##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-QSB
 Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2005
 COMMISSION FILE No.: 333-122090
 DISCOVERY BANCORP
   
  o x
  o x
  Exhibit Index at page 29
Total number of pages: 34




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TABLE OF CONTENTS
 PAGEPART I
    
    FINANCIAL INFORMATIONITEM 1
    
    Financial Statements
    
    3ITEM 2
    
    Managements Discussion and Analysis or Plan of Operation
    
    11ITEM 3
    
    Controls and Procedures
    
    28PART II
    
    OTHER INFORMATIONITEM 1
    
    Legal Proceedings
    
    29ITEM 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    29ITEM 3
    
    Defaults Upon Senior Securities
    
    29ITEM 4
    
    Submission of Matters to a Vote of Security Holders
    
    29ITEM 5
    
    Other Information
    
    29ITEM 6
    
    Exhibits
    
    29Signatures
    
    30EX-31.1EX-31.2EX-32.1EX-32.2
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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 DISCOVERY BANCORP
 CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, 2005 AND DECEMBER 31, 2004
 2005
    
    2004ASSETSCash & Due From Banks
    
    $
    2,986,362
    
    
    $
    1,638,876Fed Funds Sold
    
    
    8,280,000
    
    
    
    4,945,000Cash and cash equivalents
    
    
    11,266,362
    
    
    
    6,583,876Interest-bearing deposits at banks
    
    
    2,591,941
    
    
    
    2,691,623Investment securities
    
    
    3,827,261
    
    
    
    2,705,734Common stock, substantially restricted
    
    
    511,900
    
    
    
    483,000Loans, Net
    
    
    102,070,174
    
    
    
    80,036,566Accrued interest receivable and other assets
    
    
    787,458
    
    
    
    479,987Deferred income tax asset
    
    
    262,412
    
    
    
    291,600Premises and equipment, net
    
    
    6,089,175
    
    
    
    5,933,602TOTAL ASSETS
    
    $
    127,406,683
    
    
    $
    99,205,988LIABILITIESDepositsNon-interest-bearing demand
    
    $
    18,457,247
    
    
    $
    14,761,372Interest-bearing demand
    
    
    25,394,593
    
    
    
    27,487,866Savings
    
    
    1,368,313
    
    
    
    1,449,503Time, under $100,000
    
    
    30,190,158
    
    
    
    18,035,413Time, $100,000 and over
    
    
    30,866,672
    
    
    
    17,937,972Total deposits
    
    
    106,276,983
    
    
    
    79,672,126Borrowings
    
    
    9,897,900
    
    
    
    9,000,000Accrued interest payable and other liabilities
    
    
    733,249
    
    
    
    234,370TOTAL LIABILITIES
    
    
    116,908,132
    
    
    
    88,906,496STOCKHOLDERS EQUITYCommon stock, no par value; authorized 10,000,000 shares, issued and
outstanding 1,037,548 and 1,037,498 shares at June 30, 2005 and
December 31, 2004, respectively
    
    
    10,758,380
    
    
    
    10,756,630Accumulated deficit
    
    
    (237,691
    )
    
    
    (447,104
    )Accumulated other comprehensive (loss)
    
    
    (22,138
    )
    
    
    (10,034
    )10,498,551
    
    
    
    10,299,492TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    127,406,683
    
    
    $
    99,205,988
 The
accompanying notes are an integral part of these financial statements.
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DISCOVERY BANCORP
 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
JUNE 30, 2005
 THREE MONTHS ENDED
    
    SIX MONTHS ENDEDJUNE 30,
    
    JUNE 30,2005
    
    2004
    
    2005
    
    2004INTEREST INCOMEInterest and fees on loans
    
    $
    1,923,646
    
    
    $
    1,131,667
    
    
    $
    3,488,093
    
    
    $
    2,144,636Interest on federal funds sold
    
    
    58,329
    
    
    
    7,217
    
    
    
    98,158
    
    
    
    12,426Interest on securities
    
    
    44,306
    
    
    
    22,193
    
    
    
    70,266
    
    
    
    37,534Other
    
    
    17,883
    
    
    
    10,172
    
    
    
    35,425
    
    
    
    26,699TOTAL INTEREST INCOME
    
    
    2,044,164
    
    
    
    1,171,249
    
    
    
    3,691,942
    
    
    
    2,221,295INTEREST EXPENSEDeposits
    
    
    610,381
    
    
    
    239,612
    
    
    
    1,061,742
    
    
    
    468,480Other
    
    
    74,989
    
    
    
    8,879
    
    
    
    130,012
    
    
    
    16,890TOTAL INTEREST EXPENSE
    
    
    685,370
    
    
    
    248,491
    
    
    
    1,191,754
    
    
    
    485,370NET INTEREST INCOME
    
    
    1,358,794
    
    
    
