SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
COMMISSION FILE NUMBER: 000-50864
DSA FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 20-1661802
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
118 WALNUT STREET, LAWRENCEBURG, INDIANA 47025
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(Address of Principal Executive Offices) (Zip Code)
(812) 537-0940
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
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Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
1. YES X NO
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2. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act) Yes X No
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State issuer's revenues for its most recent fiscal year.... $4.9 million
The aggregate value of the voting stock held by non-affiliates of the
Registrant, computed by reference to the closing price of the common stock on
September 19, 2005 ($11.10) was $13.5 million.
As of September 29, 2005, there were 1,644,242 shares issued and
outstanding of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 2005 Annual Meeting of Stockholders (Parts I and
III).
2. Annual Report to Shareholders for the fiscal year ended June 30, 2005
(Parts II and IV).
Transitional Small Business Disclosure Format: YES NO X
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PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
This Annual Report contains certain "forward-looking statements" which
may be identified by the use of words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated" and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors which could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage, commercial and
other loans, real estate values, competition, changes in accounting principles,
policies, or guidelines, changes in legislation or regulation, and other
economic, competitive, governmental, regulatory, and technological factors
affecting our operations, pricing products and services.
GENERAL
DSA Financial Corporation was incorporated in March 2004 for the purpose
of acting as the holding company parent of Dearborn Savings Association, F.A.
following the completion of the mutual-to-stock conversion of Dearborn Mutual
Holding Company. The mutual-to-stock conversion was completed July 28, 2004.
Accordingly, financial information presented in this document for periods prior
to that date is for Dearborn Financial Corporation, the mid-tier stock holding
company that was the predecessor to DSA Financial Corporation. Our executive
office is located at 118 Walnut Street, Lawrenceburg, Indiana 47025 and our
telephone number is (812) 537-0940.
DEARBORN SAVINGS ASSOCIATION, F.A.
Dearborn Savings Association is a full-service, community-oriented
savings association that provides financial services to individuals, families
and businesses through its main office, located in Lawrenceburg, Indiana, and
one branch office, located in Greendale, Indiana. Originally organized in 1890,
Dearborn Savings Association reorganized into the mutual holding company
structure in October 1993 and became the wholly-owned subsidiary of Dearborn
Financial Corporation in April 1999.
Dearborn Savings Association's business consists primarily of accepting
deposits from the general public and investing those deposits, together with
funds generated from operations and borrowings, in one- to four-family
residential, multi-family residential, construction and non-residential real
estate and land loans, home equity and consumer loans and in U.S. Government
agency and other securities and mortgage-backed securities.
Dearborn Savings Association's executive offices are located at 118
Walnut Street, Lawrenceburg, Indiana 47025. Our telephone number at this address
is (812) 537-0940.
COMPETITION
We face significant competition in both originating loans and attracting
deposits. The Cincinnati, Ohio metropolitan area and Dearborn County, Indiana,
the county in which our offices are located, have a high concentration of
financial institutions, many of which are significantly larger institutions with
greater financial resources than we have, and many of which are our competitors
to varying degrees. Our competition for loans comes principally from commercial
banks, savings banks, mortgage banking companies, credit unions, insurance
companies and other financial service companies. Our most direct competition for
deposits has historically come from commercial banks, savings banks and credit
unions. We face additional competition for deposits from non-depository
competitors such as the mutual fund industry, securities and brokerage firms and
insurance companies. We have emphasized personalized banking and the advantage
of local decision-making in our banking business. We do not rely on any
individual, group, or entity for a material portion of our deposits.
MARKET AREA
Dearborn Savings Association offers a broad range of financial services
to individuals and businesses in our market area. Our primary market for
deposits is concentrated in Dearborn County, Indiana, where our full-service
banking offices are located. Our primary lending area consists of Dearborn
County as well as the contiguous counties in Kentucky and Ohio.
Dearborn County constitutes a suburban market with a broad employment
base that serves as a bedroom community for nearby Cincinnati, Ohio. The
economic environment in Dearborn County continues to be favorable and has
supported increased commercial and residential activity in recent years.
The population of Dearborn County increased by approximately 18.7%
between 1990 and 2002, while the population of the State of Indiana as a whole
increased by 9.7% during the same period.
The economy of our primary market area is based on a mixture of service,
manufacturing and wholesale/retail trade. Employment is provided by a variety of
industries and state and local governments. The diversity of the employment base
is evidenced by the many different employers in our market area. The major
employers in our market area include Argosy Casino, Aurora Casket Company,
Dearborn County Hospital and Joseph A. Seagram & Sons, Inc. Dearborn County also
has numerous small business employers. As of July 2005, the unemployment rate in
Dearborn County was 5.5%, which was higher than the unemployment rate for the
State of Indiana and the United States as a whole which were both 5.2%.
LENDING ACTIVITIES
We originate one- to four-family residential real estate loans, home
equity loans and construction loans. In addition, we originate multi-family
residential real estate loans, non-residential real estate and land loans and
consumer loans. We retain most of the loans we originate while retaining the
servicing rights on the loans sold to Freddie Mac.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. Our primary lending
activity is the origination of one- to four-family residential real estate
loans. This portfolio totaled $47.4 million, or 58.8% of our total loan
portfolio at June 30, 2005. Of this total, $23.1 million, or 48.7%, had fixed
rates of interest and $24.3 million, or 51.3%, had adjustable rates of interest.
We currently offer conforming and non-conforming fixed- and adjustable-rate
conventional mortgage loans with terms of 10 to 30 years. One- to four-family
residential mortgage loans are generally underwritten according to Freddie Mac
guidelines and loan limits, and loans that conform to such guidelines are
referred to as "conforming loans." The maximum conforming loan limit as
established by Freddie Mac is currently $359,650 for single-family homes,
although the majority of the residential mortgage loans we originate have
principal balances between $100,000 and $250,000. We also originate loans that
exceed the Freddie Mac limits, referred to as "jumbo loans." Private mortgage
insurance is generally required for loans with loan-to-value ratios in excess of
80%.
We actively monitor our interest rate risk position to determine the
desirable level of investment in fixed-rate mortgages. Depending on market
interest rates and our capital and liquidity position, we may retain all of our
newly originated longer term fixed-rate, fixed-term residential mortgage loans
or from time to time we may elect to sell all or a portion of such loans in the
secondary mortgage market to government sponsored entities, such as Freddie Mac,
or other purchasers. From October 2003 through June 2004, we sold substantially
all of the longer-term, fixed-rate, one- to four-family residential loans that
we had originated. During the fiscal year ended June 30, 2005, we elected to
keep considerably all loan production in the portfolio due to our strong capital
and cash positions as a result of the second step conversion. To generate fee
income and reinforce our commitment to customer service, we retain the servicing
rights on the loans we sell. As of June 30, 2005, loans serviced for others
totaled $34.2 million.
We currently offer several types of adjustable-rate residential mortgage
loans with rates that are fixed for a period ranging from six months to five
years. After the initial term, the interest rate on these loans is generally
reset every year based upon a contractual spread or margin above the average
yield on U.S. Treasury securities, adjusted
2
to a constant maturity of one year as published weekly by the Federal Reserve
Board, subject to certain periodic and lifetime limitations on interest rate
changes. Many of the borrowers who select these loans have shorter-term credit
needs than those who select long-term, fixed-rate loans. Adjustable-rate
mortgage loans may pose different credit risks than fixed-rate loans primarily
because the underlying debt service payments of the borrowers rise as interest
rates rise, thereby increasing the potential for default.
We require title insurance on most all of our one- to four-family
mortgage loans, and we also require that borrowers maintain fire and extended
coverage casualty insurance (and, if appropriate, flood insurance) in an amount
at least equal to the lesser of the loan balance or the replacement cost of the
improvements. We do require a mortgage escrow account from which disbursements
are made for real estate taxes and for hazard and flood insurance on all loans
that exceed 80% loan-to-value.
In addition to traditional one- to four-family residential real estate
loans, we offer equity lines of credit that are secured by the borrower's
primary residence or investment property. The borrower is permitted to draw on
the equity line of credit during the first seven years after it is originated
and may repay the outstanding balance over a term not to exceed ten years from
the date the equity line of credit is originated. Our equity lines of credit are
originated with fixed rates of interest for the first three months, and the
interest rates adjust with the prime rate of interest after the initial
three-month period. Equity lines of credit are generally underwritten with the
same criteria that we use to underwrite one- to four-family loans. Equity lines
of credit may be underwritten with a loan-to-value ratio of 80% when combined
with the principal balance of the existing mortgage loan. We appraise the
property securing the loan in order to determine the value of the property
securing the equity line of credit. At the time we close an equity line of
credit, we file a mortgage to perfect our security interest in the underlying
collateral. At June 30, 2005, the outstanding balances of equity lines of credit
totaled $5.4 million, or 6.7% of our total loan portfolio.
MULTI-FAMILY RESIDENTIAL REAL ESTATE LENDING. Loans secured by
multi-family real estate totaled approximately $3.2 million, or 3.9% of our
total loan portfolio, at June 30, 2005. Multi-family residential real estate
loans generally are secured by multi-family rental properties. At June 30, 2005,
we had ten multi-family residential real estate loans, the largest of which had
a principal balance of $824,000. The majority of our multi-family residential
real estate loans have adjustable interest rates.
In underwriting multi-family residential real estate loans, we consider
a number of factors, which include the net operating income projected to be
generated by the real estate; the age and condition of the collateral; the
financial resources and income level of the borrower; and the borrower's
experience in owning or managing similar properties. Multi-family mortgage loans
are originated in amounts up to 80% of the appraised value of the property
securing the loan. Personal guarantees are obtained from multi-family mortgage
borrowers.
