<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended June 30, 1998
-------------
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the transition period from ______ to _______.
Commission file number: 0-23521
GREAT PEE DEE BANCORP, INC.
---------------------------------------------
(Name of Small Business Issuer in Its Charter)
Delaware 56-2050592
---------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
515 MARKET STREET
Cheraw, South Carolina 29520
------------------------------- ----------
(Address of Principal Executive (Zip Code)
Offices)
Securities registered under Section 12(b) of the Exchange Act: NONE
----
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK PAR VALUE $.01 PER SHARE
-------------------------------------
(Title of Class)
(803) 537-7656
--------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 _______
-----
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The Issuer's revenues for the fiscal year ended June 30, 1998 were
$4,926,764.
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, computed by reference to the average of the closing bid and ask
price of such stock on the NASDAQ National Market on June 30, 1998 was
approximately $ 6,105,000.
The number of shares outstanding of the Issuer's Common Stock, the issuer's
only class of outstanding capital stock, as of June 30, 1998 was 2,202,125.
<PAGE>
GREAT PEE DEE BANCORP, INC.
FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I .............................................................. 1
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 18
Item 3. Legal Proceedings............................................. 18
Item 4. Submission of Matters to a Vote of Security Holders........... 18
PART II .............................................................. 18
Item 5. Market for Common Equity and Related
Stockholder Matters.......................................... 18
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operation..................................... 19
Item 7. Financial Statements.......................................... 20
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... 21
PART III .............................................................. 21
Item 9. Directors and Officers of the Registrant...................... 21
Item 10. Executive Compensation........................................ 21
Item 11. Security Ownership of Certain Beneficial Owners and
Management................................................... 21
Item 12. Certain Relationships and Related Transactions................ 21
PART IV .............................................................. 21
Item 13. Exhibits, Financial Statement Schedules
and Reports on Form 8-K...................................... 21
(a) Financial Statements Schedules............................
(b) Exhibits Required by Securities and Exchange Commission
Regulation S - B..........................................
(c) Reports on Form 8-K.......................................
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
- ------- --------
Great Pee Dee Bancorp, Inc. (the "Company") was organized in
September, 1997 at the direction of the Board of Directors of First Federal
Savings and Loan Association of Cheraw (the "Association"), for the purpose of
acquiring all of the capital stock to be issued by the Association in the
conversion of the Association from the mutual to the stock form of organization
(the "Conversion"). The Company received approval from the Office of Thrift
Supervision ("OTS") to become a savings and loan holding company and as such is
subject to regulation by the OTS. The Conversion was completed as of December
31, 1997, the Company issued 2,182,125 shares of Common Stock, and received all
of the proceeds of the offering, or $21.8 million (the balance of the proceeds
was transferred to the Association in exchange for the capital stock of the
Association). In connection with the Conversion, the Company loaned
approximately $1,745,700 to the Great Pee Dee Bancorp, Inc. Employee Stock
Ownership Plan and Trust ("ESOP") to enable the ESOP to purchase 174,570 shares
of the Company's Common Stock. The primary business activity of the Company
consists of the operations of its wholly-owned subsidiary, the Association.
The Company is a savings and loan holding company and the owner of all
of the issued and outstanding shares of capital stock of the Association. At
June 30, 1998 the assets of the Company consisted of its ownership of the
capital stock of the Association, the loan to the ESOP, an interest-bearing note
receivable from the Association of $8.6 million, and $200,000 of investment
securities. The Association is a member of the Federal Home Loan Bank ("FHLB")
of Atlanta. At June 30, 1998, the Company had total assets of $68.4 million,
total deposits of $56.8 million, and stockholders' equity of $31.5 million.
The Association was originally organized in 1920 and became a
federally-chartered savings and loan association in 1935. Since then, the
Association has conducted business from its full-service office located in
Cheraw, South Carolina. The Association's principal business consists of
attracting deposits from the general public and originating fixed-rate and
adjustable-rate loans secured primarily by first mortgage liens on one- to four-
family residential real estate. The Association's deposit accounts are insured
up to applicable limits by the SAIF of the FDIC.
The Association believes that it has developed a reputation among its
loyal customer base because of the commitment to personal service and because of
strong support of the local community. The Association offers a number of
financial services including: (i) residential real estate loans; (ii)
construction loans; (iii) commercial real estate loans; (iv) home improvement
loans; (v) money market demand accounts ("MMDAs"); (vi) passbook savings
accounts; and (vii) certificates of deposit.
LENDING ACTIVITIES
The Association has historically concentrated lending activities on
the origination of loans secured by first mortgage liens for the purchase,
construction or refinancing of one- to four-family residential real property.
One- to four-family residential mortgage loans continue to be the major focus of
loan origination activities, representing $50.9 million or 89.66% of the total
loan portfolio at June 30, 1998. The Association also offers commercial real
estate loans, construction loans and consumer loans. Loans secured by commercial
real estate totaled approximately $3.2 million or 5.55% of the total loan
portfolio at June 30, 1998. Construction loans totaled approximately $3.8
million or 6.62% of total loans as of June 30,1998. Home improvement loans
totaled $1.3 million, or 2.34% of the total loan portfolio at June 30, 1998.
<PAGE>
LOAN PORTFOLIO DATA. The following table sets forth the composition of
loan portfolio by loan type and security type as of the dates indicated,
including a reconciliation of gross loans receivable after consideration of the
allowance for loan losses and loans in process.
<TABLE>
<CAPTION>
AT JUNE 30,
-----------
1998 1997
---- ----
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Type of loan:
Real estate loans:
One- to four-family residential............... $ 50,900 89.66% $ 48,460 89.78%
Commercial.................................... 3,153 5.55 2,502 4.64
Construction.................................. 3,759 6.62 3,044 5.64
Home improvement loans........................ 1,325 2.34 1,437 2.66
-------- ------- -------- -------
Total real estate loans.................... 59,137 104.17 55,443 102.72
Other loans:
Loans secured by deposits..................... 326 0.58 319 0.59
-------- ------- -------- -------
Total loans................................ 59,463 104.75 55,762 103.31
Less:
- ----
Construction loans in process................. 2,161 3.81 1,306 2.42
Allowance for losses.......................... 354 0.62 303 0.56
Deferred loan origination fees, net of costs.. 180 0.32 180 0.33
-------- ------- -------- -------
Total, net................................. $ 56,768 100.00% $ 53,974 100.00%
======== ======= ======== =======
</TABLE>
The following table sets forth certain information at June 30, 1998,
regarding the dollar amount of loans maturing in the loan portfolio based on the
earlier of their contractual terms to maturity or their repricing. Demand loans
having no stated schedule of repayments and no stated maturity and overdrafts
are reported as due in one year or less. This schedule does not reflect the
effects of possible prepayments or enforcement of due-on-sale clauses. The
Association expects that prepayments will cause actual maturities to be shorter.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
----------------
MORE THAN MORE THAN
1 YEAR 1 YEAR TO 3 YEARS TO MORE THAN
OR LESS 3 YEARS 5 YEARS 5 YEARS TOTAL
------- ------ ------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate loans:
Adjustable............. $20,663 $ -- $ -- $ -- $20,663
Fixed.................. 519 472 1,650 33,492 36,133
------- ------ ------- ------- -------
21,182 472 1,650 33,492 56,796
Other loans.................. 326 -- -- -- 326
------- ------ ------- ------- -------
21,508 472 1,650 33,492 57,122
Less:
Allowance for loan losses.. (133) (3) (10) (208) (354)
------- ------ ------- ------- -------
Total.................. $21,375 $ 469 $ 1,640 $33,284 $56,768
======= ====== ======= ======= =======
</TABLE>
As of June 30, 1998, the dollar amount of all loans due after one year
that have fixed interest rates was $35.6 million. None of the Association's
loans with floating or adjustable interest rates are shown as being due after
one year.
ONE- TO FOUR-FAMILY RESIDENTIAL LOANS. The Association's primary
lending activity consists of the origination of one- to four-family residential
mortgage loans secured by property located in the primary market area. The
Association generally originates one-to-four family residential mortgage loans
in amounts up to 95% of the lesser of the appraised value or purchase price,
with private mortgage insurance required on loans with a loan-to-value ratio in
excess of 80%. The Association originates and retains fixed rate loans which
provide for the payment of principal and interest for up to an 18-year period.
The Association also offers adjustable-rate mortgage ("ARM") loans.
The interest rate on ARM loans is indexed to the cost of funds index ("COFI").
The COFI reacts to changes in market interest rates more slowly than other
indices. Consequently, ARM loans may not fully reflect current market interest
rates at the time they reprice.
2
<PAGE>
A substantial portion of the ARM loans in the portfolio at June 30, 1998 provide
for maximum rate adjustments per year and over the life of the loan of 1% and
5%, respectively. Residential ARMs are amortized for terms up to 30 years.
ARM loans decrease the risk associated with changes in interest rates
by periodically repricing, but involve other risks because as interest rates
increase, the underlying payments by the borrower increase, thus increasing the
potential for default by the borrower. At the same time, the marketability of
the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore, is potentially limited in effectiveness during
periods of rapidly rising interest rates. At June 30,1998, approximately 46.0%
of one- to four-family residential loans had adjustable rates of interest.
All of the one-to-four family residential mortgage loans that the
Association originate includes "due-on-sale" clauses, which give the Association
the right to declare a loan immediately due and payable in the event that, among
other things, the borrower sells or otherwise disposes of the real property
subject to the mortgage and the loan is not repaid. However, the Association
occasionally permit assumptions of existing residential mortgage loans on a
case-by-case basis.
At June 30, 1998, approximately $50.9 million, or 89.66% of the
portfolio of loans, consisted of one- to four-family residential loans.
Approximately $321,500, or 0.6% of total loans (which were comprised of $317,800
loans secured by one- to four-family properties), were included in non-
performing assets as of that date.
COMMERCIAL REAL ESTATE LOANS. At June 30, 1998, $3.1 million, or 5.55%
of the total loan portfolio, 11 in number, consisted of commercial real estate
loans. Commercial real estate loans are secured by churches, office buildings,
and other commercial properties. The Association generally originates fixed rate
commercial real estate loans with maximum terms of 15 years. The Association
also will originate adjustable rate commercial real estate loans with terms of
up to 30 years. The interest rate on adjustable rate commercial real estate
loans is indexed to the COFI with maximum loan-to-value ratios of 80%. At June
30,1998, the largest commercial loan had a principal balance of $240,000 and
was secured by a motel. On June 30, 1998, there were no commercial real
estate loans included in nonperforming assets.
Loans secured by commercial real estate generally are larger than one-
to four-family residential loans and involve a greater degree of risk.
Commercial real estate loans often involve large loan balances to single
borrowers or groups of related borrowers. Payments on these loans depend to a
large degree on results of operations and management of the properties and may
be affected to a greater extent by adverse conditions in the real estate market
or the economy in general. Accordingly, the nature of the loans makes them more
difficult for management to monitor and evaluate.
CONSTRUCTION LOANS. The Association offers construction loans with
respect to residential and commercial real estate and, in certain cases, to
builders or developers constructing such properties on a speculative basis
(i.e., before the builder/developer obtains a commitment from a buyer). Funds
are disbursed to borrowers upon the successful completion of particular stages
of construction. Typically, loans made to builders who do not have a commitment
for the sale of the property under construction will be for a term of no more
than six months. Except for construction loans made on speculative basis, upon
the successful completion of construction the loan can be converted into
permanent financing. At June 30, 1998, $3.8 million, or 6.62% of the total loan
portfolio, consisted of construction loans. The largest construction loan had a
principal balance of $205,000 on June 30, 1998 and was secured by a one- to
four-family residence. None of the construction loans were included in non-
performing assets on that date.
Construction loans generally match the term of the construction
contract and are written with interest calculated on the amount disbursed under
the loan and payable monthly. The maximum loan-to-value ratio for a construction
loan is based upon the nature of the construction project. For example, a
construction loan for a one-to four-family residence may be written with a
maximum Loan-to-Value ratio of 95% with mortgage insurance. Inspections are made
prior to any disbursement under a construction loan.
3
<PAGE>
While providing the Association with a comparable, and in some cases
higher, yield than a conventional mortgage loan, construction loans involve a
higher level of risk. For example, if a project is not completed and the
borrower defaults, the Association may have to hire another contractor to
complete the project at a higher cost. Also, a project may be completed, but may
not be salable, resulting in the borrower defaulting and taking the title to the
project.
HOME IMPROVEMENT LOANS. At June 30, 1998, home improvement loans
totaled $1.3 million, or 2.34% of total loans. Home improvement loans are
typically secured by second mortgages on the secured property. At June 30, 1998,
one home improvement loan with a balance of $3,700 was included in non-
performing assets.
ORIGINATION, PURCHASE AND SALE OF LOANS. The Association historically
has originated mortgage loans pursuant to its own underwriting standards which
do not conform with the standard criteria of Freddie Mac or the FNMA because the
Association does not require current property surveys in most cases. In the
event that the Association begins originating fixed-rate residential mortgage
loans for sale to Freddie Mac in the secondary market, such loans will be
originated in accordance with the guidelines established by Freddie Mac and
could be sold after they are originated.
The Association confines loan origination activities primarily to
Chesterfield County and the surrounding counties. At June 30, 1998, the
Association had loans secured by property located outside of South Carolina.
Loan originations are generated from referrals from existing customers, real
estate brokers, and advertising. Loan applications are underwritten and
processed at the Association's office.
The Association's loan approval process is intended to assess the
borrower's ability to repay the loan, the viability of the loan and the adequacy
of the value of the property that will secure the loan. To assess the borrower's
ability to repay, the Association studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors. All mortgage loans are approved by the loan committee.
The Association generally requires appraisals on all real property
securing loans and requiring an attorney's opinion and a valid lien on mortgaged
real estate. Appraisals for all real property securing mortgage loans are
performed by independent appraisers who are state-licensed. The Association
requires fire and extended coverage insurance in amounts at least equal to the
principal amount of the loan and also require flood insurance to protect the
property securing its interest if the property is in a flood plain. The
Association also generally requires private mortgage insurance for all
residential mortgage loans with loan-to-value ratios of greater than 80%. The
Association requires escrow accounts for insurance premiums and taxes for loans
that require private mortgage insurance. All real estate loans up to $75,000
must be approved by the loan committee. All real estate loans for amounts in
excess of $75,000 must be approved by the Board of Directors.
Underwriting standards for home improvement loans are intended to
protect against some of the risks inherent in making home improvement loans.
Borrower paying habits and financial strengths are important considerations.
The Association's one-to-four family residential loan originations
during the year ended June 30, 1998 totaled $10.6 million, compared to $6.6
million during the year ended June 30, 1997.
NON PERFORMING AND PROBLEM ASSETS
After a mortgage loan becomes 30 days past due, the Association
delivers a computer generated delinquency notice to the borrower. When loans
become 60 days past due, the Association sends additional delinquency notices
and make personal contact by letter or telephone with the borrower to establish
acceptable repayment schedules. When a mortgage loan is 90 days delinquent, the
Association will have either entered into a workout plan with the borrower or
refer the matter to the Association's attorney for collection. Management is
authorized to commence foreclosure proceedings for any loan upon making a
determination that it is prudent to do so.
