SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
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 March 31, 2005.
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission File No. 33-31013-A
ISLANDS BANCORP
----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
SOUTH CAROLINA 57-1082388
------------------------ ------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)
2348 Boundary Street, Beaufort, SC 29902
---------------------------------------------------------------
(Address of Principal Executive Offices)
(843) 521-1968
------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
N/A
------------------------------------------------
(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 May
12, 2005.
Transitional small business disclosure format (check one):
Yes No X
---- ----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
------- --------------------
ISLANDS BANCORP
BEAUFORT, SOUTH CAROLINA
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS March 31, December 31,
- ------ 2005 2004
----------- ----------
Cash and due from banks $ 541,284 $ 758,109
Federal funds sold 4,452,000 782,000
----------- -----------
Total cash and cash equivalents $ 4,993,284 $ 1,540,109
Securities:
Available-for-sale, at fair value 2,068,899 2,158,126
Loans, net 45,022,099 40,934,809
Property and equipment, net 2,231,556 2,254,139
Other assets 1,117,172 1,096,520
----------- -----------
Total Assets $55,433,010 $47,983,703
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Deposits
Non-interest bearing deposits $ 4,952,292 $ 4,378,127
Interest bearing deposits 42,566,672 35,749,189
----------- -----------
Total deposits $47,518,964 $40,127,316
Borrowings 2,200,000 2,200,000
Other liabilities 316,832 390,354
----------- -----------
Total liabilities $50,035,796 $42,717,670
----------- -----------
Commitments and contingencies
Shareholders' Equity:
Common stock, zero par value,
10,000,000 shares authorized,
652,705 shares issued and
outstanding $ 6,213,061 $ 6,213,061
Retained deficit (801,962) (927,289)
Accumulated other comprehensive loss (13,885) (19,739)
----------- -----------
Total Shareholders' Equity $ 5,397,214 $ 5,266,033
----------- -----------
Total Liabilities and
Shareholders' Equity $55,433,010 $47,983,703
=========== ===========
Refer to notes to the consolidated financial statements.
ISLANDS BANCORP
BEAUFORT, SOUTH CAROLINA
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended
March 31,
------------------------
2005 2004
---- ----
Interest income $ 837,246 $ 467,325
Interest expense 280,622 153,227
--------- ---------
Net interest income $ 556,624 $ 314,098
Provision for loan losses 56,830 43,182
--------- ---------
Net interest income after
provision for loan losses $ 499,794 $ 270,916
--------- ---------
Other income:
Gain on sale of loans $ 86,865 $ 53,816
Service fees on deposit accounts 50,497 37,556
Miscellaneous, other 2,703 4,366
--------- ---------
Total other income $ 140,065 $ 95,738
--------- ---------
Other expenses:
Salaries and benefits $ 260,053 $ 203,753
Depreciation expense 35,782 35,063
Data processing 36,544 28,661
Rent expense 2,060 2,000
ATM machine expense 8,819 9,345
Advertising and public relations 12,509 4,493
Utilities and telephone 6,331 6,708
Legal & professional 30,245 14,431
Other operating expenses 58,030 52,486
--------- ---------
Total operating expenses $ 450,373 $ 356,940
--------- ---------
Income before income tax $ 189,486 $ 9,714
Income tax 64,159 8,190
--------- ---------
Net income $ 125,327 $ 1,524
========= =========
Basic income per share $ .19 $ .00
========= =========
Diluted income per share $ .19 $ .00
========= =========
Refer to notes to the consolidated financial statements.
ISLANDS BANCORP
BEAUFORT, SOUTH CAROLINA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three-month
period ended March 31,
------------------------------
2005 2004
---- ----
Net cash used by operating activities $ 125,271 $ (170,158)
------------ ------------
Cash flows from investing activities:
Securities paydowns, calls, maturities $ 93,575 $ 201,351
Increase in loans (4,144,120) (2,271,096)
Purchase of fixed assets (13,199) - -
------------ ------------
Net cash used in investing activities $ (4,063,744) $ (2,069,745)
------------ ------------
Cash flows from financing activities:
Increase in deposits $ 7,391,648 $ 3,863,723
------------ ------------
Net cash provided
from financing activities $ 7,391,648 $ 3,863,723
------------ ------------
Net increase in cash
and cash equivalents $ 3,453,175 $ 1,623,820
Cash and cash equivalents,
beginning of period 1,540,109 326,730
------------ ------------
Cash and cash equivalents,
end of period $ 4,993,284 $ 1,950,550
============ ============
Refer to notes to the consolidated financial statements.
