SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
- ---- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001.
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
- ---- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 33-31013-A
ISLANDS BANCORP
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(Exact name of small business issuer as specified in its charter)
SOUTH CAROLINA 57-1082388
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(State of Incorporation) (I.R.S. Employer Identification No.)
2348 Boundary Street, Beaufort, SC 29903-6240
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(Address of Principal Executive Offices)
(843) 521-1968
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(Issuer's Telephone Number, Including Area Code)
N/A
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common equity as of the latest
practicable date.
Common stock, no par value per share, 652,705 shares outstanding as of
November 6, 2001.
Transitional small business disclosure format (check one):
Yes No X
---- ----
(Page 1 of 14)
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
-----------------------------
ISLANDS BANCORP
BEAUFORT, SOUTH CAROLINA
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS September 30, December 31,
- ------ 2001 2000
----------- ----------
Cash and due from banks $ 153,205 $ 40,232
Federal funds sold 3,308,000 - -
----------- ----------
Total cash and cash items $ 3,461,205 $ 40,232
Securities:
Available for sale, at fair values 180,000 - -
Loans, net 2,509,320 - -
Property and equipment, net 1,478,690 568,113
Deferred registration costs - - 296,813
Other assets 244,278 1,562
----------- ----------
Total Assets $ 7,873,493 $ 906,720
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits:
Non-interest bearing deposits $ 648,967 $ - -
Interest bearing deposits 1,664,366 - -
----------- ----------
Total deposits $ 2,313,333 $ - -
Accounts payable and accrued expenses 27,809 16,484
Other liabilities 25,466 - -
Advances from organizers - - 100,000
Notes payable - - 1,271,856
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Total liabilities $ 2,366,608 $1,388,340
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Commitments and contingencies (Note 3)
Stockholders' Equity (Note 1):
Common stock, no par value,
10,000,000 shares authorized,
652,705 and 550 shares issued and
outstanding at September 30, 2001
and December 31, 2000, respectively $ 6,213,061 $ 5,500
Retained Deficit (706,176) (487,120)
----------- ----------
Total Stockholders' Equity $ 5,506,885 $ (481,620)
----------- ----------
Total Liabilities and
Stockholders' Equity $ 7,873,493 $ 906,720
=========== ==========
Refer to notes to the consolidated financial statements.
ISLANDS BANCORP
BEAUFORT, SOUTH CAROLINA
CONSOLIDATED STATEMENTS OF OPERATION (UNAUDITED)
FOR THE THREE-MONTHS ENDED
September 30,
------------------------
2001 2000
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Interest income $ 318,053 $ - -
Interest expense 11,889 7,405
--------- ---------
Net interest income (loss) 306,164 (7,405)
Provision for loan losses 30,486 - -
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Net interest income (loss)
after provision for loan losses $ 275,678 $ (7,405)
--------- ---------
Service charges on deposit accounts $ 5,564 $ - -
Other income 222 - -
--------- ---------
Total other income $ 5,786 $ - -
--------- ---------
Salaries and benefits $ 173,944 $ 48,529
Depreciation expense 10,172 2,645
Data processing 12,475 - -
Advertising and public relations 22,343 1,820
Lease expense 12,825 3,750
Utilities and telephone 8,295 1,543
Legal & professional 10,422 2,827
Other operating expenses 51,773 16,464
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Total other expenses $ 302,249 $ 77,578
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Net (loss) before taxes $ (20,785) $ (84,983)
Income tax (benefit) (101,899) - -
--------- ---------
Net income (loss) $ 81,114 $ (84,983)
========= =========
Basic income per share $ .12 $ N/A
========= =========
Diluted income per share $ .12 $ N/A
========= =========
Refer to notes to the consolidated financial statements.
ISLANDS BANCORP
BEAUFORT, SOUTH CAROLINA
CONSOLIDATED STATEMENTS OF OPERATION (UNAUDITED)
FOR THE NINE-MONTHS ENDED
September 30,
------------------------
2001 2000
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Interest income $ 318,053 $ - -
Interest expense 107,291 23,184
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Net interest income (loss) 210,762 (23,184)
Provision for loan losses 30,486 - -
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Net interest income (loss)
after provision for loan losses $ 180,276 $ (23,184)
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Service charges on deposit accounts $ 5,564 $ - -
Other income 222 - -
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Total other income $ 5,786 $ - -
--------- ---------
Salaries and benefits $ 320,753 $ 145,315
Depreciation expense 13,634 7,935
Data processing 12,475 - -
Advertising and public relations 23,266 1,820
Lease expense 37,435 11,048
Utilities and telephone 11,347 4,448
Legal & professional 19,532 4,829
Other operating expenses 68,575 17,768
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Total other expenses $ 507,017 $ 193,163
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Net income (loss) before taxes $(320,955) $(216,347)
Income tax (benefit) (101,899) - -
--------- ---------
Net income (loss) $(219,056) $(216,347)
========= =========
Basic income (loss) per share $ (1.07) $ N/A
========= =========
Diluted income (loss) per share $ (1.07) $ N/A
========= =========
Refer to notes to the consolidated financial statements.
