Great Pee Dee Bancorp (PEDE) 10QSB 2003 Q2 Quarterly report (small business)

U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.  20549

FORM 10-QSB

x    Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2002

o    Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period ended___________

Commission File Number    0-23521

GREAT PEE DEE BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE	56-2050592
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)
515 MARKET STREET, CHERAW, SC  29520
(Address of principal executive office)
(843) 537-7656
(Issuer’s telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x No  o

As of February 5, 2003, 1,754,225 shares of the issuer’s common stock, $.01 par value, were outstanding. The registrant has no other classes of securities outstanding.

This report contains 18 pages.

			Page No.
Part l.	FINANCIAL INFORMATION
Item 1 -	Financial Statements (Unaudited)
		Consolidated Statements of Financial Condition December 31, 2002 and June 30, 2002	3
		Consolidated Statements of Operations Three Months and Six Months Ended December 31, 2002 and 2001	4
		Consolidated Statements of Cash Flows Six Months Ended December 31, 2002 and 2001	5
		Notes to Consolidated Financial Statements	6
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		8
Item 3 -	Controls and Procedures		14
Part II.	OTHER INFORMATION
		Item 4. Submission of Matters to a Vote of Security Holders	15
		Item 6. Exhibits and Reports on Form 8-K	15

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Part l. FINANCIAL INFORMATION
Item 1 - Financial Statements

Great Pee Dee Bancorp, Inc. and Subsidiaries
Consolidated Statements of Financial Condition

			December 31, 2002 (Unaudited)			June 30, 2002*
			(In Thousands)
ASSETS
Cash on hand and in banks			$	2,588		$	1,155
Interest-bearing balances in other banks				6,238			2,487
Federal funds sold				1,898			3,330
Investment securities available for sale, at fair value				424			452
Investment securities held to maturity, at amortized cost				8,775			4,877
Loans receivable				112,039			110,677
Allowance for loan losses				(1,194	)		(1,066	)
	Loans receivable, net			110,845			109,611
Loans held for sale				1,839			3,071
Accrued interest receivable				1,019			882
Premises and equipment, net				2,044			2,027
Stock in the Federal Home Loan Bank, at cost				1,000			1,000
Real estate acquired in settlement of loans				85			50
Other assets				1,979			2,091
		TOTAL ASSETS	$	138,734		$	131,033
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
	Deposit accounts		$	102,137		$	88,090
	Advances from Federal Home Loan Bank			10,500			17,000
	Accrued interest payable			136			91
	Advance payments by borrowers for property taxes and insurance			27			90
	Accrued expenses and other liabilities			162			194
		TOTAL LIABILITIES		112,962			105,465
STOCKHOLDERS’ EQUITY
	Preferred stock, no par value, 400,000 shares authorized, no shares issued and outstanding			—			—
	Common stock, $.01 par value, 3,600,000 shares authorized; 2,224,617 shares issued			22			22
	Additional paid in capital			22,199			21,966
	Unearned compensation			(1,157	)		(1,212	)
	Retained earnings, substantially restricted			10,623			10,417
	Accumulated other comprehensive loss			(47	)		(30	)
				31,640			31,163
	Common stock in treasury, at cost (476,230 and 459,005 shares, respectively)			(5,868	)		(5,595	)
		TOTAL STOCKHOLDERS’ EQUITY		25,772			25,568
		TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	138,734		$	131,033

* Derived from audited financial statements

See accompanying notes.

