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 December 31, 2006
--------------------------------
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
--------------------------------------------------------------------------------
(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 February 9, 2007, the latest practicable date, 1,677,962 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 20
INDEX
Page
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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 17
Controls and Procedures 17
PART II - OTHER INFORMATION 18
SIGNATURES 20
2
DSA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
DECEMBER 31, JUNE 30,
2006 2006
(Unaudited)
------------ --------
ASSETS
Cash and due from banks $ 2,469 $ 1,920
Interest-bearing deposits in other financial institutions 647 488
-------- --------
Cash and cash equivalents 3,116 2,408
Investment securities designated as available for sale - at market 4,483 4,385
Mortgage-backed securities designated as available for sale - at market 353 423
Loans receivable - net 93,192 88,477
Office premises and equipment - at depreciated cost 3,323 2,092
Stock in Federal Home Loan Bank - at cost 937 1,138
Accrued interest receivable on loans 457 411
Accrued interest receivable on investments 24 37
Bank-owned life insurance 2,899 2,845
Prepaid expenses and other assets 467 421
Prepaid income taxes -- 23
Deferred income taxes 418 414
-------- --------
Total assets $109,669 $103,074
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 82,538 $ 76,412
Borrowings from the Federal Home Loan Bank 8,500 8,000
Advances by borrowers for taxes and insurance 185 128
Accounts payable on mortgage loans serviced for others 36 61
Accrued interest payable 40 20
Accrued income taxes 61 --
Other liabilities 1,196 1,208
-------- --------
Total liabilities 92,556 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; 1,686,662
shares issued as of December 31, 2006 and June 30, 2006 17 17
Additional paid-in capital 10,817 10,817
Shares acquired by stock benefit plans (1,161) (1,161)
Treasury stock - at cost, 4,100 shares at December 31, 2006 (52) --
Retained earnings, restricted 7,539 7,682
Accumulated comprehensive loss, net of related tax benefits (47) (110)
-------- --------
Total stockholders' equity 17,113 17,245
-------- --------
Total liabilities and stockholders' equity $109,669 $103,074
======== ========
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,
-------------------- ------------------
2006 2005 2006 2005
------ ------ ------ ------
Interest income
Loans $1,531 $1,278 $3,019 $2,460
Mortgage-backed securities 4 6 8 13
Investment securities 44 39 88 77
Interest-bearing deposits and other 29 28 56 70
------ ------ ------ ------
Total interest income 1,608 1,351 3,171 2,620
Interest expense
Deposits 799 480 1,518 904
Borrowings 105 90 212 172
------ ------ ------ ------
Total interest expense 904 570 1,730 1,076
------ ------ ------ ------
Net interest income 704 781 1,441 1,544
Provision for losses on loans 15 24 30 31
------ ------ ------ ------
Net interest income after provision
for losses on loans 689 757 1,411 1,513
Other income
Gain on sale of loans 20 4 33 15
Gain on sale of investment and mortgage-backed securities -- 159 -- 159
Gain on sale of office premises 122 -- 122 --
Loss on sale of real estate acquired through foreclosure -- (7) -- (10)
Cash surrender value of bank-owned life insurance 28 26 53 46
Other operating 63 43 124 100
------ ------ ------ ------
Total other income 233 225 332 310
General, administrative and other expense
Employee compensation and benefits 357 321 723 646
Occupancy and equipment 37 38 70 76
Data processing 39 34 75 68
Other operating 163 168 292 302
------ ------ ------ ------
Total general, administrative and other expense 596 561 1,160 1,092
------ ------ ------ ------
Earnings before income taxes 326 421 583 731
Income taxes
Current 121 209 264 323
Deferred (1) (62) (52) (61)
------ ------ ------ ------
Total income taxes 120 147 212 262
------ ------ ------ ------
NET EARNINGS $ 206 $ 274 $ 371 $ 469
====== ====== ====== ======
EARNINGS PER SHARE
Basic and diluted $ .13 $ .17 $ .23 $ .29
====== ====== ====== ======
DIVIDENDS DECLARED PER SHARE $ .105 $ .105 $ .305 $ .305
====== ====== ====== ======
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,
-------------------- ------------------
2006 2005 2006 2005
---- ---- ---- ----
Net earnings $206 $274 $371 $469
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities during the
period, net of (taxes) benefits of $(11), $16, $(48)
and $35 during the respective periods 15 (22) 63 (47)
Reclassification adjustment for realized gains included in
earnings, net of tax benefits of $ --, $68, $ -- and
$68 during the respective periods -- (91) -- (91)
---- ---- ---- ----
Comprehensive income $221 $161 $434 $331
==== ==== ==== ====
Accumulated comprehensive loss $(47) $(85) $(47) $(85)