The Association reviews mortgage loans on a regular basis and place
such loans on a non-accrual status when they are specifically determined to be
impaired or when they become 90 days delinquent. When loans are placed on a non-
accrual status, unpaid accrued interest is written off, and further income is
recognized only to the extent received.
4
<PAGE>
NONPERFORMING ASSETS. At June 30, 1998, $330,000, or 0.48% of total
assets, were nonperforming (nonperforming loans and non-accruing loans). At June
30, 1998, loans secured by real estate accounted for $321,000 of non performing
assets. The Association had real estate owned ("REO") properties in the amount
of $9,000 as of June 30, 1998.
The table below sets forth the amounts and categories of nonperforming
assets (nonperforming loans and foreclosed real estate) for the last two years.
It is the Association's policy that all earned but uncollected interest on all
loans be reviewed monthly to determine if any portion thereof should be
classified as uncollectible for any loan past due in excess of 90 days.
Delinquent loans that are 90 days or more past due are considered nonperforming
assets. During the periods presented, the Association did not have any troubled
debt restructurings.
<TABLE>
<CAPTION>
At June 30,
----------------------
1998 1997
-------- --------
(Dollars In Thousands)
<S> <C> <C>
Loans not accruing interest.............. $ 321 $ 97
Accruing loans 90 days or more past due.. -- --
Total nonperforming loans............. 321 97
Foreclosed real estate................... 9 10
----- -----
Total nonperforming assets............ $ 330 $ 107
===== =====
Nonperforming assets to total assets.. 0.48% 0.18%
===== =====
</TABLE>
Interest on loans of $10,000 would have been reported for the year
ended June 30,1998 if the non-performing loans summarized above had been current
in accordance with their original terms. Interest totaling $4,000 was reported
on nonperforming loans for the year ended June 30, 1998.
CLASSIFIED ASSETS. Federal regulations and the Association's asset
classification policy provide for the classification of loans and other assets
such as debt and equity securities considered by the OTS to be of lesser quality
as "substandard," "doubtful" or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obliger or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
5
<PAGE>
At June 30, 1998, the aggregate amount of classified assets, and of
general and specific loss allowances, were as follows:
<TABLE>
<CAPTION>
Loan Loss
Amount Allowance
-------- -----------
(IN THOUSANDS)
Classified loans receivable:
<S> <C> <C>
Substandard....................... $321 $ --
Doubtful.......................... -- --
Loss.............................. -- --
---- ----
$321 --
====
General unallocated loss allowance.. $354
----
Total allowance..................... $354
====
</TABLE>
The Association regularly reviews the loan portfolio to determine
whether any loans require classification in accordance with applicable
regulations. Not all classified assets constitute non-performing assets.
ALLOWANCE FOR LOAN LOSSES
The Association provides for loan losses on the allowance method.
Accordingly, all loan losses are charged to the related allowance and all
recoveries are credited to it. Additions to the allowance for loan losses are
provided by charges to operations based on various factors which, in
management's judgment, deserve current recognition in estimating possible
losses. Such factors considered by management include the market value of the
underlying collateral, growth and composition of the loan portfolio, the
relationship of the allowance for loan losses to outstanding loans, delinquency
trends, and economic conditions. The Association evaluates the carrying value
of loans periodically and the allowance is adjusted accordingly. While
management uses the best information available to make evaluations, future
adjustments to the allowance may be necessary if conditions differ substantially
from the assumptions used in making the evaluations.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Association's allowance for loan
losses. Such agencies may require the Association to recognize additions to the
allowance based on judgments of information available to them at the time of
examination.
6
<PAGE>
SUMMARY OF LOAN LOSS EXPERIENCE. The following table analyzes changes
in the allowance during the fiscal years ended June 30, 1998, and 1997.
<TABLE>
<CAPTION>
At June 30,
--------------
1998 1997
-------- --------------
(Dollars In Thousands)
<S> <C> <C>
Balance at beginning of period........................................... $ 303 $ 169
----- -----
Loans charged off:
Real estate.............................................................. 13 9
Other.................................................................... -- --
----- -----
Total loans charged-off................................................. 13 9
Recoveries:
Real estate.............................................................. -- --
Other.................................................................... -- --
----- -----
Total recoveries........................................................ -- --
----- -----
Net loans charged-off.................................................... 13 9
----- -----
Provision for loan losses................................................ 63 143
----- -----
Balance at end of period................................................. $ 354 $ 303
===== =====
Ratio of net charge-offs to average loans outstanding during the period.. 0.02% 0.02%
===== =====
</TABLE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table presents
an analysis of the allocation of allowance for loan losses at the dates
indicated. The allocation of the allowance to each category is not necessarily
indicative of future loss in any particular category and does not restrict the
use of the allowance to absorb losses in other categories.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------
1998 1997
----------------------------------- ---------------------------------
Percent of Percent Percent of Percent
Amount of Allowance of Loans Amount of Allowance of Loans
Loan Loss to Total to Gross Loan Loss to Total to Gross
Allowance Allowance Loans Allowance Allowance Loans
--------- ----------- ----------- --------- ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family residential... $230 65.04% 85.60% $169 55.78% 86.91%
Commercial........................ 25 7.07 5.30 24 7.92 4.49
Construction...................... 25 7.07 6.32 33 10.89 5.46
Home improvement loans............ 10 2.83 2.23 10 3.30 2.58
---- ----- ----- ---- ------ ------
Total real estate loans.......... 290 82.01 99.45 236 77.89 99.43
Other loans:
Loans secured by deposits......... 1 .28 .55 1 0.33 0.57
Unallocated....................... 62 17.71 -- 66 21.78 --
---- ----- ----- ---- ------ ------
Total allowance for loan losses.. $354 100.00% 100.00% $303 100.00% 100.00%
==== ====== ====== ==== ====== ======
</TABLE>
7
<PAGE>
INVESTMENTS
The Association's investment portfolio consists of short-term U.S.
Treasury and federal agency securities, interest earning deposits in other
financial institutions, federal funds sold, and to a lesser extent mortgage back
securities, marketable equity securities and FHLB stock. At June 30, 1998,
approximately $10.6 million, or 15.60%, of total assets consisted of such
investments. The Association had $10.6 million in interest-earning deposits as
of that date.
The following table sets forth the carrying value of the Association's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------
1998 1997
------- ------
(In Thousands)
<S> <C> <C>
Securities available for sale:
Marketable equity securities.............. $ 200 --
Securities held to maturity:
U.S. government and agency securities..... $ 3,300 $1,700
Mortgage-backed securities................ 41 66
------- ------
Total securities held to maturity...... 3,341 1,766
Interest-earning balances in other banks.. 5,013 2,720
Federal Funds sold........................ 1,400 800
Federal Home Loan Bank Stock.............. 495 484
------- ------
Total investments...................... $10,449 $5,770
======= ======
</TABLE>
At June 30, 1998, the market value of the Association's investment
securities held to maturity totaled $3.3 million.
8
<PAGE>
The following table sets forth the amount of investment securities which
mature during each of the periods indicated and the weighted average yields for
each range of maturities at June 30, 1998.
<TABLE>
<CAPTION>
AFTER ONE YEAR AFTER FIVE YEARS
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS
------------------ ------------------- ------------------ ------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- --------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
Marketable equity securities............... $ 200 7.51% $ -- -- $ -- -- $ -- --
Securities held to maturity:
U.S. government and agency securities...... -- -- 3,100 6.23% 200 6.26 -- --
Mortgage-backed securities................ -- -- -- -- 41 8.80% -- --
Other:
Interest-earning balances in other banks... 5,013 6.23% -- -- -- -- -- --
Federal Funds Sold......................... 1,400 5.81 -- -- -- -- -- --
Federal Home Loan Bank Stock............... -- -- -- -- -- -- 495 7.48%
------ ------ ----- ----
Total $6,613 6.18% $3,100 6.23% $241 6.69% $495 7.48%
====== ====== ===== ====
<CAPTION>
TOTAL
----------------------
CARRYING AVERAGE
VALUE YIELD
-------- --------
<S> <C> <C>
Securities available for sale:
Marketable equity securities................ $ 200 7.51%
Securities held to maturity:
U.S. government and agency securities....... 3,300 6.23%
Mortgage-backed securities................. 41 8.80
Other:
Interest-earning balances in other banks.... 5,013 6.23
Federal Funds Sold.......................... 1,400 5.81
Federal Home Loan Bank Stock................ 495 7.48
-------
Total $10,449 6.27%
=======
</TABLE>
9
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits have traditionally bee the primary source of funds
for use in lending and investment activities. In addition to deposits, the
Association derives funds from scheduled loan payments, investment maturities,
loan prepayments, retained earnings, income on earning assets and borrowings.
While scheduled loan payments and income on earning assets are relatively stable
sources of funds, deposit inflows and outflows can vary widely and are
influenced by prevailing interest rates, market conditions and levels of
competition. Borrowings from the FHLB of Atlanta may be used in the short-term
to compensate for reductions in deposits or deposit inflows at less than
projected levels.
DEPOSITS. The Association attracts deposits principally from within
Chesterfield County and Marlboro County through the offering of a selection of
deposit instruments, including passbook accounts, money market accounts, fixed
term certificates of deposit, individual retirement accounts and savings
accounts. The Association does not actively solicit or advertise for deposits
outside of Chesterfield County and adjacent Marlboro County, and substantially
all of the depositors are residents of Chesterfield or Marlboro County. Deposit
account terms vary, with the principal differences being the minimum balance
required, the amount of time the funds remain on deposit and the interest rate.
The Association does not pay broker fees for any deposits received.
The Association establishes the interest rates paid, maturity terms,
service fees and withdrawal penalties on a periodic basis. Determination of
rates and terms are predicated on funds acquisition and liquidity requirements,
rates paid by competitors, growth goals, and applicable regulations. The
Association relies, in part, on customer service and long-standing relationships
with customers to attract and retain deposits. The Association also closely
prices deposits to the rates offered by competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and other prevailing interest rates and
competition. The variety of deposit accounts offered has allowed the Association
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Association has become more susceptible to short-term
fluctuations in deposit flows as customers have become more interest rate
conscious. The Association manages the pricing of deposits in keeping with
asset/liability management and profitability objectives. Based on experience,
the Association believes that passbook and MMDAs are relatively stable sources
of deposits. However, the ability to attract and maintain certificates of
deposit, and the rates paid on these deposits, have been and will continue to be
significantly affected by market conditions. At June 30, 1998, 78.67% of
deposit accounts were certificate of deposit accounts, of which $21.3 million
have maturities of one year or less.
Total deposits at June 30,1998 were approximately $36.7 million,
compared to approximately $46.9 million at June 30, 1997. Deposit base is
somewhat dependent upon the manufacturing sector of Chesterfield and Marlboro
Counties. Although the manufacturing sector in Chesterfield and Marlboro
Counties is relatively diversified and not significantly dependent upon any
industry, a loss of a material portion of the manufacturing workforce could
adversely affect the ability to attract deposits due to the loss of personal
income attributable to the lost manufacturing jobs and the attendant loss in
service industry jobs.
In the unlikely event of the liquidation, all claims of creditors
(including those of deposit account holders, to the extent of their deposit
balances) would be paid first followed by distribution of the liquidation
account to certain deposit account holders, with any assets remaining thereafter
distributed to the Company as the sole shareholder of the Association.
BORROWINGS. The Association focuses on generating high quality loans
and then seek the best source of funding from deposits, investments or
borrowings. At June 30, 1998, the Association had no borrowings from the FHLB of
Atlanta. The Association is required to maintain eligible loans in its
portfolio of at least 170% of outstanding advances as collateral for advances
from the FHLB of Atlanta. The Association does not anticipate any difficulty in
obtaining advances appropriate to meet these requirements in the future.
10
<PAGE>
The following table sets forth the maximum month-end balance and
average balance of FHLB advances, for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1998 1997
----------- ----------
Maximum Balance:
- ----------------
<S> <C> <C>
FHLB advance...................................... $2,400,000 $2,400,000
Average Balance:
- ----------------
FHLB advances..................................... $1,427,000 $1,985,000
</TABLE>
11
<PAGE>
The following table presents certain information relating to the maturities of
FHLB of Atlanta borrowings at or for the years ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Balance At June 30,
------------------
Maturing during the year
ended June 30, Interest Rates 1998 1997
------------- -------------- ---- ----
<S> <C> <C> <C>
1997 5.58-5.72% -- --
1998 5.83-5.95% -- $2,350,000
1999 -- -- --
2000 -- -- --
2001 -- -- --
Thereafter 3.00% -- 50000
----------
Total -- $2,400,000
==========
Weighted average interest rate
-- 5.81%
</TABLE>
REGULATION
GENERAL
As a federally chartered, SAIF-insured savings association, the Association
is subject to extensive regulation by the OTS and the FDIC. For example, the
Association must obtain OTS approval before the Association may engage in
certain activities and must file reports with the OTS regarding activities and
financial condition. The OTS periodically examines the Association's books and
records and, in conjunction with the FDIC in certain situations, has examination
and enforcement powers. This supervision and regulation are intended primarily
for the protection of depositors and federal deposit insurance funds. The
Association's semi-annual assessment owed to the OTS, which is based upon a
specified percentage of assets, is approximately $10,000.
The Association is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
securities, and limitations upon other aspects of banking operations. In
addition, the Association's activities and operations are subject to a number of
additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and antitrust
laws.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
As the holding company for the Association, the Company is a "non-
diversified savings and loan holding company" within the meaning of the Home
Owners' Loan Act, as amended ("HOLA"), and subject to regulatory oversight of
the Director of the OTS. As such, the Company is registered with the OTS and
thereby subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the
Association is subject to certain restrictions in its dealings with the Company
and with other companies affiliated with the Company.
In general, the HOLA prohibits a savings and loan holding company, without
prior approval of the Director of the OTS, from acquiring control of another
savings association or savings and loan holding company or retaining more than
5% of the voting shares of a savings association or of another holding company
which is not a subsidiary. The HOLA also restricts the ability of a director or
officer the Company, or any person who owns more than 25%
12
<PAGE>
of the Company's stock, from acquiring control of another savings association or
savings and loan holding company without obtaining the prior approval of the
Director of the OTS.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply.) At June 30, 1998,
asset composition was in excess of that required to qualify the Association as a
Qualified Thrift Lender.