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Great Pee Dee Bancorp, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)

						Three Months Ended December 31,				Six Months Ended December 31,
						2002		2001		2002		2001
						(In Thousands Except Share and Per Share Data)
INTEREST INCOME
			Loans		$		2,057	$	2,115	$	4,074	$	4,147
			Investments				100		106		182		215
			Deposits in other banks and federal funds sold				37		19		75		44
				TOTAL INTEREST INCOME			2,194		2,240		4,331		4,406
INTEREST EXPENSE
			Deposit accounts				774		798		1,533		1,750
		Borrowed funds					94		175		219		349
TOTAL INTEREST EXPENSE							868		973		1,752		2,099
NET INTEREST INCOME							1,326		1,267		2,579		2,307
PROVISION FOR LOAN LOSSES							75		150		150		225
				NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			1,251		1,117		2,429		2,082
NON-INTEREST INCOME							389		161		550		349
NON-INTEREST EXPENSES
		Personnel costs					407		336		763		663
		Occupancy					80		108		168		184
	Other						326		325		625		680
				TOTAL NON-INTEREST EXPENSES			813		769		1,556		1,527
INCOME BEFORE INCOME TAXES							827		509		1,423		904
PROVISION FOR INCOME TAXES							316		189		543		333
				NET INCOME	$		511	$	320	$	880	$	571
NET INCOME PER SHARE
	Basic				$		.32	$	.20	$	.55	$	.35
	Diluted						.31		.19		.53		.35
CASH DIVIDEND PER SHARE					$		.140	$	.114	$	.265	$	.214
WEIGHTED AVERAGE SHARES OUTSTANDING
	Basic						1,606,978		1,640,120		1,613,317		1,639,528
	Effect of outstanding stock options						1,606,978		1,640,120		1,613,317		1,639,528
	Diluted						1,642,343		1,655,329		1,645,276		1,647,544

See accompanying notes.

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Great Pee Dee Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)

					Six Months Ended December 31,
					2002			2001
					(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
	Net income				$	880		$	571
	Adjustments to reconcile net income to net cash provided (used) by operating activities:
		Depreciation and amortization				235			235
		Provision for loan losses				150			225
		Release of ESOP shares				106			76
		Amortization of stock awards under recognition and retention plan				5			35
		Treasury stock issued as compensation				—			12
		(Increase) decrease in loans held for sale				1,233			(1,852	)
		Change in assets and liabilities:
			Increase in accrued interest receivable			(137	)		(178	)
			Increase in accrued interest payable			45			29
			Other			(43	)		(133	)
				NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES		2,474			(980	)
CASH FLOWS FROM INVESTING ACTIVITIES
	Purchases of held to maturity investment securities					(4,406	)		(799	)
	Proceeds from maturities of held-to-maturity investments					508			1,059
	Net increase in loans					(1,419	)		(4,589	)
	Purchase of Federal Home Loan Bank stock					—			(125	)
	Purchases of property and equipment					(118	)		(447	)
	Other					—			6
				NET CASH USED BY INVESTING ACTIVITIES		(5,435	)		(4,895	)
CASH FLOWS FROM FINANCING ACTIVITIES
	Net increase in deposit accounts					14,047			3,120
	Proceeds from (repayments of) FHLB advances					(6,500	)		4,200
	Increase in advances from borrowers					(63	)		(81	)
	Purchase of treasury stock					(355	)		(64	)
	Cash dividends paid					(416	)		(340	)
				NET CASH PROVIDED BY FINANCING ACTIVITIES		6,713			6,835
				NET INCREASE IN CASH AND CASH EQUIVALENTS		3,752			960
CASH AND CASH EQUIVALENTS, BEGINNING						6,972			3,354
				CASH AND CASH EQUIVALENTS, ENDING	$	10,724		$	4,314

See accompanying notes.

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Great Pee Dee Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

NOTE A - BASIS OF PRESENTATION

In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three and six month periods ended December 31, 2002 and 2001, in conformity with accounting principles generally accepted in the United States of America.

The financial statements include the accounts of Great Pee Dee Bancorp, Inc. (the “Company”) and its wholly-owned subsidiaries, First Federal Savings and Loan Association of Cheraw (“First Federal” or the “Bank”) and First Federal Investment Services, Inc. Operating results for the three and six month periods ended December 31, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2003.

The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the financial statements filed as part of the Company’s annual report on Form 10-KSB. This quarterly report should be read in conjunction with such annual report.