ISLANDS BANCORP
BEAUFORT, SOUTH CAROLINA
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 2004 AND 2005
(UNAUDITED)
Common Stock Accumulated
------------------ Other
No. of Retained Comprehensive
Shares Amount Earnings Income Total
------ ------ -------- ------ -----
Balance,
December 31,
2003 652,705 $ 6,213,061 $(1,067,330) $ (20,827) $ 5,124,904
--------- ---------- ---------- -------- ----------
Comprehensive Income:
- ---------------------
Net income,
three-month
period ended
March 31,
2004 - - - - 1,524 - - 1,524
Net unrealized
gains on
securities,
three-month
period ended
March 31, 2004 - - - - - - 2,153 2,153
--------- ---------- ---------- -------- ----------
Total comprehensive
income - - - - 1,524 2,153 3,677
--------- ---------- ---------- -------- ----------
Balance,
March 31,
2004 652,705 $ 6,213,061 $(1,065,806) $ (18,674) $ 5,128,581
========= ========== ========== ======== ==========
- --------------------------
Balance,
December 31,
2004 652,705 $ 6,213,061 $ (927,289) $ (19,739) $ 5,266,033
--------- ---------- ---------- -------- ----------
Comprehensive Income:
- ---------------------
Net income,
three-month
period ended
March 31,
2005 - - - - 125,327 - - 125,327
Net unrealized
gains on
securities,
three-month
period ended
March 31, 2005 - - - - - - 5,854 5,854
--------- ---------- ---------- -------- ----------
Total comprehensive
income - - - - 125,327 5,854 131,181
--------- ---------- ---------- -------- ----------
Balance,
March 31,
2004 652,705 $ 6,213,061 $ (801,962) $ (13,885) $ 5,397,214
========= ========== ========== ======== ==========
Refer to notes to the consolidated financial statements.
ISLANDS BANCORP
BEAUFORT, SOUTH CAROLINA
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2005
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited 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 period ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2005. 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, 2004.
NOTE 2 - SUMMARY OF ORGANIZATION
Islands Bancorp (the "Company") is a one-bank holding company with respect
to Islands Community Bank, N.A., Beaufort, South Carolina (the "Bank"). The
Company was incorporated July 23, 1999, and its principal operations commenced
when the Bank opened for business on July 9, 2001. The Bank is engaged in the
business of gathering and obtaining customers' deposits and providing
commercial, consumer and real estate loans to the general public.
NOTE 3 - INVESTMENT SECURITIES
Information pertaining to securities with gross unrealized losses at March
31, 2005, aggregated by investment category and further segregated by the length
of time (less than or over twelve months) that the securities have been in a
continuous loss position follows:
Less than Over
Twelve Months Twelve Months Total
------------------- ----------------- ------------------
Fair Unrealized Fair Unrealized Fair Unrealized
Description Value Loss Value Loss Value Loss
- ----------- ----- ---- ----- ---- ----- ----
U.S. Agency $500,468 $(1,220) $ - - $ - - $ 500,468 $ (1,220)
U.S. Agency Pool - - - - 1,221,132 (19,818) 1,221,132 (19,818)
------- ------ --------- ------- --------- --------
Total $500,468 $(1,220) $1,221,132 $(19,818) $1,721,600 $ (21,038)
======= ====== ========= ======= ========= ========
At March 31, 2005, unrealized losses in the securities portfolio amounted
to $21,038 representing 1.02% of the total portfolio. All of the unrealized
losses relate to U.S. Agency securities and U.S. government corporations. These
unrealized losses were caused by fluctuations in market interest rates, rather
than concerns over the credit quality of the issuers. The Company believes that
the U.S. Agencies and government corporations will continue to honor their
interest payments on time as well as the full debt at maturity. Because the
unrealized losses are due to fluctuations in the interest rate, and no credit-
worthiness factors exist, the Company believes that the investments are not
considered other-than-temporarily impaired.
