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, 2007
| ¨ | 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 7, 2007, 1,809,674 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, 2007 (Unaudited) | June 30, 2007* | |||||||
| (In thousands, except share and per share data) | ||||||||
ASSETS | ||||||||
Cash on hand and due from banks | $ | 489 | $ | 3,207 | ||||
Interest-earning balances in other banks | 466 | 368 | ||||||
Federal funds sold | 416 | 12,220 | ||||||
Cash and cash equivalents | 1,371 | 15,795 | ||||||
Investment securities available for sale, at fair value | 19,521 | 20,025 | ||||||
Loans | 174,702 | 178,687 | ||||||
Allowance for loan losses | (1,987 | ) | (1,938 | ) | ||||
Net Loans | 172,715 | 176,749 | ||||||
Loans held for sale | 16,443 | 12,318 | ||||||
Accrued interest receivable | 1,245 | 1,166 | ||||||
Restricted stock, at cost | 2,050 | 2,253 | ||||||
Premises and equipment, net | 4,900 | 4,902 | ||||||
Real estate | 558 | 558 | ||||||
Intangible assets | 448 | 494 | ||||||
Other assets | 2,390 | 2,487 | ||||||
| TOTAL ASSETS | $ | 221,641 | $ | 236,747 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Deposit accounts | $ | 160,427 | $ | 171,204 | ||||
Short-term borrowings | 2,000 | 4,500 | ||||||
Long-term borrowings | 29,900 | 31,900 | ||||||
Accrued interest payable | 296 | 392 | ||||||
Advance payments by borrowers for property taxes and insurance | 140 | 117 | ||||||
Accrued expenses and other liabilities | 1,524 | 1,320 | ||||||
| TOTAL LIABILITIES | 194,287 | 209,433 | ||||||
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 | 22,145 | 22,131 | ||||||
Unearned compensation | (556 | ) | (582 | ) | ||||
Retained earnings, substantially restricted | 12,014 | 12,194 | ||||||
Accumulated other comprehensive loss | (379 | ) | (487 | ) | ||||
Common stock in treasury, at cost (429,109 and 434,636 shares, respectively) | (5,892 | ) | (5,964 | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | 27,354 | 27,314 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 221,641 | $ | 236,747 | ||||
| * | 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, | ||||||
| 2007 | 2006 | |||||
| (In thousands, except share and per share data) | ||||||
INTEREST INCOME | ||||||
Loans | $ | 3,665 | $ | 3,286 | ||
Investments | 241 | 232 | ||||
Deposits in other banks and federal funds sold | 35 | 27 | ||||
| TOTAL INTEREST INCOME | 3,941 | 3,545 | ||||
INTEREST EXPENSE | ||||||
Deposit accounts | 1,839 | 1,450 | ||||
Short-term borrowings | 165 | 133 | ||||
Long-term borrowings | 225 | 241 | ||||
| TOTAL INTEREST EXPENSE | 2,229 | 1,824 | ||||
| NET INTEREST INCOME | 1,712 | 1,721 | ||||
PROVISION FOR LOAN LOSSES | 67 | 47 | ||||
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 1,645 | 1,674 | ||||
| NON-INTEREST INCOME | 275 | 290 | ||||
NON-INTEREST EXPENSES | ||||||
Personnel costs | 654 | 577 | ||||
Occupancy | 148 | 152 | ||||
Other | 775 | 502 | ||||
| TOTAL NON-INTEREST EXPENSES | 1,577 | 1,231 | ||||
| INCOME BEFORE INCOME TAXES | 343 | 733 | ||||
PROVISION FOR INCOME TAXES | 248 | 280 | ||||
| NET INCOME | $ | 95 | $ | 453 | ||
NET INCOME PER SHARE | ||||||
Basic | $ | 0.06 | $ | 0.27 | ||
Diluted | 0.05 | 0.26 | ||||
CASH DIVIDENDS PER SHARE | $ | 0.16 | $ | 0.16 | ||
WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||
Basic | 1,721,382 | 1,705,851 | ||||
Effect of outstanding stock options | 14,352 | 6,015 | ||||
Assuming dilution | 1,735,734 | 1,711,870 | ||||
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 ESOP 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, 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 | |||||||||||||