NOTE B - NET INCOME PER SHARE

Basic income per share has been computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. In accordance with generally accepted accounting principles, Employee Stock Ownership Plan (“ESOP”) shares are only considered outstanding for earnings per share calculations when they are earned or committed to be released. Diluted net income per share reflects the dilutive effects of outstanding common stock options.

Net income per share and weighted average shares outstanding have been adjusted for a 10% stock dividend distributed in October 2001.

NOTE C - NEW ACCOUNTING STANDARDS

In October 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 147, Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9 (SFAS 147).  This statement removes acquisitions of financial institutions from the scope of both Statement No. 72 and Interpretation No. 9 and requires that those transactions, which constitute a business, be accounted for in accordance with SFAS No. 141 and SFAS No. 142.  The adoption of SFAS 147 has had no effect on the Company’s financial statements.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure (Statement 148). Statement 148 amends SFAS No. 123, Accounting for Stock-Based Compensation (Statement 123), to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  Statement 148 is effective for financial statements for fiscal years ending after December 15, 2002.  Early application of the disclosure provisions is encouraged.  The Company continues to account for its stock-based compensation in accordance with APB 25 and will adopt the disclosure provisions of Statement 148 effective January 1, 2003.

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Great Pee Dee Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

NOTE D - COMPREHENSIVE INCOME

A summary of comprehensive income is as follows:

		Three Months Ended December 31,						Six Months Ended December 31,
		2002			2001			2002			2001
		(In thousands)
Net income		$	511		$	320		$	880		$	571
Other comprehensive income
	Net decrease in the fair value of investment securities available for sale, net of tax		(12	)		(5	)		(17	)		(8	)
Total comprehensive income		$	499		$	315		$	863		$	563

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-QSB may contain certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates.  These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company’s operations, pricing, products and services.

Comparison of Financial Condition at
December 31, 2002 and June 30, 2002

The Company’s growth during the six months ended December 31, 2002 was primarily deposit-driven, as total customer deposit accounts increased by $14.0 million, or 15.9%, from $88.1 million to $102.1 million.  Deployment of the funds generated by this deposit growth pushed total assets up from $131.0 million at the beginning of the six months to $138.7 million at period end.  The majority of these new funds that were retained by the Company were invested in interest-bearing liquid investments, including federal funds sold, interest-earning balances in other banks and investment securities held to maturity, which collectively increased by $6.2 million.  The balance of the funds generated by deposit growth were applied to reduce borrowings by $6.5 million and to support loan growth, as net loans receivable increased by $1.2 million, or 1.1%, from $109.6 million to $110.8 million.  Total stockholders’ equity was $25.8 million at December 31, 2002 as compared with $25.6 million at June 30, 2002, an increase of $204,000.  Net income of $880,000 for the six months was offset by a combination of cash dividends of $416,000 and treasury share purchases aggregating $355,000.  At December 31, 2002, the Bank continued to significantly exceed all applicable regulatory capital requirements.

Comparison of Results of Operations for the
Three Months Ended December 31, 2002 and 2001

Net Income.  Net income for the quarter ended December 31, 2002 was $511,000, an increase of $191,000, or 60%, over net income of $320,000 for the quarter ended December 31, 2001.  On a per share basis, net income for the current quarter was $.32 per basic share and $.31 per diluted share as compared with $.20 basic and $.19 diluted for the second quarter of the last fiscal year.  The primary reasons for the increase in income were a decrease of $75,000 in the provision for loan losses for the current quarter and the recognition during the quarter of $175,000 of non-interest income that resulted from resolution of a legal matter.  Otherwise, an increase of $59,000 in net interest income was largely offset by an increase of $44,000 in non-interest expenses.