If the Company were to acquire control of another savings association
other than through a merger or other business combination with the Association,
the Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings association meets the QTL
test, the activities of the Holding Company and any of its subsidiaries (other
than the Association or other subsidiary savings associations) would thereafter
be subject to further restrictions. The HOLA provides that, among other things,
no multiple savings and loan holding company or subsidiary thereof which is not
a savings association shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary
thereof, any business activity other than (i) furnishing or performing
management services for a subsidiary savings association, (ii) conducting an
insurance agency or escrow business, (iii) holding, managing, or liquidating
assets owned by or acquired from a subsidiary savings association, (iv) holding
or managing properties used or occupied by a subsidiary savings association, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by the Federal Savings and Loan Insurance Corporation
("FSLIC") by regulation as of March 5, 1987, to be engaged in by multiple
holding companies, or (vii) those activities authorized by the Board of
Governors of the Federal Reserve System (the "FRS") as permissible for bank
holding companies, unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies. Those activities
described in (vii) above must also be approved by the Director of the OTS before
a multiple holding company may engage in such activities.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5,1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
No subsidiary savings association of a savings and loan holding
company may declare or pay a dividend on its permanent or nonwithdrawable stock
unless it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without
giving notice shall be invalid.
FEDERAL HOME LOAN BANK SYSTEM
The Association is a member of the FHLB of Atlanta, which is one of
twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from funds deposited
by savings associations and proceeds derived from the sale of consolidated
obligations of the FHLB system. It makes loans to members ("FHLB advances") in
accordance with policies and procedures established by the Board of Directors of
the FHLB. All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an
independent agency, controls the FHLB System, including the FHLB of Atlanta.
As a member, the Association is required to purchase and maintain
stock in the FHLB of Atlanta in an amount equal to at least 1% of the aggregate
unpaid residential mortgage loans, home purchase contracts, or similar
obligations at the beginning of each year. At June 30, 1998, investment in stock
of the FHLB of Atlanta was $495,000. The FHLB imposes various limitations on
advances such as limiting the amount of certain types of real estate-related
collateral to 30% of a member's capital and limiting total advances to a member.
Interest rates charged
13
<PAGE>
for advances vary depending upon maturity, the cost of funds to the FHLB of
Atlanta and the purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended June 30, 1998, dividends paid by the
FHLB of Atlanta to the Association totaled approximately $36,000, for an annual
rate of 7.35%.
INSURANCE OF DEPOSITS
DEPOSIT INSURANCE. The FDIC is an independent federal agency that
insures savings institution deposits up to applicable limits, of banks and
thrifts and safeguards the safety and soundness of the banking and thrift
industries. The FDIC administers two separate insurance funds, the BIF for
commercial banks and state savings banks and the SAIF for savings associations
such as the Association and banks that have acquired deposits from savings
associations. The FDIC is required to maintain designated levels of reserves in
each fund.
ASSESSMENTS. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time, and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital levels, and the FDIC's level of supervisory
concern about the institution.
In 1996, federal legislation was enacted to recapitalize the SAIF and
eliminate the significant premium disparity between the BIF and the SAIF. Under
that law, the Association and other institutions with SAIF-insured deposits were
charged a one-time special assessment equal to $0.657 per $100 of assessable
deposits at March 31, 1995. The Association recognized this special assessment
as a charge to noninterest expense of $312,000 ($197,000 after tax) during the
three-month period ended September 30, 1996. The assessment was fully deductible
for both federal and state income tax purposes. Assessment rates for regular
ongoing, deposit insurance premiums currently range from 0.0% of deposits for an
institution in the highest category (i.e., well-capitalized and financially
sound, with no more than a few minor weaknesses) to 0.27% of deposits for an
institution in the lowest category (i.e., undercapitalized and substantial
supervisory consent). The FDIC is authorized to raise the assessment rates as
necessary to maintain the required reserve ratio of 1.25%, and both the BIF and
the SAIF currently satisfy the reserve ratio requirement. The annual rate of
assessments on SAIF-assessable deposits for the payments on the FICO bonds was
0.0648% for the semi-annual period beginning on January 1, 1997; 0.0630% for the
semi-annual period beginning on July 1, 1997; and 0.0622% currently. The 1996
law also provides for the merger of the SAIF and the BIF by 1999, but not until
such time as bank and thrift charters are combined. Until the charters are
combined, savings associations with SAIF deposits may not transfer deposits to
the BIF without paying various exit and entrance fees, and SAIF institutions
will continue to pay higher FICO assessments. Such exit and entrance fees need
not be paid if a SAIF institution converts to a bank charter or merges with a
bank, as long as the resulting bank continues to pay applicable insurance
assessments to the SAIF, and as long as certain other conditions are met.
SAVINGS ASSOCIATION REGULATORY CAPITAL
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common shareholders' equity
(including retained income), noncummulative perpetual preferred stock and
related surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
Under the tangible capital requirement, a savings association must maintain
tangible capital (core capital less all intangible assets except purchased
mortgage servicing rights which may be included after making the above-noted
adjustment in an amount up to 100% of tangible capital) of at least 1.5% of
total assets. Under the risk-based capital requirements, a minimum amount of
capital must be maintained by a savings association to account for the relative
risks inherent in the type and amount of assets held by the savings association.
The risk-based capital requirement
14
<PAGE>
requires a savings association to maintain capital (defined generally for these
purposes as core capital plus general valuation allowances and permanent or
maturing capital instruments such as preferred stock and subordinated debt less
assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets
are ranked as to risk in one of four categories (0-100%). A credit risk-free
asset, such as cash, requires no risk-based capital, while an asset with a
significant credit risk, such as a non-accrual loan, requires a risk factor of
100%. Moreover, a savings association must deduct from capital, for purposes of
meeting the core capital, tangible capital and risk-based capital requirements,
its entire investment in and loans to a subsidiary engaged in activities not
permissible for a national bank (other than exclusively agency activities for
its customers or mortgage banking subsidiaries). At June 30, 1998, the
Association was in compliance with all capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. If the OTS were to implement this regulation, the
Association would be exempt from its provisions because the Association has less
than $300 million in assets and its risk-based capital ratio exceeds 12%. The
Association nevertheless measures interest rate risk in conformity with the OTS
regulation.
If an association is not in compliance with the capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operating activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
PROMPT CORRECTIVE REGULATORY ACTION
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FDICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At June 30,
1998, the Association was categorized as "well capitalized," meaning that total
risk-based capital ratio exceeded 10%, Tier I risk-based capital ratio exceeded
6%, leverage ratio exceeded 5%, and the Association was not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient
capital to take corrective actions. For example, a savings association which is
categorized as "undercapitalized" would be subject to growth limitations and
would be required to submit a capital restoration plan, and a holding company
that controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
DIVIDEND LIMITATIONS
An OTS regulation imposes limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by an association to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized associations. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution ("Tier 1
Institution"). An association that has total capital at least equal to its
minimum capital requirements, but less than its fully-phased in capital
requirements, would be a Tier 2 institution ("Tier 2 Institution"). An
institution having total capital that is less than its minimum capital
requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an
institution which otherwise qualifies as a Tier 1 Institution may be designated
by the OTS as a Tier 2 or Tier 3 Institution if the OTS
15
<PAGE>
determines that the institution is "in need of more than normal supervision."
The Association is currently a Tier 1 Institution.
A Tier 1 Institution may, after prior notice to but without the
approval of the OTS, make capital distributions during a calendar year up to the
greater of (a) 100% of its net income to date during the calendar year plus the
amount that would reduce by one-half its "surplus capital ratio" at the
beginning of the calendar year (the smallest excess over its capital
requirements), or (b) 75% of its net income over the most recent four-quarter
period. Any additional amount of capital distributions would require prior
regulatory approval. Accordingly, at June 30, 1998, the Association had
available approximately $5.3 million for distribution, without consideration of
any capital infusion from the conversion.
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would need to file a prior notice with the OTS
concerning such dividend declaration.
LOANS TO ONE BORROWER
Under OTS regulations, the Association may not make a loan or extend
credit to a single or related group of borrowers in excess of 15% of its
unimpaired capital and surplus. Additional amounts may be loaned to, not in
excess of 10% of unimpaired capital and surplus, if such loans or extensions of
credit are fully secured by readily marketable collateral, including certain
debt and equity securities but not including real estate. In some cases, a
savings association may lend up to 30 percent of unimpaired capital and surplus
to one borrower for purposes of developing domestic residential housing,
provided that the association meets its regulatory capital requirements and the
OTS authorizes the association to use this expanded lending authority. At June
30, 1998, the Association did not have any loans or extensions of credit to a
single or related group of borrowers in excess of its lending limits. The
Association does not believe that the loans-to-one-borrower limits will have a
significant impact on business operations or earnings.
QUALIFIED THRIFT LENDER
Savings associations must meet a QTL test. If the Association
maintains an appropriate level of qualified thrift investments ("QTIs")
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualify as a QTL, the Association
will continue to enjoy full borrowing privileges from the FHLB of Atlanta. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the association in conducting its
business and liquid assets equal to 10% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA, and Freddie
Mac as QTIs. Compliance with the QTL test is determined on a monthly basis and
must be satisfied in nine out of every twelve months. As of June 30, 1998, the
Association was in compliance with its QTL requirement, with approximately
89.21% of assets invested in QTIs.
A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to the SAIF) or be subject to the following penalties: (i) it
may not enter into any new activity except for those permissible for a national
bank and for a savings association; (ii) its branching activities shall be
limited to those of a national bank; (iii) it shall not be eligible for any new
FHLB advances; and (iv) it shall be bound by regulations applicable to national
banks respecting payment of dividends. Three years after failing the QTL test
the association must (i) dispose of any investment or activity not permissible
for a national bank and a savings association and (ii) repay all outstanding
FHLB advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
ACQUISITIONS AND BRANCHING
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located.
16
<PAGE>
Similarly, a savings and loan holding company may acquire control of a bank.
Moreover, federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to
the extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in (S)7701(a)(19) of the Code or the asset
composition test of (S)7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire
banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion.
TRANSACTIONS WITH AFFILIATES
The Association is subject to Sections 22(h), 23A and 23B of the
Federal Reserve Act, which restrict financial transactions between banks and
affiliated companies. The statute limits credit transactions between a bank or
savings association and its executive officers and its affiliates, prescribes
terms and conditions for bank affiliate transactions deemed to be consistent
with safe and sound banking practices, and restricts the types of collateral
security permitted in connection with a bank's extension of credit to an
affiliate.
FEDERAL SECURITIES LAW
The shares of common stock of the Company is registered with the
Securities and Exchange Commission ("SEC") under the Securities Exchange Act of
1934, as amended (the "1934 Act"). The Company is subject to the information,
proxy solicitation, insider trading restrictions and other requirements the 1934
Act and the rules of the SEC thereunder. After three years following the
conversion to stock form, if the Company has fewer than 300 shareholders, it may
deregister its shares under the 1934 Act and cease to be subject to the
foregoing requirements.
Shares of common stock held by persons who are affiliates of the
Company may not be resold without registration unless sold in accordance with
the resale restrictions of Rule 144 under the 1933 Act. If the Company meets the
current public information requirements under Rule 144, each affiliate of the
Company who complies with the other conditions of Rule 144 (including those that
require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i) 1%
of the outstanding shares of the Company or (ii) the average weekly volume of
trading in such shares during the preceding four calendar weeks.
COMMUNITY REINVESTMENT ACT MATTERS
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating--outstanding, satisfactory, needs to
improve, and substantial noncompliance--and a written evaluation of an
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the
17
<PAGE>
CRA and its record of lending to first time home buyers. The OTS has designated
the Association's record of meeting community credit needs as "outstanding."
ITEM 2. PROPERTIES
- --------------------
The Company conducts its business through one facility located in
Cheraw and Chesterfield County, South Carolina. The main office at its current
location opened and has been owned by the Association since 1981. At June 30,
1998, the net book value of the Company's property and equipment was $212,000.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
- -------------------------------------------------------------------------------
As of June 30, 1998, the Company had 2,202,125 shares of common stock
issued and outstanding. At such date, the Company had 441 shareholders of
record. The Company's common stock is traded on the NASDAQ National Market under
the symbol "PEDE." Set forth below are the quarterly high and low bid prices for
the Common Stock, as reported on the NASDAQ National Market since the completion
of the Conversion.
High Low
---- ---
Quarter ended March 31, 1998 16.25 14.75
Quarter ended June 30, 1998 17.38 14.75
18
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS
- --------------------------------------------------------------------
The "Management's Discussion and Analysis of Financial Condition" section of the
Registrants 1998 Annual Report to Shareholders is incorporated herein by
reference.
19
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
- -------------------------------
The material identified in Item 13(a) hereof is incorporated herein by
reference.
20
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
PART III
ITEM 9. DIRECTORS AND OFFICERS OF THE REGISTRANT
- ------- ----------------------------------------
Information included in Great Pee Dee Bancorp, Inc.'s Proxy Statement for
its 1998 Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
- -------- ----------------------
Information included in Great Pee Dee Bancorp, Inc.'s Proxy Statement for
its 1998 Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
Information included in Great Pee Dee Bancorp, Inc.'s Proxy Statement for
its 1998 Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
Information included in Great Pee Dee Bancorp, Inc.'s Proxy Statement for
its 1998 Annual Meeting of Shareholders is incorporated herein by reference.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------- ---------------------------------------------------------------
(a) The following documents appear in sections of the Registrants
1998 Annual Report to Shareholders under the same caption, and
are incorporated herein by reference. No other sections of the
1998 Annual Report to Shareholders are incorporated herein by
this reference.
(1) Report to Shareholders
(2) Selected Financial and Other Data
(3) Management's Discussion and Analysis
(4) Independent Auditors' Report
(5) Consolidated Financial Statements
(i) Consolidated Statements of Financial Condition
(ii) Consolidated Statements of Operations
(iii) Consolidated Statements of Stockholders' Equity
(iv) Consolidated Statements of Cash Flows
(v) Notes to Consolidated Financial Statements
(6) Corporate Information
(b) The following exhibits are filed as part of this report.
3.1 Certificate of Incorporation of Great Pee Dee Bancorp, Inc.*
3.2 Bylaws of Great Pee Dee Bancorp, Inc.*
4.0 Stock Certificate of Great Pee Dee Bancorp, Inc.*
10.1 Employee Agreement for Herbert W. Watts*
10.2 Great Pee Dee Bancorp, Inc. Employee Stock Ownership Plan and
Trust**
27.1 EDGAR Financial Data Schedule
(c) Reports on Form 8-K
None
* Incorporated herein by reference into this document from the Exhibits
to Form SB-2 Registration Statement, initially filed on September 26,
1997, Registration No. 333-36489.
21
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
GREAT PEE DEE BANCORP, INC.
