FORM 10-QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2005
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 0-50864
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DSA FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 20-1661802
------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
118 Walnut Street, Lawrenceburg, Indiana 47025
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(Address of principal executive office)
Registrant's telephone number, including area code: (812) 537-0940
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of February 9, 2006, the latest practicable date, 1,644,242 shares of the
registrant's common stock, $.01 par value, were issued and outstanding.
Page 1 of 17
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10
Liquidity and Capital Resources 15
Controls and Procedures 15
PART II - OTHER INFORMATION 16
SIGNATURES 17
2
DSA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
DECEMBER 31, JUNE 30,
ASSETS 2005 2005
(Unaudited)
Cash and due from banks $ 2,101 $ 3,058
Interest-bearing deposits in other financial institutions 1,865 985
-------- --------
Cash and cash equivalents 3,966 4,043
Certificates of deposit in other financial institutions 31 829
Investment securities designated as available for sale - at market 4,280 4,550
Mortgage-backed securities designated as available for sale - at market 582 835
Loans receivable - net 83,339 76,379
Real estate acquired through foreclosure 218 87
Office premises and equipment - at depreciated cost 1,648 1,635
Stock in Federal Home Loan Bank - at cost 1,150 1,150
Accrued interest receivable on loans 360 337
Accrued interest receivable on investments 28 27
Cash surrender value of life insurance 2,792 1,869
Prepaid expenses and other assets 487 543
Prepaid income taxes 65 104
Deferred income taxes 304 141
-------- --------
Total assets $ 99,250 $ 92,529
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 73,689 $ 66,891
Borrowings from the Federal Home Loan Bank 7,000 7,000
Advances by borrowers for taxes and insurance 152 208
Accounts payable on mortgage loans serviced for others 103 67
Accrued interest payable 18 16
Other liabilities 1,226 1,114
-------- --------
Total liabilities 82,188 75,296
Stockholders' equity
Preferred stock - 1,000,000 and 10,000 shares of $0.01 par value
authorized as of June 30, 2005 and December 31, 2005, respectively;
no shares issued - -
Common stock - 5,000,000 and 2,500,000 shares of $0.01 par value
authorized as of June 30, 2005 and December 31, 2005, respectively;
1,644,242 shares issued and outstanding 16 16
Additional paid-in capital 10,284 10,284
Retained earnings, restricted 7,627 7,660
Accumulated comprehensive income (loss), net of related tax effects (85) 53
Shares acquired by stock benefit plans (780) (780)
-------- --------
Total stockholders' equity 17,062 17,233
-------- --------
Total liabilities and stockholders' equity $ 99,250 $ 92,529
======== ========
3
DSA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share data)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
2005 2004 2005 2004
Interest income
Loans $1,278 $1,001 $2,460 $1,944
Mortgage-backed securities 6 10 13 22
Investment securities 39 46 77 108
Interest-bearing deposits and other 28 33 70 74
------ ------ ------ ------
Total interest income 1,351 1,090 2,620 2,148
Interest expense
Deposits 480 270 904 544
Borrowings 90 52 172 104
------ ------ ------ ------
Total interest expense 570 322 1,076 648
------ ------ ------ ------
Net interest income 781 768 1,544 1,500
Provision for losses on loans 24 6 31 12
------ ------ ------ ------
Net interest income after provision
for losses on loans 757 762 1,513 1,488
Other income
Gain on sale of loans 4 14 15 41
Gain (loss) on sale of investment and mortgage-backed securities 159 - 159 (2)
Loss on sale of real estate acquired through foreclosure (7) - (10) -
Cash surrender value of life insurance 26 15 46 35
Other operating 43 54 100 104
------ ------ ------ ------
Total other income 225 83 310 178
General, administrative and other expense
Employee compensation and benefits 321 294 646 597
Occupancy and equipment 38 45 76 86
Data processing 34 33 68 65
Other operating 168 142 302 257
------ ------ ------ ------
Total general, administrative and other expense 561 514 1,092 1,005
------ ------ ------ ------
Earnings before income taxes 421 331 731 661
Income taxes
Current 209 135 323 279
Deferred (62) (10) (61) (32)
------ ------ ------ ------
Total income taxes 147 125 262 247
------ ------ ------ ------
NET EARNINGS $ 274 $ 206 $ 469 $ 414
====== ====== ====== ======
EARNINGS PER SHARE