Balance at June 30, 2007 | 2,224,617 | 434,636 | $ | 22 | $ | 22,131 | $ | (582 | ) | $ | 12,194 | $ | (487 | ) | $ | (5,964 | ) | $ | 27,314 | |||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | 95 | — | — | 95 | |||||||||||||||||||||||
Change in accumulated other comprehensive loss, net of income taxes | — | — | — | — | — | — | 108 | — | 108 | |||||||||||||||||||||||
Total comprehensive income | 203 | |||||||||||||||||||||||||||||||
Purchase of treasury shares | — | 500 | — | — | — | — | — | (11 | ) | (11 | ) | |||||||||||||||||||||
Exercise of stock options | — | (6,027 | ) | — | (25 | ) | — | — | — | 83 | 58 | |||||||||||||||||||||
Stock based compensation | — | — | — | 3 | — | — | — | — | 3 | |||||||||||||||||||||||
Release of ESOP shares | — | — | — | 36 | 26 | — | — | — | 62 | |||||||||||||||||||||||
Cash dividends paid ($0.16 per share) | — | — | — | — | — | (275 | ) | — | — | (275 | ) | |||||||||||||||||||||
Balance at September 30, 2007 | 2,224,617 | 429,109 | $ | 22 | $ | 22,145 | $ | (556 | ) | $ | 12,014 | $ | (379 | ) | $ | (5,892 | ) | $ | 27,354 | |||||||||||||
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, | ||||||||
| 2007 | 2006 | |||||||
| (In thousands) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 95 | $ | 453 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 118 | 132 | ||||||
Loss on sale of foreclosed real estate | — | 3 | ||||||
Gain on sale of loans held for sale | (9 | ) | (22 | ) | ||||
Loss on sale of available for sale investments | — | 7 | ||||||
Provision for loan losses | 67 | 47 | ||||||
Release of ESOP shares | 62 | 48 | ||||||
Stock based compensation | 3 | 15 | ||||||
Proceeds from sales of loans held for sale | 2,077 | 2,788 | ||||||
Originations of loans held for sale | (6,193 | ) | (2,513 | ) | ||||
Change in assets and liabilities: | ||||||||
Increase in accrued interest receivable | (79 | ) | (70 | ) | ||||
Increase (decrease) in accrued interest payable | (96 | ) | 37 | |||||
Decrease in other assets | 29 | 4 | ||||||
Increase in other liabilities | 204 | 104 | ||||||
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | (3,722 | ) | 1,033 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of available-for-sale investments | (5 | ) | (249 | ) | ||||
Proceeds from sale and maturities of available-for-sale investments | 684 | 918 | ||||||
Net (increase) decrease in loans | 3,967 | (3,732 | ) | |||||
Sale of restricted stock | 203 | 135 | ||||||
Purchases of property and equipment | (69 | ) | (86 | ) | ||||
Proceeds from sale of foreclosed real estate | — | 98 | ||||||
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | 4,780 | (2,916 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Net increase (decrease) in deposit accounts | (10,777 | ) | 4,048 | |||||
Proceeds from long-term borrowings | 22,600 | 7,000 | ||||||
Decrease in advances from borrowers | 23 | 18 | ||||||
Purchase of treasury stock | (11 | ) | (138 | ) | ||||
Repayment of long-term borrowings | (24,600 | ) | (10,000 | ) | ||||
Repayment of short-term borrowings | (2,500 | ) | — | |||||
Cash dividends paid | (275 | ) | (273 | ) | ||||
Tax benefit from exercise of stock options | — | 1 | ||||||
Exercise of stock options | 58 | 12 | ||||||
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | (15,482 | ) | 668 | |||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | (14,424 | ) | (1,215 | ) | ||||
CASH AND CASH EQUIVALENTS, BEGINNING | 15,795 | 4,701 | ||||||
CASH AND CASH EQUIVALENTS, ENDING | $ | 1,371 | $ | 3,486 | ||||
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, 2007 and 2006, 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, 2007, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2008.
