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, 1999
-------------
|_| 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 Identification Number)
Incorporation or Organization)
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)
(843) 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, 1999 were
$5,151,802.
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, 1999 was
approximately $21,734,030.
The number of shares outstanding of the Issuer's Common Stock, the
issuer's only class of outstanding capital stock, as of June 30, 1999 was
2,085,953.
<PAGE>
Documents Incorporated by Reference
The following documents, in whole or in part, are specifically
incorporated by reference in the indicated Part of this Annual Report on Form
10-KSB:
I. Portions of the Great Pee Dee Bancorp, Inc. Proxy Statement for the 1999
Annual Meeting of Shareholders are incorporated by reference into certain
items of Part III.
II. Portions of the Great Pee Dee Bancorp, Inc. Annual Report for the 1999
Annual Meeting of Shareholders are incorporated by reference into certain
items of Part II.
<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 ($10.6 million 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, 1999 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 $5.9 million, and $450,000 of investment
securities. The Association is a member of the Federal Home Loan Bank ("FHLB")
of Atlanta. At June 30, 1999, the Company had consolidated total assets of $72.6
million, total deposits of $41.3 million, and stockholders' equity of $29.8
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; (vii) checking accounts; (viii) full banking services; and (ix)
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 $55.4 million or 86.0% of the total
loan portfolio at June 30, 1999. The Association also offers commercial real
estate loans, construction loans and consumer loans. Loans secured by commercial
real estate totaled approximately $5.2 million or 8.0% of the total loan
portfolio at June 30, 1999. Construction loans totaled approximately $4.2
million or 6.5% of total loans as of June 30,1999. Home improvement loans
totaled $1.5 million, or 2.4% of the total loan portfolio at June 30, 1999.
<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,
-------------------------------------------
1999 1998
---- ----
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Type of loan:
Real estate loans:
One- to four-family residential................... $55,385 85.99% $50,900 89.66%
Commercial........................................ 5,159 8.01 3,153 5.55
Construction...................................... 4,185 6.49 3,759 6.62
Home improvement loans............................ 1,534 2.38 1,325 2.34
------- ------- ------- -------
Total real estate loans........................ 66,263 102.87 59,137 104.17
Other loans:
Commercial........................................ 272 0.43 -- --
Consumer.......................................... 279 0.43 -- --
Loans secured by deposits......................... 263 0.41 326 0.58
------- ------- -------- --------
Total other loans.............................. 814 1.27 326 0.58
Total loans........................................ 67,077 104.14 59,463 104.75
Less:
Construction loans in process..................... 2,018 3.13 2,161 3.81
Allowance for losses.............................. 444 0.69 354 0.62
Deferred loan origination fees, net of costs...... 204 0.32 180 0.32
------- ------- ------- --------
Total, net..................................... $64,411 100.00% $56,768 100.00%
======= ======= ======= ======
</TABLE>
The following table sets forth certain information at June 30, 1999,
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, 1999
---------------------------------------------------------------------
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....................... $ 23,690 $ 1,006 $ 37 $ 330 $ 25,063
Fixed............................ 1,981 1,087 2,193 33,717 38,978
--------- --------- --------- -------- --------
Total real estate loans...... 25,671 2,093 2,230 34,047 64,041
Other loans........................... 271 62 193 288 814
--------- ---------- --------- --------- ---------
Total loans............. 25,942 2,115 2,423 34,335 64,855
Less:
Allowance for loan losses........... (178) (15) (17) (234) (444)
--------- ---------- --------- --------- ---------
Total............................ $25,764 $2,140 $2,406 $34,101 $64,411
======= ====== ====== ======= =======
</TABLE>
As of June 30, 1999, the dollar amount of all loans due after one year
that have fixed interest rates was $37.0 million. None of the Association's
loans with floating or adjustable interest rates are shown as being due after
one year.
2
<PAGE>
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. A substantial portion of the ARM loans in the portfolio
at June 30, 1999 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 30,1999, approximately 46.2%
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, 1999, approximately $55.4 million, or 86.0% of the
portfolio of loans, consisted of one- to four-family residential loans.
Approximately $271,000, or 0.42% of total loans (which were comprised of eight
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, 1999, $5.2 million, or 8.0%
of the total loan portfolio, 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
30,1999, the largest commercial loan had a principal balance of $575,000 and was
secured by a funeral home. On June 30, 1999, 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
3
<PAGE>
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,
1999, $4.2 million, or 6.5% of the total loan portfolio, consisted of
construction loans. The largest construction loan had a principal balance of
$202,000 on June 30, 1999 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. 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.
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, 1999, home improvement loans
totaled $1.5 million, or 2.4% of total loans. Home improvement loans are
typically secured by second mortgages on the secured property. At June 30, 1999,
three home improvement loans with an aggregate balance of $7,548 were
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. Loan originations are
generated from referrals from existing customers, real estate brokers, and
advertising.
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. Mr. Watts and Mr. Long may approve
loans up to $100,000. The Association's Loan Committee may approve loans up to
$250,000 and any loan in excess of $250,000 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.
4
<PAGE>
The Association's one-to-four family residential loan originations
during the year ended June 30, 1999 totaled $17.4 million, compared to $13.0
million during the year ended June 30, 1998.
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.
Nonperforming Assets. At June 30, 1999, $304,000, or 0.41% of total
assets, were nonperforming (nonperforming loans and non-accruing loans). At June
30, 1999, loans secured by real estate accounted for $271,000 of non performing
assets. The Association had real estate owned ("REO") properties in the amount
of $33,000 as of June 30, 1999.
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,
--------------------------
1999 1998
-------- ---------
(Dollars In Thousands)
<S> <C> <C>
Loans not accruing interest............................................ $ 271 $ 321
Accruing loans 90 days or more past due................................ -- --
Total nonperforming loans........................................... 271 321
Foreclosed real estate................................................. 33 9
------ -------
Total nonperforming assets.......................................... $ 304 $ 330
====== =======
Nonperforming assets to total assets................................ 0.41% 0.48%
====== =======
</TABLE>
Interest on loans of $10,000 would have been reported for the year
ended June 30,1999 if the non-performing loans summarized above had been current
in accordance with their original terms. Interest totaling $12,000 was reported
on nonperforming loans for the year ended June 30, 1999.
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
5
<PAGE>
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.
At June 30, 1999, the aggregate amount of classified assets, and of
general and specific loss allowances, were as follows:
<TABLE>
<CAPTION>
Loan Loss
Amount Allowance
------ ---------
(In Thousands)
<S> <C> <C>
Classified loans receivable:
Substandard.......................... $ 502 $ 126
Doubtful............................. -- --
Loss................................. -- --
---- ----
$ 502 126
===
General loss allowance................. 318
---
Total allowance........................ $ 444
</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.
6
<PAGE>
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.
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance during the fiscal years ended June 30, 1999, and 1998.
<TABLE>
<CAPTION>
At June 30,
--------------------------
1999 1998
-------- ---------
(Dollars In Thousands)
<S> <C> <C>
Balance at beginning of period............................................. $ 354 $ 303
------ -------
Loans charged off:
Real estate.............................................................. 6 13
Other.................................................................... -- --
------ -------
Total loans charged-off................................................ 6 13
Recoveries:
Real estate.............................................................. -- --
Other.................................................................... -- --
------ -------
Total recoveries....................................................... -- --
------ -------
Net loans charged-off...................................................... 6 13
------ -------
Provision for loan losses.................................................. 96 63
------ -------
Balance at end of period................................................... $ 444 $ 354
====== =======
Ratio of net charge-offs to average loans outstanding during the period.... 0.01% 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,
-------------------------------------------------------------
1999 1998
------------------------------ ----------------------------
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....................... $ 257 57.89% 82.57% $ 230 65.04% 85.60%
Commercial............................................ 51 11.49 7.69 25 7.07 5.30
Construction.......................................... 10 2.25 6.24 25 7.07 6.32
Home improvement loans................................ 9 2.03 2.29 10 2.83 2.23
-------- ---- ------ ----- ------- -------
Total real estate loans............................. 327 73.66 98.79 290 82.01 99.45
Other loans:
Commercial.......................................... 1 0.23 0.41 -- -- --
Consumer............................................ 1 0.23 0.41 -- -- --
Loans secured by deposits........................... 1 0.23 0.39 1 0.28 0.55
Unallocated........................................... 114 25.65 -- 62 17.71 --
-------- ----- --- ----- ------- ----
Total allowance for loan losses..................... $ 444 100.00% 100.00% $ 354 100.00% 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, 1999,
approximately $5.3 million, or 7.3%, of total assets consisted of such
investments. The Association had $726,000 in interest-earning deposits as of
that date.
The following table sets forth the carrying value of the Company's
investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------
1999 1998
-------- ---------
(In Thousands)
<S> <C> <C>
Securities available for sale:
Marketable equity securities........................................... $ 450 $ 200
Securities held to maturity:
U.S. government and agency securities.................................. 3,600 3,300
Mortgage-backed securities............................................. 21 41
-------- ---------
Total securities held to maturity................................... 3,621 3,341
Interest-earning balances in other banks............................... 726 5,013
Federal Funds sold..................................................... -- 1,400
Federal Home Loan Bank Stock........................................... 524 495
-------- ---------
Total investments................................................... $ 5,321 $ 10,449
======== =========
</TABLE>
At June 30, 1999, the market value of the Association's investment
securities held to maturity totaled $3.6 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, 1999.