==== ==== ==== ====
5
DSA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended December 31, 2006 and 2005
(Unaudited)
(In thousands)
2006 2005
-------- --------
Cash flows from operating activities:
Net earnings for the period $ 371 $ 469
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Amortization and accretion, net (2) 14
Provision for losses on loans 30 31
Depreciation and amortization 37 42
Increase in cash surrender value of bank-owned life insurance (54) (46)
Loss on sale of real estate acquired through foreclosure -- 10
Gain on sale of investment and mortgage-backed securities
designated as available for sale -- (159)
Origination of loans for sale in the secondary market (2,480) (873)
Proceeds from sale of loans in the secondary market 2,165 881
Gain on sale of loans (15) (8)
Gain on sale of office premises (122) --
Federal Home Loan Bank stock dividends (12) --
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (46) (23)
Accrued interest receivable on investments 13 (1)
Prepaid expenses and other assets (46) 30
Accounts payable on mortgage loans serviced for others (25) 36
Accrued interest payable 20 2
Other liabilities (12) 112
Income taxes
Current 84 39
Deferred (52) (61)
-------- --------
Net cash provided by (used in) operating activities (146) 495
Cash flows used in investing activities:
Proceeds from sale of investment securities designated as available
for sale -- 203
Principal repayments on mortgage-backed securities 83 241
Principal repayments on loans 12,615 11,236
Loan disbursements (15,786) (18,460)
Loans purchased (1,242) --
Purchase of office premises and equipment (1,306) (55)
Proceeds from sale of office premises and equipment 160 --
Decrease in certificates of deposit in other financial institutions -- 800
Purchase of bank-owned life insurance -- (900)
Redemption of bank-owned life insurance -- 23
Redemption of Federal Home Loan Bank stock 213 --
Proceeds from sale of real estate acquired through foreclosure, net -- 100
-------- --------
Net cash used in investing activities (5,263) (6,812)
-------- --------
Net cash used in operating and investing activities
(balance carried forward) (5,409) (6,317)
-------- --------
6
DSA FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended December 31, 2006 and 2005
(Unaudited)
(In thousands)
2006 2005
------- -------
Net cash used in operating and investing activities
(balance brought forward) $(5,409) $(6,317)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts 6,126 6,798
Repayment of Federal Home Loan Bank borrowings (8,300) (3,000)
Proceeds from Federal Home Loan Bank borrowings 8,800 3,000
Advances by (disbursements for) borrowers for taxes and insurance 57 (56)
Purchase of treasury stock (52) --
Dividends on common stock (514) (502)
------- -------
Net cash provided by financing activities 6,117 6,240
------- -------
Net increase (decrease) in cash and cash equivalents 708 (77)
Cash and cash equivalents at beginning of period 2,408 4,043
------- -------
Cash and cash equivalents at end of period $ 3,116 $ 3,966
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Income taxes $ 180 $ 284
======= =======
Interest on deposits and borrowings $ 1,710 $ 1,074
======= =======
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ 63 $ (47)
======= =======
Recognition of mortgage servicing rights in accordance with
SFAS No. 140 $ 18 $ 7
======= =======
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, 2006 and 2005
1. Basis of Presentation
---------------------
The Board of Directors of Dearborn Mutual Holding Company (the "M.H.C.")
completed a Plan of Conversion (the "Plan") in fiscal 2005. Pursuant to the
Plan, 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. In addition, 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 (the "ESOP"). 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 Consolidated
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- and six-month periods ended December 31, 2006, are not
necessarily indicative of the results which may be expected for an 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 previously 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 1,630,730 and
1,632,000 for the three- and six-month period ended December 31, 2006. For both
the three- and six-month period ended December 31, 2005, weighted-average common
shares deemed outstanding totaled 1,584,112, which gives effect to 60,130
unallocated ESOP shares.
The Corporation had no dilutive or potentially dilutive securities at December
31, 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 six and three months ended December 31, 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 July 1, 2006 as to the
Corporation. The Corporation currently has a stock-based incentive option plan
that will be subject to the provisions of SFAS No. 123(R). However, at the time
of this filing, no stock-based incentive options have been granted under that
plan.