NOTE 4 - RECENT ACCOUNTING PRONOUNCEMENTS
EXCHANGES OF NONMONETARY ASSETS: In December 2004, the FASB issued SFAS
153, "Exchanges of Nonmonetary Assets", an amendment to APB Opinion No. 29,
"Accounting for Nonmonetary Transactions." This statement amends the principle
that exchanges of nonmonetary assets should be measured based on the fair value
of the assets exchanged and more broadly provides for exceptions regarding
exchanges of nonmonetary assets that do not have commercial substance. This
Statement is effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The adoption of this standard is not
expected to have a material impact on the Company's financial condition, results
of operations, or liquidity.
SHARE-BASED PAYMENT: In December 2004, the FASB issued Statement No.
123(R), "Share-Based Payment." Statement No. 123(R) requires companies to
recognize in the income statement the grant-date fair value of stock options
and other equity-based compensation issued to employees. The revised Statement
generally requires that companies account for these share-based transaction
using the fair-value-based method, and eliminates a company's ability to account
for these transactions using the intrinsic value method of accounting in APB
Opinion No. 25. For small business issuers, Statement No. 123(R) is effective
as of the beginning of the first interim or annual reporting period that begins
after December 15, 2005. The Company has not yet determined the exact impact
the new standard will have on its consolidated financial statements. The above
disclosures, as required by FASB Statement No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No. 123,"
provide detail as to its results of operations as if it had applied the fair
value based method and recognition provisions of Statement No. 148 to stock-
based employee compensation to the current reporting periods.
MEANING OF OTHER THAN TEMPORARY IMPAIRMENT: In March 2004, the Financial
Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) released
Issue 03-01, "Meaning of Other Than Temporary Impairment," which addressed
other-than-temporary impairment for certain debt and equity investments. The
recognition and measurement requirements of Issue 03-01, and other disclosure
requirements not already implemented, were effective for periods beginning after
June 15, 2004. In September 2004, the FASB staff issued FASB Staff Position
(FSP) EITF 03-1-1, which delayed the effective date for certain measurement and
recognition guidance contained in Issue 03-01. The FSP requires the application
of pre-existing other-than-temporary guidance during the period of delay until
a final consensus is reached. Management does not anticipate the issuance of
the final consensus will have a material impact on the Company's financial
condition, results of operations, or liquidity.
LOAN COMMITMENTS: On March 9, 2004, the SEC issued Staff Accounting
Bulletin 105 (SAB 105), "Application of Accounting Principles to Loan
Commitment" stating that the fair value of loan commitments is to be accounted
for as a derivative instrument under SFAS 133, but the valuation of such
commitment should not consider expected future cash flows related to servicing
of the future loan.
The Company adopted the provisions of SAB 105 as of January 1, 2004.
Adoption of SAB 105 did not result in a material impact on the Company's
financial condition, results of operations, or liquidity.
ACCOUNTING FOR CERTAIN LOANS OR DEBT SECURITIES ACQUIRED IN A TRANSFER:
In December 2003, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 03-3, "Accounting for Certain Loans or Debt
Securities Acquired in a Transfer." SOP 03-3 requires acquired loans, including
debt securities, to be recorded at the amount of the purchaser's initial
investment and prohibits carrying over valuation allowances from the seller for
those individually-evaluated loans that have evidence of deterioration in credit
quality since origination, and it is probable all contractual cash flows on the
loan will be unable to be collected. SOP 03-3 also requires the excess of all
undiscounted cash flows expected to be collected at acquisition over the
purchaser's initial investment to be recognized as interest income on a level-
yield basis over the life of the loan. Subsequent increases in cash flows
expected to be collected are recognized as impairment. Loans carried at fair
value, mortgage loans held for sale, and loans to borrowers in good standing
under revolving credit agreements are excluded from the scope of SOP 03-3. The
guidance is effective for loans acquired in fiscal years beginning after
December 15, 2004 and is not expected to have a material impact on the Company's
financial condition, results of operations, or liquidity.
