U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997.
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. 333-30469
EQUALITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1785126
---------------------------- --------------------------
(State or other jurisdiction (I.R.S. Employer ID Number)
of incorporation or organization)
9920 Watson Road, St. Louis, Missouri 63126
------------------------------------------------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code (314) 965-7090
--------------
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 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 ____ No _X_
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Class Shares Outstanding at November 10, 1997
----------------- ---------------------------------------
Common Stock, Par Value $0.01 100
Transitional Small Business Disclosure Format: Yes ____ No _X_
<PAGE> 2
On August 12, 1997, the Registrant's Registration Statement on Form S-
1 was declared effective by the Securities and Exchange Commission.
On October 27, 1997, the Registrant's Registration Statement on Form
S-1 registering additional shares of its common stock was declared
effective by the Securities and Exchange Commission. The Registration
Statements and the related Prospectus and Prospectus Supplement
forming parts thereof related to the offering of the Registrant's
common stock in connection with the mutual holding company
reorganization (the "Reorganization") of Equality Savings and Loan
Association, F.A., St. Louis, Missouri, a publicly traded federally-
chartered-stock-based-savings association (the "Association"). The
Association currently owns 100% of the issued and outstanding capital
stock of the Registrant. Upon consummation of, and pursuant to, the
Reorganization, the Association will become a wholly-owned subsidiary
of the Registrant, and the Registrant will close the public offering
of its common stock. The Registrant has not engaged in any business
to date and is not expected to engage in any business until the
consummation of the Reorganization. The Registrant will have no
material assets or liabilities prior to the consummation of the
Reorganization. The information presented in this Form 10-QSB is
therefore identical to the information contained in the Association's
Form 10-QSB previously filed with the Office of Thrift Supervision and
relates solely to the business conducted by the Association.
<PAGE> 3
INDEX TO FORM 10-QSB
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated Balance Sheets
- Consolidated Statements of Income
- Consolidated Statement of Stockholders' Equity
- Consolidated Statements of Cash Flows
- Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE> 4
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Balance Sheets
September 30, 1997 and March 31, 1997
(Unaudited)
Sept. 30, March 31,
Assets 1997 1997
------ -------- ---------
<S> <C> <C>
Cash, primarily interest-bearing demand accounts $ 22,070,474 1,037,199
Interest-bearing deposits 2,110,874 3,819,744
Investment securities:
Available for sale, at market value 81,894,169 70,122,807
Held to maturity, at cost 3,600,000 4,848,587
Mortgage-backed securities, available
for sale, at market value 9,491,550 14,954,025
Loans receivable, net 95,941,160 91,530,369
Loans held for sale 11,910,999 4,397,614
----------- -----------
Total loans receivable, net 107,852,159 95,927,983
Investment in real estate 787,778 869,898
Stock in Federal Home Loan Bank 3,525,000 3,350,000
Mortgage servicing rights 603,782 513,275
Office properties and equipment, net 3,663,338 2,933,591
Accrued interest receivable and other assets 2,942,243 2,386,533
----------- -----------
$ 238,541,367 200,763,642
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits $ 149,133,966 122,982,954
Accrued interest payable on savings deposits 162,526 134,599
Borrowed money 73,637,786 64,248,804
Advance payments by borrowers for taxes and insurance 131,352 86,776
Income tax payable 359,153 99,863
Deferred income taxes 688,299 196,427
Accrued expenses and other liabilities 539,813 379,958
----------- -----------
Total liabilities 224,652,895 188,129,381
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value per share;
1,000,000 shares authorized; none issued -- --
Common stock, $1 par value per share;
4,000,000 shares authorized; 836,400
shares issued and outstanding 836,400 836,400
Additional paid-in capital 2,771,873 2,768,548
Retained earnings - substantially restricted 10,134,944 9,674,676
Unrealized gain (loss) on investment and mortgage-
backed securities available for sale, net 259,815 (509,523)
Unearned ESOP shares (114,560) (135,840)
----------- -----------
Total stockholders' equity 13,888,472 12,634,261
----------- -----------
$ 238,541,367 200,763,642
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 5
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Income
Three and Six months ended September 30, 1997 and 1996
(Unaudited)
Three months Six months
ended September 30 ended September 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $1,997,895 1,850,262 3,952,769 3,686,839
Investment securities 1,166,543 991,519 2,286,974 1,774,021
Mortgage-backed securities 172,061 437,918 389,530 867,399
Interest-bearing deposits 132,729 151,785 187,684 313,445