    922,758
    
    
    
    2,500,188
    
    
    
    1,735,925PROVISION FOR LOAN LOSSES
    
    
    123,485
    
    
    
    117,790
    
    
    
    282,427
    
    
    
    151,201NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES
    
    
    1,235,309
    
    
    
    804,968
    
    
    
    2,217,761
    
    
    
    1,584,724NON  INTEREST INCOMECustomer service fees & charges
    
    
    29,464
    
    
    
    1,185
    
    
    
    40,426
    
    
    
    21,401Gain on sale of SBA loans
    
    
    123,423
    
    
    
    
    
    
    
    123,423
    
    
    
    Other Income
    
    
    175,449
    
    
    
    38,568
    
    
    
    317,789
    
    
    
    50,396TOTAL NON
 INTEREST INCOME
    
    
    328,336
    
    
    
    39,753
    
    
    
    481,638
    
    
    
    71,797NON  INTEREST EXPENSESalaries and employee benefits
    
    
    611,317
    
    
    
    467,240
    
    
    
    1,122,658
    
    
    
    883,453Net occupancy
    
    
    107,784
    
    
    
    54,386
    
    
    
    219,162
    
    
    
    105,295Furniture and equipment
    
    
    72,497
    
    
    
    44,690
    
    
    
    139,326
    
    
    
    89,042Data processing
    
    
    51,487
    
    
    
    43,772
    
    
    
    99,810
    
    
    
    84,327Advertising
    
    
    31,840
    
    
    
    22,526
    
    
    
    52,347
    
    
    
    45,323Professional
    
    
    209,916
    
    
    
    52,341
    
    
    
    376,683
    
    
    
    104,354Office supplies
    
    
    17,787
    
    
    
    11,750
    
    
    
    34,998
    
    
    
    26,553Other operating
    
    
    149,879
    
    
    
    110,234
    
    
    
    305,187
    
    
    
    202,705TOTAL NON
 INTEREST EXPENSE
    
    
    1,252,507
    
    
    
    806,939
    
    
    
    2,350,171
    
    
    
    1,541,052INCOME BEFORE INCOME TAXES
    
    
    311,138
    
    
    
    37,782
    
    
    
    349,228
    
    
    
    115,469INCOME TAX PROVISION
    
    
    103,075
    
    
    
    6,899
    
    
    
    139,815
    
    
    
    20,494NET INCOME
    
    $
    208,063
    
    
    $
    30,883
    
    
    $
    209,413
    
    
    $
    94,975Earnings per share
    
    $
    0.20
    
    
    $
    0.03
    
    
    $
    0.20
    
    
    $
    0.09Diluted Earnings per share
    
    $
    0.19
    
    
    $
    0.03
    
    
    $
    0.19
    
    
    $
    0.09
 The accompanying notes are an integral part of these financial statements.
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DISCOVERY BANCORP
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
 Common Stock no par value;
    
    
    
    
    
    Accumulated10,000,000 shares authorized
    
    
    
    
    
    Other
    
    TotalShares
    
    
    
    
    
    Accumulated
    
    Comprehensive
    
    StockholdersOutstanding
    
    Amount
    
    Deficit
    
    Income(Loss)
    
    EquityBalance,January 1, 2004
    
    
    1,037,298
    
    
    $
    10,754,630
    
    
    $
    (1,065,744
    )
    
    $
    7,356
    
    
    $
    9,696,242Net income
    
    
    
    
    
    
    
    
    
    
    94,975
    
    
    
    
    
    
    
    94,975Unrealized losses on
investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,028
    )
    
    
    (30,028
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,947Balance,June 30, 2004
    
    
    1,037,298
    
    
    $
    10,754,630
    
    
    $
    (970,769
    )
    
    $
    (22,672
    )
    
    $
    9,761,189Balance,January 1, 2005
    
    
    1,037,498
    
    
    $
    10,756,630
    
    
    $
    (447,104
    )
    
    $
    (10,034
    )
    
    
    10,299,492Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    209,413
    
    
    
    
    
    
    
    209,413Unrealized losses on
investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,104
    )
    
    
    (12,104
    )Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    197,309Warrants exercised
    
    
    250
    
    
    
    3,750
    
    
    
    
    
    
    
    
    
    
    
    3,750Repurchase of
Organizational Shares
Issued
    
    
    (200
    )
    
    
    (2,000
    )
    
    
    
    
    
    
    
    
    
    
    (2,000
    )Balance,June 30, 2005
    
    
    1,037,548
    
    
    $
    10,758,380
    
    
    $
    (237,691
    )
    
    $
    (22,138
    )
    
    $
    10,498,551
 The accompanying notes are an integral part of these financial statements.
 5