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
LIABILITIES AND EQUITY: In May 2003, the FASB issued SFAS 150, "Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity." This statement establishes standards for classifying and measuring
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. The provisions of SFAS 150
became effective June 1, 2003, for all financial instruments created or modified
after May 31, 2003, and otherwise became effective as of July 1, 2003. The
adoption of this standard did not have a material impact on the Company's
financial condition, results of operations, or liquidity.
In December 2003, the FASB deferred for an indefinite period the
application of the guidance in SFAS 150 to noncontrolling interest that are
classified as equity in the financial statement of a subsidiary but would be
classified as a liability in the parent's financial statements under SFAS 150.
The deferral is limited to mandatorily redeemable noncontrolling interest
associated with finite-lived subsidiaries. Management does not believe any
such applicable entities exist as of March 31, 2005, but will continue to
evaluate the applicability of this deferral to entities which may be
consolidated as a result of FASB Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities."
CONSOLIDATION OF VARIABLE INTEREST ENTITIES: In January 2003, the FASB
issued FIN 46, which provides guidance on how to identify a variable interest
entity (VIE) and determine when the assets, liabilities, noncontrolling
interests, and the results of operations of a VIE are to be included in an
entity's consolidated financial statements. A VIE exists when either the total
equity investment is at risk is not sufficient to permit the entity to finance
its activities itself, or the equity investors lack one of three characteristics
associated with owning a controlling financial interest. Those characteristics
include the direct and indirect ability to make decisions about the entity's
activities through voting rights or similar rights, the obligation to absorb the
expected losses of an entity if they occur, or the right to receive the expected
residual returns of the entity if they occur.
In December 2003, the FASB reissued FIN 46 with certain modifications and
clarifications. Application of this guidance was effective for interests in
certain VIEs commonly referred to as special-purpose entities (SPEs) as of
December 31, 2003. Application for all other types of entities was required as
of March 31, 2004, unless previously applied. Adoption of FIN 46 did not result
in a material impact on the Company's financial condition, results of
operations, or liquidity.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------ -----------------------------------------------------------------------
OF OPERATIONS.
--------------
Critical Accounting Policies
- ----------------------------
Critical accounting policies are defined as those that were reflective
of significant judgments and uncertainties and could potentially result
in materially different results under different assumptions and conditions.
We believe that our most critical accounting policy upon which our financial
condition depends, and which involve the most complex or subjective decisions
or assessments is as follows:
Allowance for Loan Losses: Arriving at an appropriate level of allowance
for loan losses involves a high degree of judgment. The Company's allowance
for loan losses provides for probable losses based upon evaluations of known
and inherent risks in the loan portfolio. Management uses historical
information to assess the adequacy of the allowance for loan losses as well
as the prevailing business environment; as it is affected by changing economic
conditions and various external factors, which may impact the portfolio in ways
currently unforeseen. The allowance is increased by provisions for loan losses
and by recoveries of loans previously charge-off, and is reduced by loans
charged-off. For an additional discussion of the Company's methodology of
assessing the adequacy of the allowance for loan losses, please refer to the
December 31, 2004 Management's Discussion and Analysis of Financial Condition
and Results of Operations found in the annual report as well as in the annual
filing with the SEC.
Overview
- --------
The Company's results of operations are largely dependent on interest
income, which is the difference between the interest earned on loans and
securities and interest paid on deposits and borrowings. The results of
operations are also affected by the level of income/fees from loans, deposits,
borrowings, as well as operating expenses, the provision for loan losses, the
impact of federal and state income taxes, and the relative levels of interest
rates and economic activity.