Other 60,612 60,377 119,844 115,201
--------- --------- --------- ---------
Total interest income 3,529,840 3,491,861 6,936,801 6,756,905
--------- --------- --------- ---------
Interest expense:
Savings deposits 1,431,212 1,442,938 2,832,764 2,878,105
Advances from the Federal Home Loan Bank 890,689 897,331 1,781,930 1,680,240
Other borrowed money 16,083 11,958 27,271 23,369
--------- --------- --------- ---------
Total interest expense 2,337,984 2,352,227 4,641,965 4,581,714
--------- ---------- --------- ---------
Net interest income 1,191,856 1,139,634 2,294,836 2,175,191
Provision for losses on loans 24,313 -- 24,313 --
--------- ---------- --------- ---------
Net interest income after pro-
vision for losses on loans 1,167,543 1,139,634 2,270,523 2,175,191
--------- ---------- --------- ---------
Noninterest income:
Gain on sale of mortgage loans 428,731 231,483 619,561 445,364
Loan servicing fees and late charges 235,954 224,350 472,745 434,814
Equity in loss of joint ventures -- (10,933) (16,491) (8,027)
Rental income 51,114 28,929 57,378 85,559
Gain on sale of real estate -- -- -- 105,875
Gain (loss) on sale of investment and
mortgage backed securities
available for sale 1,388 (89,397) 48,905 (59,737)
Other 108,132 144,278 198,203 248,504
--------- --------- --------- ---------
Total Noninterest income 825,319 528,710 1,380,301 1,252,352
--------- --------- --------- ---------
Noninterest expense:
Salaries and employee benefits 818,955 766,102 1,605,412 1,513,511
Occupancy 143,896 132,615 250,511 247,098
Data processing 60,869 46,028 114,645 91,612
Advertising 21,965 24,545 49,466 44,625
Federal insurance premiums 19,218 69,431 38,910 141,089
SAIF special assessment -- 787,770 -- 787,770
Other 376,671 372,840 732,202 699,427
--------- ---------- --------- ---------
Total noninterest expense 1,441,574 2,200,331 2,791,146 3,526,132
--------- ---------- --------- ----------
Income (loss) before income
tax expense (benefit) 551,288 (531,987) 859,678 (98,589)
Income tax expense (benefit) 214,977 (207,418) 335,249 (38,421)
--------- ---------- --------- ---------
Net income (loss) $336,311 (324,569) 524,429 (60,168)
========= ========== ========= ==========
Earnings (loss) per share $ .41 (.39) .64 (.07)
========= ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 6
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statement of Stockholders' Equity
Six months ended September 30, 1997
(Unaudited)
Unrealized
gain (loss) on
investment and
Retained mortgage-backed Total
Additional earnings- securities stock
Common Stock paid-in substantially available for Unearned holders'
Shares Amount capital restricted sale, net ESOP shares equity
------ ------ ---------- ------------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1997 836,400 $836,400 2,768,548 9,674,676 (509,523) (135,840) 12,634,261
Net income -- -- -- 524,429 -- -- 524,429
Amortization of
ESOP awards -- -- 3,325 -- -- 21,280 24,605
Dividend declared
on nonmutual
holding company
owned common
stock at $.17
per share -- -- -- (64,161) -- -- (64,161)
Change in unre-
alized gain (loss)
on investment
and mortgage-
backed securities
available for
sale, net -- -- -- -- 769,338 -- 769,338
------- ------- --------- --------- ------- --------- ----------
Balance, Sept. 30,
1997 836,400 $836,400 2,771,873 10,134,944 259,815 (114,560) 13,888,472
======= ======= ========= ========== ======= ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 7
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Six months ended September 30, 1997 and 1996
(Unaudited)
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $524,429 (60,168)
Adjustments to reconcile net income to net cash pro-
vided by (used in) operating activities:
Depreciation and amortization:
Office properties and equipment 138,852 112,211
Real estate investments 5,631 5,631
Premiums and discounts, net 18,112 370,655
Mortgage servicing rights 117,429 66,561
Increase in accrued interest receivable (293,242) (265,168)
Decrease in valuation reserve on loans held for sale -- (85,094)
Gain on sale of office property and equipment -- (7,000)
Gain on sale of investment in real estate -- (105,875)
Loss (gain) on sale of investment and mortgage-backed
securities available for sale, net (48,905) 59,737
Increase in accrued interest payable on savings deposits 27,927 44,875
Change in income tax payable 259,290 128,463
Equity in loss of joint ventures 16,491 8,027
SAIF recapitalization payable -- 788,770
Other, net (78,008) 161,650
Decrease (increase) in loans held for sale (7,513,385) 6,574,995
---------- ---------
Net cash provided by (used in) operating activities (6,825,379) 7,798,270
---------- ---------
Cash flow from investing activities:
Net change in loans receivable (4,370,070) (6,212,932)
Decrease in interest-bearing deposits 1,708,870 2,434,982
Principal repayments on investment securities, AFS 85,904 251,600
Principal repayments on mortgage-backed securities, AFS 1,025,331 2,897,956
Proceeds from the sale of investment securities, AFS 46,124,512 1,017,970
Proceeds from the maturity of investment securities, AFS 14,135,000 3,050,000
Proceeds from the sale of mortgage-backed securities, AFS 4,408,193 12,464,720
Proceeds from the maturity of mortgage-backed securities, AFS 229,697 --