Loans secured by multi-family residential real estate generally involve
a greater degree of credit risk than one- to four-family residential mortgage
loans and carry larger loan balances. This increased credit risk is a result of
several factors, including the concentration of principal in a limited number of
loans and borrowers, the effects of general economic conditions on income
producing properties, and the increased difficulty of evaluating and monitoring
these types of loans. Furthermore, the repayment of loans secured by
multi-family real estate typically depends upon the successful operation of the
related real estate property. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
NON-RESIDENTIAL REAL ESTATE LENDING. We also originate real estate loans
secured by first liens on non-residential real estate and land. Our
non-residential real estate properties consist of restaurants, office buildings,
motels and car washes. We may, from time to time, purchase non-residential real
estate loan participations. Almost all of our non-residential real estate loans
have initial principal balances less than $1.0 million, although we occasionally
originate non-residential real estate loans in excess of that amount up to our
current loan-to-one borrower limitation of $2.0 million. Loans secured by
non-residential real estate totaled $20.5 million, or 25.5% of our total loan
portfolio at June 30, 2005. All of our non-residential real estate loans are
secured by properties located in our primary lending area.
3
Most of our non-residential real estate loans are written as three-year
adjustable-rate mortgages that amortize over 15 to 30 years, although we
originate non-residential real estate loans that provide for balloon payments.
We also originate non-residential real estate loans that amortize over ten
years. In the underwriting of non-residential real estate loans, we generally
lend up to 80% of the property's appraised value. Decisions to lend are based on
the economic viability of the property and the creditworthiness of the borrower.
In evaluating a proposed non-residential real estate loan, we analyze the ratio
of the property's projected net cash flow to the loan's debt service requirement
(generally requiring a ratio of 115%). In addition, a personal guarantee of the
loan is required from the principal(s) of the borrower. We generally require
title insurance insuring the priority of our lien. We require fire and extended
coverage casualty insurance, and flood insurance, if appropriate, in order to
protect our security interest in the underlying property.
Non-residential real estate loans generally carry higher interest rates
and have shorter terms than those on one- to four-family residential mortgage
loans. Non-residential real estate loans, however, entail significant additional
credit risks compared to one- to four-family residential mortgage loans, as they
typically involve large loan balances concentrated with single borrowers or
groups of related borrowers. In addition, the payment of loans secured by
income-producing properties typically depends on the successful operation of the
related real estate project, and thus may be subject to a greater extent to
adverse conditions in the real estate market and in the general economy.
CONSTRUCTION LOANS. We originate construction loans to local home and
non-residential builders in our market area, generally with whom we have an
established relationship, and to individuals who have a contract with a builder
for the construction of their residence. These loans totaled $8.2 million, or
10.1% of our total loan portfolio, at June 30, 2005.
Our construction loans to home builders are repaid on an interest-only
basis for the period of construction, which is generally six months, with
interest calculated on the amount disbursed to the builders based upon a
percentage of completion of construction. The majority of these loans have a
maximum loan-to-value ratio of 80%. Interest rates can be fixed or adjustable
during the construction phase of the loan. These loans generally convert to
permanent financing after the initial construction period. Loans to builders are
made on either a pre-sold or speculative (unsold) basis. Construction loans to
individuals who intend to occupy the completed dwelling are converted to
permanent financing after the construction phase is completed. These loans are
generally originated pursuant to the same policy guidelines regarding
loan-to-value ratios and interest rates that are used in connection with loans
secured by one- to four-family residential real estate. Prior to making a
commitment to fund a construction loan, we require an appraisal of the property
from a qualified appraiser approved by us, and all appraisals are reviewed by
management.
Construction lending exposes us to greater credit risk than permanent
mortgage financing because of the inherent difficulty in estimating both a
property's value at completion of the project and the estimated cost of the
project. If the estimate of construction costs is inaccurate, we may be required
to advance funds beyond the amount originally committed to permit completion of
the project. If the estimate of value upon completion is inaccurate, the value
of the property may be insufficient to assure full repayment. Projects also may
be jeopardized by disagreements between borrowers and builders and by the
failure of builders to pay subcontractors. Loans to builders to construct homes
for which no purchaser has been identified carry more risk because the repayment
of the loan depends on the builder's ability to sell the property prior to the
time that the construction loan is due. We have attempted to minimize these
risks by, among other things, limiting our construction lending primarily to
residential properties and requiring personal guarantees from the principals of
corporate borrowers.
CONSUMER LOANS. We originate a variety of consumer and other loans,
including new and used automobile loans and loans collateralized by savings
accounts. As of June 30, 2005, consumer loans totaled $1.4 million, or 1.7% of
the total loan portfolio. At June 30, 2005 the largest group of consumer loans
consisted of $588,000 of indirect mobile home loans, located primarily in the
State of Kentucky, although we discontinued mobile home lending in January 1997.
We receive principal and interest payments for these loans, but a third party
handles collection activity.
4
As of June 30, 2005, automobile loans totaled $393,000, or 0.5% of our
total loan portfolio. We originate automobile loans directly to our customers
and have no outstanding agreements with automobile dealerships to generate
indirect loans.
Our procedures for underwriting consumer loans include an assessment of
an applicant's credit history and the ability to meet existing obligations and
payments on the proposed loan. Although an applicant's creditworthiness is a
primary consideration, the underwriting process also includes a comparison of
the value of the collateral security, if any, to the proposed loan amount.
Consumer loans generally entail greater risk than residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that tend to depreciate rapidly, such as automobiles. In addition, the
repayment of consumer loans depends on the borrower's continued financial
stability, as their repayment is more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy than a single family mortgage
loan.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of our loan portfolio, excluding loans held for sale, by type of
loan at the dates indicated.
AT JUNE 30,
--------------------------------------------
2005 2004
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Residential real estate:
One- to four-family................... $ 47,418 58.76% $ 35,073 55.66%
Multi-family ......................... 3,168 3.93 2,811 4.46
Construction.......................... 8,180 10.14 6,088 9.54
-------- --------
Total residential real estate
loans............................. 58,766 43,892
Nonresidential real estate and land...... 20,542 25.46 17,335 27.52
Consumer and other loans................. 1,381 1.71 1,774 2.82
-------- ------- -------- -------
Total loans.............................. 80,689 100.00% 63,001 100.00%
======== ======= ======== =======
Other items:
Deferred loan origination costs.......... 25 11
Undisbursed portion of loans in
process............................... (3,973) (3,588)
Allowance for loan losses................ (362) (336)
-------- --------
Total loans, net......................... $ 76,379 $ 59,088
======== ========
5
LOAN PORTFOLIO MATURITIES AND YIELDS. The following table summarizes the
scheduled repayments of our loan portfolio at June 30, 2005. Demand loans, loans
having no stated repayment schedule or maturity, and overdraft loans are
reported as being due in one year or less.
MULTI-FAMILY NONRESIDENTIAL REAL
ONE- TO FOUR-FAMILY RESIDENTIAL CONSTRUCTION ESTATE AND LAND
-------------------- -------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
--------- -------- --------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
Due During the Years
Ending June 30,
---------------
2006................... $ 1,799 5.50% $ 73 6.69% $ 349 6.11% $ 1,249 6.71%
2007 to 2008........... 3,935 5.51 160 6.69 766 6.11 1,324 7.05
2009 to 2010........... 4,422 5.52 184 6.72 864 6.11 2,034 6.90
2011 to 2015........... 10,287 5.61 582 6.74 2,685 6.11 6,498 6.92
2016 to 2025........... 14,923 5.74 1,951 6.80 3,212 6.11 9,437 6.45
2026 and beyond........ 12,052 5.75 218 6.33 304 6.12 -- --
--------- --------- --------- ----------
Total............. $ 47,418 5.66% $ 3,168 6.74% $ 8,180 6.11% $ 20,542 6.69%
========= ========= ========= =========
(Continued)
CONSUMER AND
OTHER TOTAL
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
--------- -------- --------- --------
(DOLLARS IN THOUSANDS)
Due During the Years
Ending June 30,
---------------
2006................... $ 239 7.61% $ 3,709 6.12%
2007 to 2008........... 534 7.63 6,719 6.08
2009 to 2010........... 388 8.22 7,892 6.10
2011 to 2015........... 220 8.61 20,272 6.16
2016 to 2025........... -- -- 29,523 6.08
2026 and beyond........ -- -- 12,574 5.77
--------- ---------
Total............. $ 1,381 7.95% $ 80,689 6.05%
========= =========
The following table sets forth the scheduled repayments of fixed- and
adjustable-rate loans at June 30, 2005 that are contractually due after June 30,
2006.
DUE AFTER JUNE 30, 2006
---------------------------------------
FIXED ADJUSTABLE TOTAL
----------- ----------- -----------
(IN THOUSANDS)
One- to four-family......................... $ 22,415 $ 23,204 $ 45,619
Multi-family residential.................... 537 2,558 3,095
Construction................................ 1,446 6,385 7,831
Nonresidential real estate and land......... 3,241 16,052 19,293
Consumer and other loans.................... 956 186 1,142
----------- ----------- -----------
Total loans........................ $ 28,595 $ 48,385 $ 76,980
=========== =========== ===========
6
LOAN ORIGINATIONS, PURCHASES, SALES AND SERVICING. While we originate
both fixed-rate and adjustable-rate loans, our ability to generate each type of
loan depends upon borrower demand, market interest rates, borrower preference
for fixed- versus adjustable-rate loans, and the interest rates offered on each
type of loan by other lenders in our market area. This includes competing banks,
savings banks, credit unions, mortgage banking companies and life insurance
companies that may also actively compete for local non-residential real estate
loans. Loan originations are derived from a number of sources, including branch
office personnel, existing customers, borrowers, builders, attorneys, real
estate broker referrals and walk-in customers.
Our loan origination and sales activity may be adversely affected by a
rising interest rate environment that typically results in decreased loan
demand, while declining interest rates may stimulate increased loan demand.