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 six and three months ended December 31, 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 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. The Corporation currently uses the
roll-over method for quantifying identified financial statement misstatements.
SAB 108 established an approach that requires quantification of financial
statement misstatements based on the effects of the misstatement on each of the
Corporation'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
currently expect it to have a material adverse effect on the Corporation's
financial position or results of operations.
10
DSA FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six and three months ended December 31, 2006 and 2005
4. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------------------
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 and 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
which were disclosed in the Corporation's Form 10-KSB as of June 30, 2006.
Discussion of Financial Condition Changes from June 30, 2006 to December 31,
2006
----------------------------------------------------------------------------
ASSETS. Total assets increased $6.6 million, or 6.4%, to $109.7 million at
December 31, 2006, from $103.1 million at June 30, 2006. The increase in assets
resulted from a $4.7 million increase in loans, to $93.2 million at December 31,
2006 from $88.5 million at June 30, 2006, a $1.2 million increase in office
premises and equipment, to $3.3 million at December 31, 2006 from $2.1 million
at June 30, 2006, and a $708,000 increase in cash and cash equivalents to $3.1
million at December 31, 2006 from $2.4 million at June 30, 2006. The increase in
office premises and equipment, is due to the newly completed construction of our
headquarters which was opened in January 2007. The increase in loans primarily
reflects increases of $1.7 million in one- to four-family residential real
estate, $589,000 in multi-family residential real estate and $1.5 million in
nonresidential real estate and land loans. Throughout fiscal 2005 and through
the first two quarters of calendar 2006, we 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, since the
beginning of fiscal 2007, we have sold 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 $6.7 million, or 7.8%, to $92.6 million
at December 31, 2006 from $85.8 million at June 30, 2006. The increase in
liabilities reflects a $6.1 million, or 8.0%, increase in deposits, to $82.5
million at December 31, 2006 from $76.4 million at June 30, 2006 and a $500,000,
or 6.3%, increase in Federal Home Loan Bank advances to $8.5 million at December
31, 2006 from $8.0 million at June 30, 2006. The increase in deposits consisted
of an increase of $6.4 million in certificates of deposit and a $1.0 million
increase in Money Market/NOW Accounts, partially offset by a decrease of $1.3
million in passbook accounts. The growth in certificates of deposit was due to
the higher interest rates offered during the 2006 period.
STOCKHOLDERS' EQUITY. Stockholders' equity decreased $132,000, or 0.8%, to $17.1
million at December 31, 2006, reflecting the purchase of $52,000 in treasury
stock coupled with dividends paid of $514,000, which were largely offset by net
earnings of $371,000 and a decrease of $63,000 in unrealized losses on
securities available for sale. The 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 December 31,
2006 and 2005
------------------------------------------------------------------------------
GENERAL. Net earnings decreased $68,000, or 24.8%, to $206,000 for the three
months ended December 31, 2006, from $274,000 for the three months ended
December 31, 2005. The decrease resulted primarily from a $77,000 decrease in
net interest income and a $35,000 increase in general, administrative and other
expense, which were partially offset by a decrease of $27,000 in income taxes.
INTEREST INCOME. Interest income was $1.6 million for the three months ended
December 31, 2006, an increase of $257,000, or 19.0%, over the $1.3 million
recorded for the three months ended December 31, 2005. Interest income on loans
increased $253,000, or 19.8%, to $1.5 million for the three months ended
December 31, 2006 from $1.3 million for the three months ended December 31,
2005. The increase was due primarily to a $11.0 million, or 13.5%, increase in
the average balance of loans outstanding, and an increase of 35 basis points in
the average yield, to 6.64% for the three months ended December 31, 2006, from
6.29% for the three months ended December 31, 2005. The remainder of our
interest-bearing income accounts remained essentially unchanged year over year
as a result of static investment balances.
INTEREST EXPENSE. Interest expense increased $334,000, or 58.6%, to $904,000 for
the three months ended December 31, 2006 from $570,000 for the three months
ended December 31, 2005. The increase in interest expense resulted from a
$319,000 increase in deposit costs and a $15,000 increase in interest expense on
borrowings.
