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 March 31, 2007 ---------------------- 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 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) 595 W. Eads Parkway, 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 May 14, 2007, the latest practicable date, 1,673,962 shares of the registrant's common stock, $.01 par value, were issued and outstanding. Transitional Small Business Disclosure Format: Yes [ ] No [X] 1 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 11 Liquidity and Capital Resources 16 Controls and Procedures 16 PART II - OTHER INFORMATION 17 SIGNATURES 18 2 DSA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands, except share data) MARCH 31, JUNE 30, ASSETS 2007 2006 (Unaudited) Cash and due from banks $ 876 $ 1,920 Interest-bearing deposits in other financial institutions 2,548 488 --------- --------- Cash and cash equivalents 3,424 2,408 Investment securities designated as available for sale - at market 4,497 4,385 Mortgage-backed securities designated as available for sale - at market 325 423 Loans receivable - net 93,720 88,477 Office premises and equipment - at depreciated cost 3,561 2,092 Stock in Federal Home Loan Bank - at cost 936 1,138 Accrued interest receivable on loans 454 411 Accrued interest receivable on investments 46 37 Bank-owned life insurance 2,924 2,845 Prepaid expenses and other assets 457 421 Prepaid income taxes -- 23 Deferred income taxes 441 414 --------- --------- Total assets $ 110,785 $ 103,074 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 85,013 $ 76,412 Borrowings from the Federal Home Loan Bank 7,000 8,000 Advances by borrowers for taxes and insurance 251 128 Accounts payable on mortgage loans serviced for others 44 61 Accrued interest payable 54 20 Accrued income taxes 56 - Other liabilities 1,350 1,208 --------- --------- Total liabilities 93,768 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 March 31, 2007 and June 30, 2006 17 17 Additional paid-in capital 10,844 10,817 Shares acquired by stock benefit plans (1,104) (1,161) Treasury stock - at cost, 12,700 shares at March 31, 2007 (162) -- Retained earnings, restricted 7,452 7,682 Accumulated comprehensive loss, net of related tax benefits (30) (110) --------- --------- Total stockholders' equity 17,017 17,245 --------- --------- Total liabilities and stockholders' equity $ 110,785 $ 103,074 ========= ========= 3 DSA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (In thousands, except per share data) FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED MARCH 31, ENDED MARCH 31, 2007 2006 2007 2006 Interest income Loans $ 1,542 $ 1,351 $ 4,561 $ 3,811 Mortgage-backed securities 3 5 11 18 Investment securities 45 40 133 117 Interest-bearing deposits and other 34 32 90 102 ------- ------- ------- ------- Total interest income 1,624 1,428 4,795 4,048 Interest expense Deposits 848 581 2,366 1,485 Borrowings 88 75 300 247 ------- ------- ------- ------- Total interest expense 936 656 2,666 1,732 ------- ------- ------- ------- Net interest income 688 772 2,129 2,316 Provision for losses on loans 10 31 40 62 ------- ------- ------- ------- Net interest income after provision for losses on loans 678 741 2,089 2,254 Other income Gain on sale of loans 3 17 36 32 Gain on sale of investment and mortgage-backed securities - - - 159 Gain on sale of office premises - - 122 - Gain on sale of real estate acquired through foreclosure - 28 - 19 Cash surrender value of life insurance 26 26 79 72 Other operating 61 50 185 149 ------- ------- ------- ------- Total other income 90 121 422 431 General, administrative and other expense Employee compensation and benefits 370 323 1,094 969 Occupancy and equipment 65 40 135 116 Data processing 43 33 118 101 Other operating 168 122 460 424 ------- ------- ------- ------- Total general, administrative and other expense 646 518 1,807 1,610 ------- ------- ------- ------- Earnings before income taxes 122 344 704 1,075 Income taxes Current 51 182 315 505 Deferred (19) (51) (71) (112) ------- ------- ------- ------- Total income taxes 32 131 244 393 ------- ------- ------- ------- NET EARNINGS $ 90 $ 213 $ 460 $ 682 ======= ======= ======= ======= EARNINGS PER SHARE Basic and diluted $ .05 $ .14 $ .28 $ .43 ======= ======= ======= ======= DIVIDENDS PER SHARE $ .1050 $ .1050 $ .41 $ .41 ======= ======= ======= ======= 4 DSA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In thousands) FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED MARCH 31, ENDED MARCH 31, 2007 2006 2007 2006 Net