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, 2007. This quarterly report should be read in conjunction with such annual report.
NOTE B—MERGER BETWEEN GREAT PEE DEE BANCORP, INC. AND FIRST BANCORP
On July 12, 2007, Great Pee Dee Bancorp, Inc. entered into a merger agreement with First Bancorp. Pursuant to the agreement, the Company will be merged with and into First Bancorp. Under the terms of the merger agreement, each share of the Company common stock issued and outstanding at the effective time of the merger will be converted into and exchanged for the right to receive 1.15 shares of First Bancorp common stock. The total transaction price is valued at approximately $38.2 million. Closing of the merger, which is expected to occur in the first quarter of 2008, is subject to certain conditions, including the approval of the shareholders of the Company, regulatory approvals, and other customary closing conditions. The Bank’s offices will become branch offices of First Bank, the wholly-owned subsidiary of First Bancorp.
In connection with the announced merger, the Bank expects to incur additional liabilities related to compensation and other merger costs that will range from $1.7 million to $2.0 million.
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 are not included in income per share computations. No options were anti-dilutive for the quarter ending September 30, 2007. Approximately 85,000 options were anti-dilutive for the quarter ending September 30, 2006.
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Great Pee Dee Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE D—COMPREHENSIVE INCOME
A summary of comprehensive income is as follows:
| Three Months Ended September 30, | ||||||
| 2007 | 2006 | |||||
| (In thousands) | ||||||
Net income | $ | 95 | $ | 453 | ||
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 | 108 | 143 | ||||
Total comprehensive income | $ | 203 | $ | 600 | ||
NOTE E—NEW ACCOUNTING PRONOUNCEMENTS
The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and / or disclosure of financial information by the Company.
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurement, which enhances existing guidance for measuring assets and liabilities using fair value and requires additional disclosure about the use of fair value for measurement. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company has not yet evaluated the impact of SFAS No. 157.
In February 2007, the Financial Account Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of SFAS No. 115. This statement permits, but does not require, entities to measure many financial instruments at fair value. The objective is to provide entities with an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Entities electing this option will apply it when the entity first recognizes an eligible instrument and will report unrealized gains and losses on such instruments in current earnings. This statement 1) applies to all entities, 2) specifies certain election dates, 3) can be applied on an instrument–by–instrument basis with some exceptions, 4) is irrevocable and 5) applies only to entire instruments. One exception is demand deposit liabilities which are explicitly excluded as qualifying for fair value. With respect to SFAS No. 115, available for sale and held to maturity securities at the effective date are eligible for the fair value option at that date. If the fair value option is elected for those securities at the effective date, cumulative unrealized gains and losses at that date shall be included in the cumulative–effect adjustment and thereafter, such securities will be accounted for as trading securities. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. SFAS No. 159 does contain an early election option that would allow the Company to elect the fair value option for existing eligible items as of the beginning of a fiscal year that begins on or before November 15, 2007. The Company has not early adopted SFAS 159 and does not expect the adoption of SFAS 159 to materially impact the Company’s consolidated financial statements.
NOTE F—RECLASSIFICATIONS
Certain amounts in the September 2006 income statement have been reclassified to conform to the September 2007 presentation. The reclassifications had no effect on net income or stockholders’ equity, as previously reported.
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Great Pee Dee Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE G – INCOME TAXES
The Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—and Interpretation of FASB Statement No. 109” (“FIN 48”), effective for the Company July 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. The adoption of FIN 48 did not have a material effect on the Company’s consolidated financial position or results of operations.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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.
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 earnings. 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
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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 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 certain residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.
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.