Interest expense on deposits increased $319,000, or 66.5%, to $799,000 for the
three months ended December 31, 2006 from $480,000 for the three months ended
December 31, 2005. The increase was due to a 123 basis point increase in the
average rate paid on deposits to 3.99% for the three months ended December 31,
2006 from 2.76% for the same period in 2005, and an increase in the average
balance of deposits outstanding of $10.6 million, or 15.3%. The average balance
of certificates of deposit increased $14.0 million, or 31.0%, and the average
rate paid increased 121 basis points, to 4.75% for the three months ended
December 31, 2006 from 3.54% for the three months ended December 31, 2005. The
average balance of passbook accounts decreased by $3.4 million, or 22.2%, while
the average cost of passbook accounts increased by 79 basis points to 2.50% for
the period. The growth in the cost of deposits was due to the increase in
interest rates in the marketplace during the period. The interest rates offered
on deposits by Dearborn Savings were increased to match rates offered by
competitors in order to increase deposit share. Management believes this pricing
strategy facilitated the Corporation's growth over the 2006 period.
Interest expense on borrowings increased $15,000, or 16.7%, to $105,000 for the
three months ended December 31, 2006 from $90,000 for the three months ended
December 31, 2005. The increase was due to a 53 basis point increase in the
average rate paid on borrowings to 5.14% for the three months ended December 31,
2006 from 4.61% for the same period in 2005, and an increase in the average
balance of borrowings outstanding of $369,000, or 4.7%. Management primarily
utilized increased borrowings in 2006 to fund loan growth.
NET INTEREST INCOME. The foregoing changes in our interest income and our
interest expense resulted in a $77,000, or 9.9%, decrease in net interest
income, to $704,000 for the three months ended December 31, 2006, from $781,000
for the three months ended December 31, 2005. Our interest rate spread decreased
to 2.41% in the 2006 quarter from 3.14% in the 2005 quarter and our net interest
margin decreased to 2.85% during the 2006 quarter from 3.52% during the 2005
quarter, while average net interest-earning assets decreased to $10.6 million
for the three months ended December 31, 2006 from $11.4 million for the three
months ended December 31, 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 December 31,
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 $24,000
for the three months ended December 31, 2006 and 2005, respectively. The
allowance for loan losses was $472,000, or 0.49%, of gross loans outstanding at
December 31, 2006, as compared with $442,000, or 0.47%, of gross loans
outstanding at June 30, 2006. 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 $1.2 million, or 1.27% of total loans at
December 31, 2006, compared to $364,000, or 0.44% of total loans at December 31,
2005. Nonperforming loans at December 31, 2006 consisted of one $503,000
multi-family loan, with the remainder of the total represented by one- to
four-family residential loans. Based on a continuing review of nonperforming
loans, management does not anticipate any material unreserved losses on these
nonperforming loans. The provision for losses on loans for the three months
ended December 31, 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 increase the allowance based on its judgment regarding the
adequacy of our allowance for loan losses at the time of examination.
OTHER INCOME. Other income increased $8,000, or 3.6%, to $233,000 for the three
months ended December 31, 2006 from $225,000 for the three months ended December
31, 2005. The increase resulted primarily from a gain on the sale of office
premises of $122,000, an increase in the gain on sale of loans of $16,000 and an
increase in other operating income of $20,000 offset by a decrease in gain on
sale of investments of $159,000. With the recent opening of our new
headquarters, we sold our Walnut Street office building on December 28, 2006,
resulting in the aforementioned gain of $122,000. The gain on sale of investment
securities during the quarter ended December 31, 2005 resulted from our
redemption of our investment in the common stock of another financial
institution, as that entity was acquired in an all-cash transaction. We sold
$1.3 million of loans during the three months ended December 31, 2006, compared
to $341,000 of such sales during the three months ended December 31, 2005. The
increase in sales volume resulted from management's recent decision during the
current period to begin selling a higher percentage of certain one- to
four-family fixed-rate residential loans.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other
expense increased $35,000, or 6.2%, to $596,000 for the three months ended
December 31, 2006 from $561,000 for the three months ended December 31, 2005.
The increase resulted primarily from a $36,000, or 11.2%, increase in employee
compensation and benefits expense, to $357,000 for the three months ended
December 31, 2006 from $321,000 for the three months ended December 31, 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
in the latter part of the 2005 six month period.
INCOME TAXES. The provision for income taxes was $120,000 for the three months
ended December 31, 2006 and $147,000 for the three months ended December 31,
2005, reflecting effective tax rates of 36.8% and 34.9%, respectively.
14
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,
2006 and 2005
----------------------------------------------------------------------------
GENERAL. Net earnings decreased $98,000, or 20.9%, to $371,000 for the six
months ended December 31, 2006, from $469,000 for the six months ended December
31, 2005. The decrease resulted primarily from a $103,000 decrease in net
interest income and a $68,000 increase in general, administrative and other
expense, which were partially offset by an increase of $22,000 in other income.
