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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 1999
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
------------------- --------------------
Commission file number 333-30469
EQUALITY BANCORP, INC.
(Name of small business issuer in its charter)
DELAWARE 43-1785126
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9920 WATSON ROAD, ST. LOUIS, MISSOURI 63126
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (314) 965-7090
Securities Registered Under Section 12(b) of the Exchange Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
Securities Registered Under Section 12(g) of the Exchange Act: None
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO .
----- -----
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [x]
State issuer's revenues for its most recent fiscal year: $21,795,653.
State the aggregate market value of the voting and nonvoting common
equity held by nonaffiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price as of June 22,
1999: $18,802,025.
State the number of shares outstanding of each of the issuer's classes
of common equity: As of May 31, 1999, there were issued and outstanding
2,520,426 shares of the issuer's common stock.
Transitional Small Business Disclosure Format (Check One):
Yes No X
----- -----
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<TABLE>
EQUALITY BANCORP, INC.
1999 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
<CAPTION>
Page
<S> <C>
PART I
Item 1. Description of Business 1
Item 2. Description of Properties 31
Item 3. Legal Proceedings 32
Item 4. Submission of Matters to a Vote of Security Holders 32
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 32
Item 6. Management's Discussion and Analysis 33
Item 7. Financial Statements 42
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 78
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons, Compliance With Section 1b(a)
of the Exchange Act 78
Item 10. Executive Compensation 79
Item 11. Security Ownership of Certain Beneficial
Owners and Management 81
Item 12. Certain Relationships and Related Transactions 82
Item 13. Exhibits and Reports on Form 8-K 82
SIGNATURES 84
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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GENERAL
Equality Bancorp, Inc. ("Equality") is a Delaware corporation which
was formed on May 14, 1997. Equality is the holding company for Equality
Savings Bank ("ESB"). Equality holds, as its only material asset, all of the
capital stock of ESB, its sole subsidiary. Equality is engaged in the
business of managing its investments and directing, planning and coordinating
the business activities of ESB. At March 31, 1999, Equality had total assets
of $288.4 million, deposit accounts of $129.0 million and total stockholders'
Equity of $25.6 million.
ESB is a federally chartered stock-based savings association
regulated by the Office of Thrift Supervision ("OTS") and its deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC") through the
Savings Association Insurance Fund ("SAIF"). ESB was originally chartered in
1884. ESB conducts its business through four full-service branch offices and
five limited-service loan-production offices. ESB's main office is located
at 4131 South Grand Boulevard, St. Louis, Missouri 63118-3464, and its
telephone number is (314) 352-3333.
On October 22, 1993, Equality Savings and Loan Association (the
"Association" and the predecessor of ESB) (i) reorganized into a mutual
holding company and changed its name to First Missouri Financial, M.H.C.
(The "Mutual Holding Company") and (ii) transferred substantially all of its
assets and all of its liabilities to the Association, which sold a minority
interest in its common stock to depositors of the Association and various
stock compensation plans (the "Mutual Holding Company Reorganization"). A
total of 380,000 shares of newly issued common stock were sold at $10.00 per
share. An additional 11,400 authorized but unissued shares were later sold
to the Association's 1993 Management Recognition Plan ("MRP") at $10.00 per
share. The Association received net proceeds of approximately $3.2 million
from the sale of its common stock. On June 13, 1995, the Association
converted from a Missouri-chartered-stock-savings-and-loan association to a
federally-chartered-stock-savings-and-loan association.
On December 1, 1997, Equality completed the sale of 1,322,500 shares
of common stock at a price of $10.00 per share in a subscription offering.
In conjunction with the subscription offering an additional 1,163,402 shares
of common stock were issued by Equality to convert 391,400 shares of the
Association's common stock held by minority shareholders into common stock of
the Company.
Equality's business strategy includes (i) maintaining a strong
capital level, (ii) maintaining a high level of asset quality, (iii) limiting
ESB's exposure to fluctuations in interest rates, (iv) emphasizing local
originations of one-to- four-family fixed-rate mortgage loans and adjustable
rate mortgage loans ("ARMS") and (v) continuing to emphasize high quality
customer service with a competitive service fee structure.
ESB's business is similar in many respects to other savings
associations in that it gathers deposits from its local community and uses
these funds, along with FHLB advances, to invest primarily in residential
one- to four-family mortgage loans, U.S. government and agency securities,
mortgage-backed securities and corporate obligations and, to a lesser extent,
multifamily and commercial real estate, consumer and commercial business
loans. Notwithstanding these traditional thrift attributes, ESB's operations
are distinct in one respect in that it conducts its residential mortgage
lending business primarily through a wholly-owned mortgage-banking subsidiary
- -- Equality Mortgage Corporation ("EMC").
Operating through ESB's nine full and limited service offices, EMC
acts as a conduit for the origination, purchase and sale of residential
mortgage loans for the benefit of ESB. It funds its mortgage-banking
activities through lines of credit from ESB and an unrelated commercial bank.
EMC provides several benefits to ESB, including, among other things,
originating a variety of mortgage loan products for ESB's portfolio and
generating noninterest income for ESB through its activities in the secondary
mortgage market. ESB's President and Chief Executive Officer, Richard C.
Fellhauer, also is Chairman of EMC. Leonard O. Wolter, Senior Vice President
of ESB, is EMC's President. Mr. Wolter, in consultation with Mr. Fellhauer
and Michael A. Deelo, ESB's Chief Financial Officer, manages the day to day
operations of EMC. These individuals have over 50 years combined experience
in the mortgage-banking business. The following description includes
detailed information regarding the business of ESB and EMC.
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LENDING AND MORTGAGE-BANKING ACTIVITIES
ESB concentrates its business in residential mortgage finance, which
involves the origination, purchase and sale of residential real estate loans
secured by one- to four-family, owner-occupied residential properties. In
the past, and to a much lesser degree, ESB has originated conventional loans
secured by multifamily residential dwellings and commercial real estate
projects. ESB also originates short-term consumer loans, primarily loans
secured by savings deposits, home equity and second mortgage loans, direct
automobile loans and student loans, and, since early 1997, commercial
business loans.
LOAN ORIGINATIONS. During the first several years of its existence,
EMC originated primarily government mortgage loans (FHA and VA loans) on
behalf of ESB, while ESB originated conventional loans. But in 1989, ESB
shifted its mortgage loan origination function to EMC. However, ESB will
still on occasion originate a mortgage loan directly and it continues to
originate a limited amount of consumer and other non-mortgage loans.
Today, EMC, using its 50 employees (including 12 commissioned loan
originators), underwrites residential mortgage loans, which are secured by
properties located primarily in the St. Louis metropolitan area. In
addition, through ESB's Affordable Housing Program, EMC provides mortgage
financing to low- and moderate-income families, which provides ESB with an
effective way to attract customers in its local market area. During fiscal
1999, EMC originated mortgage loans totaling $170.1 million, all of which
were one- to four-family loans.
LOAN SALES. Central to EMC's loan origination activity is the sale
of fixed-rate mortgage loans to the secondary mortgage market. All loans
originated by EMC satisfy the guidelines of the Federal Housing
Administration ("FHA"), the Veterans Administration ("VA"), the Federal
National Mortgage Association ("FNMA"), the Government National Mortgage
Association ("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or
various private investors so that the loans can be sold in the secondary
mortgage market. EMC has been approved under the FHA Direct Endorsement
Program and, consequently, EMC's FHA approved direct endorsement underwriters
are authorized to approve or reject FHA insured loans up to maximum amounts
established by the FHA. EMC also has been approved as a VA "automatic
approved lender," which enables designated qualified EMC personnel to approve
or reject loans on behalf of ESB.
In most cases, EMC sells in the secondary mortgage market the
majority of the fixed-rate loans it originates, while the majority of its ARM
originations are sold to ESB and retained by ESB in its portfolio. The
current strategy of selling fixed-rate loans and retaining ARMs assists ESB
in management of the interest-rate sensitivity of its assets. Moreover, the
loans retained by ESB contribute to ESB's net interest margin.
EMC's loan-origination and sale activities create interest rate risk
for ESB in that if interest rates decline after the loan commitment date
below the interest rate on the loan, and ESB has not hedged its interest rate
risk using a forward commitment, ESB may incur a loss when the loan is sold.
ESB manages this risk by using a computerized tracking system that allows
EMC's management to closely monitor the interest rates for all loans being
processed by EMC, reviewing the future prospects for movements in interest
rates and entering into forward commitment contracts with FNMA, GNMA and
FHLMC for the sale of fixed-rate loans that limit the potential loss on loan
sales, but which also limit the potential gain. EMC's success in managing
the interest-rate risk associated with the origination-and-sale and
purchase-and-resale of fixed-rate mortgage loans depends primarily on the
abilities of its managers.
LOAN PURCHASES AND RESALES. In addition to originating residential
mortgage loans for sale in the secondary market, EMC also purchases loans
from other financial institutions for packaging (or securitization) and
resale in the secondary mortgage market as either whole loans or as loan
pools to FNMA, GNMA, FHLMC or other investors. Other financial institutions
may sell loans to EMC because they lack the capability or expertise to
package and sell their own loans in the secondary market. EMC performs
strict underwriting on each loan purchased based on guidelines of the federal
secondary mortgage market agencies and private investors and standards
otherwise applicable to loans originated by ESB. Immediately following the
purchase of a loan or loan package, EMC simultaneously sells the mortgage or
group of mortgages for future delivery. Accordingly, ESB does not assume
so-called pipeline risk because the loans are not held in inventory.
Pipeline risk is the hazard that market interest rates will increase before
the loan is sold, thereby reducing the price at which the loan may be sold.
During fiscal 1999, EMC purchased mortgage loans totaling $7.4 million.
EMC'S CONTRIBUTIONS TO THE BUSINESS OF EQUALITY. EMC contributes
significantly to Equality's operations by providing an additional income
stream and by providing a conduit to offer lending services to the local
community. EMC's mortgage-banking activities produce primarily two types of
income -- gain on sale of mortgage loans and loan servicing fees and late
charges. Each of these two types of income accounted for 49.6% and 15.7%,
respectively, of EMC's total noninterest income for the fiscal year ended
March 31, 1999. EMC contributed approximately 20.2% to Equality's total
interest income and other income for the year ended March 31, 1999.
Loan sales are intended to generate one-time gains, while loan
originations (whether the loans are sold or retained by ESB in portfolio)
produce loan origination fees that generally approximate 1% of the loan
amount. FHA and VA loans are
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generally sold with servicing released, for which EMC generally receives an
additional servicing fee of approximately 1.5% of the aggregate loan amount,
and, because EMC sells conventional mortgage loans (non-FHA and VA) servicing
retained, ESB's loan servicing portfolio (and the associated earnings stream)
continues to grow.
At March 31, 1999, EMC serviced $369.2 million in residential
mortgage loans (of which $71.5 million was for ESB) and has the capacity to
expand its servicing portfolio significantly through additional loan
originations. Loan servicing fees and late charges totaled $611,000,
$547,000 and $562,000 for fiscal years 1999, 1998 and 1997, respectively.
The proportionate contribution made by gains on loan sales, loan origination
fees and loan servicing fees to Equality's net income varies each year
depending on interest rates, which, in turn, affects EMC's business focus
from year to year.
EMC's residential mortgage loan origination volume has increased
steadily since 1994. As a result, EMC has focused its efforts toward
increasing its loan servicing portfolio and increasing the associated income
stream through increased servicing retention. EMC's focus on servicing
retention and fluctuating interest rates have contributed to instability in
recent years in EMC's gains on loan sales. EMC has not, nor does it
anticipate, selling a bulk portion of its loan servicing portfolio to augment
earnings.
COMPOSITION OF THE LOAN PORTFOLIO. The following table sets forth
the composition of Equality's loan portfolio by type of loan as of the dates
indicated:
<TABLE>
<CAPTION>
====================================================================================================================
At March 31,
--------------------------------------------------------------------------
1999 1998 1997
-------------------- ----------------- --------------------
Amount Percent Amount Percent Amount Percent
- --------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One- to four-family:
Conventional <F1> $54,525 60.1% $ 67,543 62.0% $69,810 72.5%
FHA/VA 10,629 11.7 11,718 10.8 14,233 14.8
Loans held for sale 7,021 7.8 14,523 13.3 4,398 4.6
Multifamily 1,430 1.6 1,382 1.3 1,637 1.7
Commercial 4,382 4.8 2,684 2.5 2,662 2.8
- --------------------------------------------------------------------------------------------------------------------
Total loans secured by
real estate 77,987 86.0 97,850 89.9 92,740 96.4
- --------------------------------------------------------------------------------------------------------------------
Consumer loans:
Loans secured by savings deposits 254 0.3 391 .4 366 .4
Property improvement 1,482 1.6 1,728 1.6 1,596 1.7
Automobiles 1,042 1.1 617 .6 122 .1
Other consumer loans 268 0.4 157 .1 162 .1
- --------------------------------------------------------------------------------------------------------------------
Total consumer loans 3,046 3.4 2,893 2.7 2,246 2.3
- --------------------------------------------------------------------------------------------------------------------
Commercial business loans 9,642 10.6 8,153 7.4 1,280 1.3
- --------------------------------------------------------------------------------------------------------------------
Total loans 90,675 100.0% 108,896 100.0% 96,266 100.0%
Less:
Loans in process -- 3 --
Deferred loan fees, net 25 37 46
Unearned discounts 5 8 4
Allowance for loan losses 366 374 283
Valuation reserve on loans
held for sale 48 59 5
- --------------------------------------------------------------------------------------------------------------------
Total loans receivable, net $90,231 $108,415 $95,928
====================================================================================================================
<CAPTION>
====================================================================================================
At March 31,
----------------------------------------------------------
1996 1995
-------------------- ---------------------
Amount Percent Amount Percent
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One- to four-family:
Conventional <F1> $64,873 66.6% $61,455 73.5%
FHA/VA 13,656 14.0 13,616 16.3
Loans held for sale 13,507 13.9 2,971 3.5
Multifamily 783 .8 828 1.0
Commercial 2,622 2.7 2,975 3.5
- ----------------------------------------------------------------------------------------------------
Total loans secured by
real estate 95,441 98.0 81,845 97.8
- ----------------------------------------------------------------------------------------------------
Consumer loans:
Loans secured by savings deposits 453 .5 448 .5
Property improvement 1,300 1.3 1,053 1.3
Automobiles 97 .1 126 .2
Other consumer loans 96 .1 175 .2
- ----------------------------------------------------------------------------------------------------
Total consumer loans 1,946 2.0 1,802 2.2
- ----------------------------------------------------------------------------------------------------
Commercial business loans -- -- -- --
- ----------------------------------------------------------------------------------------------------
Total loans 97,387 100.0% 83,647 100.0%
Less:
Loans in process -- --
Deferred loan fees, net 59 71
Unearned discount 12 24
Allowance for loan losses 233 217
Valuation reserve on loans
held for sale 85 100
- ----------------------------------------------------------------------------------------------------
Total loans receivable, net $ 96,998 $ 83,235
====================================================================================================
<FN>
<F1> Includes construction loans converted to permanent loans.
</TABLE>
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Residential One- to Four-Family Loans. The primary lending activity
of ESB has been the making of mortgage loans to enable borrowers to purchase
existing homes or to construct new single-family homes. The mortgage loans
are primarily originated by EMC and are sold to ESB at par. Management
believes that this policy of focusing on single-family residential mortgage
loans has been successful in contributing to interest income while keeping
delinquencies and losses to a minimum. At March 31, 1999, approximately
$72.2 million, or 79.6% of the total loan portfolio, consisted of loans
secured by one- to four-family residential real estate. In recent years,
ESB's one- to four-family mortgage lending has been concentrated in St. Louis
City and St. Louis County.