Net Interest Income.  Net interest income for the quarter ended December 31, 2002 was $1,326,000 as compared with $1,267,000 during the quarter ended December 31, 2001, an increase of $59,000.   This increase resulted principally from a higher level of interest-earning assets during the current quarter as compared with the same quarter a year ago.  The sustained period of lower interest rates, which has caused reductions in both the rates of interest earned on interest-earning assets and interest paid on interest-bearing liabilities, resulted in a slight narrowing of the Company’s interest rate spread.  For the quarter ended December 31, 2002, the Company’s interest rate spread was 3.61%, and its net interest margin was 4.08% on average interest-earning assets of $130.0 million.  In comparison, for the quarter ended December 31, 2001, the Company’s interest rate spread was 3.66%, and its net interest margin was 4.38% on average interest-earning assets of $115.8 million.  As a result of the sustained period of lower interest rates, the yield on average interest-earning assets declined to 6.75% during the current fiscal quarter from 7.74% for the quarter ended December 31, 2001.  The Company’s cost of funds dropped similarly, from 4.08% to 3.14%, due to the repricing of interest-bearing liabilities at lower interest rates.

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Provision for Loan Losses.  The provision for loan losses was $75,000 for the current quarter, down $75,000 from the $150,000 provision made for the quarter ended December 31, 2001.  There were net loan charge-offs of $22,000 during the current quarter, while net loan charge-offs totaled $16,000 during the quarter ended December 31, 2001.  At December 31, 2002, nonaccrual loans aggregated $1,360,000 while the allowance for loan losses stood at $1,194,000.

Non-Interest Income.  Non-interest income increased by $228,000, from $161,000 for the three months ended December 31, 2001 to $389,000 for the three months ended December 31, 2002.  Of this increase, $175,000 resulted from recognition during the current quarter of a nonrecurring income item that arose from settlement of a dispute with another company.  In addition, the Company realized additional income of $60,000 from customer overdrafts during the current quarter as a result of the successful implementation of a new deposit product through which the Company’s bank subsidiary will cover limited overdrafts while still charging overdraft fees.

Non-Interest Expenses.  Non-interest expenses increased from $769,000 for the three months ended December 31, 2001 to $813,000 for the current quarter, an increase of $44,000.  This increase resulted from additional personnel costs of $71,000 related principally to growth, partially offset by a decrease of $28,000 in occupancy costs.  Overall the fluctuation in non-interest expenses tracks the Company’s growth and expected inflation-related increases.

Provision for Income Taxes.  The provision for income taxes, as a percentage of income before income taxes, was 38.2% and 37.1% for the quarters ended December 31, 2002 and 2001, respectively.

Comparison of Results of Operations for the
Six Months Ended December 31, 2002 and 2001

Net Income.  Net income for the six months ended December 31, 2002 was $880,000, an increase of $309,000, or 54%, over net income of $571,000 for the six months ended December 31, 2001.  On a per share basis, net income for the current six months was $.55 per basic share and $.53 per diluted share as compared with $.35 basic and $.35 diluted for the first six months of the last fiscal year.  The primary reasons for the increase in income were an increase of $272,000 in net interest income, a decrease of $75,000 in the provision for loan losses for the current period and the recognition during the six months of $175,000 of non-interest income that resulted from resolution of a legal matter.

Net Interest Income.  Net interest income for the six months ended December 31, 2002 was $2,579,000 as compared with $2,307,000 during the six months ended December 31, 2001, an increase of $272,000.  Most of this increase was achieved during the first three months of the current fiscal year.  This increase resulted principally from a higher level of interest-earning assets during the current six months as compared with the same six months a year ago.  The sustained period of lower interest rates, which has caused reductions in both the rates of interest earned on interest-earning assets and interest paid on interest-bearing liabilities, resulted in a slight increase in the Company’s interest rate spread.  For the six months ended December 31, 2002, the Company’s interest rate spread was 3.47%, and its net interest margin was 4.93% on average interest-earning assets of $131.3 million.  In comparison, for the six months ended December 31, 2001, the Company’s interest rate spread was 3.21%, and its net interest margin was 3.99% on average interest-earning assets of $115.6 million.  As a result of the sustained period of lower interest rates, the yield on average interest earning assets declined to 6.60% during the current six months from 7.62% for the six months ended December 31, 2001.  The Company’s cost of funds dropped similarly, from 4.42% to 3.13%, due to the repricing of interest-bearing liabilities at lower interest rates.