Basic and diluted $ .17 $ .13 $ .29 $ .26
====== ====== ====== ======
4
DSA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
2005 2004 2005 2004
Net earnings $274 $206 $469 $414
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during the
period, net of taxes (benefits) of $(16), $(6), $(35)
and $61 during the respective periods (22) (8) (47) 82
Reclassification adjustment for realized (gains) losses
included in earnings, net of taxes (benefits) of $68, $ -,
$68 and $(1) during the respective periods (91) - (91) 1
------ ------ ------ ------
Comprehensive income $ 161 $ 198 $ 331 $ 497
====== ====== ====== ======
Accumulated comprehensive loss $ (85) $ (43) $ (85) $ (43)
====== ====== ====== ======
5
DSA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended December 31,
(Unaudited)
(In thousands)
2005 2004
Cash flows from operating activities:
Net earnings for the period $ 469 $ 414
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities - net (4) (9)
Amortization of deferred loan origination fees (8) (17)
Amortization of mortgage servicing rights 26 17
Provision for losses on loans 31 12
Depreciation and amortization 42 51
Increase in cash surrender value of life insurance (46) (35)
Loss on sale of real estate acquired through foreclosure 10 -
(Gain) loss on sale of investment and mortgage-backed securities
designated as available for sale (159) 2
Origination of loans for sale in the secondary market (873) (2,157)
Proceeds from sale of loans in the secondary market 881 1,645
Gain on sale of loans (8) (28)
Federal Home Loan Bank stock dividends - (24)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (23) (56)
Accrued interest receivable on investments (1) 5
Prepaid expenses and other assets 30 33
Accounts payable on mortgage loans serviced for others 36 4
Accrued interest payable 2 -
Other liabilities 112 15
Income taxes
Current 39 (37)
Deferred (61) (32)
--------- ---------
Net cash provided by (used in) operating activities 495 (197)
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale - (492)
Proceeds from sale of investment securities designated as available
for sale 203 498
Proceeds from maturity and principal repayments of investment securities - 2,500
Principal repayments on mortgage-backed securities 241 365
Principal repayments on loans 11,236 13,295
Loan disbursements (18,460) (23,944)
Purchase of office premises and equipment (55) (7)
(Increase) decrease in certificates of deposit in other financial institutions 800 (656)
Purchase of life insurance (900) (30)
Redemption of cash surrender value of life insurance 23 -
Proceeds from sale of real estate acquired through foreclosure 104 25
Improvements to real estate acquired through foreclosure (4) (6)
--------- ---------
Net cash used in investing activities (6,812) (8,452)
--------- ---------
Net cash used in operating and investing activities
(balance carried forward) (6,317) (8,649)
--------- ---------
6
DSA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended December 31,
(Unaudited)
(In thousands)
2005 2004
Net cash used in operating and investing activities
(balance brought forward) $ (6,317) $ (8,649)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts 6,798 (7,049)
Repayment of Federal Home Loan Bank borrowings (3,000) -
Proceeds from Federal Home Loan Bank borrowings 3,000 -
Advances by borrowers for taxes and insurance (56) 97
Proceeds from issuance of common stock - 7,339
Dividends on common stock (502) (170)
--------- ---------
Net cash provided by financing activities 6,240 217
--------- ---------
Net decrease in cash and cash equivalents (77) (8,432)
Cash and cash equivalents at beginning of period 4,043 10,564
--------- ---------
Cash and cash equivalents at end of period $ 3,966 $ 2,132
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 284 $ 322
========= =========
Interest on deposits and borrowings $ 1,074 $ 648
========= =========
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ (47) $ 82
========= =========
Recognition of mortgage servicing rights in accordance with
SFAS No. 140 $ 7 $ 13
========= =========
Transfers from loans to real estate acquired through foreclosure $ 278 $ -
========= =========
Loans originated upon sale of real estate acquired through foreclosure $ 37 $ -
========= =========
7
DSA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six and three months ended December 31, 2005 and 2004
1. BASIS OF PRESENTATION
The Board of Directors of Dearborn Mutual Holding Company (the "M.H.C.") adopted
a Plan of Conversion (the "Plan") on December 30, 2003. Pursuant to the Plan,