Proceeds from the maturity of investment securities, HTM 1,250,000 1,000,000
Purchase of investment securities, AFS (71,014,309) (28,755,000)
Purchase of mortgage-backed securities, AFS -- (8,306,227)
Proceeds from the sale of investment in real estate -- 1,039,961
Decrease in joint venture borrowings 6,652 6,128
Purchase of stock in FHLB (175,000) (200,000)
Increase in cost of mortgage servicing rights (207,936) (280,895)
Purchase of office properties and equipment, net (868,599) (29,642)
---------- -----------
Net cash used in investing activities (7,661,755) (19,621,379)
Cash flows from financing activities:
Net increase (decrease) in savings deposits 26,151,012 (570,190)
Proceeds from Federal Home Loan Bank advances 12,500,000 38,000,000
Repayment of Federal Home Loan Bank advances (5,000,000) (32,000,000)
Proceeds from other borrowed money 1,888,982 1,523,688
Cash dividends paid (64,161) (112,547)
Increase (decrease) in advance payments by borrowers
for taxes and insurance 44,576 (17,149)
---------- ---------
Net cash provided by financing activities 35,520,409 6,823,802
---------- ----------
Net increase (decrease) in cash and cash equivalents 21,033,275 (4,999,307)
Cash and cash equivalents, beginning of period 1,037,199 5,550,292
---------- ----------
Cash and cash equivalents, end of period $ 22,070,474 550,985
========== ==========
Supplemental disclosure of cash flow information:
Interest paid $ 4,581,694 4,452,505
Income taxes paid, net 75,958 (111,920)
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE> 8
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
(Unaudited)
(1) Mutual Holding Company Formation
--------------------------------
On October 22, 1993, Equality Savings and Loan Association, F.A.
(Equality) reorganized from a Missouri-chartered mutual
savings and loan association into a mutual holding company.
The mutual holding company is a federal corporation,
chartered and regulated by the Office of Thrift Supervision
(OTS), and is named First Missouri Financial, M.H.C. (the
MHC). As part of the reorganization, Equality transferred
substantially all of its assets and all of its liabilities
to a new Missouri-chartered savings and loan association and
retained its same name. The reorganization was accounted
for as a change in corporate form with the historic basis of
Equality's assets, liabilities, and retained earnings
unchanged as a result.
Concurrent with the reorganization, Equality offered a minority
interest in its common stock to its depositors and to its
Employee Stock Ownership Plan (ESOP). A total of 380,000
shares of newly issued common stock was sold at $10.00 per
share. An additional 11,400 authorized shares of common
stock were sold to Equality's Management Recognition Plan
(MRP) at $10.00 per share. The cost of issuing the 391,400
shares totaled $333,000 and was deducted from the sale
proceeds.
Equality will be a majority-owned subsidiary of the MHC at all
times as long as the MHC remains in existence. The existing
rights of Equality's depositors upon liquidation were
transferred to the MHC and records will be maintained to
ensure such rights receive statutory priority in the event
of a future mutual-to-stock conversion, or in the more
unlikely event of the MHC's liquidation.
On May 16, 1997, as amended on June 20, 1997, August 8, 1997 and
October 10, 1997, First Missouri Financial, M.H.C. and
Equality Savings and Loan Association, F.A. adopted a Plan
of Conversion and Reorganization pursuant to which First
Missouri Financial, M.H.C. will convert from the mutual to
stock form of organization. Shares of common stock of a new
holding company, Equality Bancorp, Inc., will be offered in
a subscription offering in descending order of priority to
eligible account holders; employee stock benefit plans;
supplemental eligible account holders; other members;
directors, officers, and employees; and public stockholders.
Any shares remaining unsold in the subscription offering
will be sold through a community offering.
<PAGE> 9
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
(2) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have
been prepared in accordance with instructions for Form 10-
QSB and, therefore, do not include information for footnotes
necessary for a complete presentation of financial position,
results of operations, and cash flows in conformity with
generally accepted accounting principles. However, all
adjustments (consisting only of normal recurring accruals)
which, in the opinion of management, are necessary for a
fair presentation of the consolidated financial statements
have been included in the results of operations for the
three and six months ended September 30, 1997 and 1996.
Operating results for the six months ended September 30, 1997 are
not necessarily indicative of the result that may be
expected for the year ending March 31, 1998.
(3) Principles of Consolidation
---------------------------
The accompanying unaudited consolidated financial statements
include the accounts of Equality Savings and Loan
Association, F.A. and its wholly owned subsidiaries,
Equality Commodity Corporation (ECC) and Equality Mortgage
Corporation (EMC). All significant intercompany accounts
and transactions have been eliminated in consolidation.
