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 September 30, 2006
| ¨ | 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 November 6, 2006, 1,786,169 shares of the issuer’s common stock, $.01 par value, were outstanding. The registrant has no other classes of securities outstanding.
Transitional Small Business Disclosure Format Yes ¨ No x
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Great Pee Dee Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
September 30, 2006 (Unaudited) | June 30, 2006* | |||||||
| (In thousands, except | ||||||||
| share and per share data) | ||||||||
ASSETS | ||||||||
Cash on hand and due from banks | $ | 2,313 | $ | 3,355 | ||||
Interest-earning balances in other banks | 774 | 488 | ||||||
Federal funds sold | 399 | 858 | ||||||
Cash and cash equivalents | 3,486 | 4,701 | ||||||
Investment securities available for sale, at fair value | 20,048 | 20,487 | ||||||
Loans | 180,880 | 177,176 | ||||||
Allowance for loan losses | (1,940 | ) | (1,901 | ) | ||||
Net Loans | 178,940 | 175,275 | ||||||
Loans held for sale | 705 | 958 | ||||||
Accrued interest receivable | 1,097 | 1,027 | ||||||
Restricted stock, at cost | 1,863 | 1,998 | ||||||
Premises and equipment, net | 5,018 | 5,017 | ||||||
Real estate acquired in settlement of loans | 28 | 109 | ||||||
Intangible assets | 632 | 679 | ||||||
Other assets | 2,420 | 2,455 | ||||||
TOTAL ASSETS | $ | 214,237 | $ | 212,706 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Deposit accounts | $ | 155,387 | $ | 151,339 | ||||
Short-term borrowings | 9,500 | 9,500 | ||||||
Long-term borrowings | 20,600 | 23,600 | ||||||
Accrued interest payable | 324 | 287 | ||||||
Advance payments by borrowers for property taxes and insurance | 139 | 121 | ||||||
Accrued expenses and other liabilities | 1,424 | 1,319 | ||||||
TOTAL LIABILITIES | 187,374 | 186,166 | ||||||
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 | 22,120 | 22,094 | ||||||
Unearned ESOP compensation | (667 | ) | (707 | ) | ||||
Retained earnings, substantially restricted | 11,926 | 11,746 | ||||||
Accumulated other comprehensive loss | (528 | ) | (675 | ) | ||||
Common stock in treasury, at cost (438,448 and 434,448 shares, respectively) | (6,010 | ) | (5,940 | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY | 26,863 | 26,540 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 214,237 | $ | 212,706 | ||||
| * | 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 September 30, | ||||||
| 2006 | 2005 | |||||
(In thousands, except share and per share data) | ||||||
INTEREST INCOME | ||||||
Loans | $ | 3,286 | $ | 2,601 | ||
Investments | 232 | 284 | ||||
Deposits in other banks and federal funds sold | 27 | 10 | ||||
TOTAL INTEREST INCOME | 3,545 | 2,895 | ||||
INTEREST EXPENSE | ||||||
Deposit accounts | 1,450 | 974 | ||||
Short-term borrowings | 133 | 153 | ||||
Long-term borrowings | 241 | 180 | ||||
TOTAL INTEREST EXPENSE | 1,824 | 1,307 | ||||
NET INTEREST INCOME | 1,721 | 1,588 | ||||
PROVISION FOR LOAN LOSSES | 47 | 120 | ||||
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 1,674 | 1,468 | ||||
NON-INTEREST INCOME | 290 | 253 | ||||
NON-INTEREST EXPENSES | ||||||
Personnel costs | 577 | 528 | ||||
