Great Pee Dee Bancorp (PEDE) 10QSB 2003 Q3 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 March 31, 2003
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 May 1, 2003, 1,754,725 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 I.	FINANCIAL INFORMATION
Item 1 -	Financial Statements (Unaudited)
		Consolidated Statements of Financial Condition March 31, 2003 and June 30, 2002	3
		Consolidated Statements of Operations Three Months and Nine Months Ended March 31, 2003 and 2002	4
		Consolidated Statements of Cash Flows Nine Months Ended March 31, 2003 and 2002	5
		Notes to Consolidated Financial Statements	6
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3 -	Controls and Procedures		14
Part II.	OTHER INFORMATION
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

	March 31, 2003 (Unaudited)			June 30, 2002*
	(In Thousands)
ASSETS
Cash on hand and in banks	$	2,021		$	1,155
Interest-earning balances in other banks		9,151			2,487
Federal funds sold		6,568			3,330
Investment securities available for sale, at fair value		429			452
Investment securities held to maturity, at amortized cost		9,294			4,877
Loans receivable		110,894			110,677
Allowance for loan losses		(1,286	)		(1,066	)
Loans receivable, net		109,608			109,611
Loans held for sale		1,437			3,071
Accrued interest receivable		920			882
Premises and equipment, net		2,095			2,027
Stock in the Federal Home Loan Bank, at cost		1,000			1,000
Real estate acquired in settlement of loans		35			50
Intangible assets		1,280			1,474
Other assets		810			617
TOTAL ASSETS	$	144,648		$	131,033
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposit accounts	$	107,958		$	88,090
Advances from Federal Home Loan Bank		10,500			17,000
Accrued interest payable		120			91
Advance payments by borrowers for property taxes and insurance		58			90
Accrued expenses and other liabilities		145			194
TOTAL LIABILITIES		118,781			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		22,204			21,966
Unearned compensation		(1,121	)		(1,212	)
Retained earnings, substantially restricted		10,635			10,417
Accumulated other comprehensive loss		(44	)		(30	)
		31,696			31,163
Common stock in treasury, at cost (469,892 and 459,005 shares, respectively)		(5,829	)		(5,595	)
TOTAL STOCKHOLDERS’ EQUITY		25,867			25,568
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	144,648		$	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 March 31,				Nine Months Ended March 31,
	2003		2002		2003		2002
	(In Thousands Except Share and Per Share Data)
INTEREST INCOME
Loans	$	1,937	$	2,048	$	6,011	$	6,195
Investments		100		103		282		318
Deposits in other banks and federal funds sold		33		19		108		63
TOTAL INTEREST INCOME		2,070		2,170		6,401		6,576
INTEREST EXPENSE
Deposit accounts		725		691		2,258		2,441
Borrowed funds		88		148		307		497
TOTAL INTEREST EXPENSE		813		839		2,565		2,938
NET INTEREST INCOME		1,257		1,331		3,836		3,638
PROVISION FOR LOAN LOSSES		100		150		250		375
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,157		1,181		3,586		3,263
NON-INTEREST INCOME		208		179		758		528
NON-INTEREST EXPENSES
Personnel costs		435		336		1,198		999
Occupancy		73		114		241		298
Other		473		392		1,098		1,072
TOTAL NON-INTEREST EXPENSES		981		842		2,537		2,369
INCOME BEFORE INCOME TAXES		384		518		1,807		1,422
PROVISION FOR INCOME TAXES		126		191		669		524
NET INCOME	$	258	$	327	$	1,138	$	898
NET INCOME PER SHARE
Basic	$	.16	$	.20	$	.71	$	.55
Diluted		.16		.20		.69		.54
CASH DIVIDEND PER SHARE	$	.140	$	.125	$	.405	$	.339
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic		1,606,978		1,632,639		1,613,317		1,637,232
Effect of outstanding stock options		35,365		22,336		31,959		12,789
Assuming dilution		1,642,343		1,654,975		1,645,276		1,650,021

See accompanying notes.

