FORM 10-QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File No. 0 -50864
DSA FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 20-1661802
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
118 Walnut Street, Lawrenceburg, Indiana 47025
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(Address of principal executive office)
Registrant's telephone number, including area code: (812) 537-0940
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of May 12, 2005, the latest practicable date, 1,644,242 shares of the
registrant's common stock, $.01 par value, were issued and outstanding.
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 11
Quantitative and Qualitative Disclosures
About Market Risk 15
Controls and Procedures 15
PART II - OTHER INFORMATION 16
SIGNATURES 17
2
DSA Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
(In thousands, except share data)
March 31, June 30,
ASSETS 2005 2004
------ ---- ----
Cash and due from banks $ 842 $ 1,664
Interest-bearing deposits in other financial institutions 2,590 8,900
-------- --------
Cash and cash equivalents 3,432 10,564
Certificates of deposit in other financial institutions 824 199
Investment securities designated as available for sale - at market 4,331 6,763
Mortgage-backed securities designated as available for sale - at market 981 1,484
Loans receivable - net 71,655 59,088
Loans held for sale - at lower of cost or market -- 104
Office premises and equipment - at depreciated cost 1,654 1,193
Stock in Federal Home Loan Bank - at cost 1,138 1,103
Accrued interest receivable on loans 333 258
Accrued interest receivable on investments 43 34
Cash surrender value of life insurance 1,856 1,774
Prepaid expenses and other assets 534 914
Prepaid income taxes 112 24
Deferred income taxes 256 264
-------- --------
Total assets $ 87,149 $ 83,766
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 63,659 $ 68,203
Borrowings from the Federal Home Loan Bank 5,000 5,000
Accounts payable on mortgage loans serviced for others 61 74
Accrued interest payable 11 10
Advances by borrowers for taxes and insurance 397 255
Other liabilities 1,014 965
-------- --------
Total liabilities 70,142 74,507
Stockholders' equity
Preferred stock - 1,000,000 shares of $.01 par value authorized; no shares issued at
March 31, 2005; 2,000,000 shares authorized, no shares issued at June 30, 2004 -- --
Common stock - 5,000,000 shares of $.01 par value authorized; 1,644,242 shares
issued and outstanding at March 31, 2005; 8,000,000 shares of $.10 par value
authorized; 484,579 shares issued and outstanding at June 30, 2004 16 49
Additional paid-in capital 10,190 2,224
Retained earnings, restricted 7,728 7,337
Accumulated comprehensive loss, unrealized losses on securities,
designated as available for sale, net of related tax effects (79) (126)
Shares acquired by stock benefit plans (848) (225)
-------- --------
Total stockholders' equity 17,007 9,259
-------- --------
Total liabilities and stockholders' equity $ 87,149 $ 83,766
======== ========
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,
2005 2004 2005 2004
---- ---- ---- ----
Interest income
Loans $ 1,081 $ 942 $ 3,025 $ 2,885
Mortgage-backed securities 9 14 32 22
Investment securities 38 48 145 162
Interest-bearing deposits and other 29 26 103 68
------- ------- ------- -------
Total interest income 1,157 1,030 3,305 3,137
Interest expense
Deposits 299 315 842 1,030
Borrowings 54 51 159 171
------- ------- ------- -------
Total interest expense 353 366 1,001 1,201
------- ------- ------- -------
Net interest income 804 664 2,304 1,936
Provision for losses on loans 18 6 30 18
------- ------- ------- -------
Net interest income after provision
for losses on loans 786 658 2,274 1,918
Other income
Gain on sale of loans 15 51 56 206
Gain (loss) on sale of investment and mortgage-backed securities -- 4 (2) (9)
Gain on sale of real estate acquired through foreclosure 13 4 13 6
Cash surrender value of life insurance 18 20 53 61
Other operating 52 43 156 124
------- ------- ------- -------
Total other income 98 122 276 388
General, administrative and other expense
Employee compensation and benefits 304 280 902 809
Occupancy and equipment 46 44 131 124
Data processing 33 22 98 64
Other operating 132 98 389 308
------- ------- ------- -------
Total general, administrative and other expense 515 444 1,520 1,305
------- ------- ------- -------
Earnings before income taxes 369 336 1,030 1,001
Income taxes
Current 82 127 361 427
Deferred 57 (13) 25 (54)
------- ------- ------- -------
Total income taxes 139 114 386 373
------- ------- ------- -------
NET EARNINGS $ 230 $ 222 $ 644 $ 628
======= ======= ======= =======
EARNINGS PER SHARE
Basic and diluted $ .15 $ .13 $ .41 $ .38
======= ======= ======= =======
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,
2005 2004 2005 2004