Date: September 24, 1998 By: /s/ Herbert W. Watts
----------------------------------
Herbert W. Watts,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Herbert W. Watts By: /s/ Johnnie L. Craft
---------------------------------- --------------------------------
Herbert W. Watts, President, Chief Johnnie L. Craft, Secretary and
Executive Officer and Director Treasurer
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
Date: September 24, 1998 Date: September 24, 1998
By: /s/ Robert M. Bennett By: /s/ William R. Butler
--------------------------------- ----------------------------------
Robert M. Bennett, Chairman of the William R. Butler, Director
Board
Date: September 24, 1998 Date: September 24, 1998
By: /s/ James C. Crawford, III By: /s/ Henry P. Duvall, IV
--------------------------------- ----------------------------------
James C. Crawford, III, Director Henry P. Duvall, IV, Director
Date: September 24, 1998
By: /s/ Cornelius B. Young
---------------------------------
Cornelius B. Young, Director
22
<PAGE>
GREAT PEE DEE BANCORP, INC
1998 ANNUAL REPORT
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
================================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report to Shareholders............................ 1
Selected Financial and Other Data................. 2
Management's Discussion and Analysis.............. 3
Independent Auditors' Report...................... 14
Consolidated Financial Statements
Consolidated Statements of Financial Condition... 15
Consolidated Statements of Operations............ 16
Consolidated Statements of Stockholders' Equity.. 17
Consolidated Statements of Cash Flows............ 18
Notes to Consolidated Financial Statements....... 20
Corporate Information............................. 41
</TABLE>
This annual report to stockholders contains certain forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and other business of Great Pee Dee Bancorp, Inc. and its wholly-
owned subsidiary that are subject to various factors which could cause actual
results to differ materially from those estimates. Factors which could influence
the estimates include changes in national, regional and local market conditions,
legislative and regulatory conditions, and the interest rate environment.
<PAGE>
REPORT TO SHAREHOLDERS
Dear Shareholders:
First Federal has come a long way since its beginning as a private institution
to a federal charter in 1935, but nothing like the events of the past year. On
December 31, 1997, First Federal converted from a federal mutual savings and
Loan association to a federal stock savings association and became a wholly-
owned subsidiary of Great Pee Dee Bancorp, Inc., a unitary thrift holding
company formed in connection with the conversion to stock ownership. We are
proud of the fact that our depositors oversubscribed for the 2,182,000 shares of
stock issued in the conversion. The added capital received will enable us to
better serve our market area as a community financial institution.
Assets of the company grew by $7.9 million during the year to $68.4 million on
June 30, 1998, and capital increased by $20.4 million to $31.5 million. The
increase in assets and capital was primarily due to the stock offering. Earnings
for the year were up $319,000 to $905,000 compared to $586,000 the previous
year.
Since the conversion, First Federal has been working to become a full service
institution. New computer equipment is being installed that is designed to
enable us to deliver full banking services for our customers and also to be
fully prepared for the year 2000. Our office is being remodeled and several new
employees have been hired to better serve our customers.
We look forward to the future and believe Great Pee Dee Bancorp, Inc. is in
position to grow and increase earnings. We plan to build on our experience from
the past to lead us into the future. The Board of Directors will continue to
study ways to increase the value of your investment. It will consider such
issues as regular cash dividends, special dividends, and repurchase of
outstanding common stock. On May 22, 1998, the company paid its first quarterly
cash dividend and is optimistic that this payment can continue.
On behalf of the Board of Directors, management, and staff, we would like to
thank you for your loyalty and confidence by your investment in Great Pee Dee
Bancorp, Inc.
Sincerely,
Herbert W. Watts
President and Chief Executive Officer
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
SELECTED FINANCIAL AND OTHER DATA
================================================================================
<TABLE>
<CAPTION>
At or for the year ended June 30,
1998 1997 1996
----------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Financial condition data:
Total assets $68,400 $60,538 $59,694
Investments (1) 10,449 5,770 5,470
Loans receivable 56,768 53,974 53,335
Deposits 36,663 46,863 47,949
Stockholders' equity 31,475 11,090 10,504
Operating data:
Interest income 4,897 4,558 4,521
Interest expense 2,329 2,595 2,668
------- ------- -------
Net interest income 2,568 1,963 1,853
Provision for loan losses 63 143 18
------- ------- -------
Net interest income after provision for
loan losses 2,505 1,820 1,835
Noninterest income 30 23 42
Noninterest expense 1,047 915 (2) 654
------- ------- -------
Income before income taxes 1,488 928 1,223
Income tax expense 583 342 429
------- ------- -------
Net income $ 905 $ 586 $ 794
======= ======= =======
Per Common Share Data:
Net income, basic (3), (4) $ 0.32 $ - $ -
Net income, diluted (3), (4) 0.32 - -
Regular cash dividends (3) 0.075 - -
Dividend payment ratio 23.44% - -
Selected Other Data:
Number of:
Outstanding loans 1,996 1,773 1,776
Deposit accounts 3,770 4,206 4,486
Full-service offices open 1 1 1
Return on average assets 1.41% 0.98% 1.33%
Return on average equity 5.27% 5.47% 7.80%
Average equity to average assets 26.73% 17.89% 16.99%
Interest rate spread 2.40% 2.37% 2.24%
Net yield on average interest-earning assets 4.08% 3.32% 3.13%
Average interest-earning assets to average interest-
bearing liabilities 145.45% 121.73% 119.79%
Ratio of noninterest expense to average total assets 1.63% 1.53% 1.09%
Nonperforming assets to total assets 0.48% 0.18% 0.12%
Loan loss reserves to nonperforming loans at
period end 110.28% 312.37% 367.39%
</TABLE>
(1) Includes interest-bearing deposits, federal funds sold, FHLB stock and
investment securities.
(2) Includes a special assessment of $312,000 for the year ended June 30,
1997 which was paid to recapitalize the Savings Association Insurance
Fund
(3) On December 31, 1997, First Federal Savings and Loan Association of
Cheraw converted from a federally-chartered mutual savings and loan
association to a federally-chartered stock savings association and became
a wholly-owned subsidiary of Great Pee Dee Bancorp, Inc.
(4) Earnings per share is based on earnings from December 31, 1997 to June
30, 1998 divided by the weighted average number of shares outstanding
during that period.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
================================================================================
Management's discussion and analysis is intended to assist readers in the
understanding and evaluation of the financial condition and results of
operations of Great Pee Dee Bancorp, Inc. and Subsidiary. It should be read in
conjunction with the audited consolidated financial statements and accompanying
notes included in this report and the supplemental financial data appearing
throughout this discussion and analysis.
DESCRIPTION OF BUSINESS
Great Pee Dee Bancorp, Inc. ("Great Pee Dee" or "Parent") was incorporated under
the laws of the State of Delaware for the purpose of becoming the bank
holding company of First Federal Savings and Loan Association of Cheraw (the
"Bank" or "First Federal") in connection with First Federal's conversion from a
federally-chartered mutual savings and loan association to a federally-chartered
stock savings association (the "Conversion"), pursuant to its Plan of
Conversion. Great Pee Dee was organized to acquire all of the common stock of
First Federal upon its conversion to stock form. A subscription and community
offering (the "Offering") of Great Pee Dee's common stock closed on December 31,
1997, at which time Great Pee Dee acquired all of the outstanding common stock
of the Bank and commenced operations.
In accordance with the Plan of Conversion, Great Pee Dee issued common stock
with a value of $21.8 million in the Offering and received proceeds of $21.1
million, net of Conversion costs. From the net proceeds, Great Pee Dee paid
$10.6 million to First Federal in exchange for the common stock of First Federal
issued in the conversion, and retained the balance of the net conversion
proceeds. The transaction was recorded as an "as-if" pooling with assets and
liabilities recorded at historical cost.
Great Pee Dee has no operations and conducts no business of its own other than
owning First Federal, investing its portion of the net proceeds received in the
Conversion, and lending funds to the Great Pee Dee Bancorp, Inc. Employee Stock
Ownership Plan and Trust (the "ESOP") which was formed in connection with the
Conversion. The principal business of the Bank is accepting deposits from the
general public and using those deposits and other sources of funds to make loans
secured by real estate located in the Bank's primary market area of Chesterfield
and Marlboro counties, South Carolina. On June 30, 1998, approximately 99% of
the Bank's total loans was composed of real estate loans.
Great Pee Dee's principal sources of income are earnings on capital retained by
Great Pee Dee, interest earned from the loan to the ESOP, and dividends paid by
the Bank to Great Pee Dee, if any. Revenues of First Federal are derived
primarily from interest on loans. First Federal also receives interest income
from its investment securities and interest-earning deposit balances and various
types of non-interest income. The major expenses of First Federal are interest
on deposits and general and administrative expenses such as personnel costs,
occupancy, and federal deposit insurance premiums.
Great Pee Dee and its subsidiary are collectively referred to herein as the
"Company".
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS (COUNTINUED)
================================================================================
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk primarily stems from interest rate risk, the potential
economic loss due to future changes in interest rates, which is inherent in
lending and deposit gathering activities. The Company's objective is to manage
the mix of interest-sensitive assets and liabilities to moderate interest rate
risk and stabilize the net interest margin while enhancing profitability.
ASSET/LIABILITY AND INTEREST RATE RISK MANAGEMENT
The Company's asset/liability management, or interest rate risk management,
program is focused primarily on evaluating and managing the composition of its
assets and liabilities in view of various interest rate scenarios. Factors
beyond the Company's control, such as market interest rates and competition, may
also have an impact on the Company's interest income and interest expense.
In the absence of other factors, the yield or return associated with the
Company's earning assets generally will increase from existing levels when
interest rates rise over an extended period of time, and, conversely, interest
income will decrease when interest rates decrease. In general, interest expense
will increase when interest rates rise over an extended period of time, and,
conversely, interest expense will decrease when interest rates decrease.
INTEREST RATE GAP ANALYSIS. As a part of its interest rate risk management
policy, the Company calculates an interest rate "gap." Interest rate "gap"
analysis is a common, though imperfect, measure of interest rate risk, which
measures the relative dollar amounts of interest-earning assets and interest-
bearing liabilities which reprice within a specific time period, either through
maturity or rate adjustment. The "gap" is the difference between the amounts of
such assets and liabilities that are subject to repricing. A "negative" gap for
a given period means that the amount of interest-bearing liabilities maturing or
otherwise repricing within that period exceeds the amount of interest-earning
assets maturing or otherwise repricing within the same period. Accordingly, in a
declining interest rate environment, an institution with a negative gap would
generally be expected, absent the effects of other factors, to experience a
lower decrease in the yield of its assets relative to the cost of its
liabilities and its income should be positively affected. Conversely, the cost
of funds for an institution with a negative gap would generally be expected to
increase more quickly than the yield on its assets in a rising interest rate
environment, and such institution's net interest income generally would be
expected to be adversely affected by rising interest rates. Changes in interest
rates generally have the opposite effect on an institution with a "positive
gap."
The Company's one-year interest sensitivity gap as a percentage of total
interest-earning assets at June 30, 1998 was a negative 1.84%. At June 30, 1998,
the Company's three-year and five-year cumulative interest sensitivity gaps as a
percentage of total interest-earning assets were a negative 4.55% and a negative
4.61%, respectively.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS (COUNTINUED)
================================================================================
ASSET/LIABILITY AND INTEREST RATE RISK MANAGEMENT (CONTINUED)
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1998 which are projected to
reprice or mature in each of the future time periods shown. Except as stated
below, the amounts of assets and liabilities shown which reprice or mature
within a particular period were determined in accordance with the contractual
terms of the assets or liabilities. Loans with adjustable rates are shown as
being due at the end of the next upcoming adjustment period. Passbook accounts
and money market deposit accounts are assumed to be subject to immediate
repricing and depositor availability and have been placed in the shortest
period. In making the gap computations, none of the assumptions sometimes made
regarding prepayment rates and deposit decay rates have been used for any other
interest-earning assets or interest-bearing liabilities. In addition, the table
does not reflect scheduled principal payments which will be received throughout
the lives of the loans. The interest rate sensitivity of the Company's assets
and liabilities illustrated in the following table would vary substantially if
different assumptions were used or if actual experience differs from that
indicated by such assumptions.
<TABLE>
<CAPTION>
Terms to Repricing at June 30, 1998
---------------------------------------------------------
More Than More Than
1 Year 1 Year to 3 Years to More Than
or Less 3 Years 5 Years 5 Years Total
---------- ---------- ----------- ---------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable:
Real estate loans:
Adjustable $20,663 $ - $ - $ - $20,663
Fixed 519 472 1,650 33,492 36,133
Other loans 326 - - - 326
Interest-earning balances in other banks 5,013 - - - 5,013
Federal funds sold 1,400 - - - 1,400
Investments 200(1) 3,100 241 - 3,541
FHLB common stock(2) - - - 495 495
------- ------- ------- ------- -------
Total interest-earning assets $28,121 $ 3,572 $ 1,891 $33,987 $67,571
======= ======= ======= ======= =======
INTEREST-BEARING LIABILITIES:
Savings deposits:
Regular passbook $ 2,084 $ - $ - $ - $ 2,084
Money market passbook 5,736 - - - 5,736
Certificate accounts 21,347 5,399 1,933 164 28,843
------- ------- ------- ------- -------
Total interest-bearing liabilities $29,167 $ 5,399 $ 1,933 $ 164 $36,663
======= ======= ======= ======= =======
INTEREST SENSITIVITY GAP PER PERIOD $(1,046) $(1,827) $ (42) $33,823 $30,908
CUMULATIVE INTEREST SENSITIVITY GAP $(1,046) $(2,873) $(2,915) $30,908 $30,908
CUMULATIVE GAP AS A PERCENTAGE OF TOTAL INTEREST-EARNING ASSETS (1.55)% (4.25)% (4.31)% 45.74% 45.74%
CUMULATIVE INTEREST-EARNING
ASSETS AS A PERCENTAGE OF
INTEREST-BEARING LIABILITIES 96.41% 96.69% 92.01% 184.30% 184.30%
</TABLE>
(1) Equity security with no stated maturities; readily available and assumed
to mature in less than one year.
(2) Nonmarketable equity security; substantially all required to be
maintained and assumed to mature in periods greater than 10 years.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
================================================================================
ASSET/LIABILITY AND INTEREST RATE RISK MANAGEMENT (CONTINUED)
In addition to the traditional gap analysis, the Company also uses a computer
based interest rate risk simulation model. This comprehensive model includes
rate sensitivity gap analysis, rate shock net interest margin analysis, and
asset/liability term and rate analysis. The Company uses this model to monitor
interest rate risk on a quarterly basis and to detect trends that may affect
overall interest income. As a result, this analysis more accurately predicts the
risk to net interest income over the upcoming twelve month period. The Company
has a policy establishing the maximum allowable risk to net interest income
caused by changes in interest rates. The modeling results indicate that the
Company is within the established parameters of the interest rate risk policy.
NET INTEREST INCOME
Net interest income represents the difference between income derived from
interest-earning assets and interest expense incurred on interest-bearing
liabilities. Net interest income is affected by both (i) the difference between
the rates of interest earned on interest-earning assets and the rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities ("net
earning balance"). The following table sets forth information relating to
average balances of the Company's assets and liabilities for the years ended
June 30, 1998 and 1997. For the periods indicated, the table reflects the
average yield on interest-earning assets and the average cost of interest-
bearing liabilities (derived by dividing income or expense by the monthly
average balance of interest-earning assets or interest-bearing liabilities,
respectively) as well as the net yield on interest-earning assets (which
reflects the impact of the net earning balance). Nonaccruing loans were included
in the computation of average balances.
