Discovery Bancorp Reports Sale and Lease Back of Building, Second Quarter Results and Pending Capital Raise

SAN MARCOS, Calif., Jul 25, 2008 (BUSINESS WIRE) -- Discovery Bancorp (OTCBB:DVBC), holding company for Discovery Bank and Celtic Capital, reported today that it has entered into a transaction for the sale and leaseback of the commercial building housing the Bank's headquarters and administrative operations in San Marcos for a sum of $8.4 million. Scheduled to close in August 2008, the sale will result in a pre-tax gain of approximately $2 million which, based on Generally Accepted Accounting Principles, will be accreted into income over the term of the ten year lease entered into by the parties.
President and Chief Executive Officer, Frank J. Mercardante said, "The sale of the building frees up a nonearning asset and creates greater liquidity, enabling us to strengthen our balance sheet and reduce costs. The sale will be accretive to annual earnings by approximately $0.06 per share in future periods."

The Company also reported consolidated results for the second quarter 2008 reflecting a net loss of $1.2 million, or $0.64 per diluted share after booking a pre-tax, second quarter loan loss provision of $2.0 million at the bank subsidiary. This compares with a net profit of $248 thousand, or $0.13 per diluted share for the second quarter of 2007. Year-to-date the Company posted a net loss of $1.1 million or $0.58 per diluted share compared with a net profit of $585 thousand, or $0.30 per diluted share for the first half of 2007.

Consolidated assets at the end of the second quarter totaled $193.9 million compared to $199.5 million at June 30, 2007 and $211.6 million at December 31, 2007. Consolidated net loans at June 30, 2008 equaled $159.1 million compared with $157.9 million at June 30, 2007. Net loans at Discovery Bank equaled $137.8 million compared with $138.0 million at June 30, 2007.

Total deposits at June 30, 2008 were $141.5 million compared to $147.4 million in the prior year period. Noninterest bearing deposits totaled $35.5 million, or 25% of total deposits at the end of the quarter compared to $27.3 million, or 18.5% at the end of the comparable period in 2007. Total interest-bearing deposits declined 12% to $106.0 million from $120.1 million from June 30, 2007 reflecting the intentional run-off of higher cost certificates of deposit.

Mercardante continued, "We remain committed to maintaining a strong balance sheet while at the same time protecting and creating shareholder value. We have several initiatives under way to enhance our capital position and reduce our risk profile. We expect to make further announcements during the quarter. These initiatives, together with the sale of the Bank's headquarters building, will provide us with a stronger balance sheet, greater liquidity and enhanced shareholder value."

Consolidated Operating Results for the Quarter

Consolidated net interest income, before provision for loan losses, declined by 7.6% in the current quarter to $2.5 million from $2.7 million in the second quarter of 2007, reflecting continued compression of the net interest margin. The decline was largely attributed to the Bank subsidiary having a higher volume of rate sensitive assets than rate sensitive liabilities, which negatively impacts interest income in a declining rate environment and the higher volume of nonaccrual loans during the current quarter. The consolidated net interest margin for the current period was 5.55% compared to 6.11% for the second quarter of 2007 and 5.45% in the first quarter of 2008.

Noninterest income increased 56% in the current period to $432 thousand from $277 thousand in the 2007 second quarter. The increase was due to an increase in gain on loan sales and higher fees and service charges on deposit accounts. Year-to-date, noninterest income increased 27% from $687 thousand to $874 thousand. The 2007 year-to-date total includes a $230 thousand one time gain on sale of other real estate owned. Excluding this nonrecurring gain, noninterest income increased by 91% in the first half of 2008 to $874 thousand compared to $457 thousand the first half of 2007.

Noninterest expense increased 9% in the 2008 quarter to $2.7 million from $2.5 million in the comparable 2007 period with salaries, legal and loan collection expenses, other operating expenses, and occupancy representing the largest increases. Year-to-date, noninterest expense totaled $5.4 million, representing an 8% increase over the 2007 year-to-date total of $5.0 million. Salaries, legal and loan collection expenses, other operating expenses, and occupancy represented the largest increases.