<TABLE>
<CAPTION>
After One Year After Five Years
One Year or Less Through Five Years Through Ten Years
---------------- ------------------ ------------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale:
Marketable equity securities......... $ 450 7.48% $ -- -- $ -- --
Securities held to maturity:
U.S. government and agency securities -- -- 3,600 5.92% -- --
Mortgage-backed securities........... -- -- 21 8.60 -- --
Other:
Interest-earning balances in other banks 726 5.75% -- -- -- --
Federal Funds Sold................... -- -- -- -- -- --
Federal Home Loan Bank Stock......... -- -- -- -- -- --
------- ------- -------
Total $ 1,176 6.41% $ 3,621 5.94% $ -- --%
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
After Ten Years Total
---------------- ---------------
Carrying Average Carrying Average
Value Yield Value Yield
----- ----- ----- -----
<S>
Securities available for sale: <C> <C> <C> <C>
$ -- -- $ 450 7.48%
Marketable equity securities.........
Securities held to maturity: -- -- 3,600 5.92%
U.S. government and agency securities -- -- 21 8.60%
Mortgage-backed securities...........
Other: -- -- 726 5.75%
Interest-earning balances in other banks -- -- -- --
Federal Funds Sold................... 524 7.75% 524 7.75%
Federal Home Loan Bank Stock......... ------ -------
$ 524 7.75% $ 5,321 6.22%
Total ====== =======
</TABLE>
9
<PAGE>
Sources of Funds
General. Deposits have traditionally been 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, checking 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, 1999, 67.1% of deposit
accounts were certificate of deposit accounts, of which $16.1 million have
maturities of one year or less.
Total deposits at June 30,1999 were approximately $41.3 million,
compared to approximately $36.7 million at June 30, 1998. 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, 1999, the Association had borrowings of $1.2 million
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,
--------------------------
1999 1998
---------- -----------
<S> <C> <C>
Maximum Balance:
- ----------------
FHLB advances........................................................... $1,200,000 $ 2,400,000
Average Balance:
- ----------------
FHLB advances........................................................... $ 92,000 $ 1,427,000
</TABLE>
The following table presents certain information relating to the
maturities of FHLB of Atlanta borrowings at or for the years ended June 30, 1999
and 1998.
<TABLE>
<CAPTION>
Balance At June 30,
Maturing during the year -------------------
------------------------
ended June 30, Interest Rates 1999 1998
-------------- -------------- ---- ----
<S> <C> <C> <C>
2000 -- $ -- $ --
2001 5.09% 1,200,000 --
Thereafter --% -- --
--------- -------
--
Total $ 1,200,000 $ --
========= =======
Weighted average interest
rate 5.09% --%
</TABLE>
Additional Risk Factors
In addition to factors discussed in the description of the business of
the Company and Association and elsewhere in this report, the following are
factors that could adversely affect future results of operations and the
financial condition of the Company.
The Impact of Changes in Interest Rates
The Association's ability to make a profit, like that of most financial
institutions, substantially depends upon net interest income, which is the
difference between the interest income earned on interest earning assets (such
as mortgage loans) and the interest expense paid on interest-bearing liabilities
(such as deposits). Approximately 61.0% of our real estate loans have rates of
interest which are fixed for the term of the loan ("fixed rate"), while deposit
accounts have significantly shorter terms to maturity than real estate loans.
Because interest-earning assets generally have fixed rates of interest and have
longer effective maturities than interest-bearing liabilities, the yield on the
Association's interest earning assets generally will adjust more slowly to
changes in interest rates than the cost of its interest-bearing liabilities. The
slower adjustment of interest earning assets as compared to interest-bearing
liabilities results in First Federal having a "negative gap." At June 30, 1999,
our one year interest rate gap was negative 3.62%. As a result, our net interest
income will be adversely affected by material and prolonged increases in
interest rates. In addition, rising interest rates may adversely affect our
earnings because there might be a lack of customer demand for loans. Changes in
interest rates also can affect the average life of loans and mortgage-backed
securities.
11
<PAGE>
Reliance on Certificate of Deposit Accounts
A significant percentage of our deposit accounts are certificates of
deposit rather than passbook or money market accounts. At June 30, 1999, $27.7
million, or 67.1% of our total deposits were certificate of deposit accounts.
$16.1 million of our certificates of deposit mature within one year.
Certificates of deposit can be a more interest rate sensitive source of funds
than passbook or money market accounts. In the event that interest rates
significantly increase, or if we do not offer competitive rates of interest on
its certificates of deposit, the Association may experience a significant
decrease in its deposit accounts.
Competition
The Association experiences strong competition in its local market area
in originating loans, primarily from mortgage brokers. There is also significant
competition in attracting deposits, primarily from commercial banks, thrifts and
money center banks. Such competition may limit our growth in the future.
Geographic Concentration of our Loans
All of the Association's real estate mortgage loans are secured by
properties located in South Carolina, mostly in Chesterfield and Marlboro
Counties. A weakening in the local real estate market or in the local or
national economy, or a reduction in the workforce at the manufacturing
facilities in the area could result in an increase in the number of borrowers
who default on their loans and a reduction in the value of the collateral
securing the loans, which would reduce our earnings.
Financial Institution Regulation and Future of the Thrift Industry
The Association and the Company are subject to extensive regulation,
supervision, and examination by the Office of Thrift Supervision ("OTS") and the
Federal Deposit Insurance Corporation (the 'FDIC"). Such regulation and
supervision govern the activities in which an institution can engage and are
intended primarily for the protection of the insurance fund and depositors.
Regulatory authorities have been granted extensive discretion in connection with
their supervisory and enforcement activities which are intended to strengthen
the financial condition of the banking and thrift industries, including the
imposition of restrictions on the operation of an institution, the
classification of assets by an institution and the adequacy of an institution's
allowance for loan losses. Any change in such regulation and oversight, whether
by the OTS, the FDIC or Congress, could have a material impact on the Company,
the Bank and their respective operations.
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
$11,500.
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.
12
<PAGE>
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% 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, 1999,
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 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.
13
<PAGE>
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, 1999, investment in stock of the FHLB of
Atlanta was $524,000. 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 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, 1999, dividends paid by the
FHLB of Atlanta to the Association totaled approximately $37,200, for an annual
rate of 7.5%.
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 semi-annual rate
of assessments on SAIF-assessable deposits for the payments on the FICO bonds is
currently 0.0622%. Several bills have been introduced in Congress that would
eliminate the federal thrift charter and OTS. The Association is also unable to
predict whether the SAIF and BIF funds will eventually be merged.
14
<PAGE>
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. However, to be considered "Adequately Capitalized", a savings
institution must maintain a 4.0% leverage capital ratio. 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
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, 1999, 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,
1999, 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
15
<PAGE>
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. A "well-capitalized" institution can, after prior notice but without
prior approval from the OTS, make capital distributions during a calendar year
in an amount of up to 100 percent of its net income during the calendar year,
plus its retained net income for the proceeding two years. As of June 30, 1999,
the Association was a "well-capitalized" institution.
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, 1999, 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
The HOLA requires savings institutions to be qualified thrift lenders
("QTL"). To be a QTL, the Bank can either satisfy the QTL test, or the Domestic
Building and Loan Association ("DBLA") Test of the Code. Under the QTL test, a
savings bank is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly basis in 9 out of every 12 months. Under the DBLA test,
an institution must meet a "business operations test" and a "60% of assets
test." The business operations test requires the business of a DBLA to consist
primarily of acquiring the savings of the public and investing in loans. An
institution meets the public savings requirements when it meets one of two
conditions: (i) the institution acquires its savings in conformity with OTS
rules and regulations; or (ii) the general public holds more than 75% of its
deposits, withdrawable shares, and other obligations. The general public may not
include family or related business groups or persons who are officers or
directors of the institution.
The 60% of assets test requires that at least 60% of a DBLA's assets
must consist of assets that thrifts normally hold, except for consumer loans
that are not educational loans. The DBLA test does not include, as the QTL test
does to a limited or optional extent, mortgage loans originated and sold into
the secondary market and subsidiary investments. A savings bank that fails to be
a QTL must either convert to a bank charter or operate under certain
restrictions. As of June 30, 1999, the Association was in compliance with its
QTL requirement, with approximately 84.3% of assets invested in QTIs.
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. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations
16
<PAGE>
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 ss.7701(a)(19) of the Code or the asset
composition test of ss.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.
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 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 "satisfactory."
17
<PAGE>
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,
1999, the net book value of the Company's property and equipment was $740,000.
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
- ------------------------------------------------------------------------------
Information included in Great Pee Dee Bancorp, Inc.'s 1999 Annual
Report to Shareholders is herein incorporated by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Information included in Great Pee Dee Bancorp, Inc.'s 1999 Annual
Report to Shareholders is herein incorporated by reference.
Item 7. Financial Statements
- -----------------------------
Information included in Great Pee Dee Bancorp, Inc.'s 1999 Annual
Report to Shareholders is herein incorporated by reference.
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 1999 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 1999 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 1999 Annual Meeting of Shareholders is incorporated herein by reference.