(4) Earnings Per Share
------------------
Earnings per share are based upon the weighted average number of
common shares and common stock equivalents outstanding
during the period. The weighted average number of common
stock equivalents is calculated using the treasury stock
method.
Equality adopted the provisions of Statement of Position 93-6,
EMPLOYERS' ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS
(SOP 93-6) on April 1, 1994. Under the provisions of SOP
93-6, only ESOP shares that have been committed to be
released are considered outstanding shares. Accordingly,
earnings per share for the six month periods ending
September 30, 1997 and 1996 were computed based upon net
income for the period April 1st to September 30th using
weighted average common shares outstanding of 825,317 and
820,180 respectively. For the three month periods ended
September 30, 1997 and 1996, earnings per share were
computed based upon net income for the period July 1st to
September 30th using weighted average common shares
outstanding of 825,862 and 820,755 respectively.
<PAGE> 10
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion reviews the financial condition and results
of operations of Equality Savings and Loan Association, F.A. and
subsidiaries (Equality) as of September 30, 1997 and for the
three and six months ended September 30, 1997 and 1996.
FINANCIAL CONDITION
The total assets of Equality increased approximately $37.8 million, or
18.8%, to $238.5 million at September 30, 1997 from $200.8
million at March 31, 1997. This increase in asset size primarily
relates to funds received by Equality in connection with its Plan
of Conversion and Reorganization and its subsequent common stock
subscription offering. Pending OTS approval, these funds were
placed into deposit accounts at Equality. In addition, asset
size increased due to additional purchases of investment
securities and origination of mortgage loans which were funded
through cash reserves, FHLB advances and the proceeds from sales
of mortgage-backed securities.
Cash, primarily interest-bearing demand accounts, increased $21.0
million, or 2027.9%, to $22.1 million at September 30, 1997 from
$1.0 million at March 31, 1997. The increase is due to new funds
received in Equality's common stock subscription offering in
connection with its Plan of Conversion and Reorganization
totaling approximately $27.5 million. At September 30, 1997,
closing of the offering was pending OTS approval. Management
expects OTS approval and closing of the offering in November,
1997.
Investment securities available for sale increased approximately $11.8
million, or 16.8%, to $81.9 million at September 30, 1997 from
$70.1 million at March 31, 1997. The increase is due primarily
to additional leveraging of Equality's stockholders' equity
funded by sales of mortgage-backed securities and additional FHLB
advances.
Mortgage-backed securities available for sale decreased by
approximately $5.5 million, or 36.5%, to $9.5 million at
September 30, 1997 from $15.0 million at March 31, 1997. This
decrease resulted from sales generated to fund mortgage loan
originations and investment security purchases.
Loans held for investment totaled $95.9 million at September 30, 1997,
an increase of approximately $4.4 million, or 4.8%, from the
March 31, 1997 balance of $91.5 million. This increase is
primarily the result of continued portfolio mortgage lending on
one to four family residences due to strong demand and favorable
interest rates as well as Equality's new lending in the secured
commercial loan area which began in February, 1997, offset by
principal repayments.
<PAGE> 11
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
Loans held for sale increased by approximately $7.5 million, or
170.9%, to $11.9 million at September 30, 1997 from $4.4 million
at March 31, 1997. This increase is the result of increased one
to four family mortgage loan originations due to improved
residential lending interest rates.
Office properties and equipment increased $730,000, or 24.9%, to $3.7
million at September 30, 1997 from $2.9 million at March 31,
1997. The increase resulted from the purchase of two properties
designed to become branch facilities, one to replace a currently
leased, limited-use facility in the fourth quarter of 1997 and
the other to expand Equality's branch network during the spring
of 1998. Appropriate regulatory notification has been made to
the OTS.
Savings deposits totaled $149.1 million at September 30, 1997, an
increase of approximately $26.2 million, or 21.3% from the
March 31, 1997 balance of $123.0 million. The increase is
primarily due to the receipt of proceeds in connection with
Equality's common stock subscription offering associated with its
Plan of Conversion and Reorganization which is pending OTS
approval at September 30, 1997. These funds were temporarily
placed in passbook savings accounts. Interest credited during
the six months ended September 30, 1997 was approximately $2.2
million.
Borrowed money increased $9.4 million, or 14.6%, to $73.6 million at
September 30, 1997 from $64.2 million at March 31, 1997. FHLB
advances increased $7.5 million, or 11.9%, at September 30, 1997
as compared to $63.0 million at March 31, 1997. Proceeds from
these advances were used to fund mortgage loan originations and
increased investment in investment securities. Other borrowed
money increased by $1.9 million. These short-term borrowings
relate to Equality Mortgage Corporation (EMC), a wholly owned
subsidiary engaged in the mortgage banking business, the proceeds
of which were invested solely in residential mortgage loans.