ISLANDS BANCORP
BEAUFORT, SOUTH CAROLINA
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the nine-month
period ended September 30,
-----------------------------
2001 2000
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Cash flows used in
operating activities $ (84,048) $ (439,050)
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Cash flows from investing activities:
Purchase of securities $ (180,000 $ - -
Increase in loans (2,539,806) - -
Purchase of fixed assets (924,211) (22,036)
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Net cash used in investing activities $ (3,644,017) $ (22,036)
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Cash flows from financing activities:
Sale of common stock, net $ 6,207,561 $ - -
Increase in deposits 2,313,333 - -
Advances from organizers (100,000) - -
Decrease in notes payable (1,271,856) 447,115
------------ ----------
Net cash provided
from financing activities $ 7,149,038 $ 447,115
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Net increase in cash
and cash equivalents $ 3,420,973 $ (13,971)
Cash and cash equivalents,
beginning of period 40,232 24,061
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Cash and cash equivalents,
end of period $ 3,461,205 $ 10,090
============ ==========
Refer to notes to the consolidated financial statements.
ISLANDS BANCORP
BEAUFORT, SOUTH CAROLINA
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 2001
Accumulated
Common Stock Other
-------------------- Comprehen-
Number of Retained sive
Shares Amount Deficit Income Total
------- ----------- ---------- ----- -----------
Balance,
December 31, 1999 550 $ 5,500 $ (174,255) $ - - $ (168,755)
------- ----------- ---------- ----- -----------
Comprehensive Income:
- ---------------------
Net (loss), nine-
month period ended
September 30, 2000 - - - - (216,347) - - (216,347)
------- ----------- ---------- ----- -----------
Total
comprehensive income - - - - (216,347) - - (216,347)
------- ----------- ---------- ----- -----------
Balance,
September 30, 2000 550 $ 5,500 $ (390,602) $ - - $ (385,102)
======= ============ ========== ===== ===========
- -------------------------------------------------------------
Balance,
December 31, 2000 550 $ 5,500 $ (487,120) $ - - $ (481,620)
------- ----------- ---------- ----- -----------
Comprehensive Income:
- ---------------------
Net (loss), nine-
month period ended
September 30, 2001 - - - - (219,056) - - (219,056)
------- ----------- ---------- ----- -----------
Total
comprehensive income - - - - (219,056) - - (219,056)
------- ----------- ---------- ----- -----------
Sale of common stock 652,155 6,207,561 - - - - 6,207,561
------- ----------- ---------- ----- -----------
Balance,
September 30, 2001 652,705 $ 6,213,061 $ (706,176) $ - - $ 5,506,885
======= ============ ========== ===== ===========
Refer to notes to the consolidated financial statements.
ISLANDS BANCORP
BEAUFORT, SOUTH CAROLINA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2001
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Item 310 of Regulation S-B promulgated by the Securities and Exchange
Commission. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting only of
those of a normal recurring nature) considered necessary for a fair
presentation have been included. Operating results for the three-month and
nine-month periods ended September 30, 2001 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2001.
These statements should be read in conjunction with the financial statements
and footnotes thereto included in the annual report for the year ended
December 31, 2000.
NOTE 2 - SUMMARY OF ORGANIZATION
Islands Bancorp, Beaufort, South Carolina (the "Company") was
incorporated on July 23, 1999 to serve as a bank holding company with respect
to a then proposed de novo bank, Islands Community Bank, N.A., beaufort,
South Carolina (the "Bank"). The Company applied to (i) the Office of the
Comptroller of the Currency ("OCC") for approval to establish the Bank,
(ii) the Federal Deposit Insurance Corporation ("FDIC") for approval to
insure the Bank's depositors, and (iii) the Federal Reserve Board ("FRB") and
the South Carolina Department of Banking ("SCDB") for approval to operate as
a bank holding company. The Company also filed a Registration Statement on
Form SB-2 with the Securities and Exchange Commission ("SEC") relating to its
offering of the Company's common stock for sale to the public. As of
July 6, 2001, requisite approvals from the OCC, FDIC, FRB and SCDB were
obtained. Moreover, 652,705 shares of the Company's common stock were sold
to the public for net proceeds of $6,213,061.