<TABLE>
<CAPTION>
Year Ended June 30, 1998 Year Ended June 30, 1997
---------------------------- ----------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning balances $ 5,409 $ 405 7.49% $ 2,537 $ 146 5.75%
Investments 2,362 181 7.66% 2,367 151 6.38%
Loans 55,232 4,311 7.81% 54,199 4,261 7.86%
------- ------ ------- ------
Total interest-earning assets 63,003 4,897 7.77% 59,103 4,558 7.71%
Other assets 1,257 780
------- -------
Total assets $64,260 $59,883
======= =======
Interest-bearing liabilities:
Deposits $41,888 2,248 5.37% $46,568 2,481 5.33%
Borrowings 1,427 81 5.68% 1,985 114 5.74%
------- ------ ------- ------
Total interest-bearing liabilities 43,315 2,329 5.38% 48,553 2,595 5.34%
------ ------
Other liabilities 3,766 618
Stockholders' equity 17,179 10,712
------- -------
Total liabilities and stockholders' equity $64,260 $59,883
======= =======
Net interest income and interest rate spread $2,568 2.40% $1,963 2.37%
====== ==== ====== ====
Net yield on average interest-earning assets 4.08% 3.32%
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities 145.45% 121.73%
======= =======
</TABLE>
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
================================================================================
RATE/VOLUME ANALYSIS
The following table analyzes the dollar amount of changes in interest income and
interest expense for major components of interest-earning assets and interest-
bearing liabilities. The table distinguishes between (i) changes attributable to
volume (changes in volume multiplied by the prior period's rate), (ii) changes
attributable to rate (changes in rate multiplied by the prior period's volume),
and (iii) net change (the sum of the previous columns). The change attributable
to both rate and volume (changes in rate multiplied by changes in volume) has
been allocated equally to both the changes attributable to volume and the
changes attributable to rate.
<TABLE>
<CAPTION>
Year Ended June 30, 1998 vs. 1997
------------------------------------
Increase (Decrease) Due To
------------------------------------
Volume Rate Total
------------ ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Interest income:
Interest-earning balances $ 205 $ 54 $ 259
Investments - 30 30
Loans 80 (30) 50
----- ---- -----
Total interest income 285 54 339
----- ---- -----
Interest expense:
Deposits (251) 18 (233)
Borrowings (32) (1) (33)
----- ---- -----
Total interest expense (283) 17 (266)
----- ---- -----
Net interest income $ 568 $ 37 $ 605
===== ==== =====
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND 1997
Principally as a result of net proceeds of $21.1 million received on December
31, 1997 from the sale of the Company's common stock, consolidated total assets
increased by $7.9 million from $60.5 million at June 30, 1997 to $68.4 million
at June 30, 1998. Proceeds generated by the stock sale were used principally to
fund an increase in interest-bearing deposits, federal funds sold and investment
securities held to maturity totaling $4.6 million, and growth in loans
receivable of $2.8 million. Customer deposit accounts decreased by $10.2 million
from $46.9 million at June 30, 1997 to $36.7 million at June 30, 1998. This
decrease resulted primarily from deposit withdrawals by customers who used the
funds thus provided to purchase shares of the Company's common stock.
Total stockholders' equity was $31.5 million at June 30, 1998 as compared with
$11.1 million at June 30, 1997. The Company and its bank subsidiary
substantially exceeded all regulatory capital requirements at June 30, 1998.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
================================================================================
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1998 AND 1997
NET INCOME. The Company earned consolidated net income of $905,000 during the
year ended June 30, 1998 as compared with net income of $586,000 during the
prior year, an increase of $319,000. This increase resulted primarily from an
increase in net interest income of $605,000, and the absence of the special SAIF
deposit insurance assessment of $312,000 which, net of an income tax benefit of
$115,000, decreased net income for the year ended June 30, 1997 by approximately
$197,000. The increase in net interest income was partially offset by an
increase in personnel costs of $171,000, and the Company's contribution of its
common stock valued at $200,000 to the charitable foundation formed by the
Company in connection with the Conversion (see Note J to the consolidated
financial statements).
NET INTEREST INCOME. Net interest income increased to $2,568,000 during the
year ended June 30, 1998 as compared with $1,963,000 during the previous year.
This increase resulted in part from an increase in average interest-earning
assets of $3.9 million, consisting of a $2.9 million increase in the average
balance for interest-earning balances, and a $1.0 million increase in the
average balance of loans receivable. The increase in average interest-earning
assets was attributable to the investment of proceeds from sale of the Company's
common stock. Also contributing to the increase in net interest income was a
decrease in average customer deposits of $4.7 million due to customer
withdrawals used to purchase shares of the Company's common stock.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $63,000 and
$143,000 for the years ended June 30, 1998 and 1997, respectively. Management
believes that the provision for loan losses and the resulting loan loss
allowance at June 30, 1997 will be adequate to absorb losses on existing loans.
There was $13,000 in net loan charge-offs during the year ended June 30, 1998 as
compared with net charge-offs of $8,000 during the year ended June 30, 1997.
Nonaccrual loans aggregated $321,000 at June 30, 1998.
OTHER INCOME. Other income consisting of late fees, mortgage insurance
commissions and gains and losses on foreclosed real estate increased from
$23,000 during the year ended June 30, 1997 to $30,000 during the current year.
OTHER EXPENSES. Exclusive of the special SAIF assessment and the Company's
contribution to the charitable foundation, both of which are explained under the
caption "Net Income" (also see Notes I and J to the consolidated financial
statements), other expenses increased by $231,000 from $604,000 during the year
ended June 30, 1997 to $835,000 during the year ended June 30, 1998. This
increase was primarily due to an increase of $171,000 in personnel costs,
$104,000 of which resulted from the expense incurred under the Company's new
ESOP which was adopted simultaneously with the Conversion, and an increase of
$83,000 in other expenses, resulting from costs associated with operating as a
public company.
PROVISION FOR INCOME TAXES
The provision for income taxes, as a percentage of income before income taxes,
was 39.2% and 36.9% for the years ended June 30, 1998 and 1997, respectively.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
================================================================================
ASSET QUALITY
Non-performing assets include non-accrual loans, accruing loans contractually
past due 90 days or more, restructured loans, other real estate and other real
estate under contract for sale. Loans are placed on non-accrual when management
has concerns relating to the ability to collect the loan principal and interest,
and generally when such loans are 90 days or more past due. While non-performing
assets represent potential losses to the Company, management does not anticipate
any aggregate material losses since most loans are believed to be adequately
secured. Management believes the allowance for loan losses is sufficient to
absorb known risks in the portfolio. No assurance can be given that economic
conditions will not adversely affect borrowers and result in increased losses.
The following table summarizes non-performing assets by type at the dates
indicated. Other than the amounts listed, there were no other loans that (i)
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity or capital
resources or (ii) represent material credits about which management has
information that causes them to have serious doubts as to the ability of such
borrowers to comply with the loan repayment terms.
SCHEDULE OF NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
At June 30,
------------
1998 1997
----- -----
<S> <C> <C>
Non-accrual loans $ 321 $ 97
Loans past due 90 days or more and still accruing - -
Other real estate 9 10
Renegotiated troubled debt - -
----- -----
Total non-performing assets $ 330 $ 107
===== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
On May 22, 1998, Great Pee Dee Bancorp, Inc. paid a cash dividend of $.075 per
share. Although Great Pee Dee Bancorp, Inc. 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.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
================================================================================
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 June 30, 1998, liquid assets (cash, interest-earning deposits, and
marketable investment securities) were approximately $10.5 million, which
represents 28.5% of deposits. First Federal is required under applicable federal
regulations to maintain specified levels of "liquid" investments in qualifying
types of United States Government, federal agency and other investments having
maturities of five years or less. Current OTS regulations require that a
savings association maintain liquid assets of not less than 4% of its average
daily balance of net withdrawable deposit accounts and borrowings payable in one
year or less. Monetary penalties may be imposed for failure to meet applicable
liquidity requirements. At June 30, 1998, First Federal's liquidity, as
measured for regulatory purposes, was 20.4% or $7.0 million in excess of the
minimum OTS requirement.
At June 30, 1998, outstanding mortgage loan commitments were $848,000, and the
undisbursed portion of construction loans was $2.2 million. Funding for these
commitments is expected to be provided from deposits, loan and mortgage-backed
securities principal repayments, maturing investments and income generated from
operations.
Under federal capital regulations, Great Pee Dee Bancorp, Inc. and First Federal
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 First Federal's financial
statements. At June 30, 1998 and 1997, Great Pee Dee Bancorp, Inc. and First
Federal exceeded all such requirements.
The Bank is restricted in its ability to pay dividends and to make
distributions. A significant source of Great Pee Dee's funds are dividends
received from the Bank. In fiscal 1999, the amount of dividends that can be
paid by the Bank without prior approval from regulators is approximately $5.6
million. These funds should be adequate to cover Great Pee Dee's needs.
ACCOUNTING AND REGULATORY MATTERS
Management is not aware of any known trends, events, uncertainties or current
recommendations by regulatory authorities that will have, or that are reasonably
likely to have, a material effect on the Company's liquidity, capital resources,
or other operations.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
================================================================================
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes thereto presented herein have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
nearly all the Company's assets and liabilities are monetary in nature. As a
result, interest rates have a greater impact on the Company's performance than
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the price of goods and
services.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This
Statement establishes standards of reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. In
addition to net income, as has been historically determined, comprehensive
income for the Company would include unrealized holding gains and losses on
available-for-sale securities. This Statement will be effective for the
Company's fiscal year ending June 30, 1999, and the Company does not intend to
early adopt. Had the Company early-adopted this Statement, it would have
reported comprehensive income in the same amounts as reported net income for the
years ended June 30, 1998 and 1997, respectively.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This Statement establishes standards for the
way that public business enterprises report information about operating segments
and certain other information in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. This Statement will be
effective for the Company's fiscal year ending June 30, 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts. Under this standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposure to changes in fair values, cash flows, or foreign currencies.
If the hedged exposure is a fair value exposure, the gain or loss on the
derivative instrument is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the effective
portion of the gain or loss on the derivative instrument is reported initially
as a component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to accounting for fair value
and cash flow hedges. If the derivative instrument is not designated as a hedge,
the gain or loss is recognized in earnings in the period of change. Management
anticipates that this statement will have no effect on its consolidated
financial statements.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
================================================================================
YEAR 2000 COMPLIANCE
The "Year 2000" issue confronting the Company and its suppliers, customers,
customers' suppliers and competitors centers on the inability of computer
systems to recognize the Year 2000. Many existing computer programs and systems
were originally programmed with six digit dates that provided only two digits to
identify the calendar year in the date field, without considering the upcoming
change in the century. With the impending new millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year 2000. Like
most financial service providers, the Company and its operations may be
significantly affected by the Year 2000 issue due to its dependence on computer
generated financial information. Software, hardware, and equipment both within
and outside the Company's direct control and with whom the Company
electronically or operationally interfaces (e.g. third party vendors providing
data processing, information system management, maintenance of computer systems,
and credit bureau information) are likely to be affected. Furthermore, if
computer systems are not adequately changed to identify the Year 2000, many
computer applications could fail or create erroneous results. As a result, many
calculations which rely on date field information, such as interest, payment or
due dates and other operating functions, could generate results which are
significantly misstated, and the Company could experience a temporary inability
to process transactions, prepare statements or engage in similar normal business
activities. In addition, under certain circumstances, failure to adequately
address the Year 2000 issue could adversely affect the viability of the
Company's suppliers and creditors and the creditworthiness of its borrowers.
Thus, if not adequately addressed, the Year 2000 matter could result in a
significant adverse impact on products, services and the competitive condition
of the Company.
Financial institution regulators have recently increased their focus upon Year
2000 compliance issues, issuing guidance concerning the responsibilities of
senior management and directors. The Federal Financial Institutions Examination
Council ("FFIEC") has issued several interagency statements on Year 2000 Project
Management Awareness. These statements require financial institutions to, among
other things, examine the Year 2000 implications of reliance on vendors, data
exchange and potential impact on customers, suppliers and borrowers. These
statements also require each federally regulated financial institution to survey
its exposure, measure its risk and prepare a plan in order to solve the Year
2000 issue. In addition, the federal banking regulators have issued safety and
soundness guidelines to be followed by insured depository institutions, such as
the Bank, to assure resolution of any Year 2000 problems. The federal banking
agencies have asserted that Year 2000 testing and certification is a key safety
and soundness issue in conjunction with regulatory exams, and thus an
institution's failure to address appropriately the Year 2000 issue could result
in supervisory action, including such enforcement actions as the reduction of
the institution's supervisory ratings, the denial of applications for approval
of a merger or acquisition, or the imposition of civil money penalties.
In order to address the Year 2000 issue and to minimize its potential adverse
impact, management has begun a process to identify areas that will be affected
by the Year 2000, assess their potential impact on operations, monitor the
progress of third party software vendors in addressing the matter, test changes
provided by these vendors, and develop contingency plans for any critical
systems which are not effectively reprogrammed. The plan is divided into the
five phases: (1) awareness, (2) assessment, (3) renovations, (4) validation,
and (5) implementation.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
================================================================================
YEAR 2000 COMPLIANCE (CONTINUED)
The Company has substantially completed the first two phases of the plan and is
currently working internally and with external vendors on the final three
phases. The Company outsources its item processing operations to a service
provider. The Company's Year 2000 compliance is being closely coordinated with
that of the service provider.
The Company does not currently expect that the cost of its Year 2000 compliance
program will be material to its financial condition or results of operations,
and expects that it will satisfy such compliance program without material
disruption of its operations. In the event that the Company's significant
suppliers do not successfully and timely achieve Year 2000 compliance, the
Company's business, results of operations or financial condition could be
adversely affected.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Great Pee Dee Bancorp, Inc.
