<PAGE> 1
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 June 30, 1998.
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 small business issuer 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, MO 63126
- --------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
Issuer's telephone number, including area code (314) 965-7090
--------------
Check whether the issuer (1) has 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
----- ------
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding at August 14, 1998
- ----------------------------- -------------------------------------
Common Stock, Par Value $0.01 2,519,793
Traditional Small Business Disclosure Format (Check one): Yes No X
----- -----
<PAGE> 2
<TABLE>
INDEX TO FORM 10-QSB
<CAPTION>
PAGE NO.
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated Balance Sheets 1
- Consolidated Statements of Income 2
- Consolidated Statement of Stockholders' Equity 3
- Consolidated Statements of Cash Flows 4
- Consolidated Statements of Comprehensive Income 5
- Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of 8
Operation
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
<PAGE> 3
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1998 and March 31, 1998
(Unaudited)
<CAPTION>
June 30, March 31,
Assets 1998 1998
------ -------- ---------
<S> <C> <C>
Cash, primarily interest-bearing demand accounts $ 9,787,737 1,070,538
Interest-bearing deposits 1,279,000 1,378,000
Investment securities:
Available for sale, at market value 66,094,654 68,897,156
Held to maturity, at cost 1,600,000 2,600,000
Mortgage-backed securities available
for sale, at market value 76,345,329 58,512,089
Loans receivable 89,101,690 93,892,385
Loans held for sale 12,779,022 14,523,036
------------ -----------
Total loans receivable, net 101,880,712 108,415,421
Investment in real estate 690,972 734,317
Stock in Federal Home Loan Bank 6,200,000 5,200,000
Mortgage servicing rights 1,022,698 837,597
Office properties and equipment, net 5,787,420 5,574,287
Accrued interest receivable and other assets 2,672,734 2,330,908
------------ -----------
273,361,256 255,550,313
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Savings deposits 118,671,154 119,301,376
Accrued interest payable on savings deposits 139,881 134,203
Borrowed money 126,540,424 105,678,694
Advance payments by borrowers for taxes and insurance 135,644 105,950
Income tax payable 166,013 696,192
Deferred income taxes 893,420 871,839
Accrued expenses and other liabilities 632,929 2,924,244
------------ -----------
Total liabilities 247,179,465 229,712,498
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value per share;
200,000 shares authorized; none issued -- --
Common stock, $.01 par value per share;
4,000,000 shares authorized; 2,517,534
and 2,505,855 shares issued and outstanding
at June 30, 1998 and March 31, 1998, respectively 25,175 25,059
Additional paid-in capital 16,062,705 15,997,241
Retained earnings - substantially restricted 10,903,524 10,694,400
Accumulated other comprehensive income - unrealized
gain on investment and mortgage-backed
securities available for sale, net of tax 431,974 398,219
Unearned ESOP shares (1,241,587) (1,277,104)
------------ -----------
Total stockholders' equity 26,181,791 25,837,815
------------ -----------
$273,361,256 255,550,313
============ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
1
<PAGE> 4
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Three months ended June 30, 1998 and 1997
(Unaudited)
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Interest income:
Loans receivable $2,072,260 1,954,874
Investment securities 1,100,274 1,120,431
Mortgage-backed securities 967,326 217,469
Interest bearing deposits 125,317 54,955
Other 96,293 59,232
---------- ---------
Total interest income 4,361,470 3,406,961
---------- ---------
Interest expense:
Savings deposits 1,322,750 1,401,552
Advances from the Federal Home Loan Bank 1,545,387 891,241
Other borrowed money 13,178 11,188
---------- ---------
Total interest expense 2,881,315 2,303,981
---------- ---------
Net interest income 1,480,155 1,102,980
Provision for losses on loans -- --
---------- ---------
Net interest income after pro-
vision for losses on loans 1,480,155 1,102,980
---------- ---------
Noninterest income:
Gain on sale of mortgage loans 551,641 190,830
Loan servicing fees and late charges 292,577 236,791
Gain on sale of investment and mortgage-
backed securities available for sale 6,397 47,517
Equity in loss of joint ventures (37,236) (16,491)
Rental income 25,661 6,264
Other 110,571 90,071
---------- ---------
Total noninterest income 949,611 554,982
---------- ---------
Noninterest expense:
Salaries and employee benefits 1,037,719 786,457
Occupancy 115,019 106,615
Data processing 73,181 53,776
Advertising 84,104 27,501
Federal insurance premiums 18,260 19,692
Other 521,649 355,531
---------- ---------
Total noninterest expense 1,849,932 1,349,572
---------- ---------
Income before income tax expense 579,834 308,390
Income tax expense 228,889 120,272
---------- ---------
Net income 350,945 188,118
========== =========
Basic earnings per share $ .15 .07
========== =========
Diluted earnings per share $ .15 .07
========== =========
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE> 5
<TABLE>
EQUALITY BANCORP, INC.
