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FORM 10-QSB
 Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2006
COMMISSION FILE No.: 333-122090
 DISCOVERY BANCORP
       o þ
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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONITEM 3. CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 3. DEFAULTS UPON SENIOR SECURITIESITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 5. OTHER INFORMATIONITEM 6. EXHIBITSSIGNATURESExhibit 31.1Exhibit 31.2Exhibit 32.1    Table of Contents  
 PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 DISCOVERY BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2006 AND DECEMBER 31, 2005
 (dollars in thousands)March 31,
    
    
    December 31,2006
    
    
    2005(unaudited)ASSETSCash & due from banks
    
    $
    7,763
    
    
    $
    6,709Fed Funds sold
    
    
    9,820
    
    
    
    8,145Cash and cash equivalents
    
    
    17,583
    
    
    
    14,854Interest-bearing deposits at banks
    
    
    5,193
    
    
    
    2,606Investment securities available-for-sale
    
    
    3,335
    
    
    
    3,402Common stock, substantially restricted
    
    
    738
    
    
    
    648Loans, net of allowance for loan losses of
$1,890,634 in 2006 and $1,784,498 in 2005
    
    
    143,074
    
    
    
    134,326Goodwill
    
    
    1,731
    
    
    
    1,731Accrued interest receivable and other assets
    
    
    1,232
    
    
    
    1,127Premises and equipment, net
    
    
    5,928
    
    
    
    6,012TOTAL ASSETS
    
    $
    178,814
    
    
    $
    164,706LIABILITIESDepositsNon-interest-bearing demand
    
    $
    29,879
    
    
    $
    21,569Interest-bearing demand
    
    
    24,001
    
    
    
    28,560Savings
    
    
    1,610
    
    
    $
    1,987Time, under $100,000
    
    
    41,488
    
    
    
    28,032Time, $100,000 and over
    
    
    34,834
    
    
    
    32,437Total deposits
    
    
    131,812
    
    
    
    112,585Borrowings under line of credit
    
    
    17,957
    
    
    
    16,086Overnight borrowings  FHLB
    
    
    4,284
    
    
    
    12,000Accrued interest payable and other liabilities
    
    
    1,413
    
    
    
    1,192TOTAL LIABILITIES
    
    
    155,466
    
    
    
    141,863STOCKHOLDERS EQUITYCommon stock, no par value; authorized
10,000,000 shares, issued and outstanding
1,871,883 and 1,871,883 shares at March 31,
2006 and December 31, 2005, respectively
    
    
    22,815
    
    
    
    22,776Retained earnings
    
    
    580
    
    
    
    106Accumulated other comprehensive loss
    
    
    (47
    )
    
    
    (39
    )23,348
    
    
    
    22,843TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    178,814
    
    
    $
    164,706
 The accompanying notes are an integral part of these financial statements.
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DISCOVERY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
 (dollars in thousands)March 31,
    
    
    March 31,2006
    
    
    2005INTEREST INCOMEInterest and fees on loans
    
    $
    3,633
    
    
    $
    1,563Interest on federal funds sold
    
    
    103
    
    
    
    40Interest on securities
    
    
    41
    
    
    
    26Other
    
    
    39
    
    
    
    18TOTAL INTEREST INCOME
    
    
    3,816
    
    
    
    1,647INTEREST EXPENSEDeposits
    
    
    873
    
    
    
    451Borrowings under line of credit
    
    
    293
    
    
    
    0Overnight borrowing  FHLB
    
    
    119
    
    
    
    55TOTAL INTEREST EXPENSE
    
    
    1,285
    
    
    
    506NET INTEREST INCOME
    
    
    2,531
    
    
    
    1,141PROVISION FOR LOAN LOSSES
    
    
    106
    
    
    
    159NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES
    
    
    2,425
    
    
    
    982NON-INTEREST INCOMECustomer service fees & charges
    
    
    37
    
    
    
    27Gain on sale of SBA loans
    
    
    151
    
    
    
    Rental income, net
    
    
    76
    
    
    
