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, 2004
| ¨ | 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) |
901 CHESTERFIELD HIGHWAY, 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 ¨
As of May 3, 2004, 1,811,784 shares of the issuer’s common stock, $.01 par value, were outstanding. The registrant has no other classes of securities outstanding.
This report contains 14 pages.
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Great Pee Dee Bancorp, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
| March 31, 2004 (Unaudited) | June 30, 2003* | |||||||
| (In Thousands) | ||||||||
ASSETS | ||||||||
Cash on hand and in banks | $ | 2,140 | $ | 1,498 | ||||
Interest-earning balances in other banks | 583 | 3,580 | ||||||
Federal funds sold | 1,921 | 3,834 | ||||||
Investment securities available for sale, at fair value | 27,346 | 449 | ||||||
Investment securities held to maturity, at amortized cost | — | 18,065 | ||||||
Loans receivable | 116,534 | 109,370 | ||||||
Allowance for loan losses | (1,550 | ) | (1,416 | ) | ||||
Loans receivable, net | 114,984 | 107,954 | ||||||
Loans held for sale | 1,792 | 2,056 | ||||||
Accrued interest receivable | 602 | 792 | ||||||
Premises and equipment, net | 4,110 | 2,340 | ||||||
Stock in the Federal Home Loan Bank, at cost | 1,233 | 675 | ||||||
Real estate/other assets acquired in settlement of loans | 189 | 36 | ||||||
Intangible assets | 1,094 | 1,233 | ||||||
Other assets | 924 | 814 | ||||||
TOTAL ASSETS | $ | 156,918 | $ | 143,326 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Deposit accounts | $ | 108,967 | $ | 108,812 | ||||
Advances from Federal Home Loan Bank | 21,000 | 8,000 | ||||||
Accrued interest payable | 90 | 96 | ||||||
Advance payments by borrowers for property taxes and insurance | 79 | 108 | ||||||
Accrued expenses and other liabilities | 324 | 266 | ||||||
TOTAL LIABILITIES | 130,460 | 117,282 | ||||||
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 | 21,865 | 21,911 | ||||||
Unearned compensation | (1,004 | ) | (1,083 | ) | ||||
Retained earnings, substantially restricted | 11,135 | 10,943 | ||||||
Accumulated other comprehensive loss | (6 | ) | (31 | ) | ||||
| 32,012 | 31,762 | |||||||
Common stock in treasury, at cost (429,833 and 461,002 shares, respectively) | (5,554 | ) | (5,718 | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY | 26,458 | 26,044 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 156,918 | $ | 143,326 | ||||
* Derived from audited consolidated 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, | |||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
| (In Thousands Except Share and Per Share Data) | ||||||||||||
INTEREST INCOME | ||||||||||||
Loans | $ | 1,797 | $ | 1,937 | $ | 5,468 | $ | 6,011 | ||||
Investments | 294 | 100 | 797 | 282 | ||||||||
Deposits in other banks and federal funds sold | 6 | 33 | 18 | 108 | ||||||||
TOTAL INTEREST INCOME | 2,097 | 2,070 | 6,283 | 6,401 | ||||||||
INTEREST EXPENSE | ||||||||||||
Deposit accounts | 608 | 725 | 1,922 | 2,258 | ||||||||
Borrowed funds | 170 | 88 | 430 | 307 | ||||||||
TOTAL INTEREST EXPENSE | 778 | 813 | 2,352 | 2,565 | ||||||||
NET INTEREST INCOME | 1,319 | 1,257 | 3,931 | 3,836 | ||||||||
PROVISION FOR LOAN LOSSES | 75 | 100 | 375 | 250 | ||||||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 1,244 | 1,157 | 3,556 | 3,586 | ||||||||
NON-INTEREST INCOME | 355 | 208 | 840 | 758 | ||||||||
NON-INTEREST EXPENSES | ||||||||||||
Personnel costs | 598 | 435 | 1,522 | 1,198 | ||||||||