which was completed effective July 28, 2004, the M.H.C. converted from the
mutual holding company form of organization to the fully public form. The
M.H.C., the mutual holding company parent of Dearborn Financial Corporation,
merged into Dearborn Savings Association F.A. ("Dearborn Savings" or the
"Association"), and as a result the M.H.C. no longer exists. Pursuant to the
Plan, Dearborn Financial Corporation, which owned 100% of Dearborn Savings, was
succeeded by a new Delaware corporation named DSA Financial Corporation ("DSA
Financial" or the "Corporation"). As part of the conversion, the M.H.C.'s
ownership interest, as formerly evidenced by 250,000 shares of Dearborn
Financial Corporation common stock, was sold in a subscription and community
offering and to a newly-formed Employee Stock Ownership Plan. Shares of existing
stockholders of Dearborn Financial Corporation were exchanged for shares of DSA
Financial, pursuant to an exchange ratio of 3.3926-to-one. The offering resulted
in proceeds, net of costs related to the offering, of $7.2 million. Following
the completion of the Plan, DSA Financial had 1,644,242 total shares issued.
Following the completion of the conversion, effective July 28, 2004, all of the
capital stock of Dearborn Savings is held by DSA Financial.
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-QSB and, therefore, do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with accounting
principles generally accepted in the United States of America. Accordingly,
these financial statements should be read in conjunction with the financial
statements and notes thereto of the Corporation for the year ended June 30,
2005. However, in the opinion of management, all adjustments (consisting of only
normal recurring accruals) which are necessary for a fair presentation of the
financial statements have been included. The results of operations for the
three- and six-month periods ended December 31, 2005, are not necessarily
indicative of the results which may be expected for the entire fiscal year.
2. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation
and the Association. All intercompany transactions and balances have been
eliminated.
3. EARNINGS PER SHARE
Basic earnings per share is computed based upon the weighted-average common
shares outstanding during the period, restated for the effects of the
Corporation's reorganization and related stock offering. Weighted-average common
shares deemed outstanding totaled 1,584,112 for both the three- and six-month
periods ended December 31, 2005 and 1,576,366 for both the three- and six-month
periods ended December 31, 2004.
The Corporation had no dilutive or potentially dilutive securities at December
31, 2005 and 2004.
8
DSA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six and three months ended December 31, 2005 and 2004
4. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (the "FASB") issued a
revision to Statement of Financial Accounting Standards ("SFAS") No. 123 which
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services, primarily on accounting
for transactions in which an entity obtains employee services in share-based
transactions. This Statement, SFAS No. 123 (R) "Share-Based Payment", requires a
public entity to measure the cost of employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the award,
with limited exceptions. That cost will be recognized over the period during
which an employee is required to provide services in exchange for the award -
the requisite service period. No compensation cost is recognized for equity
instruments for which employees do not render the requisite service. Employee
share purchase plans will not result in recognition of compensation cost if
certain conditions are met.
Initially, the cost of employee services received in exchange for an award of
liability instruments will be measured based on current fair value; the fair
value of that award will be remeasured subsequently at each reporting date
through the settlement date. Changes in fair value during the requisite service
period will be recognized as compensation cost over that period. The grant-date
fair value of employee share options and similar instruments will be estimated
using option-pricing models adjusted for the unique characteristics of those
instruments (unless observable market prices for the same or similar instruments
are available). If an equity award is modified after the grant date, incremental
compensation cost will be recognized in an amount equal to the excess of the
fair value of the modified award over the fair value of the original award
immediately before the modification.