    65Other loan fees & charges
    
    
    63
    
    
    
    26TOTAL NON-INTEREST INCOME
    
    
    327
    
    
    
    119NON-INTEREST EXPENSESalaries and employee benefits
    
    
    1,168
    
    
    
    511Net occupancy
    
    
    127
    
    
    
    77Furniture and equipment
    
    
    69
    
    
    
    67Data processing
    
    
    101
    
    
    
    48Advertising
    
    
    44
    
    
    
    21Professional
    
    
    180
    
    
    
    167Office supplies
    
    
    21
    
    
    
    17Other operating
    
    
    211
    
    
    
    155TOTAL NON-INTEREST EXPENSE
    
    
    1,921
    
    
    
    1,063INCOME BEFORE INCOME TAXES
    
    
    831
    
    
    
    38PROVISION FOR INCOME TAXES
    
    
    357
    
    
    
    37NET INCOME
    
    $
    474
    
    
    $
    1Basic earnings per share
    
    $
    0.25
    
    
    $
    0.00Diluted earnings per share
    
    $
    0.25
    
    
    $
    0.00
 The accompanying notes are an integral part of these financial statements.
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DISCOVERY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
 (dollars in thousands)Retained
    
    
    AccumulatedCommon Stock
    
    
    Earnings
    
    
    Other
    
    
    TotalShares
    
    
    
    
    
    
    (Accumulated
    
    
    Comprehensive
    
    
    StockholderOutstanding
    
    
    Amount
    
    
    Deficit)
    
    
    Loss
    
    
    EquityBalance,January 1, 2005
    
    
    1,037,498
    
    
    $
    10,757
    
    
    
    ($447
    )
    
    
    ($10
    )
    
    $
    10,299Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Change in unrealized loss on
investment securities, net
of tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    (36
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )Balance,March 31, 2005
    
    
    1,037,498
    
    
    $
    10,757
    
    
    
    ($446
    )
    
    
    ($46
    )
    
    $
    10,264Balance,January 1, 2006
    
    
    1,871,883
    
    
    $
    22,776
    
    
    $
    106
    
    
    
    ($39
    )
    
    $
    22,843Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    474
    
    
    
    
    
    
    
    474Change in unrealized loss on
investment securities, net
of tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    466Compensation expense on
stock options
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    39Balance,March 31, 2006
    
    
    1,871,883
    
    
    $
    22,815
    
    
    $
    580
    
    
    
    ($47
    )
    
    $
    23,348
 The accompanying notes are an integral part of these financial statements
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DISCOVERY BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
 (dollars in thousands)March 31,
    
    
    March 31,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    474
    
    
    $
    1Adjustments to reconcile net income to net cash provided by
operating activities:Provision for loan losses
    
    
    106
    
    
    
    159Depreciation and amortization
    
    
    122
    
    
    
    93Amortization of deferred loan fees
    
    
    (48
    )
    
    
    (56
    )Capitalization of deferred origination costs
    
    
    (101
    )
    
    
    (88
    )Compensation expense on stock options
    
    
    39
    
    
    
    Change in:Deferred tax assets
    
    
    (45
    )
    
    
    29Accrued interest receivable and other assets
    
    
    (60
    )
    
    
    (304
    )Accrued interest payable and other liabilities
    
    
    221
    
    
    
    374Net cash provided by operating activities
    
    
    708
    
    
    
    208CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of premises and equipment
    
    
    (38
    )
    
    
    (225
    )Net change in interest bearing deposits at banks
    
    
    (2,587
    )
    
    
    (192
    )Purchase of common stock substantially restricted
    
    
    (91
    )
    
    
    Sales, maturities and paydowns of securities available-for-sale
    
    
    
    
    
    
    50Purchases of securities available-for-sale
    
    
    59
    
    
    
    (505
    )Net change in loans
    
    
    (8,705
    )
    
    
    (13,376
    )Net cash used for investing activities
    
    
    (11,362
    )
    
