UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
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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 _______________
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
--------------------------------------------------------------------------------
(Address of principal executive office)
Registrant's telephone number, including area code: (812) 537-0940
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 November 10, 2006, the latest practicable date, 1,684,362 shares of the
registrant's common stock, $.01 par value, were issued and outstanding.
Transitional Small Business Disclosure Format: Yes |_| No |X|
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 12
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)
SEPTEMBER 30, JUNE 30,
ASSETS 2006 2006
(Unaudited)
Cash and due from banks $ 1,848 $ 1,920
Interest-bearing deposits in other financial institutions 322 488
-------- --------
Cash and cash equivalents 2,170 2,408
Investment securities designated as available for sale - at market 4,458 4,385
Mortgage-backed securities designated as available for sale - at market 384 423
Loans receivable - net 91,871 88,477
Office premises and equipment - at depreciated cost 2,570 2,092
Stock in Federal Home Loan Bank - at cost 1,000 1,138
Accrued interest receivable on loans 455 411
Accrued interest receivable on investments 54 37
Bank-owned life insurance 2,871 2,845
Prepaid expenses and other assets 431 421
Prepaid income taxes -- 23
Deferred income taxes 431 414
-------- --------
Total assets $106,695 $103,074
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 78,656 $ 76,412
Borrowings from the Federal Home Loan Bank 9,000 8,000
Advances by borrowers for taxes and insurance 223 128
Accounts payable on mortgage loans serviced for others 317 61
Accrued interest payable 28 20
Accrued income taxes 123 --
Other liabilities 1,257 1,208
-------- --------
Total liabilities 89,604 85,829
Stockholders' equity
Preferred stock - 10,000 shares of $0.01 par value authorized;
no shares issued -- --
Common stock - 2,500,000 shares of $0.01 par value authorized; 1,684,362
and 1,686,662 shares issued and outstanding as of September 30, 2006 and
June 30, 2006, respectively 17 17
Additional paid-in capital 10,817 10,817
Shares acquired by stock benefit plans (1,161) (1,161)
Treasury stock - at cost, 2,300 shares at September 30, 2006 (29) --
Retained earnings, restricted 7,509 7,682
Accumulated comprehensive loss, net of related tax benefits (62) (110)
-------- --------
Total stockholders' equity 17,091 17,245
-------- --------
Total liabilities and stockholders' equity $106,695 $103,074
======== ========
3
DSA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended September 30,
(Unaudited)
(In thousands, except per share data)
2006 2005
Interest income
Loans $1,488 $1,182
Mortgage-backed securities 4 7
Investment securities 44 38
Interest-bearing deposits and other 27 42
Total interest income 1,563 1,269
Interest expense
Deposits 718 424
Borrowings 108 82
------ ------
Total interest expense 826 506
------ ------
Net interest income 737 763
Provision for losses on loans 15 7
------ ------
Net interest income after provision
for losses on loans 722 756
Other income (expense)
Gain on sale of loans 13 11
Loss on sale of real estate acquired through foreclosure -- (3)
Bank-owned life insurance 25 20
Other operating 61 57
------ ------
Total other income 99 85
General, administrative and other expense
Employee compensation and benefits 366 325
Occupancy and equipment 34 38
Data processing 35 34
Other operating 129 134
------ ------
Total general, administrative and other expense 564 531
------ ------
Earnings before income taxes 257 310
Income taxes
Current 143 114
Deferred (51) 1
------ ------
Total income taxes 92 115
------ ------
NET EARNINGS $ 165 $ 195
====== ======
EARNINGS PER SHARE
Basic and diluted $ 0.10 $ 0.12
====== ======
DIVIDENDS DECLARED PER SHARE $ 0.20 $ 0.20
====== ======
4
DSA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended September 30,
(Unaudited)
(In thousands)
2006 2005
Net earnings $165 $195
Other comprehensive income, net of related tax effects:
Unrealized holding gains (losses) on securities during the
period, net of taxes (benefits) of $34 and $(18) during
the respective periods 48 (25)
---- ----
Comprehensive income $213 $170
==== ====
Accumulated comprehensive income (loss) $(62) $ 28
==== ====
5
DSA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended September 30,
(Unaudited)
(In thousands)
2006 2005
Cash flows from operating activities:
Net earnings for the period $ 165 $ 195
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities - net -- (3)
Amortization of deferred loan origination fees (1) (1)
Amortization of mortgage servicing rights -- 11
Provision for losses on loans 15 7
Depreciation and amortization 18 22
Loss on sale of real estate acquired through foreclosure -- 3
Origination of loans for sale in the secondary market (827) (532)
Proceeds from sale of loans in the secondary market 833 539
Gain on sale of loans (6) (7)
Increase in cash surrender value of life insurance (26) (20)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (44) 2
Accrued interest receivable on investments (17) (18)
Prepaid expenses and other assets (10) 82
Accounts payable on mortgage loans serviced for others 256 (3)