earnings $ 90 $ 213 $ 460 $ 682 Other comprehensive income, net of tax: Unrealized holding gains (losses) on securities during the period, net of taxes (benefits) of $13, $(7), $59, and $(42) during the respective periods 17 (10) 80 (57) Reclassification adjustment for realized gains included in earnings, net of taxes of $68 for the nine months ended March 31, 2006 - - - (91) ----- ----- ----- ----- Comprehensive income $ 107 $ 203 $ 540 $ 534 ===== ===== ===== ===== Accumulated comprehensive loss $ (30) $ (95) $ (30) $ (95) ===== ===== ===== ===== 5 DSA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended March 31, (Unaudited) (In thousands) 2007 2006 Cash flows from operating activities: Net earnings for the period $ 460 $ 682 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Amortization of discounts, premiums and fees, net (1) 41 Provision for losses on loans 40 62 Depreciation and amortization 75 61 Increase in cash surrender value of life insurance (79) (72) Amortization expense of stock benefit plan 84 80 Gain on sale of real estate acquired through foreclosure - (19) Gain on sale of investment and mortgage-backed securities designated as available for sale - (159) Origination of loans for sale in the secondary market (2,527) (2,131) Proceeds from sale of loans in the secondary market 2,543 2,047 Gain on sale of loans (16) (16) Gain on sale of office premises (122) - Federal Home Loan Bank stock dividends (11) - Increase (decrease) in cash due to changes in: Accrued interest receivable on loans (43) (65) Accrued interest receivable on investments (9) (11) Prepaid expenses and other assets (36) 69 Accounts payable on mortgage loans serviced for others (17) 76 Accrued interest payable 34 - Other liabilities 142 (45) Income taxes Current 63 89 Deferred (71) (112) -------- -------- Net cash provided by operating activities 509 577 Cash flows provided by (used in) investing activities: Purchase of investment securities designated as available for sale - (150) Proceeds from sale of investment securities designated as available for sale - 203 Proceeds from maturity and principal repayments of investment securities 10 10 Principal repayments on mortgage-backed securities 116 319 Principal repayments on loans 17,719 16,261 Loan disbursements (21,759) (25,585) Loans purchased (1,242) - Purchase of office premises and equipment (1,582) (153) Proceeds from sale of office premises and equipment 160 - Redemption of Federal Home Loan Bank Stock 213 - Purchase of bank-owned life insurance - (900) Redemption of bank-owned life insurance - 24 Decrease in certificates of deposit in other financial institutions - 831 Proceeds from sale of real estate acquired through foreclosure, net - 347 -------- -------- Net cash used in investing activities (6,365) (8,793) -------- -------- Net cash used in operating and investing activities (balance carried forward) (5,856) (8,216) -------- -------- 6 DSA FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the nine months ended March 31, (Unaudited) (In thousands) 2007 2006 Net cash used in operating and investing activities (balance brought forward) $ (5,856) $ (8,216) Cash flows provided by financing activities: Net increase in deposit accounts 8,601 8,402 Repayment of Federal Home Loan Bank borrowings (10,800) (4,000) Proceeds from Federal Home Loan Bank borrowings 9,800 4,000 Advances by borrowers for taxes and insurance 123 - Purchase of treasury stock (162) - Dividends paid on common stock (690) (674) -------- -------- Net cash provided by financing activities 6,872 7,728 -------- -------- Net increase (decrease) in cash and cash equivalents 1,016 (488) Cash and cash equivalents at beginning of period 2,408 4,043 -------- -------- Cash and cash equivalents at end of period $ 3,424 $ 3,555 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Income taxes $ 225 $ 407 ======== ======== Interest on deposits and borrowings $ 2,632 $ 1,732 ======== ======== Supplemental disclosure of noncash investing activities: Unrealized gains (losses) on securities designated as available for sale, net of related tax effects $ 80 $ (57) ======== ======== Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 20 $ 16 ======== ======== 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 nine and three months ended March 31, 2007 and 2006 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 net proceeds 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 nine-month periods ended March 31, 2007, 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 1,624,654 and 1,629,587 for the three- and nine-month periods ended March 31, 2007. For both the three- and nine-month periods ended March 31, 2006, 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 March 31, 2007 and 2006. 