RESULTS OF OPERATIONS
---------------------
NET INCOME
Net income increased $585,000, or 971.7%, from a loss of $60,000 for
the six months ended September 30, 1996 to $524,000 for the six
months ended September 30, 1997. The increase was primarily the
result of increased net interest income of $120,000, or 5.5%,
increased noninterest income of $128,000, or 10.2%, and reduced
noninterest expense of $735,000, or 20.8%, offset by increased
income taxes of $374,000, or 972.6%. The noninterest expense and
income tax expense fluctuations are the result of legislation
passed by Congress in September, 1996 to recapitalize the Savings
Association Insurance Fund (SAIF) in which Equality was assessed
a one-time FDIC insurance premium of $789,000 on September 30,
1996. There was no comparable item at September 30, 1997.
<PAGE> 12
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
Net income increased $661,000 from a loss of $325,000 for the three
months ended September 30, 1996 to $336,000 for the three months
ended September 30, 1997. The increase was primarily the result
of the SAIF legislation mentioned above accompanied by increased
net interest income of $52,000, or 4.6%, and increased
noninterest income of $297,000, or 56.1%, offset by increased
salary and benefit expenses of $53,000, or 6.9%.
INTEREST INCOME
Interest income increased from $6.8 million for the six months ended
September 30, 1996 to $6.9 million for the six months ended
September 30, 1997. Interest on loans receivable increased by
$266,000, or 7.2%, to $4.0 million for the six months ended
September 30, 1997 as compared to $3.7 million for the six months
ended September 30, 1996. This increase was primarily due to an
increase in the average balance of loans outstanding from $100.1
million for the six months ended September 30, 1996 to $105.3
million for the six months ended September 30, 1997, accompanied
by an increase in the yield on loans from 7.36% for the six
months ended September 30, 1996 to 7.51%, for the six months
ended September 30, 1997. The higher average balance of loans
outstanding for the six months ended September 30, 1997 reflects
an increase in mortgage loan portfolio and secured commercial
lending. Interest on investment securities increased $513,000,
or 28.9%, from $1.8 million for the six months ended September
30, 1996 to $2.3 million for the six months ended September 30,
1997, due to an increase in the average balance of investment
securities from $58.2 million for the six months ended September
30, 1996 to $69.9 million for the six months ended September 30,
1997. During the same period the yield on investment securities
increased from 6.09% for the six months ended September 30, 1996
to 6.54% for the six months ended September 30, 1997. Interest
income on mortgage-backed securities decreased $478,000, or
55.1%, from $867,000 for the six months ended September 30, 1996
to $390,000 for the six months ended September 30, 1997 due to a
decrease in the average balances from $25.3 million for the six
months ended September 30, 1996 to $11.0 million for the six
months ended September 30, 1997, offset by an increase in the
yield on mortgage-backed securities from 6.85% for the six months
ended September 30, 1996 to 7.07% for the six months ended
September 30, 1997.
Interest income increased $38,000, or 1.1%, from $3.5 million for the
three months ended September 30, 1996 to $3.5 million for the
three months ended September 30, 1997. This increase was due
primarily to increases in the interest on loans receivable and
investment securities offset by decreases in interest on
mortgage-backed securities for the same general reasons as noted
above.
INTEREST EXPENSE
Interest expense increased $60,000, or 1.3%, from $4.6 million for the
six months ended September 30, 1996 to $4.6 million for the six
months ended September 30, 1997. The increase resulted primarily
<PAGE> 13
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
from increased average savings deposit balances and increased
FHLB advances. Average deposit balances increased $2.7 million,
or 2.2%, from $124.0 million for the six months September 30,
1996 to $126.7 million for the six months ended September 30,
1997. The weighted average cost of deposits decreased 17 basis
points from 4.64% for the six months ended September 30, 1996 to
4.47% for the six months ended September 30, 1997, due to the
effects of increased average passbook balances.
Average advances from the FHLB increased $4.3 million, or 7.1%, to
$65.1 million, at September 30, 1997 compared to $60.8 million at
September 30, 1996. The increase was primarily the result of
borrowings used to fund increased investments in securities and
mortgage loan originations. The weighted average cost of
advances decreased 4 basis points from 5.52% for the six months
ended September 30, 1996 to 5.48% for the six months ended
September 30, 1997 due to effective borrowing programs offered by
the FHLB.
Interest expense decreased $14,000, or 0.6%, from $2.4 million for the
three months ended September 30, 1996 to $2.4 million for the
three months ended September 30, 1997. The decrease resulted
from decreased weighted average cost of deposits and cost of
borrowings for the three months ended September 30, 1997, as
compared to the three months ended September 30, 1996 offset by
increased average savings deposit and FHLB advance balance for
the same period.