Excess tax benefits, as defined by SFAS 123(R) will be recognized as an addition
to additional paid-in capital. Cash retained as a result of those excess tax
benefits will be presented in the statement of cash flows as financing cash
inflows. The write-off of deferred tax assets relating to unrealized tax
benefits associated with recognized compensation cost will be recognized as
income tax expense unless there are excess tax benefits from previous awards
remaining in additional paid-in capital to which it can be offset.
Compensation cost is required to be recognized in the first annual period that
begins after December 15, 2005, or July 1, 2006 as to the Corporation. The
Corporation currently has a stock option plan that is subject to the provisions
of SFAS No. 123(R). However, at the time of this filing, no stock options have
been granted.
9
DSA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This document 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 and other loans,
real estate values, and 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.
DISCUSSION OF FINANCIAL CONDITION CHANGES FROM JUNE 30, 2005 TO DECEMBER 31,
2005
ASSETS. Total assets increased $6.7 million, or 7.3%, to $99.3 million at
December 31, 2005, from June 30, 2005. The increase in assets resulted from a
$7.0 million increase in loans, net to $83.3 million at December 31, 2005 from
$76.4 million at June 30, 2005, and a $923,000 increase in cash surrender value
of life insurance, to $2.8 million at December 31, 2005 from $1.9 million at
June 30, 2005, partially offset by a $798,000 decrease in certificates of
deposit in other financial institutions, to $31,000 at December 31, 2005 from
$829,000 at June 30, 2005. The decrease in certificates of deposit resulted from
maturities. Management elected to fund loan originations with proceeds from
these maturities. The increase in loans reflected increases in one- to
four-family, construction and nonresidential real estate and land loans. We have
opted to retain a majority of our recently originated fixed-rate one- to
four-family residential real estate loans in our portfolio due to our strong
capital position. In addition, we maintain construction loans, nonresidential
real estate and land loans in our portfolio because they are originated at
favorable rates of interest compared to one- to four-family residential real
estate loans and assist us in managing interest rate risk.
LIABILITIES. Total liabilities increased $6.9 million, or 9.2%, to $82.2 million
at December 31, 2005 from $75.3 million at June 30, 2005. The increase in
liabilities primarily reflects a $6.8 million, or 10.2%, increase in deposits,
to $73.7 million at December 31, 2005 from $66.9 million at June 30, 2005. The
increase in deposits consisted of an increase of $9.2 million in certificates of
deposit, partially offset by a decrease in passbook accounts of $2.3 million.
The growth in certificates of deposit included $5.0 million of public funds as
well as growth related to the higher interest rates offered during the period.
STOCKHOLDERS' EQUITY. Stockholders' equity decreased $171,000 to $17.1 million
at December 31, 2005, reflecting a $138,000 increase in unrealized losses on
securities available for sale coupled with dividends paid of $502,000, partially
offset by net earnings of $469,000. The $138,000 increase in unrealized losses
resulted from the sale of an investment in December, 2005 that reflected an
unrealized gain of $89,000 at June 30, 2005.
COMPARISON OF OPERATING RESULTS FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31,
2005 AND 2004
GENERAL. Net earnings increased $68,000, or 33.0%, to $274,000 for the three
months ended December 31, 2005, from $206,000 for the three months ended
December 31, 2004. The increase resulted primarily from a gain on sale of
investments of $159,000, partially offset by a $47,000 increase in general,
administrative and other expense, an $18,000 increase in the provision for
losses on loans, and an increase in income taxes of $22,000.
10
DSA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF OPERATING RESULTS FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31,
2005 AND 2004 (continued)
INTEREST INCOME. Interest income was $1.4 million for the three months ended
December 31, 2005, an increase of $261,000, or 23.9%, over the $1.1 million
recorded for the three months ended December 31, 2004. Material changes occurred
primarily in interest income on loans.
Interest income on loans increased $277,000, or 27.7%, to $1.3 million for the
three months ended December 31, 2005 from $1.0 million for the three months
ended December 31, 2004. The increase was due primarily to a $15.9 million, or
24.3%, increase in the average balance of loans outstanding, and an increase of
16 basis points in the average yield, to 6.29% for the three months ended
December 31, 2005, from 6.13% for the three months ended December 31, 2004.