On July 9, 2001, the Bank opened for business and the Company ceased
to operate as a "development stage enterprise."
NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("FASB 141") addresses financial accounting and reporting for
business combinations and supersedes both APB Opinion No. 16, "Business
Combinations" and FASB Statement No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises." All business combinations in the
scope of FASB 141 are to be accounted for using one method - the purchase
method. The provisions of FASB 141 apply to all business combinations
initiated after June 30, 2001. The adoption of FASB 141 is not expected to
have a material impact on the financial position or results of operation of
the Company.
Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("FASB 142") addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes
APB Opinion No. 17, "Intangible Assets." FASB 142 addresses how intangible
assets that are acquired individually or with a group of other assets (but
not those acquired in a business combination) should be accounted for in
financial statements upon their acquisition. FASB 142 also addresses how
goodwill and other intangible assets should be accounted for after they have
been initially recognized in the financial statements. FASB 142 is effective
for fiscal years beginning after December 15, 2001. The adoption of FASB 142
is not expected to have a material impact on the financial position or results
of operation of the Company.
Statement of Financial Accounting Standards No. 143, "Accounting for
Asset Retirement Obligations" ("FASB 143") addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. FASB 143 applies to all
entities. FASB 143 also applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development and (or) the normal operation of a long-lived asset, except for
certain obligations of leases. FASB 143 amends FASB Statement No. 19,
"Financial Accounting and Reporting by Oil and Gas Producing Companies". FASB
143 is effective for fiscal years beginning after December 15, 2002. The
adoption of FASB 143 is not expected to have a material impact on the financial
position or results of operation of the Company.
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FASB 144") addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
FASB 144 supersedes both FASB Statement No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operation - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a Segment of a business (as previously
defined in that opinion). FASB 144 also amends ARB No. 51, "Consolidated
Financial Statements" to eliminate the exception to consolidation for a
subsidiary for which control is likely temporary. The provisions of FASB 144
are required to be applied with fiscal years beginning after December 15, 2001.
Adoption of FASB 144 is not expected to have a material impact on the financial
position or results of operation of the Company.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS.
- ----------------------
As discussed earlier under Note 2, our banking operations commenced July
9, 2001. The Company cautions against comparing results obtained in periods
prior to the commencement of banking operations with results obtained after
commencement of our banking operations; in fact, such comparisons may not be
meaningful and may possibly be misleading.
Total assets increased by $7.0 million, from $.9 million at December 31,
2000 to $7.9 million at September 30, 2001. More specifically, cash and cash
equivalents increased by $3.4 million, from $.1 million at December 31, 2000 to
$3.5 million at September 30, 2001; securities increased by $.2 million, from no
securities at December 31, 2000 to $.2 million at September 30, 2001; loans
increased by $2.5 million, from no loans at December 31, 2000 to $2.5 million at
September 30, 2001; property and equipment increased by $.9 million, from $.6
million at December 31, 2000 to $1.5 million at September 30, 2001; and all
other remaining assets were constant at $.2 million. To fund the growth in
assets, deposits increased by $2.3 million, from no deposits at December 31,
2000 to $2.3 million at September 30, 2001; capital accounts grew by $6.0
million, from a negative $.5 million at December 31, 2000 to $5.5 million at
September 30, 2001; and other liabilities, including loans and advances
decreased by $1.3 million, from $1.4 million at December 31, 2000 to $.1 million
at September 30, 2001.
Liquidity and Sources of Capital
- --------------------------------
From its inception until July 6, 2001, the Company's operations were
funded primarily through loans and other borrowings. On July 6, 2001, the
Company received approximately $6.2 million from the sale of its common stock to
the public. Soon thereafter, the Company injected $6.0 million into the Bank's
capital accounts and used the majority of the remaining funds to pay-off debt it
had incurred during the development stage. The Bank, in turn, also paid-off
debts associated with its organizational costs, the purchase of its facilities,
and the purchase of its furniture and equipment. As of September 30, 2001, the
consolidated organization had only $53,275 in obligations other than customers'
deposits.