Occupancy | 152 | 146 | ||||
Other | 502 | 484 | ||||
TOTAL NON-INTEREST EXPENSES | 1,231 | 1,158 | ||||
INCOME BEFORE INCOME TAXES | 733 | 563 | ||||
PROVISION FOR INCOME TAXES | 280 | 217 | ||||
NET INCOME | $ | 453 | $ | 346 | ||
NET INCOME PER SHARE | ||||||
Basic | $ | 0.27 | $ | 0.20 | ||
Diluted | 0.26 | 0.20 | ||||
CASH DIVIDENDS PER SHARE | $ | 0.16 | $ | 0.16 | ||
WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||
Basic | 1,705,855 | 1,709,851 | ||||
Effect of outstanding stock options | 6,015 | 7,104 | ||||
Assuming dilution | 1,711,870 | 1,716,955 | ||||
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 of common stock | Additional paid-in capital | Unearned ESOP compensation | Accumulated other comprehensive (loss) | ||||||||||||||||||||||||||||
Retained earnings | Treasury stock | Total stockholders’ equity | ||||||||||||||||||||||||||||||
| Issued | In treasury | |||||||||||||||||||||||||||||||
| (In thousands, except share and per share data) | ||||||||||||||||||||||||||||||||
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 | — | — | — | — | — | 346 | — | — | 346 | |||||||||||||||||||||||
Change in accumulated other comprehensive loss, net of income taxes | — | — | — | — | — | — | (32 | ) | — | (32 | ) | |||||||||||||||||||||
Total comprehensive income | 314 | |||||||||||||||||||||||||||||||
Exercise of stock options | — | (3,284 | ) | — | (45 | ) | — | — | — | 45 | — | |||||||||||||||||||||
Shares traded to exercise options | — | 2,239 | — | 36 | — | — | — | (36 | ) | — | ||||||||||||||||||||||
RRP and incentive shares earned | — | — | — | — | 14 | — | — | — | 14 | |||||||||||||||||||||||
Release of ESOP shares | — | — | — | 21 | 30 | — | — | — | 51 | |||||||||||||||||||||||
Cash dividends paid ($0.16 per share) | — | — | — | — | — | (273 | ) | — | — | (273 | ) | |||||||||||||||||||||
Balance at September 30, 2005 | 2,224,617 | 422,062 | $ | 22 | $ | 22,021 | $ | (829 | ) | $ | 11,315 | $ | (420 | ) | $ | (5,747 | ) | $ | 26,362 | |||||||||||||
Balance at June 30, 2006 | 2,224,617 | 434,448 | $ | 22 | $ | 22,094 | $ | (707 | ) | $ | 11,746 | $ | (675 | ) | $ | (5,940 | ) | $ | 26,540 | |||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 453 | — | — | 453 | |||||||||||||||||||||||
Change in accumulated other comprehensive loss, net of income taxes | — | — | — | — | — | — | 147 | — | 147 | |||||||||||||||||||||||
Total comprehensive income | 600 | |||||||||||||||||||||||||||||||
Purchase of treasury shares | — | 9,000 | — | — | — | — | — | (138 | ) | (138 | ) | |||||||||||||||||||||
Exercise of stock options | — | (1,000 | ) | — | 1 | — | — | — | 12 | 13 | ||||||||||||||||||||||
Reclassification of Unearned Compensation - | — | — | — | (1 | ) | 12 | — | — | — | 11 | ||||||||||||||||||||||
RRP Shares Issued | — | (4,000 | ) | — | 6 | — | — | — | 56 | 62 | ||||||||||||||||||||||
Release of ESOP shares | — | — | — | 20 | 28 | — | — | — | 48 | |||||||||||||||||||||||
Cash dividends paid ($0.16 per share) | — | — | — | — | — | (273 | ) | — | — | (273 | ) | |||||||||||||||||||||
Balance at September 30, 2006 | 2,224,617 | 438,448 | $ | 22 | $ | 22,120 | $ | (667 | ) | $ | 11,926 | $ | (528 | ) | $ | (6,010 | ) | $ | 26,863 | |||||||||||||
See accompanying notes.