Comparison of Financial Condition at September 30, 2007 and June 30, 2007
Total assets decreased by $15.1 million, from $236.7 million at June 30, 2007, to $221.6 million at September 30, 2007. The Company’s decrease in assets was largely attributable to decreases in federal funds sold and cash that were used to fund the maturities of borrowings and brokered certificates of deposit.
The Company’s interest-earning liquid assets, including interest-earning balances in other banks, federal funds sold and investment securities decreased by $12.2 million, to $20.4 million at September 30, 2007, representing 9.2% of total assets at that date as compared with $32.6 million or 13.8% of total assets at June 30, 2007.
Loans receivable decreased by $4.0 million from $178.7 million at June 30, 2007, to $174.7 million at September 30, 2007, primarily due to a decrease in real estate loans due to a decline in loan request volume.
Total deposits decreased by $10.8 million from $171.2 million at June 30, 2007, to $160.4 million at September 30, 2007, primarily due to decreases in large customer certificates of deposit and maturing brokered certificates of deposit used to fund loan volume.
Total stockholders’ equity increased by $40,000 from $27.3 million at June 30, 2007, to $27.4 million at September 30, 2007. The increase in stockholders’ equity from net income and increases in the fair market value of available for sale securities were 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, 2007 and 2006
Net Income. Net income for the quarter ended September 30, 2007 was $95,000, a decrease of $358,000 from net income of $453,000 for the quarter ended September 30, 2006. On a per share basis, net income for the current quarter was $0.05 per diluted share as compared with $0.26 per diluted share for the first quarter of the last fiscal year. The decrease in net income was a result of incurred nondeductible merger costs of $304,000.
Net Interest Income.Net interest income for each of the quarters ended September 30, 2007 and 2006 was $1.7 million. Both interest income and interest expense increased primarily due to the increase in average loans and increases in rates 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 no significant impact on the Company’s net interest income during the quarter.
Provision for Loan Losses.The provision for loan losses totaled $67,000 in the current quarter, compared to $47,000 in the quarter ended September 30, 2006. The provision for loan loss increased as a result of increases in commercial and land loans which are assigned a higher reserve percentage.
We experienced changes in the loan portfolio mix as well as increases in non-performing loans from September 30, 2006 to 2007, both of which increased the necessary amount of the allowance for loan losses when the changes were analyzed in our allowance for loan loss model and resulted in the provision for loan losses of $67,000 for the three months ended September 30, 2007. 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, 2007 and 2006, respectively.
| For the Three Months Ended September 30, | ||||||||
| 2007 | 2006 | |||||||
Balance at the beginning of the period | $ | 1,938 | $ | 1,901 | ||||
Charge-offs: | ||||||||
Real estate mortgage | — | 1 | ||||||
Installment loans to individuals | 18 | 8 | ||||||
| 18 | 9 | |||||||
Recoveries: | ||||||||
Real estate mortgage | — | — | ||||||
Installment loans to individuals | — | 1 | ||||||
| — | 1 | |||||||
Net charge-offs | (18 | ) | (8 | ) | ||||
Provision for loan losses | 67 | 47 | ||||||
Balance at end of period | $ | 1,987 | $ | 1,940 | ||||
Ratio of net charge-offs during the period to average loans outstanding during the period | 0.01 | % | — | % | ||||
Non-Interest Income. Non-interest income decreased by $15,000, from $290,000 for the three months ended September 30, 2006 to $275,000 for the three months ended September 30, 2007. This decrease is due primarily to decreases in other income of $60,000 offset by increases in investment service income and deposit service charges of $39,000 and $10,000, respectively.
Non-Interest Expenses. Non-interest expenses increased $346,000 for the three months ending September 30, 2007 when compared to the same period in 2006. This increase was largely attributable to expenses related to the merger of $304,000 as well as increases in personnel cost of $77,000 when compared to the September 2006 quarter.
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Provision for Income Taxes. The provision for income taxes, as a percentage of income before income taxes, was 72.3% and 38.2% for the quarters ended September 30, 2007 and 2006, respectively. The increase in the provision for income tax was due to merger costs treated as nondeductible for income tax purposes.
