reason to
believe that the standing and responsibility of the institution is of doubtful
character or when he otherwise deems it prudent. The Administrator is empowered
to order the revocation of the license of an institution if he finds that it has
violated or is in violation of any North Carolina law or regulation and that
revocation is necessary in order to preserve the assets of the institution and
protect the interests of its depositors. The Administrator has the power to
issue cease and desist orders if any person or institution is engaging in, or
has engaged in, any unsafe or unsound practice or unfair and discriminatory
practice in the conduct of its business or in violation of any other law, rule
or regulation.

     A North Carolina-chartered savings bank must maintain net worth, computed
in accordance with the Administrator's requirements, of 5% of total assets and
liquidity of 10% of total assets, as discussed above. Additionally, a North
Carolina-chartered savings bank is required to maintain general valuation
allowances and specific loss reserves in the same amounts as required by the
FDIC.

     Subject to limitation by the Administrator, North Carolina-chartered
savings banks may make any loan or investment or engage in any activity which 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 FHLB; (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.

     North Carolina law provides a procedure by which savings institutions may
consolidate or merge, subject to approval of the Administrator. The approval is
conditioned upon findings by the Administrator 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
supervisory mergers conducted by the Administrator.

                                       20
<PAGE>

     Future Requirements.  Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, operations and
competitive relationships of financial institutions.  It cannot be predicted
whether or 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.

Gramm - Leach - Bliley Act

     On November 12, 1999, the President signed into law the Gramm - Leach -
Bliley Act.  This statute contains several provisions that may affect how the
Company does business or the nature of the competition that it faces.  The act
permits banks, insurance companies, and securities firms to affiliate within a
single corporate structure, now known as a financial holding company.  Using the
financial holding company structure, insurance companies and securities firms
may acquire bank holding companies, such as the Company, and bank holding
companies may acquire insurance companies and securities firms.  A bank holding
company that wishes to become a financial holding company must satisfy a number
of conditions, including that all of the insured depository institution
subsidiaries of the bank holding company have at least a "satisfactory"
Community Reinvestment Act rating.  In addition, a financial holding company may
not commence a new financial activity or acquire control of a company engaged in
such activities without satisfying this Community Reinvestment Act requirement.
As a result of this new act, the Company may face increased competition from
more and larger financial institutions.  The act allows increased activity in
the insurance and securities underwriting businesses, to be conducted through a
subsidiary of a financial holding company and would involve both additional risk
and regulatory burdens.

     The act also contains several provisions respecting customer privacy.  The
extent of the Bank's obligations in this regard will not be known until the
Federal Reserve and the other federal banking agencies issue rules applicable to
financial institutions.  However, the Bank will be required to disclose a
privacy policy to its customers on an annual basis.  In addition, if the Bank
provides nonpublic personal information about customers to third parties for use
in the marketing of third party products, it must first disclose this fact to
its customers and provide them an opportunity to opt out of the arrangement.

ITEM 2.   PROPERTIES

     At December 31, 1999, 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 and Garner, North Carolina.  In addition,
the Bank had a loan origination office in Clayton, North Carolina.  The
following table sets forth certain information regarding the Company's
properties as of December 31, 1999.  See Note 4 to the Company's Consolidated
Financial Statements included in the 1999 Annual Report which is incorporated
herein by reference.

                                       21
<PAGE>

                                                     Net Book Value
                Address                                Of Property
                -------                              --------------
        Kenly
                Corporate offices:
                207 West Second Street
                Kenly, North Carolina 27542              $  384,923

                Branch facility:
                200 North Church Street
                Kenly, North Carolina 27542              $  472,214

        Selma
                115 West Anderson Street
                Selma, North Carolina 27576              $  116,460

        Wilson
                206 N. Ward Boulevard
                Wilson, North Carolina 27893             $  453,244

        Clayton
                11440 Highway 70 West
                Clayton, North Carolina 27520               (Leased)

        Goldsboro
                1112 E. Ash Street
                Goldsboro, North Carolina 27530          $  219,985

        Garner
                920 7th Avenue
                Garner, North Carolina 27529                (Leased)

                                                         $1,646,826
                                                         ==========

The total net book value of the Company's furniture and equipment on December
31, 1999 was $781,480.