Asset quality:

Total consolidated nonperforming assets, which consist of loans on non-accrual or past due 90 days or more, at June 30, 2008 equaled $11.2 million, or 5.8% of total assets, compared with $12.2 million, or 6.2% of total assets on a linked quarter basis and $12.5 million, or 5.9% at December 31, 2007. Total nonperforming assets at Discovery Bank totaled $10.1 million June 30, 2008, or 6.0% of total assets compared with $12.2 million, or 7.2% on a linked quarter basis and $12.5 million, or 6.8% at December 31, 2007. Loans are placed on non-accrual status if there is reasonable doubt as to the collectibility of principal and interest in accordance with the original credit terms. The Company had no OREO at any of the reporting periods.

Net charge offs at Discovery Bank were $587 thousand in the current quarter and $789 thousand year-to-date, compared with net recoveries of $80 thousand in the 2007 second quarter and $836 in net losses in the first half of 2007. There were no charge offs at Celtic Capital during either periods. The allowance for loan and lease losses at Discovery Bank as of June 30, 2008 represented 3.2% of loans outstanding compared to 2.1% on a linked quarter basis and 2.1% at December 31, 2007. The coverage ratio of reserves to nonperforming loans equaled 44% at June 30, 2008 compared with 24% on a linked quarter basis and 25% at December 31, 2007. "While the coverage ratio appears low, the total reserves at Discovery Bank is based on a loan-by-loan impairment analysis using current collateral valuations," added Mercardante. He continued, "Accordingly, we believe the reserves are adequate as of the end of the period."

The consolidated allowance for loan and lease losses as of June 30, 2008, including Celtic Capital, represented 3.0% of loans outstanding compared to 2.02% on a linked quarter basis and 2.02% at December 31, 2007.

Capital ratios at both the Company and Discovery Bank remain above the levels required for a "well capitalized" designation by regulatory agencies. The Tier 1 Leverage capital ratios for the Company and the Bank at June 30, 2008 were 11.65% and 9.47%, respectively. Mercardante added, "While the Company and Bank capital ratios continue to be adequate to maintain the "well capitalized" designation, we recognize that, in this environment, more capital is better. Accordingly, we have initiated the necessary steps to enhance our capital position and expect to have further announcements during the current quarter."

Discovery Bancorp is a bank holding company serving the financial needs of small to medium-sized businesses, professionals and individuals through two principal subsidiaries: Discovery Bank and Celtic Capital Corp. The bank, founded in 2001, has offices in San Marcos, Poway, and Los Angeles, California; Celtic Capital, founded in 1982, maintains offices in Santa Monica California, Phoenix Arizona and Bellevue Washington.

Shares of the Company's common stock are traded on the OTC Bulletin Board under the symbol DVBC. For more information, visit our web site at www.discovery-bank.com.

Forward-Looking Statements: The statements contained in this release that are not historical facts are forward-looking statements based on management's current expectations and beliefs concerning future developments and their potential effects on the Company. There can be no assurance that future developments affecting the Company will be those anticipated by management. Actual results may differ from those projected in the forward-looking statements. These forward-looking statements involve risks and uncertainties.

DISCOVERY BANCORP AND SUBSIDIARIES
(dollars in thousands, except per share data)
----------------------------------------------------------------------

Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
Consolidated
Statements of Income 2008 2007 2008 2007
---------------------- ----------- ----------- ----------- -----------
Unaudited Unaudited
Interest income $ 3,529 $ 4,491 $ 7,362 $ 8,927
Interest expense 1,047 1,804 2,404 3,544
----------- ----------- ----------- -----------
Net interest income 2,482 2,687 4,958 5,383
Provision for loan
losses 2,043 0 2,049 0
----------- ----------- ----------- -----------
Net interest income
after provision 439 2,687 2,909 5,383