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Provision for Loan Losses.  The provision for loan losses was $150,000 for the current six months, down $75,000 from the $225,000 provision made for the six months ended December 31, 2001.  There were net loan charge-offs of $22,000 during the current six months, as compared with net loan charge-offs of $3,000 during the six months ended December 31, 2001.  At December 31, 2002, nonaccrual loans aggregated $1,360,000 while the allowance for loan losses stood at $1,194,000.

Non-Interest Income.  Non-interest income increased by $201,000, from $349,000 for the six months ended December 31, 2001 to $550,000 for the six months ended December 31, 2002.  Of this increase, $175,000 resulted from recognition during the current six months of a nonrecurring income item that arose from settlement of a dispute with another company.  In addition, the Company realized additional income of $67,000 from customer overdrafts during the current six months as a result of the successful implementation of a new deposit product through which the Company’s bank subsidiary will cover limited overdrafts while still charging overdraft fees.  Offsetting these increases in non-interest income was a decrease of $36,000 in income from originations of mortgage loans for sale in the secondary market.

Non-Interest Expenses.  Non-interest expenses increased from $1,527,000 for the six months ended December 31, 2001 to $1,556,000 for the current six months, an increase of $29,000.  This increase resulted from additional personnel costs of $100,000 related principally to growth, partially offset by a decrease of $16,000 in occupancy costs and a decrease of $55,000 in other non-interest expenses.  Other non-interest expenses for the six months ended December 31, 2001 included $73,000 incurred during that period as a result of implementation of a new data processing system.  Overall the fluctuation in non-interest expenses tracks the Company’s growth and expected inflation-related increases.

Provision for Income Taxes.  The provision for income taxes, as a percentage of income before income taxes, was 38.2% and 36.8% for the six months ended December 31, 2002 and 2001, respectively.

Asset Quality

The Company considers asset quality to be of primary importance, and employs a formal internal loan review process to ensure adherence to the Lending Policy as approved by the Board of Directors. An ongoing systematic evaluation process fundamentally drives the function of determining the allowance for loan losses.   This ongoing evaluation process serves as the basis for determining, on a monthly basis, the allowance for loan losses and any resulting provision to be charged against earnings. Consideration is given to historical loan loss experience, the value and adequacy of collateral, economic conditions in the Company’s market area and other factors. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The allowance for loan losses represents Management’s estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio.

The Company’s policy regarding past due loans normally requires a prompt charge-off to the allowance for loan losses following timely collection efforts and a thorough review. Further efforts are then pursued through various means available. Loans carried in a non-accrual status are generally collateralized and the possibility of future losses is considered in the determination of the allowance for loan losses.

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Nonperforming Assets

The following table sets forth, at the dates indicated, information with respect to the Company’s nonaccrual loans, restructured loans, total nonperforming loans (nonaccrual loans plus restructured loans), and total nonperforming assets.

		December 31, 2002			June 30, 2002			December 31, 2001
			(Dollars in thousands)
Nonaccrual loans		$	1,360		$	1,079		$	1,432
Restructured loans			—			—			—
	Total nonperforming loans		1,360			1,079			1,432
Real estate owned			85			50			31
	Total nonperforming assets	$	1,445		$	1,129		$	1,463
Accruing loans past due 90 days or more		$	—		$	—		$	—
Allowance for loan losses			1,194			1,066			793
Nonperforming loans to period-end loans			1.23	%		.94	%		1.40	%
Allowance for loan losses to period-end loans			1.08	%		.93	%		.78	%
Allowance for loan losses to nonperforming loans			87.79	%		98.79	%		55.38	%
Nonperforming assets to total assets			1.04	%		.86	%		1.18	%