INTEREST EXPENSE. Interest expense increased $248,000, or 77.0%, to $570,000 for
the three months ended December 31, 2005 from $322,000 for the three months
ended December 31, 2004. The increase in interest expense resulted from a
$210,000 increase in interest expense on deposits and a $38,000 increase in
interest expense on borrowed money.
Interest expense on deposits increased $210,000, or 77.8%, to $480,000 for the
three months ended December 31, 2005 from $270,000 for the three months ended
December 31, 2004. The increase was due to an increase in the average rate paid
on deposits to 2.65% for the three months ended December 31, 2005 from 1.71% for
the same period in 2004, and an increase in the average balance of deposits
outstanding of $9.4 million, or 14.8%. The average balance of certificates of
deposit increased $13.1 million, or 41.2%, and the average rate paid increased
112 basis points, to 3.54% for the three months ended December 31, 2005 from
2.42% for the three months ended December 31, 2004. The average balance of
passbook accounts decreased by $3.7 million, or 19.4%, while the average cost of
passbook accounts increased by 37 basis points to 1.71% for the period. The
increase in the cost of deposits was due to the increase in interest rates in
the overall economy during the period. The interest rates offered on deposits by
Dearborn Savings were increased to match rates offered by competitors to
maintain deposit share.
Interest expense on borrowings increased $38,000, or 73.1%, to $90,000 for the
three months ended December 31, 2005 from $52,000 for the three months ended
December 31, 2004. The increase was due to an increase in the average rate paid
on borrowings to 4.61% for the three months ended December 31, 2005 from 4.15%
for the same period in 2004, and an increase in the average balance of
borrowings outstanding of $2.8 million, or 55.5%. Management increased
borrowings between periods to fund loan growth.
NET INTEREST INCOME. The foregoing changes in our interest income and our
interest expense resulted in a $13,000, or 1.7%, increase in net interest
income, to $781,000 for the three months ended December 31, 2005, from $768,000
for the three months ended December 31, 2004. Our interest rate spread decreased
to 3.25% in the 2005 quarter from 3.76% in the 2004 quarter and our net interest
margin decreased to 3.52% during the 2005 quarter from 3.98% during the 2004
quarter, while average net interest-earning assets decreased to $8.5 million for
the three months ended December 31, 2005 from $9.1 million for the three months
ended December 31, 2004.
PROVISION FOR LOSSES ON LOANS. We establish provisions for losses on loans,
which are charged to operations, at a level necessary to absorb known and
inherent losses that are both probable and reasonably estimable at the date of
the financial statements. Management made provisions of $24,000 and $6,000 for
the three months ended December 31, 2005 and 2004, respectively. We used the
same methodology and generally similar assumptions in assessing the allowance
for both periods. The allowance for loan losses was $384,000, or 0.44%, of gross
loans outstanding at December 31, 2005, as compared with $362,000, or 0.45%, of
gross loans outstanding at June 30, 2005. The level of the allowance is based on
estimates, and ultimate losses may vary from the estimates.
11
DSA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF OPERATING RESULTS FOR THE THREE-MONTH PERIODS ENDED DECEMBER 31,
2005 AND 2004 (continued)
PROVISION FOR LOSSES ON LOANS (CONTINUED). Determining the amount of the
allowance for loan losses necessarily involves a high degree of judgment.
Management reviews the level of the allowance on a quarterly basis, at a
minimum, and establishes the provision for losses on loans based on the
composition of the loan portfolio, delinquency levels, loss experience, economic
conditions, and other factors related to the collectibility of the loan
portfolio. Nonperforming loans totaled $364,000, or 0.44% of total loans at
December 31, 2005, compared to $77,000, or 0.10% of total loans at June 30,
2005. Nonperforming loans consisted primarily of one- to four-family residential
loans at December 31, 2005. Management expects no losses on these nonperforming
loans. The provision for losses on loans for the three months ended December 31,
2005 was predicated primarily upon growth in the portfolio of loans secured by
nonresidential real estate and loans secured by one- to four-family real estate.