PROVISION FOR LOSSES ON LOANS
Provision for losses on loans increased $24,000 to $24,000 for the six
months ended September 30, 1997 compared to no provision for the
six months ended September 30, 1996. The provision for losses on
loans is based on management's evaluation of the credit risk
inherent in the loan portfolio and the amount required to be
maintained in the allowance for loan losses. Equality's
allowance for loan losses totaled $283,000 at September 30, 1997
and March 31, 1997, respectively. Management believes the
allowance for loan losses is adequate.
Provision for losses on loans increased $24,000 to $24,000 for the
three months ended September 30, 1997 compared to no provision
for the three months ended September 30, 1996.
NONINTEREST INCOME
Noninterest income increased $128,000, or 10.2%, from $1.3 million for
the six months ended September 30, 1996 to $1.4 million for the
six months ended September 30, 1997. The increase is due
primarily to gain on sale of mortgage loans which increased from
$445,000 for the six months ended September 30, 1996 to $620,000
for the six months ended September 30, 1997, gains on the sale of
investment and mortgage-backed securities-available for sale
totaling $49,000 for the six months ended September 30, 1997
compared to losses of $60,000 for the six months ended September
30, 1996, and increased loan servicing fees and late charges
<PAGE> 14
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
which increased from $435,000 for the six months ended September
30, 1996 to $473,000 for the six months ended September 30, 1997
offset by the results of the sale of a 26 unit residential
property by ECC in June, 1996 at a gain of $106,000 with no
comparable gain for the six months ended September 30, 1997 and
the resulting reduction in rental income of $28,000 for the same
period. The increase of $174,000, or 39.1%, on gain on sale of
mortgage loans was due to a continued improvement in market rates
during the six months ended September 30, 1997. For the six
months ended September 30, 1997, Equality, through EMC, sold
$38.0 million of mortgage loans as compared to $47.6 million in
the comparable period in 1996. However, the decreased sales
volume of $9.6 million resulted in increased gain on sale of
mortgage loans due to the condition of the secondary mortgage
market. Loan servicing fees and late charges increased $38,000,
or 8.7% to $473,000 for the six months ended September 30, 1997
due primarily to an increase in the servicing portfolio of EMC.
Loans serviced by EMC increased $10.9 million, or 3.4%, from
$319.3 million at September 30, 1996 to $330.2 million at
September 30, 1997.
Noninterest income increased by $297,000, or 56.1%, from $529,000 for
the three months ended September 30, 1996 to $825,000 for the
three months ended September 30, 1997. Gain on sale of mortgage
loans increased $197,000, or 85.2%, from $235,000 for the three
months ended September 30, 1996 to $429,000 for the three months
ended September 30, 1997. Gain on sale of investment and
mortgage-backed securities increased $91,000 to $1,000 for the
three months ended September 30, 1997 from a loss of $89,000 for
the three months ended September 30, 1996. This increase was due
to the market effect of mortgage-backed securities portfolio
restructuring done in August, 1996 with no comparable item in
1997.
NONINTEREST EXPENSE
Noninterest expense decreased $735,000, or 20.8%, for the six months
ended September 30, 1997 compared to the six months ended
September 30, 1996, due primarily to legislation passed by
Congress to capitalize the SAIF in which Equality was assessed a
one-time FDIC insurance premium of $789,000. In addition,
ongoing federal deposit insurance premiums decreased $102,000, or
72.4%, from $141,000 for the six months ended September 30, 1996
to $39,000 for the six months ended September 30, 1997 as a
result of reduced premiums from approximately 23 basis points to
six basis points in connection with the SAIF recapitalization,
offset by increased salaries and employee benefits of $92,000, or
6.1%, from $1.5 million for the six months ended September 30,
1996 to $1.6 million for the six months ended September 30, 1997
and general increases in data processing and other general
operating expenses. Increased salary and employee benefits are
the direct result of general wage increases and an increase in
commercial loan production personnel.
<PAGE> 15
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
Noninterest expense decreased $759,000, or 34.5%, from $2.2 million
for the three months ended September 30, 1996 to $1.4 million for
the three months ended September 30, 1997 due to the factors
noted above and previously.
INCOME TAXES
Income tax expense (benefit) increased from a benefit of $38,000 for
the six months ended September 30, 1996 to an expense of $335,000
for the six months ended September 30, 1997. The increase of
$374,000, or 972.6%, was the result of the increase in income
before income tax expense of $958,000 due to the previously
mentioned Congress approved SAIF recapitalization assessment of
$789,000 as well as previously mentioned improvements in net
interest income and noninterest income. The effective tax rate
was approximately 39.0% for the six month periods ended
September 30, 1997 and 1996.
Income tax expense (benefit) increased $422,000 from a benefit of
$207,000 for the three months ended September 30, 1996 to an
expense of $215,000 for the three months ended September 30, 1997
for the reasons noted above. The effective tax rate was
approximately 39.0% for the three month periods ended September
30, 1997 and 1996.