EMC presently originates both fixed-rate mortgage loans and ARMs
secured by one- to four-family properties with loan terms of 10 to 30 years.
The ARMs have interest rates that adjust at regular intervals ranging between
one- to five-years generally based upon changes in the One-, Three- and
Five-Year Treasury Index. At March 31, 1999, ESB's ARM portfolio totaled
approximately $38.5 million. The majority of these loans provide that the
amount of any increase or decrease in the interest rate is limited to one or
two percentage points (upward or downward) per adjustment period and are
generally limited to an increase or decrease of five to eight percentage
points over the life of the loan. Borrower demand for ARMs versus fixed-rate
mortgage loans is a function of the level of interest rates, the expectation
of changes in the level of interest rates and the difference between the
interest rates and loan fees offered for fixed-rate mortgage loans and the
first year "teaser rates" and loan fees for ARMs. The relative amount of
fixed-rate mortgage loans and ARMs that can be originated at any time is
largely determined by the demand for each in a competitive mortgage finance
environment. During 1999, total one- to four-family mortgage loan
originations were $172.3 million of which $9.6 million, or 5.6%, were subject
to periodic interest rate adjustments and $162.7 million, or 94.4%, were
long-term, fixed-rate mortgage loans.
ARMs generally involve credit risks different from those inherent in
fixed-rate mortgage loans, primarily because if interest rates rise, the
underlying payments of the borrower rise, thereby increasing the potential
for default. ESB underwrites ARMs based on the borrower's ability to repay
the loan assuming the fully indexed accrual rate on the ARM remains constant
during the loan term. As a result, the potential for a substantial increase
in delinquencies and defaults is lessened.
The retention of ARMs helps reduce ESB's exposure to interest rate
risk. In an environment of rapidly increasing interest rates, however, it is
possible for the interest rate increases to exceed the maximum allowable
adjustment on ARMs, which would negatively affect ESB's interest rate spread.
In addition, because the interest earned on ARMs, which are refinanced on a
one- to three-year cycle, varies with prevailing interest rates, such loans
do not offer ESB as predictable a cash flow as do longer-term, fixed-rate
loans.
EMC originates long-term, fixed-rate loans under guidelines
established by FNMA and FHLMC, which facilitates the sale of such loans to
FNMA or FHLMC in the secondary market. Long-term, fixed-rate mortgage loans
are originated with terms of between 10 and 30 years, amortized on a monthly
basis with principal and interest due each month. At March 31, 1999, ESB had
approximately $32.9 million of long-term, fixed-rate mortgage loans in its
portfolio. A determination is made at the time of origination whether the
loan is held for sale. Currently, EMC is originating fixed-rate loans
primarily for sale in the secondary market. At March 31, 1999, Equality had
approximately $7.0 million of loans held for sale of which all were
fixed-rate loans.
ESB's lending policies generally limit the maximum loan-to-value
ratio on fixed-rate and adjustable-rate residential mortgage loans to 80% of
the lesser of the appraised value or purchase price of the underlying
residential property unless private mortgage insurance to cover the excess
over 80% is obtained, in which case the mortgage is limited to 95% of the
lesser of appraised value or purchase price. The loan-to-value ratio,
maturity and other provisions of the loans made by ESB are generally
reflected in the policy of making less than the maximum loan permissible
under federal regulations, in accordance with established lending practices,
market conditions and underwriting standards maintained by ESB. ESB requires
title, fire and extended insurance coverage on all mortgage loans originated.
All of ESB's real estate loans contain due-on-sale clauses and ESB obtains
appraisals on all its real estate loans from outside appraisers.
ESB also originates construction loans on residential properties
against commitments for permanent financing at the completion of
construction. Construction loans are generally for a term of six to 11
months, and bear an interest rate tied to ESB's cost of funds which varies on
the term and amount of the loan. At March 31, 1999, ESB had no construction
loans outstanding.
Construction lending is generally considered to involve a higher
degree of credit risk than residential mortgage lending. ESB's risk of loss
on a construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction and the
estimated cost (including interest) of construction. If the estimate of
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construction cost proves to be inaccurate, ESB may be required to advance
funds beyond the amount originally committed to permit completion of the
dwelling. If the estimate of value proves to be inaccurate, ESB may be
confronted with, at or before the maturity of the loan, loan security with a
value which is insufficient to assure full repayment. In addition,
construction lending entails the risk that the project may not be completed
due to cost overruns or changes in market conditions.
MULTIFAMILY AND COMMERCIAL REAL ESTATE LOANS. In addition to
originating one- to four-family residential real estate loans, ESB originates
loans secured by multifamily dwelling units (more than four units). At March
31, 1999, ESB had $1.4 million, or 1.6% of the total loan portfolio, secured
by multifamily dwelling units, located primarily in ESB's primary market
area. At March 31, 1999, ESB's largest multifamily residential loan was a
$913,000 loan secured by a 26-unit apartment complex. Multifamily real
estate loans are generally originated at 75% of the appraised value of the
property or selling price, whichever is less, and are generally originated
for 10- to 30-year terms with the principal amortized over 30 years. Loans
secured by multifamily residential real estate are generally larger and
involve a greater degree of risk than one-to four-family residential mortgage
loans, similar to the risks associated with commercial real estate lending.
At March 31, 1999, ESB had no multifamily loans accounted for on a nonaccrual
basis.
ESB's permanent commercial real estate loans are secured by improved
properties such as office buildings, restaurants and various retail
operations located in ESB's primary market area. At March 31, 1999,
commercial real estate loans totaled approximately $4.4 million, or 4.8% of
ESB's total loan portfolio. ESB originates permanent loans on commercial
real estate at up to 80% of the appraised value.
Currently, it is ESB's policy to originate commercial real estate
loans only to selected borrowers known to ESB and on properties in its
primary market area. These loans generally have repayment schedules based
upon a 10- to 25-year constant payment amortization, but may have a 10-year
final maturity (balloon payment) and are currently originated with an
interest rate that floats over the prime rate. At March 31, 1999, ESB had
one commercial real estate loan with an outstanding principal balance of
approximately $51,000 which was 90 days or more past due at March 31, 1999.
The largest commercial real estate loan in the portfolio at March 31,
1999 totaled $1.4 million, which was secured by a real estate mortgage on a
shopping center located in the St. Louis metropolitan area. This loan is a
seasoned loan having been originated in 1994. ESB's legal lending limit is
approximately $3.8 million. Of primary concern in commercial real estate
lending is the borrower's creditworthiness, and the feasibility and cash flow
potential of the project. Loans secured by income properties are generally
larger and involve greater risks than residential mortgage loans because
payments on loans secured by income properties are often dependent on the
successful operation or management of the properties. As a result, repayment
of such loans may be subject to a greater extent than residential real estate
loans to adverse conditions in the real estate market or the economy.
Although many thrift institutions have had material adverse loss experience
in commercial real estate lending, ESB has sustained few losses, and those
losses were not significant relative to the size of the entire commercial
real estate loan portfolio or the mortgage loan portfolio at the time. ESB
does not presently intend to emphasize or expand this type of lending in the
future.
CONSUMER LOANS. ESB originates a wide variety of consumer loans,
which are made primarily on a secured basis to existing customers. Such
loans include loans secured by savings deposits, home equity and second
mortgage loans, direct automobile loans and student loans. These loans are
made at both fixed- and variable-rates of interest, which adjust annually,
and vary in terms depending on the type of loan. In addition, ESB offers
unsecured consumer loans. Consumer loans totaled approximately $3.0 million
at March 31, 1999, or 3.4% of ESB's total loan portfolio.
ESB applies strict underwriting standards for consumer loans. These
procedures include an assessment of the applicant's payment history on other
debts and ability to meet existing obligations and payments on the proposed
loans. Although the applicant's creditworthiness is a primary consideration,
the underwriting process also includes a comparison of the value of the
security, if any, to the proposed loan amount. ESB underwrites and
originates all of its consumer loans internally, which management believes
limits exposure to credit risks relating to loans underwritten or purchased
from brokers or other outside sources. ESB views consumer lending as a
component of its business operations because consumer loans generally have
shorter terms and higher yields, thus reducing exposure to changes in
interest rates. In addition, ESB believes that offering consumer loans helps
to expand and create stronger ties to its customer base. ESB does not
presently intend to emphasize this type of lending in the future.
ESB's consumer loan portfolio had five automobile loans with a total
outstanding principal balance of approximately $15,000, which were 90 days or
more delinquent at March 31, 1999. Consumer loans may entail greater risk
than do residential mortgage loans, particularly in the case of consumer
loans which are unsecured or secured by assets that depreciate rapidly, such
as automobiles. In the latter case, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, consumer
loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or
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personal bankruptcy. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount that can be recovered on such loans. Such loans may also give rise to
claims and defenses by the borrower against ESB as the holder of the loan, and
a borrower may be able to assert claims and defenses that it has against the
seller of the underlying collateral.
COMMERCIAL BUSINESS LOANS. In early 1997, in connection with its
hiring of a new commercial lending officer, ESB began originating a limited
number of commercial business loans based on community needs. Management of
ESB expects this type of lending to increase gradually over the next several
years. Such loans include, but are not limited to, automobile dealer floor
planning, commercial use vehicles and general working capital loans. These
loans are made at both fixed and variable rates of interest and vary in terms
depending on the type of loan and collateral.
At March 31, 1999, approximately $9.6 million, or 10.6% of ESB's loan
portfolio, consisted of commercial business loans, which are primarily
secured by automobile floor planning collateral. At March 31, 1999, the
largest commercial loan in the portfolio, which was secured by floor planned
vehicles, had a principal balance of approximately $1.3 million. Unlike
residential mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment based on the borrower's salary and other
income and which are secured by real property, the value of which tends to be
more easily ascertainable, commercial business loans typically are made on
the basis of the borrower's ability to make repayment from the cash flow of
the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself (which, in turn, is likely to be dependent, in
part, upon the general economic environment). ESB's commercial business
loans are usually secured by business assets, which may depreciate over time,
may be difficult to appraise and may fluctuate in value based on the success
of the business.
ESB's underwriting standards for commercial business loans include
credit file documentation and analysis of the borrower's character, capacity
to repay the loan, the adequacy of the borrower's capital and collateral as
well as an evaluation of conditions affecting the borrower. Analysis of the
borrower's past, present and future cash flows is also an important aspect of
ESB's current credit analysis. Nonetheless, such loans, are believed to
carry higher credit risk than residential mortgage loans. ESB generally
requires personal guarantees from corporate borrowers.
LOAN MATURITY AND REPRICING. The following table sets forth certain
information at March 31, 1999 regarding the dollar amount of loans maturing
in ESB's portfolio based on their contractual terms to maturity, but does not
include scheduled payments or potential prepayments. Overdrafts are reported
as due in one year or less. Loan balances do not include undisbursed loan
proceeds, unearned discounts, unearned income and allowance for loan losses.
<TABLE>
<CAPTION>
===================================================================================================================================
Due after 3 Due after 5 Due after 10
Due during the year ended through 5 through 10 through 15 Due after 15
March 31 years after years after years after years after
-------------------------- March 31, March 31, March 31, March 31,
2000 2001 2002 1999 1999 1999 1999 Total
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential <F1><F2> $ 7,198 $ 905 $1,254 $3,291 $ 9,515 $7,661 $43,781 $73,604
Commercial -- -- -- 1,498 1,818 783 283 4,382
Loans secured by savings
deposits 239 15 -- -- -- -- -- 254
Property improvement 18 78 167 429 733 57 -- 1,482
Automobiles 64 331 311 336 -- -- -- 1,042
Other consumer loans 106 14 -- 78 -- 70 -- 268
Commercial business loans 6,387 936 831 805 555 128 -- 9,642
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans $14,012 $2,279 $2,563 $6,437 $12,621 $8,699 $44,064 $90,675
===================================================================================================================================
<FN>
<F1> Includes $7.0 million of loans held for sale, reported as due in one
year or less.
<F2> Includes multifamily loans totaling $1.4 million.
</TABLE>
6
<PAGE> 9
The following table sets forth the dollar amount of all loans due after
March 31, 2000 which have fixed interest rates and adjustable interest rates.
<TABLE>
<CAPTION>
============================================================================================
Fixed Adjustable
rates rates
--------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Loans secured by real estate:
Residential $29,271 $37,136
Commercial 3,616 766
Loans secured by savings
deposits 15 --
Property improvement 1,464 --
Automobiles 978 --
Other consumer loans 162 --
Commercial business loans -- 3,255
--------------------------------------------------------------------------------------------
Total loans $35,506 $41,157
============================================================================================
</TABLE>
The following table sets forth total loans originated, purchased, sold
and repaid during the periods indicated:
<TABLE>
<CAPTION>
==================================================================================================================
Year ended March 31
--------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Total loans at beginning of period $ 108,896 $ 96,266 $ 97,387
Loans originated:
Residential one- to four-family 172,345 113,982 70,019
Multifamily -- -- 950
Commercial business loans 4,626 8,298 1,462
Consumer (property improvement and automobiles) 1,893 1,415 774
Other loans 165 189 107
- ------------------------------------------------------------------------------------------------------------------
Total loans originated 179,029 123,884 73,312
Loans purchased - residential one- to four-family 7,374 6,059 5,892
Participation purchased - residential one- to four-family 817 -- --
Loans sold:
Whole loans:
Servicing retained (110,079) (56,302) (45,669)
Servicing released (31,713) (21,759) (15,617)
Participation loans (servicing retained) -- -- (185)
- ------------------------------------------------------------------------------------------------------------------
Total loans sold (141,792) (78,061) (61,471)
- ------------------------------------------------------------------------------------------------------------------
Loan principal repayments (20,593) (11,879) (2,486)
Loans converted to mortgage-backed securities and sold (43,056) (27,373) (16,368)
- ------------------------------------------------------------------------------------------------------------------
Total loans at end of period $ 90,675 $108,896 $ 96,266
==================================================================================================================
</TABLE>
LOAN SOLICITING AND PROCESSING. Loan originations are derived primarily
through EMC loan officers' solicitation and personal visits to the local real
estate offices in the metropolitan St. Louis area as well as current and
walk-in customers. These loan officers have developed a clientele over the
years that send potential customers to EMC for loans. By use of the EMC loan
officers and client contacts, ESB has been able to cover a broad market area
and offer mortgage services to an extended number of potential customers.
The eight member Executive Loan Committee, chaired by Mr. Fellhauer is
authorized to approve residential mortgage loans up to $200,000. Residential
mortgage loans in excess of $200,000 require full Board of Directors
approval. All residential mortgage loans are subsequently approved by the
full Board of Directors.
7
<PAGE> 10
LOANS-TO-ONE BORROWER LIMITATIONS. ESB's loans and extensions of credit
to a person outstanding at one time and not fully secured may not exceed 15%
of the unimpaired capital and surplus of ESB. This limitation calls for a
loan-to-one borrower limitation for ESB of $3.8 million at March 31, 1999.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of unimpaired capital and surplus. At March
31, 1999, the largest aggregate amount of loans by ESB to any borrower was
approximately $2.0 million, which was secured by automobile floor planning
and personal assets.