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

	Nine Months Ended March 31,
	2003			2002
	(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,138		$	898
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		336			371
Provision for loan losses		250			375
Release of ESOP shares		149			117
Amortization of stock awards under recognition and retention plan		10			38
Treasury stock issued as compensation		—			12
(Increase) decrease in loans held for sale		1,635			(28	)
Change in assets and liabilities:
Increase in accrued interest receivable		(38	)		(289	)
Increase in accrued interest payable		29			27
Other		(233	)		(238	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		3,276			1,283
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of held to maturity investment securities		(8,406	)		(1,299	)
Proceeds from maturities of held-to-maturity investments		3,989			1,059
Net increase in loans		(282	)		(7,474	)
Purchase of Federal Home Loan Bank stock		—			(275	)
Purchases of property and equipment		(210	)		(956	)
Proceeds from sale of foreclosed real estate		50			—
NET CASH USED BY INVESTING ACTIVITIES		(4,859	)		(8,945	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts		19,868			3,511
Proceeds from (repayments of) FHLB advances		(6,500	)		4,700
Decrease in advances from borrowers		(32	)		(57	)
Purchase of treasury stock		(355	)		(179	)
Cash dividends paid		(636	)		(538	)
Exercise of stock options		6			—
NET CASH PROVIDED BY FINANCING ACTIVITIES		12,351			7,437
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		10,768			(225	)
CASH AND CASH EQUIVALENTS, BEGINNING		6,972			3,354
CASH AND CASH EQUIVALENTS, ENDING	$	17,740		$	3,129

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 nine month periods ended March 31, 2003 and 2002, 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, Sentry Bank & Trust (“Sentry” or the “Bank”) and First Federal Investment Services, Inc. Operating results for the three and nine month periods ended March 31, 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2003.

Effective February 17, 2003, the Company’s bank subsidiary changed its name from First Federal Savings and Loan Association of Cheraw to Sentry Bank & Trust.

NOTE B - SIGNIFICANT ACCOUNTING POLICIES

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.

Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25 (“Opinion No. 25”), Accounting for Stock Issued to Employees, whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company’s stock option plan have no intrinsic value at the grant date, and, under Opinion No. 25, no compensation cost is recognized for them. The Company has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, has provided pro forma disclosures of net income and earnings per share and other disclosures, as if the fair value based method of accounting had been applied.

	Three Months Ended March 31,						Nine Months Ended March 31,
		2003			2002			2003			2002
	(Amounts in thousands, except per share data)
Net income:
As reported	$	258		$	327		$	1,138		$	898
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(5	)		(4	)		(11	)		(6	)
Pro forma	$	253		$	323		$	1,127		$	892
Basic net income per share:
As reported	$	.16		$	.20		$	.71		$	.55
Proforma		.16			.20			.70			.54
Diluted net income per share:
As reported	$	.16		$	.20		$	.69		$	.54
Pro forma		.15			.20			.68			.54

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

NOTE C - 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 D - NEW ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.  SFAS No. 141 requires that all business combinations entered into after June 30, 2001 be accounted for under the purchase method.  SFAS No. 142 requires that goodwill and all intangible assets of indefinite life be periodically (at least annually) evaluated for impairment, with any resulting impairment loss being charged against earnings.  Also, under SFAS No. 142, goodwill resulting from any business combination accounted for in accordance with SFAS No. 141 will not be amortized, and the amortization of goodwill related to business combinations entered into prior to July 1, 2001 will be discontinued.  Substantially all of the Company’s intangible assets were recorded in connection with its purchase in March of 2000 of a branch office in Florence, South Carolina.  None of those intangible assets constitutes goodwill that must cease to be amortized under the provisions of SFAS 142.  Accordingly, the Company’s adoption of SFAS 142 on July 1, 2001 has not significantly affected its consolidated financial statements.

In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9.  This statement removes acquisitions of financial institutions from the scope of both SFAS 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 No. 147 has had no effect on the Company’s operating results.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, 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 SFAS No. 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.  SFAS No. 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 Opinion No. 25 and has adopted the disclosure provisions of SFAS No. 148.