---- ---- ---- ----
Net earnings $ 230 $ 222 $ 644 $ 628
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during the
period, net of taxes (benefits) of $(19), $19, $24
and $9 during the respective periods (36) 37 46 18
Reclassification adjustment for realized (gains) losses included
in earnings, net of taxes (benefits) of $ -, $1, $(1) and
$(3) during the respective periods -- (3) 1 6
----- ----- ----- -----
Comprehensive income $ 194 $ 256 $ 691 $ 652
===== ===== ===== =====
Accumulated comprehensive income (loss) $ (79) $ 16 $ (79) $ 16
===== ===== ===== =====
5
DSA Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended March 31,
(Unaudited)
(In thousands)
2005 2004
---- ----
Cash flows from operating activities:
Net earnings for the period $ 644 $ 628
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities - net (16) 24
Amortization of deferred loan origination fees (25) (25)
Amortization of mortgage servicing rights 23 47
Provision for losses on loans 30 18
Depreciation and amortization 75 71
Amortization expense of stock benefit plan 56 57
Gain on sale of real estate acquired through foreclosure (13) (6)
Loss on sale of investment and mortgage-backed securities
designated as available for sale 2 9
Origination of loans for sale in the secondary market (2,159) (10,169)
Proceeds from sale of loans in the secondary market 2,301 12,361
Gain on sale of loans (38) (108)
Federal Home Loan Bank stock dividends (35) (53)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (75) 27
Accrued interest receivable on investments (9) (1)
Prepaid expenses and other assets 42 (222)
Accounts payable on mortgage loans serviced for others (13) (28)
Accrued interest payable 1 (6)
Other liabilities 49 49
Income taxes
Current (112) (146)
Deferred 25 (54)
-------- --------
Net cash provided by operating activities 753 2,473
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (492) (8,772)
Proceeds from sale of investment securities designated as available
for sale 498 11,970
Proceeds from maturity and principal repayments of investment securities 2,510 --
Purchase of mortgage-backed securities designated as available for sale -- (999)
Principal repayments on mortgage-backed securities 518 2,329
Principal repayments on loans 18,640 19,267
Loan disbursements (31,003) (19,620)
Purchase of office premises and equipment (536) (81)
Proceeds from sale of automobile -- 7
(Increase) decrease in certificates of deposit in other financial institutions (656) 100
Increase in cash surrender value of life insurance (53) (61)
Proceeds from sale of real estate acquired through foreclosure 96 247
Capital improvements to real estate acquired through foreclosure (6) (10)
-------- --------
Net cash provided by (used in) investing activities (10,484) 4,377
-------- --------
Net cash provided by (used in) operating and investing activities
(balance carried forward) (9,731) 6,850
-------- --------
6
DSA Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended March 31,
(Unaudited)
(In thousands)
2005 2004
---- ----
Net cash provided by (used in) operating and investing activities
(balance brought forward) $ (9,731) $ 6,850
Cash flows provided by (used in) financing activities:
Net decrease in deposit accounts (4,544) (1,465)
Repayment of Federal Home Loan Bank borrowings (2,000) (2,800)
Proceeds from Federal Home Loan Bank borrowings 2,000 1,800
Advances by borrowers for taxes and insurance 142 124
Proceeds from issuance of common stock 7,341 --
Dividends paid on common stock (340) (247)
-------- --------
Net cash provided by (used in) financing activities 2,599 (2,588)
-------- --------
Net increase (decrease) in cash and cash equivalents (7,132) 4,262
Cash and cash equivalents at beginning of period 10,564 3,722
-------- --------
Cash and cash equivalents at end of period $ 3,432 $ 7,984
======== ========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Income taxes $ 479 $ 572
======== ========
Interest on deposits and borrowings $ 1,000 $ 1,209
======== ========
Supplemental disclosure of noncash investing activities:
Unrealized gains on securities designated as available
for sale, net of related tax effects $ 46 $ 18
======== ========
Recognition of mortgage servicing rights in accordance with
SFAS No. 140 $ 18 $ 98
======== ========
7
DSA Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and nine months ended March 31, 2005 and 2004
1. Basis of Presentation
---------------------
The Board of Directors of Dearborn Mutual Holding Company (the
"M.H.C.") adopted a Plan of Conversion (the "Plan") on December 30,
2003. Pursuant to the Plan, which was completed effective July 28,
2004, the M.H.C. converted from the mutual holding company form of
organization to the fully public form. The M.H.C., the mutual holding
company parent of Dearborn Financial Corporation, merged into Dearborn