LOAN COMMITMENTS. ESB issues commitments for fixed- and adjustable-rate
single-family residential mortgage loans conditioned upon the occurrence of
certain events. Such commitments are made in writing on specified terms and
conditions and are generally honored for up to 60 days from application,
depending on the type of transaction. ESB had outstanding loan commitments
of approximately $4.8 million at March 31, 1999.
LOAN ORIGINATION AND OTHER FEES. ESB, in most instances, receives loan
origination fees and discount "points." Loan fees and points are a percentage
of the principal amount of the mortgage loan that are charged to the borrower
for funding the loan. ESB usually charges origination fees of 1% on all real
estate loans. Current accounting standards require fees received for
originating loans to be deferred and amortized into interest income over the
contractual life of the loan. Deferred fees associated with loans that are
sold are included in the gain/loss computation at the time of sale. ESB had
approximately $25,000 of net deferred loan fees at March 31, 1999.
ESB offsets all loan origination fees and certain related direct loan
origination costs against all fees and costs associated with loan
origination. The resulting net amount is deferred and amortized over the
contractual life of the related loans as an adjustment to the yield on such
loans, unless prepayments of a large group of similar loans are probable and
the timing and amount of prepayments can be reasonably estimated. ESB
offsets commitment fees against related direct costs and the resulting net
amount is recognized over the contractual life of the related loans as an
adjustment of yield if the commitment is exercised. If the commitment
expires unexercised, the fees collected are recognized as noninterest income
upon expiration of the commitment.
DELINQUENCIES. ESB's collection procedures provide that when a loan is
30 days overdue and again after an additional 15 days, the borrower will be
contacted by mail and payment requested. After a delinquency of 15 days, a
late charge is assessed. If the delinquency continues, subsequent efforts
will be made to contact the delinquent borrower. In certain instances, ESB
may modify the loan or grant a limited moratorium on loan payments to enable
reorganization of the borrower's financial affairs. If the loan continues in
a delinquent status for 90 days or more, ESB generally will initiate
foreclosure proceedings.
NONPERFORMING ASSETS AND THEIR CLASSIFICATION. The following table sets
forth information with respect to ESB's nonperforming assets for the periods
indicated. During the periods shown, ESB had no restructured loans within
the meaning of Statement of Financial Accounting Standards No. 15,
Accounting by Debtors and Creditors for Troubled Debt Restructurings:
<TABLE>
<CAPTION>
===========================================================================================================
At March 31
---------------------------------------
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans which are contractually past due
90 days or more <F1>:
Residential one- to four-family <F2> $ 650 $ 853 $ 643
Commercial real estate 51 -- --
Consumer 15 8 --
- -----------------------------------------------------------------------------------------------------------
Total 716 861 643
Personal property owned 4 -- -
Real estate owned -- -- 66
- -----------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 720 $ 861 $ 709
===========================================================================================================
Nonperforming loans to gross loans .79% .79% .67%
Total nonperforming assets to total assets .25% .34% .35%
===========================================================================================================
<FN>
<F1> All loans contractually past due 90 days or more are accounted for on a
nonaccrual basis by ESB.
<F2> Includes $486,000, $833,000 and $571,000 of FHA/VA loans, the principal
and interest payments of which are insured by the FHA or guaranteed by
the VA, at March 31, 1999, 1998 and 1997, respectively.
</TABLE>
8
<PAGE> 11
ESB had $716,000 in loans 90 days or more delinquent at March 31,
1999 which consisted of 22 one- to four-family residential mortgage loans,
each with an outstanding principal balance of less than $100,000, one
commercial real estate loan and an outstanding principal balance of $51,000
and five consumer automobile loans, each with an outstanding principal
balance of less than $6,000.
For fiscal 1999 and 1998, gross interest income which would have been
recorded had the nonaccruing loans been current in accordance with their
original terms amounted to $62,000 and $69,000, respectively, of which
$31,000 and $49,000, respectively, was included in interest income.
ASSET CLASSIFICATION. The OTS asset classification system conforms
with commercial banking practices and puts the establishment of loan loss
allowances on a basis consistent with the requirements of generally accepted
accounting principles. The regulations require that each insured institution
review and classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, OTS examiners have
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful and loss. "Substandard" assets must have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
"Doubtful" assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified
"loss" is considered uncollectible and of such little value that continuance
as an asset of the institution is not warranted. The regulations have also
created a "special Mention" category, described as assets which do not
currently expose an insured institution to a sufficient degree of risk to
warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specific allowances for
loan losses in the amount of 100% of the portion of the asset classified loss
or charge-off such amount. A portion of general loss allowances established
to cover possible losses related to assets classified substandard or doubtful
may be included in determining an institution's regulatory capital, while
specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
ESB's classified assets, general and specific loss allowances and
charge-offs were as follows for the
<TABLE>
<CAPTION>
At or for the
year ended March 31
----------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Substandard assets <F1> $ 234 $ 28 $ 138
General loss allowances 366 374 283
Specific loss allowances -- -- --
Charge-offs 8 25 --
========================================================================================
<FN>
<F1> Includes "doubtful" assets of $4,000 at March 31,
1999.
</TABLE>
REAL ESTATE OWNED. Real estate acquired by ESB as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate
owned until sold. When property is acquired it is recorded at fair value.
ESB had no real estate owned at March 31, 1999.
ALLOWANCE FOR LOAN LOSSES. ESB's management evaluates the need to
establish reserves against losses on loans and other assets based on
estimated losses on specific loans and on any real estate held for investment
or acquired through foreclosure when it is determined that a decline in value
has occurred. Such evaluation includes a review of all loans for which full
collectibility may not be reasonably assured and considers, among other
matters, the estimated market value of the underlying collateral of problem
loans, prior loss experience, economic conditions and overall portfolio
quality. These provisions for losses are charged against earnings in the
year they are established. ESB established provisions for losses on loans
for fiscal 1999, 1998 and 1997 of approximately $-0-, $116,000 and $50,000,
respectively. At March 31, 1999, ESB had an allowance for loan losses of
$366,000, which represented .41% of total loans. Based on past Experience
and future expectations, management believes that the allowance for loan
losses is adequate.
9
<PAGE> 12
The following table sets forth an analysis of ESB's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
=======================================================================================================================
Year ended March 31
--------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $ 374 $ 283 $ 233 $ 217 $ 242
Provision charged to expense -- 116 50 31 9
Charge-offs:
Residential one- to four-family -- (25) -- (15) (34)
Automobiles (8) -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 366 $ 374 $ 283 $ 233 $ 217
=======================================================================================================================
Ratio of allowance to total loans outstanding
at the end of the period .41% .34% .29% .24% .26%
Ratio of net charge-offs to average loans
outstanding during the period .01% .02% -- .02% .04%
Allowance for loan losses to total
nonperforming assets 49.9% 43.4% 39.9% 30.4% 30.4%
Allowance for loan losses to total
nonperforming loans 50.2% 43.4% 44.0% 34.8% 32.8%
</TABLE>
10
<PAGE> 13
The following table sets forth the breakdown of the allowance for loan losses
by loan category for the periods indicated:
<TABLE>
<CAPTION>
====================================================================================================================================
At March 31
----------------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------- -------------------------------- ----------------------------------
Amount of Loan Percent Amount of Loan Percent Amount of Loan Percent
Allowance Amounts of Allowance Amounts of Allowance Amount of
for by total for by total for by total
Loan Losses Category loans Loan Losses Category loans Loan Losses Category loans
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential one- to four-
family <F1> $ 235 $72,175 79.6% $ 234 $ 93,784 86.1% $ 174 $88,441 91.9%
Multi-family and
commercial 28 5,812 6.4 19 4,066 3.8 49 4,299 4.5
Property improvement 7 1,482 1.6 7 1,728 1.6 20 1,596 1.7
Automobiles 5 1,042 1.1 3 617 .6 2 122 .1
Other 2 522 0.7 -- 548 .5 -- 528 .5
Commercial business loans 89 9,642 10.6 111 8,153 7.4 38 1,280 1.3
- ------------------------------------------------------------------------------------------------------------------------------------
Total allowance for
loan losses $ 366 $90,675 100.0% $ 374 $108,896 100.0% $ 283 $96,266 100.0%
====================================================================================================================================
<CAPTION>
=============================================================================================================
At March 31
--------------------------------------------------------------------
1996 1995
--------------------------------- ------------------------------
Amount of Loan Percent Amount of Loan Percent
Allowance Amounts of Allowance Amount of
for by total for by total
Loan Losses Category loans Loan Losses Category loans
- ---------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential one- to four-
family <F1> $ 174 $92,036 94.5% $ 202 $78,042 93.3%
Multi-family and
commercial 41 3,405 2.7 11 3,803 3.5
Property improvement 16 1,300 1.3 -- 1,053 1.3
Automobiles 2 97 .1 4 126 .2
Other -- 549 1.4 -- 623 1.7
Commercial business loans -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------
Total allowance for
loan losses $ 233 $97,387 100.0% $ 217 $83,647 100.0%
=============================================================================================================
<FN>
- ------------------------------------------
<F1> Includes loans held for sale.
</TABLE>
11
<PAGE> 14
INVESTMENT ACTIVITIES
ESB classifies its investment securities and mortgage-backed
securities for financial accounting purposes into one of three categories:
Held to Maturity: includes investments in debt securities
----------------
which esb has the positive intent and ability to hold until maturity.
Trading: includes investments in debt and equity securities
-------
purchased and held principally for the purpose of selling them in the
near term.
Available for Sale: includes investments in debt and equity
------------------
securities not classified as held to maturity or trading (i.E.,
Investments that esb has no present plans to sell in the near term
but may be sold in the future under different circumstances).
Investment and mortgage-backed securities classified as held to
maturity are measured at amortized cost, in which the amortization of
premiums and accretion of discounts, which are recognized as adjustments to
interest income, are recorded using methods approximating the interest
method. Unrealized holding gains and losses for trading securities (for
which no securities were so designated at March 31, 1999 or 1998) are
included in earnings, while such gains and losses for available for sale
securities are excluded from earnings and reported as a net amount as
accumulated other comprehensive income, a separate component of stockholders'
Equity, net of income taxes, until realized. Unrealized holding gains and
losses for held to maturity securities are excluded from earnings and
stockholders' Equity. Gains or losses for available for sale securities are
realized and included in other noninterest income upon sale, based on the
amortized cost of the individual security sold. All previous fair value
adjustments included in accumulated other comprehensive income are reversed
upon sale. Mortgage-backed securities represent a significant portion of the
debt security portfolio. Amortization of premiums and accretion of discounts
on mortgage-backed securities are analyzed in relation to the corresponding
prepayment rates, both historical and estimated, using a method that
approximates the interest method.
It has been ESB's practice to maintain assets in investment
securities at levels higher than required by federal regulations. ESB's
investment securities portfolio at March 31, 1999 consisted of $600,000 in
U.S. Government and agency obligations classified as held to maturity, with a
fair value of $531,000, and $59.9 million in U.S. Government and agency
obligations classified as available for sale carried at their estimated
market value of $60.5 million, and $21.1 million in investment-grade
corporate bonds classified as available for sale carried at their estimated
fair value of $21.0 million.
The overall objective of ESB's investment portfolio is to provide a
sufficient and consistent spread over ESB's marginal cost of funds by
investing funds that are not currently required for lending purposes and to
provide a liquidity reserve in excess of regulatory requirements. ESB has
traditionally maintained an investment portfolio in the range of 15% to 20%
of total assets. ESB's regulatory liquidity ratio at March 31, 1999 was
32.3%. The portfolio is also intended to assist in managing ESB's asset and
liability interest rate sensitivity.
ESB's chief financial officer is responsible for daily management of
ESB's investment activities and is authorized to perform any Board of
Directors approved transaction necessary to achieve the objectives
established by the Board of Directors and that falls within parameters
established by the Board of Directors.
The following table sets forth ESB's investment securities at the
dates indicated:
<TABLE>
<CAPTION>
====================================================================================================================================
At March 31
-----------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ------------------------------- --------------------------------
Carrying Percent of Fair Carrying Percent of Fair Carrying Percent of Fair
Value Portfolio Value Value Portfolio Value Value Portfolio Value
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
agency obligations:
available for sale $60,500 73.7% $60,500 $68,897 96.4% $68,897 $70,123 93.5% $70,123
held to maturity 600 0.7 531 2,600 3.6 2,527 4,849 6.5 4,725
Corporate obligations -
available for sale 21,047 25.6 21,047 -- -- -- -- -- --
Marketable equity
securities -
available for sale 88 0.1 88 -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
$82,235 100.0% $82,166 $71,497 100.0% $71,424 $74,972 100.0% $74,848
====================================================================================================================================
</TABLE>
12
<PAGE> 15
The following table sets forth the maturities and weighted average yields of
ESB's debt securities at March 31, 1999:
<TABLE>
<CAPTION>
===================================================================================================================================
Less than one year One to five years Five to ten years Over ten years
----------------- ----------------- ----------------- --------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
agency obligations:
Available for sale $ 509 7.84% $ 5,649 6.62% $30,674 6.15% $23,668 6.92%
Held to maturity -- -- 600 3.51 -- -- -- --
Corporate obligations -
available for sale -- -- 21,047 6.32 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total $ 509 7.84% $27,296 6.32% $30,674 6.15% $23,668 6.92%
===================================================================================================================================
<CAPTION>
=============================================================================================
Total
-----------------------------------------------------
Average
Remaining Weighted
Years to Carrying Fair Average
Maturity Yield Value Yield
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. government and
agency obligations:
Available for sale 10.6 $60,500 $60,500 6.51%
Held to maturit 4.3 600 531 3.51
Corporate obligations -
available for sale 2.8 21,047 21,047 6.32
- ---------------------------------------------------------------------------------------------
Total 8.5 $82,147 $82,078 6.44%
=============================================================================================
</TABLE>
13
<PAGE> 16
MORTGAGE-BACKED SECURITIES
In order to supplement residential loan demand in its primary market
area and maintain geographic diversity in its loan portfolio, ESB has a
substantial portfolio of mortgage-backed securities that are classified as
available for sale and, accordingly, are carried at fair value. All of ESB's
mortgage-backed securities are federal agency securities.
Mortgage-backed securities represent a participation interest in a
pool of single-family or multi-family mortgages, the principal and interest
payments of which are passed from the mortgage originators through
intermediaries that pool and repackage the participation interest in the form
of securities to investors such as ESB. Such intermediaries may include
quasi-governmental agencies such as FHLMC, FNMA and GNMA that guarantee or
insure the payment of principal and interest to investors. Mortgage-backed
securities generally increase the quality of ESB's assets by virtue of the
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of ESB.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans
with interest rates that are within an identified range and have similar
maturities. The underlying pool of mortgages can be composed of either fixed
rate mortgages, ARMs, or balloon loans. Mortgage-backed securities generally
are referred to as mortgage participation certificates or pass-through
certificates. As a result, the interest rate risk characteristics of the
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
prepayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security is equal to the life of the underlying
mortgages.
The actual maturity of a mortgage-backed security varies, depending
on when the mortgagors prepay or repay the underlying mortgages. Prepayments
of the underlying mortgages may shorten the life of the investment, thereby
adversely affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and
the amortization of the premium or discount related to the mortgage-backed
security. Premiums and discounts on mortgage-backed securities are amortized
over the estimated term of the securities using a level yield method. The
prepayment assumptions used to determine the amortization period for premiums
and discounts can significantly affect the yield of the mortgage-backed
security and these assumptions are reviewed periodically to reflect the
actual prepayment. The actual prepayments of the underlying mortgages depend
on many factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates.
The difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates is an important determinant in the rate of
prepayments. If the coupon rate of the underlying mortgages significantly
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the
underlying mortgages. Prepayment experience is more difficult to estimate
for adjustable rate mortgage-backed securities.
Certain of ESB's mortgage-backed securities yield above-market rates
of interest and are subject to substantial risk of prepayment. In a
declining interest rate environment, ESB may experience significant
prepayments of both fixed and adjustable rate mortgage-backed and related
securities. In such instances, ESB may be unable to reinvest the cash flow
from these securities into comparable yielding investments, and would expect
this reinvestment risk to continue so long as interest rates remained
relatively low.
ESB's mortgage-backed securities are a blend of fixed-rate balloon
securities and adjustable-rate securities maturing in between 20 and 30
years. ESB's holdings of mortgage-backed securities have increased in the
past year as a result of reduced portfolio/lending and the inclusion of
mortgage-backed securities in Equality's asset growth plan. Because federal
agency mortgage-backed securities generally carry a yield of approximately 50
to 100 basis points below that of the corresponding type of residential loan
(due to the implied federal agency guarantee fee and the retention of a
servicing spread by the loan servicer), ESB's asset yields have been somewhat
adversely affected. Due to the existence of the federal agency guarantee on
ESB's mortgage-backed securities and the availability of adjustable-rate
mortgage-backed securities, however, ESB's credit risk has not increased.
ESB will continue to evaluate mortgage-backed securities purchases based on
its asset/liability objectives, market conditions and its alternate
investment opportunities.
14
<PAGE> 17
The following table sets forth certain information regarding carrying
and fair values and percentage of total carrying values of ESB's
mortgage-backed securities portfolio.
<TABLE>
<CAPTION>
====================================================================================================================================
At March 31
-------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ------------------------------- -------------------------------
Carrying Percent of Fair Carrying Percent of Fair Carrying Percent of Fair
Value Total Value Value Total Value Value Total Value
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA $49,365 54.4% $49,365 $28,570 48.8% $28,570 $ 7,025 47.0% $ 7,025
FHLMC 17,120 18.9 17,120 2,580 4.4 2,580 4,555 30.5 4,555
GNMA 24,326 26.7 24,326 27,362 46.8 27,362 3,374 22.5 3,374
- ------------------------------------------------------------------------------------------------------------------------------------
Total mortgage-
backed securities $90,811 100.0% $90,811 $58,512 100.0% $58,512 $14,954 100.0% $14,954
====================================================================================================================================
</TABLE>
The following table sets forth the activity in ESB's mortgage-backed
securities during the periods indicated:
<TABLE>
<CAPTION>
==============================================================================================================
For the Year Ended March 31,
------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Mortgage-backed securities:
At beginning of period $ 58,512 $ 14,954 $ 28,096
Purchases 92,917 56,569 14,211
Sales (26,460) (10,036) (22,254)
Repayments (33,071) (3,134) (4,585)
Premium/discount amortization, net (648) (204) (295)
Fair value adjustment (439) 363 (219)
- --------------------------------------------------------------------------------------------------------------
End of period $ 90,811 $ 58,512 $ 14,954
==============================================================================================================
</TABLE>
15
<PAGE> 18
The composition and maturities of ESB's mortgage-backed securities portfolio
are indicated in the following table at March 31, 1999:
<TABLE>
<CAPTION>
===================================================================================================================================
Less than one year One to five years Five to ten years Over ten years
----------------- ----------------- ----------------- --------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA $ 75 7.68% $ 519 6.44% $ 1,332 6.23% $47,439 6.20%
FHLMC 537 8.02 69 7.16 4,952 6.06 11,562 6.06
GNMA -- -- 80 9.00 -- -- 24,246 6.57
- -----------------------------------------------------------------------------------------------------------------------------------
Total mortgage-
backed securities $ 612 7.97% $ 668 6.82% $ 6,284 6.10% $83,247 6.29%
===================================================================================================================================
<CAPTION>
=============================================================================================
Total
-----------------------------------------------------
Average
Remaining Weighted
Years to Carrying Fair Average
Maturity Yield Value Yield
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
FNMA 16.3 $49,365 $49,365 6.21%
FHLMC 17.1 17,120 17,120 6.13
GNMA 26.3 24,326 24,326 6.58
- ---------------------------------------------------------------------------------------------
Total mortgage-
backed securities 19.1 $90,811 $90,811 6.29%
=============================================================================================
</TABLE>
16
<PAGE> 19
At March 31, 1999, ESB did not hold any security of an issuer (other
than U.S. government and agency securities) which had an aggregate book value
or aggregate fair value in excess of 10% of ESB's stockholders' equity at the
dates indicated.
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits and advances from the FHLB of Des Moines are the
primary source of ESB's funds for lending and other investment purposes. In
addition ESB derives funds from loan principal repayments. Loan repayments
are a relatively stable source of funds while deposit inflows and outflows
may be significantly influenced by the general level of interest rates and
money market conditions.
DEPOSIT ACCOUNTS. Local deposits are and traditionally have been
the primary source of ESB's funds for use in lending and other general
business purposes. Deposits are attracted from within ESB's primary market
area(metropolitan St. Louis) through an offering of a variety of financial
accounts including savings, checking, money market, certificates of deposit,
retirement plan accounts and commercial checking. The account terms vary by
type of account according to minimum balance requirements, interest rate and
the length of time the account must remain open without incurring a penalty
for withdrawal of the funds as well as other factors. ESB relies on the
location of its offices, customer satisfaction and other references as its
primary sources of deposit solicitation. To a lesser degree, local media
advertising is used in the seeking of deposit funds.
In determining the individual characteristics of its deposit
accounts, ESB considers the products and rates offered by the competition,
the attractiveness of the product to its customer base, the profitability of
the product to ESB and the effect the account will have on the asset
liability mix of the institution. Attractive, convenient locations and
quality service are ESB's benchmark of success. ESB does not use brokered
deposits.
17
<PAGE> 20
The following table sets forth information concerning ESB's savings deposits
at the dates indicated.
<TABLE>
<CAPTION>
=======================================================================================================================
1999 1998
------------------------------ ----------------------------------
Percent Percent
of Total Nominal of Total Nominal
Balance Deposits Rate Balance Deposits Rate
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts $ 8,123 6.30% 2.25% $ 8,370 7.02% 1.86%
Passbook 20,767 16.10 2.51 19,762 16.57 2.51
Money market demand 8,237 6.39 4.31 5,517 4.62 3.07
Noninterest checking 7,959 6.17 -- 6,920 5.80 --
Certificates of Deposit:
28-91 days - Fixed-term, fixed-rate 16 0.01 3.00 30 0.02 2.95
6 months - Fixed-term, fixed-rate 2,106 1.63 4.04 2,271 1.90 4.00
9 months - Fixed-term, fixed-rate 11,738 9.10 5.00 8,054 6.75 5.26
12 months - Fixed-term, fixed-rate 9,646 7.48 4.86 8,036 6.74 5.14
24 months - Fixed-term, fixed-rate 8,441 6.55 5.36 7,467 6.26 5.50
36 months - Fixed-term, fixed-rate 3,229 2.51 5.51 3,029 2.54 5.57
48 months - Fixed-term, fixed-rate 15,759 12.22 5.87 12,955 10.86 6.36
60 months - Fixed-term, fixed-rate 7,611 5.90 5.67 12,869 10.79 5.61
24 months - Fixed-term, variable-rate 980 0.76 4.80 639 0.54 5.50
5 - 20 years - Fixed-term, fixed-rate
(Guaranteed Account) 132 0.10 8.92 122 0.10 8.92
1-60 months - Negotiated rate 2,112 1.64 5.79 2,214 1.86 6.12
Retirement Accounts (IRAs):
12 months - Fixed-term, fixed-rate 1,123 0.87 4.85 883 0.74 5.00
24 months - Fixed-term, fixed-rate 957 0.74 5.30 1,004 0.84 5.39
36 months - Fixed-term, fixed-rate 711 0.55 5.48 734 0.62 5.53
48 months - Fixed-term, fixed-rate 9,518 7.38 5.87 10,848 9.09 6.53
60 months - Fixed-term, fixed-rate 9,065 7.03 5.64 6,944 5.82 5.86
120 months - Fixed-term, fixed-rate 422 0.33 10.00 395 0.33 10.00
24 months - Fixed-term, variable-rate 302 0.24 4.80 238 0.19 5.50
- -----------------------------------------------------------------------------------------------------------------------
$128,954 100.00% 4.37% $119,301 100.00% 4.49%
=======================================================================================================================
<CAPTION>
=============================================================================================
1997
------------------------------------
Percent
of Total Nominal
Balance Deposits Rate
- ---------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
NOW accounts $ 7,170 5.83% 2.24%
Passbook 21,577 17.55 2.51
Money market demand 6,135 4.99 3.22
Noninterest checking 4,993 4.06 --
Certificates of Deposit:
28-91 days - Fixed-term, fixed-rate 34 0.03 2.88
6 months - Fixed-term, fixed-rate 2,439 1.98 4.01
9 months - Fixed-term, fixed-rate 7,932 6.45 5.27
12 months - Fixed-term, fixed-rate 8,350 6.79 5.06
24 months - Fixed-term, fixed-rate 6,760 5.50 5.55
36 months - Fixed-term, fixed-rate 3,010 2.45 5.35
48 months - Fixed-term, fixed-rate 11,568 9.41 6.39
60 months - Fixed-term, fixed-rate 18,300 14.88 5.67
24 months - Fixed-term, variable-rate 631 0.51 5.50
5 - 20 years - Fixed-term, fixed-rate
(Guaranteed Account) 115 0.09 8.93
1-60 months - Negotiated rate 2,718 2.21 6.20
Retirement Accounts (IRAs):
12 months - Fixed-term, fixed-rate 962 0.78 5.00
24 months - Fixed-term, fixed-rate 942 0.77 5.53
36 months - Fixed-term, fixed-rate 755 0.61 5.44
48 months - Fixed-term, fixed-rate 10,260 8.34 6.59
60 months - Fixed-term, fixed-rate 7,710 6.27 5.87
120 months - Fixed-term, fixed-rate 370 0.30 10.00
24 months - Fixed-term, variable-rate 252 0.20 5.50
- ---------------------------------------------------------------------------------------------
$122,983 100.00% 4.63%
=============================================================================================
</TABLE>
18
<PAGE> 21
The following table indicates the amount of ESB's jumbo certificates of
deposit by time remaining until maturity as of March 31, 1999. Jumbo
certificates of deposit require minimum deposits of $100,000 and have
negotiable rates.
<TABLE>
<CAPTION>
====================================================================================================
Certificates
Maturity period of deposit
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C>
Three months or less $ 261
Three through six months --
Six through twelve months 951
Over twelve months 900
- ----------------------------------------------------------------------------------------------------
$ 2,112
====================================================================================================
</TABLE>
DEPOSIT FLOW
The following table sets forth the balances of savings deposit in the
various types of savings accounts offered by ESB at March 31, 1999, 1998 and
1997:
<TABLE>
<CAPTION>
===================================================================================================================================
At March 31
----------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ -------------------------------
Percent Percent Percent
of Increase of Increase of Increase
Amount total (decrease) Amount total (decrease) Amount total (decrease)
------ ------- ---------- ------ ------- ---------- ------ ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-
bearing checking $ 7,959 6.17% $1,039 $ 6,920 5.80% $ 1,927 $ 4,993 4.06% $ 1,169
NOW accounts 8,123 6.30 (247) 8,370 7.02 1,200 7,170 5.83 180
Passbook
accounts 20,767 16.10 1,005 19,762 16.57 (1,815) 21,577 17.55 (254)
Money market
demand 8,237 6.39 2,720 5,517 4.62 (618) 6,135 4.99 (417)
Fixed-rate
certificates 82,587 64.04 4,732 77,855 65.26 (4,370) 82,225 66.86 (2,002)
Variable-rate
certificates 1,281 0.99 404 877 0.73 (6) 883 0.71 (208)
- -----------------------------------------------------------------------------------------------------------------------------------
Total $128,954 100.00% $9,653 $119,301 100.00% $(3,682) $122,983 100.00% $(1,532)
====================================================================================================================================
</TABLE>
CERTIFICATES OF DEPOSIT BY RATES
The following table sets forth the certificates of deposits classified
by rates at March 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
=======================================================================================================
At March 31
-------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Less than 3.00% $ -- $ 3 $ 8
3.00% to 3.99% 16 26 251
4.00% to 4.99% 17,288 3,214 3,925
5.00% to 5.99% 49,393 48,216 49,200
6.00% to 6.99% 13,634 15,122 17,083
7.00% to 7.99% 2,982 11,634 12,155
8.00% and greater 555 517 486
- -------------------------------------------------------------------------------------------------------
Total $ 83,868 $ 78,732 $ 83,108
=======================================================================================================
</TABLE>
19
<PAGE> 22
Certificate of deposit accounts at March 31, 1999, 1998 and 1997 are
scheduled to mature as indicated in the following table.
<TABLE>
<CAPTION>
=======================================================================================================================
1999 1998 1997
-------------------- ------------------- ----------------------
Percent Percent Percent
of of of
Amount total Amount total Amount total
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Within one year $46,479 55.4% $42,430 53.9% $36,335 43.7%
Second year 12,329 14.7 21,282 27.0 22,832 27.5
Third year 4,943 5.9 6,832 8.7 16,693 20.1
Fourth year 13,109 15.6 4,563 5.8 4,949 6.0
Thereafter 7,008 8.4 3,625 4.6 2,299 2.7
- -----------------------------------------------------------------------------------------------------------------------
Total $83,868 100.0% $78,732 100.0% $83,108 100.0%
=======================================================================================================================
</TABLE>
The following table sets forth the savings activities of ESB for the
periods indicated.
<TABLE>
<CAPTION>
=========================================================================================================
For the Year Ended March 31,
--------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $119,301 $122,983 $124,515
Net increase (decrease) before
interest credited 5,354 (8,121) (5,811)
Interest credited 4,299 4,439 4,279
- ---------------------------------------------------------------------------------------------------------
$128,954 $119,301 $122,983
=========================================================================================================
</TABLE>
BORROWINGS
Deposits and advances from the FHLB of Des Moines are the primary source
of funds for ESB. At March 31, 1999, ESB had $130.2 million in FHLB of Des
Moines advances outstanding. During fiscal year 1999, ESB utilized FHLB
advances to provide for increased investment in mortgage-backed securities
and investment securities.
EMC maintains a custodial borrowing relationship at an unaffiliated bank
secured by investment securities with an amortized cost and a fair value of
approximately $4.0 million at March 31, 1999. At March 31, 1999, there was
$1.8 million outstanding on this note payable.
20
<PAGE> 23
The following table sets forth certain information regarding borrowings
by ESB at the end of and during the periods indicated.
<TABLE>
<CAPTION>
============================================================================================================
At and For the Year Ended March 31,
------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Weighted average rate at March 31:
FHLB of Des Moines borrowings 5.37% 5.32% 5.34%
Note payable to bank 2.25 2.25 2.25
ESOP debt -- -- 9.50
Maximum amount of borrowings outstanding
at any month-end:
FHLB of Des Moines borrowings $130,396 $104,000 $67,000
Note payable to bank 4,000 4,000 4,000
ESOP debt -- 136 158
Approximate average borrowings outstanding
with respect to:
FHLB of Des Moines borrowings $125,994 $ 76,208 $61,917
Note payable to bank 3,108 3,085 2,259
ESOP debt -- 68 150
Approximate weighted average rate paid on:
FHLB of Des Moines borrowings 5.41% 5.29% 5.46%
Note payable to bank 2.28 1.90 2.16
ESOP debt -- 8.50 9.25
- ------------------------------------------------------------------------------------------------------------
</TABLE>
COMPETITION
Equality has been, and intends to continue to be, a community-oriented
financial intermediary offering a wide variety of financial services to meet
the needs of the communities it serves. Equality is headquartered in St.