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Great Pee Dee Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended September 30, | ||||||||
| 2006 | 2005 | |||||||
| (In thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 453 | $ | 346 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 132 | 125 | ||||||
Loss on sale of foreclosed real estate | 3 | — | ||||||
Gain on sale of loans held for sale | (22 | ) | (46 | ) | ||||
Loss on sale of available for sale investments | 7 | — | ||||||
Provision for loan losses | 47 | 120 | ||||||
Release of ESOP shares | 48 | 51 | ||||||
Stock based compensation | 15 | 14 | ||||||
Proceeds from sales of loans held for sale | 2,788 | 4,237 | ||||||
Originations of loans held for sale | (2,513 | ) | (3,703 | ) | ||||
Change in assets and liabilities: | ||||||||
Increase in accrued interest receivable | (70 | ) | (102 | ) | ||||
Increase (decrease) in accrued interest payable | 37 | (18 | ) | |||||
Increase in other assets | 4 | (49 | ) | |||||
Increase in other liabilities | 104 | 378 | ||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES | 1,033 | 1,353 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of available-for-sale investments | (249 | ) | 19 | |||||
Proceeds from sale and maturities of available-for-sale investments | 918 | 984 | ||||||
Net increase in loans | (3,732 | ) | (10,260 | ) | ||||
(Purchase) sale of restricted stock | 135 | (477 | ) | |||||
Purchases of property and equipment | (86 | ) | (48 | ) | ||||
Proceeds from sale of foreclosed real estate | 98 | 118 | ||||||
NET CASH USED BY INVESTING ACTIVITIES | (2,916 | ) | (9,664 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Net increase in deposit accounts | 4,048 | 4,074 | ||||||
Proceeds from long-term borrowings | 7,000 | 10,600 | ||||||
Decrease in advances from borrowers | 18 | 62 | ||||||
Purchase of treasury stock | (138 | ) | — | |||||
Repayment of long-term borrowings | (10,000 | ) | — | |||||
Repayment of short-term borrowings | — | (3,448 | ) | |||||
Cash dividends paid | (273 | ) | (273 | ) | ||||
Tax benefit from exercise of stock options | 1 | — | ||||||
Exercise of stock options | 12 | — | ||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 668 | 11,015 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (1,215 | ) | 2,704 | |||||
CASH AND CASH EQUIVALENTS, BEGINNING | 4,701 | 2,033 | ||||||
CASH AND CASH EQUIVALENTS, ENDING | $ | 3,486 | $ | 4,737 | ||||
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 periods ended September 30, 2006 and 2005, 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-month period ended September 30, 2006, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2007.
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, 2006. This quarterly report should be read in conjunction with such annual report.
NOTE B - - STOCK- BASED COMPENSATION
Effective July 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) which was issued by the FASB in December 2004. SFAS No. 123R revises SFAS No. 123 “Accounting for Stock Based Compensation,” and supersedes APB No. 25, “Accounting for Stock Issued to Employees,” (APB No. 25) and its related interpretations. SFAS No. 123R requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). SFAS No. 123R also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. SFAS No. 123R also amends SFAS No. 95 “Statement of Cash Flows,” to require that excess tax benefits be reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows.
The Company adopted SFAS No.123R using the modified prospective application as permitted under SFAS No. 123R. Accordingly, prior period amounts have not been restated. Under this application, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.
Prior to the adoption of SFAS No.123R, the Company used the intrinsic value method as prescribed by APB No. 25 and thus recognized no compensation expense for options granted with exercise prices equal to the fair market value of the Company’s common stock on the date of grant.
The Company has three share-based compensation plans in effect at September 30, 2006. The compensation cost that has been charged against income for those plans was approximately $15,000 for the three months ended September 30, 2006. The Company recorded an approximate $6,000 deferred tax benefit related to share-based compensation during the quarter ended September 30, 2006.
At the Company’s first annual meeting of stockholders held on January 7, 1999, the Company’s stockholders approved the 1998 Recognition and Retention Plan (the “RRP”). Under the RRP, 88,874 shares of common stock were reserved for issuance to key officers and directors with vesting of the awards determined at the time of the grant. The Company recognizes compensation costs over the vesting period of the RRP shares granted as shares are earned. Within the Plan, 81,392 shares have been granted as of September 30, 2006, leaving 7,482 shares that can be granted.
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Great Pee Dee Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE B - STOCK- BASED COMPENSATION (Continued)
At the Company’s annual meeting held on January 7, 1999, the stockholders approved the Great Pee Dee Bancorp, Inc. Stock Option Plan (the “SOP”). The SOP provides for the issuance to directors, officers and employees of the Bank options to purchase up to 242,233 shares of the Company’s common stock. Options granted to directors, executive officers, and employees vest over terms up to three years. All options will expire if not exercised within ten years from the date of grant. Within the Plan, 234,999 shares have been granted as of September 30, 2006, leaving 7,234 options that can be granted.