For calendar year 2005, the Company anticipates a higher net interest
income as the Bank continues to expand its asset base. Many economists are
predicting that the Federal Reserve Board will continue to increase short-term
rates to combat inflationary fears and to bring down the growth in GDP rate to
a more sustainable level. Because the Bank is asset sensitive, an increase in
interest rates should benefit the Bank at least in the short run. This is due
to the fact that assets would reprice faster than liabilities.
There are a number of initiatives that are expected to contribute to 2005
and beyond. These initiatives include:
* expectation of higher productivity generated by a loan production
office in Charleston, South Carolina, and
* investment in additional new business development capabilities and
process improvements within the lending area.
Total assets increased by $7.4 million, from $48.0 million at December 31,
2004 to $55.4 million at March 31, 2005. More specifically, cash and cash
equivalents increased by $3.5 million, from $1.5 million at December 31, 2004 to
$5.0 million at March 31, 2005; securities decreased by $.1 million, from $2.2
million at December 31, 2004 to $2.1 million at March 31, 2005; loans increased
by $4.0 million, from $41.0 million at December 31, 2004 to $45.0 million at
March 31, 2005; property and equipment and all other assets remained unchanged
at $3.3 million. To fund the growth in assets, deposits increased by $7.4
million, from $40.1 million at December 31, 2004 to $47.5 million at March 31,
2005; other liabilities decreased by $.1 million, from $.4 million at December
31, 2004 to $.3 million at March 31, 2005; and the capital accounts increased
by $.1 million, from $5.3 million at December 31, 2004 to $5.4 million at
March 31, 2005.
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.
Liquidity is the Company's ability to meet all deposit withdrawals
immediately, while also providing for the credit needs of customers. The March
31, 2004 financial statements evidence a satisfactory liquidity position as
total cash and cash equivalents amounted to $5.0 million, representing 9.0%
of total assets. Investment securities, which amounted to $2.1 million, or
3.7% of total assets, provide a secondary source of liquidity because securities
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
March 31, 2005 by the OCC
-------------- ----------------
Leverage ratio 10.3% 4.0%
Risk weighted ratio 12.9% 8.0%
Results of Operations
- ---------------------
For the three-month period ended March 31, 2005, net income amounted to
$125,327, or $.19 per both basic and diluted share. For the three-month
period ended March 31, 2004, net income amounted to $1,524 or $.00 per both
basic and diluted share. The primary reasons for the improvement in income for
the three-month period ended March 31, 2005 when compared with the three-month
period ended March 31, 2004 are as follows:
a. Interest income, which represents interest received on interest earning
assets, increased from $467,325 for the three-month period ended March 31,
2004 to $837,246 for the three-month period ended March 31, 2005, an
increase of $369,921. The cost of funds, which represents interest paid
on deposits and borrowings, increased as well, from $153,227 for the three-
month period ended March 31, 2004 to $280,622 for the three-month period
ended March 31, 2005, an increase of $127,395. Because the growth in
interest income during the three-month period ended March 31, 2005 out-
paced the increase in cost of funds, net interest income grew from $314,098
for the three-month period ended March 31, 2004 to $556,624 for the three-
month period ended March 31, 2005.
Net interest yield, defined as net interest income divided by average
interest earnings assets, increased from 4.17% during the three-month
period ended March 31, 2004 to 4.57% during the three-month period ended
March 31, 2005. The increase is due to the fact the Company was able to
increase the yield on its earning assets while maintaining its cost of
funds at a level close to last year's. Below is pertinent information
concerning the yield on earning assets and the cost of funds for the three-
month period ended March 31, 2005.
(Dollars in '000s)
Avg. Assets/ Interest Yield/
Description Liabilities Income/Expense Cost
----------- ----------- -------------- ------
Federal funds $ 2,501 $ 14 2.24%
Securities 2,096 14 2.67%
Loans 44,129 809 7.33%
------ --- ----
Total $48,726 $837 6.87%
====== --- ----
FHLB borrowings $ 2,200 $ 16 2.91%
Transactional
accounts 6,867 23 1.34%
Savings 679 2 1.03%
CD's 32,377 239 2.95%
------ --- ----
Total $42,123 $280 2.66%
====== --- ----
Net interest income $557
===
Net yield on earnings assets 4.57%
====
b. For the three-month period ended March 31, 2005, non-interest income
amounted to $140,065, or 1.07% of average assets. By comparison, non-
interest income for the three-month period ended March 31, 2004 amounted to
$95,738, or 1.12% of average assets, slightly above 2005 results. The
reason for the increase (in dollar amount) from 2004 to 2005 is due to
higher transactional activity and additional premium on the sale of SBA-
guaranteed loans.