Consolidated Statement of Stockholders' Equity
Three months ended June 30, 1998
(Unaudited)
<CAPTION>
Accumulated other
comprehensive income-
unrealized gain on
investment and
mortgage-backed Total
Common Stock Additional securities stock
------------------- paid-in Retained available for Unearned holders'
Shares Amount capital earnings sale, net ESOP shares equity
------ ------ ---------- -------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1998 2,505,85 $25,059 15,997,241 10,694,400 398,219 (1,277,104) $25,837,815
Net income 350,945 350,945
Exercise of stock
options 11,679 116 42,689 42,805
Amortization of
ESOP awards 22,775 35,517 58,292
Dividend declared
on common stock
of Equality Bancorp,
Inc. at $.06
per share (141,821) (141,821)
Change in unre-
alized gain
on investment
and mortgage-
backed securities
available for
sale, net 33,755 33,755
--------- ------- ---------- ---------- ------- ---------- -----------
Balance, June 30,
1998 2,517,534 $25,175 16,062,705 10,903,524 431,974 (1,241,587) $26,181,791
========= ======= ========== ========== ======= ========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE> 6
<TABLE>
EQUALITY BANCORP, INC.
Consolidated Statements of Cash Flows
Three months ended June 30, 1998 and 1997
(Unaudited)
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 350,945 188,118
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization:
Office properties and equipment 19,582 71,428
Real estate investments 2,815 2,815
Premiums and discounts, net (87,330) 47,229
Mortgage servicing rights 113,357 47,691
Decrease (increase) in accrued interest receivable (247,721) 71,687
Gain on sale of investment and mortgage-backed
securities available for sale (6,397) (47,517)
Increase (decrease)in accrued interest payable on savings deposits 5,678 (1,140)
Change in income tax payable (530,179) 44,314
Equity in loss of joint ventures 37,236 16,491
Other, net (2,328,485) 26,545
Origination and purchase of loans held for sale (38,389,649) (19,806,007)
Proceeds from sales of loans held for sale 40,133,663 11,540,558
------------ -----------
Net cash used in operating activities (926,485) (7,797,788)
------------ -----------
Cash flow from investing activities:
Net change in loans receivable 4,781,666 (2,320,333)
Decrease in interest-bearing deposits 99,000 1,157,370
Principal repayments on investment securities, AFS 14,088 66,830
Principal repayments on mortgage-backed securities, AFS 4,044,543 572,684
Proceeds from the sale of investment securities, AFS -- 43,936,191
Proceeds from the maturity of investment securities, AFS 16,285,000 6,000,000
Proceeds from the sale of mortgage-backed securities, AFS 6,244,094 3,519,453
Proceeds from the maturity of investment securities, HTM 1,000,000 --
Purchase of investment securities, AFS (13,236,875) (19,375,000)
Purchase of mortgage-backed securities, AFS (28,222,140) --
Decrease in joint venture borrowings 3,294 3,292
Purchase of stock in FHLB (1,000,000) (50,000)
Increase in cost of mortgage servicing rights (298,458) (48,714)
Purchase of office properties and equipment, net (232,714) (771,154)
------------ -----------
Net cash provided by (used in) investing activities (10,518,502) 32,690,619
------------ -----------
Cash flow from financing activities:
Net decrease in savings deposits (630,222) (957,039)
Proceeds from Federal Home Loan Bank advances 30,000,000 5,000,000
Repayment of Federal Home Loan Bank advances (10,000,000) (5,000,000)
Proceeds from other borrowed money 861,730 913,328
Cash dividends paid (141,821) (64,161)
Proceeds from stock option exercise 42,805 --
Increase in advance payments by borrowers
for taxes and insurance 29,694 44,615
------------ -----------
Net cash provided by (used in) financing activities 20,162,186 (63,257)
------------ -----------
Net increase in cash and cash equivalents 8,717,199 24,829,574
Cash and cash equivalents, beginning of period 1,070,538 1,037,199
------------ -----------
Cash and cash equivalents, end of period $ 9,787,737 25,866,773
============ ===========
Supplemental disclosure of cash flow information:
Interest paid 2,875,637 2,305,122
Income taxes paid, net 760,012 75,958
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE> 7
<TABLE>
EQUALITY BANCORP, INC.