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DISCOVERY BANCORP
 STATEMENTS OF CASH FLOWS (UNAUDITED)
 FOR THE SIX MONTHS ENDED JUNE 30,
    
    2005
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net Income
    
    $
    209,413
    
    
    $
    94,975Adjustments to reconcile net income to net cash provided by
operating activities:Provision for loan losses
    
    
    282,427
    
    
    
    151,201Depreciation and amortization
    
    
    188,806
    
    
    
    31,805Amortization of deferred loan fees
    
    
    (138,825

    )
    
    
    (107,309
    )Gain on sale of SBA loans
    
    
    (123,423
    )Change in:Deferred tax assets
    
    
    29,188
    
    
    
    Accrued interest receivable and other assets
    
    
    (340,728
    )
    
    
    (108,199
    )Accrued interest payable and other liabilities
    
    
    498,877
    
    
    
    103,385Net cash provided by operating activities
    
    
    605,735
    
    
    
    165,858CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of premises and equipment
    
    
    (344,386
    )
    
    
    (135,341
    )Net change in interest bearing deposits at banks
    
    
    99,682
    
    
    
    (8,968
    )Purchase of common stock substantially restricted
    
    
    (28,900
    )
    
    
    (49,400
    )Sales, maturities and paydowns of securities available-for-sale
    
    
    617,588
    
    
    
    2,518,955Purchases of securities available-for-sale
    
    
    (1,751,219
    )
    
    
    (1,746,624
    )Proceeds from sale of SBA loans
    
    
    1,776,104Net change in loans
    
    
    (23,796,625
    )
    
    
    (14,376,056
    )Net cash used for investing activities
    
    
    (23,427,756
    )
    
    
    (13,797,434
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from borrowings, net of repayments
    
    
    897,900
    
    
    
    1,295,000Proceeds from warrants exercised
    
    
    3,750
    
    
    
    Repurchase of organizational shares issued
    
    
    (2,000
    )
    
    
    Net change in deposits
    
    
    26,604,857
    
    
    
    16,688,717Net cash provided by financing activities
    
    
    27,504,507
    
    
    
    17,983,717Increase in cash and cash equivalents
    
    
    4,682,486
    
    
    
    4,352,141CASH AND CASH EQUIVALENTS BALANCEBeginning of year or period
    
    
    6,583,876
    
    
    
    2,110,388End of year or period
    
    $
    11,266,362
    
    
    $
    6,462,529Supplemental Disclosures of Cash Flow InformationCash paid during the year for:Income taxes
    
    $
    
    
    
    $
    34,852Interest
    
    $
    1,128,035
    
    
    $
    475,501Supplemental Disclosures of Noncash ActivitiesTotal change in unrealized losses on securities available-for -sale
    
    $
    (12,104
    )
    
    $
    (30,028
    )
 The accompanying notes are an integral part of these financial statements.
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NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
 Note 1  Summary of Significant Accounting Policies
  Note 2  Basis of presentation
   Note 3  Stock option plan
 Accounting for Stock Issued to Employees, Accounting
for Stock Based Compensation
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Accounting for Share-Based Payments,
 For the three months ended
    
    For the six months endedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004(dollars in thousands)Net income
    
    $
    208,063
    
    
    $
    30,883
    
    
    $
    209,413
    
    
    $
    94,975Additional compensation
for fair value of stock
options
    
    
    2,090
    
    
    
    1,146
    
    
    
    16,734
    
    
    
    6,909Pro forma net income
    
    $
    205,973
    
    
    $
    29,737
    
    
    $
    192,679
    
    
    $
    88,066Basic EPS:As reported
    
    $
    0.20
    
    
    $
    0.03
    
    
    $
    0.20
    
    
    $
    0.09Pro Forma
    
    $
    0.20
    
    
    $
    0.03
    
    
    $
    0.19
    
    
    $
    0.09Diluted EPS:As reported
    
    $
    0.19
    
    
    $
    0.03
    
    
    $
    0.19
    
    
    $
    0.09Pro Forma
    
    $
    0.19
    
    
    $
    0.03
    
    
    $
    0.18
    
    
    $
    0.09
 Note 4  Earnings Per Share
  Earnings per share calculationFor the three months ended June 302005
    
    
    
    
    
    
    
    
    
    2004Weighted
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    
    
    
    Average
    
    PerNet
    
    Shares
    
    Per Share
    
    Net
    
    Shares
    
    ShareIncome
    
    Outstanding
    
    Amount
    
    Income
    
    Outstanding
    
    AmountBasic EPS:Income available to common
shareholders
    
    $
    208,063
    
    
    
    1,037,498
    
    
    $
    0.20
    
    
    $
    30,883
    
    
    
    1,037,298
    
    
    $
    0.03Effect of dilutive securities:Stock options
    
    
    
    
    
    
    55,449
    
    
    ($

    0.01
    )
    
    
    
    
    
    
    56,836
    
    
    
    Diluted EPS:Income available to common
shareholders
    
    $
    208,063
    
    
    
    1,092,847
    
    
    $
    0.19
    
    
    $
    30,883
    
    
    
    1,094,134
    
    
    $
    0.03
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Earnings per share calculationFor the six months ended June 302005
    
    
    
    
    
    
    
    
    
    2004Weighted
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    
    
    
    AverageNet
    
    Shares
    
    Per Share
    
    Net
    
    Shares
    
    Per ShareIncome
    
    Outstanding
    
    Amount
    
    Income
    
    Outstanding
    
    AmountBasic EPS:Income available to
common shareholders.
    