Although we believe that we use the best information available to establish the
allowance for loan losses, future additions to the allowance may be necessary
based on estimates that are susceptible to change as a result of changes in
economic conditions and other factors. In addition, the Office of Thrift
Supervision, as an integral part of its examination process, periodically
reviews our allowance for loan losses. The Office of Thrift Supervision may
require us to recognize adjustments to the allowance based on its judgment
regarding the adequacy of our allowance for loan losses at the time of its
examination.
OTHER INCOME. Other income increased $142,000, or 171.1%, to $225,000 for the
three months ended December 31, 2005 from $83,000 for the three months ended
December 31, 2004. The increase resulted primarily from a gain on the sale of an
investment of $159,000, partially offset by a decrease of $10,000 in gain on
sale of loans, to $4,000 for the three months ended December 31, 2005, from
$14,000 for the three months ended December 31, 2004. The gain on sale of
investment securities resulted from our redemption of our investment in the
common stock of another financial institution, as that entity was acquired
during the current quarter in an all-cash transaction. We sold $341,000 of loans
during the three months ended December 31, 2005 compared to $676,000 of such
sales during the three months ended December 31, 2004. The decline in sales
volume resulted from management's decision to retain one- to four-family
residential loans in our portfolio during the current period, as discussed
above.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other
expense increased $47,000, or 9.1%, to $561,000 for the three months ended
December 31, 2005 from $514,000 for the three months ended December 31, 2004.
The increase resulted primarily from a $27,000, or 9.2%, increase in employee
compensation and benefits expense, to $321,000 for the three months ended
December 31, 2005 from $294,000 for the three months ended December 31, 2004 and
an increase in other operating expense of $26,000, or 18.3%, to $168,000 for the
three-month period ended December 31, 2005 from $142,000 for the three-month
period ended December 31, 2004. The increase in employee compensation and
benefits resulted primarily from normal merit increases, an increase in health
insurance costs and increases in benefit plan costs, including the directors
deferred compensation plan, the employee SEP plan and the employee stock
ownership plan (ESOP). The increase in other operating expense resulted from an
increase in costs associated with becoming a publicly traded company, including
an assessment of Delaware franchise taxes of $11,000.
INCOME TAXES. The provision for income taxes was $147,000 for the three months
ended December 31, 2005 and $125,000 for the three months ended December 31,
2004, reflecting effective tax rates of 34.9% and 37.8%, respectively.
12
DSA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF OPERATING RESULTS FOR THE SIX-MONTH PERIODS ENDED DECEMBER 31,
2005 AND 2004
GENERAL. Net earnings increased $55,000, or 13.3%, to $469,000 for the six
months ended December 31, 2005, from $414,000 for the six months ended December
31, 2004. The increase resulted primarily from a gain on sale of investments of
$159,000, partially offset by an $87,000 increase in general, administrative and
other expense, a $19,000 increase in the provision for losses on loans and an
increase in income taxes of $15,000.
INTEREST INCOME. Interest income was $2.6 million for the six months ended
December 31, 2005, an increase of $472,000, or 22.0%, over the $2.1 million
recorded for the six months ended December 31, 2004. Material changes occurred
in interest income on loans and to a lesser extent in interest income on
investment securities.
Interest income on loans increased $516,000, or 26.5%, to $2.5 million for the
six months ended December 31, 2005 from $1.9 million for the six months ended
December 31, 2004. The increase was due primarily to a $16.0 million, or 25.5%,
increase in the average balance of loans outstanding, and an increase of five
basis points in the average yield, to 6.22% for the six months ended December
31, 2005, from 6.17% for the six months ended December 31, 2004.
Interest income on investment securities decreased by $31,000, or 28.7%, due
primarily to a $1.9 million, or 29.8%, decrease in the average outstanding
balance.