Savings Association F.A. ("Dearborn Savings" or the "Association"), and
as a result the M.H.C. no longer exists. Pursuant to the Plan, Dearborn
Financial Corporation, which owned 100% of Dearborn Savings, was
succeeded by a new Delaware corporation named DSA Financial Corporation
("DSA Financial" or the "Corporation"). As part of the conversion, the
M.H.C.'s ownership interest, as formerly evidenced by 250,000 shares of
Dearborn Financial Corporation common stock, was sold in a subscription
and community offering and to a newly-formed Employee Stock Ownership
Plan. Shares of existing stockholders of Dearborn Financial Corporation
were exchanged for shares of DSA Financial, pursuant to an exchange
ratio of 3.3926-to-one. The offering resulted in proceeds, net of costs
related to the offering, of $7.2 million. Following the completion of
the Plan, DSA Financial had 1,644,242 total shares issued. Following
the completion of the conversion, effective July 28, 2004, all of the
capital stock of Dearborn Savings is held by DSA Financial.
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-QSB and,
therefore, do not include information or footnotes necessary for a
complete presentation of financial position, results of operations and
cash flows in conformity with accounting principles generally accepted
in the United States of America. Accordingly, these financial
statements should be read in conjunction with the financial statements
and notes thereto of the Corporation for the year ended June 30, 2004.
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, 2005, are not necessarily indicative of the results which may be
expected for the entire fiscal year.
2. Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Corporation and the Association. All intercompany transactions and
balances have been eliminated.
3. Earnings Per Share
------------------
Basic earnings per share is computed based upon the weighted-average
common shares outstanding during the period, restated for the effects
of the Corporation's reorganization and related stock offering.
Weighted-average common shares deemed outstanding totaled 1,576,366 for
each of the three- and nine-month periods ended March 31, 2005.
Weighted-average common shares deemed outstanding totaled 1,643,983 for
each of the three- and nine-month periods ended March 31, 2004.
The Corporation had no dilutive or potentially dilutive securities at
March 31, 2005 and 2004.
8
DSA Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended March 31, 2005 and 2004
4. Effects of Recent Accounting Pronouncements
-------------------------------------------
In December 2003, the Financial Accounting Standards Board (the "FASB")
issued FASB Interpretation No. 46(R) ("FIN 46(R)"), "Consolidation of
Variable Interest Entities." FIN 46(R) requires a variable interest
entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual
returns, or both. FIN 46(R) also requires disclosures about variable
interest entities that a company is not required to consolidate, but in
which it has a significant variable interest. The consolidation
requirements of FIN 46(R) apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements
of FIN 46(R) apply to existing entities in the first fiscal year ending
after December 15, 2004. The Corporation does not have any variable
interest entities, therefore the adoption of FIN 46(R) had no material
effect on the Corporation's financial statements.
In March 2004, the Emerging Issues Task Force ("EITF") issued EITF
03-01 "The Meaning of Other-than-Temporary Impairment and its
Application to Certain Investments." EITF 03-01 requires that
unrealized losses on investment securities that are deemed
other-than-temporary be recorded as an adjustment to earnings. The
Statement applies both to securities designated as held to maturity and
those designated as available for sale. EITF 03-01 provides that
unrealized losses may be viewed as other-than-temporary as a result not
only due to deterioration of the credit quality of the issuer, but due
to changes in the interest rate environment as well. An investor must
be able to demonstrate the positive ability and intent to hold such
securities until a forecasted recovery takes place or until maturity of
the security. EITF 03-01 requires separate disclosure related to
unrealized losses for securities that have been in an unrealized loss
position for a period of less than twelve months and for those that
have been in an unrealized loss position for a period greater than
twelve months, for financial statements issued for years ending after
December 15, 2003. In September 2004, the FASB issued a final FASB
Staff Position, FSP EITF Issue 03-01-1, which has delayed the effective
date for the measurement and recognition guidance of EITF 03-01. The
comment period related to this staff position ended October 29, 2004.