    $
    209,413
    
    
    
    1,037,398
    
    
    $
    0.20
    
    
    $
    94,975
    
    
    
    1,037,298
    
    
    $
    0.09Effect of dilutive
securities:Stock options
    
    
    
    
    
    
    60,391
    
    
    ($
    0.01
    )
    
    
    
    
    
    
    56,819
    
    
    
    Diluted EPS:Income available to
common shareholders.
    
    $
    209,413
    
    
    
    1,097,789
    
    
    $
    0.19
    
    
    $
    94,975
    
    
    
    1,094,117
    
    
    $
    0.09
 Note 5  Recently Issued Accounting Pronouncements
       9




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Accounting for Certain Loans or
Debt Securities Acquired in a Transfer
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Introduction .
    
    
    competition within the banking industry;
    
    changes in the interest rate environment;
    
    general economic conditions, nationally, regionally and in our market areas,
including declines in real estate values;
    
    the effects of terrorism and the conduct of the war on terrorism by the United
States and its allies;
    
    the regulatory environment;
    
    business conditions and inflation;
    
    the securities markets;
    
    technology;
    
    regulatory compliance issues;
    
    planned asset growth;
    
    unanticipated loan losses;
    
    unanticipated increases in operating expenses; and
    
    the ability to generate fee and other non-interest income.
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Critical Accounting Policies .
   Allowance for Loan Losses
  Securities Available-for-Sale .
 Income Taxes
 General
  12




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Distribution of Assets, Liabilities and Shareholders Equity
   13




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Three Months Ended June 30,2005
    
    2004Interest
    
    Rates
    
    
    
    
    
    Interest
    
    RatesAverage
    
    Income/
    
    Earned/
    
    Average
    
    Income/
    
    Earned/Balance
    
    Expense
    
    Paid1
    
    Balance
    
    Expense
    
    Paid1(dollars in thousands)AssetsInvestment securities
    
    $
    3,606
    
    
    $
    44
    
    
    
    4.89
    %
    
    $
    2,196
    
    
    $
    22
    
    
    
    4.02
    %Interest-bearing deposits
    
    
    2,862
    
    
    
    18
    
    
    
    2.52
    %
    
    
    2,506
    
    
    
    10
    
    
    
    1.60
    %Federal funds sold
    
    
    7,490
    
    
    
    58
    
    
    
    3.11
    %
    
    
    2,826
    
    
    
    7
    
    
    
    0.99
    %Loans, net2
    
    
    98,681
    
    
    
    1,924
    
    
    
    7.82
    %
    
    
    67,945
    
    
    
    1,132
    
    
    
    6.68
    %Total Interest-Earning Assets
    
    
    112,639
    
    
    
    2,044
    
    
    
    7.28
    %
    
    
    75,473
    
    
    
    1,171
    
    
    
    6.22
    %Noninterest-earning assets
    
    
    12,385
    
    
    
    
    
    
    
    
    
    
    
    3,935Total Assets
    
    $
    125,024
    
    
    
    
    
    
    
    
    
    
    $
    79,408LiabilitiesTransaction and NOW accounts
    
    $
    6,752
    
    
    
    16
    
    
    
    0.95
    %
    
    $
    6,878
    
    
    
    20
    
    
    
    1.17
    %Savings and money market
    
    
    20,069
    
    
    
    110
    
    
    
    2.20
    %
    
    
    12,360
    
    
    
    44
    
    
    
    1.43
    %Time deposits
    
    
    59,443
    
    
    
    485
    
    
    
    3.27
    %
    
    
    34,622
    
    
    
    175
    
    
    
    2.03
    %Borrowings
    
    
    9,252
    
    
    
    75
    
    
    
    3.25
    %
    
    
    3,264
    
    
    
    9
    
    
    
    1.11
    %Total Interest-Bearing Liabilities
    
    
    95,516
    
    
    
    686
    
    
    
    2.88
    %
    
    
    57,124
    
    
    
    248
    
    
    
    1.74
    %Demand deposits
    
    
    17,610
    
    
    
    
    
    
    
    
    
    
    
    12,223Other liabilities
    
    
    1,565
    
    
    