    
    (14,248
    )CASH FLOWS FROM FINANCING ACTIVITIES:Change in loans from directors
    
    
    
    
    
    
    177Net change in borrowings under lines of credit
    
    
    (5,844
    )
    
    
    (500
    )Net change in deposits
    
    
    19,227
    
    
    
    20,197Net cash provided by financing activities
    
    
    13,383
    
    
    
    19,874Increase in cash and cash equivalents
    
    
    2,729
    
    
    
    5,834CASH AND CASH EQUIVALENTS BALANCEBeginning of period
    
    
    14,854
    
    
    
    6,591End of period
    
    $
    17,583
    
    
    $
    12,425Supplemental Disclosures of Cash Flow InformationCash paid during the year for:Income taxes
    
    $
    309
    
    
    $
    Interest
    
    $
    1,205
    
    
    $
    435
 The accompanying notes are an integral part of these financial statements.
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DISCOVERY BANCORP AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  OPERATIONS, BASIS OF PRESENTATION AND STOCK BASED COMPENSATION
 Nature
of Operations
    Basis of Presentation
  Presentation of 2005 Consolidated Financial Statements
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Reclassifications
 Stockholders Equity and Stock Based Compensation
 Accounting for stock
Issued to Employees
 Share-Based Payment Statement of Cash
Flows Accounting for Stock-Based Compensation
   (dollars in thousands)Three monthsended March 312005Reported net earnings
    
    $
    1Stock-based employee compensation expense, net of related tax effects
    
    $
    15Pro Forma Net Loss
    
    $
    (14
    )Reported basic and diluted net earnings per share
    
    $
    0.00Pro forma basic and diluted net earnings per share
    
    $
    (0.01
    )
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NOTE 2  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 Accounting Changes and Error Corrections  A Replacement
of APB Opinion No. 20 and FASB Statement No. 3
      The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments Recognition of Other-Than-Temporary Impairment upon the Planned
Sale of a Security Whose Cost Exceeds Fair Value Accounting for Certain Investments in Debt and Equity Securities
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NOTE 3  EARNINGS PER SHARE
 Earnings Per Share (EPS)
  Net
    
    
    Weighted Average
    
    
    Per Share(net income dollars in thousands)
    
    Income
    
    
    Shares Outstanding
    
    
    AmountBasic EPS:Income available to common shareholders
    
    $
    474
    
    
    
    1,871,883
    
    
    $
    0.25Effect of dilutive securities:Stock Options
    
    
    
    
    
    
    60,116
    
    
    
    (0.00
    )Diluted EPS:Income available to common shareholders
    
    $
    474
    
    
    
    1,931,999
    
    
    $
    0.25
  Net
    
    
    Weighted Average
    
    
    Per Share(net income dollars in thousands)
    
    Income
    
    
    Shares Outstanding
    
    
    AmountBasic EPS:Income available to common shareholders
    
    $
    1
    
    
    
    1,037,498
    
    
    $
    0.00Effect of dilutive securities:Stock Options
    
    
    
    
    
    
    65,197
    
    
    
    (0.00
    )Diluted EPS:Income available to common shareholders
    
    $
    1
    
    
    
    1,102,695
    
    
    $
    0.00
 NOTE 4
 BORROWINGS
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NOTE 5  PURCHASE OF ASSETS AND LIABILITIES
   (dollars in thousands)Assets acquired:Cash
    
    $
    1,529Loans
    
    
    15,966Goodwill
    
    
    1,731Other assets
    
    
    98Total assets acquired
    
    $
    19,324Liabilities assumed:Borrowing under line of credit
    
    $
    13,214Other liabilities
    
    
    53Total liabilities assumed
    
    $
    13,267
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NOTE 6  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
    (dollars in thousands)March 31,
    
    
    December 31,2006
    
    
    2005Unfunded commitments under lines of credit
    
    $
    42,549
    
    
    $
    38,626Commercial and standby letters of credit
    
    $
    619
    
    
    $
    566
    11




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 Introduction .
      
    
    competition within the banking industry;
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
    