18
<PAGE>
Item 12. Certain Relationships and Related Transactions
- -------------------------------------------------------
Information included in Great Pee Dee Bancorp, Inc.'s Proxy Statement
for its 1999 Annual Meeting of Shareholders is incorporated herein by reference.
PART IV
Item 13. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) The following documents appear in sections of the Registrants
1999 Annual Report to Shareholders under the same caption, and
are incorporated herein by reference. No other sections of the
1999 Annual Report to Shareholders are incorporated herein by
this reference.
(1) Report to Shareholders
(2) Selected Financial and Other Data
(3) Managements Discussion and Analysis of Financial Condition and
Results of Operations
(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**
13.1 Great Pee Dee Bancorp, Inc. 1999 Annual
Report to Shareholders
23.2 Consent of Dixon, Odom PLLC
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.
19
<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 28, 1999 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 28, 1999 Date: September 28, 1999
By: /s/ Robert M. Bennett By: /s/ William R. Butler
--------------------------------- --------------------------------
Robert M. Bennett, Chairman William R. Butler, Director
of the Board
Date: September 28, 1999 Date: September 28, 1999
By: /s/ James C. Crawford, III By: /s/ Henry P. Duvall, IV
--------------------------------- --------------------------------
James C. Crawford, III, Director Henry P. Duvall, IV, Director
Date: September 28, 1999 Date: September 28, 1999
By: /s/ John S. Long By: /s/ Cornelius B. Young
---------------------------------- --------------------------------
John S. Long, Director, Cornelius B. Young, Director
Vice President and
Chief Operating Officer
Date: September 28, 1999 Date: September 28, 1999
<PAGE>
EXHIBIT 13
<PAGE>
GREAT PEE DEE BANCORP, INC
1999 ANNUAL REPORT
<PAGE>
Great Pee Dee Bancorp, Inc. and Subsidiary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page No.
<S> <C>
Report to Shareholders................................................................................... 1
Selected Financial and Other Data........................................................................ 2
Management's Discussion and Analysis..................................................................... 3
Independent Auditors' Report............................................................................. 12
Consolidated Financial Statements
Consolidated Statements of Financial Condition........................................................ 13
Consolidated Statements of Operations................................................................. 14
Consolidated Statements of Stockholders' Equity....................................................... 15
Consolidated Statements of Cash Flows................................................................. 16
Notes to Consolidated Financial Statements............................................................ 18
Common Stock Information................................................................................. 39
Corporate Information.................................................................................... 40
</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, the interest rate
environment, computer system failures related to the year 2000 and other
factors.
<PAGE>
[LETTERHEAD OF GREAT PEE DEE BANCORP, INC.]
REPORT TO SHAREHOLDERS
Dear Shareholders:
June 30, 1999 marked the end of a very successful first full year of operations
as a public company. It was a year marked with many changes, all positive.
Our subsidiary, First Federal Cheraw, has now become a full service bank
offering many new products and services. From our completely remodeled office to
our new Chesterfield Highway site and ATM, you can easily see the progress. A
completely new computer system has been installed and is fully operational and
tested for the year 2000. Operationally, First Federal has gone from no banking
deposits to 474 accounts with more than $6.0 million on deposit. Loan
originations increased to $21.5 million from $15.2 million, a record year. Total
assets increased to $72.6 million from $68.4 million for the previous year.
Total stockholders' equity amounted to $29.8 million after the Company paid cash
dividends of $.36 per share during 1999 and repurchased 192,000 shares of common
stock for a total of $2.5 million.
The Board of Directors continues to study various methods of increasing the
value of your investment. In the future, the Board will consider such issues as
expansion, regular cash dividends, special dividends and repurchases of
outstanding shares of stock.
On behalf of the Board of Directors, management, and staff, we would like to
thank you for your loyalty and confidence as demonstrated by your investment in
Great Pee Dee Bancorp, Inc.
Sincerely,
/s/ Herbert W. Watts
Herbert W. Watts
President and Chief Executive Officer
-1-
<PAGE>
Great Pee Dee Bancorp, Inc. and Subsidiary
Selected Financial and Other Data
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At or for the year ended June 30,
1999 1998 1997
------------ ----------- -----------
(Dollars in thousands)
Financial condition data:
<S> <C> <C> <C>
Total assets $ 72,601 $ 68,400 $ 60,538
Investments (1) 5,321 10,449 5,770
Loans receivable 64,411 56,768 53,974
Deposits 41,332 36,663 46,863
Stockholders' equity 29,813 31,475 11,090
Operating data:
Interest income 5,067 4,897 4,558
Interest expense 1,960 2,329 2,595
------------ ----------- -----------
Net interest income 3,107 2,568 1,963
Provision for loan losses 96 63 143
------------ ----------- -----------
Net interest income after provision for
loan losses 3,011 2,505 1,820
Noninterest income 85 30 23
Noninterest expense 1,718 1,047 915
------------ ----------- -----------
Income before income taxes 1,378 1,488 928
Income tax expense 488 583 342
------------ ----------- -----------
Net income $ 890 $ 905 $ 586
============ =========== ===========
Per Common Share Data:
Net income, basic (3), (4) $ 0.45 $ 0.32 $ -
Net income, diluted (3), (4) 0.45 0.32 -
Regular cash dividends (3) 0.36 0.075 -
Dividend payment ratio 80.00% 23.44% -
Selected Other Data:
Number of:
Outstanding loans 2,084 1,996 1,773
Deposit accounts 4,329 3,770 4,206
Full-service offices open 1 1 1
Return on average assets 1.28% 1.41% 0.98%
Return on average equity 2.88% 5.27% 5.47%
Average equity to average assets 44.30% 26.73% 17.89%
Interest rate spread 2.39% 2.40% 2.37%
Net yield on average interest-earning assets 4.58% 4.08% 3.32%
Average interest-earning assets to average interest-
bearing liabilities 175.79% 145.45% 121.73%
Ratio of noninterest expense to average total assets 2.46% 1.63% 1.53%
Nonperforming assets to total assets 0.41% 0.48% 0.18%
Loan loss reserves to nonperforming loans at
period end 163.84% 110.28% 312.37%
</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 for the year ended June 30, 1998 is based on earnings
from December 31, 1997 to June 30, 1998 divided by the weighted average
number of shares outstanding during that period.
-2-
<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 savings and
loan 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, 1999, 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".
-3-
<PAGE>
Great Pee Dee Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
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, 1999 was a negative 3.62%. At June 30, 1999,
the Company's three-year and five-year cumulative interest sensitivity gaps as a
percentage of total interest-earning assets were a negative 3.16% and a negative
8.31%, respectively.
-4-
<PAGE>
Great Pee Dee Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at June 30, 1999 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, 1999
-----------------------------------------------------------------------------
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)
INTEREST-EARNING ASSETS:
Loans receivable:
Real estate loans:
<S> <C> <C> <C> <C> <C>
Adjustable $ 23,690 $ 1,006 $ 37 $ 330 $ 25,063
Fixed 1,981 1,087 2,193 33,717 38,978
Other loans 271 62 193 288 814
Interest-earning balances in other banks 726 - - - 726
Investments 450(1) 3,600 21 - 4,071
FHLB common stock(2) - - - 524 524
-------------- ------------- ------------- ------------ ------------
Total interest-earning assets $ 27,118 $ 5,755 $ 2,444 $ 34,859 $ 70,176
============== ============= ============= ============ ============
INTEREST-BEARING LIABILITIES:
Deposits:
Regular passbook savings $ 2,094 $ - $ - $ - $ 2,094
Money market passbook and checking 11,490 - - - 11,490
Certificate accounts 16,075 5,432 6,057 184 27,748
-------------- ------------- ------------- ------------ ------------
Total interest-bearing liabilities $ 29,659 $ 5,432 $ 6,057 $ 184 $ 41,332
============== ============= ============= ============ ============
INTEREST SENSITIVITY GAP PER PERIOD $ (2,541) $ 323 $ (3,613) $ 34,675 $ 28,844
CUMULATIVE INTEREST SENSITIVITY GAP $ (2,541) $ (2,218) $ (5,831) $ 28,844 $ 30,908
CUMULATIVE GAP AS A PERCENTAGE OF
TOTAL INTEREST-EARNING ASSETS (3.62)% (3.16)% (8.31)% 41.10% 44.04%
CUMULATIVE INTEREST-EARNING
ASSETS AS A PERCENTAGE OF
INTEREST-BEARING LIABILITIES 91.43% 93.68% 85.83% 169.79% 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.