    
    
    
    
    
    
    
    
    196Total Liabilities
    
    
    114,691
    
    
    
    
    
    
    
    
    
    
    
    69,543Shareholders Equity
    
    
    10,333
    
    
    
    
    
    
    
    
    
    
    
    9,865Total Liabilities and Shareholders Equity
    
    $
    125,024
    
    
    
    
    
    
    
    
    
    
    $
    79,408Net interest margin3
    
    
    
    
    
    $
    1,358
    
    
    
    4.84
    %
    
    
    
    
    
    $
    923
    
    
    
    4.91
    %Net interest spread4
    
    
    
    
    
    
    
    
    
    
    4.40
    %
    
    
    
    
    
    
    
    
    
    
    4.48
    %Return on Average Assets
    
    
    
    
    
    
    
    
    
    
    0.67
    %
    
    
    
    
    
    
    
    
    
    
    0.16
    %Return on Average Equity
    
    
    
    
    
    
    
    
    
    
    8.06
    %
    
    
    
    
    
    
    
    
    
    
    1.25
    %Average Equity to Average Assets Ratio
    
    
    
    
    
    
    
    
    
    
    8.3:1
    
    
    
    
    
    
    
    
    
    
    
    12.4:1
 Three Months Ended June 30, 2005 and 2004 .
  
 1
    
    The ratios have been annualized.2
    
    Average loans are net of unearned loan
fees and allowances for loan losses. Unearned loan fees were $206,000 and
$166,000 at June 30, 2005 and 2004, respectively. Allowances for loan losses
were $1,280,000 and $890,000 at June 30, 2005 and 2004, respectively. Interest
income from loans includes loan fees of $76,000 and $62,000 for the three
months ended June 30, 2005 and 2004, respectively.3
    
    Net interest income as a percentage of
average interest-earning assets.4
    
    Net interest spread is the absolute
difference between the rate earned on interest-earning assets and the rate paid
on interest-bearing liabilities. 14




---



##### Table of Contents



Six Months Ended June 30,2005
    
    2004Interest
    
    Rates
    
    
    
    
    
    Interest
    
    RatesAverage
    
    Income/
    
    Earned/
    
    Average
    
    Income/
    
    Earned/Balance
    
    Expense
    
    Paid1
    
    Balance
    
    Expense
    
    Paid1(dollars in thousands)AssetsInvestment securities
    
    $
    3,258
    
    
    
    70
    
    
    
    4.33
    %
    
    $
    2,385
    
    
    $
    37
    
    
    
    3.11
    %Interest-bearing deposits
    
    
    2,871
    
    
    
    36
    
    
    
    2.53
    %
    
    
    2,521
    
    
    
    27
    
    
    
    2.15
    %Federal funds sold
    
    
    6,844
    
    
    
    98
    
    
    
    2.89
    %
    
    
    2,392
    
    
    
    12
    
    
    
    1.01
    %Loans, net2
    
    
    92,483
    
    
    
    3,488
    
    
    
    7.61
    %
    
    
    64,756
    
    
    
    2,145
    
    
    
    6.64
    %Total Interest-Earning Assets
    
    
    105,456
    
    
    
    3,692
    
    
    
    7.06
    %
    
    
    72,054
    
    
    
    2,221
    
    
    
    6.18
    %Noninterest-earning assets
    
    
    11,803
    
    
    
    
    
    
    
    
    
    
    
    3,819Total Assets
    
    
    117,259
    
    
    
    
    
    
    
    
    
    
    $
    75,873LiabilitiesTransaction and NOW accounts
    
    $
    6,749
    
    
    
    33
    
    
    
    0.99
    %
    
    $
    5,952
    
    
    
    33
    
    
    
    1.11
    %Savings and money market
    
    
    20,460
    
    
    
    211
    
    
    
    2.08
    %
    
    
    11,556
    
    
    
    85
    
    
    
    1.48
    %Time deposits
    
    
    52,737
    
    
    
    818
    
    
    
    3.13
    %
    
    
    33,750
    
    
    
    350
    
    
    
    2.08
    %Borrowings
    
    
    9,005
    
    
    
    130
    
    
    
    2.91
    %
    
    
    3,057
    
    
    
    17
    
    
    
    1.12
    %Total Interest-Bearing Liabilities
    
    
    88,951
    
    
    
    1,192
    
    
    
    2.70
    %
    
    
    54,315
    
    
    
    485
    
    
    
    1.79
    %Demand deposits
    
    
    17,094
    
    
    
    
    
    
    
    
    
    
    
    11,405Other liabilities
    
    
    871
    
    
    
    
    
    
    
    
    
    
    
    171Total Liabilities
    
    
    106,916
    
    
    
    
    
    
    
    
    
    
    