The Company’s financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on loans, except for loans accounted for on a nonaccrual basis. Loans are placed on a nonaccrual basis when there are serious doubts about the collectibility of principal or interest. Generally, the Company’s policy is to place a loan on nonaccrual status when the loan becomes past due 90 days. Loans are also placed on nonaccrual status in cases where it is uncertain as to whether the borrower can satisfy the contractual terms of the loan agreement. Amounts received on nonaccrual loans generally are applied first to principal and then to interest only after all past due principal has been collected. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal, have been granted due to the borrower’s weakened financial condition. Interest is accrued on restructured loans at the restructured rates when it is anticipated that no loss of original principal will occur.  Real estate owned consists of foreclosed, repossessed and idled properties.

Analysis of Allowance for Loan Losses

The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. The allowance for loan losses is increased by provisions charged to operations and by recoveries of amounts previously charged off, and reduced by loans charged off. The Company evaluates the adequacy of the allowance monthly. In addition, on a monthly basis the board of directors reviews the loan portfolio, conducts an evaluation of credit quality and reviews the computation of the loan loss provision, recommending changes as may be required. In evaluating the adequacy of the allowance, the Company considers the growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. In addition, regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require the Company to make adjustments to the allowance for loan losses based upon judgments different from those of Management.

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The Company follows a loan review program designed to evaluate the credit risk in the loan portfolio. Through this loan review process, the Company maintains an internally classified watch list that helps Management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, Management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquent status. As a result of this process, certain loans are categorized as substandard, doubtful or loss and reserves are allocated based on Management’s judgment and historical experience.

Loans classified as “substandard” are those loans with clear and defined weaknesses such as unfavorable financial ratios, uncertain repayment sources or poor financial condition that may jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some losses if the deficiencies are not corrected. A reserve of 15% is generally allocated to these loans. Loans classified as “doubtful” are those loans that have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable. A reserve of 50% is generally allocated to loans classified as doubtful. Loans classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be achieved in the future. As a practical matter, when loans are identified as loss they are charged off against the allowance for loan losses. In addition to the above classification categories, we also categorize loans based upon loan type, assigning an allowance allocation based upon each category.

The allowance for loan losses represents Management’s estimate of an amount adequate to provide for known and inherent losses in the loan portfolio in the normal course of business. The Company makes specific allowances that are allocated to certain individual loans and pools of loans based on risk characteristics, as discussed above. In addition to the allocated portion of the allowance for loan losses, the Company maintains an unallocated portion that is not assigned to any specific category of loans. This unallocated portion is intended to reserve for the inherent risk in the portfolio and the intrinsic inaccuracies associated with the estimation of the allowance for loan losses and its allocation to specific loan categories. While Management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while Management believe the Company has established the allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing the portfolio, will not require an increase in the allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed herein. Any material increase in the allowance for loan losses may adversely affect the Company’s financial condition and results of operations.

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The following table shows the allocation of the allowance for loan losses at the dates indicated. The allocation is based on an evaluation of defined loan problems, historical ratios of loan losses and other factors that may affect future loan losses in the categories of loans shown.

					At December 31, 2002					At June 30, 2002
					Amount		% of Total Loans (1)			Amount		% of Total Loans (1)
					(Dollars in thousands)
Balance applicable to:
	Real estate loans:
		One-to-four family residential			$	459		62.4	%	$	396		59.7	%
		Commercial				215		13.8	%		126		9.6	%
		Construction				100		6.5	%		—		10.6	%
		Home improvement				76		8.7	%		42		7.1	%
		Other loans:
			Commercial			200		4.8	%		230		5.7	%
			Consumer			80		3.8	%		140		7.3	%
			Unallocated			62		—	%		132		—	%
	Total				$	1,194		100.0	%	$	1,066		100.0	%
			(1)	Represents total of all outstanding loans in each category as a percent of total loans outstanding.

Liquidity and Capital Resources

During the six months ended December 31, 2002, the Company paid cash dividends of $.265 per share.  Although the Company anticipates that it will continue to declare cash dividends on a regular basis, the Board of Directors will review its policy on the payment of dividends on an ongoing basis, and such payment will be subject to future earnings, cash flows, capital needs, and regulatory restrictions.