Consolidated Statements of Comprehensive Income
Three months ended June 30, 1998 and 1997
(Unaudited)
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net Income $350,945 188,118
Other comprehensive income:
Net unrealized gain on investment and mortgage-backed
securities available for sale, net of tax 37,657 551,684
Less adjustment for gain on sale of investment and
mortgage-backed securities available for sale,
net realized in net income, net of tax of $2,495
and $18,532 for the three months ended June 30,
1998 and 1997, respectively (3,902) (28,985)
-------- -------
Total other comprehensive income 33,755 522,699
-------- -------
Comprehensive income $384,700 710,817
======== =======
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE> 8
EQUALITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
(1) 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 months ended June 30, 1998
and 1997.
Operating results for the three months ended June 30, 1998 are not
necessarily indicative of the result that may be expected for the
year ending March 31, 1999.
(2) Principles of Consolidation
---------------------------
The accompanying unaudited consolidated financial statements include
the accounts of Equality Bancorp, Inc. and its wholly owned
subsidiary, Equality Savings Bank (the "Bank") as well as
Equality Savings Bank's wholly owned subsidiaries, Equality
Commodity Corporation (ECC) and Equality Mortgage Corporation
(EMC). All significant intercompany accounts and transactions
have been eliminated in consolidation.
(3) Earnings Per Share
------------------
Equality Bancorp, Inc. (the "Company") adopted the provisions of
Statement of Accounting Standards No. 128, Earnings Per Share
------------------
(SFAS 128) on December 31, 1997. This statement replaced the
previously reported earnings per share with basic and diluted
earnings per share. Basic earnings per share excludes any
dilutive effect of options and convertible securities. Diluted
earnings per share does consider the effects of options and
convertible securities. All prior period earnings per share data
have been restated to conform with the requirements of SFAS 128.
Earnings per share information has also been adjusted to reflect
the second-step conversion of Equality Savings and Loan
Association, F.A. and the exchange of each share of its common
stock for 2.9724 shares of the Company's common stock.
Basic earnings per share for the three month periods ended June 30, 1998
and 1997 was computed based upon net income for the period using
weighted average common shares outstanding of 2,358,040 and
2,450,383, respectively.
6
<PAGE> 9
EQUALITY BANCORP, INC.
Diluted earnings per share for the three month periods ended June 30,
1998 and 1997 was computed based upon net income for the period
using weighted average common shares and dilutive potential
common shares outstanding of 2,394,875 and 2,468,343,
respectively. Stock options are the only dilutive potential
common shares.
7
<PAGE> 10
EQUALITY BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
The following discussion reviews the financial condition and results of
operations of Equality Bancorp, Inc., and its subsidiary, Equality
Savings Bank, with subsidiaries, as of June 30, 1998 and for the three
months then ended.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of
such statements.
CHANGES IN FINANCIAL CONDITION
The total assets of the Company increased by approximately $17.8 million, or
7.0%, to $273.4 million at June 30, 1998 from $255.6 million at March
31, 1998. This increase in asset size primarily relates to increased
investment in mortgage-backed securities and cash reserves which were
funded through Federal Home Loan Bank of Des Moines ("FHLB") advances
and the proceeds from maturities of investment securities.