c. For the three-month period ended March 31, 2005, non-interest expense
amounted to $450,373, or 3.44% of average assets. By comparison, for the
three-month period ended March 31, 2004, non-interest expense amounted to
$356,940, or 4.16% of average assets. This decrease is primarily due to
the improvement of operational efficiencies.
d. Provision for loan losses for the three-month periods ended March 31, 2005
and 2004 amounted to $56,830 and $43,182, respectively. The increase in
the 2005 period, as compared to the 2004 period, is due to the growth in
the loan portfolio rather than a deterioration in asset quality.
During the three-month period ended March 31, 2005, the allowance for loan
losses increased by $56,830, to $544,685. At March 31, 2005, the allowance for
loan losses as a percent of gross loans increased by .02% to 1.20%, from the
December 31, 2004 results. 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 it was to be implemented, would have a material effect on
the Company's liquidity, capital resources, or results of operations.
The Company cautions readers of this report that such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company
to be materially different from those expressed or implied by such forward-
looking statements. Although the Company's management believes that their
expectations of future performance are based on reasonable assumptions within
the bounds of their knowledge of their business and operations, there can be no
assurance that actual results will not differ materially from their
expectations.
The Company's operating performance each quarter is subject to various
risks and uncertainties that are discussed in detail in the Company's filings
with the SEC, including the "Risk Factors" section of the Company's Registration
Statement (Registration No. 333-92653) as filed with the SEC and declared
effective on March 13, 2000.
Off-Balance Sheet Arrangements
- ------------------------------
In the normal course of business, the Company has outstanding various
commitments to extend credit in the form of unused loan commitments and standby
letters of credit that are not reflected in the Company's consolidated financial
statements. Since these commitments may expire without being exercised, these
commitments do not necessarily represent future funding requirements. The
Company uses the same credit and collateral policies in making commitments as
those it uses in making loans.
As of March 31, 2005, the Company had outstanding unused loan commitments
of approximately $8.8 million, and standby letters of credit of approximately
$42 thousand were outstanding. Various assets collateralize the majority of
these commitments. The Company does not anticipate that it will suffer any
material losses as a result of these transactions.
ITEM 3 - CONTROLS AND PROCEDURES
- ------ -----------------------
At March 31, 2005, an evaluation was performed, under the supervision
and with the participation of the Company's management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures.
Based on the evaluation, the Company's management, including the Chief Executive
Officer and Chief Financial Officer, concluded that the Company's disclosure
controls and procedures were effective at timely alerting them to material
information relating to the Company (including its consolidated subsidiary)
that is required to be included in the Company's periodic filings with the
Securities and Exchange Commission. There have been no changes in the Company's
internal control over financial reporting during the three-months ended March
31, 2005 that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ------- ------------------
The Company is not a party to any pending litigation.
ITEM 2. CHANGES IN SECURITIES AND REPURCHASE OF SECURITIES.
- ------- --------------------------------------------------
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.
- ------- ----------------------------------------------------
No matters were submitted to a vote of the shareholders of the Company
during the three-month period ended March 31, 2005.
ITEM 5. OTHER INFORMATION.
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This item is not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
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(a) The certification of chief executive and financial officer is filed
as Exhibit 31.1 hereto.
(b) The certification pursuant to Section 906 of the Sarbanes-Oxley Act is
filed as Exhibit 32.1 hereto.
(c) Reports on Form 8-K. There were no reports on Form 8-K filed during
the quarter ended March 31, 2005.
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: May 12, 2005 BY: /s/ William B. Gossett
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William B. Gossett
President and Chief Executive Officer
(principal executive and financial officer)