    65,891Shareholders Equity
    
    
    10,343
    
    
    
    
    
    
    
    
    
    
    
    9,982Total Liabilities and Shareholders Equity
    
    $
    117,259
    
    
    
    
    
    
    
    
    
    
    $
    75,873Net interest
margin3
    
    
    
    
    
    $
    2,500
    
    
    
    4.78
    %
    
    
    
    
    
    $
    1,736
    
    
    
    4.83
    %Net interest
spread4
    
    
    
    
    
    
    
    
    
    
    4.36
    %
    
    
    
    
    
    
    
    
    
    
    4.39
    %Return on Average Assets
    
    
    
    
    
    
    
    
    
    
    0.36
    %
    
    
    
    
    
    
    
    
    
    
    0.25
    %Return on Average Equity
    
    
    
    
    
    
    
    
    
    
    4.05
    %
    
    
    
    
    
    
    
    
    
    
    1.90
    %Average Equity to Average Assets Ratio
    
    
    
    
    
    
    
    
    
    
    8.8:1
    
    
    
    
    
    
    
    
    
    
    
    13.2:1
 Six Months Ended June 30, 2005 and 2004.
 
 1
    
    The ratios have been annualized.2
    
    Average loans are net of unearned loan fees and
allowances for loan losses. Unearned loan fees were $206,000 and $166,000 at
June 30, 2005 and 2004, respectively. Allowances for loan losses were
$1,280,000 and $890,000 at June 30, 2005 and 2004, respectively. Interest
income from loans includes loan fees of $139,000 and $108,000 for the six
months ended June 30, 2005 and 2004, respectively3
    
    Net interest income as a percentage of
average interest-earning assets.4
    
    Net interest spread is the absolute
difference between the rate earned on interest-earning assets and the rate
paid on interest-bearing liabilities. 15




---



##### Table of Contents



Net Interest Income and Net Yield
   For the Three Months Ended June 30,
    
    For the Six Months Ended June 30,2005 Compared to the Three Months
    
    2005 Compared to the Six MonthsEnded June 30, 2004
    
    Ended June 30, 2004Increase (Decrease) Due To Change In
    
    Increase (Decrease) Due To Change InTotal
    
    
    
    
    
    
    
    
    
    TotalVolume
    
    Rate
    
    Change
    
    Volume
    
    Rate
    
    Change(dollars in thousands)Interest-Earning AssetsInvestment securities
    
    $
    20
    
    
    $
    2
    
    
    $
    22
    
    
    $
    20
    
    
    $
    13
    
    
    $
    33Interest-earning deposits
    
    
    1
    
    
    
    7
    
    
    
    8
    
    
    
    4
    
    
    
    5
    
    
    
    9Federal funds sold
    
    
    12
    
    
    
    39
    
    
    
    51
    
    
    
    22
    
    
    
    64
    
    
    
    86Loans
    
    
    512
    
    
    
    280
    
    
    
    792
    
    
    
    902
    
    
    
    441
    
    
    
    1343Total Interest Income
    
    
    545
    
    
    
    328
    
    
    
    873
    
    
    
    948
    
    
    
    523
    
    
    
    1471Interest-Bearing LiabilitiesTransaction and Now
Accounts
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )
    
    
    4
    
    
    
    (4
    )
    
    
    Savings and Money Market
    
    
    27
    
    
    
    39
    
    
    
    66
    
    
    
    65
    
    
    
    61
    
    
    
    126Time Deposits
    
    
    125
    
    
    
    185
    
    
    
    310
    
    
    
    196
    
    
    
    272
    
    
    
    468Borrowings
    
    
    17
    
    
    
    49
    
    
    
    66
    
    
    
    33
    
    
    
    80
    
    
    
    113Total Interest Expense
    
    
    169
    
    
    
    269
    
    
    
    438
    
    
    
    298
    
    
    
    409
    
    
    
    707Net Interest Income
    
    $
    376
    
    
    $
    59
    
    
    $
    435
    
    
    $
    649
    
    
    $
    114
    
    
    $
    764
 Investments
   16




---



##### Table of Contents



Investment Portfolio
 June 30, 2005
    
    December 31, 2004Amortized
    
    Unrealized
    
    Unrealized
    
    Fair
    
    Amortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    Value
    
    Cost
    
    Gains
    
    Losses
    
    Value(dollars in thousands)Available-for-Sale:Obligations of US
Govt. Agency Book
    
    $
    3,849
    
    
    
    
    
    
    ($
    22
    )
    
    $
    3,827
    
    
    $
    2,716
    
    
    
    
    
    
    ($
    10
    )
    
    $
    2,706Total
    
    $
    3,849
    
    
    
    
    
    
    ($
    22
    )
    
    $
    3,827
    
    
    $
    2,716
    
    
    
    
    
    
    ($
    10
    )
    