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

NOTE E - COMPREHENSIVE INCOME

A summary of comprehensive income is as follows:

	Three Months Ended March 31,					Nine Months Ended March 31,
	2003		2002			2003			2002
	(In thousands)
Net income	$	258	$	327		$	1,138		$	898
Other comprehensive income
Net increase (decrease) in the fair value of investment securities available for sale, net of tax		3		(6	)		(14	)		(14	)
Total comprehensive income	$	261	$	321		$	1,124		$	884

NOTE F - INTANGIBLE ASSETS

The following is a summary of the gross carrying amount and accumulated amortization of amortized intangible assets as of March 31, 2003 and June 30, 2002:

	March 31, 2003				June 30, 2002
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
	(In thousands)
Non-compete agreement	$	250	$	250	$	250	$	194
Deposit intangibles related to branch acquisition		1,850		570		1,850		432
Total	$	2,100	$	820	$	2,100	$	626

The following table presents the estimated amortization for intangible assets for each of the five fiscal years ending June 30, 2007 and the estimated amount amortizable thereafter.  These estimates are subject to change in future periods to the extent management determines it is necessary to make adjustments to the carrying value or estimated useful lives of amortized intangible assets.

	Estimated amortization expense
	(In thousands)
2003	$	241
2004		185
2005		185
2006		185
2007		185
Thereafter		493
	$	1,474

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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
March 31, 2003 and June 30, 2002

The Company’s growth during the nine months ended March 31, 2003 was primarily deposit-driven, as total customer deposit accounts increased by $19.9 million, or 22.6%, from $88.1 million to $108.0 million.  Deployment of the funds generated by this deposit growth pushed total assets up from $131.0 million at the beginning of the nine months to $144.6 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 $14.3 million.  The balance of the funds generated by deposit growth was applied to reduce borrowings, which were lowered from $17.0 million at June 30, 2002 to $10.5 million at March 31, 2003.  Net loan receivable of $109.6 million at March 31, 2003 was unchanged from the June 30, 2002 balance.  Total stockholders’ equity was $25.9 million at March 31, 2002 as compared with $25.6 million at June 30, 2002, an increase of $299,000.  Net income of $1.1 million for the nine months was offset by a combination of cash dividends of $636,000 and treasury share purchases aggregating $355,000.  At March 31, 2003, the Bank continued to significantly exceed all applicable regulatory capital requirements.

Comparison of Results of Operations for the
Three Months Ended March 31, 2003 and 2002

Net Income.  Net income for the quarter ended March 31, 2003 was $258,000, a decrease of $69,000 from net income of $327,000 for the quarter ended March 31, 2002.  On a per share basis, net income for the current quarter was $.16 per basic and diluted share as compared with $.20 per basic and diluted for the third quarter of the last fiscal year.  The primary reason for the decrease in income was costs, net of income tax, of $118,000 incurred in connection with the changing of the name of the Company’s bank subsidiary from First Federal Savings and Loan Association of Cheraw to Sentry Bank & Trust.

Net Interest Income.  Net interest income for the quarter ended March 31, 2003 was $1,257,000 as compared with $1,331,000 during the quarter ended March 31, 2002, a decrease of $74,000.   This decrease resulted from a narrowing of the Company’s net interest margin that offset the effects of 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 has resulted in reductions in both the rates of interest earned on interest-earning assets and interest paid on interest-bearing liabilities.  For the current quarter the Company has maintained a higher level of investment in liquid assets, which earn lower rates of interest than do loans.  Interest-earning liquid assets represented 16.6% of total interest-earning assets for the current quarter as compared with 9.1% of total interest-earning assets for the quarter ended March 31, 2002.  This shift in asset concentrations is the principal reason for the narrowing of the Company’s interest rate spread.  For the quarter ended March 31, 2003, the Company’s interest rate spread was 3.43%, and its net interest margin was 3.74% on average interest-earning assets of $134.3 million.  In comparison, for the quarter ended March 31, 2002, the Company’s interest rate spread was 3.93%, and its net interest margin was 4.50% on average interest-earning assets of $118.4 million.