Non-interest income 432 277 874 687
Non-interest expense 2,749 2,530 5,432 5,039
----------- ----------- ----------- -----------
Income (loss) before
income taxes (1,878) 434 (1,649) 1,031
Income tax provision
(benefit) (651) 186 (538) 446
----------- ----------- ----------- -----------
Net Income (Loss) $ (1,227) $ 248 $ (1,111) $ 585
=========== =========== =========== ===========

Basic EPS $ (0.64) $ 0.13 (0.59) $ 0.30
Diluted EPS $ (0.64) $ 0.13 (0.58) $ 0.30
Average shares
outstanding 1,911,604 1,931,514 1,895,139 1,936,499
Average diluted shares
outstanding 1,919,418 1,957,775 1,918,775 1,965,763

Return on average
equity (annualized) -19.32% 3.84% -8.75% 4.60%
Return on average
assets (annualized) -2.54% 0.51% -1.12% 0.61%
Net Interest Margin 5.55% 6.11% 5.49% 6.16%
Efficiency ratio 94.34% 85.36% 93.14% 83.01%
Net charge-offs to
average loans
(annualized) 1.47% -0.20% 0.97% 1.07%
Non-performing loans
to total loans 7.03% 0.27% 7.03% 0.27%
Allowance for loan
losses to period-end
loans 2.99% 1.39% 2.99% 1.39%
Allowance for loan
losses to non-
performing loans 42.53% 510.26% 42.53% 510.26%

Bank Only Asset
Quality:
Net charge-offs to
average loans
(annualized) 1.70% -0.23% 1.12% 1.21%
Non-performing loans
to total loans 7.31% 0.31% 7.31% 0.31%
Allowance for loan
losses to period-end
loans 3.20% 1.38% 3.20% 1.38%
Allowance for loan
losses to non-
performing loans 44% 444% 44% 444%


June 30, 2008 June 30, 2007 December 31, 2007
Consolidated Balance
Sheets Unaudited Unaudited Audited
------------------------ ------------- ------------- -----------------
Assets
Cash and due from
banks $ 7,194 $ 11,044 $ 12,245
Federal funds sold 13,745 11,365 6,245
Investment securities &
interest bearing
deposits at banks 7,537 10,829 11,425

Loans, net of unearned
income 159,102 157,923 173,414
Less allowance for
loan losses 4,756 2,189 3,496
------------- ------------- -----------------
Net loans 154,346 155,734 169,918
Other assets 11,101 10,521 11,719
------------- ------------- -----------------
Total $ 193,923 $ 199,493 $ 211,552
============= ============= =================

Liabilities and
Shareholders' Equity
Non-interest bearing $ 35,456 $ 27,336 $ 32,027
Interest bearing 106,003 120,106 115,828
------------- ------------- -----------------
Total Deposits 141,459 147,442 147,855
Accrued interest and
other liabilities 953 1,194 1,374
Junior subordinated
debt
Other borrowings 27,361 24,831 37,505
Total Liabilities 169,773 173,467 186,734
------------- ------------- -----------------
Shareholders' Equity
Common stock 23467 24006 23013
Retained earnings 686 2048 1797
Accumulated other
comprehensive income
(loss) (3) (28) 8
------------- ------------- -----------------
Total Shareholders'
Equity 24,150 26,026 24,818
------------- ------------- -----------------
Total Liabilities and
Shareholders' Equity $ 193,923 $ 199,493 $ 211,552
============= ============= =================

Book value per share
at end of period $ 12.63 $ 13.39 $ 13.28
Tangible Book value per
share, net of Goodwill,
at end of period $ 11.73 $ 12.50 $ 12.35
Shares outstanding at
end of period 1,911,604 1,943,792 1,868,792
Tier One Leverage
Capital Ratio -
Company 11.65% 12.58% 11.35%
Tier One Leverage
Capital Ratio - Bank 9.47% 9.14% 8.92%

SOURCE: Discovery Bancorp
CONTACT: Discovery Bancorp
Frank J. Mercardante
President & CEO
760-759-7600

Copyright Business Wire 2008
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KEYWORD: United States
North America
California
INDUSTRY KEYWORD: Professional Services
Banking
SUBJECT CODE: Earnings