Louis, Missouri. It currently operates through ESB and EMC using nine full-
and limited-service offices in the St. Louis area.
ESB faces intense competition both in making loans and in attracting
deposits. The St. Louis area has a large number of financial institutions,
many of which have greater financial resources, name recognition and market
presence than ESB, and all of which are competitors of ESB to varying
degrees. Particularly intense competition exists for deposits and in all of
the lending activities engaged in by ESB and EMC.
EMC's competition for loans comes principally from national, regional
and local mortgage-banking companies, commercial banks, other savings and
loan associations, savings banks, insurance companies, finance companies and
credit unions. Thus, no assurances can be made that EMC will be able to
maintain its current level of such loans. ESB competes for mortgage loans
principally through EMC. Competition is based on a combination of interest
rates and loan fees charged in addition to the availability of special issues
such as the Affordable Housing Program. The efficiency and quality of the
service provided also plays a significant role in EMC's competitive position.
ESB's most direct competition for deposits historically has come from
other savings and loan associations, commercial banks, savings banks and
credit unions. In addition, ESB faces increasing competition for deposits
from non-bank institutions such as brokerage firms and insurance companies in
such areas as money market funds, other mutual funds (such as corporate and
government securities funds) and annuities. ESB competes for deposits by
offering customers a variety of savings accounts, checking accounts,
certificates of deposit and a responsive, customer-oriented staff, as well as
convenient access to ESB by 24-hour automatic teller machines or personal
appointment.
Trends toward the consolidation of the banking industry and the lifting
of interstate banking and branching restrictions may make it more difficult
for smaller institutions, such as ESB, to compete effectively with large,
national and regional banking institutions.
21
<PAGE> 24
Smaller institutions such as ESB will be forced to either compete with
larger institutions on pricing of products and services, or to identify and
operate in a "niche" that will allow for operating margins to be maintained
at profitable levels. As a locally-based financial institution, ESB's
strategy has been to position itself as a community-oriented financial
institution that provides high quality products and services to meet the
retail banking needs of its local customer base. This strategy is designed
to identify a niche in ESB's market where it can effectively compete against
much larger institutions.
SUBSIDIARY ACTIVITIES AND JOINT VENTURES
ESB has two wholly owned subsidiaries, EMC and Equality Commodity
Corporation ("ECC"). ECC operates a full-service insurance agency under the
name Equality Insurance Agency ("EIA"). EIA provides a full array of
insurance products, including property and casualty, automobile, health and
life insurance, and, to a much lesser degree, commercial fire and casualty
insurance. EIA also offers annuities and operates Flood Information
Specialists, which issues flood plain certificates. These certificates are
required by all mortgage loan lenders and is a requirement for selling a loan
in the secondary market.
PERSONNEL
As of March 31, 1999, ESB, including subsidiaries, had 103 full-time
employees and 48 part-time employees. The employees are not represented by a
union or collective bargaining unit. ESB believes its relationship with its
employees is good.
REGULATION AND SUPERVISION
GENERAL
-------
ESB is chartered under federal law by the OTS. It is a member of the
FHLB System, and its deposit accounts are insured up to legal limits by the
FDIC under the SAIF. The OTS is charged with overseeing and regulating ESB's
activities and monitoring its financial condition. This regulatory framework
sets parameters for ESB's activities and operations and grants the OTS
extensive discretion with regard to its supervisory and enforcement powers
and examination policies. ESB files periodic reports with the OTS concerning
its activities and financial condition, must obtain OTS approval prior to
entering into certain transactions or initiating new activities and is
subject to periodic examination by the OTS to evaluate ESB's compliance with
various regulatory requirements.
Equality is a savings and loan holding company and, like ESB, is subject
to regulation by the OTS. As part of this regulation, Equality is required
to file certain reports with, and is subject to periodic examination by, the
OTS.
FEDERAL SAVINGS ASSOCIATION REGULATION
--------------------------------------
BUSINESS ACTIVITIES. The activities of savings associations are
governed by the Home Owners' Loan Act, as amended (the "HOLA"), and, in
certain respects, the Federal Deposit Insurance Act (the "FDI Act"). The
HOLA and the FDI Act were amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). FIRREA was enacted
for the purpose of resolving problem savings associations, establishing a new
thrift insurance fund, reorganizing the regulatory structure applicable to
savings associations and imposing bank-like standards on savings
associations. FDICIA, among other things, requires that federal banking
regulators intervene promptly when a depository institution experiences
financial difficulties, mandates the establishment of a risk-based deposit
insurance assessment system and requires imposition of numerous additional
safety and soundness operational standards and restrictions. FIRREA and
FDICIA both contain provisions affecting numerous aspects of the operations
and regulations of federally-insured savings associations and empowers the
OTS and the FDIC, among other agencies, to promulgate regulations
implementing its provisions.
QUALIFIED THRIFT LENDER TEST. In September 1996, the Economic Growth
and Regulatory Paperwork Reduction Act of 1996 became law (the "Economic
Growth Act of 1996"). In the past, savings associations were required to
satisfy a qualified thrift lender test ("QTL" test) by maintaining 65% of
their portfolio assets (defined as all assets minus intangible assets,
property used by the association in conducting its business and liquid assets
equal to 20% of total assets) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed securities) on a monthly basis in nine out of every twelve
months.
22
<PAGE> 25
The Economic Growth Act of 1996 liberalized the QTL test for savings
associations by permitting them to satisfy a similar-but-different 60% asset
test under the Internal Revenue Code. Alternatively, savings associations
may meet the QTL test by satisfying a more liberal 65% asset test that
allows an institution to include small business, credit card, agriculture and
education loans as qualified investments for purposes of the test.
Furthermore, consumer loans now count as qualified thrift investments up to
20% of portfolio assets. On April 3, 1997, OTS issued a final rule that
implements provisions of the Economic Growth Act of 1996, including the
amended QTL test.
If a federal savings association fails the QTL test, it must convert to
a bank or conform its activities to those permitted to a national bank (but
which activities also are not inconsistent with the powers permitted to a
savings association), particularly as they relate to investments, branching
and dividends, and it also shall not be eligible for new advances from any
Federal Home Loan Bank. A federal savings association that fails the QTL
test may requalify.
BRANCHING. A federally-chartered savings association, like ESB, can
establish branches in any state or states in the United States and its
territories, subject to a few exceptions. The exercise by the OTS of its
authority to permit interstate branching by federal savings associations is
preemptive of any state law purporting to address the subject of branching by
a federal savings association.
COMMERCIAL AND CONSUMER LENDING AUTHORITY. Before the Economic Growth
Act of 1996, federal savings associations were able to lend up to 10% of
their assets in commercial business loans (i.e., secured or unsecured loans
for commercial, corporate, business, or agricultural purposes) and, subject
to OTS approval for a higher amount, up to 400% of their capital in
commercial real estate loans. In addition, federal savings associations were
permitted to make consumer loans (i.e., loans for personal, family or
household purposes) in an amount not to exceed 35% of their assets.
The Economic Growth Act of 1996 amended the commercial-lending-asset
limit by increasing the ceiling from 10% to 20%, but provides that amounts in
excess of 10% may be used only for small business loans. Moreover, the new
law exempts credit card and educational loans from any percentage of asset
limitations applicable to consumer loans. The interim final rule issued by
the OTS on November 27, 1996, defines a "small business loan" as one which
meets the Small Business Administration size eligibility standards. This
definition also applies for purposes of the new QTL test.
Effective October 30, 1996, the OTS (as part of its regulatory
streamlining project) amended its lending regulations for federal savings
associations to remove the requirement that commercial loans made at the
service corporation level be aggregated with the 10% of assets limit on
commercial lending.
LOANS TO ONE BORROWER. Under HOLA, savings associations are generally
subject to the national bank limits regarding loans to one borrower.
Generally, savings associations may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of the association's
unimpaired capital and surplus, where the borrowing is not fully secured by
readily-marketable collateral. An additional amount may be lent, equal to
10% of the association's unimpaired capital and surplus, if such additional
borrowing is secured by readily-marketable collateral at least equal to the
amount of such additional funds. At March 31, 1999, ESB had no outstanding
loans or commitments that exceeded the loans to one borrower limit at the
time made or committed.
BROKERED DEPOSITS. Well-capitalized savings associations that are not
troubled are not subject to brokered deposit limitations.
Adequately-capitalized associations are able to accept, renew or roll over
brokered deposits but only (i) with a waiver from the FDIC and (ii) subject
to the limitation that they do not pay an effective yield on any such deposit
that exceeds by more than (a) 75 basis points the effective yield paid on
deposits of comparable size and maturity in such association's normal market
area for deposits accepted in its normal market area or (b) 120 basis points
of the current yield on similar maturity U.S. Treasury obligations or, in the
case of any deposit at least half of which is uninsured, 130% of such
Treasury yield. Undercapitalized associations are not permitted to accept
brokered deposits and may not solicit deposits by offering an effective yield
that exceeds by more than 75 basis points the prevailing effective yields on
insured deposits of comparable maturity in the association's normal market
area or in the market area in which such deposits are being solicited. ESB is
not presently soliciting brokered deposits.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings associations and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured association. Civil penalties cover a wide range of violations and
actions. Criminal penalties for most financial association crimes include
fines and imprisonment. In addition, regulators have substantial discretion
to impose
23
<PAGE> 26
enforcement action on an association that fails to comply with its
regulatory requirements, particularly with respect to amounts of capital.
Possible enforcement action ranges from requiring the preparation of a
capital plan or imposition of a capital directive to receivership,
conservatorship or the termination of deposit insurance. Under the FDI Act,
the FDIC has the authority to recommend to the Director of OTS enforcement
action be taken with respect to a particular savings association. If action
is not taken by the Director, the FDIC has authority to take enforcement
action under certain circumstances.
ASSESSMENTS. Savings associations are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment paid on a semi-annual basis is computed based upon the savings
association's total assets, including consolidated subsidiaries, as reported
in the association's latest quarterly thrift financial report.
FEDERAL HOME LOAN BANK SYSTEM. ESB is a member of the FHLB System, which
consists of 12 regional FHLB's. The FHLB provides a central credit facility
primarily for member associations. ESB, as a member of the FHLB-Des Moines,
is required to acquire and hold shares of capital stock in that FHLB in an
amount at least equal to 1% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 1/20 of its advances (borrowings) from the FHLB-Des Moines,
whichever is greater. ESB is in compliance with this requirement, with an
investment in FHLB-Des Moines stock at March 31, 1999 of $6.9 million. FHLB
advances must be secured by specified types of collateral and may be obtained
only for the purpose of purchasing or funding new residential housing finance
assets.
OTS CAPITAL REQUIREMENTS. The OTS capital regulations require savings
associations to meet three capital standards: a 1.5% tangible capital
standard, a 3% leverage ratio (or core capital ratio) and an 8% risk-based
capital standard.
Tangible capital is defined as common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related
earnings, certain nonwithdrawable accounts and pledged deposits of mutual
savings associations and minority interests in equity accounts of fully
consolidated subsidiaries, less intangible assets (other than certain
mortgage servicing rights) and certain equity and debt investments in
nonqualifying subsidiaries.
Core capital is defined as common stockholders' equity (including
retained earnings), certain noncumulative perpetual preferred stock and
related surplus, minority interests in equity accounts of consolidated
subsidiaries, certain nonwithdrawable accounts and pledged deposits of mutual
savings associations, certain amounts of goodwill resulting from prior
regulatory accounting practices, less intangible assets (other than certain
mortgage servicing rights) and certain equity and debt investments in
nonqualifying subsidiaries.
In April 1991, the OTS issued a proposal to amend its regulatory capital
regulation to establish a 3% leverage ratio (defined as the ratio of core
capital to adjusted total assets) for associations in the strongest financial
and managerial condition, with a 1 CAMEL Rating (the highest rating of the
OTS for savings associations). For all other associations, the minimum core
capital leverage ratio would be 3% plus at least an additional 100 to 200
basis points. In determining the amount of additional capital under the
proposal, the OTS would assess both the quality of risk management systems
and the level of overall risk in each individual association through the
supervisory process on a case-by-case basis. Associations that failed the
new leverage ratio would be required to file with the OTS a capital plan that
details the steps they would take to reach compliance. If enacted in final
form as proposed, management does not believe that the proposed regulation
would have a material effect on ESB's operations.
Although the OTS has not adopted this regulation in final form,
generally a savings association that has a leverage capital ratio of less
than 4% will be deemed to be "undercapitalized" under the OTS prompt
corrective action regulations and consequently can be subject to various
limitations on activities.
The OTS' risk-based capital standard requires that savings associations
maintain a ratio of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of 8%. In calculating total
capital, a savings association must deduct reciprocal holdings of depository
institution capital instruments, all equity investments and that portion of
land loans and nonresidential construction loans in excess of 80%
loan-to-value ratio and its interest rate risk component (as discussed
below), in addition to the assets that must be deducted in calculating core
capital. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
of 0% to 100%, as assigned by the OTS capital regulation based on the risks
OTS believes are inherent in the type of asset.
24
<PAGE> 27
The components of core capital are equivalent to those discussed above
under the 3% leverage standard. The components of supplementary capital
include cumulative preferred stock, long-term perpetual preferred stock,
mutual capital certificates, certain nonwithdrawable accounts and pledged
deposits, certain net worth certificates, income capital certificates,
certain perpetual subordinated debt, mandatory convertible subordinated debt,
certain intermediate-term preferred stock, certain mandatorily redeemable
preferred stock and allowance for loan and lease losses. Allowance for loan
and lease losses includable in supplementary capital is limited to a maximum
of 1.25%. Overall, the amount of capital counted toward supplementary
capital cannot exceed 100% of core capital. At March 31, 1999, ESB met each
of its capital requirements.
FDICIA required that the OTS (and other federal banking agencies) revise
risk-based capital standards, with appropriate transition rules, to ensure
that they take account of interest rate risk, concentration of risk and the
risks of nontraditional activities.
On December 1, 1998, the OTS adopted comprehensive guidance, in the form
of Thrift Bulletin 13a ("TB l3a"), covering interest rate risk, investment
securities and use of financial derivatives. TB 13a replaces seven prior OTS
thrift bulletins covering these and related topics. The OTS also updated its
regulations with a new rule (effective January 1, 1999) on forward
commitments, futures transactions and financial options transactions. The new
rule, which is designed to work with TB 13a, establishes general requirements
applicable to all derivative instruments, sets forth responsibilities of the
board of directors and management with respect to financial derivatives and
makes dear that reducing risk exposure should be the primary reason for
entering into a derivatives transaction. TB 13a provides guidelines for
evaluating an institution's risk management, identifies a set of "sound
practices" for consideration of management and describes the qualitative and
quantitative guidelines the OTS will use in assessing an institution's
current exposure to interest rate changes and its ability to manage that
exposure effectively. The OTS will use the results of its net portfolio value
("NPV") model to measure an institution's current exposure. Under TB 13a, an
institution's board of directors should establish interest rate risk limits
in terms of its capital position (its economic capital-to-assets ratio).