Cash, primarily interest bearing deposits, increased $8.7 million, or 814.3%,
to $9.8 million at June 30, 1998 from $1.1 million at March 31, 1998.
This increase is primarily the result of increased FHLB advances,
decreased investment securities, and accelerated mortgage loan
prepayments offset by increased mortgage-backed securities.
Interest bearing deposits decreased $99,000, or 7.2%, to $1.3 million at June
30, 1998 from $1.4 million at March 31, 1998. The decrease is due to
the maturity of a certificate of deposit at another financial
institution. The Company is consciously reducing its investment in
this area as certificates of deposit mature.
Investment securities available for sale decreased approximately $2.8
million, or 4.1%, to $66.1 million at June 30, 1998 from $68.9 million
at March 31, 1998. The decrease is due primarily to $13.2 million of
purchases of securities and an increase in the fair market value of
such securities totaling $72,000, offset by $16.3 million of
maturities.
Investment securities held to maturity decreased $1.0 million, or 38.5%, to
$1.6 million at June 30, 1998 from $2.6 million at March 31, 1998. The
decrease is the result of the maturity of such securities.
Mortgage-backed securities available for sale increased approximately $17.8
million, or 30.5%, to $76.3 million at June 30, 1998 from $58.5 million
at March 31, 1998. This increase is the result of purchases of
securities totaling $28.2 million, offset by normal principal
repayments of $4.0 million and sales proceeds of $6.2 million.
8
<PAGE> 11
EQUALITY BANCORP, INC.
Loans held for investment decreased approximately $4.8 million, or 5.1%, to
$89.1 million at June 30, 1998 from $93.9 million at March 31, 1998.
This decrease reflects accelerated principal repayments due to
refinancing, the result of low mortgage interest rates.
Loans held for sale decreased approximately $1.8 million, or 12.2%, to $12.8
million at June 30, 1998 from $14.5 million at March 31, 1998. This
decrease is the result of EMC mortgage loan originations totaling $37.4
million and mortgage loan purchases of $971,000, offset by mortgage
loan sales of $40.2 million for the three months ended June 30, 1998.
9
<PAGE> 12
EQUALITY BANCORP, INC.
The following table sets forth composition of the Company's loan portfolio in
dollars and in percentages of total loans at the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, 1998 MARCH 31, 1998
---------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One to four family:
Conventional $ 59,105 57.8% $ 67,543 62.0%
FHA/VA 14,872 14.5% 11,718 10.8%
Loans held for sale 12,756 12.5% 14,523 13.3%
Multifamily 1,369 1.3% 1,382 1.3%
Commercial 2,889 2.8% 2,684 2.5%
-------- ----- -------- -----
Total Real Estate Loans 90,991 88.9% 97,850 89.9%
Commercial Business Loans 8,452 8.3% 8,153 7.4%
-------- ----- -------- -----
Consumer Loans:
Loans secured by savings deposits 346 .3% 391 .4%
Property improvement loans 1,644 1.6% 1,728 1.6%
Automobile loans 746 .7% 617 .6%
Other consumer loans 192 .2% 157 .1%
-------- ----- -------- -----
Total Consumer Loans 2,928 2.8% 2,893 2.7%
-------- ----- -------- -----
Total Loans 102,371 100.0% 108,896 100.0%
===== =====
LESS:
Loans in process 2 3
Deferred loan fees 32 37
Unearned discounts 23 8
Allowance for loan losses 374 374
Valuation reserve on loans held
for sale 59 59
-------- --------
Total loans receivable, net $101,881 $108,415
======== ========
</TABLE>
10
<PAGE> 13
EQUALITY BANCORP, INC.
Office properties and equipment increased $213,000, or 3.8%, to $5.8 million
at June 30, 1998 from $5.6 million at March 31, 1998. The increase
resulted from additional improvements to the Bank's branch network
during the three months ended June 30, 1998.
Savings deposits decreased $630,000, or .5%, to $118.7 million at June 30,
1998 from $119.3 million at March 31, 1998. The decrease is due
primarily to deposit outflow. Interest credited during the three
months ended June 30, 1998 was approximately $1.1 million.