Accordingly, the volume of loan originations, the mix of fixed- and
adjustable-rate loans, and the profitability of this activity can vary from
period to period. One- to four-family residential mortgage loans are generally
underwritten to current Freddie Mac seller/servicer guidelines, and closed on
standard Freddie Mac documents. If such loans are sold, the sales are conducted
using standard Freddie Mac purchase contracts and master commitments as
applicable. All one- to four-family mortgage loans that we have sold to Freddie
Mac have been sold on a non-recourse basis, whereby foreclosure losses are the
responsibility of the purchaser and not Dearborn Savings Association. We have
not sold any participation loans to Freddie Mac, as the loans in which we have
participated have exceeded the conforming loan limit as established by Freddie
Mac for their purchase of loans from financial institutions.
We are a qualified loan servicer for Freddie Mac. Our policy has been to
retain the servicing rights for all conforming loans sold, and to continue to
collect payments on the loans, maintain tax escrows and applicable fire and
flood insurance coverage, and supervise foreclosure proceedings if necessary. We
retain a portion of the interest paid by the borrower on the loans as
consideration for our servicing activities.
LOAN APPROVAL AUTHORITY AND UNDERWRITING. The loan approval process is
intended to assess the borrower's ability to repay the loan, the viability of
the loan, and the adequacy of the value of the property that will secure the
loan. To assess the borrower's ability to repay, we review the employment and
credit history and information on the historical and projected income and
expenses of borrowers. Loans of up to $250,000 to any borrower and the
borrower's related interests may be approved by the loan committee, consisting
of directors and senior management. All loans in excess of $250,000 must be
approved by the Board of Directors.
We require appraisals of real property securing loans. Appraisals are
performed by independent appraisers, who are approved by the Board of Directors
annually. We require fire and extended coverage insurance in amounts adequate to
protect our principal balance. Where appropriate, flood insurance is also
required. Private mortgage insurance is generally required for all residential
mortgage loans with loan-to-value ratios greater than 80%.
LOAN ORIGINATION FEES AND COSTS. In addition to interest earned on
loans, we also receive loan origination fees. Such fees vary with the volume and
type of loans and commitments made, and competitive conditions in the mortgage
markets, which in turn respond to the demand and availability of money. We defer
loan origination fees and costs, and amortize such amounts as an adjustment to
yield over the term of the loan by use of the level-yield method. Deferred loan
origination costs (net of deferred fees) were $25,000 at June 30, 2005.
To the extent that originated loans are sold with servicing retained, we
capitalize a mortgage servicing asset at the time of the sale in accordance with
applicable accounting standards (Statement of Financial Accounting Standards No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities"). The capitalized amount is amortized thereafter
(over the period of estimated net servicing income) as a reduction of servicing
fee income. The unamortized amount is fully charged to income when loans are
prepaid. Originated mortgage servicing rights with an amortized cost of $282,000
are included in other assets at June 30, 2005. See also Note A-3 of the Notes to
Consolidated Financial Statements.
LOANS TO ONE BORROWER. At June 30, 2005, our five largest aggregate loan
amounts to any one borrower and certain related interests of the borrower
(including any unused lines of credit) consisted of secured and unsecured
financing of $1.8 million, $1.8 million, $1.6 million, $1.2 million and $1.2
million. As of June 30, 2005, all of these loans were performing in accordance
with their terms. See "Supervision and Regulation--Federal Banking
Regulation--Loans to One Borrower" for a discussion of applicable regulatory
limitations.
7
DELINQUENT LOANS, OTHER REAL ESTATE OWNED AND CLASSIFIED ASSETS
COLLECTION PROCEDURES. A computer-generated late notice is sent by the
16th day after the payment due date on a loan requesting the payment due plus
any late charge that was assessed. When loans become 30 days past due, we send
additional delinquency notices and we attempt to make personal contact with the
borrower by letter or telephone to establish acceptable repayment schedules. The
Board of Directors is advised of all loans delinquent 60 days or more. The Board
will consider the borrower's willingness to comply with the loan terms, our
actions to date, and the value of the loan collateral in determining what
actions, if any, are to be taken. Generally, when a mortgage loan is 90 days
delinquent and no acceptable resolution has been reached, we will refer the
matter to counsel and management will begin foreclosure proceedings unless
management is engaged in active payment resolution with the borrower.
LOANS PAST DUE AND NON-PERFORMING ASSETS. Loans are reviewed on a
regular basis, and are generally placed on non-accrual status when either
principal or interest is 90 days or more past due and when, in the opinion of
management, there is sufficient reason to question the borrower's ability to
continue to meet contractual principal or interest payment obligations. In
addition, loans may be placed on non-accrual status prior to being 90 days or
more past due when, in the opinion of management, there is sufficient reason to
question the borrower's ability to continue to meet contractual principal or
interest payment obligations. Interest accrued and unpaid at the time a loan is
placed on non-accrual status is reversed from interest income. At June 30, 2005,
we had non-accrual loans of $77,000. Management included approximately $4,000
within the general allowance for loan losses for these loans at June 30, 2005.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as real estate owned ("REO") until such time as it is
sold. When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the fair value of the property is less than the loan balance, the difference
is charged against the allowance for loan losses.
The following table sets forth certain information with respect to our
loan portfolio delinquencies at the dates indicated.
LOANS DELINQUENT FOR
----------------------------------------------------
60-89 DAYS 90 DAYS AND OVER TOTAL
------------------------ ------------------------ ------------------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
At June 30, 2005
----------------
One- to four-family........ 13 $ 500 1 $ 71 14 $ 571
Multi-family residential... -- -- -- -- -- --
Construction............... -- -- -- -- -- --
Nonresidential real
estate and land....... -- -- -- -- -- --
Consumer and other......... 1 5 2 6 3 11
---------- ---------- ---------- ---------- ---------- ----------
Total.................... 14 $ 505 3 $ 77 17 $ 582
========== ========== ========== ========== ========== ==========
At June 30, 2004
----------------
One- to four-family........ 4 $ 123 10 $ 571 14 $ 694
Multi-family residential... -- -- -- -- -- --
Construction............... -- -- -- -- -- --
Nonresidential real
estate and land....... -- -- -- -- -- --
Consumer and other......... 3 43 3 18 6 61
---------- ---------- ---------- ---------- ---------- ----------
Total.................... 7 $ 166 13 $ 589 20 $ 755
========== ========== ========== ========== ========== ==========
8
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of our non-performing assets at the dates indicated. At each date
presented, we had no troubled debt restructurings (loans for which a portion of
interest or principal has been forgiven and loans modified at interest rates
materially less than current market rates).
AT JUNE 30,
------------------------
2005 2004
--------- ---------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
One- to four-family..................... $ 71 $ 251
Multi-family residential................ -- --
Construction............................ -- --
Non-residential real estate and land.... -- --
Consumer and other...................... 6 18
--------- ---------
Total non-accrual loans............... 77 269
--------- ---------
Loans 90 days or more delinquent and still
accruing:
One- to four-family..................... -- 320
Multi-family residential................ -- --
Construction............................ -- --
Non-residential real estate and land.... -- --
Consumer and other...................... -- --
--------- ---------
Total loans 90 days or more
delinquent and still accruing....... -- 320
--------- ---------
Total non-performing loans............ 77 589
--------- ---------
Real estate owned:
One- to four-family..................... 84 --
Multi-family residential................ -- --
Construction............................ -- --
Non-residential real estate and land.... -- --
Consumer and other...................... 3 --
--------- ---------
Total real estate owned............... 87 --
--------- ---------
Total non-performing assets................ $ 164 $ 589
========= =========
Ratios:
Non-performing loans to total loans..... 0.10% 0.93%
Non-performing assets to total assets... 0.18 0.70
For the years ended June 30, 2005 and 2004, gross interest income that
would have been recorded had the non-accrual loans at the end of the period
remained on accrual status throughout the period amounted to $4,000 and $12,000,
respectively.
CLASSIFICATION OF ASSETS. Our policies, consistent with regulatory
guidelines, provide for the classification of loans and other assets that are
considered to be of lesser quality as substandard, doubtful, or loss assets. An
asset is considered substandard if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral pledged, if
any. Substandard assets include those characterized by the distinct possibility
that the savings institution will sustain some loss if the deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses inherent in
those classified substandard with the added characteristic that the weaknesses
present make collection or liquidation in full, on the basis of currently
existing facts, conditions, and values, highly questionable and improbable.
Assets classified as loss are those considered uncollectible and of such little
value that their continuance as assets is not warranted. Assets that do not
expose us to risk sufficient to warrant classification in one of the
aforementioned categories, but which possess potential weaknesses that deserve
our close attention, are required to be designated as special mention. As of
June 30, 2005, we had $501,000 of assets designated as special mention. This
classified assets total includes $1,000 of nonperforming loans.
When we classify assets as either substandard or doubtful, we allocate a
portion of the related general loss allowances to such assets as deemed prudent
by management. The allowance for loan losses represents amounts that have been
established to recognize losses inherent in the loan portfolio that are both
probable and reasonably
9
estimable at the date of the financial statements. When we classify problem
assets as loss, we charge-off such amount. Our determination as to the
classification of our assets and the amount of our loss allowances are subject
to review by our regulatory agencies, which can order the establishment of
additional loss allowances. Management regularly reviews our asset portfolio to
determine whether any assets require classification in accordance with
applicable regulations. On the basis of management's review of our assets at
June 30, 2005, classified assets consisted of substandard assets of $234,000 and
no assets classified as doubtful or loss.
ALLOWANCE FOR LOAN LOSSES. We provide for loan losses based on the
allowance method. Accordingly, all loan losses are charged to the related
allowance and all recoveries are credited to it. Additions to the allowance for
loan losses are provided by charges to income based on various factors which, in
management's judgment, deserve current recognition in estimating probable
losses. Management regularly reviews the loan portfolio and makes provisions for
loan losses in order to maintain the allowance for loan losses in accordance
with accounting principles generally accepted in the United States of America.