The implementation date is unknown until further guidance is issued by
the FASB. We are currently evaluating the impact of adopting EITF
03-01.
In December 2004, the FASB issued a revision to Statement of Financial
Accounting Standards No. 123, "Share Based Payment" (SFAS No. 123(R)),
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 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.
9
DSA Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three and nine months ended March 31, 2005 and 2004
4. Effects of Recent Accounting Pronouncements (continued)
-------------------------------------------------------
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 consolidated
statement of cash flows as financing cash inflows. The write-off of
deferred tax assets relating to unrealized tax benefits associated with
recognized compensation cost will be recognized as income tax expense,
unless there are excess tax benefits from previous awards remaining in
additional paid-in capital to which it can be offset.
Compensation cost is required to be recognized in the first annual
period that begins after December 15, 2005, or July 1, 2006 as to the
Corporation. The Corporation currently has no stock option plans or
other instruments that are subject to the provisions of SFAS No.
123(R).
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.
Discussion of Financial Condition Changes from June 30, 2004 to March 31, 2005
------------------------------------------------------------------------------
Assets. Total assets increased $3.4 million, or 4.0%, to $87.1 million at March
31, 2005, from June 30, 2004. The increase in assets resulted from a $12.5
million increase in loans, net to $71.7 million at March 31, 2005 from $59.2
million at June 30, 2004, partially offset by a $6.3 million decrease in
interest-bearing deposits in other financial institutions, to $2.6 million at
March 31, 2005 from $8.9 million at June 30, 2004 and a $2.4 million decrease in
investment securities, to $4.3 million at March 31, 2005 from $6.8 million at
June 30, 2004. The decrease in investment securities and interest-bearing
deposits resulted from our funding loan originations with proceeds from
maturities and excess cash we received in connection with the mutual-to-stock
conversion of the M.H.C. and our related stock offering. The increase in loans
reflected increases in all loan categories except consumer and other loans. We
have opted to retain recently originated fixed-rate one- to four-family
residential real estate loans in our portfolio due to our strong capital and
cash positions. In addition, we maintain construction loans and 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 decreased $4.4 million, or 5.9%, to $70.1 million
at March 31, 2005 from $74.5 million at June 30, 2004. The decrease in
liabilities reflects a $4.5 million decrease in deposits, to $63.7 million at
March 31, 2005 from $68.2 million at June 30, 2004. The decrease in deposits
resulted primarily from the reclassification of stock offering proceeds to
stockholders' equity, totaling $7.8 million, partially offset by net deposit
inflows of approximately $3.3 million. To a lesser extent, the decrease reflects
customers' authorizing direct withdrawals to purchase shares of common stock in
connection with the mutual-to-stock conversion and our related stock offering.
Stockholders' Equity. Stockholders' equity increased $7.7 million to $17.0
million at March 31, 2005, reflecting our receipt of net proceeds of
approximately $7.2 million in connection with our sale of 848,450 shares of
common stock at a price of $10.00 per share, coupled with net earnings of
$644,000 and a $47,000 decrease in unrealized losses on securities available for
sale, partially offset by dividends paid of $340,000. The completion of the sale
of our shares was partially offset by an increase in shares acquired by stock
benefit plans to $848,000 at March 31, 2005 from $225,000 at June 30, 2004. This
increase resulted from the purchase of Employee Stock Ownership Plan (ESOP)
shares that have not yet been allocated.
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, 2005
and 2004
--------------------------------------------------------------------------------
General. Net earnings increased $8,000 to $230,000 for the three months ended
March 31, 2005, from $222,000 for the three months ended March 31, 2004. The
increase resulted primarily from a $140,000 increase in net interest income,
offset by a decrease in gain on sale of loans of $36,000 and a $71,000 increase
in general, administrative and other expense. During the three months ended
March 31, 2005 and 2004, all significant elements of income or expense arose
from our continuing operations.