-5-
<PAGE>
Great Pee Dee Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
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, 1999 and 1998. 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, 1999 Year Ended June 30, 1998
------------------------------------- -------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
---------- ---------- ------- --------- --------- --------
(Dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning balances $ 2,614 $ 199 7.61% $ 5,409 $ 405 7.49%
Investments 4,375 243 5.55% 2,362 181 7.66%
Loans 60,853 4,625 7.60% 55,232 4,311 7.81%
---------- ---------- ---------- ----------
Total interest-earning assets 67,842 5,067 7.47% 63,003 4,897 7.77%
Other assets 1,878 1,257
---------- ----------
Total assets $ 69,720 $ 64,260
========== ==========
Interest-bearing liabilities:
Deposits $ 38,501 1,953 5.07% $ 41,888 2,248 5.37%
Borrowings 92 7 7.61% 1,427 81 5.68%
---------- ---------- ---------- ----------
Total interest-bearing liabilities 38,593 1,960 5.08% 43,315 2,329 5.38%
---------- ----------
Other liabilities 238 3,766
Stockholders' equity 30,889 17,179
---------- ----------
Total liabilities and stockholders'
equity $ 69,720 $ 64,260
=========== ==========
Net interest income and interest rate spread $ 3,107 2.39% $ 2,568 2.40%
=========== ===== =========== =====
Net yield on average interest-earning assets 4.58% 4.08%
===== =====
Ratio of average interest-earning assets to
average interest-bearing liabilities 175.79% 145.45%
======== =======
</TABLE>
-6-
<PAGE>
Great Pee Dee Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
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, 1999 vs. 1998
-----------------------------------------------------
Increase (Decrease) Due To
-----------------------------------------------------
Volume Rate Total
---------------- -------------- --------------
(Dollars in thousands)
Interest income:
<S> <C> <C> <C>
Interest-earning balances $ (213) $ 7 $ (206)
Investments 92 (30) 62
Loans 423 (109) 314
-------------- --------------- --------------
Total interest income 302 (132) 170
-------------- --------------- --------------
Interest expense:
Deposits (176) (119) (295)
Borrowings (116) 42 (74)
--------------- -------------- ---------------
Total interest expense (292) (77) (369)
--------------- --------------- ---------------
Net interest income $ 594 $ (55) $ 539
============== =============== ==============
</TABLE>
-7-
<PAGE>
Great Pee Dee Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Comparison of Financial Condition at June 30, 1999 and June 30, 1998
The Company's total assets increased by $4.2 million during the year ended June
30,1999, from $68.4 million at June 30, 1998 to $72.6 million at the year-end.
The Company continued to experience strong loan demand during the year, as net
loans receivable increased $7.6 million, or 13.5%, to $64.4 million at June 30,
1999. The Company also implemented a stock repurchase plan during the year,
reacquiring 192,364 shares at an aggregate cost of $2.5 million. Funding for
these activities was provided through reductions of $4.3 million and $1.4
million, respectively, in interest-bearing balances in other banks and federal
funds sold, and through borrowings from the Federal Home Loan Bank of $1.2
million and an increase in deposits of $4.7 million.
The growth in deposits arose from the successful introduction during the year of
interest-bearing checking accounts that grew to $6.1 million by the end of the
year, while certificate of deposit accounts decreased by $1.1 million, from
$28.8 million at the beginning of the year to $27.7 million at year-end. The
Company has made significant progress in its efforts to develop a broader array
of banking products during the year. In addition, during 1999 the Bank purchased
for $275,000 a commercial lot located on Highway 9 West in Cheraw for future
development of another full service banking facility.
Total stockholders' equity was $29.8 million at June 30, 1999 as compared with
$31.5 million at June 30, 1998, a decrease of $1.7 million. Net income of
$890,000 for the year was offset by regular quarterly dividends aggregating
$726,000, or $.36 per share, and by the $2.5 million purchase of treasury stock
discussed above. At June 30, 1999, despite the reduction in stockholders'
equity, both the Company and the Bank continued to substantially exceed all
applicable regulatory capital requirements.
Comparison of Results of Operations for the Years Ended June 30, 1999 and 1998
Net Income. Consolidated net income for the year ended June 30, 1999 was
$890,000, or $.45 per share, as compared with net income of $905,000 for the
year ended June 30, 1998, a decrease in consolidated net income of $15,000.
During the current year, the Company had available substantially all of the
capital generated in the conversion stock offering that closed on December 31,
1997, while such capital was available only during the last six months of the
year ended June 30, 1998. As a result, the average level of net interest-earning
assets during the current year was approximately $9.6 million higher than during
the previous year, with a resultant increase of $539,000 in net interest income.
During the year, the Company also implemented successfully a program of
origination and sale of mortgage loans, generating gains on sales of such loans
aggregating $53,000. These increases in income, however, were more than offset
by an increase of $670,000 in non-interest expenses.
Net Interest Income. Net interest income for the year ended June 30, 1999 was
$3.1 million as compared with $2.6 million during the year ended June 30, 1998,
an increase of $539,000 relating principally to the increase in average net
interest-earning assets discussed under the caption "Net Income" above. Detailed
analyses of the components of net interest income and the changes in interest
income and expense are presented herein under the captions "Net Interest Income"
and "Rate/Volume Analysis".
Provision for Loan Losses. The provision for loan losses was $96,000 and $63,000
for the years ended June 30, 1999 and 1998, respectively, while net loan
charge-offs were $6,000 and $12,000, respectively. Management believes that the
provision for loan losses and the resulting loan loss allowance at June 30, 1999
will be adequate to absorb losses on existing loans. Non-accrual loans
aggregated $271,000 at June 30, 1999 as compared with $321,000 at June 30, 1998.
The allowance for loan losses of $444,000 at June 30, 1999 stood at
approximately 164% of non-accrual loans.
Non-Interest Income. Non-interest income increased by $55,000, from $30,000 for
the year ended June 30, 1998 to $85,000 for the year ended June 30, 1999. Of
this increase, $53,000 represented gains from sales of mortgage loans originated
to be sold in the secondary market.
Non-Interest Expenses. Non-interest expenses increased to $1.7 million during
the year ended June 30, 1999 as compared with $1.0 million for the year ended
June 30, 1998, an increase of $670,000. Direct costs of $537,000 relating to the
adoption and implementation of the Company's RRP was the largest single
component of this overall expense increase (see Note H to the consolidated
financial statements). Occupancy costs increased by $52,000 as a result of (1) a
significant renovation of the Bank's office facility and (2) substantial
additions and replacements of data processing equipment and office furnishings.
Charitable contributions charged to expense decreased from $212,000 for the year
ended June 30, 1998 to $13,000 for the year ended June 30, 1999. The expense for
1998 included the $200,000 value of common shares contributed to the Company
sponsored charitable
-8-
<PAGE>
Great Pee Dee Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
foundation in connection with the Company's public stock offering. Other
non-interest increased by $183,000, from $210,000 for the year ended June 30,
1998 to $393,000 for the year ended June 30, 1999. The Company incurred
additional costs of approximately $55,000 relating to upgrades of its data
processing capabilities, including training costs of $28,000. The Company also
charged to expense during the current year costs of $48,000 incurred in the
development of expanded products and services to customers. The balance of the
increase in non-interest expenses relates principally to the higher costs
arising from a full year of operating as a publicly owned entity.
Provision for Income Taxes. The provision for income taxes, as a percentage of
income before income taxes, was 35.4% and 39.2% for the years ended June 30,
1999 and 1998, respectively.
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.
<TABLE>
<CAPTION>
At June 30,
------------------------
1999 1998
----------- ----------
Non-performing assets:
<S> <C> <C>
Non-accrual loans $ 271 $ 321
Loans past due 90 days or more and still accruing - -
Other real estate 33 9
Renegotiated troubled debt - -
----------- ----------
Total non-performing assets $ 304 $ 330
=========== ==========
</TABLE>
Liquidity and Capital Resources
During the year ended June 30, 1999, Great Pee Dee Bancorp, Inc. paid cash
dividends of $.36 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.
-9-
<PAGE>
Great Pee Dee Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
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, 1999, liquid assets (cash, interest-earning deposits, federal
funds sold and marketable investment securities) were approximately $5.7
million, which represents 13.7% 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, 1999, First
Federal's liquidity, as measured for regulatory purposes, was 8.3% or $2.4
million in excess of the minimum OTS requirement.
At June 30, 1999, outstanding mortgage loan commitments were $1.7 million, and
the undisbursed portion of construction loans was $2.0 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 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, 1999 and 1998, Great Pee Dee Bancorp 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 2000, the amount of dividends that can be paid
by the Bank without prior approval from regulators is approximately $5.0
million. These funds should be adequate to cover Great Pee Dee's needs.
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.
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.
-10-
<PAGE>
Great Pee Dee Bancorp, Inc. and Subsidiary
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Impact of New Accounting Standards
FASB Statement on Accounting for Derivative Instruments and Hedging Activities.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, this Statement was amended by
SFAS No. 137 to defer the effective date to fiscal years beginning after June
15, 2000. This Statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative
instruments embedded in other contracts, and requires that an entity recognize
all derivatives as assets or liabilities in the statement of financial condition
and measure them at fair value. If certain conditions are met, an entity may
elect to designate a derivative as follows: (a) a hedge of exposure to changes
in the fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of an unrecognized
firm commitment, an available-for-sale security, a foreign currency denominated
forecasted transaction, or a net investment in a foreign operation. The
Statement generally provides for matching the timing of the recognition of the
gain or loss on derivatives designated as hedging instruments with the
recognition of the changes in the fair value of the item being hedged. Depending
on the type of hedge, such recognition will be in either net income or other
comprehensive income. For a derivative not designated as a hedging instrument,
changes in fair value will be recognized in net income in the period of change.
Management anticipates that the statement will have no material effect on the
Company's consolidated financial statements.
