Great Pee Dee Bancorp (PEDE) 10QSB 2006 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, 2005

¨ 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  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of February 6, 2006, 1,802,555 shares of the issuer’s common stock, $.01 par value, were outstanding. The registrant has no other classes of securities outstanding.

		Page No.
Part I.	FINANCIAL INFORMATION
Item 1 -	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition December 31, 2005 and June 30, 2005	3
	Consolidated Statements of Operations Three Months and Six Months Ended December 31, 2005 and 2004	4
	Consolidated Statements of Stockholders’ Equity Six Months Ended December 31, 2005 and 2004	5
	Consolidated Statements of Cash Flows Six Months Ended December 31, 2005 and 2004	6
	Notes to Consolidated Financial Statements	7
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 4 -	Submission of Matters to a Vote of Securities Holders	15
Item 6 -	Exhibits	15

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Part I. FINANCIAL INFORMATION

Item 1 - Financial Statements

Great Pee Dee Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

	December 31, 2005 (Unaudited)			June 30, 2005*
	(In thousands, except share and per share data)
ASSETS
Cash on hand and in banks	$	2,772		$	1,601
Interest-earning balances in other banks		726			432
Cash and cash equivalents		3,498			2,033
Investment securities available for sale, at fair value		26,934			28,779
Loans		174,691			155,724
Allowance for loan losses		(1,760	)		(1,593	)
Net loans		172,931			154,131
Loans held for sale		907			1,116
Accrued interest receivable		1,066			890
Restricted stock, at cost		1,960			1,681
Premises and equipment, net		5,053			4,098
Real estate acquired in settlement of loans		250			183
Intangible assets		771			863
Other assets		2,280			1,972
TOTAL ASSETS	$	215,650		$	195,746
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposit accounts	$	150,748		$	136,573
Short-term borrowings		2,677			8,448
Long-term borrowings		34,200			23,000
Accrued interest payable		198			191
Advance payments by borrowers for property taxes and insurance		51			157
Accrued expenses and other liabilities		1,444			1,121
TOTAL LIABILITIES		189,318			169,490
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		22,041			22,009
Unearned compensation		(784	)		(873	)
Retained earnings, substantially restricted		11,420			11,242
Accumulated other comprehensive loss		(620	)		(388	)
Common stock in treasury, at cost (422,062 and 423,107 shares, respectively)		(5,747	)		(5,756	)
TOTAL STOCKHOLDERS’ EQUITY		26,332			26,256
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	215,650		$	195,746

* Derived from audited consolidated financial statements

See accompanying notes.

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Great Pee Dee Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations (Unaudited)

	Three Months Ended December 31,				Six Months Ended December 31,
	2005		2004		2005		2004
	(In thousands, except per share data)
INTEREST INCOME
Loans	$	2,923	$	1,874	$	5,570	$	3,982
Investments		307		259		594		527
Deposits in other banks and federal funds sold		4		21		11		28
TOTAL INTEREST INCOME		3,234		2,154		6,175		4,537
INTEREST EXPENSE
Deposit accounts		1,175		714		2,149		1,349
Short-term borrowings		48		18		130		33
Long-term borrowings		310		107		561		270
TOTAL INTEREST EXPENSE		1,533		839		2,840		1,652
NET INTEREST INCOME		1,701		1,315		3,335		2,885
PROVISION FOR LOAN LOSSES		97		24		217		24
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		1,604		1,291		3,118		2,861
NON-INTEREST INCOME		210		351		470		427
NON-INTEREST EXPENSES
Personnel costs		591		571		1,172		1,183
Occupancy		144		143		290		308
Other		455		455		939		838
TOTAL NON-INTEREST EXPENSES		1,190		1,169		2,401		2,329
INCOME BEFORE INCOME TAXES		624		473		1,187		959
PROVISION FOR INCOME TAXES		246		169		463		345
NET INCOME	$	378	$	304	$	724	$	614
NET INCOME PER SHARE
Basic	$	0.22	$	0.18	$	0.42	$	0.36
Diluted		0.22		0.18		0.42		0.36
CASH DIVIDEND PER SHARE	$	0.16	$	0.16	$	0.32	$	0.315
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic		1,713		1,712		1,713		1,708
Effect of outstanding stock options		7		16		7		17
Assuming dilution		1,720		1,728		1,720		1,725

See accompanying notes.