Occupancy | 116 | 73 | 287 | 241 | ||||||||
Other | 387 | 473 | 1,086 | 1,098 | ||||||||
TOTAL NON-INTEREST EXPENSES | 1,101 | 981 | 2,895 | 2,537 | ||||||||
INCOME BEFORE INCOME TAXES | 498 | 384 | 1,501 | 1,807 | ||||||||
PROVISION FOR INCOME TAXES | 173 | 126 | 545 | 669 | ||||||||
NET INCOME | $ | 325 | $ | 258 | $ | 956 | $ | 1,138 | ||||
NET INCOME PER SHARE | ||||||||||||
Basic | $ | .19 | $ | .16 | $ | .57 | $ | .71 | ||||
Diluted | .19 | .16 | .56 | .69 | ||||||||
CASH DIVIDEND PER SHARE | $ | .155 | $ | .140 | $ | .450 | .405 | |||||
WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||||||
Basic | 1,682,513 | 1,606,978 | 1,664,819 | 1,613,317 | ||||||||
Effect of outstanding stock options | 31,271 | 35,365 | 40,092 | 31,959 | ||||||||
Assuming dilution | 1,713,784 | 1,642,343 | 1,704,911 | 1,645,276 | ||||||||
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, | ||||||||
| 2004 | 2003 | |||||||
| (In Thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 956 | $ | 1,138 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 391 | 336 | ||||||
Gain on sale of Securities | (163 | ) | — | |||||
Gain on sale of foreclosed real estate | (22 | ) | — | |||||
Provision for loan losses | 375 | 250 | ||||||
Release of ESOP shares | 129 | 149 | ||||||
Amortization of stock awards under recognition and retention plan | 12 | 10 | ||||||
Treasury stock issued as compensation | 41 | — | ||||||
(Increase) decrease in loans held for sale | 264 | 1,635 | ||||||
Change in assets and liabilities: | ||||||||
(Increase) decrease in accrued interest receivable | 190 | (38 | ) | |||||
Increase (decrease) in accrued interest payable | (6 | ) | 29 | |||||
Other assets | (15 | ) | (233 | ) | ||||
Other liabilities | 58 | — | ||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 2,210 | 3,276 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of available for sale investment securities | (25,737 | ) | (8,406 | ) | ||||
Proceeds from maturities of held-to-maturity investments | 17,007 | 3,989 | ||||||
Net increase in loans | (7,779 | ) | (282 | ) | ||||
Purchase of Federal Home Loan Bank stock | (558 | ) | — | |||||
Purchases of property and equipment | (1,920 | ) | (210 | ) | ||||
Proceeds from sale of foreclosed real estate | 132 | 50 | ||||||
NET CASH USED BY INVESTING ACTIVITIES | (18,855 | ) | (4,859 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Net increase in deposit accounts | 155 | 19,868 | ||||||
Proceeds from (repayments of) FHLB advances | 13,000 | (6,500 | ) | |||||
Decrease in advances from borrowers | (29 | ) | (32 | ) | ||||
Purchase of treasury stock | — | (355 | ) | |||||
Cash dividends paid | (764 | ) | (636 | ) | ||||
Exercise of stock options | 15 | 6 | ||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 12,377 | 12,351 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (4,268 | ) | 10,768 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING | 8,912 | 6,972 | ||||||
CASH AND CASH EQUIVALENTS, ENDING | $ | 4,644 | $ | 17,740 | ||||
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, 2004 and 2003, in conformity with accounting principles generally accepted in the United States of America.
The consolidated financial statements include the accounts of Great Pee Dee Bancorp, Inc. (the “Company”) and its wholly-owned subsidiary, Sentry Bank & Trust (“Sentry” or the “Bank”). Operating results for the three and nine month periods ended March 31, 2004, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2004.
The organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the consolidated financial statements filed as part of the Company’s 2003 annual report on Form 10-KSB. This quarterly report should be read in conjunction with such annual report.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
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, | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
| (Amounts in thousands, except per share data) | ||||||||||||||||
Net income: | ||||||||||||||||
As reported | $ | 325 | $ | 258 | $ | 956 | $ | 1,138 | ||||||||
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects | (2 | ) | (5 | ) | (28 | ) | (11 | ) | ||||||||
Pro forma | $ | 323 | $ | 253 | $ | 928 | $ | 1,127 | ||||||||
Basic net income per share: | ||||||||||||||||
As reported | $ | .19 | $ | .16 | $ | .57 | $ | .71 | ||||||||
Proforma | .19 | .16 | .56 | .70 | ||||||||||||
Diluted net income per share: | ||||||||||||||||
As reported | $ | .19 | $ | .16 | $ | .56 | $ | .69 | ||||||||
Pro forma | .19 | .15 | .54 | .68 | ||||||||||||
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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 accounting principles generally accepted in the United States of America, 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.
NOTE D - COMPREHENSIVE INCOME
A summary of comprehensive income is as follows:
| Three Months Ended March 31, | Nine Months Ended March 31, | ||||||||||||
| 2004 | 2003 | 2004 | 2003 | ||||||||||
| (In thousands) | |||||||||||||
Net income | $ | 325 | $ | 258 | $ | 956 | $ | 1,138 | |||||
Other comprehensive income | |||||||||||||
Net increase (decrease) in the fair value of investment securities available for sale, net of tax | 3 | 3 | 25 | (14 | ) | ||||||||
Total comprehensive income | $ | 328 | $ | 261 | $ | 981 | $ | 1,124 | |||||
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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, 2004 and June 30, 2003
Total assets increased by $13.6 million during the nine month period ended March 31, 2004, from $143.3 million at June 30, 2003, to $156.9 million at December 31, 2003. The Company’s growth during the period was primarily a result of the utilization of $13.0 million of additional Federal Home Loan Bank (FHLB) advances. These advances were used to purchase investment securities and to fund loan growth.
The Company’s interest-earning liquid assets, including interest-earning balances in other banks, federal funds sold and investment securities increased by $3.9 million, to $29.9 million, during the nine months ended March 31, 2004, representing 19.0% of total assets at that date as compared with 18.1% of total assets at June 30, 2003. In addition, during the second quarter of the current fiscal year the Company transferred to available for sale all securities that previously had been classified as held to maturity. These reclassifications were made in order to reduce interest rate risk and to enhance the overall return on the investment portfolio.
Net loans receivable grew by $7.0 million from $108.0 million at June 30, 2003, to $115.0 million at March 31, 2004. Funding for this loan growth was provided by additional FHLB advances.
Premises and equipment increased by $1.8 million during the nine month period as a result of costs incurred in construction of the Company’s new headquarters/branch office facility in Cheraw. This facility opened for business on February 23, 2004. Principally as a result of opening this new facility, the Company has added ten full-time employees since the beginning of the year.
The total balance of customer deposits was essentially unchanged during the nine month period ended March 31, 2004. However, deposit composition has changed as interest rate sensitive customers shifted funds from time deposits to lower interest bearing, NOW, money market and savings accounts in anticipation of future increases in interest rates.
Total stockholders’ equity was $26.5 million at March 31, 2004, as compared with $26.0 million at June 30, 2003, an increase of $414,000 resulting principally from retention of a portion of the net income of $956,000 earned during the period. At March 31, 2004, the Bank continued to significantly exceed all applicable regulatory capital requirements.
Comparison of Results of Operations for the
Three Months Ended March 31, 2004 and 2003
Net Income. Net income for the quarter ended March 31, 2004, was $325,000, an increase of $67,000 from net income of $258,000 for the quarter ended March 31, 2003. On a per share basis, net income for the current quarter was $.19 per diluted share as compared with $.16 per diluted for the third quarter of the last fiscal year. The primary reason for the increase was an increase in non-interest income, which totaled $355,000 for the current quarter, an increase of $147,000 from the $208,000 of non-interest income recorded during the quarter ended March 31, 2003.