Interest Income. Interest income was $1.2 million for the three months ended
March 31, 2005, an increase of $127,000, or 12.3%, over the three months ended
March 31, 2004. With the exception of interest income on loans, there were no
material changes in the components of interest income between the periods.
Interest income on loans increased $139,000, or 14.8%, to $1.1 million for the
three months ended March 31, 2005 from $942,000 for the three months ended March
31, 2004. The increase was due primarily to a $10.3 million increase in the
average balance of loans, partially offset by a decrease of 12 basis points in
the average yield, to 6.08% for the three months ended March 31, 2005, from
6.20% for the three months ended March 31, 2004.
Interest Expense. Interest expense decreased $13,000, or 3.6%, to $353,000 for
the three months ended March 31, 2005 from $366,000 for the three months ended
March 31, 2004. The decrease in interest expense resulted primarily from a
$16,000 decrease in interest expense on deposits.
Interest expense on deposits decreased $16,000, or 5.1%, to $299,000 for the
three months ended March 31, 2005 from $315,000 for the three months ended March
31, 2004. The decrease was due to a decrease in the average rate paid on
deposits to 1.82% for the three months ended March 31, 2005 from 2.00% for the
same period in 2004, partially offset by an increase in the average balance of
deposits outstanding of $2.5 million, or 4.0%. All deposit categories except
passbook accounts experienced a decrease in interest rates. The average balance
of money market/NOW accounts increased between periods, while the average
balance of passbook accounts and certificates of deposit decreased.
Net Interest Income. The foregoing changes in our interest income and our
interest expense resulted in a $140,000, or 21.1%, increase in net interest
income to $804,000 for the three months ended March 31, 2005, from $664,000 for
the three months ended March 31, 2004. Our interest rate spread increased to
3.76% in the 2005 quarter from 3.40% in the 2004 quarter and our net interest
margin increased to 4.00% during the 2005 quarter from 3.58% during the 2004
quarter, while average net interest-earning assets increased to $9.6 million for
the three months ended March 31, 2005 from $6.1 million for the three months
ended March 31, 2004.
Provision for Losses on Loans. We establish provisions for losses on loans,
which are charged to operations, at a level necessary to absorb known and
inherent losses that are both probable and reasonably estimable at the date of
the financial statements. Based on our evaluation of these factors, management
made provisions of $18,000 and $6,000 for the three months ended March 31, 2005
and 2004, respectively. We used the same methodology and generally similar
assumptions in assessing the allowance for both periods. The allowance for loan
losses was $349,000, or 0.46%, of gross loans outstanding at March 31, 2005, as
compared with $336,000, or 0.53%, of gross loans outstanding at June 30, 2004.
The level of the allowance is based on estimates, and ultimate losses may vary
from the estimates.
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, 2005
and 2004 (continued)
--------------------------------------------------------------------------------
Provision for Losses on Loans. (continued) Determining the amount of the
allowance for loan losses necessarily involves a high degree of judgment.
Management reviews the level of the allowance on a quarterly basis, at a
minimum, and establishes the provision for losses on loans based on the
composition of the loan portfolio, delinquency levels, loss experience, economic
conditions, and other factors related to the collectibility of the loan
portfolio. Nonperforming loans totaled $174,000, or 0.23% of total loans at
March 31, 2005, compared to $589,000, or 0.93% of total loans at June 30, 2004.
The provision for the three months ended March 31, 2005 was predicated primarily
upon growth in the overall loan portfolio.
Although we believe that we use the best information available to establish the
allowance for loan losses, future additions to the allowance may be necessary
based on estimates that are susceptible to change as a result of changes in
economic conditions and other factors. In addition, the Office of Thrift
Supervision, as an integral part of its examination process, periodically
reviews our allowance for loan losses. The Office of Thrift Supervision may
require us to recognize adjustments to the allowance based on its judgment
regarding the adequacy of our allowance for loan losses at the time of its
examination.
Other Income. Other income decreased $24,000, or 19.7%, to $98,000 for the three
months ended March 31, 2005 from $122,000 for the three months ended March 31,
2004. A decrease of $36,000 in gain on sale of loans, to $15,000 for the three
months ended March 31, 2005, from $51,000 for the three months ended March 31,
2004 was partially offset by a $9,000 increase in gain on sale of real estate
acquired through foreclosure for the three-month period ended March 31, 2005. We
sold $646,000 of loans during the three months ended March 31, 2005 compared to
$4.6 million of such sales during the three months ended March 31, 2004,
resulting from our retaining one- to four-family residential loans in our
portfolio, as discussed above.