Accrued interest payable 8 1
Other liabilities 49 27
Income taxes
Current 146 115
Deferred (51) 1
------- -------
Net cash provided by operating activities 508 421
Cash flows used in investing activities:
Principal repayments on mortgage-backed securities 48 143
Principal repayments on loans 5,835 6,181
Loan disbursements (8,301) (7,959)
Loans purchased (942) --
Purchase of office premises and equipment (496) (7)
Decrease in certificates of deposit in other financial institutions -- 800
Purchase of bank-owned life insurance -- (900)
Redemption of bank-owned life insurance -- 24
Redemption of Federal Home Loan Bank stock 138 --
Proceeds from sale of real estate acquired through foreclosure -- 51
Improvements to real estate acquired through foreclosure -- (4)
------- -------
Net cash used in investing activities (3,718) (1,671)
------- -------
Net cash used in operating and investing activities
(balance carried forward) (3,210) (1,250)
------- -------
6
DSA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended September 30,
(Unaudited)
(In thousands)
2006 2005
Net cash used in operating and investing activities
(balance brought forward) $(3,210) $(1,250)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 2,244 471
Repayment of Federal Home Loan Bank borrowings (5,500) --
Proceeds from Federal Home Loan Bank borrowings 6,500 --
Advances by borrowers for taxes and insurance 95 91
Purchase of treasury stock (29) --
Dividends paid on common stock (338) (329)
------- -------
Net cash provided by financing activities 2,972 233
------- -------
Net decrease in cash and cash equivalents (238) (1,017)
Cash and cash equivalents at beginning of period 2,408 4,043
------- -------
Cash and cash equivalents at end of period $ 2,170 $ 3,026
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ -- $ --
======= =======
Interest on deposits and borrowings $ 818 $ 505
======= =======
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ 48 $ (25)
======= =======
Recognition of mortgage servicing rights in accordance with
SFAS No. 140 $ 7 $ 4
======= =======
Transfers from loans to real estate acquired through foreclosure $ -- $ 60
======= =======
Loans originated upon sale of real estate acquired through foreclosure $ -- $ 37
======= =======
7
DSA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended September 30, 2006 and 2005
1. Basis of Presentation
---------------------
The Board of Directors of Dearborn Mutual Holding Company (the "M.H.C.") adopted
a Plan of Conversion (the "Plan") in fiscal 2004. Pursuant to the Plan, which
was completed effective in fiscal 2005, 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. was merged out of existence. 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, all of the capital stock of Dearborn
Savings was 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,
2006. 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-month periods ended September 30, 2006, 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, less shares in the ESOP that are
unallocated and not committed to be released, and were restated for the effects
of the Corporation's reorganization and related stock offering. Weighted-average
common shares deemed outstanding, which gives effect to a reduction for 53,241
unallocated shares held by the ESOP, totaled 1,633,271 for the three-month
period ended September 30, 2006. Weighted-average common shares deemed
outstanding, which gives effect to a reduction for 60,130 unallocated shares
held by the ESOP, totaled 1,584,112 for the three-month period ended September
30, 2005.
The Corporation had no dilutive or potentially dilutive securities at September
30, 2006 and 2005.
At the Annual Meeting of Stockholders held in November 2005, the Corporation's
shareholders approved the DSA Financial Corporation 2005 Stock-Based Incentive
Plan. On April 20, 2006, the Corporation awarded 42,420 shares of restricted
stock to directors and certain officers and employees of the Corporation. These
awards will vest over a five-year period beginning on the date of the award.
8
DSA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended September 30, 2006 and 2005
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 or interim
period that begins after December 15, 2005, or January 1, 2006 as to the
Corporation. The Corporation currently has a stock option plan that will be
subject to the provisions of SFAS No. 123(R). However, at the time of this
filing, no stock options have been granted.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets - an amendment of SFAS No. 140," to simplify the accounting for
separately recognized servicing assets and servicing liabilities. Specifically,
SFAS No. 156 amends SFAS No. 140 to require an entity to take the following
steps:
o Separately recognize financial assets as servicing assets or servicing
liabilities, each time it undertakes an obligation to service a
financial asset by entering into certain kinds of servicing contracts;
o Initially measure all separately recognized servicing assets and
liabilities at fair value, if practicable; and
o Separately present servicing assets and liabilities subsequently
measured at fair value in the statement of financial condition and
additional disclosures for all separately recognized servicing assets
and servicing liabilities.