The allowance for loan losses consists of amounts specifically allocated to
non-performing loans and other criticized or classified loans (if any) as well
as allowances determined for each major loan category. Loans secured by
multi-family residential real estate and loans secured by non-residential real
estate and land are evaluated individually for impairment. Other
smaller-balance, homogeneous loan types, including loans secured by one- to
four-family residential real estate and consumer installment loans, are
evaluated for impairment on a collective basis. After we establish a provision
for loans that are known to be non-performing, criticized or classified, we
calculate percentage loss factors to apply to the remaining categories within
the loan portfolio to estimate probable losses inherent in these categories of
the portfolio. When the loan portfolio increases, therefore, the percentage
calculation results in a higher dollar amount of estimated probable losses than
would be the case without the increase, and when the loan portfolio decreases,
the percentage calculation results in a lower dollar amount of estimated
probable losses than would be the case without the decrease. These percentage
loss factors are determined by management based on our historical loss
experience for the applicable loan category, which may be adjusted to reflect
our evaluation of levels of, and trends in, delinquent and non-accrual loans,
trends in volume and terms of loans, and local economic trends and conditions.
We consider non-residential real estate and land loans and construction
loans to be riskier than one- to four-family residential mortgage loans.
Non-residential real estate loans and land loans have greater credit risks
compared to one- to four-family residential mortgage loans, as they typically
involve large loan balances concentrated with single borrowers or groups of
related borrowers. In addition, the payment experience on loans secured by
income-producing properties typically depends on the successful operation of the
related real estate project and thus may be subject to a greater extent to
adverse conditions in the real estate market and in the general economy.
Construction loans have greater credit risk than permanent mortgage financing
because of the inherent difficulty in estimating both a property's value at
completion of the project and the estimated cost of the project. If the estimate
of construction costs is inaccurate, we may be required to advance funds beyond
the amount originally committed to permit completion of the project. If the
estimate of value upon completion is inaccurate, the value of the property may
be insufficient to assure full repayment. Projects also may be jeopardized by
disagreements between borrowers and builders and by the failure of builders to
pay subcontractors. Loans to builders to construct homes for which no purchaser
has been identified carry more risk because the repayment of the loan depends on
the builder's ability to sell the property prior to the time that the
construction loan is due. The increased risk characteristics associated with
non-residential real estate and land loans and construction loans are considered
by management in the evaluation of the allowance for loan losses and generally
result in a larger loss factor applied to these segments of the loan portfolio
in developing an estimate of the required allowance for loan losses.
We intend to increase our originations of non-residential real estate
and land loans, and we intend to retain these loans in our portfolio. Because
these loans entail significant additional credit risks compared to one- to
four-family residential mortgage loans, an increase in our origination (and
retention in our portfolio) of these types of loans would, in the absence of
other offsetting factors, require us to make additional provisions for loan
losses.
The carrying value of loans is periodically evaluated and the allowance
is adjusted accordingly. While management uses the best information available to
make evaluations, future adjustments to the allowance may be necessary if
conditions differ substantially from the information used in making the
evaluations. In addition, as an integral part of their examination process, our
regulatory agencies periodically review the allowance for loan losses. Such
agencies may require us to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
10
The following table sets forth activity in our allowance for loan losses
for the periods indicated.
AT OR FOR THE YEARS
ENDED JUNE 30,
----------------------------
2005 2004
----------- -----------
(DOLLARS IN THOUSANDS)
Balance at beginning of period.................... $ 336 $ 314
----------- -----------
Charge-offs:
One- to four-family............................ -- --
Multi-family residential....................... -- --
Construction................................... -- --
Nonresidential real estate and land............ -- --
Consumer and other loans....................... 27 3
----------- -----------
Total charge-offs............................ 27 3
Recoveries:
One- to four-family............................ -- --
Multi-family residential....................... -- --
Construction................................... -- --
Nonresidential real estate and land............ -- --
Consumer and other loans....................... -- 1
----------- -----------
Total recoveries............................. -- 1
Net charge-offs................................... (27) (2)
Provision for loan losses......................... 53 24
----------- -----------
Balance at end of year............................ $ 362 $ 336
=========== ===========
Ratios:
Net charge-offs to average loans outstanding...... 0.04% --%
Allowance for loan losses to non-performing
loans at end of period......................... 470.13 57.05
Allowance for loan losses to total loans at
end of period.............................. 0.45 0.53
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allowance for loan losses allocated by loan category, the total loan
balances by category, and the percent of loans in each category to total loans
at the dates indicated. The allowance for loan losses allocated to each category
is not necessarily indicative of future losses in any particular category and
does not restrict the use of the allowance to absorb losses in other categories.
AT JUNE 30,
-----------------------------------------------------------------------------------------
2005 2004
-------------------------------------------- -------------------------------------------
PERCENT OF PERCENT OF
ALLOWANCE LOAN LOANS IN EACH ALLOWANCE LOAN LOANS IN EACH
FOR LOAN BALANCES BY CATEGORY TO FOR LOAN BALANCES BY CATEGORY TO
LOSSES CATEGORY TOTAL LOANS LOSSES CATEGORY TOTAL LOANS
----------- ----------- -------------- ----------- ----------- -------------
(DOLLARS IN THOUSANDS)
One- to four-family........ $ 102 $ 47,418 58.76% $ 78 $ 35,073 55.66%
Multi-family residential... 16 3,168 3.93 12 2,811 4.46
Construction............... 17 8,180 10.14 10 6,008 9.54
Nonresidential real estate
and land................ 173 20,542 25.46 154 17,335 27.52
Consumer and other......... 54 1,381 1.71 82 1,774 2.82
----------- ----------- -------------- ----------- ----------- -------------
Total................... $ 362 $ 80,689 100.00% $ 336 $ 63,001 100.00%
=========== =========== ============== =========== =========== =============
11
SECURITIES ACTIVITIES
Our securities investment policy is established by our Board of
Directors. This policy dictates that investment decisions be made based on the
safety of the investment, liquidity requirements, potential returns, cash flow
targets, and consistency with our interest rate risk management strategy. Our
asset/liability committee oversees our investment program and evaluates on an
ongoing basis our investment policy and objectives. Our chief executive officer,
acting with our chief financial officer, is responsible for making securities
portfolio decisions in accordance with established policies. Our chief financial
officer and chief executive officer have the authority to purchase and sell
securities within specific guidelines established by the investment policy. In
addition, all transactions are reviewed by our asset/liability committee at
least quarterly.
Our current investment policy generally permits securities investments
in debt securities issued by the U.S. Government and U.S. Agencies, municipal
bonds, and corporate debt obligations, as well as investments in preferred and
common stock of government agencies and government sponsored enterprises such as
Fannie Mae, Freddie Mac and the Federal Home Loan Bank of Indianapolis (federal
agency securities) and, to a lesser extent, other equity securities. Securities
in these categories are classified as "investment securities" for financial
reporting purposes. The policy also permits investments in mortgage-backed
securities, including pass-through securities issued and guaranteed by Fannie
Mae, Freddie Mac and Ginnie Mae as well as collateralized mortgage obligations
("CMOs") issued or backed by securities issued by these government agencies.
SFAS No. 115 requires that, at the time of purchase, we designate a
security as held to maturity, available for sale, or trading, depending on our
ability and intent. Securities available for sale are reported at fair value. We
do not have a held to maturity or a trading portfolio.
GOVERNMENT SECURITIES. At June 30, 2005, we held U.S. Government agency
obligations classified as available-for-sale, with a fair value of $3.5 million.
While these securities generally provide lower yields than other investments
such as mortgage-backed securities, our current investment strategy is to
maintain investments in such instruments to the extent appropriate for liquidity
purposes, as collateral for borrowings, and for prepayment protection.
MORTGAGE-BACKED SECURITIES. We invest in mortgage-backed securities in
order to generate positive interest rate spreads with minimal administrative
expense; lower credit risk as a result of the guarantees provided by Freddie
Mac, Fannie Mae and Ginnie Mae; and increase liquidity. We invest primarily in
mortgage-backed securities issued or sponsored by Fannie Mae and Freddie Mac. At
June 30, 2005, we held mortgage-backed securities classified as available for
sale with a fair value of $835,000. All of such mortgage-backed securities were
CMOs. We held no "pass-through" mortgage-backed securities at June 30, 2005.
Mortgage-backed securities are created by pooling mortgages and issuing
a security collateralized by the pool of mortgages with an interest rate that is
less than the interest rate on the underlying mortgages. Mortgage-backed
securities typically represent a participation interest in a pool of
single-family or multi-family mortgages, although most of our mortgage-backed
securities are collateralized by single-family mortgages. The issuers of such
securities (generally U.S. Government agencies and government sponsored
enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell
the participation interests in the form of securities to investors, such as
Dearborn Savings Association, and guarantee the payment of principal and
interest to these investors. Investments in mortgage-backed securities involve a
risk that actual prepayments will be greater or less than the prepayment rate
estimated at the time of purchase, which may require adjustments to the
amortization of any premium or accretion of any discount relating to such
instruments, thereby affecting the net yield on such securities. We review
prepayment estimates for our mortgage-backed securities at the time of purchase
to ensure that prepayment assumptions are reasonable considering the underlying
collateral for the securities and current interest rates, and to determine the
yield and estimated maturity of the mortgage-backed securities portfolio.
Periodic reviews of current prepayment speeds are performed in order to
ascertain whether prepayment estimates require modification, that would cause
amortization or accretion adjustments.