Investment securities and derivatives, especially those with the potential to
alter significantly an institution's risk profile, should be evaluated on the
basis of their impact on the institution's economic capital. Institutions
with greater capacity to absorb potential losses will have greater latitude
in using derivatives and other complex financial instruments.
LIQUIDITY. ESB is required to maintain an average daily balance of
liquid assets (e.g., cash, accrued interest on liquid assets, certain time
deposits, savings accounts, bankers' acceptances, specified United States
Government, state or federal agency obligations, shares of certain mutual
funds and certain corporate debt securities and commercial paper) equal to
not less than a specified percentage of the average daily balance of its net
withdrawal deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within
the range of 4% to 10% depending upon economic conditions and the savings
flows of member associations; this requirement is currently 4%. The OTS
requires that the average daily balance of liquid assets be determined
calculated using the amount of the institution's liquidity base as the end of
the preceding calendar quarter or the average daily balance of its liquidity
base during the preceding quarter The OTS may determine the adequacy of an
institution's liquidity on a case-by-case basis, using as a standard that
level of liquidity necessary to ensure that the institution operates on a
"safe and sound" basis. The OTS may initiate enforcement actions for failure
to meet these liquidity requirements. At March 31, 1999, ESB complied with
the regulatory liquidity requirements.
INSURANCE OF DEPOSIT ACCOUNTS AND DEPOSIT INSURANCE PREMIUMS. FDICIA
required the FDIC to establish a risk-based assessment system for insured
depository associations that takes into account the risks attributable to
different categories and concentrations of assets and liabilities. Under the
rule, the FDIC assigns an association to one of three capital categories
consisting of (i) "well capitalized," (ii) "adequately capitalized" or (iii)
"undercapitalized" and one of three supervisory subcategories. The
supervisory subgroup to which an association is assigned is based on a
supervisory evaluation provided to the FDIC by the association's primary
federal regulator and information which the FDIC determines to be relevant to
the association's financial condition and the risk posed to the deposit
insurance funds (which may include, if applicable, information provided by
the association's state supervisor). An association's assessment rate
depends on the capital category and supervisory category to which it is
assigned. There are nine assessment risk classifications (i.e., combinations
of capital groups and supervisory subgroups) to which different assessment
rates are applied. Assessment rates range from 23 basis points for an
association in the highest category (i.e., well-capitalized and healthy) to
31 basis points for an association in the lowest category (i.e.,
undercapitalized and of substantial supervisory concern).
The SAIF and the BIF were required by law to achieve and maintain a
ratio of insurance reserves to total insured deposits equal to 1.25%. The
BIF reached this required reserve ratio during 1995, while some predictions
indicated the
25
<PAGE> 28
SAIF would not reach this target until the year 2002. The SAIF had not grown
as quickly as the BIF for many reasons, but in large part because almost half
of SAIF premiums had to be used to retire bonds issued by the Financing
Corporation ("FICO Bonds") in the late 1980's to recapitalize the Federal
Savings and Loan Insurance Corporation. Until 1995, the SAIF and BIF deposit
insurance premium rate schedules had been identical. But in-mid 1995, the FDIC
issued final rules modifying its assessment rate schedules for SAIF and BIF
member institutions, which required SAIF-insured institutions to pay a
significantly higher deposit premium than their BIF-insured counterparts.
Thrift industry representatives argued that this significant premium
differential caused savings associations to operate at a competitive
disadvantage to their BIF-insured bank counterparts.
On September 30, 1996, President Clinton signed the Deposit Insurance
Funds Act of 1996 ("DIFA") that was part of the omnibus spending bill enacted
by Congress at the end of its 1996 session. DIFA mandated that the FDIC
impose a special assessment on the SAIF-assessable deposits of each insured
depository institution at a rate applicable to all such institutions that
the FDIC determined would cause the SAIF to achieve its designated reserve
ratio of 1.25% as of October 1, 1996. In response to this legislation, in
order to recapitalize the SAIF, on October 10, 1996, the FDIC adopted a final
rule governing the payment of a SAIF special assessment in the amount of 65.7
basis points. SAIF-insured institutions were required to pay the assessment
by November 27, 1996. In response to the recapitalization of the SAIF, the
FDIC announced on December 11, 1996 that deposit insurance rates for most
savings associations insured under the SAIF would be lowered to zero
effective January 1, 1997, thereby equalizing SAIF insurance premiums with
those paid by BIF-insured institutions.
DIFA mandates the merger of the SAIF and BIF, effective January 1, 1999,
but only if no insured depository institution is a savings association on
that date. The combined deposit insurance fund, if the funds are merged,
will be called the "Deposit Insurance Fund", or "DIF".
Before DIFA, federal regulators and thrift industry trade groups were
predicting that a default would occur on the FICO Bonds as early as 1998, as
SAIF-assessable deposits continued to decline. DIFA amends The Federal Home
Loan Bank Act to impose the FICO assessment against both SAIF and BIF
deposits beginning after December 31, 1996. But the assessment imposed on
insured depository institutions with respect to any BIF-assessable deposit
will be assessed at a rate equal to one-fifth of the rate (approximately 1.3
basis points) of the assessments imposed on insured depository institutions
with respect to any SAIF-assessable deposit (approximately 6.7 basis points).
The FICO assessment for 1996 was paid entirely by SAIF-insured institutions.
BIF-insured banks will pay the same FICO assessment as SAIF-insured
institutions beginning as of the earlier of December 31, 1999 or the date as
of which the last savings association ceases to exist.
LIMITATION ON CAPITAL DISTRIBUTIONS. The OTS regulations impose
limitations upon all capital distributions by savings associations, such as
cash dividends, payments to repurchase or otherwise acquire its shares,
payments to shareholders of another association in a cash-out merger and
other distributions charged against capital. The regulations establish three
tiers of associations. An association that exceeds all fully phased-in
capital requirements before and after the proposed capital distribution
("Tier 1 Association") and has not been advised by the OTS that it is in need
of more than normal supervision, could, after prior notice but without the
approval of the OTS, make capital distributions during a calendar year up to
the higher of (a) 100% of its net income to date during the calendar year
plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (b) 75% of its net reserve over the most
recent four-quarter period. Any additional capital distributions would
require prior regulatory approval. In computing the association's
permissible percentage of capital distributions, previous distributions made
during the prior four quarter period must be included. As of March 31, 1999,
ESB met the requirements of a Tier 1 Association. In the event ESB's capital
fell below its fully phased-in requirement or the OTS notified it that it was
in need of more than normal supervision, ESB's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any association, which would otherwise be
permitted by regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
Effective April 1, 1999, the OTS revised its capital distribution
regulation. Under the revised regulation, institutions that are not
subsidiaries of a savings and loan holding company can qualify for a capital
distribution without a notice or application to the OTS, if they meet certain
conditions, including retaining a well-capitalized designation following the
distribution and, having CAMELS and compliance ratings of 1 or 2. Other
institutions either have to notify OTS or obtain the OTS's approval,
depending on the condition of the institution and the' amount and nature of
the capital distribution, but such institutions may now file a schedule of
proposed capital distributions for a year at a time, rather than filing
separate notices.
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<PAGE> 29
COMMUNITY REINVESTMENT. Pursuant to the OTS requirement, an
institution's performance in meeting the credit needs of its entire
community, including low- and moderate-income areas, as required by the CRA,
will generally be evaluated under three tests: the "lending test," the
"investment test," and the "service test."
The lending test analyzes lending performance using five criteria: (i)
the number and amount of loans in the institution's assessment area, (ii) the
geographic distribution of lending, including the proportion of lending in
the assessment area, the dispersion of lending in the assessment area and the
number and amount of loans in low-, moderate-, middle- and upper-income areas
in the assessment area, (iii) borrower characteristics, such as the income
level of individual borrowers and the size of businesses or farms, (iv) the
number and amount, as well as the complexity and innovativeness of an
institution's community development lending and (v) the use of innovative or
flexible lending practices in a safe and sound manner to address the credit
needs of low- or moderate-income individuals or areas. The investment test
analyzes investment performance using four criteria: (i) the dollar amount of
qualified investments, (ii) the innovativeness or complexity of qualified
investments, (iii) the responsiveness of qualified investments to credit and
community development needs and (iv) the degree to which the qualified
investments made by the institution are not routinely provided by private
investors. The service test analyzes service performance using six criteria:
(i) the institution's branch distribution among low-, moderate-, middle- and
upper-income areas, (ii) its record of opening and closing branches,
particularly in low- and moderate-income areas, (iii) the availability and
effectiveness of alternative systems for delivering retail banking services,
(iv) the range of services provided in low-, moderate-, middle- and
upper-income areas and extent to which those services are tailored to meet
the needs of those areas, (v) the extent to which the institution provides
community development services and (vi) the innovativeness and responsiveness
of community development services provided.
An independent financial institution with assets of less than $250
million, or a financial institution with assets of less than $250 million
that is a subsidiary of a holding company with assets of less than $1
billion, is evaluated under a streamlined assessment method based primarily
on its lending record. The streamlined test considers an institution's
loan-to-deposit ratio adjusted for seasonal variation and special lending
activities, its percentage of loans and other lending related activities in
the assessment area, its record of lending to borrowers of different income
levels and businesses and farms of different sizes, the geographic
distribution of its loans and its record of taking action, if warranted, in
response to written complaints. In lieu of being evaluated under the three
assessment tests or the streamlined test, a financial institution can adopt a
"strategic plan" and elect to be evaluated on the basis of achieving the
goals and benchmarks outlined in the strategic plan.
TRANSACTIONS WITH RELATED PARTIES. ESB's authority to engage in
transactions with related parties or "affiliates," (i.e., any company that
controls or is under common control with an association) including the
Corporation and its non-savings-association subsidiaries or to make loans to
certain insiders, is limited by Sections 23A and 23B of the Federal Reserve
Act ("FRA"). Subsidiaries of a savings association are generally exempted
from the definition of "affiliate." Section 23A limits the aggregate amount
of transactions with any individual affiliate to 10% of the capital and
surplus of the savings association and also limits the aggregate amount of
transactions with all affiliates to 20% of the savings association's capital
and surplus. Certain transactions with affiliates are required to be secured
by collateral in an amount and of a type described in the FRA and the
purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including
loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the association as those prevailing at the time for comparable
transactions with non-affiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to non-affiliated companies. Notwithstanding Sections 23A and 23B,
FIRREA prohibits any savings association from lending to any affiliate that
is engaged in activities that are not permissible for bank holding companies
under Section 4(c) of the Bank Holding Company Act ("BHC Act"). Further, no
savings association may purchase the securities of any affiliate other than a
subsidiary.
ESB's authority to extend credit to executive officers, directors and
10% shareholders, as well as such entities such persons control are currently
governed by Section 22(g) and 22(h) of the FRA and Regulation O promulgated
by the Federal Reserve Board. Among other things, these regulations require
such loans to be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amount of loans ESB may make to
such persons based, in part, on ESB's capital position, and require certain
approval procedures to be followed. OTS regulations, with the exception of
minor variations, apply Regulation O to savings associations.
PROMPT CORRECTIVE REGULATORY ACTION. FDICIA establishes a system of
prompt corrective action to resolve the problems of undercapitalized
associations. Under this system, the OTS is required to take certain
supervisory actions against
27
<PAGE> 30
undercapitalized associations, the severity of which depends upon the
association's degree of undercapitalization. Generally, subject to a narrow
exception, FDICIA requires the OTS to appoint a receiver or conservator for an
association that is critically undercapitalized. FDICIA authorizes the OTS to
specify the ratio of tangible equity to assets at which an association becomes
critically undercapitalized and requires that ratio be no less than 2% of
assets.
Under OTS regulations, a savings association is considered to be
undercapitalized if it has risk-based capital of less than 8% or has a Tier 1
risk-based capital ratio that is less than 4% or has a leverage ratio that is
less than 4% or has a leverage ratio less than 3% if the savings association
is rated composite 1 under the composite numerical rating assigned to the
association by the OTS under the Uniform Financial Institutions Rating System
or an equivalent rating under a comparable rating system adopted by the OTS
in the most recent rating of which the association has been notified in
writing (the "UFIRS"). A savings association that has risk-based capital
less than 6% or a Tier 1 risk-based capital ratio that is less than 3% or a
leverage ratio that is less than 3% would be considered to be "significantly
undercapitalized." A savings association that has a tangible equity to total
assets ratio equal to or less than 2% would be deemed to be "critically
undercapitalized." Generally, a capital restoration plan must be filed with
the OTS within 45 days of the date an association receives notice that it is
undercapitalized, significantly undercapitalized or critically
undercapitalized. In addition, numerous mandatory supervisory actions become
immediately applicable to the association, including, but not limited to,
restrictions on growth, investment activities, capital distributions and
affiliate transactions. In addition, the OTS could issue a capital directive
to the savings association that includes additional discretionary
restrictions on the savings association.
REAL ESTATE LENDING STANDARDS. The OTS and the other federal banking
agencies have uniform regulations prescribing real estate lending standards.
The OTS regulation requires each savings association to establish and
maintain written internal real estate lending standards consistent with safe
and sound banking practices and appropriate to the size of the institution
and the nature and scope of its real estate lending activities. The policy
must also be consistent with accompanying OTS guidelines, which include
maximum loan-to-value ratios for the following types of real estate loans:
raw land (65%), land development (75%), nonresidential construction (80%),
improved property (85%) and one- to four-family residential construction
(85%). Owner-occupied one- to four-family mortgage loans and home equity
loans do not have maximum loan-to-value ratio limits, but those with a
loan-to-value ratio at origination of 90% or greater are to be backed by
private mortgage insurance or readily marketable collateral. Institutions
are also permitted to make a limited amount of loans that do not conform to
the proposed loan-to-value limitations so long as such exceptions are
appropriately reviewed and justified. The guidelines also list a number of
lending situations in which exceptions to the loan-to-value standard are
justified.
STANDARDS FOR SAFETY AND SOUNDNESS. As required by FDICIA and
subsequently amended by the Riegle Community Development and Regulatory
Improvement Act of 1994, the federal banking regulators adopted interagency
guidelines establishing standards for safety and soundness for depository
institutions on matters such as internal controls, loan documentation, credit
underwriting, interest-rate risk exposure, asset growth, compensation and
other benefits and asset quality and earnings (the "Guidelines"). The
agencies expect to request a compliance plan from an institution whose
failure to meet one or more of the standards is of such severity that it
could threaten the safe and sound operation of the institution. FDIC
regulations enacted under FDICIA also require all depository institutions to
be examined annually by the banking regulators (but see, "Regulatory Relief
for Thrifts and Banks") and depository institutions having $500 million or
more in total assets to have an annual independent audit, an audit committee
comprised solely of outside directors and to hire outside auditors to
evaluate the institution's internal control structure and procedures and
compliance with laws and regulations relating to safety and soundness. The
FDIC, in adopting the regulations, reiterated its belief that every
depository institution, regardless of size, should have an annual independent
audit and an independent audit committee.
FINANCIAL MANAGEMENT REQUIREMENTS. FDICIA imposes new financial
reporting requirements on all depository institutions with assets of more
than $500 million, their management, and their independent auditors. It also
establishes new rules for the composition, duties and authority of such
institutions' audit committees and boards of directors. Among other things,
all such depository institutions will be required to prepare and make
available to the public annual reports on their financial condition and
management (including statements of managements' responsibility for the
financial statements, internal controls and compliance with certain federal
banking laws and regulations relating to safety and soundness, and an
assessment by management of the effectiveness of the institution's internal
controls and procedures and the institution's compliance with such laws and
regulations). The institution's independent public accountants are required
to attest to these management assessments. Each such institution is also
required to have an audit committee composed of independent directors.