Year 2000 Compliance Issues
All levels of the Company's management and its Board of Directors are aware of
the issues presented by the Year 2000 century change and the serious effects it
may have on the Company and its customers. In May 1997, the Federal Financial
Institutions Examination Council ("FFIEC") issued an Interagency Statement,
"Year 2000 Project Management Awareness", to emphasize the critical issues that
need to be addressed to implement an effective Year 2000 project management
plan. The FFIEC Statement identifies five phases of the Year 2000 project
management process. The Company has formed a Year 2000 project team, consisting
of senior officers within the Company's operations, information systems,
financial and management areas, to ensure that the Company will be Year 2000
compliant. Although the Company relies entirely upon outside vendors and service
providers for its computer hardware and software and its security and
communications equipment, all date sensitive systems are being evaluated for
Year 2000 compliance. During 1998, the Company completed upgrading and testing
of systems that have been identified as critical to conducting its banking
business. Testing of systems with lower priorities was completed in early 1999.
The Company has also developed contingency plans for its computer processes,
including the use of alternative systems and the manual processing of certain
critical operations. In addition, the Company is undertaking efforts to ensure
that significant vendor and customer relationships are or will be Year 2000
compliant. There can be no guarantee that the systems of other entities on which
the Company either directly or indirectly relies will be timely converted, or
that a failure to convert by another entity, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company in future periods. However, the Company's management
believes that all of its systems will be verified Year 2000 compliant. The
Company estimates that its total Year 2000 compliance costs will aggregate
approximately $175,000, including capital expenditures of approximately $141,000
and other expenses of approximately $34,000 that have been or will be charged to
operations. In addition to the estimated costs of its Year 2000 compliance, the
Company routinely makes annual investments in technology in its efforts to
improve customer service and to efficiently manage its product and service
delivery systems
-11-
<PAGE>
[LETTERHEAD OF DIXON ODOM PLLC]
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, 1999 and 1998 and
the related consolidated statements of operations, changes in 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, 1999 and 1998, 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
Sanford, North Carolina
August 13, 1999
-12-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
----------------- ------------------
<S> <C> <C>
Cash on hand and in banks $ 857,267 $ 510,412
Interest-earning balances in other banks 726,203 5,013,308
Federal funds sold - 1,400,000
Investment securities available for sale, at fair value (amortized cost of
$450,000 and $200,000 at June 30, 1999 and 1998,
respectively) (Note B) 450,000 200,000
Investment securities held to maturity, at amortized cost (fair
value of $3,559,755 and $3,341,035 at June 30, 1999 and 1998,
respectively) (Note B) 3,621,297 3,340,675
Loans receivable, net (Note C) 64,411,377 56,768,325
Loans held for sale 525,000 -
Accrued interest receivable 356,328 277,931
Premises and equipment, net (Note D) 740,012 211,766
Foreclosed real estate 33,300 8,900
Stock in the Federal Home Loan Bank, at cost 524,000 495,200
Other assets 356,302 173,599
----------------- ------------------
TOTAL ASSETS $ 72,601,086 $ 68,400,116
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposit accounts (Note G) $ 41,332,445 $ 36,663,436
Advances from Federal Home Loan Bank (Note F) 1,200,000 -
Accrued interest payable 50,441 68,614
Advance payments by borrowers for property taxes
and insurance 62,801 62,176
Accrued expenses and other liabilities 142,272 130,855
----------------- ------------------
TOTAL LIABILITIES 42,787,959 36,925,081
----------------- ------------------
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; 2,224,617 and 2,202,125 shares issued
at June 30, 1999 and 1998, respectively 22,246 22,021
Additional paid in capital 21,530,265 21,292,979
Unearned compensation (Note H) (1,938,390) (1,682,319)
Retained earnings, substantially restricted 12,006,012 11,842,354
Common stock in treasury, at cost (138,664 shares
at June 30, 1999) (1,807,006) -
----------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 29,813,127 31,475,035
----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 72,601,086 $ 68,400,116
================= ==================
</TABLE>
See accompanying notes.
-13-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
INTEREST INCOME
<S> <C> <C>
Loans $ 4,625,506 $ 4,311,381
Investments 242,692 181,006
Deposits in other banks and federal funds sold 198,991 404,786
---------------- ---------------
TOTAL INTEREST INCOME 5,067,189 4,897,173
---------------- ---------------
INTEREST EXPENSE
Deposits (Note G) 1,952,718 2,247,995
Borrowed funds 7,309 80,839
---------------- ---------------
TOTAL INTEREST EXPENSE 1,960,027 2,328,834
---------------- ---------------
NET INTEREST INCOME 3,107,162 2,568,339
PROVISION FOR LOAN LOSSES (Note C) 96,000 63,000
---------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,011,162 2,505,339
---------------- ---------------
NON-INTEREST INCOME 84,613 29,591
---------------- ---------------
NON-INTEREST EXPENSES
Personnel costs 1,178,260 538,038
Occupancy 110,824 59,429
Deposit insurance premiums 22,200 27,931
Charitable contributions (Note J) 13,084 212,050
Other 393,118 209,780
---------------- ---------------
TOTAL NON-INTEREST EXPENSES 1,717,486 1,047,228
---------------- ---------------
INCOME BEFORE INCOME TAXES 1,378,289 1,487,702
INCOME TAXES (Note K) 488,400 582,948
---------------- ---------------
NET INCOME $ 889,889 $ 904,754
================ ===============
EARNINGS PER COMMON SHARE (Note A)
Basic and diluted $ 0.45 $ 0.32
================ ===============
</TABLE>
See accompanying notes.
-14-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended June 30, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additional Total
Common stock paid-in Unearned Retained Treasury stockholders'
------------------------
Shares Amount capital compensation earnings stock equity
--------- ------------- ------------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 $.01 par
value common stock 2,182,125 21,821 21,052,560 - - - 21,074,381
Purchase of 174,570
shares of common
stock by ESOP - - - (1,745,700) - - (1,745,700)
Issuance of 20,000
shares of common
stock to charitable
foundation 20,000 200 199,800 - - - 200,000
Release of ESOP
shares - - 40,619 63,381 - - 104,000
Cash dividends paid
($.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
Net income - - - - 889,889 - 889,889
Purchase of treasury
stock - - - - - (2,503,891) (2,503,891)
Adoption of Recognition
and Retention Plan 22,492 225 217,194 (914,304) - 696,885 -
Recognition and Retention
Plan shares earned - - - 537,198 - - 537,198
Release of ESOP shares - - 20,092 121,035 - - 141,127
Cash dividends paid
($.36 per share) - - - - (726,231) - (726,231)
------------- ------------- ------------- -------------- ------------ ------------ ------------
Balance at June 30,
1999 2,224,617 $ 22,246 $ 21,530,265 $ (1,938,390) $ 12,006,012 $ (1,807,006) $ 29,813,127
============= ============= ============= ============== ============ ============ ============
</TABLE>
See accompanying notes.
-15-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 889,889 $ 904,754
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 65,387 15,588
Amortization, net 23,745 643
Loss on sale of foreclosed real estate, net - 1,892
Provision for loan losses 96,000 63,000
Deferred income taxes (137,727) (100,871)
Contribution of common stock to charitable foundation - 200,000
ESOP contribution expense 141,127 104,000
Vesting of deferred recognition and retention plan 537,198 -
Change in assets and liabilities
Increase in accrued interest receivable (78,397) (39,499)
Increase in loans held for sale (525,000) -
(Increase) decrease in other assets (44,976) 66,599
Decrease in accrued interest payable (18,173) (37,092)
Increase in accrued expenses and other liabilities 11,417 111,672
---------------- ---------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 960,490 1,290,686
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of available-for-sale securities (250,000) (200,000)
Purchases of held to maturity investment securities (2,400,000) (3,700,000)
Proceeds from maturities and calls of
held to maturity investment securities 2,119,378 2,125,456
Purchase of Federal Home Loan Bank stock (28,800) (10,600)
Net increase in loans (7,788,397) (2,911,023)
Purchase of premises and equipment (593,633) (43,914)
Proceeds from sale of real estate acquired in settlement of loans 1,200 64,150
Capital expenditures for real estate acquired in settlement of loans - (12,142)
---------------- ----------------
NET CASH USED BY
INVESTING ACTIVITIES (8,940,252) (4,688,073)
----------------- ---------------
</TABLE>
See accompanying notes.
-16-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1999 and 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C>
Net increase (decrease) in demand accounts $ 5,763,500 $ (1,164,385)
Net decrease in certificates of deposit (1,094,491) (9,035,186)
Increase (decrease) in advance payments by borrower
for taxes and insurance 625 2,191
Net increase (decrease) in advances from Federal
Home Loan Bank 1,200,000 (2,400,000)
Net proceeds from issuance of common stock - 21,074,381
Loan to ESOP for purchase of common stock - (1,745,700)
Purchase of treasury stock (2,503,891) -
Cash dividends paid (726,231) (152,066)
----------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
NET CASH PROVIDED
BY FINANCING ACTIVITIES 2,639,512 6,579,235
---------------- ---------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS (5,340,250) 3,181,848
CASH AND CASH EQUIVALENTS, BEGINNING 6,923,720 3,741,872
---------------- ---------------
CASH AND CASH
EQUIVALENTS, ENDING $ 1,583,470 $ 6,923,720
================ ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for:
Interest $ 1,978,200 $ 2,365,926
================ ===============
Income taxes $ 700,590 $ 499,603
================ ===============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Loans receivable transferred to real estate acquired in
settlement of loans
$ 25,600 $ 52,700
================ ===============
Adoption of deferred recognition and retention plan
$ 914,304 $ -
================ ================
</TABLE>
See accompanying notes.