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 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 nine and three months ended March 31, 2007 and 2006 4. Effects of Recent Accounting Pronouncements In March 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 March 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 nine and three months ended March 31, 2007 and 2006 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 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 March 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. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement emphasizes that fair value is a market-based measurement and should be determined based on assumptions that a market participant would use when pricing an asset or liability. This Statement clarifies that market participant assumptions should include assumptions about risk as well as the effect of a restriction on the sale or use of an asset. Additionally, this Statement establishes a fair value hierarchy that provides the highest priority to quoted prices in active markets and the lowest priority to unobservable data. This Statement is effective for fiscal years beginning after November 15, 2007, or July 1, 2008, for the Corporation. The adoption of this Statement is not expected to have a material effect on the Corporation's consolidated financial statements. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115." This Statement allows companies the choice to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board's long-term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007, or July 1, 2008 as to the Corporation, and interim periods within that fiscal year. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157, "Fair Value Measurements." The Corporation is currently evaluating the impact the adoption of SFAS No. 159 will have on the financial statements. 10 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 are 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 March 31, 2007 ASSETS. Total assets increased $7.7 million, or 7.5%, to $110.8 million at March 31, 2007, from $103.1 million at June 30, 2006. The increase in assets resulted from a $5.2 million increase in loans, to $93.7 million at March 31, 2007 from $88.5 million at June 30, 2006, a $1.5 million increase in office premises and equipment, to $3.6 million at March 31, 2007 from $2.1 million at June 30, 2006, and a $1.0 million increase in cash and cash equivalents to $3.4 million at March 31, 2007 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 $3.4 million in one- to four-family residential real estate loans and $565,000 in multi-family residential real estate 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 $7.9 million, or 9.2%, to $93.8 million at March 31, 2007 from $85.8 million at June 30, 2006. The increase in liabilities reflects an $8.6 million, or 11.3%, increase in deposits, to $85.0 million at March 31, 2007 from $76.4 million at June 30, 2006, which was partially offset by a $1.0 million, or 12.5%, decrease in Federal Home Loan Bank advances to $7.0 million at March 31, 2007 from $8.0 million at June 30, 2006. The increase in deposits consisted of an increase of $8.4 million in certificates of deposit and a $890,000 increase in money market/NOW accounts, partially offset by a decrease of $690,000 in all other accounts. The growth in certificates of deposit was due to the higher interest rates we have offered in response to increases in market interest rates. STOCKHOLDERS' EQUITY. Stockholders' equity decreased $228,000, or 1.3%, to $17.0 million at March 31, 2007, reflecting the repurchase of $162,000 of treasury shares coupled with dividends paid of $690,000, which were largely offset by net earnings of $460,000 and a decrease of $80,000 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. 