Provision for Loan Losses.  The provision for loan losses was $100,000 for the current quarter, down $50,000 from the $150,000 provision made for the quarter ended March 31, 2002.  There were net loan charge-offs of $8,000 during the current quarter, while net loan charge-offs totaled $0 during the quarter ended March 31, 2002.  At March 31, 2003, nonaccrual loans aggregated $1,538,000 while the allowance for loan losses stood at $1,286,000.   While total loans outstanding have not changed significantly during the current year, the Company has continued to increase the allowance for loan losses because of

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increased nonaccrual loans and because of concerns about overall economic conditions in the Company’s market area.

Non-Interest Income.  Non-interest income increased by $29,000, from $179,000 for the three months ended March 31, 2002 to $208,000 for the three months ended March 31, 2003.  The Company realized additional income of $44,000 from customer overdrafts fees and $18,000 from originations of mortgage loans for sale in the secondary market.  Offsetting these increases in non-interest income was a decrease of $25,000 in investment service fees.  Non-interest income for the quarter ended March 31, 2002 included $18,000 in non-recurring income related to the disposal of real estate acquired in settlement of loans.

Non-Interest Expenses.  Non-interest expenses increased from $842,000 for the three months ended March 31, 2002 to $981,000 for the current quarter, an increase of $139,000.  This increase resulted from additional personnel costs of $99,000 related principally to growth, partially offset by a decrease of $41,000 in occupancy costs.  The higher occupancy costs in the quarter ended March 31, 2002 related to the relocation of the Florence branch to a new facility.  Most significantly, however, the Company incurred advertising, administrative and other costs aggregating $190,000 during the three months ended March 31, 2003 in connection with change of the bank subsidiary’s name to Sentry Bank & Trust.

Provision for Income Taxes.  The provision for income taxes, as a percentage of income before income taxes, was 32.8% and 36.8% for the quarters ended March 31, 2003 and 2002, respectively.  The decrease in the effective rate for the current quarter resulted principally from a revision in the expected effective tax rate to be applicable for the full fiscal year ending June 30, 2003.

Comparison of Results of Operations for the
Nine Months Ended March 31, 2003 and 2002

Net Income.  Net income for the nine months ended March 31, 2003 was $1,138,000, an increase of $240,000, or 26.7%, over net income of $898,000 for the nine months ended March 31, 2002.  On a per share basis, net income for the current nine months was $.71 per basic share and $.69 per diluted share as compared with $.55 basic and $.54 diluted for the first nine months of the last fiscal year.  The reasons for the increase in income were increases of $198,000 and $230,000, respectively, in net interest income and non-interest income, and a decrease of $125,000 in the provision for loan losses, partially offset by increases of $168,000 and $145,000, respectively, in non-interest expenses and the provision for income taxes. 

Net Interest Income.  Net interest income for the nine months ended March 31, 2003 was $3,836,000 as compared with $3,638,000 during the nine months ended March 31, 2002, an increase of $198,000.  This increase resulted principally from a higher level of interest-earning assets during the current nine months as compared with the same nine months a year ago, offsetting the effects of a narrowing of the Company net interest margin.  The sustained period of lower interest rates has resulted in reductions in both the rates of interest earned on interest-earning assets and interest paid on interest-bearing liabilities.  For the current nine months the Company has maintained a higher level of investment in liquid assets, which earn lower rates of interest than do loans.  Interest-earning liquid assets represented 14.1% of total interest-earning assets for the current nine months as compared with 8.8% of total interest-earning assets for the nine months ended March 31, 2002.  This shift in asset concentrations is the principal reason for the narrowing of the Company’s interest rate spread and margin.  For the nine months ended March 31, 2003, the Company’s interest rate spread was 3.42%, and its net interest margin was 3.86% on average interest-earning assets of $132.5 million.  In comparison, for the nine months ended March 31, 2002, the Company’s interest rate spread was 3.45%, and its net interest margin was 4.16% on average interest-earning assets of $116.5 million. 