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, 2007 | June 30, 2007 | September 30, 2006 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Nonaccrual loans | $ | 1,633 | $ | 1,248 | $ | 581 | ||||||
Restructured loans | — | — | — | |||||||||
Total nonperforming loans | 1,633 | 1,248 | 581 | |||||||||
Real estate and other assets owned | 94 | 94 | 28 | |||||||||
Total nonperforming assets | $ | 1,727 | $ | 1,342 | $ | 609 | ||||||
Accruing loans past due 90 days or more | $ | — | $ | — | $ | — | ||||||
Allowance for loan losses | 1,987 | 1,938 | 1,940 | |||||||||
Nonperforming loans to period-end loans | 0.93 | % | 0.70 | % | 0.32 | % | ||||||
Allowance for loan losses to period-end loans | 1.14 | % | 1.08 | % | 1.07 | % | ||||||
Allowance for loan losses to nonperforming loans | 121.68 | % | 155.29 | % | 333.91 | % | ||||||
Nonperforming assets to total assets | 0.78 | % | 0.56 | % | 0.28 | % | ||||||
The nonperforming loans as of September 30, 2007 consist primarily of one commercial real-estate loan and several 1-4 family mortgage loans. Our portfolio typically includes a small amount of non-performing loans; these loans are not the result of any trend.
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.
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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. 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, 2007 | As of June 30, 2007 | |||||||||||
| Amount | Percent of loans in each category to total loans | Amount | Percent of loans in each category to total loans | |||||||||
Commercial, Financial & Agricultural | $ | 188 | 5.18 | % | $ | 157 | 4.37 | % | ||||
Real Estate—construction | 252 | 18.91 | % | 241 | 17.61 | % | ||||||
Real Estate—mortgage | 1,174 | 73.50 | % | 1,154 | 75.39 | % | ||||||
Installment loans to individuals | 80 | 1.91 | % | 90 | 2.04 | % | ||||||
Other | 71 | 0.50 | % | 71 | 0.59 | % | ||||||
Unallocated | 222 | N/A | 225 | N/A | ||||||||
| $ | 1,987 | 100.00 | % | $ | 1,938 | 100.00 | % | |||||
Liquidity and Capital Resources
During the three months ended September 30, 2007 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, 2007, liquid assets (cash, interest-earning deposits, and investment securities) were approximately $20.9 million, which represents 13.0% of deposits. At that date, outstanding loan commitments were $4.0 million. The undisbursed portion of construction loans was $9.0 million and undrawn lines of credit totaled $18.1 million. Brokered certificates of deposit scheduled to mature within the next year total $14.4 million. Funding for these commitments is expected to be provided from deposits, loan principal repayments, maturing investments, income generated from operations and, to the extent necessary, from borrowings.
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Under federal capital regulations, 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, 2007, 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. No dividends were paid by the Bank to Great Pee Dee in the first quarter ending September 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.
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 Principal Executive Officer and Principal 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 Principal Executive Officer and Principal 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
The following table sets forth information with respect to stock repurchased during the quarter ended September 30, 2007.
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part Of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |||||
July 2007 | — | $ | — | — | 37,853 | ||||
August 2007 | — | $ | — | — | 37,853 | ||||
September 2007 | 500 | $ | 21 | — | 37,853 | ||||
| (1) | The existing stock repurchase plan was announced on August 15, 2000 and approved the repurchase of up to 10% shares of outstanding common stock at that time (168,000 shares of common stock). Subsequently, this plan was adjusted by the 10% stock dividend in November 2001. The program does not contain an expiration date. The Company does not intend to discontinue stock repurchases under this plan. |
Item 4. Submission of Matters to a Vote of Securities Holders
N/A
| 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 8, 2007 | By: | /s/ John S. Long | ||
| John S. Long | ||||
| Chief Executive Officer | ||||
| Date: November 8, 2007 | By: | /s/ John M. Digby | ||
| John M. Digby | ||||
| Chief Financial Officer | ||||
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