9
DSA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended September 30, 2006 and 2005
4. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------------------
Additionally, SFAS No. 156 permits, but does not require, an entity to choose
either the amortization method or the fair value measurement method for
measuring each class of separately recognized servicing assets and servicing
liabilities. SFAS No. 156 also permits a servicer that uses derivative financial
instruments to offset risks on servicing to use fair value measurement when
reporting both the derivative financial instrument and related servicing asset
or liability.
SFAS No. 156 applies to all separately recognized servicing assets and
liabilities acquired or issued after the beginning of an entity's fiscal year
that begins after September 15, 2006, or July 1, 2007 as to the Corporation,
with earlier application permitted. The Corporation has adopted the provisions
of SFAS No. 156 effective July 1, 2006, without material effect on the
Corporation's financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 158, "Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans: An Amendment of FASB
Statements No. 87, 88, 106 and 132R." The Statement requires recognition of the
funded status of postretirement benefit plans in the consolidated statement of
financial condition. An employer must recognize an asset or liability in its
statement of financial condition for the difference between the fair value of
the plan assets and the projected benefit obligations. Changes in the plan's
funded status must be recognized, in the year of change, in comprehensive
income.
Additionally, the Statement will generally require entities to measure the
funded status of the plan as of the date of the year-end statement of financial
condition.
The recognition provisions of this Statement are effective for fiscal years
ending after December 31, 2006, or June 30, 2007, as to the Corporation.
Application as of the end of an earlier fiscal year is encouraged. The Statement
is to be applied as of the end of the year adopted. Retrospective application is
prohibited.
The provisions that may require an entity to change the plan measurement date
are effective for fiscal years ending after December 31, 2008, or June 30, 2009,
as to the Corporation.
Management is currently evaluating the requirements of SFAS No. 158 but does not
expect it to have a material effect on its consolidated statement of financial
condition and results of operations.
In September 2006, the SEC staff issued Staff Accounting Bulletin ("SAB") No.
108, "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements." SAB 108 was issued to
provide consistency between how registrants quantify financial statement
misstatements.
Historically, there have been two widely-used methods for quantifying the
effects of financial statement misstatements. These methods are referred to as
the "roll-over" and "iron curtain" method. The roll-over method quantifies the
amount by which the current year income statement is misstated. Exclusive
reliance on an income statement approach can result in the accumulation of
errors on the balance sheet that may not have been material to any individual
income statement, but which may misstate one or more balance sheet accounts. The
iron curtain method quantifies the error as the cumulative amount by which the
current year balance sheet is misstated. Exclusive reliance on a balance sheet
approach can result in disregarding the effects of errors in the current year
income statement that results from the correction of an error existing in
previously issued financial statements. We currently use the roll-over method
for quantifying identified financial statement misstatements.
10
DSA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three months ended September 30, 2006 and 2005
4. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------------------
SAB 108 established an approach that requires quantification of financial
statement misstatements based on the effects of the misstatement on each of the
company's financial statements and the related financial statement disclosures.
This approach is commonly referred to as the "dual approach" because it requires
quantification of errors under both the roll-over and iron curtain methods.
SAB 108 allows registrants to initially apply the dual approach either by (1)
retroactively adjusting prior financial statements as if the dual approach had
always been used, or by (2) recording the cumulative effect of initially
applying the dual approach as adjustments to the carrying values of assets and
liabilities as of July 1, 2006, with an offsetting adjustment recorded to the
opening balance of retained earnings. Use of this "cumulative effect" transition
method requires detailed disclosure of the nature and amount of each individual
error being corrected through the cumulative adjustment and how and when it
arose.
Management is currently evaluating the requirements of SAB 108 but does not
expect it to have a material adverse effect on the Corporation's financial
position or results of operations.
In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes." The interpretation clarifies the accounting
for uncertainty in income taxes recognized in a company's financial statements
in accordance with SFAS No. 109, "Accounting for Income Taxes." Specifically,
FIN 48 prescribes a recognition threshold and a measurement attribute for the
financial statement recognition and measurement of a tax provision taken or
expected to be taken on a tax return. FIN 48 also provides guidance on the
related derecognition, classification, interest and penalties, accounting for
interim periods, disclosure, and transition of uncertain tax positions. FIN 48
is effective for fiscal years beginning after December 15, 2006, or July 1, 2007
as to the Corporation. The Corporation is currently evaluating the requirements
of FIN 48 but has not quantified the effects of adoption, if any.