The 2003 Long Term Incentive Stock Benefit Plan was approved at the 2003 Annual Meeting and authorizes up to 88,388 shares of common stock to be granted in either stock options or stock awards for issuance to key officers and directors with vesting of the awards determined at the time of the grant. Within the Plan, 13,000 shares have been granted as of September 30, 2006; of which four thousand shares were granted as stock awards in the quarter ending September 30, 2006, leaving 75,388 options or shares that can be granted.
The share-based awards granted under the aforementioned Plans have similar characteristics, except that some awards have been granted in options and certain awards have been granted in restricted stock. Therefore, the following disclosures have been disaggregated for the stock option and restricted stock awards of the Plans due to their dissimilar characteristics.
Stock Options
The fair market value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. No options were granted for the quarter ended September 30, 2006. The Company granted 2,239 stock options for the quarter ended September 30, 2005 with a fair value of $2.15 per option.
The risk-free interest rate is based upon a U.S. Treasury instrument with a life that is similar to the expected life of the option grant. Expected volatility is based upon the historical volatility of the Company based upon trading history. The expected term of the options is based upon the average life of previously issued stock options. The expected dividend yield is based upon current yield on date of grant. No post-vesting restrictions exist for these options. The following table illustrates the assumptions for the Black-Scholes model used in determining the fair value of options granted to employees in the quarter ended September 2005.
Quarter Ended September 30, 2005 | |||
Dividend yield | 1.25 | % | |
Risk-free interest rate | 5.00 | % | |
Volatility | 25.00 | % | |
Expected life | 2 Years |
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Great Pee Dee Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE B - STOCK- BASED COMPENSATION (Continued)
A summary of option activity under the stock option plans as of September 30, 2006, and changes during the three month period ended September 30, 2006, is presented below:
| Shares | Weighted average exercise price | Weighted average remaining contractual term | Aggregate intrinsic value | ||||||||
At June 30, 2006 | 125,515 | $ | 15.70 | ||||||||
Exercised | (1,000 | ) | 12.25 | ||||||||
Authorized | — | — | |||||||||
Forfeited | — | — | |||||||||
Granted | — | — | |||||||||
Outstanding at September 30, 2006 | 124,515 | $ | 15.73 | 2.9 Years | $ | 134,420 | |||||
Exercisable at September 30, 2006 | 124,515 | $ | 15.73 | 2.9 Years | $ | 134,420 | |||||
For the quarters ended September 30, 2006 and 2005, respectively, the intrinsic value of options exercised was approximately $2,000 and $17,000. The fair value of options vested during the periods was approximately $0 and $3,000, respectively.
Cash received from option exercises under all share-based payment arrangements for the three-month period ended September 30, 2006 was $12,000. The actual tax benefit in stockholders’ equity realized for the tax deductions from option exercise of the share-based payment arrangements totaled $1,000 for the three months ended September 30, 2006.
Restricted Stock
A summary of the status of the Company’s restricted stock as of September 30, 2006, and changes during the quarter then ended is presented below:
| Shares | Weighted average grant date fair value | ||||
Balance - June 30, 2006 | 3,000 | $ | 17.05 | ||
Granted | 4,000 | 15.45 | |||
Vested | — | — | |||
Forfeited | — | — | |||
Balance - September 30, 2006 | 7,000 | $ | 16.14 | ||
The fair value of restricted stock vested over the quarters ended September 30, 2006 and 2005, respectively was $15,000 and $14,000.
As of September 30, 2006, there was $65,000 of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under all of the Company’s stock benefit plans. That cost is expected to be recognized over a weighted-average period of 3.6 years.
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Great Pee Dee Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE B - STOCK- BASED COMPENSATION (Continued)
The Company funds the option shares and restricted stock from authorized but unissued shares and treasury stock. The Company does not typically purchase shares to fulfill the obligations of the stock benefit plans. Company policy does allow option holders to exercise options with seasoned shares.