General, Administrative and Other Expense. General, administrative and other
expense increased $71,000, or 16.0%, to $515,000 for the three months ended
March 31, 2005 from $444,000 for the three months ended March 31, 2004. The
increase resulted, in part, due to a $24,000, or 8.6%, increase in employee
compensation and benefits expense to $304,000 for the three months ended March
31, 2005 from $280,000 for the three months ended March 31, 2004. This increase
resulted primarily from an increase in health insurance premiums, annual salary
adjustments effective with the start of the new fiscal year and expense related
to the new ESOP plan of approximately $18,000. In addition, other operating
expense increased $34,000, or 34.7%, to $132,000 for the three-month period
ended March 31, 2005 from $98,000 for the three-month period ended March 31,
2004. The increase resulted from an increase in ATM charges, increased
advertising expenditures, and costs associated with becoming a publicly traded
company.
Income Taxes. The provision for income taxes increased by $25,000, or 21.9%, to
$139,000 for the three months ended March 31, 2005, compared to $114,000 for the
three months ended March 31, 2004, due primarily to a $33,000, or 9.8%, increase
in pre-tax income and effective tax rates of 37.7% and 33.9%, respectively.
Comparison of Operating Results for the Nine-Month Periods Ended March 31, 2005
and 2004
--------------------------------------------------------------------------------
General. Net earnings increased $16,000 to $644,000 for the nine months ended
March 31, 2005, from $628,000 for the nine months ended March 31, 2004. The
increase resulted primarily from a $368,000 increase in net interest income,
offset by a $215,000 increase in general, administrative and other expense and a
$112,000 decrease in other income. During the nine months ended March 31, 2005
and 2004, all significant elements of income or expense arose from our
continuing operations.
13
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, 2005
and 2004 (continued)
--------------------------------------------------------------------------------
Interest Income. Interest income was $3.3 million for the nine months ended
March 31, 2005, an increase of $168,000, or 5.4%, over the nine months ended
March 31, 2004. The increase in interest income resulted primarily from a
$140,000 increase in interest income on loans and a $35,000 increase in interest
income on interest-earning deposits and other interest-earning assets.
Interest income on loans increased $140,000, or 4.9%, to $3.0 million for the
nine months ended March 31, 2005 from $2.9 million for the nine months ended
March 31, 2004. The increase was due to a $4.1 million increase in the average
balance of loans, which was partially offset by a 10 basis point decrease in the
average yield, to 6.14% for the nine months ended March 31, 2005, from 6.24% for
the nine months ended March 31, 2004.
Interest income on interest-earning deposits and other interest-earning assets
increased $35,000, or 51.5%, to $103,000 for the nine months ended March 31,
2005 from $68,000 for the nine months ended March 31, 2004. The increase was due
to a $1.9 million increase in the average balance of interest-earning deposits
and other interest-earning assets, reflecting our receipt of subscription funds
to purchase shares of common stock in connection with the mutual-to-stock
conversion and our related stock offering. There was an increase of seven basis
points in the yield we earned on these assets, to 2.37% for the nine months
ended March 31, 2005, from 2.30% for the nine months ended March 31, 2004.
Interest Expense. Interest expense decreased $200,000, or 16.7%, to $1.0 million
for the nine months ended March 31, 2005 from $1.2 million for the nine months
ended March 31, 2004. The decrease in interest expense resulted from a $188,000
decrease in interest expense on deposits and a $12,000 decrease in interest
expense on borrowings.
Interest expense on deposits decreased $188,000, or 18.3%, to $842,000 for the
nine months ended March 31, 2005 from $1.0 million for the nine months ended
March 31, 2004. The decrease was due to a decrease in the average rate paid on
deposits to 1.74% for the nine month period ended March 31, 2005, from 2.16% for
the same period in 2004, which was partially offset by a $1.0 million, or 1.6%,
increase in the average balance of deposits. All deposit categories experienced
a decrease in interest rates. The average balances of passbook accounts and
money market/NOW accounts increased between periods, while the average balance
of certificates of deposit decreased.