Provision for Loan Losses.  The provision for loan losses was $250,000 for the current nine months, down $125,000 from the $375,000 provision made for the nine months ended March 31, 2002.  There were net loan charge-offs of $30,000 during the current nine months, as compared with net loan charge-offs of $2,000 during the nine months ended March 31, 2002.  At March 31, 2003, nonaccrual loans aggregated $1,538,000 while the allowance for loan losses stood at $1,286,000.   While total loans outstanding have not changed significantly during the current year, the Company has continued to increase the allowance for loan losses because of increased nonaccrual loans and because of concerns about overall economic conditions in the Company’s market area.

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Non-Interest Income.  Non-interest income increased by $230,000, from $528,000 for the nine months ended March 31, 2002 to $758,000 for the nine months ended March 31, 2003.  Of this increase, $175,000 resulted from recognition during the current nine months of a nonrecurring income item that arose from settlement of a dispute with another company.  In addition, the Company realized additional income of $111,000 from customer overdrafts during the current nine 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 $19,000 in income from originations of mortgage loans for sale in the secondary market and a decrease of $34,000 for investment services.

Non-Interest Expenses.  Non-interest expenses increased from $2,369,000 for the nine months ended March 31, 2002 to $2,537,000 for the current nine months, an increase of $168,000.  This increase resulted from additional personnel costs of $199,000 related principally to growth, partially offset by a decrease of $57,000 in occupancy costs. The higher occupancy costs in the nine months ended March 31, 2002 related to the relocation of the Florence branch to a new facility.  Included in other non-interest expenses for the nine months ended March 31, 2003 are advertising, administrative and other costs aggregating $190,000 during incurred in connection with change of the bank subsidiary’s name to Sentry Bank & Trust.  Other non-interest expenses for the nine months ended March 31, 2002 included $73,000 incurred during that period as a result of implementation of a new data processing system.  Exclusive of these items, the overall 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 37.0% and 36.8% for the nine months ended March 31, 2003 and 2002, 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.

	March 31, 2003			June 30, 2002			March 31, 2002
	(Dollars in thousands)
Nonaccrual loans	$	1,538		$	1,079		$	1,493
Restructured loans		—			—			—
Total nonperforming loans		1,538			1,079			1,493
Real estate owned		35			50			50
Total nonperforming assets	$	1,573		$	1,129		$	1,543
Accruing loans past due 90 days or more	$	—		$	—		$	—
Allowance for loan losses		1,286			1,066			943
Nonperforming loans to period-end loans		1.37	%		.94	%		1.46	%
Allowance for loan losses to period-end loans		1.14	%		.93	%		.89	%
Allowance for loan losses to nonperforming loans		83.61	%		98.79	%		63.16	%
Nonperforming assets to total assets		1.06	%		.86	%		1.24	%

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.

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

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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 adjustment to 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.

Liquidity and Capital Resources

During the nine months ended March 31, 2003, the Company paid cash dividends of $.405 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 March 31, 2003, liquid assets (cash, interest-earning deposits, federal funds sold and investment securities) were approximately $27.5 million, which represents 25.4% of deposits. At that date, outstanding loan commitments were $3.9 million, the undisbursed portion of construction loans was $1.7 million and undrawn lines of credit totaled $4.2 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.

Under federal capital regulations, Sentry must satisfy certain minimum leverage ratio requirements and risk-based capital requirements. Failure to meet such requirements can initiate certain mandatory, and

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possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. At March 31, 2003, Sentry 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 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 March 31, 2003, 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:	May 13, 2003	By:	/s/ HERBERT W. WATTS
			Herbert W. Watts Chief Executive Officer
Date:	May 13, 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 officer 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 officer 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 officer 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: May 13, 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 officer 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 officer 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 officer 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: May 13, 2003	By:	/s/ JOHNNIE L. CRAFT
		Johnnie L. Craft Chief Financial Officer

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