INTEREST INCOME. Interest income was $3.2 million for the six months ended
December 31, 2006, an increase of $551,000, or 21.0%, over the $2.6 million
recorded for the six months ended December 31, 2005. Interest income on loans
increased $559,000, or 22.7%, to $3.0 million for the six months ended December
31, 2006 from $2.5 million for the six months ended December 31, 2005. The
increase was due primarily to a $12.2 million, or 15.4%, increase in the average
balance of loans outstanding, and an increase of 40 basis points in the average
yield, to 6.62% for the six months ended December 31, 2006, from 6.22% for the
six months ended December 31, 2005. Interest income on all other
interest-bearing assets decreased by $8,000 from $160,000 in 2005 to $152,000 in
fiscal 2006. The decline in other interest income types primarily resulted from
a reduction in weighted-average balances.
INTEREST EXPENSE. Interest expense increased $654,000, or 60.8%, to $1.7 million
for the six months ended December 31, 2006 from $1.1 million for the six months
ended December 31, 2005. The increase in interest expense resulted from a
$614,000 increase in interest expense on deposits and a $40,000 increase in
interest expense on borrowed money.
Interest expense on deposits increased $614,000, or 67.9%, to $1.5 million for
the six months ended December 31, 2006 from $904,000 for the six months ended
December 31, 2005. The increase was due to a 121 basis point increase in the
average rate paid on deposits to 3.86% for the six months ended December 31,
2006 from 2.65% for the same period in 2005, and an increase in the average
balance of deposits outstanding of $10.4 million, or 15.2%. The average balance
of certificates of deposit increased $14.1 million, or 32.6%, and the average
rate paid increased 119 basis points, to 4.59% for the six months ended December
31, 2006 from 3.40% for the six months ended December 31, 2005. The average
balance of passbook accounts decreased by $3.7 million, or 23.2%, while the
average cost of passbook accounts increased by 74 basis points to 2.48% for the
period. The increase in the cost of deposits was due to the increase in interest
rates in the marketplace during the period. The interest rates offered on
deposits by Dearborn Savings were increased to match rates offered by
competitors to maintain deposit share. As stated previously, management believes
this pricing strategy has facilitated deposit growth in the 2006 period.
Interest expense on borrowings increased $40,000, or 23.3%, to $212,000 for the
six months ended December 31, 2006 from $172,000 for the six months ended
December 31, 2005. The increase was due to a 47 basis point increase in the
average rate paid on borrowings to 5.12% for the six months ended December 31,
2006 from 4.65% for the same period in 2005, and an increase in the average
balance of borrowings outstanding of $882,000, or 11.9%. Management has utilized
increased borrowings in the 2006 period to fund loan growth.
NET INTEREST INCOME. The foregoing changes in our interest income and our
interest expense resulted in a $103,000, or 6.7%, decrease in net interest
income, to $1.4 million for the six months ended December 31, 2006, from $1.5
million for the six months ended December 31, 2005. Our interest rate spread
decreased to 2.49% in 2006 from 3.14% in 2005, and our net interest margin
decreased to 2.94% during 2006 from 3.52% during 2005, while average net
interest-earning assets decreased to $11.0 million for the six months ended
December 31, 2006, from $11.9 million for the six months ended December 31,
2005.
15
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,
2006 and 2005 (continued)
----------------------------------------------------------------------------
PROVISION FOR LOSSES ON LOANS. Management recorded loan loss provisions of
$30,000 and $31,000 for the six months ended December 31, 2006 and 2005,
respectively. The allowance for loan losses was $472,000, or 0.49%, of gross
loans outstanding at December 31, 2006, as compared with $442,000, or 0.47%, of
gross loans outstanding at June 30, 2006. 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, 2006 was
primarily influenced by 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 $22,000, or 7.1%, to $332,000 for the six
months ended December 31, 2006 from $310,000 for the six months ended December
31, 2005. The increase resulted primarily from a gain on the sale of office
premises of $122,000, an increase in the gain on sale of loans of $18,000 and an
increase in other operating income of $24,000 offset by a decrease in gain on
sale of investments of $159,000. With the recent opening of our new
headquarters, we sold our Walnut Street office building on December 28, 2006,
resulting in the aforementioned gain of $122,000. The gain on sale of investment
securities during the six months ended December 31, 2005 resulted from our
redemption of our investment in the common stock of another financial
institution, as that entity was acquired in an all-cash transaction. We sold
$2.1 million of loans during the six months ended December 31, 2006, compared to
$873,000 of such sales during the six months ended December 31, 2005. The
increase in sales volume resulted from management's recent decision during the
current six-month period to begin selling a higher percentage of one- to
four-family fixed-rate residential loans.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other
expense increased $68,000, or 6.2%, to $1.2 million for the six months ended
December 31, 2006 from $1.1 million for the six months ended December 31, 2005.