Cheraw, South Carolina
We have audited the accompanying consolidated statements of financial condition
of Great Pee Dee Bancorp, Inc. and Subsidiary as of June 30, 1998 and 1997 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Great Pee Dee
Bancorp, Inc. and Subsidiary at June 30, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Dixon, Odom PLLC
Southern Pines, North Carolina
July 17, 1998
<PAGE>
GREAT PEE DEE BANCORP, INC. SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998 AND 1997
================================================================================
<TABLE>
<CAPTION>
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Cash on hand and in banks $ 510,412 $ 222,334
Interest-earning balances in other banks 5,013,308 2,719,538
Federal funds sold 1,400,000 800,000
Investment securities available for sale, at fair value
(amortized cost of $200,000 at June 30, 1998) (Note B) 200,000 -
Investment securities held to maturity, at amortized cost (fair value of $3,341,035 and $1,755,793 at
June 30, 1998 and 1997, respectively) (Note B) 3,340,675 1,765,939
Loans receivable, net (Note C) 56,768,325 53,973,837
Accrued interest receivable 277,931 238,432
Premises and equipment, net (Note D) 211,766 183,440
Foreclosed real estate 8,900 10,100
Stock in the Federal Home Loan Bank, at cost 495,200 484,600
Other assets 173,599 139,327
----------- -----------
TOTAL ASSETS $68,400,116 $60,537,547
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts (Note G) $36,663,436 $46,863,007
Advances from Federal Home Loan Bank (Note F) - 2,400,000
Accrued interest payable 68,614 105,706
Advance payments by borrowers for property taxes and
insurance 62,176 59,985
Accrued expenses and other liabilities 130,855 19,183
----------- -----------
TOTAL LIABILITIES 36,925,081 49,447,881
----------- -----------
Commitments and Contingencies (Notes C and M)
STOCKHOLDERS' EQUITY (Note L)
Preferred stock, no par value, 400,000 shares
authorized, no shares issued and outstanding - -
Common stock, $.01 par value, 3,600,000 shares
authorized; 2,202,125 shares issued and outstanding 22,021 -
Additional paid in capital 21,292,979 -
ESOP note receivable (Note H) (1,682,319) -
Retained earnings, substantially restricted 11,842,354 11,089,666
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 31,475,035 11,089,666
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $68,400,116 $60,537,547
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1998 AND 1997
================================================================================
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
INTEREST INCOME
Loans $ 4,311,381 $ 4,260,688
Investments 181,006 150,766
Deposits in other banks and federal funds sold 404,786 146,431
----------- -----------
TOTAL INTEREST INCOME 4,897,173 4,557,885
----------- -----------
INTEREST EXPENSE
Savings deposits (Note G) 2,247,995 2,480,441
Borrowed funds 80,839 114,369
----------- -----------
TOTAL INTEREST EXPENSE 2,328,834 2,594,810
----------- -----------
NET INTEREST INCOME 2,568,339 1,963,075
PROVISION FOR LOAN LOSSES (Note C) 63,000 143,000
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,505,339 1,820,075
----------- -----------
OTHER INCOME 29,591 23,361
----------- -----------
OTHER EXPENSES
Personnel costs 538,038 366,672
Occupancy 59,429 46,412
Deposit insurance premiums 27,931 63,868
SAIF special assessment (Note I) - 311,693
Contributions to charitable foundation (Note J) 212,050 -
Other 209,780 127,076
----------- -----------
TOTAL OTHER EXPENSES 1,047,228 915,721
----------- -----------
INCOME BEFORE INCOME TAXES 1,487,702 927,715
INCOME TAXES (Note K) 582,948 342,000
----------- -----------
NET INCOME $ 904,754 $ 585,715
=========== ===========
NET INCOME PER COMMON SHARE (Note A)
Basic and diluted $0.32 $ -
=========== ===========
Weighted average shares outstanding 2,027,555 -
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1998 AND 1997
================================================================================
<TABLE>
<CAPTION>
Additional ESOP Total
Common stock paid-in note Retained stockholders'
---------------------
Shares Amount capital receivable earnings equity
------------ ------- ----------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 - $ - $ - $ - $10,503,951 $10,503,951
Net income - - - - 585,715 585,715
------------ ------- ----------- ----------- ----------- -----------
Balance at June 30, 1997 - - - - 11,089,666 11,089,666
Net income - - - - 904,754 904,754
Net proceeds from issuance of 2,182,125 shares of
$.01 par value common stock 2,182,125 21,821 21,052,560 - - 21,074,381
Purchase of 174,570 shares of common stock by ESOP - - - (1,745,700) - (1,745,700)
Issuance of 20,000 shares of common stock to
charitable foundation (Note J) 20,000 200 199,800 - - 200,000
Repayment of ESOP note - - - 63,381 - 63,381
ESOP contribution (Note H) - - 40,619 - - 40,619
Cash dividends paid ($.075 per share) - - - - (152,066) (152,066)
------------ ------- ----------- ----------- ----------- -----------
Balance at June 30, 1998 2,202,125 $22,021 $21,292,979 $(1,682,319) $11,842,354 $31,475,035
============ ======= =========== =========== =========== ===========
</TABLE>
See accompanying notes.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1998 AND 1997
================================================================================
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 904,754 $ 585,715
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 15,588 17,392
Amortization, net 643 (25,792)
Loss on sale of foreclosed real estate, net 1,892 9,454
Provision for loan losses 63,000 143,000
Deferred income taxes (100,871) (23,525)
Contribution of common stock to charitable foundation 200,000 -
ESOP contribution expense credited to additional paid-in
capital 40,619 -
Change in assets and liabilities
(Increase) decrease in accrued interest receivable (39,499) 4,311
Decrease in other assets 66,599 38,101
Increase (decrease) in accrued interest payable (37,092) 32,585
Increase (decrease) in accrued expenses and other liabilities 111,672 (9,541)
----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,227,305 771,700
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in interest-earning balances in other banks (2,293,770) (427,810)
Net increase in feNOTE A - SIGNIFICANT ACCOUNTING POLICIESderal funds sold (600,000) (300,000)
Purchase of available-for-sale securities (200,000) -
Purchases of held Organization and Operationsto maturity investment securities (3,700,000) (1,300,000)
Proceeds from maturities and calls of
held to maturity investment securities 2,125,456 1,730,571
Purchase of Federal Home Loan Bank stock (10,600) (2,600)
Proceeds from sale of loans - 524,661
Net increase in loans (2,911,023) (1,292,446)
Purchase of premises and equipment (43,914) (4,506)
Proceeds from sale of real estate acquired in settlement of loans 64,150 21,907
Capital expenditures for real estate acquired in settlement of loans (12,142) (3,495)
----------- -----------
NET CASH USED BY
INVESTING ACTIVITIES (7,581,843) (1,053,718)
----------- -----------
</TABLE>
See accompanying notes.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,1998 AND 1997
================================================================================
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand accounts $(1,164,385) $ 615,479
Net decrease in certificates of deposit (9,035,186) (1,701,705)
Increase (decrease) in advance payments by borrower
for taxes and insurance 2,191 (29,014)
Stock conversion costs incurred - (15,000)
Net increase (decrease) in advances from Federal
Home Loan Bank (2,400,000) 1,350,000
Net proceeds from issuance of common stock 21,074,381 -
Loan to ESOP for purchase of common stock (1,745,700) -
Collection of ESOP note receivable principal 63,381 -
Cash dividends paid (152,066) -
----------- -----------
NET CASH PROVIDED
BY FINANCING ACTIVITIES 6,642,616 219,760
----------- -----------
NET INCREASE (DECREASE)
IN CASH ON HAND AND IN BANKS 288,078 (62,258)
CASH ON HAND AND IN BANKS, BEGINNING 222,334 284,592
----------- -----------
CASH ON HAND
AND IN BANKS, ENDING $ 510,412 $ 222,334
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 2,365,926 $ 2,562,225
=========== ===========
Income taxes $ 499,603 $ 352,500
=========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Loans receivable transferred to real estate acquired in settlement of loans $ 52,700 $ 10,800
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Organization and Operations
- ---------------------------
On December 31, 1997, pursuant to a Plan of Conversion which was approved by its
members and regulators, First Federal Savings and Loan Association of Cheraw
("First Federal" or the "Bank") converted from a federally chartered mutual
savings and loan association to a federally-chartered stock savings association
(the "Conversion") and became a wholly-owned subsidiary of Great Pee Dee
Bancorp, Inc. (the "Company" or "Parent"). The Company was formed to acquire
all of the common stock of First Federal upon its conversion to stock form. The
Company has no operations and conducts no business on its own other than owning
First Federal, investing its portion of the net proceeds received in the
Conversion and lending funds to the Employee Stock Ownership Plan and Trust (the
"ESOP") which was formed in connection with the Conversion.
Nature of Business
- ------------------
First Federal maintains its sole office and conducts its primary business in
Cheraw, Chesterfield County, South Carolina. The Bank is primarily engaged in
the business of attracting deposits from the general public and using such
deposits to make mortgage loans secured by one-to-four family residential real
estate located in its primary market area. The Bank also makes home improvement
loans, multi-family residential loans, construction loans and loans secured by
deposit accounts. First Federal is a portfolio lender in that it does not
originate its fixed or adjustable rate loans for sale in the secondary market.
First Federal has been and intends to continue to be a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities it serves.
Basis of Presentation
- ---------------------
The accompanying consolidated financial statements include the accounts of the
parent and the Bank, together referred to as the "Company." All significant
intercompany transactions and balances are eliminated in consolidation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly sensitive to significant change relate
to the determination of the allowance for losses on loans and the valuation of
real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for losses on
loans and foreclosed real estate, management obtains independent appraisals for
significant properties.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates (Continued)
- ---------------------------
A majority of the Bank's loan portfolio consists of single-family residential
loans in its market area. The regional economy is currently stable and consists
of various types of industry. Real estate prices in this market are also stable;
however, the ultimate collectibility of a substantial portion of the Bank's loan
portfolio is susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the Bank's
allowances for losses on loans and foreclosed real estate. Such agencies may
require the Bank to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the allowances for
losses on loans and foreclosed real estate may change materially in the near
term.
Investment Securities
- ---------------------
The Bank classifies its securities in one of three categories: trading,
available for sale, or held to maturity. There were no trading securities at
June 30, 1998 or 1997. Securities held to maturity are those securities for
which the Bank has the ability and intent to hold to maturity.
Available-for-sale securities consist of marketable equity securities and are
recorded at fair value. Held to maturity securities are recorded at cost,
adjusted for the amortization or accretion of premiums or discounts. Unrealized
holding gains and losses, net of the related tax effect, on securities available
for sale are excluded from earnings and are reported as a separate component of
stockholders' equity until realized. Transfers of securities between categories
are recorded at fair value at the date of transfer. Unrealized holding gains or
losses associated with transfers of securities from held to maturity to
available for sale are recorded as a separate component of stockholders' equity.
A decline in the market value of any available-for-sale or held-to-maturity
investment below cost that is deemed other than temporary is charged to earnings
and establishes a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to the yield. Realized gains and losses are included
in earnings and the costs of securities sold are derived using the specific
identification method.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loans Receivable
- ----------------
Loans receivable are stated at unpaid balances, less the allowance for loan
losses and net deferred loan fees.
Loan origination and commitment fees, as well as certain direct origination
costs, are deferred and amortized as a yield adjustment over the contractual
lives of the related loans using the interest method. Amortization of deferred
loan fees is discontinued when a loan is placed on nonaccrual status.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.
The Bank accounts for impaired loans in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of
a Loan, amended for SFAS No. 118, Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosure. A loan is impaired when, based on
current information and events, it is probable that all amounts due according to
the contractual terms of the loan agreement will not be collected. Impaired
loans are measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's observable market
price, or the fair value of the collateral of the loan if the loan is collateral
dependent. Interest income from impaired loans is recognized using the cash
basis method of accounting during the time within that period in which the loans
were impaired.
Allowance for Loan Losses
- -------------------------
The Bank provides for loan losses on the allowance method. Accordingly, all loan
losses are charged to the related allowance and all recoveries are credited to
it. Additions to the allowance for loan losses are provided by charges to
operations based on various factors which, in management's judgment, deserve
current recognition in estimating possible losses. Such factors considered by
management include the market value of the underlying collateral, growth and
composition of the loan portfolio, the relationship of the allowance for loan
losses to outstanding loans, delinquency trends, and economic conditions.
Management evaluates the carrying value of loans periodically and the allowance
is adjusted accordingly. While management uses the best information available to
make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the assumptions used in making the
evaluations.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments of information available to them at the time of their
examination.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment
- ----------------------
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation of premises and equipment is recorded on a straight-line basis over
the estimated useful lives of the related assets.
Expenditures for maintenance and repairs are charged to expense as incurred,
while those for improvements are capitalized. The costs and accumulated
depreciation relating to premises and equipment retired or otherwise disposed of
are eliminated from the accounts, and any resulting gains or losses are credited
or charged to earnings.
Investment in Federal Home Loan Bank Stock
- ------------------------------------------
As a requirement for membership, the Bank invests in stock of the Federal Home
Loan Bank of Atlanta ("FHLB"). This investment is carried at cost.
Real Estate Acquired In Settlement of Loans
- -------------------------------------------
Real estate acquired in settlement of loans is carried at the lower of cost or
fair value less estimated costs to dispose. Generally accepted accounting
principles define fair value as the amount that is expected to be received in a
current sale between a willing buyer and seller other than in a forced or
liquidation sale. Fair values at foreclosure are based on appraisals. Losses
arising from the acquisition of foreclosed properties are charged against the
allowance for loan losses. Subsequent writedowns are provided by a charge to
operations through the allowance for losses on other real estate in the period
in which the need arises.
Income Taxes
- ------------
Deferred tax assets and liabilities are recorded for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Future tax
benefits are recognized to the extent that realization of such benefits is more
likely than not. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which the assets
and liabilities are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income tax
expense in the period that includes the enactment date.
In the event the future tax consequences of differences between the financial
reporting bases and the tax bases of the Bank's assets and liabilities result in
deferred tax assets, applicable accounting standards require an evaluation of
the probability of being able to realize the future benefits indicated by such
assets. A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. In
assessing the realizability of the deferred tax assets, management considers the
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes (Continued)
- ------------
A deferred tax liability is not recognized for portions of the allowance for
loan losses for income tax purposes in excess of the financial statement
balance, as described in Note K. Such a deferred tax liability will only be
recognized when it becomes apparent that those temporary differences will
reverse in the foreseeable future.
Benefit Plans
- -------------
The Bank has an ESOP which covers substantially all of its employees. Minimum
contributions to the ESOP are based upon the amortization requirements of the
ESOP's debt to the Parent. Contributions are determined by the Board of
Directors based upon compensation limitations and are expensed in accordance
with the AICPA's Statement of Position 93-6, Employers' Accounting for Employee
Stock Ownership Plans. The Bank also has a 401(k) retirement plan covering
substantially all of its employees. The Bank's policy is to fund retirement
plan contributions to these plans as accrued.
Net Income Per Common Share
- ---------------------------
Effective with the year ended June 30, 1998, the Company has implemented
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share. This Statement simplifies the standards for computing earnings per share
previously found in Accounting Principles Board ("APB") Opinion No. 15, Earnings
Per Share, and makes them comparable to international earnings per share ("EPS")
standards. It replaces the presentation of primary EPS with the presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the statement of operations for all entities with complex capital
structures. It also requires a reconciliation of the numerator and the
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and it is computed by
dividing income available to common shareholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. For the period from
December 31, 1997 to the end of the fiscal year, basic and diluted earnings per
share are the same amounts because no potentially dilutive securities were
outstanding during the period.
Net income per common share for the year ended June 30, 1998 is based on
unaudited net income earned from the date of Conversion, December 31, 1997, to
the end of the fiscal year, divided by the weighted average number of shares
outstanding during that period. For purposes of this computation, the number of
shares of common stock purchased by the Bank's ESOP which have not been
allocated to participant accounts are not assumed to be outstanding.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
- --------------------------------
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This
Statement establishes standards of reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. In
addition to net income as has been historically determined, comprehensive income
for the Company would include unrealized holding gains and losses on available-
for-sale securities. This Statement will be effective for the Company's fiscal
year ending June 30, 1999, and the Company does not intend to early adopt. Had
the Company early-adopted this Statement, it would have reported comprehensive
income in the same amounts as reported net income for the years ended June 30,
1998 and 1997, respectively.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. This Statement establishes standards for the
way that public business enterprises report information about operating segments
and certain other information in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. This Statement will be
effective for the Company's fiscal year ending June 30, 1999.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts. Under this standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value. The
accounting for changes in the fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and, if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative instrument as a
hedge of exposure to changes in fair values, cash flows, or foreign currencies.