Liquidity is the Company's ability to meet all deposit withdrawals
immediately, while also providing for the credit needs of customers. The
September 30, 2001 financial statements evidence a satisfactory liquidity
position as total cash and cash equivalents amounted to $3.5 million,
representing 44.0% of total assets. Investment securities, which amounted to
$.2 million, or 2.3% of total assets, provide a secondary source of liquidity
because they can be converted into cash in a timely manner. The Bank is a
member of the Federal Reserve System and maintains relationships with several
correspondent banks and, thus, could obtain funds from these banks on short
notice. The Company's management closely monitors and maintains appropriate
levels of interest earning assets and interest bearing liabilities, so that
maturities of assets can provide adequate funds to meet customer withdrawals and
loan demand. The Company knows of no trends, demands, commitments, events or
uncertainties that will result in or are reasonably likely to result in its
liquidity increasing or decreasing in any material way. The Bank maintains an
adequate level of capitalization as measured by the following capital ratios and
the respective minimum capital requirements by the Bank's primary regulator, the
OCC.
Bank's Minimum required
September 30, 2001 by the OCC
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Leverage ratio 139.2% 4.0%
Risk weighted ratio 114.6% 8.0%
Results of Operations
- ---------------------
For the three-month period ended September 30, 2001, net income amounted to
$81,114, or $.12 per both basic and diluted share. For the three-month period
ended September 30, 2000 a net (loss) in the amount of $(84,983) was incurred.
The primary reasons for the improvement in income for the three-month period
ended September 30, 2001 when compared with the three-month period ended
September 30, 2000 are as follows:
a. Net interest income increased by approximately $313,000, from $(7,000)
for three month period ended September 30, 2000 to $306,000 for the three-
month period ended September 30, 2001. The reasons for the above
improvement are two-fold: First, during the three-month period ended
September 30, 2001 the Company had interest earning assets; while during
2000, banking operations had not commenced. Second, during the three-
month period ended September 30, 2001 the Company recognized the interest
income earned from funds collected in the sale of stock but which were
held in escrow; during 2000, such recognition of interest was not
appropriate as the successful completion of the stock offering was not
assured.
b. The Company booked a $102,000 income tax benefit during the three-month
period ended September 30, 2001; such benefit was not booked during 2000
as the successful completion of the stock offering was not assured. With
the commencement of planned principal operations, however, the Company
expects to realize these income tax benefits in the future.
c. Operating expenses were approximately $225,000 higher during the three-
month period ended September 30, 2001 when compared to the three-month
period ended September 30, 2000. As discussed earlier, banking
operations commenced July 9, 2001, necessitating the need for a banking
facility and a full staff.
Net (loss) for the nine-month period ended September 30, 2001 amounted to
$(219,056), or $(1.07) per both basic and diluted share. Net (loss) for the
nine month period ended September 30, 2000 was $(216,347). The following
observations are made concerning the results obtained during the nine-month
period ended September 30, 2001:
a. Approximately $249,000 in interest income was earned from funds held in
escrow with the Escrow Agent, while approximately $95,000 in interest
expense was incurred as a result of carrying assets purchased prior to
commencement of operations. These items should be considered as one-
time occurrences, and their significance weighted appropriately when
conducting any financial analysis.
b. When excluding the interest income and expense items discussed directly
above, interest income and interest expense would have amounted to
approximately $69,000 and $12,000, respectively. As a result, the
yield on average earning assets and the average cost of funds would
have been 8.32% and 5.24%, respectively. Finally, the net yield on
average earning assets would have been 6.88%.
c. Net overhead expense, defined as operating expenses less operating
revenues, amounted to $501,000 for the nine-month period ended September
30, 2001. However, when excluding the net overhead expense incurred
prior to the commencement of banking operations, net overhead expense
would have amounted to $201,000, or 12.2% of average assets.
As of September 30, 2001, the allowance for loan losses amounted to $30,486. As
a percent of gross loans, the allowance for loan losses amounted to 1.20% at
September 30, 2001. Management considers the allowance for loan losses to be
adequate and sufficient to absorb possible future losses; however, there can be
no assurance that charge-offs in future periods will not exceed the allowance
for loan losses or that additional provisions to the allowance will not be
required.
The Company is not aware of any current recommendation by the regulatory
authorities which, if they were to be implemented, would have a material effect
on the Company's liquidity, capital resources, or results of operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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The Company is not a party to any pending litigation.
Item 2. Changes in Securities and Use of Proceeds.
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This item is not applicable.
Item 3. Defaults Upon Senior Securities.
--------------------------------
This item is not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
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No matters were submitted to a vote of the shareholders of the Company
during the three-months ended September 30, 2001.
Item 5. Other Information.
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This item is not applicable.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits. None.
(b) Reports on Form 8-K. Registrant filed no reports on Form 8-K
during the three-month period ended September 30, 2001.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ISLANDS BANCORP
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(Registrant)
Date: November 7, 2001 BY: /s/ William B. Gossett
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William B. Gossett
President and Chief Executive Officer
(Principal Executive, Financial and
Accounting Officer)