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Great Pee Dee Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity (Unaudited)

	Shares of common stock			Par value of common stock		Additional paid-in capital			Unearned compensation			Retained earnings			Accumulated other comprehensive loss			Treasury stock			Total stockholders’ equity
	Issued	In treasury
				(In thousands, except share and per share data)
Balance at June 30, 2004	2,224,617	412,833		$	22	$	21,982		$	(1,058	)	$	11,162		$	(723	)	$	(5,334	)	$	26,051
Comprehensive income:
Net income	—	—			—		—			—			614			—			—			614
Unrealized loss on securities available for sale, net of income taxes	—	—			—		—			—			—			489			—			489
Total comprehensive income																						1,103
Exercise of stock options	—	(3,000	)		—		(6	)		—			—			—			39			33
RRP and incentive shares earned	—	—			—					34			—			—			—			34
Release of ESOP shares	—	—			—		48			63			—			—			—			111
Cash dividends paid ($0.315 per share)	—	—			—		—			—			(537	)		—			—			(537	)
Balance at December 31, 2004	2,224,617	409,833		$	22	$	22,024		$	(961	)	$	11,239		$	(234	)	$	(5,295	)	$	26,795
Balance at June 30, 2005	2,224,617	423,107		$	22	$	22,009		$	(873	)	$	11,242		$	(388	)	$	(5,756	)	$	26,256
Comprehensive income:
Net income	—	—			—		—			—			724			—			—			724
Change in accumulated other comprehensive loss, net of income taxes	—	—			—		—			—			—			(232	)		—			(232	)
Total comprehensive income																						492
Exercise of stock options	—	(1,045	)		—		(9	)		—			—			—			9			—
RRP and incentive shares earned	—	—			—		—			29			—			—			—			29
Release of ESOP shares	—	—			—		41			60			—			—			—			101
Cash dividends paid ($0.32 per share)	—	—			—		—			—			(546	)		—			—			(546	)
Balance at December 31, 2005	2,224,617	422,062		$	22	$	22,041		$	(784	)	$	11,420		$	(620	)	$	(5,747	)	$	26,332

See accompanying notes.

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Great Pee Dee Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended December 31,
	2005			2004
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	724		$	614
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		292			299
Loss (gain) on sale of foreclosed real estate		1			(87	)
Gain on sale of loans held for sale		(77	)		(109	)
Provision for loan losses		217			24
Release of ESOP shares		101			111
Amortization of stock awards under recognition and retention plan		29			34
Proceeds from sales of loans held for sale		7,140			5,538
Originations of loans held for sale		(6,854	)		(5,355	)
Change in assets and liabilities:
Increase in accrued interest receivable		(176	)		(130	)
Increase in accrued interest payable		7			44
Increase in other assets		(169	)		(541	)
Increase in other liabilities		323			773
NET CASH PROVIDED BY OPERATING ACTIVITIES		1,558			1,215
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale investments		(353	)		(4,000	)
Proceeds from maturities of available-for-sale investments		1,787			4,041
Proceeds from sale of land		150			—
Net increase in loans		(19,202	)		(16,504	)
Purchase of restricted stock		(279	)		(299	)
Purchases of property and equipment		(1,264	)		(91	)
Proceeds from sale of foreclosed real estate		118			587
NET CASH USED BY INVESTING ACTIVITIES		(19,043	)		(16,266	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposit accounts		14,174			12,011
Proceeds from short-term borrowings		—			5,000
Proceeds from long-term borrowings		11,200			—
Decrease in advances from borrowers		(107	)		(107	)
Repayment of long-term borrowings		—			(3,000	)
Repayment of short-term borrowings		(5,771	)		—
Cash dividends paid		(546	)		(537	)
Exercise of stock options		—			33
NET CASH PROVIDED BY FINANCING ACTIVITIES		18,950			13,400
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,465			(1,651	)
CASH AND CASH EQUIVALENTS, BEGINNING		2,033			3,879
CASH AND CASH EQUIVALENTS, ENDING	$	3,498		$	2,228

See accompanying notes.

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Great Pee Dee Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

NOTE A - BASIS OF PRESENTATION

In management’s opinion, the unaudited financial information presented in this document reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three- month and six- month periods ended December 31, 2005 and 2004, 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 six-month periods ended December 31, 2005, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2006.

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 Annual Report on Form 10-KSB for the year ended June 30, 2005. This quarterly report should be read in conjunction with such annual report.