At June 30, 2005, all of our mortgage-backed securities portfolio was
invested in CMOs backed by Fannie Mae and Freddie Mac. CMOs are types of debt
securities issued by a special-purpose entity that aggregates pools of mortgages
and mortgage-backed securities and creates different classes of securities with
varying maturities and
12
amortization schedules, as well as a residual interest, with each class
possessing different risk characteristics. The cash flows from the underlying
collateral are generally divided into "tranches" or classes that have descending
priorities with respect to the distribution of principal and interest cash
flows, while cash flows on pass-through mortgage-backed securities are
distributed pro rata to all security holders. Floating rate CMOs are purchased
with emphasis on the relative trade-offs between lifetime interest rate caps,
prepayment risk, and interest rates.
AVAILABLE FOR SALE PORTFOLIO. The following table sets forth the
composition of our available for sale portfolio at the dates indicated.
AT JUNE 30,
--------------------------------------------------
2005 2004
----------------------- -----------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
INVESTMENT SECURITIES:
U.S. Government agency
securities..................... $ 3,494 $ 3,452 $ 5,500 $ 5,369
Corporate equity securities...... 44 199 -- --
Municipal obligations............ 404 407 414 404
Asset management funds........... 500 492 1,000 990
---------- ---------- ---------- ----------
Total investment securities
available for sale............. 4,442 4,550 6,914 6,763
---------- ---------- ---------- ----------
MORTGAGE-BACKED SECURITIES:
CMOs:
Fannie Mae..................... 669 654 1,134 1,091
Freddie Mac.................... 183 181 390 393
---------- ---------- ---------- ----------
Total mortgage-backed securities
available for sale............. 852 835 1,524 1,484
---------- ---------- ---------- ----------
Total securities available
for sale....................... $ 5,294 $ 5,385 $ 8,438 $ 8,247
========== ========== ========== ==========
13
PORTFOLIO MATURITIES AND YIELDS. The composition and maturities of the
investment securities portfolio and the mortgage-backed securities portfolio at
June 30, 2005 are summarized in the following table. Maturities are based on the
final contractual payment dates, and do not reflect the impact of prepayments or
early redemptions that may occur. State and municipal securities yields have not
been adjusted to a tax-equivalent basis.
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS MORE THAN TEN YEARS
---------------------- ---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
AVAILABLE FOR SALE:
MORTGAGE-BACKED SECURITIES:
CMOs:
Fannie Mae.................. $ 70 3.42% $ 153 3.42% $ 90 3.42% $ 356 3.42%
Freddie Mac................. 59 3.84 124 3.84 -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total..................... $ 129 3.61% $ 277 3.61% $ 90 3.42% $ 356 3.42%
--------- --------- --------- --------- --------- --------- --------- ---------
INVESTMENT SECURITIES:
U.S. Government agency
securities.................. $ -- --% $ 1,494 3.04% $ -- --% $ 2,000 3.50%
Corporate equity securities.... 44 6.00 -- -- -- -- -- --
Municipal obligation........... 10 5.20 47 5.46 75 5.91 272 3.75
Asset management funds......... 500 3.87 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Total..................... $ 554 3.59% $ 1,541 3.11% $ 75 5.91% $ 2,272 3.53%
--------- --------- --------- --------- --------- --------- --------- ---------
Total debt securities
available for sale........ $ 683 $ 1,818 $ 165 $ 2,628
========= ========= ========= =========
(Continued)
TOTAL SECURITIES
-----------------------------------
WEIGHTED
AMORTIZED AVERAGE
COST FAIR VALUE YIELD
--------- ---------- --------
AVAILABLE FOR SALE:
MORTGAGE-BACKED SECURITIES:
CMOs:
Fannie Mae.................. $ 669 $ 654 3.42%
Freddie Mac................. 183 181 3.82
--------- ---------- --------
Total..................... $ 852 $ 835 3.51%
--------- ---------- --------
INVESTMENT SECURITIES:
U.S. Government agency
securities.................. $ 3,494 $ 3,452 3.30%
Corporate equity securities.... 44 199 6.00
Municipal obligation........... 404 407 4.39
Asset management funds......... 500 492 3.87
--------- ---------- --------
Total..................... $ 4,442 $ 4,550 3.49%
--------- ---------- --------
Total debt securities
available for sale........ $ 5,294 $ 5,385
========= ===========
14
SOURCES OF FUNDS
GENERAL. Deposits, borrowings, repayments and prepayments of loans and
securities, proceeds from sales of loans and securities, proceeds from maturing
securities and cash flows from operations are the primary sources of our funds
for use in lending, investing and for other general purposes.
DEPOSITS. We offer a variety of deposit accounts with a range of
interest rates and terms. Our deposit accounts consist of passbook savings
accounts, NOW accounts, checking accounts, money market accounts, club accounts,
certificates of deposit and IRAs and other qualified plan accounts. We provide
commercial checking accounts for businesses.
Our deposits are obtained predominantly from the areas in which our
branch offices are located. We rely on our customer service and competitive
pricing to attract and retain these deposits. While we accept certificates of
deposit in excess of $100,000 for which we may provide preferential rates, we do
not actively solicit such deposits as they are more difficult to retain than
core deposits.
The following table sets forth the distribution of total deposit
accounts, by account type, at the dates indicated.
AT JUNE 30,
----------------------------------------------------------------
2005 2004
------------------------------- -------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
BALANCE PERCENT RATE BALANCE PERCENT RATE
--------- -------- -------- --------- -------- --------
(DOLLARS IN THOUSANDS)
DEPOSIT TYPE:
Passbook accounts........ $ 17,094 25.56% 1.78% $ 25,774 37.79% 0.91%
Money market deposits.... 3,304 4.94 0.93 3,913 5.74 0.77
NOW deposits............. 6,090 9.10 0.40 5,248 7.69 0.38
--------- -------- --------- --------
Total transaction
accounts............ 26,488 39.60 1.36 34,935 51.22 0.81
Certificates of deposit.. 40,403 60.40 3.03 33,268 48.78 2.46
--------- -------- --------- --------
Total deposits........ $ 66,891 100.00% 2.37% $ 68,203 100.00% 1.62%
========= ======== ========= ========
The following table sets forth, by interest rate ranges, information
concerning certificates of deposit at the dates indicated.
AT JUNE 30, 2005
--------------------------------------------------------------------------------
PERIOD TO MATURITY
--------------------------------------------------------------------------------
LESS THAN ONE TO TWO TWO TO MORE THAN PERCENT OF
ONE YEAR YEARS THREE YEARS THREE YEARS TOTAL TOTAL
----------- ----------- ----------- ----------- ----------- ----------
(DOLLARS IN THOUSANDS)
INTEREST RATE RANGE:
2.00% and below.... $ 6,550 $ 30 $ -- $ 10 $ 6,590 16.31%
2.01% to 3.00%..... 12,037 1,897 177 -- 14,111 34.93%
3.01% to 4.00%..... 8,779 3,837 2,127 948 15,691 38.83%
4.01% to 5.00%..... 280 2,937 145 331 3,693 9.14%
5.01% and above.... 14 194 -- 110 318 0.79%
----------- ----------- ----------- ----------- ----------- ----------
Total.............. $ 27,660 $ 8,895 $ 2,449 $ 1,399 $ 40,403 100.00%
=========== =========== =========== =========== =========== ==========
15
As of June 30, 2005, the aggregate amount of outstanding certificates of
deposit in amounts greater than or equal to $100,000 was approximately $14.6
million, the majority of which were retail deposits. The following table sets
forth the maturity of those certificates as of June 30, 2005.
AT
JUNE 30, 2005
---------------
(IN THOUSANDS)
Three months or less..................... $ 2,118
Over three months through six months..... 2,098
Over six months through one year......... 4,135
Over one year to three years............. 5,796
Over three years......................... 416
-----------
Total.................................... $ 14,563
===========
BORROWINGS. Our borrowings consist solely of advances from the Federal
Home Loan Bank of Indianapolis. At June 30, 2005, we had access to additional
Federal Home Loan Bank advances of up to $44.1 million. The following table sets
forth information concerning balances and interest rates on our Federal Home
Loan Bank advances at the dates and for the periods indicated.
AT OR FOR THE YEARS
ENDED JUNE 30,
----------------------------
2005 2004
------------ ------------
(DOLLARS IN THOUSANDS)
Balance at end of period $ 7,000 $ 5,000
Average balance during period $ 5,380 $ 5,295
Maximum outstanding at any month end $ 7,000 $ 7,000
Weighted average interest rate at end
of period 4.56% 4.05%
Average interest rate during period 4.31% 4.19%
COMPETITION
We face significant competition in both originating loans and attracting
deposits. The Cincinnati, Ohio metropolitan area and Dearborn County, Indiana,
the county in which our offices are located, have a high concentration of
financial institutions, many of which are significantly larger institutions with
greater financial resources than we have, and many of which are our competitors
to varying degrees. Our competition for loans comes principally from commercial
banks, savings banks, mortgage banking companies, credit unions, insurance
companies and other financial service companies. Our most direct competition for
deposits has historically come from commercial banks, savings banks and credit
unions. We face additional competition for deposits from non-depository
competitors such as the mutual fund industry, securities and brokerage firms and
insurance companies. We have emphasized personalized banking and the advantage
of local decision-making in our banking business. We do not rely on any
individual, group, or entity for a material portion of our deposits.
As of June 30, 2005, the most recent date for which data is available,
Dearborn Savings Association had deposits of $68.5 million in Dearborn County.
These deposits represented 8.6% of all bank and thrift deposits in Dearborn
County as of that date, making Dearborn Savings Association the fifth largest
financial institution out of nine financial institutions in terms of deposits in
the county.
LEGAL PROCEEDINGS
We are not involved in any pending legal proceedings as a defendant
other than routine legal proceedings occurring in the ordinary course of
business. At June 30, 2005, we were not involved in any legal proceedings, the
outcome of which would be material to our financial condition or results of
operations.
PERSONNEL
As of June 30, 2005, we had 16 full-time employees and three part-time
employees. The employees are not represented by a collective bargaining unit and
we consider our relationship with our employees to be good.