11
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.
Critical Accounting Policies
----------------------------
There were no material changes to the Corporation's critical accounting policies
since that disclosed in the Corporation's Form 10-KSB as of June 30, 2006.
Discussion of Financial Condition Changes from June 30, 2006 to September 30,
2006
-----------------------------------------------------------------------------
ASSETS. Total assets increased $3.6 million, or 3.5%, to $106.7 million at
September 30, 2006, from $103.1 million at June 30, 2006. The increase in assets
resulted from a $3.4 million increase in loans, to $91.9 million at September
30, 2006 from $88.5 million at June 30, 2006, and a $478,000 increase in office
premises and equipment, to $2.6 million at September 30, 2006 from $2.1 million
at June 30, 2006, partially offset by a $238,000 decrease in cash and cash
equivalents to $2.2 million at September 30, 2006 from $2.4 million at June 30,
2006. The increase in office premises and equipment, is due to the on-going
construction of our new headquarters expected to be placed in service by early
December, 2006. The increase in loans reflected increases of $1.5 million in
one- to four-family residential real estate, $615,000 in multi-family
residential real estate and $825,000 in nonresidential real estate and land
loans. Throughout fiscal 2005 and through the first two quarters of fiscal 2006,
we had 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. However, we have recently begun to sell a greater percentage
of our current loan production. 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 $3.8 million, or 4.4%, to $89.6 million
at September 30, 2006 from $85.8 million at June 30, 2006. The increase in
liabilities reflects a $2.2 million, or 2.9%, increase in deposits, to $78.7
million at September 30, 2006 from $76.4 million at June 30, 2006 and a $1.0
million, or 12.5%, increase in Federal Home Loan Bank advances to $9.0 million
at September 30, 2006 from $8.0 million at June 30, 2006. The increase in
deposits consisted of an increase of $3.9 million in certificates of deposit,
partially offset by a decrease of $823,000 in passbook accounts and a $824,000
decrease in Money Market/NOW Accounts. The growth in certificates of deposit was
due to the higher interest rates offered during the period.
STOCKHOLDERS' EQUITY. Stockholders' equity decreased $154,000, or 0.9%, to $17.1
million at September 30, 2006, reflecting the purchase of $29,000 in treasury
stock coupled with dividends paid of $338,000, which were partially offset by
net earnings of $165,000 and a decrease of $48,000 in unrealized losses on
securities available for sale. Dividends paid included a special dividend of
$0.095 per share in addition to the $0.105 per share that has been paid rather
consistently. The $48,000 decrease in unrealized losses was due to improved
conditions in the interest rate markets, which increased the value of our
investment portfolio.
12
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 September 30,
2006 and 2005
-------------------------------------------------------------------------------
GENERAL. Net earnings decreased $30,000, or 15.4%, to $165,000 for the three
months ended September 30, 2006, from $195,000 for the three months ended
September 30, 2005. The decrease resulted primarily from a $26,000 decrease in
net interest income and a $33,000 increase in general, administrative and other
expense, which were partially offset by an increase of $14,000 in other income.
INTEREST INCOME. Interest income was $1.6 million for the three months ended
September 30, 2006, an increase of $294,000, or 23.2%, over the $1.3 million
recorded for the three months ended September 30, 2005. Material changes
occurred primarily in interest income on loans.
Interest income on loans increased $306,000, or 25.9%, to $1.5 million for the
three months ended September 30, 2006 from $1.2 million for the three months
ended September 30, 2005. The increase was due primarily to a $13.4 million, or
17.4%, increase in the average balance of loans outstanding, and an increase of
44 basis points in the average yield, to 6.59% for the three months ended
September 30, 2006, from 6.15% for the three months ended September 30, 2005.
INTEREST EXPENSE. Interest expense increased $320,000, or 63.2%, to $826,000 for
the three months ended September 30, 2006 from $506,000 for the three months
ended September 30, 2005. The increase in interest expense resulted from a
$294,000 increase in interest expense on deposits and a $26,000 increase in
interest expense on borrowed money.