NONPERFORMING ASSETS
--------------------
At September 30, 1997, nonperforming assets were approximately
$688,000, which represents a decrease of $121,000, or 3.0%, as
compared to March 31, 1997. A summary of nonperforming assets by
category is summarized as follows:
Sept. 30, March 31,
1997 1997
--------- ---------
(in thousands)
Nonaccruing loans:
One to four family $ 675 643
Consumer and other - -
---- ----
Total nonaccruing loans 675 643
Foreclosed assets - one to four family 13 66
Total nonperforming assets $ 688 709
===== ====
Nonaccruing loans as a percent of net loans .63% .67%
===== ====
Nonperforming assets as a percent of
total assets .29% .35%
===== ====
Loans are placed on nonaccrual status when either principal or
interest is more than 90 days past due or at such time when
contractual amounts due are deemed uncollectible, whichever is
<PAGE> 16
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
sooner. Interest accrued and unpaid at the time a loan is placed
on nonaccrual status is charged against interest income.
Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on
the assessment of the ultimate collectibility of the loan.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The OTS requires minimum levels of liquid assets. OTS regulations
presently require Equality to maintain an average daily balance
of liquid assets (United States Treasury, federal agency, and
other investments having maturities of five years of less) equal
to at least 5% of the sum of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year
or less. Such requirements may be changed from time to time by
the OTS to reflect changing economic conditions. Such
investments are intended to provide a source of relatively liquid
funds upon which Equality may rely, if necessary, to fund deposit
withdrawals and other short-term funding needs. Equality's
regulatory liquidity at September 30, 1997 was 33.06%. In
addition to the regulatory liquidity requirement, Equality is
required to maintain short-term liquid assets, as defined, equal
to 1.0% of the average sum of net withdrawable deposits and other
liabilities, as defined. Equality's short-term liquidity ratio
at September 30, 1997 was 11.31%.
Equality's primary sources of funds consist of deposits bearing market
rates of interest and loan repayments. Other potential sources
of funds available to Equality include borrowings from the
Federal Home Loan Bank of Des Moines. Equality uses its
liquidity resources principally to meet ongoing commitments, to
fund maturing certificates of deposit and deposit withdrawals, to
invest, to fund existing and future loan commitments, to maintain
liquidity, and to meet operating expenses. Management believes
that loan repayments and other sources of funds will be adequate
to meet and exceed Equality's liquidity needs, including meeting
its commitments to buy or fund loans. At September 30, 1997,
Equality had approximately $1.3 million in outstanding
commitments to originate loans, approximately $551,000 of which
were adjustable rate loans. The interest rate on fixed rate
commitments ranged from 7.00% to 8.48% at September 30, 1997.
The majority of the loans will be sold into the secondary market
upon origination.
REGULATORY CAPITAL
------------------
Federally insured savings associations such as Equality are required
to maintain a minimum level of regulatory capital. The capital
regulations require institutions to have tangible capital equal
to 1.5% of total adjusted assets (as defined by regulation), a
minimum core capital ratio of 3% of adjusted total assets, and a
risk-based capital ratio of 8% of risk-based assets (as defined
<PAGE> 17
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
by regulation). The risk-based capital requirement is calculated
based on the credit risk presented by both on-balance-sheet
assets and off-balance-sheet commitments and obligations. Assets
are assigned a credit-risk weighting based upon their relative
risk ranging from 0% for assets backed by the full faith and
credit of the United States or that pose no credit risk to the
institution to 100% for assets such as delinquent or repossessed
assets.
A reconciliation of stockholders' equity, as reported in the
consolidated financial statements of Equality, to the three
capital standards, as required under the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 (FIRREA), is as
follows:
<TABLE>
<CAPTION>
Regulatory Capital
-----------------------------------------------
Tangible Core Risk-based
capital capital capital
-----------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Stockholders' equity -
financial statements $ 13,888 $ 13,888 $ 13,888
Unrealized gain on investment and
mortgage-backed securities
available for sale (260) (260) (260)
------ ------ ------
Adjusted stockholders' equity 13,628 13,628 13,628
Investments in and advances to
nonincludable subsidiaries (844) (844) (844)
Additional capital item - general
loan loss reserves -- -- 283
------ ------ ------
Regulatory capital, as computed 12,784 12,784 13,067
Minimum capital requirement* 3,571 7,143 6,666
------ ------ ------
Regulatory capital in excess of
minimum capital requirement 9,213 5,641 6,401
====== ====== ======
Regulatory capital ratio 5.37% 5.37% 15.68%
====== ====== ======
</TABLE>
*As reflected in the quarterly report to the OTS.