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 March 31, 2007 and 2006 GENERAL. Net earnings decreased $123,000, or 57.7%, to $90,000 for the three months ended March 31, 2007, from $213,000 for the three months ended March 31, 2006. The decrease resulted primarily from an $84,000 decrease in net interest income and a $128,000 increase in general, administrative and other expense, which were partially offset by a decrease of $99,000 in income taxes. INTEREST INCOME. Interest income was $1.6 million for the three months ended March 31, 2007, an increase of $196,000, or 13.7%, over the $1.4 million recorded for the three months ended March 31, 2006. Interest income on loans increased $191,000, or 14.1%, to $1.5 million for the three months ended March 31, 2007 from $1.4 million for the three months ended March 31, 2006. The increase was due primarily to a $8.7 million, or 10.2%, increase in the average balance of loans outstanding, and an increase of 22 basis points in the average yield, to 6.61% for the three months ended March 31, 2007, from 6.39% for the three months ended March 31, 2006. The remainder of our interest-earning income accounts remained essentially unchanged period over period as a result of static average investment balances. INTEREST EXPENSE. Interest expense increased $280,000, or 42.7%, to $936,000 for the three months ended March 31, 2007 from $656,000 for the three months ended March 31, 2006. The increase in interest expense resulted from a $267,000 increase in deposit costs and a $13,000 increase in interest expense on borrowings. Interest expense on deposits increased $267,000, or 46.0%, to $848,000 for the three months ended March 31, 2007 from $581,000 for the three months ended March 31, 2006. The increase was due to a 94 basis point increase in the average rate paid on deposits to 4.07% for the three months ended March 31, 2007 from 3.13% for the same period in 2006, and an increase in the average balance of deposits outstanding of $9.2 million, or 12.4%. The average balance of certificates of deposit increased $11.3 million, or 22.4%, and the average rate paid increased 105 basis points, to 4.85% for the three months ended March 31, 2007 from 3.80% for the three months ended March 31, 2006. The average balance of passbook accounts decreased by $2.7 million, or 18.4%, while the average cost of passbook accounts increased by 21 basis points to 2.49% 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 2007 period. Interest expense on borrowings increased $13,000, or 17.3%, to $88,000 for the three months ended March 31, 2007 from $75,000 for the three months ended March 31, 2006. The increase was due to a 22 basis point increase in the average rate paid on borrowings to 4.94% for the three months ended March 31, 2007 from 4.72% for the same period in 2006, and an increase in the average balance of borrowings outstanding of $694,000, or 10.9%. Management primarily utilized increased borrowings in 2007 to fund loan growth. NET INTEREST INCOME. The foregoing changes in our interest income and our interest expense resulted in an $84,000, or 10.9%, decrease in net interest income, to $688,000 for the three months ended March 31, 2007, from $772,000 for the three months ended March 31, 2006. Our interest rate spread decreased to 2.33% in the 2007 quarter from 2.94% in the 2006 quarter and our net interest margin decreased to 2.74% during the 2007 quarter from 3.35% during the 2006 quarter, while average net interest-earning assets decreased to $9.9 million for the three months ended March 31, 2007 from $11.6 million for the three months ended March 31, 2006. 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 March 31, 2007 and 2006 (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 $10,000 and $31,000 for the three months ended March 31, 2007 and 2006, respectively. The allowance for loan losses was $482,000, or 0.51%, of gross loans outstanding at March 31, 2007, as compared with $442,000, or 0.50%, 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 $918,000, or 0.98% of total loans at March 31, 2007, compared to $397,000, or 0.46% of total loans at March 31, 2006. Nonperforming loans at March 31, 2007 consisted of one $503,000 multi-family residential 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 March 31, 2007 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 decreased $31,000, or 25.6%, to $90,000 for the three months ended March 31, 2007 from $121,000 for the three months ended March 31, 2006. The decrease resulted primarily from a decrease in the gain on sale of loans of $14,000 and a decrease in gain on sale of real estate acquired through foreclosure of $28,000, which were partially offset by an increase of $11,000 in other operating income. We sold $376,000 of loans during the three months ended March 31, 2007, compared to $1.2 million of such sales during the three months ended March 31, 2006. The decrease in sales volume reflects the decline in loan demand experienced in the 2007 period. GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other expense increased $128,000, or 24.7%, to $646,000 for the three months ended March 31, 2007 from $518,000 for the three months ended March 31, 2006. The increase resulted primarily from a $47,000, or 14.6%, increase in employee compensation and benefits expense, to $370,000 for the three months ended March 31, 2007 from $323,000 for the three months ended March 31, 2006, an increase of $25,000 in occupancy and equipment, or 62.5%, over the same period a year earlier and an increase in other operating expense of $46,000, or 37.7%, to $168,000, for the three months ended March 31, 2007 from $122,000 for the three months ended March 31, 2006. 