If the hedged exposure is a fair value exposure, the gain or loss on the
derivative instrument is recognized in earnings in the period of change together
with the offsetting loss or gain on the hedged item attributable to the risk
being hedged. If the hedged exposure is a cash flow exposure, the effective
portion of the gain or loss on the derivative instrument is reported initially
as a component of other comprehensive income (outside earnings) and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amounts excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to accounting for fair value
and cash flow hedges. If the derivative instrument is not designated as a hedge,
the gain or loss is recognized in earnings in the period of change. Management
anticipates that this statement will have no effect on its consolidated
financial statements.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE B - INVESTMENT SECURITIES
The following is a summary of the securities portfolios by major classification:
<TABLE>
<CAPTION>
June 30, 1998
-------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Securities available for sale:
Marketable equity securities $ 200,000 $ - $ - $ 200,000
========== ====== ======= ==========
Securities held to maturity:
U. S. government securities and
obligations of U. S. government agencies $3,300,000 $5,408 $ 4,467 $3,300,941
FHLMC mortgage-backed securities 40,675 491 1,072 40,094
---------- ------ ------- ----------
$3,340,675 $5,899 $ 5,539 $3,341,035
========== ====== ======= ==========
<CAPTION>
June 30, 1997
--------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Securities held to maturity:
U. S. government securities and
obligations of U. S. government agencies $1,699,558 $2,780 $ 5,092 $1,697,246
FHLMC mortgage-backed securities 66,381 267 8,101 58,547
---------- ------ ------- ----------
$1,765,939 $3,047 $13,193 $1,755,793
========== ====== ======= ==========
</TABLE>
The amortized cost and fair values of securities held to maturity at June 30,
1998 by contractual maturity are shown below. Available-for-sale securities are
not included in this table because they consist solely of equity securities.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Securities Held to Maturity
---------------------------
Amortized Fair
Cost Value
------------- ------------
<S> <C> <C>
Due within one year $ - $ -
Due after one year through five years 3,100,000 3,100,753
Due after five years through ten years 240,675 240,282
Due after ten years - -
---------- ------------
$3,340,675 $3,341,035
========== ============
</TABLE>
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE B - INVESTMENT SECURITIES (CONTINUED)
Proceeds from maturities and calls of investment securities held to maturity
during the years ended June 30, 1998 and 1997 were $2,125,456 and $1,730,571,
respectively. No gains or losses were realized on those maturities and calls.
There were no sales of available-for-sale securities during the years ended June
30, 1998 or 1997.
Securities with a carrying value of $1,111,582 and $1,042,281 and a fair value
of $1,111,838 and $1,038,397 at June 30, 1998 and 1997, respectively, were
pledged to secure public monies on deposit as required by law.
The following table sets forth certain information regarding the carrying
values, weighted average yields and contractual maturities of the Company's
investment portfolio and other interest-earning assets at June 30, 1998.
Marketable equity securities which have no stated maturities and are readily
available, are assumed to mature in less than one year, while FHLB common stock,
a nonmarketable equity security, substantially all of which is required to be
maintained, is assumed to mature in periods greater than ten years.
<TABLE>
<CAPTION>
Carrying value
----------------------------------------------------------
After one After five
One year year through years through After ten
or less five years ten years years Total
-------- ------------ -------------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Securities available for sale:
Marketable equity securities $ 200 $ - $ - $ - $ 200
Securities held to maturity:
U. S. government and agency
securities - 3,100 200 - 3,300
Mortgage-backed securities 41 41
Other:
Interest-earning balances in other
banks 5,013 - - - 5,013
Federal funds sold 1,400 - - - 1,400
Federal Home Loan Bank Stock - - - 495 495
------ ------------ -------------- --------- -------
Total $6,613 $3,100 $241 $495 $10,449
====== ============ ============== ========= =======
</TABLE>
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE B - INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
Average Yield
------------------------------------------------------------
After one After five
One year year through years through After ten
or less five years ten years years Total
--------- ------------- -------------- ---------- ------
<S> <C> <C> <C> <C> <C>
Securities available for sale:
Marketable equity securities 7.51% - - - 7.51%
Securities held to maturity:
U. S. government and agency
securities - 6.23% 6.26% - 6.23%
Mortgage-backed securities - - 8.80% - 8.80%
Other:
Interest-earning balances in other banks 6.23% - - - 6.23%
Federal funds sold 5.81% - - - 5.81%
Federal Home Loan Bank Stock - - - 7.48% 7.48%
Weighted average 6.18% 6.23% 6.69% 7.48% 6.27%
</TABLE>
NOTE C - LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------------------ ---------------------------
Percentage Percentage
Amount of total Amount of total
----------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Type of loan
Real estate loans:
One-to-four family residential $50,899,168 89.66% $48,459,996 89.78%
Commercial 3,153,027 5.55% 2,502,108 4.64%
Construction 3,759,400 6.62% 3,043,900 5.64%
Home improvement loans 1,325,487 2.34% 1,437,110 2.66%
----------- ------ ----------- ------
Total real estate loans 59,137,082 104.17% 55,443,114 102.72%
Other loans
Loans secured by deposits 326,236 0.58% 319,183 0.59%
----------- ------ ----------- ------
Total loans 59,463,318 104.75% 55,762,297 103.31%
Less:
Construction loans in process 2,161,418 3.81% 1,305,981 2.42%
Allowance for loan losses 353,643 0.62% 303,381 0.56%
Deferred loan origination fees,
net of costs 179,932 0.32% 179,098 0.33%
----------- ------ ----------- ------
$56,768,325 100.00% $53,973,837 100.00%
=========== ====== =========== ======
</TABLE>
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE C - LOANS RECEIVABLE (CONTINUED)
The allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Balance at beginning of year $303,381 $168,842
Provision for loan losses 63,000 143,000
Charge-offs (12,738) (8,461)
Recoveries - -
-------- --------
Balance at end of year $353,643 $303,381
======== ========
</TABLE>
The allocation of the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------- -----------------------------------
Percent of Percent Percent Percent
allowance of loans allowance of loans
Amount of to total to gross Amount of to total to gross
allowance allowance loans allowance allowance loans
--------- ---------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family
residential $230,000 65.04% 85.60% $169,000 55.71% 86.90%
Commercial 25,000 7.07% 5.30% 24,000 7.91% 4.49%
Construction 25,000 7.07% 6.32% 33,000 10.88% 5.46%
Home improvement
loans 10,000 2.83% 2.23% 10,000 3.30% 2.58%
-------- ------ ------ -------- -------- --------
Total real estate
loans 290,000 82.01% 99.45% 236,000 77.80% 99.43%
-------- ------ ------ -------- -------- --------
Other loans:
Loans secured by
deposits 1,000 0.28% 0.55% 1,000 0.32% 0.57%
-------- ------ ------ -------- -------- --------
Total other loans 1,000 0.28% 0.55% 1,000 0.32% 0.57%
-------- ------ ------ -------- -------- --------
Unallocated 62,643 17.71% - 66,381 21.88% -
-------- ------ ------ -------- -------- --------
Total allowance for
loan losses $353,643 100.00% 100.00% $303,381 100.00% 100.00%
======== ====== ====== ======== ======== ========
</TABLE>
At June 30, 1998 and 1997, respectively, the Bank had loans totaling
approximately $321,500 and $97,000 which were in a nonaccrual status.
Loans serviced for other investors amounted to $1,921,511 and $1,322,665 at June
30, 1998 and 1997, respectively. The Bank had no loans held for sale at June 30,
1998 or 1997.
At June 30, 1998, the Bank had mortgage loan commitments outstanding of
$847,800, including loans of $615,800 to be originated at fixed interest rates
ranging from 7.00% to 10.00%. In management's opinion, these commitments, and
undisbursed proceeds on construction loans in process reflected above, represent
no more than normal lending risk to the Bank and will be funded from normal
sources of liquidity.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE C - LOANS RECEIVABLE (CONTINUED)
The Bank has had loan transactions with its directors and executive officers.
Such loans were made in the ordinary course of business and also on
substantially the same terms and collateral as those comparable transactions
prevailing at the time and did not involve more than the normal risk of
collectibility or present other unfavorable features. A summary of related party
loan transactions is as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Balance at beginning of year $ 50,087 $ 79,893
Additional borrowings 445,630 587
Loan repayments (119,527) (30,393)
--------- ---------
Balance at end of year $ 376,190 $ 50,087
========= =========
</TABLE>
NOTE D - PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Land $ 59,250 $ 59,250
Building and improvements 316,090 316,090
Furniture and equipment 186,016 142,102
--------- ---------
561,356 517,442
Accumulated depreciation (349,590) (334,002)
--------- ---------
$ 211,766 $ 183,440
========= =========
</TABLE>
NOTE E - FEDERAL INSURANCE OF DEPOSITS
Eligible deposit accounts are insured up to $100,000 by the Federal Deposit
Insurance Corporation.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE F - ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank of Atlanta, with weighted average
interest rates, are as follows:
<TABLE>
<CAPTION>
June 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
5.95% due on or before June 30, 1998 $ - $ 500,000
5.83% due on or before June 30, 1998 - 250,000
5.83% due on or before June 30, 1998 - 500,000
5.92% due on or before June 30, 1998 - 250,000
5.89% due on or before June 30, 1998 - 350,000
5.83% due on or before June 30, 1998 - 250,000
5.83% due on or before June 30, 1998 - 250,000
3.00% due on or before June 30, 2003 - 50,000
---------- ----------
$ - $2,400,000
========== ==========
</TABLE>
At June 30, 1998, First Federal also had $5,800,000 available on a line of
credit from the Federal Home Loan Bank.
All advances are secured by a blanket floating lien on the Bank's one-to-four
family residential mortgage loans.
NOTE G - DEPOSIT ACCOUNTS
A comparative summary of deposit accounts at June 30, 1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ ------------------------
Weighted Weighted
Balance Avg. Rate Balance Avg. Rate
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Savings deposits:
Regular passbook $ 2,084,601 2.79% $ 2,548,819 2.96%
Money market passbook 5,735,798 4.16% 6,435,965 4.18%
----------- -----------
7,820,399 8,984,784
Certificates of deposit 28,843,037 5.70% 37,878,223 5.71%
----------- -----------
Total deposit accounts $36,663,436 5.29% $46,863,007 5.35%
=========== ===========
</TABLE>
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE G - DEPOSIT ACCOUNTS (CONTINUED)
A summary of certificate accounts by maturity as of June 30, 1998 follows
(amounts in thousands):
<TABLE>
<CAPTION>
Less than $100,000
$100,000 or More Total
------------ ------------ ----------
<S> <C> <C> <C>
One year or less $ 17,101 $ 4,246 $ 21,347
More than one year to three years 4,658 741 5,399
More than three years to five years 1,491 442 1,933
More than five years 164 - 164
-------- ---------- ----------
Total certificate accounts $ 23,414 $ 5,429 $ 28,843
======== ========== ==========
</TABLE>
Interest expense on deposits for the years ended June 30 is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Passbook savings accounts $ 53,968 $ 70,007
Money market savings accounts 214,614 241,970
Certificates of deposit 1,984,830 2,175,361
---------- ----------
2,253,412 2,487,338
Penalties for early withdrawal (5,417) (6,897)
---------- ----------
$2,247,995 $2,480,441
========== ==========
</TABLE>
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS
Employee Stock Ownership Plan
- -----------------------------
In the mutual to stock conversion, the First Federal Savings and Loan
Association Employee Stock Ownership Plan (the "ESOP") purchased 174,570 shares
of the common stock of Great Pee Dee Bancorp, Inc. sold in the public offering
at a total cost of $1,745,700. The ESOP executed a note payable to Great Pee Dee
Bancorp, Inc. for the full price of the shares purchased. The note is to be
repaid over ten years in quarterly installments of principal and interest.
Interest is based upon the prime rate and will be adjusted annually. Dividends,
if any, paid on shares held by the ESOP may be used to reduce the loan.
Dividends paid on unallocated shares held by the ESOP are not reported as
dividends in the financial statements. The note may be prepaid without penalty.
The unallocated shares of stock held by the ESOP are pledged as collateral for
the note. The ESOP is funded by contributions made by the Bank in amounts
sufficient to retire the debt. At June 30, 1998, the outstanding balance of the
note is $1,682,319, and is presented as a reduction of stockholders' equity.
Shares released as the debt is repaid and earnings from the common stock held by
the ESOP are allocated among active participants on the basis of compensation in
the year of allocation. Benefits become 100% vested after five years of credited
service. Forfeitures of nonvested benefits will be reallocated among remaining
participating employees in the same proportion as contributions.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS (CONTINUED)
Employee Stock Ownership Plan (Continued)
- -----------------------------
Expense of $104,000 has been incurred in connection with the ESOP during the
year ended June 30, 1998. The expense includes, in addition to the cash
contribution necessary to fund the ESOP, $40,619 which represents the difference
between the fair market value of the shares which have been released or
committed to be released to participants and the cost of these shares to the
ESOP for the year ended June 30, 1998. The Bank has credited this amount to
additional paid-in capital.
At June 30, 1998, 2,119 shares held by the ESOP have been released or committed
to be released to the plan's participants for purposes of computing earnings per
share. The fair value of the unallocated shares amounted to approximately $2.8
million at June 30, 1998.
Deferred Compensation Plan
- --------------------------
The Bank has a deferred compensation plan for certain officers whereby the
executive officers can make elective deferrals in lieu of receiving a portion of
the salary to which they otherwise would be entitled. This plan is not entitled
to favorable tax treatment under current law. Related deferred income tax
benefits are included in the accompanying financial statements. Expenses
associated with this plan were $2,700 and $13,044 for the years ended June 30,
1998 and 1997, respectively.
401(k) Retirement Plan
- ----------------------
The Bank maintains for the benefit of its eligible employees a 401(k) plan.
Under the plan, the Bank matches fifty-percent of participant's elective
contributions up to an additional one and one-half percent of base compensation.
The only eligibility requirement is completion of one year's full-time service.
At June 30, 1998 and 1997, substantially all full-time employees are eligible
and are covered by the plan. 401(k) contributions are funded when accrued. The
total retirement plan expense was $11,763 and $14,659 for the years ended June
30, 1998 and 1997, respectively.
NOTE I - SPECIAL SAIF ASSESSMENT
On September 30, 1996, the Deposit Insurance Funds Act of 1996 was signed into
law. The legislation included a special assessment to recapitalize the SAIF
insurance fund up to its statutory goal of 1.25% of insured deposits. The
assessment required the Bank to pay an amount equal to 65.7 basis points of its
SAIF-assessable deposit base as of March 31, 1995, which resulted in a charge to
income during the year ended June 30, 1997 of $311,693.