Net Interest Income. The foregoing changes in our interest income and our
interest expense resulted in a $368,000, or 19.0%, increase in net interest
income to $2.3 million for the nine months ended March 31, 2005, from $1.9
million for the nine months ended March 31, 2004. Our interest rate spread
increased to 3.70% for the fiscal 2005 period from 3.23% for the fiscal 2004
period and our net interest margin increased to 3.92% from 3.43%, for those same
respective periods, while average net interest-earning assets increased to $8.9
million for the nine months ended March 31, 2005 from $6.3 million for the nine
months ended March 31, 2004.
Provision for Losses on Loans. Management made a provision for losses on loans
of $30,000 and $18,000 for the nine months ended March 31, 2005 and 2004,
respectively. We used the same methodology and generally similar assumptions in
assessing the allowance for both periods. The allowance for loan losses was
$349,000, or 0.46%, of gross loans outstanding at March 31, 2005, as compared
with $336,000, or 0.53%, of gross loans outstanding at June 30, 2004. The level
of the allowance is based on estimates, and ultimate losses may vary from the
estimates.
Nonperforming loans totaled $174,000, or 0.23% of total loans at March 31, 2005,
compared to $589,000, or 0.93% of total loans at June 30, 2004. The provision
for the nine months ended March 31, 2005 was predicated primarily upon growth in
the overall loan portfolio.
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, 2005
and 2004 (continued)
--------------------------------------------------------------------------------
Other Income. Other income decreased $112,000, or 28.9%, to $276,000 for the
nine months ended March 31, 2005, from $388,000 for the nine months ended March
31, 2004. The decrease in other income was due to a $150,000 decrease in gain on
sale of loans, to $56,000 for the nine months ended March 31, 2005, from
$206,000 for the nine months ended March 31, 2004. We sold $2.3 million of loans
during the nine months ended March 31, 2005 compared to $12.3 million of such
sales during the nine months ended March 31, 2004, resulting from our retaining
one- to four-family residential loans in our portfolio, as discussed above.
General, Administrative and Other Expense. General, administrative and other
expense increased $215,000, or 16.5%, to $1.5 million for the nine months ended
March 31, 2005 from $1.3 million for the nine months ended March 31, 2004. The
increase resulted, in part, from a $93,000, or 11.5%, increase in employee
compensation and benefits expense, to $902,000 for the nine months ended March
31, 2005 from $809,000 for the nine months ended March 31, 2004. This increase
resulted primarily from higher health insurance premiums, the hiring of an
additional employee, annual salary adjustments effective with the start of the
new fiscal year and expense related to the new ESOP plan of $46,000. In
addition, other operating expense increased $81,000, or 26.3%, to $389,000 for
the nine months ended March 31, 2005, from $308,000 for the nine months ended
March 31, 2004. The increase resulted from higher ATM charges, increased
advertising expenditures, and higher costs associated with becoming a publicly
traded company.
Income Taxes. The provision for income taxes was $386,000 for the nine months
ended March 31, 2005 and $373,000 for the nine months ended March 31, 2004,
reflecting effective tax rates of 37.5% and 37.3%, respectively.
ITEM 3 CONTROLS AND PROCEDURES
The Corporation's Chief Executive Officer and Chief Financial Officer evaluated
the disclosure controls and procedures (as defined under Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of
the period covered by this quarterly report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Corporation's disclosure controls and procedures are effective.
There were no changes in the Corporation's internal controls over financial
reporting that have materially affected, or were reasonably likely to materially
affect, these controls subsequent to the date of their evaluation by the
Corporation's Chief Executive Officer and Chief Financial Officer.
15
DSA Financial Corporation
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
EX-31.1 Certification of Chief Executive Officer pursuant to Rule
13(a) or 15(d)
EX-31.2 Certification of Chief Financial Officer pursuant to Rule
13(a) or 15(d)
EX-32.1 Section 1350 Certification of the Chief Executive Officer
EX-32.2 Section 1350 Certification of the Chief Financial Officer
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 12, 2005 By: /s/ Edward L. Fischer
--------------- -------------------------------------
Edward L. Fischer
President and Chief Executive Officer
Date: May 12, 2005 By: /s/ Steven R. Doll
--------------- -------------------------------------
Steven R. Doll
Chief Financial Officer
17