16
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. DSA Financial and Dearborn Savings Association are subject to
federal income taxation in the same general manner as other corporations, with
some exceptions discussed below. The following discussion of federal taxation is
intended only to summarize material federal income tax matters and is not a
comprehensive description of the tax rules applicable to DSA Financial and
Dearborn Savings Association.
METHOD OF ACCOUNTING. For federal income tax purposes, Dearborn Savings
Association currently reports its income and expenses on the accrual method of
accounting and uses a tax year ending June 30 for filing its consolidated
federal income tax returns. The Small Business Protection Act of 1996 eliminated
the use of the reserve method of accounting for bad debt reserves by savings
institutions, effective for taxable years beginning after 1995.
BAD DEBT RESERVES. Prior to the Small Business Protection Act of 1996,
Dearborn Savings Association was permitted to establish a reserve for bad debts
for tax purposes and to make annual additions to the reserve. These additions
could, within specified formula limits, be deducted in arriving at Dearborn
Savings Association's taxable income. As a result of the Small Business
Protection Act, Dearborn Savings Association must use the specific charge off
method in computing its bad debt deduction for tax purposes.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the Small Business
Protection Act of 1996, bad debt reserves created prior to 1988 were subject to
recapture into taxable income if Dearborn Savings Association failed to meet
certain thrift asset and definitional tests. The Small Business Protection Act
of 1996 eliminated these thrift-related recapture rules. However, under current
law, pre-1988 reserves remain subject to tax recapture should Dearborn Savings
Association make certain distributions from its tax bad debt reserve or cease to
maintain a bank charter. At June 30, 2005, Dearborn Savings Association's total
federal pre-1988 reserve was approximately $1.2 million. This reserve reflects
the cumulative effects of federal tax deductions by Dearborn Savings Association
for which no federal income tax provision has been made.
MINIMUM TAX. The Internal Revenue Code of 1986, as amended, imposes an
alternative minimum tax at a rate of 20% on a base of regular taxable income
plus certain tax preferences ("alternative minimum taxable income" or "AMTI").
The alternative minimum tax is payable to the extent such AMTI is in excess of
an exemption amount. Net operating losses can, in general, offset no more than
90% of AMTI. Certain payments of alternative minimum tax may be used as credits
against regular tax liabilities in future years. Dearborn Savings Association
has not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back
net operating losses to the preceding five taxable years (for losses incurred in
2001 and 2002) and forward to the succeeding 20 taxable years. This provision
applies to losses incurred in taxable years beginning after 1986. At June 30,
2005, Dearborn Savings Association had no net operating loss carryforwards for
federal income tax purposes.
CORPORATE DIVIDENDS. We may exclude from our income 100% of dividends
received from Dearborn Savings Association as a member of the same affiliated
group of corporations.
Dearborn Financial's federal income tax returns have not been audited by
the Internal Revenue Service in the last five fiscal years.
STATE AND LOCAL TAXATION
Dearborn Savings Association is subject to Indiana's Financial
Institutions Tax, which is imposed at a flat rate of 8.5% on "adjusted gross
income." "Adjusted gross income," for purposes of the Financial Institutions
Tax, is based upon taxable income as defined by Section 63 of the Internal
Revenue Code and, thus, incorporates federal tax law to the extent that it
affects the computation of taxable income. Federal taxable income is then
adjusted by
17
several Indiana modifications. Other applicable state taxes include generally
applicable sales and use taxes plus real and personal property taxes.
As a Delaware business corporation, DSA Financial is required to file
annual returns and pay annual fees and an annual franchise tax to the State of
Delaware.
SUPERVISION AND REGULATION
GENERAL
As a federally chartered savings association, Dearborn Savings
Association is regulated and supervised by the Office of Thrift Supervision and
the Federal Deposit Insurance Corporation. This regulation and supervision
establishes a comprehensive framework of activities in which we may engage and
is intended primarily for the protection of the Federal Deposit Insurance
Corporation's deposit insurance funds and depositors. Under this system of
federal regulation, financial institutions are periodically examined to ensure
that they satisfy applicable standards with respect to their capital adequacy,
assets, management, earnings, liquidity and sensitivity to market interest
rates. After completing an examination, the federal agency critiques the
financial institution's operations and assigns its rating (known as an
institution's CAMELS). Under federal law, an institution may not disclose its
CAMELS rating to the public. Dearborn Savings Association also is a member of,
and owns stock in, the Federal Home Loan Bank of Indianapolis, which is one of
the twelve regional banks in the Federal Home Loan Bank System. Dearborn Savings
Association also is regulated, to a lesser extent, by the Board of Governors of
the Federal Reserve System, governing reserves to be maintained against deposits
and other matters. The Office of Thrift Supervision examines Dearborn Savings
Association and prepares reports for consideration by our board of directors on
any operating deficiencies. Dearborn Savings Association's relationship with our
depositors and borrowers also is regulated to a great extent by both federal and
state laws, especially in matters concerning the ownership of deposit accounts
and the form and content of our loan documents.
There can be no assurance that changes to existing laws, rules and
regulations, or any other new laws, rules or regulations, will not be adopted in
the future, which could make compliance more difficult or expensive or otherwise
adversely affect our business, financial condition or prospects. Any change in
these laws or regulations, or in regulatory policy, whether by the Federal
Deposit Insurance Corporation, the Office of Thrift Supervision or Congress,
could have a material adverse impact on our business, financial condition or
operations.
FEDERAL BANKING REGULATION
BUSINESS ACTIVITIES. A federal savings association derives its lending
and investment powers from the Home Owners' Loan Act, and the regulations of the
Office of Thrift Supervision. Under these laws and regulations, Dearborn Savings
Association may invest in mortgage loans secured by residential and
non-residential real estate, commercial business and consumer loans, certain
types of debt securities and certain other loans and assets. Dearborn Savings
Association also may establish subsidiaries that may engage in activities not
otherwise permissible for Dearborn Savings Association directly, including real
estate investment, securities brokerage and insurance agency.
CAPITAL REQUIREMENTS. Office of Thrift Supervision regulations require
savings associations to meet three minimum capital standards: a 1.5% tangible
capital ratio, a 4% leverage ratio (3% for institutions receiving the highest
CAMELS rating) and an 8% risk-based capital ratio. The prompt corrective action
standards discussed below, in effect, establish a minimum 2% tangible capital
standard.
The risk-based capital standard for savings associations requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks inherent in the type of asset. Core capital is
defined as common stockholders' equity (including retained earnings), certain
noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit
18
card relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock,
allowance for loan and lease losses up to a maximum of 1.25% of risk-weighted
assets, and up to 45% of net unrealized gains on available-for-sale equity
securities with readily determinable fair market values. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
At June 30, 2005, Dearborn Savings Association's capital exceeded all
applicable requirements.
LOANS TO ONE BORROWER. A federal savings association generally may not
make a loan or extend credit to a single or related group of borrowers in excess
of 15% of unimpaired capital and surplus on an unsecured basis. An additional
amount may be loaned, equal to 10% of unimpaired capital and surplus, if the
loan is secured by readily marketable collateral, which generally does not
include real estate. As of June 30, 2005, Dearborn Savings Association was in
compliance with the loans-to-one-borrower limitations.
QUALIFIED THRIFT LENDER TEST. As a federal savings association, Dearborn
Savings Association is subject to a qualified thrift lender, or "QTL," test.
Under the QTL test, Dearborn Savings Association must maintain at least 65% of
its "portfolio assets" in "qualified thrift investments" in at least nine months
of the most recent 12-month period. "Portfolio assets" generally means total
assets of a savings institution, less the sum of specified liquid assets up to
20% of total assets, goodwill and other intangible assets, and the value of
property used in the conduct of the savings association's business.
"Qualified thrift investments" include various types of loans made for
residential and housing purposes, investments related to such purposes,
including certain mortgage-backed and related securities, and loans for
personal, family, household and certain other purposes up to a limit of 20% of
portfolio assets. "Qualified thrift investments" also include 100% of an
institution's credit card loans, education loans and small business loans.
Dearborn Savings Association also may satisfy the QTL test by qualifying as a
"domestic building and loan association" as defined in the Internal Revenue Code
of 1986.
A savings association that fails the QTL test must either convert to a
bank charter or operate under specified restrictions. At June 30, 2005, Dearborn
Savings Association maintained approximately 68.09% of its portfolio assets in
qualified thrift investments, and therefore satisfied the QTL test.
CAPITAL DISTRIBUTIONS. Office of Thrift Supervision regulations govern
capital distributions by a federal savings association, which include cash
dividends, stock repurchases and other transactions charged to the institution's
capital account. A savings association must file an application for approval of
a capital distribution if:
o the total capital distributions for the applicable calendar year
exceed the sum of the savings association's net income for that
year to date plus the savings association's retained net income
for the preceding two years;
o the savings association would not be at least adequately
capitalized following the distribution;
o the distribution would violate any applicable statute,
regulation, agreement or Office of Thrift
o Supervision-imposed condition; or
o the savings association is not eligible for expedited treatment
of its filings.
Even if an application is not otherwise required, every savings
association that is a subsidiary of a holding company must still file a notice
with the Office of Thrift Supervision at least 30 days before the board of
directors declares a dividend or approves a capital distribution.
The Office of Thrift Supervision may disapprove a notice or application
if:
o the savings association would be undercapitalized following the
distribution;
19
o the proposed capital distribution raises safety and soundness
concerns; or
o the capital distribution would violate a prohibition contained
in any statute, regulation or agreement.