IMPACT OF INFLATION AND CHANGING PRICES
---------------------------------------
The unaudited consolidated financial statements and related data
presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of
financial position and results of operations in the measurements
<PAGE> 18
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
of historical dollars without considering changes in the relative
purchasing power of money over time because of inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of Equality are monetary in nature. As a result,
interest rates have a more significant impact on Equality's
performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or
in the same magnitude as the prices of goods and services. In
the present interest rate environment, the liquidity, maturity
structure, and quality of Equality's assets and liabilities are
important factors in the maintenance of acceptable performance
levels.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
---------------------------------------
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October, 1995, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123). SFAS 123
establishes financial accounting and reporting standards for
stock-based employee compensation plans and also applies to
transactions in which an entity issues its equity instruments to
acquire goods or services from nonemployees. SFAS 123 defines a
fair valued-based method of accounting for an employee stock
option or similar equity instruments and encourages all entities
to adopt that method of accounting. SFAS 123 also allows an
entity to continue to measure compensation cost for those plans
using the intrinsic value based method accounting prescribed by
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES (APB 25). SFAS 123 was effective for
transactions entered into in fiscal years beginning after
December 15, 1995. Pro forma disclosures required for entities
that elect to continue to measure compensation cost using APB 25
must include the effect of all awards granted in fiscal years
beginning after December 15, 1995. Equality continues to measure
compensation cost using APB 25. No stock options were granted
during the year ended March 31, 1997 or during the six months
ended September 30, 1997. SFAS 123 is not expected to have a
material impact on Equality's consolidated financial statements.
EARNINGS PER SHARE
In February, 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, EARNINGS PER SHARE (SFAS 128). SFAS 128
establishes standards for computing and presenting earnings per
share and applies to entities with publicly held common stock or
potential common stock. SFAS 128 simplifies the current
standards for computing earnings per share and makes them
comparable to international earnings per share standards. Under
SFAS 128 the presentation of primary earnings per share is
replaced with a presentation of basic earnings per share. SFAS
128 also requires dual presentation of basic and diluted earnings
<PAGE> 19
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
per share on the face of the income statement for all entities
with complex capital structures and requires the reconciliation
of the numerator and denominator of the basic earnings per share
computation to the numerator and denominator of the diluted
earnings per share computation. SFAS 128 is effective for
financial statements issued for periods ending after December 15,
1997, including interim periods; early application is not
permitted. SFAS 128 will require the restatement of all prior-
period earnings per share data presented. The adoption of SFAS
128 is not expected to have a material impact on Equality's
consolidated financial statements.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE
Also in February, 1997, the FASB issued Statement of Financial
Accounting Standards No. 129, DISCLOSURE OF INFORMATION ABOUT
CAPITAL STRUCTURE (SFAS 129). SFAS 129 applies to all entities
and establishes standards for disclosing information about an
entity's capital structure. SFAS 129 is effective for financial
statements for periods ending after December 15, 1997. The
adoption of SFAS 129 is not expected to have a material impact on
Equality's consolidated financial statements.
<PAGE> 20
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities
---------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
27 Financial Data Schedule
Reports on Form 8-K: None.
<PAGE> 21
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
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.
EQUALITY BANCORP, INC.
Registrant
Date: November 10, 1997 /s/ Richard C. Fellhauer
--------------------------------
Richard C. Fellhauer, President,
Chief Executive Officer and
Chairman of the Board
Date: November 10, 1997 /s/ Michael A. Deelo
--------------------------------
Michael A. Deelo, Treasurer and
Chief Financial Officer
EQUALITY SAVINGS AND LOAN ASSOCIATION, F.A.
AND SUBSIDIARIES
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
the Consolidated Financial Statements of Equality Savings and Loan
Association, F.A. and is qualified in its entirety by reference to
such financial statements.
For the six month period ending September 30, 1997:
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 22,070
<INT-BEARING-DEPOSITS> 2,111
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 91,386
<INVESTMENTS-CARRYING> 3,600
<INVESTMENTS-MARKET> 3,544
<LOANS> 107,852
<ALLOWANCE> 283
<TOTAL-ASSETS> 238,541
<DEPOSITS> 149,134
<SHORT-TERM> 3,023
<LIABILITIES-OTHER> 1,881
<LONG-TERM> 70,615
0
0
<COMMON> 836
<OTHER-SE> 13,052
<TOTAL-LIABILITIES-AND-EQUITY> 238,541
<INTEREST-LOAN> 3,953
<INTEREST-INVEST> 2,864
<INTEREST-OTHER> 120
<INTEREST-TOTAL> 6,937
<INTEREST-DEPOSIT> 2,833
<INTEREST-EXPENSE> 4,642
<INTEREST-INCOME-NET> 2,295
<LOAN-LOSSES> 24
<SECURITIES-GAINS> 49
<EXPENSE-OTHER> 2,791
<INCOME-PRETAX> 860
<INCOME-PRE-EXTRAORDINARY> 860
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 524
<EPS-PRIMARY> .64
<EPS-DILUTED> .64
<YIELD-ACTUAL> 6.89
<LOANS-NON> 675
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 283
<CHARGE-OFFS> 24
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 283
<ALLOWANCE-DOMESTIC> 283
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