Borrowed money increased $20.9 million, or 19.7%, to $126.5 million at June
30, 1998 from $105.7 million at March 31, 1998. FHLB advances
increased $20.0 million, or 19.2%, to $124.0 million at June 30, 1998
from $104.0 million at March 31, 1998. Proceeds from these advances
were used to fund purchases of mortgage-backed securities. Other
borrowed money increased $862,000, or 51.3%, to $2.5 million at June
30, 1998 from $1.7 million at March 31, 1998. These short term
borrowings relate to a warehouse line of credit established with an
independent bank and maintained by EMC, the proceeds of which were
invested solely in residential mortgage loans.
Total stockholders' equity increased $344,000, or 1.3%, to $26.2 million at
June 30, 1998 from $25.8 million at March 31, 1998. The increase was
primarily attributable to the Company's net income of $351,000 for the
three months ended June 30, 1998 and improvement in the fair market
value of investment and mortgage-backed securities available for sale
of $34,000, net of tax, at June 30, 1998 when compared to March 31,
1998.
11
<PAGE> 14
<TABLE>
EQUALITY BANCORP, INC.
UNAUDITED CONSOLIDATED AVERAGE BALANCE SHEET,
INTEREST AND DIVIDENDS EARNED OR PAID,
AND RELATED INTEREST YIELDS AND RATES
<CAPTION>
THREE MONTHS ENDED JUNE 30,
- ----------------------------------------------------------------------------------------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
INTEREST INTEREST
AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE<F1> DIVIDENDS COST<F2> BALANCE<F1> DIVIDENDS COST<F2>
- ----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans Receivable<F3> $102,881 $2,072 8.06% $103,816 $1,955 7.53%
Investment in FHLB 5,867 96 6.55% 3,400 59 6.94%
Mortgage-backed securities 62,248 968 6.21% 12,365 217 7.02%
Investment securities 70,766 1,100 6.22% 64,607 1,121 6.94%
Interest-bearing deposits 13,536 125 3.69% 11,672 55 1.88%
-------- ------ -------- ------
Total interest-earning
assets 255,298 4,361 6.83% 195,860 3,407 6.96%
------ ------
Other assets 11,239 7,018
-------- --------
Total assets 266,537 202,878
======== ========
Interest bearing liabilities:
Regular savings 20,310 21,597
NOW accounts 14,032 12,424
Money market accounts 6,534 5,479
Certificates of deposit 77,795 82,385
-------- --------
Total savings deposits 118,671 1,323 4.46% 121,885 1,402 4.60%
FHLB advances 117,333 1,545 5.27% 64,667 891 5.51%
Other interest-bearing
liabilities 2,588 13 2.01% 1,732 11 2.54%
-------- ------ -------- ------
Total interest bearing
liabilities 238,592 2,881 4.83% 188,284 2,304 4.89%
------ ------
Other liabilities 1,867 1,709
-------- --------
Total liabilities 240,459 189,993
Stockholders' equity 26,078 12,885
-------- --------
Total liabilities and
stockholders' equity $266,537 $202,878
======== ========
Net interest income $1,480 $1,103
====== ======
Interest rate spread 2.00% 2.07%
==== ====
Net interest margin<F4> 2.32% 2.25%
==== ====
Ratio of average interest-
earning assets to
average interest-bearing
liabilities 1.07X 1.04X
==== ====
<FN>
<F1>Average balances are computed on a monthly basis (month-end balances).
<F2>Annualized.
<F3>Does not include interest on loans 90 days or more past due.
<F4>Net interest income divided by average interest-earning assets.
</TABLE>
12
<PAGE> 15
EQUALITY BANCORP, INC.
NET INCOME
Net income increased $163,000, or 86.6%, to $351,000 for the three months
ended June 30, 1998 from $188,000 for the three months ended June 30,
1997. The increase was primarily the result of increased net interest
income of $377,000, or 34.2%, and increased noninterest income of
$395,000, or 71.1%, offset by increased noninterest expense of
$500,000, or 37.1%, and increased income taxes of $109,000, or 90.3%,
for the three months ended June 30, 1998.