LIQUIDITY. A federal savings association is required to maintain a
sufficient amount of liquid assets to ensure its safe and sound operation.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING LAWS. All savings
associations have a responsibility under the Community Reinvestment Act and
related regulations of the Office of Thrift Supervision to help meet the credit
needs of their communities, including low- and moderate-income neighborhoods. In
connection with its examination of a federal savings association, the Office of
Thrift Supervision is required to assess the savings association's record of
compliance with the Community Reinvestment Act. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in
their lending practices on the basis of characteristics specified in those
statutes. A savings association's failure to comply with the provisions of the
Community Reinvestment Act could, at a minimum, result in regulatory
restrictions on its activities. The failure to comply with the Equal Credit
Opportunity Act and the Fair Housing Act could result in enforcement actions by
the Office of Thrift Supervision, as well as other federal regulatory agencies
and the Department of Justice. Dearborn Savings Association received a
"satisfactory" Community Reinvestment Act rating in its most recent federal
examination.
TRANSACTIONS WITH RELATED PARTIES. A federal savings association's
authority to engage in transactions with its "affiliates" is limited by Office
of Thrift Supervision regulations and by Sections 23A and 23B of the Federal
Reserve Act. The term "affiliates" for these purposes generally means any
company that controls or is under common control with an institution. DSA
Financial Corporation and its non-savings institution subsidiaries will be
affiliates of Dearborn Savings Association. In general, transactions with
affiliates must be on terms that are as favorable to the savings association as
comparable transactions with non-affiliates. In addition, certain types of these
transactions are restricted to an aggregate percentage of the savings
association's capital. Collateral in specified amounts must usually be provided
by affiliates in order to receive loans from the savings association. In
addition, Office of Thrift Supervision regulations prohibit a savings
association from lending to any of its affiliates that are engaged in activities
that are not permissible for bank holding companies and from purchasing the
securities of any affiliate, other than a subsidiary.
Dearborn Savings Association's authority to extend credit to its
directors, executive officers and 10% stockholders, as well as to entities
controlled by such persons, is currently governed by the requirements of
Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the
Federal Reserve Board. Among other things, these provisions require that
extensions of credit to insiders (i) be made on terms that are substantially the
same as, and follow credit underwriting procedures that are not less stringent
than, those prevailing for comparable transactions with unaffiliated persons and
that do not involve more than the normal risk of repayment or present other
unfavorable features, and (ii) not exceed certain limitations on the amount of
credit extended to such persons, individually and in the aggregate, which limits
are based, in part, on the amount of Dearborn Savings Association's capital. In
addition, extensions of credit in excess of certain limits must be approved by
Dearborn Savings Association's board of directors.
ENFORCEMENT. The Office of Thrift Supervision has primary enforcement
responsibility over federal savings associations and has the authority to bring
enforcement action against all "institution-affiliated parties," including
stockholders, attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an
association. Formal enforcement action may range from the issuance of a capital
directive or cease and desist order to removal of officers and/or directors of
the association, receivership, conservatorship or the termination of deposit
insurance. Civil penalties cover a wide range of violations and actions, and
range up to $25,000 per day, unless a finding of reckless disregard is made, in
which case penalties may be as high as $1 million per day. The Federal Deposit
Insurance Corporation also has the authority to recommend to the Director of the
Office of Thrift Supervision that enforcement action be taken with respect to a
particular savings association. If action is not taken by the Director, the
Federal Deposit Insurance Corporation has authority to take action under
specified circumstances.
20
STANDARDS FOR SAFETY AND SOUNDNESS. Federal law requires each federal
banking agency to prescribe certain standards for all insured depository
institutions. These standards relate to, among other things, internal controls,
information systems and audit systems, loan documentation, credit underwriting,
interest rate risk exposure, asset growth, compensation, and other operational
and managerial standards as the agency deems appropriate. The federal banking
agencies adopted Interagency Guidelines Prescribing Standards for Safety and
Soundness to implement the safety and soundness standards required under federal
law. The guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The guidelines address
internal controls and information systems, internal audit systems, credit
underwriting, loan documentation, interest rate risk exposure, asset growth,
compensation, fees and benefits. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard. If an institution fails
to meet these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan.
PROMPT CORRECTIVE ACTION REGULATIONS. Under the prompt corrective action
regulations, the Office of Thrift Supervision is required and authorized to take
supervisory actions against undercapitalized savings associations. For this
purpose, a savings association is placed in one of the following five categories
based on the savings association's capital:
o well-capitalized (at least 5% leverage capital, 6% tier 1
risk-based capital and 10% total risk-based capital);
o adequately capitalized (at least 4% leverage capital, 4% tier 1
risk-based capital and 8% total risk-based capital);
o undercapitalized (less than 3% leverage capital, 4% tier 1
risk-based capital or 8% total risk-based capital);
o significantly undercapitalized (less than 3% leverage capital,
3% tier 1 risk-based capital or 6% total risk-based capital);
and
o critically undercapitalized (less than 2% tangible capital).
Generally, the Office of Thrift Supervision is required to appoint a
receiver or conservator for a savings association that is "critically
undercapitalized." The regulation also provides that a capital restoration plan
must be filed with the Office of Thrift Supervision within 45 days of the date a
savings association receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." In addition,
numerous mandatory supervisory actions become immediately applicable to the
savings association, including, but not limited to, restrictions on growth,
investment activities, capital distributions and affiliate transactions. The
Office of Thrift Supervision may also take any one of a number of discretionary
supervisory actions against undercapitalized savings associations, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
At June 30, 2005, Dearborn Savings Association met the criteria for
being considered "well-capitalized."
INSURANCE OF DEPOSIT ACCOUNTS. Deposit accounts in Dearborn Savings
Association are insured by the Savings Association Insurance Fund of the Federal
Deposit Insurance Corporation, generally up to a maximum of $100,000 per
separately insured depositor. Dearborn Savings Association's deposits,
therefore, are subject to Federal Deposit Insurance Corporation deposit
insurance assessments. The Federal Deposit Insurance Corporation has adopted a
risk-based system for determining deposit insurance assessments. The Federal
Deposit Insurance Corporation is authorized to raise the assessment rates as
necessary to maintain the required ratio of reserves to insured deposits of
1.25%. In addition, all Federal Deposit Insurance Corporation-insured
institutions must pay assessments to the Federal Deposit Insurance Corporation
at an annual rate of approximately .0212% of insured deposits to fund interest
payments on federal agency bonds maturing in 2017 that were issued to
recapitalize the predecessor to the Savings Association Insurance Fund.
21
PROHIBITIONS AGAINST TYING ARRANGEMENTS. Federal savings associations
are prohibited, subject to some exceptions, from extending credit to or offering
any other service, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the savings association or its affiliates or not obtain services of
a competitor of the savings association.
FEDERAL HOME LOAN BANK SYSTEM. Dearborn Savings Association is a member
of the Federal Home Loan Bank System, which consists of 12 regional Federal Home
Loan Banks. The Federal Home Loan Bank System provides a central credit facility
primarily for member institutions. As a member of The Federal Home Loan Bank of
Indianapolis, Dearborn Savings Association is required to acquire and hold
shares of capital stock in the Federal Home Loan Bank in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year, or 1/20 of its
borrowings from the Federal Home Loan Bank, whichever is greater. As of June 30,
2005, Dearborn Savings Association was in compliance with this requirement.
FEDERAL RESERVE SYSTEM
Federal Reserve Board regulations require savings associations to
maintain non-interest-earning reserves against their transaction accounts, such
as negotiable order of withdrawal and regular checking accounts. At June 30,
2005, Dearborn Savings Association was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements
imposed by the Office of Thrift Supervision.
THE USA PATRIOT ACT
The USA PATRIOT Act gives the federal government powers to address
terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements. Title III of the USA PATRIOT Act amended the Bank
Secrecy Act to encourage information sharing among bank regulatory agencies and
law enforcement bodies. Moreover, certain provisions of Title III impose
affirmative obligations on a broad range of financial institutions, including
banks, savings associations, brokers, dealers, credit unions, money transfer
agents and parties registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must
establish anti-money laundering programs that include, at a
minimum: (i) internal policies, procedures, and controls; (ii)
specific designation of an anti-money laundering compliance
officer; (iii) ongoing employee training programs; and (iv) an
independent audit function to test the anti-money laundering
program.
o Section 326 authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue
regulations that provide for minimum standards with respect to
customer identification at the time new accounts are opened. On
July 23, 2002, the Office of Thrift Supervision and the other
federal bank regulators jointly issued proposed rules to
implement Section 326. The proposed rules require financial
institutions to establish a program specifying procedures for
obtaining identifying information from customers seeking to open
new accounts. This identifying information would be essentially
the same information currently obtained by most financial
institutions for individual customers.
o Section 312 requires financial institutions that establish,
maintain, administer, or manage private banking accounts or
correspondence accounts in the United States for non-United
States persons or their representatives (including foreign
individuals visiting the United States) to establish
appropriate, specific, and, where necessary, enhanced due
diligence policies, procedures, and controls designed to detect
and report money laundering.
22
o Effective December 25, 2001, financial institutions are
prohibited from establishing, maintaining, administering or
managing correspondent accounts for foreign shell banks (foreign
banks that do not have a physical presence in any country), and
will be subject to certain record keeping obligations with
respect to correspondent accounts of foreign banks.
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on
Federal Reserve Act and Bank Merger Act applications.
HOLDING COMPANY REGULATION
DSA Financial Corporation is a unitary savings and loan holding company,
subject to regulation and supervision by the Office of Thrift Supervision. The
Office of Thrift Supervision has enforcement authority over DSA Financial
Corporation and its non-savings institution subsidiaries. Among other things,
this authority permits the Office of Thrift Supervision to restrict or prohibit
activities that are determined to be a risk to Dearborn Savings Association.