INTEREST EXPENSE. Interest expense increased $428,000, or 66.0%, to $1.1 million
for the six months ended December 31, 2005 from $648,000 for the six months
ended December 31, 2004. The increase in interest expense resulted from a
$360,000 increase in interest expense on deposits and a $68,000 increase in
interest expense on borrowed money.
Interest expense on deposits increased $360,000, or 66.2%, to $904,000 for the
six months ended December 31, 2005 from $544,000 for the six months ended
December 31, 2004. The increase was due to an increase in the average rate paid
on deposits to 2.54% for the six months ended December 31, 2005 from 1.70% for
the same period in 2004, and an increase in the average balance of deposits
outstanding of $7.4 million, or 11.5%. The average balance of certificates of
deposit increased by $11.2 million, or 35.1%, and the average rate paid
increased 97 basis points, to 3.40% for the six months ended December 31, 2005
from 2.43% for the six months ended December 31, 2004. The average balance of
passbook accounts decreased by $4.0 million, or 20.0%, while the average cost of
passbook accounts increased by 49 basis points to 1.74% for the period. The
increase in the cost of deposits was due to the increase in interest rates in
the overall economy during the period. The interest rates offered on deposits by
Dearborn Savings were increased to match rates offered by competitors to
maintain deposit share.
Interest expense on borrowings increased $68,000, or 65.4%, to $172,000 for the
six months ended December 31, 2005 from $104,000 for the six months ended
December 31, 2004. The increase was due to an increase in the average rate paid
on borrowings to 4.65% for the six months ended December 31, 2005 from 4.15% for
the same period in 2004, and an increase in the average balance of borrowings
outstanding of $2.4 million, or 47.6%.
NET INTEREST INCOME. The foregoing changes in our interest income and our
interest expense resulted in a $44,000, or 2.9%, increase in net interest
income, to $1.5 million for the six months ended December 31, 2005, compared to
the six months ended December 31, 2004. Our interest rate spread decreased to
3.24% in the 2005 period from 3.66% in the 2004 period and our net interest
margin decreased to 3.52% during the 2005 period from 3.87% during the 2004
period, while average net interest-earning assets increased to $8.9 million for
the six months ended December 31, 2005 from $8.6 million for the six months
ended December 31, 2004.
13
DSA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF OPERATING RESULTS FOR THE SIX-MONTH PERIODS ENDED DECEMBER 31,
2005 AND 2004 (continued)
PROVISION FOR LOSSES ON LOANS. Management made provisions of $31,000 and $12,000
for the six months ended December 31, 2005 and 2004, respectively. We used the
same methodology and generally similar assumptions in assessing the allowance
for both periods. The allowance for loan losses was $384,000, or 0.44%, of gross
loans outstanding at December 31, 2005, as compared with $362,000, or 0.45%, of
gross loans outstanding at June 30, 2005. The level of the allowance is based on
estimates, and ultimate losses may vary from the estimates.
The provision for losses on loans for the six months ended December 31, 2005 was
predicated primarily upon growth in the portfolio of loans secured by
nonresidential real estate and loans secured by one- to four-family real estate.
OTHER INCOME. Other income increased $132,000, or 74.2%, to $310,000 for the six
months ended December 31, 2005 from $178,000 for the six months ended December
31, 2004. The increase resulted primarily from a gain on the sale of an
investment of $159,000, partially offset by a decrease of $26,000 in gain on
sale of loans, to $15,000 for the six months ended December 31, 2005, from
$41,000 for the six months ended December 31, 2004. The gain on sale of
investment securities resulted from our redemption of our investment in the
common stock of another financial institution, as that entity was acquired
during the current period in an all-cash transaction. We sold $873,000 of loans
during the six months ended December 31, 2005 compared to $1.6 million of such
sales during the six months ended December 31, 2004. The decline in sales volume
resulted from management's decision to retain one- to four-family residential
loans in our portfolio during the current period, as discussed above.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other
expense increased $87,000, or 8.7%, to $1.1 million for the six months ended
December 31, 2005 from $1.0 million for the six months ended December 31, 2004.