Interest expense on deposits increased $294,000, or 69.3%, to $718,000 for the
three months ended September 30, 2006 from $424,000 for the three months ended
September 30, 2005. The increase was due to a 112 basis point increase in the
average rate paid on deposits to 3.54% for the three months ended September 30,
2006 from 2.42% for the same period in 2005, and an increase in the average
balance of deposits outstanding of $10.2 million, or 15.2%. The average balance
of certificates of deposit increased $14.3 million, or 34.5%, and the average
rate paid increased 114 basis points, to 4.38% for the three months ended
September 30, 2006 from 3.24% for the three months ended September 30, 2005. The
average balance of passbook accounts decreased by $4.0 million, or 24.2%, while
the average cost of passbook accounts increased by 64 basis points to 2.41% 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 $26,000, or 31.7%, to $108,000 for the
three months ended September 30, 2006 from $82,000 for the three months ended
September 30, 2005. The increase was due to a 42 basis point increase in the
average rate paid on borrowings to 5.10% for the three months ended September
30, 2006 from 4.68% for the same period in 2005, and an increase in the average
balance of borrowings outstanding of $1.4 million, or 19.9%. Management
increased borrowings between periods primarily to fund loan growth.
NET INTEREST INCOME. The foregoing changes in our interest income and our
interest expense resulted in a $26,000, or 3.4%, decrease in net interest
income, to $737,000 for the three months ended September 30, 2006, from $763,000
for the three months ended September 30, 2005. Our interest rate spread
decreased to 2.62% in the 2006 quarter from 3.16% in the 2005 quarter and our
net interest margin decreased to 3.04% during the 2006 quarter from 3.53% during
the 2005 quarter, while average net interest-earning assets decreased to $11.4
million for the three months ended September 30, 2006 from $12.4 million for the
three months ended September 30, 2005.
13
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 September 30,
2006 and 2005 (continued)
-------------------------------------------------------------------------------
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 recorded a provision of $15,000 and $7,000
for the three months ended September 30, 2006 and 2005, respectively. We used
the same methodology and generally similar assumptions in assessing the
allowance for both periods. The allowance for loan losses was $457,000, or
0.48%, of gross loans outstanding at September 30, 2006, as compared with
$360,000, or 0.43%, 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.
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 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 $457,000, or 0.50% of total loans at
September 30, 2006, compared to $296,000, or 0.38% of total loans at September
30, 2005. Nonperforming loans consisted solely of one- to four-family
residential loans at September 30, 2006. Management expects no losses on these
nonperforming loans. The provision for losses on loans for the three months
ended September 30, 2006 was predicated primarily upon growth in the portfolio
of loans secured by land and nonresidential real estate and loans secured by
junior liens on one- to four-family residential 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 $14,000, or 16.5%, to $99,000 for the three
months ended September 30, 2006 from $85,000 for the three months ended
September 30, 2005. The were relatively minor increases in all categories of
other income. We sold $827,000 of loans during the three months ended September
30, 2006 compared to $532,000 of such sales during the three months ended
September 30, 2005. The increase in sales volume resulted from management's
recent decision during the current period to begin selling certain one- to
four-family fixed-rate residential loans, however, demand was somewhat limited
by market conditions.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other
expense increased $33,000, or 6.2%, to $564,000 for the three months ended
September 30, 2006 from $531,000 for the three months ended September 30, 2005.
The increase resulted primarily from a $41,000, or 12.6%, increase in employee
compensation and benefits expense, to $366,000 for the three months ended
September 30, 2006 from $325,000 for the three months ended September 30, 2005,
primarily offset by a decrease in other operating expense of $5,000, or 3.7%, to
$129,000 for the three-month period ended September 30, 2006 from $134,000 for
the three-month period ended September 30, 2005. The increase in employee
compensation and benefits resulted from normal merit increases and increases in
benefit plan costs, including the directors deferred compensation plan and the
Stock-Based Incentive Plan (Plan). This Plan was approved by the Corporation's
shareholders at the Annual Meeting of Shareholders held in November, 2005. The
decrease in other operating expense resulted primarily from a decrease in legal
fees and Delaware franchise tax partially offset by an increase in professional
and consulting fees.
INCOME TAXES. The provision for income taxes was $92,000 for the three months
ended September 30, 2006 and $115,000 for the three months ended September 30,
2005, reflecting effective tax rates of 35.8% and 37.1%, 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 Dearborn Savings. The building is being
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 began in December
2005 and is expected to be concluded by December 2006. Management has estimated
costs of construction, equipment and furnishings to amount to $1.9 million, of
which $911,000 has been incurred and paid as of September 30, 2006.
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,
2006.
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 control over financial
reporting that occurred during the quarter ended September 30, 2006 that have
materially affected, or are reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
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
---------------------------------------------------
Not applicable
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: November 14, 2006 By: /s/ Edward L. Fischer
------------------------------------
Edward L. Fischer
President and Chief Executive Officer
Date: November 14, 2006 By: /s/ Steven R. Doll
-------------------------------------
Steven R. Doll
Chief Financial Officer
17