    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.
  Critical Accounting Policies
   Allowance for Loan and Lease Losses
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Securities Available-for-Sale .
 Goodwill
 Income Taxes
 General
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RESULTS OF OPERATION
 Distribution of Assets, Liabilities and Shareholders Equity
   Distribution, Rate and Yield Analysis of Net Interest IncomeFor the Three Months Ended March 31,2006
    
    
    2005Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    AverageAverage
    
    
    Income/
    
    
    Rate/
    
    
    Average
    
    
    Income/
    
    
    Rate/Balance
    
    
    Expense
    
    
    Yield1
    
    
    Balance
    
    
    Expense
    
    
    Yield1AssetsInvestment Securities
    
    $
    3,374
    
    
    $
    41
    
    
    
    4.93
    %
    
    
    2,907
    
    
    $
    26
    
    
    
    3.63
    %Interest-earning deposits
    
    
    3,878
    
    
    
    39
    
    
    
    4.08
    %
    
    
    2,879
    
    
    
    18
    
    
    
    2.54
    %Federal funds sold
    
    
    9,322
    
    
    
    103
    
    
    
    4.48
    %
    
    
    6,191
    
    
    
    40
    
    
    
    2.62
    %Loans2
    
    
    138,269
    
    
    
    3,633
    
    
    
    10.65
    %
    
    
    87,254
    
    
    
    1,563
    
    
    
    7.27
    %Total Interest-Earning Assets
    
    
    154,843
    
    
    
    3,816
    
    
    
    9.99
    %
    
    
    99,231
    
    
    
    1,647
    
    
    
    6.74
    %Non Interest-earning Assets
    
    
    14,755
    
    
    
    
    
    
    
    
    
    
    
    10,095Total Assets
    
    $
    169,598
    
    
    
    
    
    
    
    
    
    
    $
    109,326LiabilitiesTransaction & NOW
    
    
    7,255
    
    
    
    21
    
    
    
    1.17
    %
    
    
    6,746
    
    
    
    17
    
    
    
    1.02
    %Savings & Money Market
    
    
    22,778
    
    
    
    173
    
    
    
    3.08
    %
    
    
    20,855
    
    
    
    101
    
    
    
    1.96
    %Time deposits
    
    
    65,614
    
    
    
    679
    
    
    
    4.20
    %
    
    
    45,957
    
    
    
    333
    
    
    
    2.94
    %Borrowings
    
    
    26,421
    
    
    
    412
    
    
    
    6.32
    %
    
    
    8,756
    
    
    
    55
    
    
    
    2.55
    %Total Interest-Bearing Liabilities
    
    
    122,068
    
    
    
    1,285
    
    
    
    4.27
    %
    
    
    82,314
    
    
    
    506
    
    
    
    2.49
    %Demand deposits
    
    
    23,361
    
    
    
    
    
    
    
    0.00
    %
    
    
    16,140
    
    
    
    
    
    
    
    0.00
    %Other liabilities
    
    
    1,129
    
    
    
    
    
    
    
    
    
    
    
    411Total Liabilities
    
    
    146,558
    
    
    
    
    
    
    
    
    
    
    
    98,865Shareholders Equity
    
    
    23,040
    
    
    
    
    
    
    
    
    
    
    
    10,461Total Liabilities and
Shareholders Equity
    
    $
    169,598
    
    
    
    
    
    
    
    
    
    
    $
    109,326Consolidated Net Interest
Income/Net Interest Margin
3
    
    
    
    
    
    $
    2,531
    
    
    
    6.63
    %
    
    
    
    
    
    $
    1,141
    
    
    
    4.67
    %
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1
    
    The ratios have been annualized.2
    
    Average loans are net of unearned loan fees and allowances for loan and lease losses. Unearned loan fees were $398,000
($137,000 relates to Celtic) and $179,000 at March 31, 2006 and 2005, respectively. Allowances for loan and lease losses
were $1,890,000 and $1,157,000 at March 31, 2006 and 2005, respectively. Interest income from loans includes loan fees
of $121,000 ($85,000 relates to Celtic) and $63,000 for the three months ended March 31, 2006 and 2005, respectively.3
    