-17-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
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 (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.
Cash and Cash Equivalents
- -------------------------
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash on hand and in banks, interest-earning balances in
other banks, and federal funds sold.
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.
-18-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates (Continued)
- ----------------
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.
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, 1999 or 1998. 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 in other comprehensive
income 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.
Loans Held for Sale
- -------------------
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
-19-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
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.
-20-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
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.
-21-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
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.
Stock Compensation Plans
- ------------------------
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value based
method of accounting for employee stock compensation plans, whereby compensation
cost is measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
However, it also allows an entity to continue to measure compensation cost for
those plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, whereby compensation cost is the excess, if any, of the quoted market
price of the stock at the grant date (or other measurement date) over the amount
an employee must pay to acquire the stock. Stock options issued under the
Company's stock option plan have no intrinsic value at the grant date, and,
under Opinion No. 25, no compensation cost is recognized for them. The Company
has elected to continue with the accounting methodology in Opinion No. 25 and,
as a result, has provided pro forma disclosures of net income and earnings per
share and other disclosures, as if the fair value based method of accounting had
been applied.
Earnings Per Common Share
- -------------------------
Basic earnings per share represent income available to common shareholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflect additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Company relate to outstanding
stock options and unvested shares in the Recognition and Retention Plan and are
determined using the treasury stock method.
Basic and diluted earnings 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.
-22-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common Share (Continued)
- -------------------------
Earnings per common share have been computed based on the following:
<TABLE>
<CAPTION>
Years Ended June 30,
1999 1998
---------- ----------
Average number of common shares outstanding used to calculate
<S> <C> <C>
basic earnings per common share 1,990,342 2,027,555
Effect of dilutive options 2,062 -
Effect of dilutive RRP shares 845 -
---------------- ----------------
Average number of common shares outstanding used to calculate
diluted earnings per common share 1,993,249 2,027,555
================ ================
</TABLE>
Comprehensive Income
- --------------------
The Company adopted SFAS 130, Reporting Comprehensive Income, as of July 1,
1998. Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income. The Adoption of SFAS 130 had no effect on the Company's
net income or shareholders' equity, and the Company had none of the components
of other comprehensive income at or during the years ended June 30, 1999 and
1998.
Recent Accounting Pronouncements
- --------------------------------
FASB Statement on Accounting for Derivative Instruments and Hedging Activities.
In June 1998, the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, this Statement was amended by
SFAS No. 137 to defer the effective date to fiscal years beginning after June
15, 2000. This Statement establishes accounting and reporting standards for
derivative instruments and hedging activities, including certain derivative
instruments embedded in other contracts, and requires that an entity recognize
all derivatives as assets or liabilities in the statement of financial condition
and measure them at fair value. If certain conditions are met, an entity may
elect to designate a derivative as follows: (a) a hedge of exposure to changes
in the fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (c) a hedge of the foreign currency exposure of an unrecognized
firm commitment, an available-for-sale security, a foreign currency denominated
forecasted transaction, or a net investment in a foreign operation. The
Statement generally provides for matching the timing of the recognition of the
gain or loss on derivatives designated as hedging instruments with the
recognition of the changes in the fair value of the item being hedged. Depending
on the type of hedge, such recognition will be in either net income or other
comprehensive income. For a derivative not designated as a hedging instrument,
changes in fair value will be recognized in net income in the period of change.
Management anticipates that the statement will have no material effect on the
Company's consolidated financial statements.
-23-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE B - INVESTMENT SECURITIES
<TABLE>
<CAPTION>
The following is a summary of the securities portfolios by major classification:
June 30, 1999
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ---------------- ----------------- ---------------
Securities available for sale:
<S> <C> <C> <C> <C>
Marketable equity securities $ 450,000 $ - $ - $ 450,000
=============== ================ ================= ===============
Securities held to maturity:
U. S. government securities and
obligations of U. S. government
agencies $ 3,600,000 $ 281 $ 61,526 $ 3,538,755
FHLMC mortgage-backed securities 21,297 - 297 21,000
--------------- ---------------- ----------------- ---------------
$ 3,621,297 $ 281 $ 61,823 $ 3,559,755
=============== ============== ================ ===============
June 30, 1998
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- ---------------- ----------------- ---------------
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
=============== ================ ================= ===============
</TABLE>
The amortized cost and fair values of securities held to maturity at June 30,
1999 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 3,621,297 3,559,755
Due after five years through ten years - -
Due after ten years - -
-------------- --------------
$ 3,621,297 $ 3,559,755
============== ==============
</TABLE>
-24-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE B - INVESTMENT SECURITIES (Continued)
Proceeds from maturities and calls of investment securities held to maturity
during the years ended June 30, 1999 and 1998 were $2,119,378 and $2,125,456,
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, 1999 or 1998.
Securities with a carrying value of $1,407,905 and $1,111,582 and a fair value
of $1,389,326 and $1,111,838 at June 30, 1999 and 1998, 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, 1999.
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)
Securities available for sale:
<S> <C> <C> <C> <C> <C>
Marketable equity securities $ 450 $ - $ - $ - $ 450
Securities held to maturity:
U. S. government and agency
securities - 3,600 - - 3,600
Mortgage-backed securities - 21 - - 21
Other:
Interest-earning balances in other
banks 726 - - - 726
Federal Home Loan Bank Stock - - - 524 524
------------- ------------- ---------- ------------- ------------
Total $ 1,176 $ 3,621 $ - $ 524 $ 5,321
============= ============= ========== ============= ============
</TABLE>
-25-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
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
----------- ------------- ------------- ------------- ---------
Securities available for sale:
<S> <C> <C> <C> <C> <C>
Marketable equity securities 7.48% - - - 7.48%
Securities held to maturity:
U. S. government and agency
securities - 5.92% - - 5.92%
Mortgage-backed securities - 8.60% - - 8.60%
Other:
Interest-earning balances in other banks 5.75% - - - 5.75%
Federal Home Loan Bank Stock - - - 7.75% 7.75%
Weighted average 6.41% 5.94% - 7.75% 6.22%
</TABLE>
NOTE C - LOANS RECEIVABLE
<TABLE>
<CAPTION>
Loans receivable consist of the following:
1999 1998
------------------------------- -----------------------------------
Percentage Percentage
Amount of total Amount of total
-------------- --------- ---------------- -----------
Type of loan
Real estate loans:
<S> <C> <C> <C> <C>
One-to-four family residential $ 55,385,112 85.99% $ 50,899,168 89.66%
Commercial 5,159,052 8.01% 3,153,027 5.55%
Construction 4,184,450 6.49% 3,759,400 6.62%
Home improvement loans 1,534,236 2.38% 1,325,487 2.34%
-------------- -------- ---------------- ----------
Total real estate loans 66,262,850 102.87% 59,137,082 104.17%
Other loans:
Commercial 272,316 0.43% - -
Consumer 278,452 0.43% - -
Loans secured by deposits 262,956 0.41% 326,236 0.58%
-------------- -------- ---------------- ----------
Total other loans 813,724 1.27% 326,236 0.58%
-------------- -------- ---------------- ----------
Total loans 67,076,574 104.14% 59,463,318 104.75%
Less:
Construction loans in process 2,017,568 3.13% 2,161,418 3.81%
Allowance for loan losses 443,951 0.69% 353,643 0.62%
Deferred loan origination fees,
net of costs 203,678 0.32% 179,932 0.32%
-------------- -------- ---------------- ----------
$ 64,411,377 100.00% $ 56,768,325 100.00%
============== ======== ================ ==========
</TABLE>
-26-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE C - LOANS RECEIVABLE (Continued)
<TABLE>
<CAPTION>
The allowance for loan losses is summarized as follows:
1999 1998
---------------- ----------------
<S> <C> <C>
Balance at beginning of year $ 353,643 $ 303,381
Provision for loan losses 96,000 63,000
Charge-offs (5,692) (12,738)
Recoveries - -
--------------- ----------------
Balance at end of year $ 443,951 $ 353,643
=============== ================
</TABLE>
The allocation of the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------- -----------------------------------------------
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 $ 257,000 57.89% 82.57% $ 230,000 65.04% 85.60%
Commercial 51,000 11.49% 7.69% 25,000 7.07% 5.30%
Construction 10,000 2.25% 6.24% 25,000 7.07% 6.32%
Home improvement
loans 9,000 2.03% 2.29% 10,000 2.83% 2.23%
------------- -------------- --------------- -------------- --------------- --------------
Total real estate
loans 327,000 73.66% 98.79% 290,000 82.01% 99.45%
------------- -------------- --------------- -------------- --------------- --------------
Other loans:
Commercial 1,000 0.23% 0.41% - - -
Consumer 1,000 0.23% 0.41% - - -
Loans secured by
deposits 1,000 0.23% 0.39% 1,000 0.28% 0.55%
------------- -------------- --------------- -------------- --------------- --------------
Total other loans 3,000 0.69% 1.21% 1,000 0.28% 0.55%
------------- -------------- --------------- -------------- --------------- --------------
Unallocated 113,951 25.65% - 62,643 17.71% -
------------- -------------- --------------- -------------- --------------- --------------
Total allowance for
loan losses $ 443,951 100.00% 100.00% $ 353,643 100.00% 100.00%
============= ============== =============== ============== =============== ==============
</TABLE>
At June 30, 1999 and 1998, respectively, the Bank had loans totaling
approximately $271,221 and $321,500 which were in a nonaccrual status.