The increase resulted primarily from a $77,000, or 11.9%, increase in employee
compensation and benefits expense, to $723,000 for the six months ended December
31, 2006 from $646,000 for the six months ended December 31, 2005, primarily
offset by a decrease in other operating expense of $10,000, or 3.3%, to $292,000
for the six-month period ended December 31, 2006 from $302,000 for the six-month
period ended December 31, 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). The decrease in other operating expense resulted
primarily from a decrease in professional fees and Delaware franchise tax,
partially offset by an increase in advertising expenditures and consulting fees.
INCOME TAXES. The provision for income taxes was $212,000 for the six months
ended December 31, 2006 and $262,000 for the six months ended December 31, 2005,
reflecting effective tax rates of 36.4% and 35.8%, respectively.
16
DSA FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Liquidity and Capital Resources
-------------------------------
The Corporation entered into a contract with a builder providing for the
construction of a new headquarters for Dearborn Savings. The building has been
constructed on land previously acquired in Lawrenceburg, Indiana at the
intersection of U.S. Route 50 and Indiana Route 48. The Corporation currently
occupies approximately seventy percent of the building and plans to lease the
remainder. The space occupied by the Corporation includes full service banking
facilities, as well as administrative offices. Construction began in December
2005 and was completed in December 2006. Management has estimated costs of
construction, equipment and furnishings to amount to $1.9 million, of which $1.7
million has been incurred and paid as of December 31, 2006.
There were no other material changes to the Corporation's liquidity and capital
resources since filing the Corporation's Form 10-KSB for fiscal 2006.
ITEM 3 CONTROLS AND PROCEDURES
The Corporation's Principal Executive Officer and Principal 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 Principal Executive Officer and Principal 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 December 31, 2006 that have
materially affected, or are reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
17
DSA FINANCIAL CORPORATION
PART II
ITEM 1. Legal Proceedings
-----------------
Not applicable
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
Total number
of shares Maximum number
Total purchased as of shares that may
number Average part of publicly yet be purchased
of shares price paid announced plans under the plans
Period purchased per share or programs or programs (1)
----------------- --------- ---------- ---------------- ------------------
October 1, 2006
through
October 31, 2006 -- $ -- -- 82,033
November 1, 2006
through
November 30, 2006 -- $ -- -- 82,033
December 1, 2006
through
December 31, 2006 1,800 $12.61 1,800 80,233
----------
(1) On September 11, 2006, the Corporation announced that its Board
of Directors had authorized management to repurchase up to 84,333
shares of the Company's common stock through open market or
privately negotiated transactions. The authorization does not
have an expiration date.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On November 9, 2006, the Corporation held its Annual Meeting of
Shareholders. Two matters were submitted to the shareholders for a
vote. The shareholders elected two directors to terms expiring in 2009
by the following votes:
FOR AGAINST ABSTAIN
--------- ------- -------
Ronald J. Denney 1,437,103 -0- 36,334
Dr. Dennis Richter 1,452,144 -0- 21,293
The following directors' terms continued through the Annual Meeting of
Shareholders: Edward L. Fischer, Robert P. Sonntag, David P. Lorey and
Richard Meador, III.
The shareholders also ratified the selection of Grant Thornton LLP as
the Company's independent registered public accounting firm for the
2007 fiscal year by the following vote:
For: 1,455,473 Against: 10,864 Abstain: 7,100
ITEM 5. Other Information
-----------------
None.
18
DSA FINANCIAL CORPORATION
PART II (CONTINUED)
ITEM 6. Exhibits
--------
EX-31.1 Certification of Principal Executive Officer pursuant to
Rule 13(a) or 15(d)
EX-31.2 Certification of Principal 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
19
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 14, 2007 By: /s/ Edward L. Fischer
------------------------------------
Edward L. Fischer
President and Chief Executive Officer
Date: February 14, 2007 By: /s/ Steven R. Doll
------------------------------------
Steven R. Doll
Chief Financial Officer
20