INTEREST INCOME
Interest income increased $955,000, or 28.0%, to $4.4 million for the three
months ended June 30, 1998 from $3.4 million for the three months ended
June 30, 1997. The increase is primarily due to increased average
mortgage-backed securities of $49.9 million to $62.2 million for the
three months ended June 30, 1998 from $12.4 million for the three
months June 30, 1997 and increased average investment securities of
$6.2 million to $70.8 million for the three months ended June 30, 1998
from $64.6 million for the three months ended June 30, 1997 offset by
decreased average loans receivable of $935,000 to $102.9 million for
the three months ended June 30, 1998 from $103.8 million for the three
months ended June 30, 1997. The weighted average yield on total
interest-earning assets decreased to 6.83% for the three months ended
June 30, 1998 from 6.96% for the three months ended June 30, 1997.
INTEREST EXPENSE
Interest expense increased $577,000, or 25.1%, to $2.9 million for the three
months ended June 30, 1998 from $2.3 million for the three months ended
June 30, 1997. The increase is primarily due to increased average FHLB
advances of $52.7 million to $117.3 million for the three months ended
June 30, 1998 from $64.7 million for the three months ended June 30,
1997 offset by decreased average savings deposits of $3.2 million to
$118.7 million for the three months ended June 30, 1998 from $121.9
million for the three months ended June 30, 1997 and by decreased
weighted average cost of funds to 4.83% for the three months ended June
30, 1998 from 4.89% for the three months ended June 30, 1997.
PROVISION FOR LOSSES ON LOANS
The Company had no provision for losses on loans for the three month periods
ended June 30, 1998 or 1997. The provision for loan losses is
determined by management as the amount to be added to the allowance for
loan losses after net chargeoffs have been deducted to bring the
allowance to a level which is considered adequate to absorb losses
inherent in the loan portfolio.
NONINTEREST INCOME
Noninterest income increased $395,000, or 71.1%, to $950,000 for the three
months ended June 30, 1998 from $555,000 for the three months ended
June 30, 1997. This increase was due primarily to increased gain on
sale of loans of $361,000, or 189.1%, to $552,000 for the three months
ended June 30, 1998 from $191,000 for the three months ended June 30,
1997 and increased loan servicing fees of $56,000, or 23.6%, to
$293,000 for the three months ended June 30, 1998 from $237,000 for the
three months ended June 30, 1997 offset by a reduction in gain on sale
of investment and mortgage-backed securities of $41,000, or 86.5%, to
$6,000 for the three months ended June 30, 1998 from $48,000 for the
three months ended June 30, 1997. For the three months ended June 30,
1998, the Company, through EMC, sold $40.2 million of mortgage loans as
compared to sales of $11.5 million for the three months ended June 30,
1997. The increased volume of sales resulted in increased gain on sale
for the comparable periods. As a result of increased volume and the
Bank's efforts at retaining servicing on loans sold, the
13
<PAGE> 16
EQUALITY BANCORP, INC.
average loan servicing portfolio increased $20.7 million, or 6.4%, to
$342.5 million for the three months ended June 30, 1998 from $321.7
million for the three months ended June 30, 1997.
NONINTEREST EXPENSE
Noninterest expense increased $500,000, or 37.1%, to $1.8 million for the
three months ended June 30, 1998 from $1.3 million for the three months
ended June 30, 1997. The increase was due primarily to increased
salary and employee benefits expense of $251,000, or 31.9%, to $1.0
million for the three months ended June 30, 1998 from $786,000 for the
three months ended June 30, 1997, increased advertising expense of
$57,000, or 205.8%, to $84,000 for the three months ended June 30, 1998
from $28,000 for the three months ended June 30, 1997 and increased
other expenses of $166,000, or 46.7%, to $522,000 for the three months
ended June 30, 1998 from $356,000 for the three months ended June 30,
1997. Salary and employee benefits increased primarily due to increased
commissions paid to loan officers of $51,000 on increased mortgage loan
originations and an increase of five Bank personnel to staff both the
new Washington branch facility as well as additional employment needs
and six EMC personnel, including two commissioned loan officers, as a
result of increased mortgage lending activity during 1998 as well as
general wage increases in effect for 1998. Advertising expense
increased as a result of marketing promotions during the three months
ended June 30, 1998 for the Bank's relocated office and new Washington
office to open in August, 1998. General operating expenses increased
due to increased amortization of originated mortgage servicing rights
(OMSR) of $66,000 to $113,000 for the three months ended June 30, 1998
from $48,000 for the three months ended June 30, 1997 and as a result
of removing certain fixed assets from service totaling $20,000 in
addition to increases totaling $10,000 in office expense and expenses
totaling $44,000 in connection with professional services and taxes for
the holding company with no comparable item in 1997.