Loans serviced for other investors amounted to $1,611,494 and $1,921,511 at June
30, 1999 and 1998, respectively.
At June 30, 1999, the Bank had mortgage loan commitments outstanding of
$1,706,060, including loans of $1,015,400 to be originated at fixed interest
rates ranging from 6.88% to 7.63%. 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.
-27-
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
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>
1999 1998
---------------- ----------------
<S> <C> <C>
Balance at beginning of year $ 376,190 $ 50,087
Additional borrowings 34,932 445,630
Loan repayments (39,017) (119,527)
---------------- ----------------
Balance at end of year $ 372,105 $ 376,190
================ ================
</TABLE>
NOTE D - PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
Premises and equipment consist of the following:
1999 1998
---------------- ----------------
<S> <C> <C>
Land $ 335,686 $ 59,250
Building and improvements 316,090 316,090
Furniture and equipment 503,213 186,016
---------------- ----------------
1,154,989 561,356
Accumulated depreciation (414,977) (349,590)
----------------- ----------------
$ 740,012 $ 211,766
================ ================
</TABLE>
NOTE E - FEDERAL INSURANCE OF DEPOSITS
Eligible deposit accounts are insured up to $100,000 by the Federal Deposit
Insurance Corporation.
NOTE F - ADVANCES FROM FEDERAL HOME LOAN BANK
<TABLE>
<CAPTION>
Advances from the Federal Home Loan Bank of Atlanta, with weighted average interest rates, are as follows:
June 30,
-------------------
1999 1998
---------------- ----------------
<S> <C> <C> <C> <C> <C>
5.09% due on February 17, 2000 $ 1,200,000 $ -
================ ================
</TABLE>
-28-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE F - ADVANCES FROM FEDERAL HOME LOAN BANK (Continued)
At June 30, 1999, First Federal also had $4,600,000 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
<TABLE>
<CAPTION>
A comparative summary of deposit accounts at June 30, 1999 and 1998 follows:
1999 1998
------------------------------------- -------------------------------------
Weighted Weighted
Balance Avg. Rate Balance Avg. Rate
------------------------------------- -------------------------------------
Demand accounts:
<S> <C> <C> <C> <C>
Regular passbook savings $ 2,093,942 2.79% $ 2,084,601 2.79%
Money market passbook
savings 5,434,617 4.33% 5,735,798 4.16%
Checking accounts 6,055,340 4.82% - -
----------------- ----------------
13,583,899 4.31% 7,820,399 3.79%
Certificates of deposit 27,748,546 5.23% 28,843,037 5.70%
----------------- ----------------
Total deposit accounts $ 41,332,445 4.93% $ 36,663,436 5.29%
================= ================
</TABLE>
<TABLE>
<CAPTION>
A summary of certificate accounts by maturity as of June 30, 1999 follows
(amounts in thousands):
Less than $100,000
$100,000 or More Total
---------------- --------------- ----------------
<S> <C> <C> <C>
One year or less $ 12,404 $ 3,672 $ 16,076
More than one year to three years 4,247 1,185 5,432
More than three years to five years 6,057 - 6,057
More than five years 84 100 184
---------------- --------------- ----------------
Total certificate accounts $ 22,792 $ 4,957 $ 27,749
================ =============== ================
</TABLE>
<TABLE>
<CAPTION>
Interest expense on deposits for the years ended June 30 is summarized as
follows:
1999 1998
--------------- ---------------
<S> <C> <C>
Checking accounts $ 67,871 $ -
Passbook savings accounts 33,832 53,968
Money market savings accounts 139,225 214,614
Certificates of deposit 1,713,942 1,984,830
--------------- ---------------
1,954,870 2,253,412
Penalties for early withdrawal (2,152) (5,417)
---------------- ----------------
$ 1,952,718 $ 2,247,995
============== ===============
</TABLE>
-29-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS
Recognition and Retention Plan
- ------------------------------
At the Company's first annual meeting of stockholders held on January 7, 1999,
the Company's stockholders approved the 1998 Recognition and Retention Plan (the
"RRP). Under the RRP, 88,085 shares of common stock were reserved for issuance
to key officers and directors. Upon approval of the RRP at the annual meeting,
76,192 shares of common stock were granted at a value of $12.00 per share at the
date of grant. The Company funded the grants with 53,700 shares of previously
purchased treasury stock and 22,492 shares of newly issued common stock. The
Company will recognize compensation costs of $914,000 over the vesting period of
the RRP shares granted, and is including such compensation costs in operations
as rapidly as is permissible, resulting in the recognition of costs of $537,000
during the year ended June 30, 1999, and costs of $241,000, $106,000 and $30,000
during the years ending June 30, 2000, 2001 and 2002, respectively.
Stock Option Plan
- -----------------
At the Company's annual meeting, held on January 7, 1999, the stockholders
approved the Great Pee Dee Bancorp, Inc. Stock Option Plan (the "SOP"). The SOP
provides for the issuance to directors, officers, and employees of the Bank
options to purchase up to 220,212 shares of the Company's common stock. Upon
approval of the SOP, the Company granted options to purchase 190,484 shares of
the Company's common stock at an exercise price of $12.00 per share, including
66,064 options granted to the Company's directors and 124,420 options granted to
the Company's executive officers and employees. Options granted to directors
were fully vested on the date of grant. Options granted to executive officers
and employees vested one-third on the date of grant and will vest one-third
annually thereafter. All options will expire if not exercised within ten years
from the date of grant. None of the options were exercised during the year ended
June 30, 1999. At such date, options to purchase 107,537 shares at $12.00 per
share were exercisable. As permitted by SFAS No. 123, the Company has applied
APB Opinion No. 25 for measurement of stock-based compensation in the
accompanying financial statements. If the Company had used the fair value based
method of accounting for stock-based compensations, operating results for the
year ended June 30, 1999 would have been affected as set forth below:
<TABLE>
<CAPTION>
As Reported Pro Forma
--------------- -------------
<S> <C> <C>
Net income $ 889,889 $ 547,252
Net income per share, basic and diluted $ 0.45 $ 0.27
</TABLE>
In determining the pro forma disclosures above, the fair value of options
granted was estimated to be $2.67 per option as of the grant date under the
Black-Scholes Option Pricing Model using the following assumptions: a risk-free
interest rate of 5.25%, a dividend yield of 3.00%, an expected life of 7 years,
and a volatility ratio of 20%. The effects of applying SFAS No. 123 in the above
pro forma disclosure are not indicative of future amounts.
-30-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE H - EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
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, 1999, the outstanding balance of the
note is $1,561,284 and is included in unearned compensation 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.
Expense of $138,515 has been incurred in connection with the ESOP during the
year ended June 30, 1999. The expense includes, in addition to the cash
contribution necessary to fund the ESOP, $20,092 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, 1999. The Bank has credited this amount to
additional paid-in capital.
At June 30, 1999, 18,442 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 $2.0
million at June 30, 1999.
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 $-0- and $2,700 for the years ended June 30, 1999
and 1998, 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, 1999 and 1998, substantially all full-time employees are eligible
and are covered by the plan. 401(k) contributions are funded when accrued. The
total 401(k) retirement plan expense was $6,387 and $11,763 for the years ended
June 30, 1999 and 1998, respectively.
-31-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE I - STOCK REPURCHASE PLAN
During the year ended June 30, 1999, the Company's Board of Directors adopted
stock repurchase plans under which the Company is authorized to repurchase
shares of its outstanding common stock in the open market or in privately
negotiated transactions at times deemed appropriate. Under the plans, the
Company could repurchase up to 10% of the outstanding common stock. During the
year ended June 30, 1999, the Company repurchased 192,364 shares of its common
stock at an aggregate cost of $2,503,891 of which 53,700 were reissued as grants
under the RRP and 138,664 are held as treasury stock at June 30, 1999.
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.
Charitable contributions for the year ended June 30, 1998 include a charge of
$200,000 for this contribution.
NOTE K - INCOME TAXES
<TABLE>
<CAPTION>
The components of income tax expense are as follows for the years ended June 30,
1999 and 1998:
1999 1998
--------------- ---------------
<S> <C> <C>
Current tax expense $ 626,127 $ 683,819
Deferred tax benefit (137,727) (100,871)
--------------- ----------------
Provision for income taxes $ 488,400 $ 582,948
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
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, 1999 and 1998:
1999 1998
--------------- ---------------
<S> <C> <C>
Income tax at federal statutory rate $ 468,618 $ 505,819
State income tax, net of federal tax benefit 34,121 45,615
ESOP expense differences 7,635 13,810
Other (21,974) 17,704
---------------- ---------------
Provision for income taxes $ 488,400 $ 582,948
=============== ===============
</TABLE>
-32-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE K - INCOME TAXES (Continued)
<TABLE>
<CAPTION>
Deferred tax assets and liabilities arising from temporary differences at June 30, 1999 and 1998 are summarized
as follows:
1999 1998
--------------- ---------------
Deferred tax assets relating to:
<S> <C> <C>
Deferred compensation $ 196,470 $ 77,159
Allowance for loan losses 164,703 129,285
Charitable contributions carryforward 52,471 66,370
--------------- ---------------
Gross deferred tax assets 413,644 272,814
Valuation allowance - -
--------------- ---------------
Total deferred tax assets 413,644 272,814
--------------- ---------------
Deferred tax liabilities relating to:
Premises and equipment (41,258) (38,078)
FHLB stock dividends (72,314) (72,390)
--------------- ---------------
Total deferred tax liabilities (113,572) (110,468)
---------------- ---------------
Net deferred tax asset $ 300,072 $ 162,346
=============== ===============
</TABLE>
Retained earnings at June 30, 1999 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 Bank is
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.