Net Interest Income.Net interest income for the quarter ended March 31, 2004, was $1,319,000 as compared with $1,257,000 during the quarter ended March 31, 2003, an increase of $62,000. This increase resulted principally from an increase in interest-earning assets from period to period. Average interest-earning assets increased from $134.3 million for the three months ended March 31, 2003 to
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$148.1 million for the current three months, while average interest-bearing liabilities increased from $181.4 million to $129.9 million respectively. For the quarter ended March 31, 2004, the Company’s interest rate spread was 3.30%, and its net interest margin was 3.56%. In comparison, for the quarter ended March 31, 2003, the Company’s interest rate spread was 3.43%, and its net interest margin was 3.74%.
Provision for Loan Losses.The provision for loan losses was $75,000 for the current quarter, which was $25,000 less than the $100,000 provision made for the quarter ended March 31, 2003. There were net loan charge-offs of $39,000 during the current quarter as compared to $8,000 during the quarter ended March 31, 2003. Most of the net charge-offs during the quarter represented losses for which specific allocations of the allowance for loan losses had previously been made. At March 31, 2004, nonaccrual loans aggregated $2.4 million while the allowance for loan losses stood at $1,550,000, representing 1.33% of total loans outstanding. In comparison, the allowance for loan losses represented 1.26% of total loans at June 30, 2003 and 1.14% of total loans at March 31, 2003. The majority of nonaccrual loans are secured by real estate, and the possibility of future losses is considered in the determination of the allowance.
Non-Interest Income. Non-interest income increased by $147,000, from $208,000 for the three months ended March 31, 2003 to $355,000 for the three months ended March 31, 2004. This increase resulted from gains of $163,000 recognized in the current quarter from sales of investment securities available for sale. These gains from securities sales were partially offset by a decrease of $35,000 in income from origination of mortgage loans for sale in the secondary market, reflecting a slowdown in the refinancing of mortgage loans.
Non-Interest Expenses. Non-interest expenses increased from $981,000 for the three months ended March 31, 2003 to $1,101,000 for the current quarter, an increase of $120,000. Personnel costs and occupancy costs increased by $163,000 and $43,000, respectively, principally reflecting both growth and the additional costs incurred in connection with the staffing and opening of the new headquarters/branch office facility. Contributing to the increase in personnel costs was an increase of $20,000 in ESOP costs resulting from increases in the value of the Company’s common stock. Other non-interest expenses decreased by $86,000, with the total of $473,000 for the quarter ended March 31, 2003 including $190,000 of advertising, administrative and other costs incurred during that quarter in connection with the change of the Bank’s name to Sentry Bank & Trust.
Provision for Income Taxes. The provision for income taxes, as a percentage of income before income taxes, was 34.7% and 32.8% for the quarters ended March 31, 2004 and 2003, respectively.
Comparison of Results of Operations for the
Nine Months Ended March 31, 2004 and 2003
Net Income: Net income for the nine months ended March 31, 2004 was $956,000, a decrease of $182,000 compared to net income of $1,135,000 for the nine months ended March 31, 2003. On a per share basis, net income for the current nine months was $.57 per basic share and $.56 diluted share as compared with $.71 basic and $.69 diluted for the same period last year. The primary reasons for the decrease were recognition of a nonrecurring income item of $175,000 during the nine month period ended March 31, 2003, as well as an increase of $125,000 in the provision for loan losses for the current nine month period.
Net-Interest Income: Net interest income was $3,931,000 for the nine months ended March 31, 2004 compared to $3,836,000 for the same period last year. Interest rates have stayed at historically low levels, resulting in a narrowing of the Company’s interest rate spread and net interest margin that was offset by an increase in average interest-earning assets from period to period. For the nine months ended March 31, 2004, the Company’s interest rate spread was 3.03% and its net interest margin was 3.65% on average interest-earning assets of $148.2 million. In comparison, 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.