NOTE B - STOCK- BASED COMPENSATION

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 December 31,				Six Months Ended December 31,
	2005		2004		2005			2004
	(Amounts in thousands, except per share data)
Net income:
As reported	$	378	$	304	$	724		$	614
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		—		—		(10	)		—
Pro forma	$	378	$	304	$	714		$	614
Basic net income per share:
As reported	$	0.22	$	0.18	$	0.42		$	0.36
Pro forma		0.22		0.18		0.42			0.36
Diluted net income per share:
As reported	$	0.22	$	0.18	$	0.42		$	0.36
Pro forma		0.22		0.18		0.42			0.36

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Great Pee Dee Bancorp, Inc. and Subsidiary

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 December 31,						Six Months Ended December 31,
	2005			2004			2005			2004
	(In thousands)
Net income	$	378		$	304		$	724		$	614
Other comprehensive income:
Reclassification adjustment, net of tax		—			—			—			—
Net (decrease) increase in the fair value of investment securities available for sale, net of tax		(200	)		(51	)		(232	)		489
Total comprehensive income	$	178		$	253		$	492		$	1,103

NOTE E - NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R),Accounting for Stock-Based Compensation (SFAS No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of the Statement are effective for the Company for fiscal years beginning after December 15, 2005. Accordingly, we will adopt SFAS No. 123 (R) commencing with the fiscal year beginning July 1, 2006. At this time we expect the adoption of SFAS No. 123(R) is not expected to have a material effect on our consolidated financial statements.

NOTE F - RECLASSIFICATIONS

Certain amounts in the December 2004 financial statements have been reclassified to conform to the December 2005 presentation. The reclassifications had no effect on net income or stockholders’ equity, as previously reported.

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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, 2005 and June 30, 2005

Total assets increased by $20.0 million during the six months ended December 31, 2005, from $195.7 million at June 30, 2005, to $215.7 million at December 31, 2005. The Company’s increase in assets was largely attributable to loan growth.

The Company’s interest-earning liquid assets, including interest-earning balances in other banks, federal funds sold and investment securities decreased by $1.5 million, to $27.7 million at December 31, 2005, representing 12.8% of total assets at that date as compared with $29.2 million or 14.9% of total assets at June 30, 2005.

Loans receivable increased by $19.0 million from $155.7 million at June 30, 2005, to $174.7 million at December 31, 2005, primarily due to the growth in commercial real estate loans. Of this growth in loans, $6.1 million was the result of entering into participation agreements with other financial institutions. Funding for this loan growth was provided by a combination of long-term FHLB advances and brokered certificate of deposit transactions.

Total stockholders’ equity remained at $26.3 million at both December 31, 2005 and June 30, 2005. Net income was offset by cash dividends paid and decreases in the fair market value of available for sale securities.

Comparison of Results of Operations for the

Three Months Ended December 31, 2005 and 2004

Net Income. Net income for the quarter ended December 31, 2005 was $378,000, an increase of $74,000 from net income of $304,000 for the quarter ended December 31, 2004. On a per share basis, net income for the current quarter was $0.22 per diluted share as compared with $0.18 per diluted share for the second quarter of the last fiscal year. The increase in net income was a result of an increase in interest income on loans and investments and was partially offset by increases in interest expense and the provision for loan losses.

Net Interest Income.Net interest income for the quarter ended December 31, 2005 was $1.7 million as compared with $1.3 million during the quarter ended December 31, 2004. Both interest income and interest expense increased primarily due to increases in average loans of $46 million, average deposits of $28 million, and average long-term borrowings of $16 million over the same period last year.

Provision for Loan Losses.The provision for loan losses totaled $97,000 in the current quarter, compared to $24,000 in the quarter ended December 31, 2004.

The growth in loans receivable during the quarter ended December 31, 2005 of $8.8 million and our ongoing evaluation of the allowance for loan losses resulted in the loan loss reserve provision of $97,000. Our loan loss methodology allowance model takes into consideration the different levels of risk for all outstanding loans. (see – “Analysis of Allowance for Loan Losses”).

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The following table provides an analysis for loan losses for the quarters ended December 31, 2005 and 2004, respectively.

	For the Three Months Ended December 31,
	2005			2004
Balance at the beginning of the period	$	1,666		$	1,505
Charge-offs:
Real estate mortgage		6			53
Installment loans to individuals		—			51
		6			104
Recoveries:
Real estate mortgage		—			—
Installment loans to individuals		3			5
		3			5
Net charge-offs		3			99
Provision for loan losses		97			24
Balance at end of period	$	1,760		$	1,430
Ratio of net charge-offs during the period to average loans outstanding during the period		.0002	%		.08	%

Non-Interest Income. Non-interest income decreased by $141,000, from $351,000 for the three months ended December 31, 2004 to $210,000 for the three months ended December 31, 2005. This decrease is primarily due to the gain on sale of real estate acquired in settlement of loans in the December 2004 quarter, which totaled $77,000.

Non-Interest Expenses. Non-interest expenses increased $21,000 from the three months ending December 31, 2005 to the same period in 2004. This increase was largely attributable to increases in personnel costs. Other expenses remained stable compared to the December 2004 quarter.