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<PAGE> 31
NEW THRIFT SUBSIDIARY AND EQUITY INVESTMENT RULES. On December 18,
1996, the OTS issued a final rule updating and streamlining its regulations
governing subsidiary and equity investments. The regulation recasts
operating subsidiaries and service corporations as "subordinate
organizations," revises the list of permissible activities for service
corporations, confirms federal preemption of state law regarding the
activities of operating subsidiaries and clarifies the application process
for establishing subordinate organizations. The new rule also codifies the
authority of a federal savings association to invest in certain pass-through
investments, such as limited partnerships and mutual funds.
FEDERAL RESERVE SYSTEM
----------------------
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts), non-personal time deposits
(those which are transferable or held by a person other than a natural
person) with an original maturity of less than one and one-half years and
certain money market accounts. The Federal Reserve Board regulations
generally require that reserves of 3% must be maintained against aggregate
transaction accounts of $52 million or less (subject to adjustment by the
Federal Reserve Board) and an initial reserve of $1.6 million plus 10%
(subject to adjustment by the Federal Reserve Board between 8% and 14%)
against that portion of total transaction accounts in excess of $52 million.
The first $4.3 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. ESB is in compliance with the foregoing requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy liquidity requirements by the
OTS. Because required reserves must be maintained in the form of either
vault cash, a non-interest-bearing account at a Federal Reserve Bank or a
pass-through account as defined by the Federal Reserve Board, the effect of
this reserve requirement is to reduce ESB's interest-earning assets.
FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal
Reserve Bank.
HOLDING COMPANY REGULATION
--------------------------
Equality is considered a non-diversified, savings and loan holding
company within the meaning of the HOLA, has registered as a savings and loan
holding company with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over Equality and its non-savings association subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from (i) acquiring control
of, or acquiring by merger or purchase of assets, another savings association
or holding company thereof, without prior written approval of the OTS; (ii)
acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings association, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by
the HOLA; or (iii) acquiring or retaining control of an institution that is
not federally insured. In evaluating applications by holding companies to
acquire savings associations, the OTS must consider the financial and
managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the insurance funds,
the convenience and needs of the community and competitive factors.
As a unitary savings and loan holding company, Equality generally is not
restricted under existing laws as to the types of business activities in
which it may engage, provided that its savings association subsidiary
continues to satisfy the QTL test. Upon any acquisition by Equality of
another SAIF-insured institution (other than Equality), a federal savings
bank insured by the BIF, or a state-chartered BIF-insured savings bank
meeting the QTL test that is deemed to be a savings institution by OTS,
except for a supervisory acquisition, Equality would become a multiple
savings and loan holding company (if the acquired institution is held as a
separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA, as amended
by the FIRREA, limits the activities of a multiple savings and loan holding
company and its non-insured institution subsidiaries primarily to activities
permissible for bank holding companies under Section 4(c)(8) of the BHC Act,
subject to the prior approval of the OTS, and activities in which multiple
savings and loan holding companies were authorized by regulation to engage in
on March 5, 1987. Such activities include mortgage banking, consumer
finance, operation of a trust company and certain types of securities
brokerage.
29
<PAGE> 32
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. For federal income tax purposes, Equality files a
federal income tax return based upon a tax year ended March 31. Consolidated
returns have the effect of eliminating intercompany distributions, including
dividends, from the computation of consolidated taxable income for the year
in which the distribution occurs.
Prior to 1997, if certain conditions were met, savings and loan
associations and savings banks were allowed special bad debt deductions in
determining taxable income based on either specified experience formulas or
on a percentage of taxable income before such deduction. Bad debt deductions
in excess of actual losses were tax-preference items, and were subject to a
minimum tax. ESB used the percentage of taxable income method for the year
ended March 31, 1996 in determining the bad debt deduction for tax purposes.
The special bad debt deduction accorded thrift institutions is covered
under Section 593 of the Code. The Small Business Job Protection Act of 1996
included the repeal of certain portions of Section 593 effective for tax
years beginning after December 31, 1995. As a result, ESB is no longer
allowed a percentage method bad debt deduction. The repeal of the thrift
reserve method generally requires thrift institutions to recapture into
income the portion of tax bad debt reserves accumulated since 1987 ("base
year reserve"). The recapture will generally be taken into income ratably
over six tax years. However, if ESB meets a residential loan requirement for
tax years beginning in 1997 and 1998, recapture of the reserve can be
deferred until the tax year beginning in 1999. At March 31, 1999, ESB had
bad Debts deducted for tax purposes in excess of the base year reserve of
approximately $204,000. ESB has recognized a deferred income tax liability
for this amount.
Certain events covered by Code Section 593(e), which was not repealed,
will trigger a recapture of the base year reserve. The base year reserve of
thrift institutions would be recaptured if a thrift ceases to qualify as a
"bank" for federal income tax purposes. The base year reserves of thrift
institutions also remain subject to income tax penalty provisions which, in
general, require recapture upon certain stock redemptions of, and excess
distributions to, stockholders. At March 31, 1999, retained earnings included
approximately $2.9 million of base year reserves for which no deferred
federal income tax liability has been recognized.
Deferred income taxes arise from the recognition of certain items of
income and expense for tax purposes in years different from those in which
they are recognized in the consolidated financial statements.
ESB is subject to the corporate alternative minimum tax which is
imposed to the extent it exceeds ESB's regular income tax for the year. The
alternative minimum tax will be imposed at the rate of 20% of a specially
computed tax base. Included in this base will be a number of preference
items, including the following: (i) 100% of the excess of a thrift
institution's bad debt deduction over the amount that would have been
allowable on the basis of actual experience; and (ii) for years beginning in
1988 and 1989 an amount equal to one-half of the amount by which an
institution's "book income" (as specially defined) exceeds its taxable income
with certain adjustments, including the addition of preference items (for
taxable years commencing after 1989 this adjustment item is replaced with a
new preference item relating to "adjusted current earnings" as specially
computed). In addition, for purposes of the new alternative minimum tax, the
amount of alternative minimum taxable income that may be offset by net
operating losses is limited to 90% of alternative minimum taxable income.
ESB has not been audited by the IRS within the last five years. For
additional information regarding taxation, see Note 12 of Notes to
Consolidated Financial Statements.
Missouri Taxation. Equality, EMC and ECC are subject to state
corporation income tax, computed on the basis of their state taxable income,
at a rate of 7%. ESB is subject to a state financial institutions tax,
computed on the basis of its state income, at a rate of 7%.
30
<PAGE> 33
ITEM 2. DESCRIPTION OF PROPERTIES
- ----------------------------------
ESB conducts its business through four full-service offices. ESB's main
office is located at 4131 South Grand Boulevard, St. Louis, Missouri. ESB
owns all four of its offices in fee and they are unencumbered.
<TABLE>
<CAPTION>
Lease
Net Expira-
Year Owned or Total Book tion Square
Location Opened Leased Investment Value Date Footage
-------- ------ -------- ---------- ----- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
MAIN OFFICE:
4131 South Grand Boulevard 1944 Owned $3,618<F1> $2,039 -- 21,740
St.Louis, Missouri 63118
BRANCHES:
Marborough Branch 1998 Owned 1,224 1,069 -- 2,912
7809 Watson Road
St.Louis, Missouri 63119
South County Branch 1987 Owned 1,945 1,304 -- 4,545
5400 South Lindbergh Boulevard
St. Louis, Missouri 63123
Washington Branch 1998 Owned 1,467 1,443 -- 1,859
801 Franklin Street
Washington, MO 63090
LOAN OFFICES:
Florissant Loan Office 1992 Leased 20 9 2001 1,306
2620 North Lindbergh
Florissant, Missouri 63033
West County Loan Office 1993 Leased 3 2 1999 1,200
14334 South Outer Forty
Chesterfield, Missouri 63017
O'Fallon Loan Office 1994 Leased -- -- 1999 300
2017 Highway K
O'Fallon, MO 63366
Crestwood Loan Office 1996 Leased -- -- 1999 500
9920 Watson Road, Suite 207
Crestwood, Missouri 63126
Chesterfield Loan Office 1996 Leased -- -- 1999 500
361 Chesterfield Center
Chesterfield, Missouri 63017
<FN>
<F1> Includes investment in future branches of $1.1 million.
</TABLE>
In May 1997, ESB purchased a building in Arnold, Missouri (which is in
Jefferson County and adjacent to St. Louis County) that ESB is remodeling as
a full-service branch office. ESB expects this office to be completed by
July 1999. In addition, ESB purchased one other property in Fenton,
Missouri, for the purpose of branch expansion and in 1999 leased an existing
full-service banking facility in St. Peters, Missouri (which is in St.
Charles County and adjacent to St. Louis County). The Fenton branch office
is currently subject to use restriction, and is expected to be completed
early in the year 2000. This facility will be used as a training facility in
the interim. The St. Peters branch office opened in April 1999. With the
exception of the foregoing, ESB believes that its current facilities are
adequate to meet the present and foreseeable needs of ESB and Equality.
The net book value of ESB's investment in office properties and
equipment totaled $6.5 million at March 31, 1999.
31
<PAGE> 34
ESB uses an outside data processing firm to process customer records and
monetary transactions, post deposit and general ledger entries and record
activity in installment lending. EMC uses a second outside data processing
firm to process loan servicing and loan originations.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Equality is, from time to time, including legal proceedings to enforce
its rights a party to legal proceedings arising in the ordinary course of its
business. Equality is not currently a party to any legal proceedings which
could reasonably be expected to have a material adverse effect on the
financial condition or operations of Equality.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended March 31, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------
The common stock of Equality Bancorp, Inc. is traded on the American
Stock Exchange under the symbol "EBI." The stock was issued on December 1,
1997 at $10.00 per share. Equality paid a quarterly dividend of $.06 per
share during the quarters ended June 30, 1998, September 30, 1998, December
31, 1998 and March 31, 1999. As of May 31, 1999, there were 1,044
stockholders of record and 2,520,426 outstanding shares of common stock.
Payment of dividends on the common stock is subject to determination and
declaration by the Board of Directors and will depend upon a number of
factors, including capital requirements, regulatory limitations on the
payment of dividends, results of operation and financial condition, tax
considerations and general economic conditions.
32
<PAGE> 35
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
- ---------------------------------------------
GENERAL
Equality Bancorp, Inc. (Equality or the Company) is the holding company
for Equality Savings Bank (ESB). Equality through its subsidiary is principally
engaged in the business of attracting deposits from the general public and
uses these deposits, together with other funding sources, to originate or
invest in residential and other mortgage loans and, to a lesser extent,
nonmortgage loans, investments and other assets. Because Equality is
primarily dependent on net interest margin (interest income from loans and
investments minus interest expense on deposit accounts and borrowed money)
for earnings, the focus of the Company's planning has been to devise and
employ strategies that provide a stable, positive spread between the yield on
interest-earning assets and the cost of interest-bearing liabilities in order
to maximize the dollar amount of net interest income.
A substantial portion of Equality's operations and income are derived from
the operations of Equality Mortgage Corporation (EMC), a wholly-owned
subsidiary of ESB. EMC provides several benefits to Equality, including,
among other things, originating a variety of mortgage loan products for
Equality's portfolio and generating fee income for Equality through its
activities in the secondary mortgage market. EMC's mortgage banking
activities produce primarily two types of income -- gain on sale of mortgage
loans and loan servicing fees and late charges. EMC's mortgage banking
activities consist of the origination, purchase and sale of residential
mortgage loans.
ASSET AND LIABILITY MANAGEMENT
Equality has employed various strategies intended to minimize the adverse
effect of interest rate risk on future operations. Strong progress has been
made toward restructuring the composition of the loan portfolio, and
liquidity has been accumulated in investments in investment-grade corporate
obligations and in U.S. government and agency notes and bonds.
Adjustable-rate mortgages, shorter-term consumer loans and commercial
business loans are among the tools currently utilized by Equality to
restructure the loan portfolio. The proper pricing of deposit accounts is
also significant. During periods of low or declining rates, the long-term
deposits extend attractive rates while in periods of high rates, the
short-term deposit accounts are competitively priced. This position allows
Equality to benefit from the ability to reprice as necessary based on market
conditions.
Through EMC, Equality has focused on the origination of adjustable-rate
mortgages that reprice based on fluctuations in interest rates. Fixed-rate
mortgage loan originations are generally sold in the secondary market. In
addition, EMC's loan servicing operations have been a source of noninterest
income to Equality.
33
<PAGE> 36
YIELDS EARNED AND RATES PAID
The earnings of Equality depend largely on the spread between the yield on
interest-earning assets (primarily loans and investments) and the cost of
interest-bearing liabilities (primarily deposit accounts and borrowed money),
as well as the relative size of Equality's interest-earning assets and
interest-bearing liability portfolios.
The following table sets forth, for the periods indicated, information
regarding average balances of interest-earning assets and interest-bearing
liabilities as well as the total dollar amounts of interest income from average
interest-earning assets and interest expense on average interest-bearing
liabilities, resultant yields, interest rate spread, net interest margin, and
ratio of average interest-earning assets to average interest-bearing
liabilities. Average balances for a period have been calculated using the
average of month-end balances during such period.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------------------------------------------------------
1999 1998
------------------------------------- ---------------------------------------
AVERAGE INTEREST AND YIELD/ AVERAGE INTEREST AND YIELD/
BALANCE<F1> DIVIDENDS COST BALANCE<F1> DIVIDENDS COST
----------- ------------ ----- ----------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans <F2> $ 86,630 $ 6,519 7.53% $ 99,335 $ 7,341 7.39%
Consumer loans <F2> 3,001 295 9.83 2,677 232 8.67
Commercial business loans <F2> 9,164 889 9.70 5,249 530 10.10
-------- ------- -------- -------
Total loans receivable 98,795 7,703 7.80 107,261 8,103 7.55
Investment securities 63,001 3,722 5.91 77,443 4,748 6.13
Interest-bearing deposits 10,686 400 3.74 10,474 416 3.97
Mortgage-backed securities 89,298 5,321 5.96 16,805 1,153 6.86
FHLB stock 6,337 412 6.50 3,894 260 6.68
-------- ------- -------- -------
Total interest-earning assets $268,117 17,558 6.55% $215,877 14,680 6.80%
======== ======= ======== =======
Interest-bearing liabilities:
Passbook savings $ 20,244 506 2.50% $ 27,229 663 2.43%
Checking 15,460 195 1.26 13,487 193 1.43
Money market accounts 7,047 236 3.35 5,401 150 2.78
Certificates of deposit 80,587 4,521 5.61 80,529 4,628 5.75
-------- ------- -------- -------
Total savings deposits 123,338 5,458 4.43 126,646 5,634 4.45
FHLB advances 125,994 6,822 5.41 76,208 4,031 5.29
Other interest-bearing liabilities 3,108 71 2.28 3,153 60 1.90
-------- ------- -------- -------
Total interest-bearing
liabilities $252,440 12,351 4.89% $206,007 9,725 4.72%
======== ------- ======== -------
Net interest income $ 5,207 $ 4,955
======= =======
Interest rate spread 1.66% 2.08%
====== ======
Net interest margin <F3> 1.94% 2.30%
====== ======
Ratio of average interest-earning assets
to average interest-bearing
liabilities 106.21% 104.79%
====== ======
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------------------------
1997
-----------------------------------------------
AVERAGE INTEREST AND YIELD/
BALANCE <F1> DIVIDENDS COST
------------ ------------ ------
<S> <C> <C> <C>
Interest-earning assets:
Mortgage loans <F2> $ 96,113 $ 7,265 7.56%
Consumer loans <F2> 2,091 182 8.70
Commercial business loans <F2> 107 2 11.21
Total loans receivable 98,311 7,449 7.58
Investment securities 63,710 3,931 6.17
Interest-bearing deposits 7,738 468 6.05
Mortgage-backed securities 21,778 1,530 7.03
FHLB stock 3,300 232 7.03
-------- -------
Total interest-earning assets $194,837 13,610 6.99%
======== =======
Interest-bearing liabilities:
Passbook savings $ 21,846 546 2.50%
Checking 11,325 169 1.49
Money market accounts 5,402 151 2.80
Certificates of deposit 84,102 4,816 5.73
-------- -------
Total savings deposit 122,675 5,682 4.63
FHLB advances 61,917 3,378 5.46
Other interest-bearing liabilities 2,409 52 2.16
-------- -------
Total interest-bearing liabilities $187,001 9,112 4.87%
======== -------
Net interest income $ 4,498
=======
Interest rate spread 2.12%
======
Net interest margin <F3> 2.31%
======
Ratio of average interest-earning assets
to average interest-bearing liabilities 104.19%
======
<FN>
<F1> Average balances are computed on a monthly basis (month-end balances).