-33-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
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, 1999, that the Bank meets all
capital adequacy requirements to which it is subject.
As of June 30, 1999, 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, 1999 is as follows.
<TABLE>
<CAPTION>
<S> <C>
Consolidated stockholders' equity $ 29,813,127
Less separate equity of Great Pee Dee Bancorp, Inc. (6,599,629)
------------------
Tier 1 and tangible capital 23,213,498
Add general loan loss allowance 443,951
-----------------
Risk-based capital $ 23,657,449
=================
</TABLE>
<TABLE>
<CAPTION>
The Bank's regulatory capital amounts and ratios are presented below.
To be well
capitalized under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------------- ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------ ------------- -------- ----------- ------
As of June 30, 1999
Total Capital
<S> <C> <C> <C> <C> <C>
(to Risk Weighted Assets) $ 23,657,449 68.7% > $ 2,754,867 > 8.0% >$ 3,443,584 > 10.0%
- - - - -
Tier 1 Capital
(to Risk Weighted Assets) 23,213,498 67.4% > 1,377,434 > 4.0% > 2,066,150 > 6.0%
- - - -
Tier 1 Capital
(to Adjusted Assets) 23,213,498 33.3% > 2,091,606 > 3.0% > 3,486,010 > 5.0%
- - - -
Tangible Capital
(to Adjusted Assets) 23,213,498 33.3% > 1,045,803 > 1.5% N/A N/A
- -
</TABLE>
-34-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
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, 1999 is as follows:
<TABLE>
<CAPTION>
Financial instruments whose contract amounts represent credit risk:
<S> <C>
Commitments to extend credit, mortgage loans $ 1,706,060
Undisbursed construction loans in process 2,017,568
</TABLE>
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.
-35-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
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.
Loans Held for Sale
Fair value for loans held for sale is determined by available market
prices.
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.
-36-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
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, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
--------------- --------------- ---------------- --------------
Financial assets:
Cash, interest-earning balances, federal
<S> <C> <C> <C> <C>
funds sold $ 1,583,470 $ 1,583,470 $ 6,923,720 $ 6,923,720
Investment securities 4,071,297 4,009,755 3,540,675 3,541,035
Loans receivable 64,411,377 64,700,000 56,768,325 57,350,000
Loans held for sale 525,000 525,000 - -
Stock in Federal Home Loan Bank of
Atlanta 524,000 524,000 495,200 495,200
Financial liabilities:
Deposits 41,332,445 41,400,000 36,663,436 36,820,000
Advances from Federal Home Loan Bank 1,200,000 1,195,000 - -
</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.
-37-
<PAGE>
GREAT PEE DEE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998
- --------------------------------------------------------------------------------
NOTE P - PARENT COMPANY FINANCIAL DATA
Following are condensed financial statements of Great Pee Dee Bancorp, Inc. as
of and for the periods ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Condensed Statements of Financial Condition
June 30, 1999 and 1998
1999 1998
----------------- -----------------
Assets:
<S> <C> <C>
Cash on hand and in banks $ 73,459 $ -
Interest bearing balances in other banks 19,330 -
Investment securities, available for sale 450,000 200,000
Note receivable from First Federal 5,950,483 8,646,931
Investment in First Federal 23,213,498 22,556,437
Accrued interest receivable 8,665 1,115
Other assets 97,692 70,552
---------------- -----------------
$ 29,813,127 $ 31,475,035
================ =================
Stockholders' equity:
Common stock $ 22,246 $ 22,021
Additional paid-in capital 21,530,265 21,292,979
ESOP loan receivable and unearned compensation (1,938,390) (1,682,319)
Retained earnings 12,006,012 11,842,354
Treasury stock (1,807,006)
---------------- -----------------
$ 29,813,127 $ 31,475,035
================ =================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Operations
Year Ended June 30, 1999 and Period from December 31, 1997 to June 30, 1998
1999 1998
----------------- -----------------
<S> <C> <C>
Equity in earnings of subsidiary $ 648,980 $ 605,350
Interest and other income 529,207 303,147
Operating expenses (141,898) (236,003)
Income taxes (146,400) (25,448)
----------------- -----------------
Net income $ 889,889 $ 647,046
================= =================
</TABLE>
-38-
<PAGE>
GREAT PEE DEE BANCORP, INC.
COMMON STOCK INFORMATION
- --------------------------------------------------------------------------------
The Company's stock began trading on December 31, 1997. There are 2,085,953
shares of common stock outstanding which were held by approximately 450
stockholders of record (excluding shares held in street name) on June 30, 1999.
The Company's common stock is quoted on the NASDAQ National market under the
symbol "PEDE". The following table reflects the stock trading and dividend
payment frequency of the Company for the years ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Stock Price Dividends
--------------------------------------
High Low per share
------------------- ---------------- ----------------
For the year ended June 30, 1999:
<S> <C> <C> <C>
First Quarter Ending September 30 $ 16.63 $ 10.88 $ 0.09
Second Quarter Ending December 31 $ 14.00 $ 10.75 $ 0.09
Third Quarter Ending March 31 $ 13.88 $ 11.75 $ 0.09
Fourth Quarter Ending June 30 $ 13.00 $ 11.38 $ 0.09
For the year ended June 30, 1998:
First Quarter Ending September 30 $ - $ - $ -
Second Quarter Ending December 31 $ - $ - $ -
Third Quarter Ending March 31 $ 16.25 $ 14.75 $ -
Fourth Quarter Ending June 30 $ 17.38 $ 14.75 $ 0.075
</TABLE>
-39-
<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 The annual meeting of stockholders of
10 Commerce Drive Great Pee Dee Bancorp, Inc. will be
Cranford, New Jersey 07016 held at 2:00 p.m. on October 19, 1999
at the Matheson Memorial Library,
Huger Street, Cheraw, SC.
SPECIAL LEGAL COUNSEL
FORM 10-KSB
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Ave. N.W., Suite 400 A copy of Form 10-KSB as filed
Washington, DC 20015 with the Securities and Exchange
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., 515 Market Street,
Cheraw, SC 29520.
INDEPENDENT AUDITORS
CORPORATE OFFICE
Dixon Odom PLLC
408 Summit Drive 515 Market Street
Sanford, NC 2733 Cheraw, SC 29520
DISCLAIMER
This annual report has not been reviewed or confirmed for accuracy or relevance
by the Federal Deposit Insurance Corporation.
-40-
<PAGE>
EXHIBIT 21
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
<S> <C>
Subsidiary Percent Owned
- ---------- -------------
First Federal Savings and Loan Association of Cheraw 100% Owned by Company
</TABLE>
24
<PAGE>
EXHIBIT 23
<PAGE>
[LETTERHEAD OF DIXON ODOM PLLC]
Consent of Independent Auditors
To the Board of Directors
Great Pee Dee Bancorp, Inc.
Cheraw, South Carolina
We consent to the incorporation by reference in the Registration Statement
of Great Pee Dee Bancorp, Inc. on Form S-8 (No. 333-79339) of our report dated
August 13, 1999 on the consolidated statements of financial condition of Great
Pee Dee Bancorp, Inc. and Subsidiary as of and for the years ended June 30, 1999
and 1998, which appears in the 1999 Annual Report of Form 10-KSB of Great Pee
Dee Bancorp, Inc.
/s/ Dixon Odom PLLC
Sanford, North Carolina
September 20, 1999
26
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0001046587
<NAME> Great Pee Dee Bancorp, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 857
<INT-BEARING-DEPOSITS> 726
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 450
<INVESTMENTS-CARRYING> 3,621
<INVESTMENTS-MARKET> 3,560
<LOANS> 64,855
<ALLOWANCE> 444
<TOTAL-ASSETS> 72,601
<DEPOSITS> 41,332
<SHORT-TERM> 1,200
<LIABILITIES-OTHER> 256
<LONG-TERM> 0
0
0
<COMMON> 22
<OTHER-SE> 29,791
<TOTAL-LIABILITIES-AND-EQUITY> 72,601
<INTEREST-LOAN> 4,625
<INTEREST-INVEST> 243
<INTEREST-OTHER> 199
<INTEREST-TOTAL> 5,067
<INTEREST-DEPOSIT> 1,953
<INTEREST-EXPENSE> 1,960
<INTEREST-INCOME-NET> 3,107
<LOAN-LOSSES> 96
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,717
<INCOME-PRETAX> 1,378
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 890
<EPS-BASIC> .45
<EPS-DILUTED> .45
<YIELD-ACTUAL> 4.58
<LOANS-NON> 271
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 232
<ALLOWANCE-OPEN> 354
<CHARGE-OFFS> 6
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 444
<ALLOWANCE-DOMESTIC> 330
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 114
</TABLE>