INCOME TAXES
Income tax expense increased $109,000, or 90.3%, to $229,000 for the three
months ended June 30, 1998 from $120,000 for the three months ended
June 30, 1997. This increase was primarily due to an increase in
income before income tax of $271,000, or 88.0%. The effective tax rate
was approximately 39.0% for the three month periods ended June 30, 1998
and 1997.
14
<PAGE> 17
EQUALITY BANCORP, INC.
NONPERFORMING ASSETS
At June 30, 1998, nonperforming assets were approximately $985,000, which
represents an increase of $132,000, or 15.5%, as compared to March 31,
1998. A summary of nonperforming assets by category is summarized as
follows:
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
-------- ---------
(in thousands)
<S> <C> <C>
Nonaccruing loans:
One to four family<F1> $977 853
Consumer and other -- 8
---- ---
Total nonaccruing loans 977 861
Repossessed assets - automobile 8 --
---- ---
Total nonperforming assets $985 861
==== ===
Nonaccruing loans as a percent of net loans .96% .79%
==== ===
Nonaccruing loans as a percent of
total assets .36% .34%
==== ===
Nonperforming assets as a percent of
total assets .36% .34%
==== ===
<FN>
<F1> Includes $805,000 and $833,000 of FHA/VA loans, the principal and
interest payments of which are either issued by FHA or guaranteed by
the VA at June 30, 1998 and March 31, 1998, respectively.
</TABLE>
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 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.
15
<PAGE> 18
EQUALITY BANCORP, INC.
LIQUIDITY AND CAPITAL RESOURCES
The Office of Thrift Supervision (OTS) requires minimum levels of liquid
assets. OTS regulations presently require the Bank to maintain an
average daily balance of liquid assets equal to a monthly average of
not less than 4.0% of net withdrawable accounts plus short-term
borrowings. 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 the
Bank may rely, if necessary, to fund deposit withdrawals and other
short-term funding needs. The Bank's regulatory liquidity at June 30,
1998 was 30.2%.
The Bank's primary sources of funds consist of deposits bearing market rates
of interest and loan repayments. Other potential sources of funds
available to the Bank include borrowings from FHLB. At June 30, 1998,
the Bank had such outstanding FHLB borrowings of $124.0 million. The
Bank 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 the Bank's liquidity needs, including
meeting its commitments to buy or fund loans. At June 30, 1998, the
Bank had approximately $6.7 million in outstanding commitments to
originate loans, approximately $327,000 of which were adjustable rate
loans. The interest rate on fixed rate commitments ranged from 6.625%
to 8.00% at June 30, 1998. The majority of the loans will be sold into
the secondary market upon origination.
REGULATORY CAPITAL
Federally insured savings associations such as the Bank 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 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.
16
<PAGE> 19
EQUALITY BANCORP, INC.
A reconciliation of stockholders' equity, as reported in the consolidated
financial statements of the Bank, 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 $24,826 24,826 24,826
Accumulated other comprehensive
income - unrealized gain on
investment and mortgage-backed
securities available for sale (432) (432) (432)
------- ------ ------
Adjusted stockholders' equity 24,394 24,394 24,394
Investments in and advances to
nonincludable subsidiaries (807) (807) (807)
Additional capital item - general
loan loss reserves -- -- 374
------- ------ ------
Regulatory capital, as computed 23,587 23,587 23,691
Minimum capital requirement 4,083 8,166 6,938
------- ------ ------
Regulatory capital in excess of
minimum capital requirement $19,504 15,421 17,023
======= ====== ======
Regulatory capital ratio 8.67% 8.67% 27.63%
======= ====== ======
</TABLE>
Management believes that under current regulations, the Bank will continue to
meet its minimum capital requirements in the foreseeable future.