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, 1999.

                                       22
<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 41 and "Common Stock" on page 42 in the Company's 1999 Annual Report,
which sections are incorporated herein by reference.  See "Item 1.  BUSINESS--
Regulation of the Bank--Restrictions on Dividends and Other Capital
Distributions" above for regulatory restrictions which limit the ability of the
Bank to pay dividends to the Company.

ITEM 6.  SELECTED FINANCIAL DATA

     The information required by this Item is set forth in the table captioned
"Selected Financial Data" on page 1 of the Company's 1999 Annual Report which is
incorporated herein by reference.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         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 12 in the Company's 1999 Annual Report, which section is
incorporated herein by reference.

ITEM 7A  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Pages 5 and 6 of the Company's 1999 Annual Report to Stockholders are
herein incorporated by reference.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements of the Company and supplementary data
set forth on pages 13 through 40 of the Company's 1999 Annual Report are
incorporated herein by reference.

ITEM 9.  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 has been selected as the Company's independent auditor for
the 2000 fiscal year.  Such selection will be submitted to the Company's
shareholders for ratification at the 2000 annual meeting of shareholders. 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 hereof; 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 its two most recent fiscal years and the subsequent interim period

                                       23
<PAGE>

through the date hereof, the Company has not consulted 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 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     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 page 8 of the
Proxy Statement for the 2000 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 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 11.  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 12 through 20 of the
Proxy Statement, which sections are incorporated herein by reference.

ITEM 12.  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 3
through 6 of the Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     See the section captioned "Proposal 1 - Election of Directors - Certain
Indebtedness and Transactions of Management" on page 20 of the Proxy Statement,
which section is incorporated herein by reference.

                                    PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

14(a)1    Consolidated Financial Statements (contained in the Company's 1999
          Annual Report attached hereto as Exhibit (13) and incorporated herein
          by reference)

          (a)  Independent Auditor's Report

          (b)  Consolidated Statements of Financial Condition -- December 31,
               1999 and 1998

          (c)  Consolidated Statements of Income -- Years Ended December 31,
               1999, 1998 and 1997

                                       24
<PAGE>

          (d)  Consolidated Statements of Stockholder's Equity -- Years Ended
               December 31, 1999, 1998 and 1997

          (e)  Consolidated Statements of Cash Flows -- Years Ended December 31,
               1999, 1998 and 1997

          (f)  Notes to Consolidated Financial Statements

14(a)2    Financial Statement Schedules

          All schedules have been omitted as the required information is either
          inapplicable or included in the Notes to Consolidated Financial
          Statements.

14(a)3    Exhibits

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

14(b)     The Company filed no reports on Form 8-K during the last quarter of
          the fiscal year ended December 31, 1999.

                                       25
<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 29, 2000                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 29, 2000
-----------------------------    Officer and Director
Harold T. Keen

/s/ Helen B. Pollock             Treasurer (Principal Financial    March 29, 2000
-----------------------------    Officer)
Helen B. Pollock

/s/ A. Carroll Coleman           Director                          March 29, 2000
-----------------------------
A. Carroll Coleman

/s/ Robert E. Fields             Director                          March 29, 2000
-----------------------------
Robert E. Fields

/s/ R. Harold Hinnant            Director                          March 29, 2000
-----------------------------
R. Harold Hinnant

/s/ James C. Parker              Director                          March 29, 2000
-----------------------------
James C. Parker

/s/ R. Elton Parrish             Director                          March 29, 2000
-----------------------------
R. Elton Parrish

/s/ Ralph Edward Scott, Jr.      Director                          March 29, 2000
-----------------------------
Ralph Edward Scott, Jr.

/s/ James C. Woodard             Director                          March 29, 2000
-----------------------------
James C. Woodard

/s/ Gordon C. Woodruff           Director                          March 29, 2000
-----------------------------
Gordon C. Woodruff
</TABLE>

                                       26
<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

Exhibit (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

(13)                1999 Annual Report to Stockholders (excluding p. 2, the
                    Report to Stockholders)

(21)                Subsidiaries of the Registrant

(23)                Consent of McGladrey & Pullen, LLP

(27)                Financial Data Schedule

                                       27