The adoption of SFAS 123R and its fair value compensation cost recognition provisions are different from the non-recognition provisions under SFAS 123 and the intrinsic value method for compensation cost allowed under APB 25. The effect (increase/(decrease))of the adoption of SFAS 123R is as follows:
Income before income tax expense | $ | — | ||
Net income | $ | — | ||
Cash flow from operating activities | $ | (1 | ) | |
Cash flow provided by financing activities | $ | 1 | ||
Basic earnings per share | $ | — | ||
Diluted earnings per share | $ | — | ||
The following illustrates the effect on net income available to common stockholders if the Company had applied the fair value recognition provisions of SFAS No. 123 to the prior year quarter ended September 30, 2005 (in thousands, except per share data):
September 30, 2005 | |||
Net income: | |||
As reported | $ | 346 | |
Add: Total stock-based employee compensation expense included in reported net income, net of related tax effects | 9 | ||
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects | 19 | ||
Pro forma | $ | 336 | |
Basic net income per share: | |||
As reported | $ | 0.20 | |
Pro forma | 0.20 | ||
Diluted net income per share: | |||
As reported | $ | 0.20 | |
Pro forma | 0.20 | ||
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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. Anti-dilutive options were not included in the income per share computations. Approximately 85,000 options were anti-dilutive for the quarter ending September 30, 2006.
NOTE D - COMPREHENSIVE INCOME
A summary of comprehensive income is as follows:
Three Months Ended September 30, | |||||||
| 2006 | 2005 | ||||||
| (In thousands) | |||||||
Net income | $ | 453 | $ | 346 | |||
Reclassification adjustment for losses realized in income, net of tax | 4 | — | |||||
Other comprehensive income: | |||||||
Net (decrease) increase in the fair value of investment securities available for sale, net of tax | 143 | (32 | ) | ||||
Total comprehensive income | $ | 600 | $ | 314 | |||
NOTE E - NEW ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued SFAS No. 155,“Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statements No. 133 and 140.” This Statement amends SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized FinancialAssets.” SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not believe that the adoption of SFAS No. 155 will have a material impact on its financial position, results of operations and cash flows.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140.” This Statement amends FASB No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract; requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; permits an entity to choose its subsequent measurement methods for each class of separately recognized servicing assets and servicing liabilities; at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, “Accounting for Certain Investments in Debt and Equity Securities”, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value; and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. An entity should adopt SFAS No. 156 as of the beginning of its first fiscal year that begins after September 15, 2006. The Company does not believe the adoption of SFAS No. 156 will have a material impact on its financial position, results of operations and cash flows.
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Great Pee Dee Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE E - NEW ACCOUNTING PRONOUNCEMENTS (Continued)
In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes”,an interpretation of FASB Statement No. 109. FIN 48 addresses the recognition and measurement of certain tax positions taken in the financial statements of a business enterprise. It also includes certain financial statement disclosures around uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the impact of FIN 48 on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS 158”), which amends SFAS 87 and SFAS 106 to require recognition of the over-funded or under-funded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost. The measurement date — the date at which the benefit obligation and plan assets are measured — is required to be the company’s fiscal year end. SFAS 158 is effective for publicly-held companies for fiscal years ending after December 15, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008. The Company is currently analyzing the effects of SFAS 158 but does not expect its implementation will have a significant impact on the Company’s financial conditions or results of operations.
NOTE F - RECLASSIFICATIONS
Certain amounts in the September 2005 financial statements have been reclassified to conform to the September 2006 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
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires the Company to make estimates and judgments regarding uncertainties that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, the Company evaluates its estimates which are based upon historical experience and on other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
The Company considers the following accounting policies to be most critical in their potential effect on its financial position or results of operations:
Allowance for Loan Losses
Due to the estimation process and the potential materiality of the amounts involved, the Company has identified the accounting for the allowance for loan losses and the related provision for loan losses as an accounting policy critical to the Company’s consolidated financial statements. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. All non-accrual loans are considered impaired.
Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.
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Interest Income Recognition
The accrual of interest on loans is discontinued at the time the loan is 90 days past due or impaired. 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.
Recent Accounting Pronouncements
See Note E to the financial statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.
Forward-looking Statements
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. These factors should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We do not undertake any obligation to update any forward-looking statement to reflect circumstances and events that occur after the date on which the forward-looking statement was made.