NOTE J - CHARITABLE FOUNDATION
In connection with the mutual to stock conversion, the Holding Company formed a
charitable foundation to which it contributed 20,000 shares of its common stock.
Other expenses for the year ended June 30, 1998 include a charge of $200,000 for
this contribution.
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE K - INCOME TAXES
The components of income tax expense are as follows for the years ended June 30,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Current tax expense $ 683,819 $365,525
Deferred tax expense (benefit)
Tax on temporary differences (100,871) (23,525)
--------- --------
$ 582,948 $342,000
========= ========
</TABLE>
The differences between the provision for income taxes and the amount computed
by applying the statutory federal income tax rate of 34% to income before income
taxes were as follows for the years ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Income tax at federal statutory rate $505,819 $315,423
State income tax, net of federal tax benefit 45,615 21,494
ESOP expense differences 13,810 -
Other 17,704 5,083
-------- --------
Provision for income taxes $582,948 $342,000
======== ========
Percentage of income before income taxes 39.2% 36.9%
======== ========
</TABLE>
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE K - INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities arising from temporary differences at June
30, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets relating to:
Deferred compensation $ 77,159 $ 75,601
Allowance for loan losses 129,285 104,153
Charitable contributions carryforward 66,370 -
--------- ---------
Gross deferred tax assets 272,814 179,754
Valuation allowance - -
--------- ---------
Total deferred tax assets 272,814 179,754
--------- ---------
Deferred tax liabilities relating to:
Premises and equipment (38,078) (45,131)
FHLB stock dividends (72,390) (72,390)
Loan fees and costs - (758)
--------- ---------
Total deferred tax liabilities (110,468) (118,279)
--------- ---------
Net deferred tax asset $ 162,346 $ 61,475
========= =========
</TABLE>
Retained earnings at June 30, 1998 includes approximately $1.7 million for which
no deferred income tax liability has been recognized. This amount represents an
allocation of income to bad debt deductions for income tax purposes only.
Reductions of the amount so allocated for purposes other than tax bad debt
losses or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then current
corporate income tax rate.
During 1996, Congress enacted certain tax legislation that exempted thrift
institutions from being taxed on these pre-1987 bad debt reserves. Further, the
use of the reserve method is now required for all thrifts. The Association will
be recapturing $20,000 of its bad debt reserve created in prior years by using
the percentage of taxable income method, requiring payment of additional income
taxes of approximately $8,000. Deferred income taxes have been previously
established for the taxes arising from the reserve recapture, and thus the
ultimate payment of the taxes will not result in a charge to earnings.
<PAGE>
GREAT PEE DEE BANCORP, INC. SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE L - REGULATORY MATTERS
Capital Requirements
- --------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier 1
capital (as defined) to risk-weighted assets (as defined), and of Tier 1 capital
(as defined) to adjusted assets (as defined) and of tangible capital to adjusted
assets. Management believes, as of June 30, 1998, that the Bank meets all
capital adequacy requirements to which it is subject.
As of June 30, 1998, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the
institution's category. A reconciliation of stockholders' equity to the Bank's
regulatory capital at June 30, 1998 is as follows.
<TABLE>
<S> <C>
Consolidated stockholders' equity $ 31,475,035
Less separate equity of Great Pee Dee Bancorp, Inc. (8,918,598)
-----------------
Tier 1 and tangible capital 22,556,437
Add general loan loss allowance 353,643
-----------------
Risk-based capital $ 22,910,080
=================
</TABLE>
The Bank's regulatory capital amounts and ratios
are presented below.
<TABLE>
<CAPTION>
For capital
Actual adequacy purposes
------ -----------------
Amount Ratio Amount Ratio
---------- ------- --------- -----
<S> <C> <C> <C> <C>
As of June 30, 1998
Total Capital
(to Risk Weighted Assets) $22,910,080 76.1% Greater than $2,405,424 Greater than 8.0%
Tier 1 Capital
(to Risk Weighted Assets) 22,556,437 75.1% Greater than 1,202,712 Greater than 4.0%
Tier 1 Capital
(to Adjusted Assets) 22,556,437 35.1% Greater than 1,927,809 Greater than 3.0%
Tangible Capital
(to Adjusted Assets) 22,556,437 35.1% Greater than 963,904 Greater than 1.5%
<CAPTION>
To be well
capitalized under
prompt corrective
action provisions
------------------
Amount Ratio
---------- -------
<S> <C> <C>
As of June 30, 1998
Total Capital
(to Risk Weighted Assets) Greater than $3,006,780 Greater than 10.0%
Tier 1 Capital
(to Risk Weighted Assets) Greater than 1,804,068 Greater than 6.0%
Tier 1 Capital
(to Adjusted Assets) Greater than 3,213,014 Greater than 5.0%
Tangible Capital
(to Adjusted Assets) N/A N/A
</TABLE>
<PAGE>
GREAT PEE DEE BANCORP, INC. SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE M - CONCENTRATION OF CREDIT RISK AND OFF-BALANCE SHEET RISK
The Bank generally originates single-family residential loans within its primary
lending area of Chesterfield County and surrounding counties. The Bank's
underwriting policies require such loans to be made at no greater than 80% loan-
to-value based upon appraised values unless private mortgage insurance is
obtained. These loans are secured by the underlying properties.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments consist of commitments to extend credit on mortgage loans.
Those instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the statements of financial
condition. The contract or notional amounts of those instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments.
A summary of the approximate contract amount of the Bank's exposure to off-
balance sheet risk as of June 30, 1998 is as follows:
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit, mortgage loans $848,000
Undisbursed construction loans in process 2,161,000
NOTE N - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The Bank has implemented Statement of Financial Accounting Standards No. 107,
Disclosures About Fair Value of Financial Instruments ("SFAS 107"), which
requires disclosure of the estimated fair values of the Bank's financial
instruments whether or not recognized in the balance sheet, where it is
practical to estimate that value. Such instruments include cash, interest-
earning balances, federal funds sold, investment securities, loans, stock in the
Federal Home Loan Bank of Atlanta, deposit accounts, advances from Federal Home
Loan Bank, and commitments. Fair value estimates are made at a specific point in
time, based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Bank's entire holdings of a
particular financial instrument. Because no active market readily exists for a
portion of the Bank's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH ON HAND AND IN BANKS, INTEREST-EARNING BALANCES IN OTHER BANKS, AND
FEDERAL FUNDS SOLD
The carrying amounts for these approximate fair value because of the short
maturities of those instruments.
<PAGE>
GREAT PEE DEE BANCORP, INC. SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE N - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Investment Securities
Fair value for investment securities equals quoted market price if such
information is available. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
LOANS
For certain homogenous categories of loans, such as residential mortgages,
fair value is estimated using the quoted market prices for securities
backed by similar loans, adjusted for differences in loan characteristics.
The fair value of other types of loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities.
STOCK IN FEDERAL HOME LOAN BANK OF ATLANTA
The fair value for FHLB stock is its carrying value, since this is the
amount for which it could be redeemed. There is no active market for this
stock and the Bank is required to maintain a minimum balance based on the
unpaid principal of home mortgage loans.
DEPOSIT LIABILITIES
The fair value of savings deposits is the amount payable on demand at the
reporting date. The fair value of certificates of deposit is estimated
using rates currently offered for deposits of similar remaining
maturities.
ADVANCES FROM FEDERAL HOME LOAN BANK
The fair value of these advances is based upon the discounted value using
current rates at which borrowings of similar maturity could be obtained.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
With regard to financial instruments with off-balance sheet risk discussed
in Note M, it is not practicable to estimate the fair value of future
financing commitments.
<PAGE>
GREAT PEE DEE BANCORP, INC. SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE N - DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and estimated fair values of the Bank's financial
instruments, none of which are held for trading purposes, are as follows at June
30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------------------- -----------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash, interest-earning balances, federal
funds sold $ 6,923,720 $ 6,923,720 $ 3,741,872 $ 3,741,872
Investment securities 3,540,675 3,541,035 1,765,939 1,755,793
Loans receivable 56,768,325 57,350,000 53,973,837 54,450,000
Stock in Federal Home Loan Bank of Atlanta 495,200 495,200 484,600 484,600
Financial liabilities:
Deposits 36,663,436 36,820,000 46,863,007 46,995,000
Advances from Federal Home Loan Bank - - 2,400,000 2,392,150
</TABLE>
NOTE O - PLAN OF CONVERSION
On July 14, 1997, the Board of Directors of the Bank adopted a Plan of Holding
Company Conversion whereby the Bank converted from a federally-charted mutual
savings and loan association to a federally-chartered stock savings association
(the "Bank") and became a wholly-owned subsidiary of Great Pee Dee Bancorp, Inc.
(the "Company" or "Holding Company") a holding company formed in connection with
the conversion. On December 31, 1997, First Federal completed its conversion
from a federally-chartered mutual savings and loan association to a federally-
chartered stock savings association. The conversion occurred through the sale of
2,182,125 shares of common stock ($.01 par value) of Great Pee Dee Bancorp, Inc.
Total proceeds of $21,821,250 were reduced by conversion expenses of $746,869.
Great Pee Dee Bancorp, Inc. paid $10,550,000 to First Federal in exchange for
the common stock of First Federal issued in the conversion, and retained the
balance of the net conversion proceeds. The transaction was recorded as an "as-
if" pooling with assets and liabilities recorded at historical cost.
At the time of conversion, the Bank established a liquidation account in an
amount equal to its net worth as reflected in its latest statement of financial
condition used in its final conversion prospectus. The liquidation account will
be maintained for the benefit of eligible deposit account holders who continue
to maintain their deposit accounts in the Bank after conversion. Only in the
event of a complete liquidation will each eligible deposit account holder be
entitled to receive a subaccount balance for deposit accounts then held before
any liquidation distribution may be made with respect to common stock. Dividends
paid by the Bank subsequent to the conversion cannot be paid from this
liquidation account
The Bank may not declare or pay a cash dividend on or repurchase any of its
common stock if its net worth would thereby be reduced below either the
aggregate amount then required for the liquidation account or the minimum
regulatory capital requirements imposed by federal and state regulations.
<PAGE>
GREAT PEE DEE BANCORP, INC. SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
================================================================================
NOTE P - SUBSEQUENT EVENTS
Subsequent to June 30, 1998, the Bank entered into a cancelable agreement to
purchase real estate for $275,000 for the planned construction of a branch
office during the year ending June 30, 1999.
NOTE Q - PARENT COMPANY FINANCIAL DATA
Following are condensed financial statements of Great Pee Dee Bancorp, Inc. as
of and for the period ended June 30, 1998:
CONDENSED STATEMENT OF FINANCIAL CONDITION
June 30, 1998
<TABLE>
Assets:
<S> <C>
Investment securities, available for sale $ 200,000
Note receivable from First Federal 8,646,931
Investment in First Federal 22,556,437
Accrued interest receivable 1,115
Other assets 70,552
-----------
$31,475,035
===========
Stockholders' equity:
Common stock $ 22,021
Additional paid-in capital 21,292,979
ESOP note receivable (1,682,319)
Retained earnings 11,842,354
-----------
$31,475,035
===========
</TABLE>
CONDENSED STATEMENT OF OPERATIONS
PERIOD FROM DECEMBER 31, 1997 TO JUNE 30, 1998
<TABLE>
<S> <C>
Equity in earnings of subsidiary $ 863,058
Interest income 303,147
Operating expenses (236,003)
Income taxes (25,448)
---------
Net income $ 904,754
=========
</TABLE>
<PAGE>
GREAT PEE DEE BANCORP, INC.
CORPORATE INFORMATION
================================================================================
EXECUTIVE OFFICERS
Herbert W. Watts John S. Long Johnnie L. Craft
President and CEO Vice President and COO Secretary and CFO
DIRECTORS
Robert M. Bennett - Chairman William R. Butler
President, Bennett Motor Company Owner, P & H Pharmacy
James C. Crawford, III Henry P. Duvall, IV
COO, B.C. Moore & Sons, Inc. Retired Corporate Executive
Cornelius B. Young
Retired Corporate Executive
STOCK TRANSFER AGENT ANNUAL MEETING
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
SPECIAL LEGAL COUNSEL FORM 10-KSB
Luse Lehman Gorman Pomerenk & Schick A COPY OF FORM 10-KSB AS FILED WITH
5335 Wisconsin Ave. N.W., Suite 400 THE SECURITIES AND EXCHANGE
Washington, DC 20015 COMMISSION WILL BE FURNISHED
WITHOUT CHARGE TO THE COMPANY'S
STOCKHOLDERS FOR THE COMPANY'S MOST
RECENT FISCAL YEAR UPON WRITTEN
REQUEST TO HERBERT W. WATTS,
PRESIDENT, GREAT PEE DEE BANCORP,
INC.______________________________.
INDEPENDENT AUDITORS
CORPORATE OFFICE
Dixon Odom PLLC
6 Turnberry Wood
Southern Pines, NC 28387
COMMON STOCK INFORMATION
The Company's stock began trading on December 31, 1997. There are 2,202,125
shares of common stock outstanding which were held by approximately 441
stockholders of record (excluding shares held in street name) on June 30, 1998.
The Company's common stock is quoted on the NASDAQ national market under the
symbol "PEDE." The high and low sales prices for the common stock for the
quarter ended March 31, 1998 were $16.25 and $14.75, respectively; and for the
quarter ended June 30, 1998 were $17.38 and $14.75, respectively. On May 22,
1998, the company paid a dividend of $0.075 a share to stockholders of record on
May 8, 1998.
DISCLAIMER
This annual report has not been reviewed or confirmed for accuracy or relevance
by the federal deposit insurance corporation.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 510
<INT-BEARING-DEPOSITS> 5,013
<FED-FUNDS-SOLD> 1,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 200
<INVESTMENTS-CARRYING> 3,341
<INVESTMENTS-MARKET> 3,341
<LOANS> 57,122
<ALLOWANCE> 354
<TOTAL-ASSETS> 68,400
<DEPOSITS> 36,663
<SHORT-TERM> 262
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 22
<OTHER-SE> 31,453
<TOTAL-LIABILITIES-AND-EQUITY> 68,400
<INTEREST-LOAN> 4,311
<INTEREST-INVEST> 181
<INTEREST-OTHER> 405
<INTEREST-TOTAL> 4,897
<INTEREST-DEPOSIT> 2,248
<INTEREST-EXPENSE> 2,329
<INTEREST-INCOME-NET> 2,568
<LOAN-LOSSES> 63
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,047
<INCOME-PRETAX> 1,488
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 905
<EPS-PRIMARY> .32
<EPS-DILUTED> .32
<YIELD-ACTUAL> 4.08
<LOANS-NON> 321
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 179
<ALLOWANCE-OPEN> 303
<CHARGE-OFFS> 13
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 354
<ALLOWANCE-DOMESTIC> 290
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 63
</TABLE>