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 November 2005. The increase in occupancy and equipment expense was due to additional depreciation expense in connection with the opening of our new headquarters. The increase in other operating expense resulted primarily from increased advertising expenditures promoting the opening of our new main office. 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 March 31, 2007 and 2006 (continued) INCOME TAXES. The provision for income taxes was $32,000 for the three months ended March 31, 2007 and $131,000 for the three months ended March 31, 2006, reflecting effective tax rates of 26.2% and 38.0%, respectively. The reduction in the tax provision and effective rate period over period primarily reflects the tax exempt earnings on bank-owned life insurance, as well as reduced earnings. Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2007 and 2006 GENERAL. Net earnings decreased $222,000, or 32.6%, to $460,000 for the nine months ended March 31, 2007, from $682,000 for the nine months ended March 31, 2006. The decrease resulted primarily from a $187,000 decrease in net interest income and a $197,000 increase in general, administrative and other expense, which were partially offset by an decrease of $149,000 in income taxes. INTEREST INCOME. Interest income was $4.8 million for the nine months ended March 31, 2007, an increase of $747,000, or 18.5%, over the $4.0 million recorded for the nine months ended March 31, 2006. Interest income on loans increased $750,000, or 19.7%, to $4.6 million for the nine months ended March 31, 2007 from $3.8 million for the nine months ended March 31, 2006. The increase was due primarily to an $11.0 million, or 13.6%, increase in the average balance of loans outstanding, and an increase of 34 basis points in the average yield, to 6.62% for the nine months ended March 31, 2007, from 6.28% for the nine months ended March 31, 2006. Interest income on all other interest-earning assets remained virtually unchanged. INTEREST EXPENSE. Interest expense increased $934,000, or 53.9%, to $2.7 million for the nine months ended March 31, 2007 from $1.7 million for the nine months ended March 31, 2006. The increase in interest expense resulted from an $881,000 increase in interest expense on deposits and a $53,000 increase in interest expense on borrowed money. Interest expense on deposits increased $881,000, or 59.3%, to $2.4 million for the nine months ended March 31, 2007 from $1.5 million for the nine months ended March 31, 2006. The increase was due to an 111 basis point increase in the average rate paid on deposits to 3.93% for the nine months ended March 31, 2007 from 2.82% for the same period in 2006, and an increase in the average balance of deposits outstanding of $10.0 million, or 14.2%. The average balance of certificates of deposit increased $13.2 million, or 28.9%, and the average rate paid increased 113 basis points, to 4.68% for the nine months ended March 31, 2007 from 3.55% for the nine months ended March 31, 2006. The average balance of passbook accounts decreased by $3.3 million, or 21.7%, while the average cost of passbook accounts increased by 56 basis points to 2.47% 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 2007 period. Interest expense on borrowings increased $53,000, or 21.5%, to $300,000 for the nine months ended March 31, 2007 from $247,000 for the nine months ended March 31, 2006. The increase was due to a 39 basis point increase in the average rate paid on borrowings to 5.06% for the nine months ended March 31, 2007 from 4.67% for the same period in 2006, and an increase in the average balance of borrowings outstanding of $820,000, or 11.6%. Management has utilized increased borrowings in the 2007 period to fund loan growth. 