Comparison of Financial Condition at
September 30, 2006 and June 30, 2006
Total assets increased by $1.5 million during the three months ended September 30, 2006, from $212.7 million at June 30, 2006, to $214.2 million at September 30, 2006. 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 $600,000, to $21.2 million at September 30, 2006, representing 9.9% of total assets at that date as compared with $21.8 million or 10.3% of total assets at June 30, 2006. The decrease was a result of pay-downs of mortgage backed securities.
Loans receivable increased by $3.7 million from $177.2 million at June 30, 2006, to $180.9 million at September 30, 2006, primarily due to an increase in real estate loans. Funding for loan growth was provided by customer certificate of deposit transactions.
Total deposits increased by $4.1 million or 2.7% from $151.3 million at June 30, 2006, to $155.4 million at September 30, 2006, primarily due to growth in customer certificate of deposits. Funds provided by the overall increase in deposit accounts were used to fund loan growth and repayment of borrowings.
Total stockholders’ equity increased by $300,000, from $26.5 million at June 30, 2006, to $26.8 million at September 30, 2006. The increase in stockholders’ equity from net income and increases in the fair market value of available for sale securities was offset by cash dividends paid and treasury stock repurchases.
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Comparison of Results of Operations for the
Three Months Ended September 30, 2006 and 2005
Net Income. Net income for the quarter ended September 30, 2006 was $453,000, an increase of $107,000 from net income of $346,000 for the quarter ended September 30, 2005. On a per share basis, net income for the current quarter was $0.26 per diluted share as compared with $0.20 per diluted share for the first quarter of the last fiscal year. The increase in net income was a result of an increase in interest income on loans and was partially offset by an increase in interest expense.
Net Interest Income.Net interest income for the quarter ended September 30, 2006 was $1.7 million as compared with $1.6 million during the quarter ended September 30, 2005. Both interest income and interest expense increased primarily due to the increase in average loans and deposits over the same period last year. The increases in average loans and deposits as well as increases in Wall Street Journal Prime and Federal Funds rates and other market interest rates had a significant impact on our net interest spread and net interest income during the quarter.
Provision for Loan Losses.The provision for loan losses totaled $47,000 in the current quarter, compared to $120,000 in the quarter ended September 30, 2005.
Although we experienced growth in loans receivable during the quarter ended September 30, 2006, of $3.7 million, a decrease in non-performing loans from September 30, 2005 to 2006 reduced the necessary amount of provision for loan losses when the changes were analyzed in our allowance for loan loss model and resulted in the provision for loan losses of $47,000. The decline of non-performing loans reflects an increase in our credit quality. 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”). The following table provides the changes in the allowance for loan losses for the quarters ended September 30, 2006 and 2005, respectively.
For the Three Months Ended September 30, | ||||||||
| 2006 | 2005 | |||||||
Balance at the beginning of the period | $ | 1,901 | $ | 1,593 | ||||
Charge-offs: | ||||||||
Real estate mortgage | 1 | — | ||||||
Installment loans to individuals | 8 | 64 | ||||||
| 9 | 64 | |||||||
Recoveries: | ||||||||
Real estate mortgage | — | — | ||||||
Installment loans to individuals | 1 | 17 | ||||||
| 1 | 17 | |||||||
Net charge-offs | (8 | ) | (47 | ) | ||||
Provision for loan losses | 47 | 120 | ||||||
Balance at end of period | $ | 1,940 | $ | 1,666 | ||||
Ratio of net charge-offs during the period to average loans outstanding during the period | 0.00 | % | 0.03 | % | ||||
Non-Interest Income. Non-interest income increased by $37,000, from $253,000 for the three months ended September 30, 2005 to $290,000 for the three months ended September 30, 2006. This increase is due primarily to increases in other income and deposit service charges of $60,000 and $20,000, respectively and offset by decreases in secondary market loan income and investment service income of $24,000 and $18,000, respectively.
Non-Interest Expenses. Non-interest expenses increased $73,000 for the three months ending September 30, 2006 when compared to the same period in 2005. This increase was largely attributable to other expenses including data processing and a decrease in deferred FASB 91 loan origination personnel costs when compared to the September 2005 quarter.
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Provision for Income Taxes. The provision for income taxes, as a percentage of income before income taxes, was 38.2% and 38.5% for the quarters ended September 30, 2006 and 2005, 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 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 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.