The increase resulted primarily from a $49,000, or 8.2%, increase in employee
compensation and benefits expense, to $646,000 for the six months ended December
31, 2005 from $597,000 for the six months ended December 31, 2004 and an
increase in other operating expense of $45,000, or 17.5%, to $302,000 for the
six-month period ended December 31, 2005 from $257,000 for the six-month period
ended December 31, 2004. The increase in employee compensation and benefits
resulted primarily from normal merit increases, an increase in health insurance
costs and increases in benefit plan costs, including the directors deferred
compensation plan, the employee SEP plan and the employee stock ownership plan
(ESOP). The increase in other operating expense resulted from an increase in ATM
charges, increased advertising expenditures, legal fees, and costs associated
with becoming a publicly traded company, including an assessment of Delaware
franchise taxes of $19,000.
INCOME TAXES. The provision for income taxes was $262,000 for the six months
ended December 31, 2005 and $247,000 for the six months ended December 31, 2004,
reflecting effective tax rates of 35.8% and 37.4%, respectively.
14
DSA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Corporation has entered into a contract with a builder providing for the
construction of a new headquarters for DSA Financial Corporation. The building
will be constructed on land previously acquired in Lawrenceburg, Indiana at the
intersection of U.S. Route 50 and Indiana Route 48. Management currently expects
to occupy approximately seventy percent of the building and lease the remainder.
The space occupied by the Corporation will include full service banking
facilities, as well as administrative offices. Construction was begun in
December 2005 and is expected to be concluded by August 2006. Management has
estimated costs of construction, equipment and furnishings to amount to $1.9
million, of which $50,000 has been incurred and paid as of December 31, 2005.
There were no other material changes to the Corporation's liquidity and capital
resources since that disclosed in the Corporation's Form 10-KSB as of June 30,
2005.
ITEM 3 CONTROLS AND PROCEDURES
The Corporation's Chief Executive Officer and Chief Financial Officer evaluated
the disclosure controls and procedures (as defined under Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of
the period covered by this quarterly report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Corporation's disclosure controls and procedures are effective.
There were no changes in the Corporation's internal controls over financial
reporting that have materially affected, or were reasonably likely to materially
affect, these controls subsequent to the date of their evaluation by the
Corporation's Chief Executive Officer and Chief Financial Officer.
15
DSA FINANCIAL CORPORATION
PART II
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 10, 2005, the Corporation held its Annual Meeting of
Shareholders. Four matters were submitted to the shareholders for a
vote. The shareholders elected two directors to terms expiring in 2008
by the following votes:
FOR WITHHELD
Edward L. Fischer 1,332,080 -0-
Richard Meador, III 1,331,189 -0-
The following directors terms continued through the Annual Meeting of
Shareholders: Ronald J. Denney, Robert P. Sonntag, David P. Lorey and
Dr. Dennis Richter.
The shareholders approved an amendment to the Corporation's
Certificate of Incorporation to reduce the number of authorized shares
of common and preferred stock by the following vote:
For: 923,964 Against: 11,156 Abstain: 4,278
The shareholders approved the DSA Financial Corporation 2005
Stock-Based Incentive Plan by the following vote:
For: 873,819 Against: 63,962 Abstain: 1,617
The shareholders also ratified the selection of Grant Thornton LLP as
the Company's independent registered public accounting firm for the
2006 fiscal year by the following vote:
For: 1,342,272 Against: 12,486 Abstain: -0-
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
EX-31.1 Certification of Chief Executive Officer pursuant to Rule
13(a) or 15(d)
EX-31.2 Certification of Chief Financial Officer pursuant to Rule
13(a) or 15(d)
EX-32.1 Section 1350 Certification of the Chief Executive Officer
EX-32.2 Section 1350 Certification of the Chief Financial Officer
16
DSA FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements 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.
Date: February 10, 2006 By: /s/ Edward L. Fischer
---------------------------- -------------------------------------
Edward L. Fischer
President and Chief Executive Officer
Date: February 10, 2006 By: /s/ Steven R. Doll
---------------------------- -------------------------------------
Steven R. Doll
Chief Financial Officer
17