Provision for Income Taxes. The provision for income taxes, as a percentage of income before income taxes, was 39.4% and 35.7% for the quarters ended December 31, 2005 and 2004, respectively. For the period ended December 31, 2004, income tax expense was lower due to the impact of reducing income taxes payable.

Comparison of Results of Operations for the

Six Months Ended December 31, 2005 and 2004

Net Income. Net income for the six months ended December 31, 2005 was $724,000, an increase of $110,000 over net income of $614,000 for the six months ended December 31, 2004. On a per share basis, net income for the current period was $0.42 per diluted share as compared with $0.36 per diluted share for the first six months of the last fiscal year. The increase in net income was a result of an increase in interest income on loans and investments and was partially offset by increases in interest expense and the provision for loan losses.

Net Interest Income.Net interest income for the six months ended December 31, 2005, was $3.3 million as compared with $2.9 million during the six months ended December 31, 2004. Both interest income and interest expense increased primarily due to increases in average loans of $43 million, average deposits of $29 million, and average long-term borrowings of $13 million over the same period last year.

Provision for Loan Losses.The provision for loan losses totaled $217,000 in the current six month period, compared to $24,000 for the same period ended December 31, 2004.

The growth in loans receivable during the current six month period of $19.0 million and our ongoing evaluation of the allowance for loan losses resulted in the loan loss reserve provision of $217,000. Our loan loss allowance model takes into consideration the different levels of risk for all outstanding loans. (see – “Analysis of Allowance for Loan Losses”).

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The following table provides an analysis for loan losses for the six months ended December 31, 2005 and 2004, respectively.

	For the Six Months Ended December 31,
	2005			2004
Balance at the beginning of the period	$	1,593		$	1,532
Charge-offs:
Real estate mortgage		6			53
Installment loans to individuals		64			83
		70			136
Recoveries:
Real estate mortgage		1			—
Installment loans to individuals		19			10
		20			10
Net charge-offs		50			126
Provision for loan losses		217			24
Balance at end of period	$	1,760		$	1,430
Ratio of net charge-offs during the period to average loans outstanding during the period		0.03	%		0.10	%

Non-Interest Income. Non-interest income increased by $43,000, from $427,000 for the six months ended December 31, 2004 to $470,000 for the six months ended December 31, 2005. This increase is primarily due to an increase in fee income earned from providing investment services.

Non-Interest Expenses. Non-interest expenses increased $72,000 from $2.3 million for the six months ending December 31, 2004 to $2.4 million for the same period in 2005. Advertising, data processing, and equipment expenses all increased while personnel costs decreased $11,000 from the 2004 to the 2005 period.

Provision for Income Taxes. The provision for income taxes, as a percentage of income before income taxes, was 39.4% and 36.7% for the six months ended December 31, 2005 and 2004 respectively. For the period ended December 31, 2004, income tax expense was lower due to the impact of reducing income taxes payable.

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 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, nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the value and adequacy of collateral, and prevailing economic conditions in the Company’s market area. 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 if the loan is collateral dependent. 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 revision. 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 when uncollectibility of the loan balance is confirmed. Further collection efforts are then pursued through various means available. Subsequent recoveries, if any, are credited to the allowance. Loans carried in a non-accrual status are generally collateralized, and probable future losses are 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, 2005			June 30, 2005			December 31, 2004
	(Dollars in thousands)
Nonaccrual loans	$	1,036		$	1,106		$	1,590
Restructured loans		—			—			—
Total nonperforming loans		1,036			1,106			1,590
Real estate and other assets owned		282			183			220
Total nonperforming assets	$	1,318		$	1,289		$	1,810
Accruing loans past due 90 days or more	$	—		$	—		$	—
Allowance for loan losses		1,760			1,593			1,430
Nonperforming loans to period-end loans		0.59	%		0.71	%		1.20	%
Allowance for loan losses to period-end loans		1.01	%		1.03	%		1.08	%
Allowance for loan losses to nonperforming loans		169.88	%		144.03	%		89.94	%
Nonperforming assets to total assets		0.61	%		0.66	%		1.05	%

The accrual of interest on loans is discontinued at the time the loan is 90 days past due or impaired unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on non-accrual status at an earlier date if collection of principal or interest is considered doubtful according to internal evaluation policies.

All interest accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Loans are also placed on non-accrual status in cases where it is uncertain as to whether the borrower can satisfy the contractual terms of the loan agreement. Amounts received on non-accrual loans generally are applied first to interest and then to principal only after all past due interest 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.

Analysis of Allowance for Loan Losses

The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb probable losses inherent in the portfolio.