    Net interest margin is calculated by dividing net interest income by average interest-earning assets.   Net Interest Income and Net Yield
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Rate/Volume Analysis of Net Interest Income
For the Three Months Ended March 31, 2006
Compared to the Three Months Ended March 31, 2005
(dollars in thousands)
 Increase (Decrease) Due To Change InVolume
    
    
    Rate
    
    
    ChangeInterest-Earning AssetsInvestment Securities
    
    $
    4
    
    
    $
    11
    
    
    $
    15Interest-earning deposits
    
    
    7
    
    
    
    14
    
    
    
    21Federal Funds Sold
    
    
    25
    
    
    
    38
    
    
    
    63Loans
    
    
    1,152
    
    
    
    918
    
    
    
    2,070Total Interest Income
    
    
    1,188
    
    
    
    981
    
    
    
    2,169Interest-Bearing LiabilitiesTransaction and Now Accounts
    
    
    1
    
    
    
    3
    
    
    
    4MMDA and Savings
    
    
    10
    
    
    
    62
    
    
    
    72Time Deposit
    
    
    172
    
    
    
    174
    
    
    
    346Borrowings
    
    
    206
    
    
    
    151
    
    
    
    357Total Interest Expense
    
    
    389
    
    
    
    390
    
    
    
    779Net Interest Income
    
    $
    799
    
    
    $
    591
    
    
    $
    1,390
 Non-Interest Income
  Non-Interest Expense
  For the Three Months Ended March 31,(dollars in thousands)2006
    
    
    2005Percent
    
    
    
    
    
    
    Percent
    
    
    2006/2005
    
    
    PercentageAmount
    
    
    of Total
    
    
    Amount
    
    
    of Total
    
    
    Change
    
    
    ChangeSalaries and benefits
    
    $
    1,168
    
    
    
    60.80
    %
    
    
    511
    
    
    
    48.07
    %
    
    $
    657
    
    
    
    128.57
    %Occupancy expense
    
    
    127
    
    
    
    6.61
    %
    
    
    77
    
    
    
    7.24
    %
    
    
    50
    
    
    
    64.94
    %Furniture & Equipment
    
    
    69
    
    
    
    3.59
    %
    
    
    67
    
    
    
    6.30
    %
    
    
    2
    
    
    
    2.99
    %Data Processing
    
    
    101
    
    
    
    5.26
    %
    
    
    48
    
    
    
    4.52
    %
    
    
    53
    
    
    
    110.42
    %Advertising
    
    
    44
    
    
    
    2.29
    %
    
    
    21
    
    
    
    1.98
    %
    
    
    23
    
    
    
    109.52
    %Professional fees
    
    
    180
    
    
    
    9.37
    %
    
    
    167
    
    
    
    15.71
    %
    
    
    13
    
    
    
    7.78
    %Office supplies
    
    
    21
    
    
    
    1.09
    %
    
    
    17
    
    
    
    1.60
    %
    
    
    4
    
    
    
    23.53
    %Other expenses
    
    
    211
    
    
    
    10.98
    %
    
    
    155
    
    
    
    14.58
    %
    
    
    56
    
    
    
    36.13
    %Total
    
    $
    1,921
    
    
    
    100.00
    %
    
    $
    1,063
    
    
    
    100.00
    %
    
    $
    858
    
    
    
    80.71
    %
  17




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##### Table of Contents



Income Taxes
 
 Investments
    Investment Portfolio
 As of March 31
    
    
    As of December 31,2006
    
    
    2005Gross
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair
    
    
    Amortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value
    
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    Value(dollars in thousands)Available-for-sale
securities:U.S. Government Agency
Securities
    
    $
    2,498
    
    
    
    
    
    
    $
    (48
    )
    
    $
    2,450
    
    
    $
    2,496
    
    
    
    
    
    
    $
    (41
    )
    