    $
    2,706
  Loans
 Loan Categories.
 June30,
    
    December 31,2005
    
    2004Percent of
    
    
    
    
    
    Percent ofAmount
    
    Total
    
    Amount
    
    Total(dollars in thousands)Loan CategoryReal estate loans:Construction loans
    
    $
    20,553
    
    
    
    20
    %
    
    $
    10,420
    
    
    
    13
    %Real estate 1st trust deeds
    
    
    37,609
    
    
    
    36
    
    
    
    36,716
    
    
    
    45Other real estate mortgage
    
    
    6,384
    
    
    
    6
    
    
    
    2,528
    
    
    
    3Total real estate
    
    
    64,546
    
    
    
    62
    
    
    
    49,664
    
    
    
    61Business secured loans
    
    
    29,982
    
    
    
    29
    
    
    
    24,855
    
    
    
    31Business unsecured loans
    
    
    1,790
    
    
    
    2
    
    
    
    1,147
    
    
    
    1Consumer and other
    
    
    7,238
    
    
    
    7
    
    
    
    5,546
    
    
    
    7Total Loans
    
    
    103,556
    
    
    
    100
    %
    
    
    81,212
    
    
    
    100
    %Less deferred loan income
    
    
    (206
    )
    
    
    
    
    
    
    (177
    )Less allowance for loan losses
    
    
    (1,280
    )
    
    
    
    
    
    
    (998
    )Net Loans
    
    $
    102,070
    
    
    
    
    
    
    $
    80,037
  17




---



##### Table of Contents



st st
  18




---



##### Table of Contents



Loan Origination and Underwriting.
     19




---



##### Table of Contents



Loan Commitments.
  Non-Performing Assets.
   Allowance and Provision for Loan Losses
   20




---



##### Table of Contents



June 30,
    
    
    
    
    
    June 30,(unaudited)
    
    December 31,
    
    (unaudited)2005
    
    2004
    
    2004(dollars in thousands)Outstanding loans:End of the period
    
    $
    103,557
    
    
    $
    81,212
    
    
    $
    75,369Average for the period
    
    $
    92,483
    
    
    $
    71,861
    
    
    $
    64,756Allowance for loan losses:Balance at beginning of period
    
    $
    998
    
    
    $
    760
    
    
    $
    760Loans charged off
    
    
    
    
    
    
    
    
    
    
    Recoveries
    
    
    
    
    
    
    
    
    
    
    Provisions charged to operating expense
    
    
    282
    
    
    
    238
    
    
    
    151Balance at end of period
    
    $
    1,280
    
    
    $
    998
    
    
    $
    911Ratios:Net charge-offs (recoveries) to average loans
    
    
    
    
    
    
    
    
    
    
    Allowance to loans at period end
    
    
    1.24
    %
    
    
    1.23
    %
    
    
    1.21
    %
  At June 30, 2005(unaudited)
    
    At December 31.2004(dollars in thousands)Percent of
    
    
    
    
    
    Percent ofLoans in
    
    Allowance
    
    Loans inAllowance for
    
    Category to
    
    for Loan
    
    Category toLoan Losses
    
    Total Loans
    
    Losses
    
    Total LoansReal Estate:Construction
    
    $
    248
    
    
    
    20
    %
    
    $
    141
    
    
    
    13
    %1st Trust Deed R.E.
    
    
    534
    
    
    
    36

    %
    
    
    373
    
    
    
    45
    %Other Real Estate
    
    
    46
    
    
    
    6
    %
    
    
    91
    
    
    
    3
    %Total Real Estate
    
    
    828
    
    
    
    62
    %
    
    
    605
    
    
    
    61
    %Business Secured
    
    
    379
    
    
    
    29
    %
    
    
    322
    
    
    
    31
    %Business Unsecured
    
    
    2
    
    
    
    2
    %
    
    
    14
    
    
    
    1
    %Consumer & other
    
    
    71
    
    
    
    7
    %
    
    
    57
    
    
    
    7
    %Unallocated allowance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    1,280
    
    
    
    100
    %
    
    $
    998
    
    
    
    100
    %
 21




---



##### Table of Contents



Non-Interest Income .
   Non-Interest Expense .
  Three Months Ended June 30,Percentage2005
    
    2004
    
    Change(dollars in thousands)Salaries and benefits
    
    $
    611
    
    
    $
    467
    
    
    
    30.8
    %Occupancy expense
    
    
    108
    
    
    
    54
    
    
    
    98.2
    %Furniture & Equipment
    
    
    73
    
    
    
    45
    
    
    
    62.2
    %Data Processing
    
    
    51
    
    
    
    44
    
    
    
    17.6
    %Advertising
    
    
    32
    
    
    
    23
    
    
    
    41.4
    %Professional fees
    
    
    210
    
    
    