Management’s determination of the adequacy of the allowance is based primarily on a mathematical model that estimates the appropriate allowance for loan losses. This model has two components. The first component involves the estimation of losses on loans defined as “impaired loans.” A loan is considered to be impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The estimated valuation allowance is the difference, if any, between the loan balance outstanding and the value of the impaired loan as determined by either 1) an estimate of the cash flows that the Company expects to receive from the borrower discounted at the loan’s effective rate, or 2) in the case of a collateral-dependent loan, the fair value of the collateral.

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The second component of the allowance model is to estimate losses for all loans not considered to be impaired loans. First, loans that have been risk graded by the Company as having more than “standard” risk but are not considered being impaired are assigned estimated loss percentages generally accepted in the banking industry. Loans that are classified by the Company as having normal credit risk are segregated by loan type, and estimated loss percentages are assigned to each loan type, based on the historical losses, current economic conditions, and operational conditions specific to each loan type. Non-performing loans typically have a higher risk grade and therefore are assigned a higher loss percentage.

The reserve estimated for impaired loans is then added to the reserve estimated for all other loans. This becomes the Company’s “allocated allowance.” In addition to the allocated allowance derived from the model, management also evaluates other data such as the ratio of the allowance for loan losses to total loans, net loan growth information, nonperforming asset levels and trends in such data. Based on this additional analysis, the Company may determine that an additional amount of allowance for loan losses is necessary to reserve for probable loan losses. This additional amount, if any, is the Company’s “unallocated allowance.” The sum of the allocated allowance and the unallocated allowance is compared to the actual allowance for loan losses recorded on the books of the Company and any adjustment necessary for the recorded allowance to equal the computed allowance is recorded as a provision for loan losses. The provision for loan losses is a direct charge to earnings in the period recorded.

Although management uses the best information available to make evaluations, future adjustments may be necessary if economic, operational, or other conditions change. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on the examiners’ judgment about information available to them at the time of their examinations.

The following table outlines the allocation of the allowance for loan losses for each reported period and reflects the result of the change in the allowance for loan loss model as discussed above.

Allocation of the Allowance for Loan Losses (dollars in thousands)

	As of December 31, 2005				As of June 30, 2005
	Amount		Percent of loans in each category to total loans		Amount		Percent of loans in each category to total loans
Commercial, Financial & Agricultural	$	90	3.62	%	$	125	6.46	%
Real Estate - construction		58	4.49	%		59	5.03	%
Real Estate - mortgage		1,213	89.29	%		1,019	85.61	%
Installment loans to individuals		68	1.73	%		154	2.86	%
Other		120	0.87	%		33	0.04	%
Unallocated		211	N/A			203	N/A
	$	1,760	100.00	%	$	1,593	100.00	%

Liquidity and Capital Resources

During the six months ended December 31, 2005 the Company paid cash dividends of $0.32 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, 2005, liquid assets (cash, interest-earning deposits, and investment securities) were approximately $30.4 million, which represents 20.2% of deposits. At that date, outstanding loan commitments were

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$6.1 million. The undisbursed portion of construction loans was $7.4 million and undrawn lines of credit totaled $4.5 million. The brokered CD’s scheduled to mature within the next year total $7.5 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 possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. At December 31, 2005, Sentry exceeded all such requirements and is considered “well capitalized” under current regulatory capital guidelines.

The Bank is restricted in its ability to pay dividends and to make distributions. A significant source of Great Pee Dee’s funds is dividends received from the Bank. In fiscal 2005, no dividends were paid by the Bank to Great Pee Dee. At December 31, 2005, prior approval is required by Office of Thrift Supervision for any payment of dividends from Sentry Bank & Trust to Great Pee Dee.

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 alerting management, in a timely manner, 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.

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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 12, 2005. Of the 1,801,510 shares entitled to vote at the meeting, 1,547,313 voted. The following matters were voted on at the meeting:

Proposal 1: To elect two members of the Board of Directors for three-year terms until the Annual Meeting of Shareholders in 2008. Votes for each nominee were as follows:

Name	For	Withheld
James C. Crawford, III	1,471,428	75,885
Herbert W. Watts	1,474,627	72,686

	The following directors continued in office after the meeting:
Proposal 2:	To ratify the appointment of Dixon Hughes PLLC as the Bank’s independent accountants for the year ending June 30, 2006.

For	Against	Abstain
1,481,171	400	65,742

Item 6. 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

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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 13, 2006	By:	/s/ John S. Long
		John S. Long
		Chief Executive Officer
Date: February 13, 2006	By:	/s/ John M. Digby
		John M. Digby
		Chief Financial Officer

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