    $
    $2,455Mortgage-backed Securities
    
    
    919
    
    
    
    
    
    
    
    (34
    )
    
    
    885
    
    
    
    973
    
    
    
    
    
    
    
    (26
    )
    
    
    947Total securities
    
    $
    3,417
    
    
    
    
    
    
    $
    (82
    )
    
    $
    3,335
    
    
    $
    3,469
    
    
    
    
    
    
    $
    (67
    )
    
    $
    3,402
  18




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##### Table of Contents



Loans
 Loan Categories.
 March 31,
    
    
    December 31,2006
    
    
    2005Percent
    
    
    
    
    
    
    PercentAmount
    
    
    of Total
    
    
    Amount
    
    
    of Total(dollars in thousands)Loan Category:Real Estate Loans:Construction & Land Development Loans
    
    $
    32,978
    
    
    
    23
    %
    
    $
    32,033
    
    
    
    23
    %Real Estate 1st Trust Deed
    
    
    45,189
    
    
    
    31
    %
    
    
    41,344
    
    
    
    30
    %Other Real Estate Mortgage
    
    
    2,614
    
    
    
    2
    %
    
    
    2,141
    
    
    
    2
    %Total Real Estate
    
    
    80,781
    
    
    
    56
    %
    
    
    75,518
    
    
    
    55
    %Business Secured Loans
    
    
    56,525
    
    
    
    39
    %
    
    
    52,221
    
    
    
    38
    %Business Unsecured Loans
    
    
    1,777
    
    
    
    1
    %
    
    
    1,390
    
    
    
    1
    %Consumer and Other
    
    
    6,279
    
    
    
    4
    %
    
    
    7,410
    
    
    
    6
    %Total Loans
    
    
    145,362
    
    
    
    100
    %
    
    
    136,539
    
    
    
    100
    %Less deferred Loan Income
    
    
    (398
    )
    
    
    
    
    
    
    (429
    )Less Allowance for Loan and Lease Losses
    
    
    (1,890
    )
    
    
    
    
    
    
    (1,784
    )Net Loans
    
    $
    143,074
    
    
    
    
    
    
    $
    134,326
    Loan Origination and Underwriting.
 19




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##### Table of Contents



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




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##### Table of Contents



March 31,
    
    
    December 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2005(dollars in thousands)Outstanding loans:End of the period 1
    
    $
    145,362
    
    
    $
    136,110
    
    
    $
    94,733Average for the period
    
    
    138,269
    
    
    
    107,448
    
    
    
    87,254Allowance for loan and lease losses:Balance at beginning of period
    
    
    1,784
    
    
    
    998
    
    
    
    998Loans charged off
    
    
    
    
    
    
    
    
    
    
    Recoveries
    
    
    
    
    
    
    
    
    
    
    Provisions charged to operating expense
    
    
    106
    
    
    
    786
    
    
    
    159Balance at end of period
    
    $
    1,890
    
    
    $
    1,784
    
    
    $
    1,157Ratios:Net charge-offs (recoveries) to average loans
    
    
    
    
    
    
    
    
    
    
    Allowance to loans at period end
    
    
    1.30
    %
    
    
    1.31
    %
    
    
    1.22
    %
 
 1
    
    Loans are gross, which excludes the allowance for loan and lease losses.
Non-accrual loans are included in the table for computation purposes, but the foregone
interest of such loans is excluded.  21




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##### Table of Contents



March 31,
    
    
    December 31,2006
    
    
    2005(dollars in thousands)Percent of
    
    
    
    
    
    
    Percent ofAllowance for
    
    
    Loans in
    
    
    Allowance for
    
    
    Loans inLoan and Lease
    
    
    Category to
    
    
    Loan and Lease
    
    
    Category toLosses
    
    
    Total Loans
    
    
    Losses
    
    
    Total LoansLoan Loss AllocationReal Estate:Construction & Land Development Loans
    
    $
    249
    
    
    
    23
    %
    
    $
    216
    
    
    
    23
    %1st Trust Deed R.E.
    