Provision for loan losses: The provision for loan losses was $375,000 for the current nine months, an increase of $125,000 from the provision made for the nine months ended March 31, 2003. This increase in the provision for loan losses reflects an increase in net loan charge-offs. There were net charge offs of
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$241,000 during the current nine months, as compared with net loan charge-offs of $2,000 during the nine months ended March 31, 2003. As a percentage of total loans outstanding, the allowance for loan losses is at 1.33% at March 31, 2004, up from 1.16% at March 31, 2003.
Non-Interest Income:Non-interest income increased $82,000 from $758,000 for the nine months ended March 31, 2003 to $840,000 for the nine months ended March 31, 2004. The total for the nine months ended March 31, 2003 included $175,000 of non-recurring income, offset during the current nine month period by the recognition of gains of $163,000 from the sale of investment securities available for sale.
Non-Interest Expense: Non-interest expenses increased from $2,537,000 for the period ended March 31, 2003 to $2,895,000 for the current nine month period, an increase of $358,000. Most of this increase was a result of personnel costs and related expenses resulting from the opening Sentry Bank and Trust’s new main office early in 2004. Contributing to the increase in personnel costs was an increase of $35,000 in ESOP costs resulting from increases in the value of the Company’s common stock.
Provision for Income Taxes: The provision for income taxes, as a percentage of income before income taxes, was 36.3% and 37.0% for the nine months ended March 31, 2004 and 2003 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 by real estate.
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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, 2004 | June 30, 2003 | March 31, 2003 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Nonaccrual loans | $ | 2,397 | $ | 2,252 | $ | 1,538 | ||||||
Restructured loans | — | — | — | |||||||||
Total nonperforming loans | 2,397 | 2,252 | 1,538 | |||||||||
Real estate owned/other asset owned | 189 | 36 | 35 | |||||||||
Total nonperforming assets | $ | 2,586 | $ | 2,288 | $ | 1,573 | ||||||
Accruing loans past due 90 days or more | $ | — | $ | — | $ | — | ||||||
Allowance for loan losses | 1,550 | 1,416 | 1,286 | |||||||||
Nonperforming loans to period-end loans | 2.06 | % | 2.00 | % | 1.37 | % | ||||||
Allowance for loan losses to period-end loans | 1.33 | % | 1.26 | % | 1.14 | % | ||||||
Allowance for loan losses to nonperforming loans | 64.66 | % | 62.88 | % | 83.61 | % | ||||||
Nonperforming assets to total assets | 1.65 | % | 1.60 | % | 1.06 | % | ||||||
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 categorized as substandard, doubtful or loss and reserves are allocated based on Management’s judgment and historical experience.
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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, 2004, the Company paid cash dividends of $.45 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, 2004, liquid assets (cash, interest-earning deposits, federal funds sold and investment securities) were approximately $32.0 million, which represents 29.4% of deposits. At that date, outstanding loan commitments were $4.7 million, the undisbursed portion of construction loans was $1.9 million and
undrawn lines of credit totaled $3.8 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, 2004, 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 2004, 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
As of the end of the period covered by 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-15(e). 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 have been no significant changes in internal control over financial reporting during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 6. Exhibits and Reports on Form 8-K
| (a) | Exhibits: |
| Exhibit # | Description | |
| 31.1 | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) | |
| 31.2 | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) | |
| 32 | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| (b) | Reports on Form 8-K. |
During the quarter ended March 31, 2004, the Company filed two reports on Form 8-K. On January 9, 2004, the Company announced the promotion of John S. Long to Chief Executive Officer of Sentry Bank and Trust, the Company’s wholly owned subsidiary. On January 16, 2004 the Company announced second quarter earnings.
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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 14, 2004 | By: | /s/ Herbert W. Watts | ||
Herbert W. Watts | ||||
Chief Executive Officer | ||||
Date: May 14, 2004 | By: | /s/ Johnnie L. Craft | ||
Johnnie L. Craft | ||||
Chief Financial Officer | ||||
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