Under prior law, a unitary savings and loan holding company generally
had no regulatory restrictions on the types of business activities in which it
could engage, provided that its subsidiary savings association was a qualified
thrift lender. The Gramm-Leach-Bliley Act of 1999, however, restricts unitary
savings and loan holding companies not existing on, or applied for before, May
4, 1999, to those activities permissible for financial holding companies or for
multiple savings and loan holding companies. DSA Financial Corporation is not be
a grandfathered unitary savings and loan holding company and, therefore, is
limited to the activities permissible for financial holding companies or for
multiple savings and loan holding companies. A financial holding company may
engage in activities that are financial in nature, including underwriting equity
securities and insurance, incidental to financial activities or complementary to
a financial activity. A multiple savings and loan holding company is generally
limited to activities permissible for bank holding companies under Section
4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the
Office of Thrift Supervision, and certain additional activities authorized by
Office of Thrift Supervision regulations.
Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring control of
another savings institution or holding company thereof, without prior written
approval of the Office of Thrift Supervision. It also prohibits the acquisition
or retention of, with specified exceptions, more than 5% of the equity
securities of a company engaged in activities that are not closely related to
banking or financial in nature or acquiring or retaining control of an
institution that is not federally insured. In evaluating applications by holding
companies to acquire savings institutions, the Office of Thrift Supervision must
consider the financial and managerial resources and future prospects of the
savings institution involved, the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive
factors.
SARBANES-OXLEY ACT OF 2002
The Sarbanes-Oxley Act of 2002 (the "Act") provides for corporate
governance, disclosure and accounting reforms intended to address corporate and
accounting fraud. The Act established an accounting oversight board that
enforces auditing, quality control and independence standards, and is funded by
fees from all publicly traded companies. The Act also places certain
restrictions on the scope of services that may be provided by accounting firms
to their public company audit clients. Any non-audit services being provided to
a public company audit client will require preapproval by the company's audit
committee. In addition, the Act makes certain changes to the requirements for
audit partner rotation after a period of time. The Act also requires chief
executive officers and chief financial officers, or their equivalent, to certify
to the accuracy of periodic reports filed with the Securities and Exchange
Commission, subject to civil and criminal penalties if they knowingly or
willingly violate this certification requirement. In addition, under the Act,
counsel will be required to report to the chief executive officer or chief legal
officer of the company, evidence of a material violation of the securities laws
or a breach of fiduciary duty by a company and, if such officer does not
appropriately respond, to report such evidence to the audit committee or other
similar committee of the board of directors or the board itself.
23
Under the Act, longer prison terms will apply to corporate executives
who violate federal securities laws; the period during which certain types of
suits can be brought against a company or its officers is extended; and bonuses
issued to top executives prior to restating a company's financial statements are
now subject to disgorgement if such restatement was due to corporate misconduct.
Executives are also prohibited from insider trading during retirement plan
"blackout" periods, and loans to company executives (other than loans by
financial institutions permitted by federal rules and regulations) are
restricted. In addition, a provision directs that civil penalties levied by the
Securities and Exchange Commission as a result of any judicial or administrative
action under the Act be deposited to a fund for the benefit of harmed investors.
The Federal Accounts for Investor Restitution provision also requires the
Securities and Exchange Commission to develop methods of improving collection
rates. The legislation accelerates the time frame for disclosures by public
companies, as they must immediately disclose any material changes in their
financial condition or operations. Directors and executive officers must also
provide information for most changes in beneficial ownership in a company's
securities within two business days of the change.
The Act also increases the oversight of, and codifies certain
requirements relating to, audit committees of public companies and how they
interact with the company's "registered public accounting firm." Audit Committee
members must be independent and are absolutely barred from accepting consulting,
advisory or other compensatory fees from the public company. In addition,
companies must disclose whether at least one member of the committee is an
"audit committee financial expert" (as defined by Securities and Exchange
Commission regulations) and if not, why not. Under the Act, a company's
registered public accounting firm will be prohibited from performing statutorily
mandated audit services for a company if such company's chief executive officer,
chief financial officer, comptroller, chief accounting officer or any person
serving in equivalent positions had been employed by such firm and participated
in the audit of such company during the one-year period preceding the audit
initiation date. The Act prohibits any officer or director of a company or any
other person acting under their direction from taking any action to fraudulently
influence, coerce, manipulate or mislead any independent accountant engaged in
the audit of the company's financial statements for the purpose of rendering the
financial statements materially misleading. The Act also requires the Securities
and Exchange Commission to prescribe rules requiring inclusion of any internal
control report and assessment by management in the annual report to
stockholders. The Act requires the company's registered public accounting firm
that issues the audit report to attest to and report on management's assessment
of the company's internal controls.
EXECUTIVE OFFICERS OF THE COMPANY
Listed below is information, as of June 30, 2005, concerning the
Company's executive officers. There are no arrangements or understandings
between the Company and any of the persons named below with respect to which he
was or is to be selected as an officer.
Name Age Position and Term
---- --- -----------------
Edward L. Fischer 53 President, Chief Executive Officer and Director
Thomas J. Sicking 65 Vice President
Steven R. Doll 53 Vice President and Chief Financial Officer
Delmar C. Schiferl 44 Vice President/Director of Lending
24
ITEM 2. PROPERTIES
The following table provides certain information with respect to our
offices as of June 30, 2005:
NET BOOK VALUE
LOCATION LEASED OR OWNED YEAR ACQUIRED OF REAL PROPERTY
-------- --------------- ------------- ----------------
Main Office Owned 1961 $62,000
118 Walnut Street
Lawrenceburg, IN 47025
Branch Office Owned 1992 $335,000
141 Ridge Avenue
Greendale, IN 47025
Land - Future Office Owned 2004 and 2005 $1,125,000
583 & 595 W. Eads Pkwy
Lawrenceburg, IN 47025
The net book value of our premises, land and equipment was approximately
$1.6 million at June 30, 2005.
ITEM 3. LEGAL PROCEEDINGS
We are involved, from time to time, as plaintiff or defendant in various
legal actions arising in the normal course of our business. At June 30, 2005, we
were not involved in any legal proceedings, the outcome of which would be
material to our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
(a) The information required by this item in incorporated by
reference to our Annual Report to Stockholders.
(b) Not applicable
(c) There were no issuer purchases of equity securities during the
fourth quarter of the 2005 fiscal year:
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to
our Annual Report to Shareholders.
25
ITEM 7. FINANCIAL STATEMENTS
(a)(1) FINANCIAL STATEMENTS
The following financial statements are incorporated by reference to our
Annual Report to Shareholders:
o Report of Independent Registered Public Accounting Firm
o Consolidated Statements of Financial Condition at June
30, 2005 and 2004
o Consolidated Statements of Earnings for the Years Ended
June 30, 2005 and 2004
o Consolidated Statements of Comprehensive Income for the
Years Ended June 30, 2005 and 2004
o Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 2005 and 2004
o Consolidated Statements of Cash Flows for the Years
Ended Years Ended June 30, 2005 and 2004
o Notes to Consolidated Financial Statements.
(a)(2) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are filed because the
required information is not applicable or is included in
the consolidated financial statements or related notes.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer, President and Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act) as
of a date (the "Evaluation Date") within 90 days prior to the filing date of
this report. Based upon that evaluation, the Chief Executive Officer, President
and Chief Financial Officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures were effective in timely alerting them to the
material information relating to us (or our consolidated subsidiaries) required
to be included in our periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during
the period covered by this report or, to our knowledge, in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.
26
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE
REGISTRANT; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Information concerning Directors of the Company is incorporated herein
by reference from our definitive Proxy Statement (the "Proxy Statement"),
specifically the section captioned "Proposal I--Election of Directors." In
addition, see "Executive Officers of the Company" in Item 1 for information
concerning our executive officers.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from our Proxy Statement, specifically the section captioned
"Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain owners and
management and related stockholder matters is incorporated herein by reference
from our Proxy Statement, specifically the sections captioned "Voting Securities
and Principal Holders Thereof" and "Benefit Plans."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning relationships and transactions is incorporated
herein by reference from our Proxy Statement, specifically the section captioned
"Transactions with Certain Related Persons."
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The exhibits filed as a part of this Form 10-KSB are as follows:
3.1 Certificate of Incorporation*
3.2 Bylaws*
4 Form of Common Stock Certificate*
10.1 Form of Employment Agreement*
10.2 Form of Severance Agreement*
10.3 Executive Supplemental Retirement Income Agreement*
10.4 Dearborn Financial Corporation 2003 Recognition and Retention
Plan*
10.5 Directors' Emeritus Plan*
10.6 Form of Directors' Deferred Compensation Agreement*
13 Portions of Annual Report to Shareholders
21 Subsidiaries of the Registrant
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
-----------------------
* Incorporated by Reference from the Registration Statement on
Form SB-2 of DSA Financial Corporation (File No. 333-113538), as
amended, initially filed with the U.S. Securities and Exchange
Commission on March 12, 2004.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICE
Information required by this Item is incorporated by reference to the
Proxy Statement under the caption "Proposal II-Ratification of Auditors."
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DSA FINANCIAL CORPORATION
Date: September 23, 2005 By: /s/ Edward L. Fischer
----------------------------------
Edward L. Fischer, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Edward L. Fischer By: /s/ Robert P. Sonntag
---------------------------------- ----------------------------------
Edward L. Fischer, President, Robert P. Sonntag
Chief Executive Officer and Chairman of the Board
Director
(Principal Executive Officer)
Date: September 23, 2005 Date: September 23, 2005
By: /s/ Steven R. Doll By: /s/ Ronald J. Denney
---------------------------------- ----------------------------------
Steven R. Doll, Chief Financial Ronald J. Denney
Officer Director
(Principal Financial and
Accounting Officer)
Date: September 23, 2005 Date: September 23, 2005
By: /s/ David P. Lorey By: /s/ Richard Meador, III
---------------------------------- ----------------------------------
David P. Lorey Richard Meador, III
Director Director
Date: September 23, 2005 Date: September 23, 2005
By: /s/ Dennis Richter
----------------------------------
Dennis Richter
Director
Date: September 23, 2005
28