Maintaining adequate liquidity while managing interest rate risk is the primary goal of Great Pee Dee Bancorp’s asset and liability management strategy. Liquidity is the ability to fund the needs of the Bank’s borrowers and depositors, pay operating expenses, and meet regulatory liquidity requirements. Maturing investments, loan and mortgage-backed security principal repayments, deposits and income from operations are the main sources of liquidity. The Bank’s primary uses of liquidity are to fund loans and to make investments.

As of December 31, 2002, liquid assets (cash, interest-earning deposits, federal funds sold and investment securities) were approximately $19.9 million, which represents 19.5% of deposits. At that date, outstanding loan commitments were $700,000, the undisbursed portion of construction loans was $1.6 million and undrawn lines of credit totaled $4.0 million. Funding for these commitments is expected to be provided from deposits, loan principal repayments, maturing investments, income generated from operations and, to the extent necessary, from borrowings.

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Under federal capital regulations, First Federal must satisfy certain minimum leverage ratio requirements and risk-based capital requirements. Failure to meet such requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. At December 31, 2002, First Federal exceeded all such requirements.

The Bank is restricted in its ability to pay dividends and to make distributions. A significant source of the Company’s funds are dividends received from the Bank. In fiscal 2003, the amount of dividends that can be paid by the Bank without prior approval from regulators is an amount that should be adequate to cover Great Pee Dee’s cash requirements.

Item 3. - CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC Filings.  There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

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Part II.   OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Securities Holders

The Annual Meeting of Shareholders was held on October 16, 2002.  Of the 1,755,612 shares entitled to vote at the meeting, 1,506,482 voted.  The following matters were voted on at the meeting:

Proposal 1:	To elect three members of the Board of Directors for three-year terms until the Annual Meeting of Shareholders in 2005.  Votes for each nominee were as follows:
	Name	For	Withheld
	Herbert W. Watts	1,506,317	165
	James C. Crawford, III	1,504,217	2,265
	Cornelius B. Young	1,506,317	165
	The following directors continue in office after the meeting:  William R. Butler, H. Malloy Evans, Jr., Henry P. Duvall, IV, John S. Long and Robert M. Bennett, Jr.,
Proposal 2:	To ratify the appointment of Dixon Odom PLLC as the Bank’s independent accountants for the year ending June 30, 2003.

For	Against	Abstain
1,506,152	—	330

Item 6.  Exhibits and Reports on Form 8-K

(a)	Exhibits.
	99.1  Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b)	Reports on Form 8-K.
	During the quarter ended December 31, 2002, the Company filed no reports on Form 8-K.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		GREAT PEE DEE BANCORP, INC.
Date:  February 11, 2003	By:	/s/ HERBERT W. WATTS
		Herbert W. Watts
		Chief Executive Officer
Date:  February 11, 2003	By:	/s/ JOHNNIE L. CRAFT
		Johnnie L. Craft
		Chief Financial Officer

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CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Herbert W. Watts, certify that:
(1)	I have reviewed this quarterly report on Form 10-QSB of Great Pee Dee Bancorp, Inc., (the “registrant”);
(2)	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
(3)	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
(4)	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
	(a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	(b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	(c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
(5)	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	(a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
(6)	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: February 11, 2003			By:	/s/ HERBERT W. WATTS
				Herbert W. Watts
				Chief Executive Officer

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CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Johnnie L. Craft, certify that:
(1)	I have reviewed this quarterly report on Form 10-QSB of Great Pee Dee Bancorp, Inc., (the “registrant”);
(2)	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
(3)	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
(4)	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
	(a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
	(b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	(c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
(5)	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	(a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	(b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
(6)	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: February 11, 2003			By:	/s/ JOHNNIE L. CRAFT
				Johnnie L. Craft
				Chief Financial Officer

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