Events beyond the control of the Bank could adversely affect future
earnings and as a result, the ability of the Bank to meet its future
minimum capital requirements.
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 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 the Company are monetary in nature. As a result, interest rates
have a more significant impact on the Company'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 the
Company's assets and liabilities are important factors in the
maintenance of acceptable performance levels.
17
<PAGE> 20
EQUALITY BANCORP, INC.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June, 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, Disclosures about
-----------------
Segments of an Enterprise and Related Information (SFAS 131). SFAS 131
-------------------------------------------------
establishes standards for the way public business enterprises are to
report information about operating segments in annual financial
statements and requires those enterprises to report selected
information about operating segments in interim financial reports
issued to shareholders. SFAS 131 is effective for financial statements
for periods beginning after December 15, 1997. SFAS is a disclosure
requirement. The adoption of SFAS 131 will not have an impact on the
Company's financial position or results of operation.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June, 1998, the FASB issued SFAS No. 133, Accounting for Derivative
-------------------------
Instruments and Hedging Activities, (SFAS 133). SFAS 133 establishes
----------------------------------
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.
It requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS 133 is effective for all fiscal years
beginning after June 15, 1999. Earlier application of SFAS 133 is
encouraged but should not be applied retroactively to financial
statements of prior periods. The Company is currently evaluating the
requirements and impact of SFAS 133.
YEAR 2000 COMPLIANCE
The Company's Year 2000 committee has developed and presented to the Board of
Directors its action plan for Year 2000 compliance with the objective
of insuring that all computerized systems and software programs are
capable of functioning in the next century. Equality does not expect
that the cost of its Year 2000 compliance will be material to its
business, financial condition, or results of operations. Management
believes that they will achieve compliance during 1999. Management
does not anticipate any material disruption in operations as the result
of any failure by the Company or its subsidiaries.
18
<PAGE> 21
EQUALITY BANCORP, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
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: None.
Reports on Form 8-K: None.
19
<PAGE> 22
EQUALITY BANCORP, INC.
SIGNATURES
Pursuant to the requirement 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: August 14, 1998 /s/ RICHARD C. FELLHAUER
----------------------------- --------------------------------------
Richard C. Fellhauer, President,
Chief Executive Officer and
Chairman of the Board
Date: August 14, 1998 /s/ MICHAEL A. DEELO
----------------------------- --------------------------------------
Michael A. Deelo,
Chief Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 9,788
<INT-BEARING-DEPOSITS> 1,279
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 142,440
<INVESTMENTS-CARRYING> 1,600
<INVESTMENTS-MARKET> 1,553
<LOANS> 101,881
<ALLOWANCE> 374
<TOTAL-ASSETS> 273,361
<DEPOSITS> 118,671
<SHORT-TERM> 2,540
<LIABILITIES-OTHER> 1,968
<LONG-TERM> 124,000
0
0
<COMMON> 25
<OTHER-SE> 26,157
<TOTAL-LIABILITIES-AND-EQUITY> 273,361
<INTEREST-LOAN> 2,072
<INTEREST-INVEST> 2,068
<INTEREST-OTHER> 221
<INTEREST-TOTAL> 4,361
<INTEREST-DEPOSIT> 1,323
<INTEREST-EXPENSE> 2,881
<INTEREST-INCOME-NET> 1,480
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 6
<EXPENSE-OTHER> 1,850
<INCOME-PRETAX> 580
<INCOME-PRE-EXTRAORDINARY> 580
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 351
<EPS-PRIMARY> .15
<EPS-DILUTED> .15
<YIELD-ACTUAL> 6.83
<LOANS-NON> 985
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 374
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 374
<ALLOWANCE-DOMESTIC> 374
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