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.
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.
September 30, 2006 | June 30, 2006 | September 30, 2005 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Nonaccrual loans | $ | 581 | $ | 555 | $ | 1,403 | ||||||
Restructured loans | — | — | — | |||||||||
Total nonperforming loans | 581 | 555 | 1,403 | |||||||||
Real estate and other assets owned | 28 | 110 | 95 | |||||||||
Total nonperforming assets | $ | 609 | $ | 665 | $ | 1,498 | ||||||
Accruing loans past due 90 days or more | $ | — | $ | — | $ | — | ||||||
Allowance for loan losses | 1,940 | 1,901 | 1,666 | |||||||||
Nonperforming loans to period-end loans | 0.32 | % | 0.31 | % | 0.84 | % | ||||||
Allowance for loan losses to period-end loans | 1.07 | % | 1.07 | % | 1.01 | % | ||||||
Allowance for loan losses to nonperforming loans | 333.91 | % | 342.45 | % | 118.7 | % | ||||||
Nonperforming assets to total assets | 0.28 | % | 0.31 | % | 0.72 | % | ||||||
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.
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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.
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.
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The following table outlines the allocation of the allowance for loan losses for each reported period and reflects the result of the allowance for loan loss model as discussed above.
Allocation of the Allowance for Loan Losses (dollars in thousands)
| As of September 30, 2006 | As of June 30, 2006 | |||||||||||
| Amount | Percent of loans in each category to total loans | Amount | Percent of loans in each category to total loans | |||||||||
Commercial, Financial & Agricultural | $ | 96 | 4.66 | % | $ | 100 | 4.38 | % | ||||
Real Estate - construction | 214 | 15.65 | % | 208 | 15.54 | % | ||||||
Real Estate - mortgage | 1,237 | 76.62 | % | 1,225 | 77.14 | % | ||||||
Installment loans to individuals | 98 | 2.76 | % | 89 | 2.63 | % | ||||||
Other | 62 | 0.31 | % | 51 | 0.31 | % | ||||||
Unallocated | 233 | N/A | 228 | N/A | ||||||||
| $ | 1,940 | 100.00 | % | $ | 1,901 | 100.00 | % | |||||
Liquidity and Capital Resources
During the three months ended September 30, 2006 the Company paid cash dividends of $0.16 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 September 30, 2006, liquid assets (cash, interest-earning deposits, and investment securities) were approximately $23.5 million, which represents 15.1% of deposits. At that date, outstanding loan commitments were $7.9 million. The undisbursed portion of construction loans was $8.2 million and undrawn lines of credit totaled $9.9 million. Brokered certificates of deposit scheduled to mature within the next year total $13.7 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 September 30, 2006, 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. A $3 million dividend was paid by the Bank to Great Pee Dee in the first quarter ending September 2006, for the fiscal year ending June 30, 2007. Under Office of Thrift Supervision regulations, prior notice is required to be given to the Office of Thrift Supervision for any payment of dividends from Sentry Bank & Trust to Great Pee Dee.
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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 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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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Repurchases of registered common stock by the Company:
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |||||
July 1st through July 31st, 2006 | 5,000 | $ | 15.51 | 5,000 | 41,853 | ||||
August 1st through August 31st, 2006 | 4,000 | $ | 15.15 | 4,000 | 37,853 | ||||
September 1st through September 30th, 2006 | — | — | — | 37,853 | |||||
| (1) | The repurchases of common stock for the quarter were not part of the publicly announced share repurchase program. The repurchases were a result of a privately negotiated transaction. |
| (2) | The existing stock repurchase plan was announced on August 15, 2000 and approved the repurchase of up to 10% of shares of outstanding common stock at that time (168,600 shares of common stock). Subsequently, this plan was adjusted by the 10% stock dividend in November 2001 increasing the shares available to repurchase to 178,387. The program does not contain an expiration date. The Company does not intend to discontinue stock repurchases under this plan. |
| 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: November 13, 2006 | By: | /s/ John S. Long | ||
| John S. Long | ||||
| Chief Executive Officer | ||||
| Date: November 13, 2006 | By: | /s/ John M. Digby | ||
| John M. Digby | ||||
| Chief Financial Officer | ||||
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