    
    481
    
    
    
    31
    %
    
    
    446
    
    
    
    30
    %Other Real Estate
    
    
    10
    
    
    
    2
    %
    
    
    11
    
    
    
    2
    %Total Real Estate
    
    
    740
    
    
    
    56
    %
    
    
    672
    
    
    
    55
    %Business Secured Loans
    
    
    523
    
    
    
    39
    %
    
    
    566
    
    
    
    38
    %Business Unsecured Loans
    
    
    22
    
    
    
    1
    %
    
    
    17
    
    
    
    1
    %Consumer and Other:
    
    
    65
    
    
    
    4
    %
    
    
    62
    
    
    
    6
    %Unallocated
Allowance (including Additional Factors: i.e. -
Economic/Concentrations)
    
    
    540
    
    
    
    
    
    
    
    467
    
    
    
    Total
    
    $
    1,890
    
    
    
    100
    %
    
    $
    1,784
    
    
    
    100
    %
 Cash and Cash Equivalents .
  Deposits .
   March 31, 2006(unaudited)(dollars in thousands)Three months or less
    
    $
    3,795Over three to six months
    
    
    11,007Over six to twelve months
    
    
    19,932Over twelve months
    
    
    100Total
    
    $
    34,834
 22




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##### Table of Contents



Borrowings
   Capital Resources
   Risk-based capital ratios
 Well
    
    MinimumCapitalized
    
    CapitalAt 3/31/2006
    
    At 12/31/2005
    
    Requirement
    
    RequirementDiscovery Bancorp:Total Risk-Based capital ratio
    
    
    14.26
    %
    
    
    14.73
    %
    
    
    10.00
    %
    
    
    8.00
    %Tier 1 Risk-Based capital ratio
    
    
    13.08
    %
    
    
    13.57
    %
    
    
    6.00
    %
    
    
    4.00
    %Tier 1 Leverage Ratio
    
    
    12.82
    %
    
    
    13.45
    %
    
    
    5.00
    %
    
    
    4.00
    %Discovery Bank:Total Risk-Based capital ratio
    
    
    11.15
    %
    
    
    11.33
    %
    
    
    10.00
    %
    
    
    8.00
    %Tier 1 Risk-Based capital ratio
    
    
    9.98
    %
    
    
    10.17
    %
    
    
    6.00
    %
    
    
    4.00
    %Tier 1 Leverage Ratio
    
    
    9.57
    %
    
    
    9.92
    %
    
    
    5.00
    %
    
    
    4.00
    %
 Liquidity and Liquidity Management
  23




---



##### Table of Contents



Off-Balance Sheet Arrangements
  Quantitative And Qualitative Disclosures About Market Risk
  24




---



##### Table of Contents



Credit Risk.
 Interest Rate Risk.
      25




---



##### Table of Contents



Adjusted Net
    
    ChangeInterest Rate Scenario
    
    Interest Income
    
    From BaseUp 300 basis points
    
    $
    8,799
    
    
    
    34.23
    %Up 200 basis points
    
    $
    8,088
    
    
    
    23.38
    %Up 100 basis points
    
    $
    7,341
    
    
    
    11.99
    %Base
    
    $
    6,555
    
    
    
    Down 100 basis points
    
    $
    6,102
    
    
    
    (6.91
    )%Down 200 basis points
    
    $
    5,654
    
    
    
    (13.74
    )%Down 300 basis points
    
    $
    5,253
    
    
    
    (19.87
    )%
 Inflation
   
 ITEM 3. CONTROLS AND PROCEDURES
    26




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##### 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
    
    
    2831.2
    
    Certification of Martin McNabb
    
    
    2932.1
    
    Certification of Periodic Financial Report
    
    
    30
 
 SIGNATURES
  Discovery BancorpDated: May 15, 2006
    
    By:
    
    /s/ James P. Kelley, IIJames P. Kelley, II,President and Chief Executive OfficerBy:
    
    /s/ Martin McNabbMartin McNabb,Executive Vice President and Chief
Financial Officer
 27