    52
    
    
    
    301.1
    %Office supplies
    
    
    18
    
    
    
    12
    
    
    
    51.4
    %Other expenses
    
    
    150
    
    
    
    110
    
    
    
    36.0
    %Total
    
    $
    1,253
    
    
    $
    807
    
    
    
    55.3
    %
 Six Months Ended June 30,Percentage2005
    
    2004
    
    Change(dollars in thousands)Salaries and benefits
    
    $
    1,123
    
    
    $
    884
    
    
    
    27.1
    %Occupancy expense
    
    
    219
    
    
    
    105
    
    
    
    108.1
    %Furniture & Equipment
    
    
    139
    
    
    
    89
    
    
    
    56.5
    %Data Processing
    
    
    100
    
    
    
    84
    
    
    
    18.4
    %Advertising
    
    
    52
    
    
    
    45
    

    
    
    15.5
    %Professional fees
    
    
    377
    
    
    
    104
    
    
    
    261.0
    %Office supplies
    
    
    35
    
    
    
    27
    
    
    
    31.8
    %Other expenses
    
    
    305
    
    
    
    203
    
    
    
    50.6
    %Total
    
    $
    2,350
    
    
    $
    1,541
    
    
    
    52.5
    %
   22




---



##### Table of Contents



Income Taxes .
  Cash and Cash Equivalents .
  Deposits .
   June 30, 2005(unaudited)(dollars in thousands)Three months or less
    
    $
    8,766Over three to six months
    
    
    22,101Over six to twelve months
    
    
    Over twelve months
    
    
    Total
    
    $
    30,867
 Borrowings
  Capital Resources .
  23




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##### Table of Contents



Risk-based capital ratios
 Well
    
    MinimumCapitalized
    
    CapitalAt 6/30/05
    
    At 12/31/04
    
    Requirement
    
    RequirementDiscovery Bancorp:Total Risk-Based capital ratio
    
    
    10.20
    %
    
    
    11.59
    %
    
    
    10.00
    %
    
    
    8.00
    %Tier 1 Risk-Based capital ratio
    
    
    9.07
    %
    
    
    10.57
    %
    
    
    6.00
    %
    
    
    4.00
    %Tier 1 Leverage Ratio
    
    
    8.36
    %
    
    
    12.04
    %
    
    
    5.00
    %
    
    
    4.00
    %Discovery Bank:Total Risk-Based capital ratio
    
    
    10.50
    %
    
    
    12.41
    %
    
    
    10.00
    %
    
    
    8.00
    %Tier 1 Risk-Based capital ratio
    
    
    9.36
    %
    
    
    11.30
    %
    
    
    6.00
    %
    
    
    4.00
    %Tier 1 Leverage Ratio
    
    
    8.62
    %
    
    
    10.57
    %
    
    
    5.00
    %
    
    
    4.00
    %
 Liquidity and Liquidity Management .
      24




---



##### Table of Contents



Recent Accounting Pronouncements.
          25




---



##### Table of Contents



Accounting for Certain Loans or
Debt Securities Acquired in a Transfer
 Quantitative And Qualitative Disclosures About Market Risk
   Credit Risk .
 26




---



##### Table of Contents



Interest Rate Risk .
      Adjusted Net
    
    ChangeInterest Rate Scenario
    
    Interest Income
    
    From BaseUp 300 basis points
    
    $
    6,514
    
    
    
    24.53
    %Up 200 basis points
    
    $
    6,134
    
    
    
    17.26
    %Up 100 basis points
    
    $
    5,697
    
    
    
    8.91
    %Base
    
    $
    5,231
    
    
    
    Down 100 basis points
    
    $
    4,977
    
    
    
    (4.86
    )%Down 200 basis points
    
    $
    4,747
    
    
    
    (9.25
    )%Down 300 basis points
    
    $
    4,580
    
    
    
    (12.45
    )%
 27




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##### Table of Contents



Inflation .
   
 ITEM 3. CONTROLS AND PROCEDURES
    Dependence on Key Employees.
 28




---



##### Table of Contents



PART
II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 Exhibit No.
    
    Description of Exhibit
    
    Page31.1
    
    Certification of James P. Kelly, II
    
    
    3131.2
    
    Certification of Lou Ellen Ficke
    
    
    3232.1
    
    Section 1350 Certification of James P. Kelly, II
    
    
    3332.2
    
    Section 1350 Certification of Lou Ellen Ficke
    
    
    34
 29




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##### Table of Contents



SIGNATURES
  Discovery BancorpDated: August 12, 2005
    
    By:
    
    /s/ James P. Kelley, IIJames P. Kelley, II,President and Chief Executive OfficerBy:
    
    /s/ Lou Ellen FickeLou Ellen Ficke,Executive Vice Presid ent and Chief Financial Officer
 30