14 DSA FINANCIAL CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2007 and 2006 (continued) NET INTEREST INCOME. The foregoing changes in our interest income and our interest expense resulted in an $187,000, or 8.1%, decrease in net interest income, to $2.1 million for the nine months ended March 31, 2007, from $2.3 million for the nine months ended March 31, 2006. Our interest rate spread decreased to 2.44% in 2007 from 3.07% in 2006, and our net interest margin decreased to 2.87% during 2007 from 3.46% during 2006, while average net interest-earning assets decreased to $10.6 million for the nine months ended March 31, 2007, from $11.8 million for the nine months ended March 31, 2006. PROVISION FOR LOSSES ON LOANS. Management recorded loan loss provisions of $40,000 and $62,000 for the nine months ended March 31, 2007 and 2006, respectively. The allowance for loan losses was $482,000, or 0.51%, of gross loans outstanding at March 31, 2007, as compared with $442,000, or 0.50%, of gross loans outstanding at June 30, 2006. The level of the allowance is based on estimates, and actual losses may vary from the estimates. The provision for losses on loans for the nine months ended March 31, 2007 was primarily influenced by growth in the portfolio of loans secured by multi-family real estate and loans secured by one- to four-family real estate. OTHER INCOME. Other income decreased $9,000, or 2.1%, to $422,000 for the nine months ended March 31, 2007 from $431,000 for the nine months ended March 31, 2006. The decrease resulted from a reduction in gain on sale of investments of $159,000 coupled with a $19,000 decrease in gain on sale of real estate acquired through foreclosure offset by a gain on the sale of office premises of $122,000, an increase in the gain on sale of loans of $4,000 and an increase in other operating income of $36,000. 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 nine months ended March 31, 2006 resulted from the redemption of our investment in the common stock of another financial institution, as that entity was acquired in an all-cash transaction. We sold $2.5 million of loans during the nine months ended March 31, 2007, compared to $2.0 million of such sales during the nine months ended March 31, 2006. The increase in sales volume resulted from management's recent decision during the current nine-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 $197,000, or 12.2%, to $1.8 million for the nine months ended March 31, 2007 from $1.6 million for the nine months ended March 31, 2006. The increase resulted primarily from a $125,000, or 12.9%, increase in employee compensation and benefits expense, to $1.1 million for the nine months ended March 31, 2007 from $969,000 for the nine months ended March 31, 2006, and an increase in other operating expense of $36,000, or 8.5%, to $460,000 for the nine-month period ended March 31, 2007 from $424,000 for the nine-month period ended March 31, 2006. 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. The increase in other operating expense resulted primarily from an increase in advertising expenditures and consulting fees, partially offset by a decrease in professional fees and Delaware franchise tax. INCOME TAXES. The provision for income taxes was $244,000 for the nine months ended March 31, 2007 and $393,000 for the nine months ended March 31, 2006, reflecting effective tax rates of 34.7% and 36.6%, respectively. The difference between the Corporation's effective tax rate and the 38% federal and state statutory rates primarily result from the tax-exempt earnings on bank-owned life insurance. 15 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. The final cost of the project including land, building and furnishings was $3.2 million. 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 March 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting. 16 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) ------ --------- --------- ----------- --------------- January 1, 2007 through January 31, 2007 4,600 $ 12.83 4,600 75,633 February 1, 2007 through February 28, 2007 - $ - - 75,633 March 1, 2007 through March 31, 2007 4,000 $ 12.88 4,000 71,633 -------------------------- (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 Not applicable ITEM 5. Other Information None. 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 17 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: May 15, 2007 By: /s/ Edward L. Fischer -------------------------- ------------------------------------ Edward L. Fischer President and Chief Executive Officer Date: May 15, 2007 By: /s/ Steven R. Doll -------------------------- --------------------------------- Steven R. Doll Chief Financial Officer 18