<F2> Does not include interest on loans 90 days or more past due.
<F3> Net interest income divided by average interest-earning assets.
Note: At March 31, 1999, the weighted average yields on certain
interest-earning assets and the weighted average cost on certain
interest-bearing liabilities were as follows: loans receivable, 7.64%;
mortgage-backed securities, 6.28%; debt securities, 6.44%; total
interest-earning assets, 6.83%; savings deposits, 4.36%; borrowed money,
5.33%; total interest-bearing liabilities, 4.85%; and interest rate
spread, 1.98%.
</TABLE>
34
<PAGE> 37
The following table sets forth the effects of changing rates and volumes on
net interest income of Equality. Information is provided with respect to
(i) effects on interest income attributable to changes in rate (changes in rate
multiplied by prior volume); (ii) effects on interest income attributable
to changes in volume (changes in volume multiplied by prior rate); and
(iii) changes in rate/volume.
<TABLE>
<CAPTION>
1999 COMPARED TO 1998 1998 COMPARED TO 1997
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
----------------------------------------- ----------------------------------------
RATE/ RATE/
RATE VOLUME VOLUME NET RATE VOLUME VOLUME NET
---- ------ ------ --- ---- ------ ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans <F1> $ 139 $ (939) $ (22) $ (822) $(162) $ 244 $ (6) $ 76
Consumer loans <F1> 31 28 4 63 (1) 51 -- 50
Commercial business loans <F1> (21) 395 (15) 359 -- 576 (48) 528
----- ------ ----- ------- ----- ------ ----- ------
Total loans receivable 149 (516) (33) (400) (163) 871 (54) 654
Investment securities (170) (885) 29 (1,026) (25) 847 (5) 817
Interest-bearing deposits (24) 98 (90) (16) (161) 165 (56) (52)
Mortgage-backed securities (152) 4,974 (654) 4,168 (36) (349) 8 (377)
FHLB stock (7) 163 (4) 152 (12) 42 (2) 28
----- ------ ----- ------- ----- ------ ----- ------
Total net change in income on
interest-earning assets (204) 3,834 (752) 2,878 (397) 1,576 (109) 1,070
----- ------ ----- ------- ----- ------ ----- ------
Interest-bearing liabilities:
Passbook savings 18 (170) (5) (157) (14) 135 (4) 117
Checking (23) 28 (3) 2 (7) 29 2 24
Money market accounts 31 46 9 86 2 -- (3) (1)
Certificates of deposit (113) 3 3 (107) 17 (205) -- (188)
----- ------ ----- ------- ----- ------ ----- ------
Total savings deposits (87) (93) 4 (176) (2) (41) (5) (48)
FHLB advances 91 2,634 66 2,791 (103) 780 (24) 653
Other interest-bearing liabilities 12 (1) -- 11 (6) 16 (2) 8
----- ------ ----- ------- ----- ------ ----- ------
Total net change in expense on
interest-bearing liabilities 16 2,540 70 2,626 (111) 755 (31) 613
----- ------ ----- ------- ----- ------ ----- ------
Net change in interest income $(220) $1,294 $(822) $ 252 $(286) $ 821 $ (78) $ 457
===== ====== ===== ======= ===== ====== ===== ======
<CAPTION>
1997 COMPARED TO 1996
INCREASE (DECREASE) DUE TO
----------------------------------------
RATE/
RATE VOLUME VOLUME NET
---- ------ ------ ---
<S> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans <F1> $ (54) $ 446 $ (6) $ 386
Consumer loans <F1> -- 14 -- 14
Commercial business loans <F1> -- -- 2 2
------ ------ ---- ------
Total loans receivable (54) 460 (4) 402
Investment securities 9 1,093 2 1,104
Interest-bearing deposits (93) (375) 39 (429)
Mortgage-backed securities 399 (155) (47) 197
FHLB stock -- 60 1 61
------ ------ ---- ------
Total net change in income on
interest-earning assets 261 1,083 (9) 1,335
------ ------ ---- ------
Interest-bearing liabilities:
Passbook savings (2) (14) -- (16)
Checking (24) 8 (1) (17)
Money market account -- (25) -- (25)
Certificates of deposit (25) 37 (1) 11
------ ------ ---- ------
Total savings deposits (51) 6 (2) (47)
FHLB advances (230) 949 (83) 636
Other interest-bearing liabilitie (18) 1 -- (17)
------ ------ ---- ------
Total net change in expense on
interest-bearing liabilities (299) 956 (85) 572
------ ------ ---- ------
Net change in interest income $ 560 $ 127 $ 76 $ 763
====== ====== ==== ======
<FN>
<F1> Does not include interest on loans 90 days or more past due.
</TABLE>
35
<PAGE> 38
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, the statements
made in this annual report are forward-looking statements that involve risks
and uncertainties. Equality's actual results, financial condition, or
business could differ materially from its historical results, financial
condition, or business, or the results of operations, financial condition, or
business contemplated by such forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES
Equality's primary sources of funds are savings deposits, borrowings,
amortization and prepayment of loan principal (including mortgage-backed
securities) and, to a lesser extent, maturities of investment securities,
short-term investments and operations. While scheduled loan repayments and
maturing investments are relatively predictable, deposit flows and early loan
repayments are more influenced by interest rates, general economic conditions
and competition. Equality attempts to price its deposits to meet its
asset/liability objectives discussed above, consistent with local market
conditions. Excess balances are temporarily invested in overnight funds. In
addition, Equality is eligible to borrow funds from the Federal Home Loan
Bank of Des Moines (FHLB).
Under Office of Thrift Supervision (OTS) regulations, a member thrift
institution is required to maintain an average daily balance of liquid assets
(cash, certain time deposits and savings accounts, bankers' acceptances,
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage of its net withdrawable accounts plus short-term borrowings. This
liquidity requirement, which is currently 4.0%, may be changed from time to
time by the OTS to any amount within the range of 4.0% to 10.0%, depending
upon economic conditions and the savings flow of member associations.
Monetary penalties may be imposed for failure to meet liquidity requirements.
Equality's regulatory liquidity ratio at March 31, 1999 was 32.3%.
The primary investing activity of Equality is lending. During 1999,
Equality originated $179.0 million of loans, of which $172.3 million were
residential mortgage loans, purchased $8.2 million of loans and sold $141.8
million of loans in the secondary market. In addition, $43.1 million of
loans were converted into mortgage-backed securities and sold.
Liquidity management is both a short- and long-term responsibility of
Equality's management. Equality adjusts its investment in liquid assets
based upon management's assessment of (i) expected loan demand, (ii)
projected loan sales, (iii) expected deposit flows, (iv) yields available on
interest-bearing deposits and (v) liquidity of its asset/liability management
program. Excess liquidity is invested generally in interest-bearing
overnight deposits and other short-term government and agency obligations.
If Equality requires funds beyond its ability to generate them internally, it
has additional borrowing capacity with the FHLB and collateral eligible for
repurchase agreements.
Equality anticipates that it will have sufficient funds available to
meet current loan commitments. At March 31, 1999, Equality had outstanding
commitments to originate loans of $4.8 million.
Certificates of deposit scheduled to mature in one year or less at March
31, 1999 totaled $46.5 million. Based upon management's experience and
familiarity with the customers involved and Equality's pricing policy
relative to that of its perceived competitors, management believes Equality
will retain a significant portion of these deposits.
FINANCIAL CONDITION
The total assets of Equality increased approximately $32.9 million, or
12.9%, to $288.4 million at March 31, 1999 from $255.6 million at March 31,
1998. This increase in asset size primarily relates to increased cash
reserves, investment securities and mortgage-backed securities which were
funded through FHLB advances and the proceeds from sales of mortgage loans.
Investment securities available for sale increased approximately $12.7
million, or 18.5%, to $81.6 million at March 31, 1999 from $68.9 million at
March 31, 1998. This increase is due primarily to $120.8 million of
purchases of securities, offset by $41.5 million of sales and $67.8 million
of maturities.
36
<PAGE> 39
Investment securities held to maturity decreased $2.0 million, or 76.9%,
to $600,000 at March 31, 1999 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
$32.3 million, or 55.2%, to $90.8 million at March 31, 1999 from $58.5
million at March 31, 1998. This increase is the result of purchases of
securities totaling $92.9 million, offset by normal principal repayments of
$33.1 million and sales proceeds of $26.5 million.
Loans receivable, net decreased approximately $18.2 million, or 16.8%,
to $90.2 million at March 31, 1999 from $108.4 million at March 31, 1998.
This decrease is the result of refinancing activity within the loan portfolio
due to low interest rates on mortgages throughout the fiscal year.
Additionally, loans held for sale decreased approximately $7.5 million, or
51.7%, to $7.0 million at March 31, 1999 from $14.5 million at March 31,
1998. This decrease is due to efforts by EMC to efficiently sell and deliver
loans once closed, resulting in a reduced level of inventory. Mortgage loan
originations increased $60.5 million, or 55.2%, to $170.1 million in 1999
from $109.6 million in 1998.
Office properties and equipment increased $877,000, or 15.7%, to $6.5
million at March 31, 1999 from $5.6 million at March 31, 1998. The increase
resulted from improvements to properties previously purchased to augment
ESB's branch network. One property was opened in September 1998, while two
others are planned to expand ESB's branch facilities during fiscal year 2000.
Savings deposits increased $9.7 million, or 8.1%, to $129.0 million at
March 31, 1999 from $119.3 million at March 31, 1998. The increase is due
primarily to deposit inflows, the result of the opening of one new branch
facility in a new market area, and extensive marketing promotion efforts to
the Company's general market. Interest credited in 1999 was approximately
$4.3 million.
Borrowed money increased $26.3 million, or 24.9%, to $132.0 million at
March 31, 1999 from $105.7 million at March 31, 1998. FHLB advances
increased $26.2 million, or 25.2%, to $130.2 million at March 31, 1999 from
$104.0 million at March 31, 1998. Proceeds from these advances were used to
fund increased investment and mortgage-backed securities. Other borrowed
money increased $147,000, or 8.8%, to $1.8 million at March 31, 1999 from
$1.7 million at March 31, 1998. These short-term borrowings relate primarily
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 decreased $230,000, or 0.9%, to $25.6 million
at March 31, 1999 from $25.8 million at March 31, 1998. The decrease was
primarily attributable to the Company's purchase of common stock to be used
for restricted stock awards, net of amortization, totaling $619,000 and
treasury stock totaling $166,000, in addition to fair market value decline of
investment and mortgage-backed securities available for sale of $259,000 and
common stock dividends totaling $568,000; offset by net income of $1.1
million and a reduction in ESOP indebtedness of $142,000 during the year
ended March 31, 1999.
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO MARCH 31, 1998
NET INCOME
Net income decreased $110,000, or 8.9%, to $1.1 million in 1999 from
$1.2 million in 1998. The decrease was primarily the result of increased
noninterest expense of $1.9 million, or 33.4%, offset by increased net
interest income of $252,000, or 5.1%, increased noninterest income of $1.4
million, or 47.1%, decreased provision for losses on loans of $116,000, or
100.0% and decreased income taxes of $70,000, or 9.0%.
INTEREST INCOME
Interest income increased $2.9 million, or 19.6%, to $17.6 million in
1999 from $14.7 million in 1998. Interest on loans receivable decreased by
$400,000, or 4.9%, to $7.7 million in 1999 as compared to $8.1 million in
1998. This decrease was the result of a decrease in the average balance of
loans outstanding of $8.5 million from $107.3 million in 1998 to $98.8
million in 1999, offset by an increase in the average yield on loans from
7.55% in 1998 to 7.80% in 1999. The lower average balance of loans
outstanding for 1999 reflects a decrease in mortgage loan portfolio lending
and increased repayments due to low interest rates, offset by increased
secured commercial lending. Interest on investment
37
<PAGE> 40
securities decreased $1.0 million, or 20.2%, from $5.2 million in 1998 to $4.1
million in 1999, due to a decrease in the average balance of investment
securities of $14.4 million from $77.4 million in 1998 to $63.0 million in
1999. During the same period the yield on investment securities decreased from
6.13% in 1998 to 5.91% in 1999. Interest income on mortgage-backed securities
increased $4.2 million, or 361.3%, from $1.2 million in 1998 to $5.3 million in
1999 due to an increase in the average balances of mortgage-backed securities
of $72.5 million from $16.8 million in 1998 to $89.3 million in 1999, offset by
a decrease in the yield on mortgage-backed securities from 6.86% in 1998 to
5.96% in 1999.
INTEREST EXPENSE
Interest expense increased $2.6 million, or 27.0%, to $12.4 million in
1999 from $9.7 million in 1998. The increase resulted primarily from
increased FHLB advances. Average advances from the FHLB increased $49.8
million from $76.2 million in 1998 to $126.0 million in 1999. The increase
was primarily the result of borrowings used to fund increased investments in
mortgage-backed securities. The weighted average cost of FHLB advances
increased from 5.29% in 1998 to 5.41% in 1999. Average deposit balances
decreased $3.3 million from $126.6 million in 1998 to $123.3 million in 1999.
During the same period, the weighted average cost of deposits decreased from
4.45% to 4.43% due to a higher concentration of money market demand accounts
and a 14 basis point decrease in the average cost of certificates of deposit.
PROVISION FOR LOSSES ON LOANS
Provision for losses on loans was $-0- in 1999 as compared to $116,000
in 1998. The provision for loan losses is determined by management as the
amount to be added to the allowance for loan losses after net charge-offs
have been deducted to bring the allowance to a level which is considered
adequate to absorb losses inherent in the loan portfolio. ESB's allowance
for loan losses totaled $366,000 at March 31, 1999 and $374,000 at March 31,
1998. The allowance for loan losses is established through a provision for
loan losses charged to expense. While ESB maintains its allowance for losses
at a level which it considered to be adequate, there can be no assurances
that further additions will not be made to the allowance or that such losses
will not exceed the estimated amounts.
NONINTEREST INCOME
Noninterest income increased $1.4 million, or 47.1%, to $4.2 million in
1999 from $2.9 million in 1998. The increase is due primarily to gain on
sale of mortgage loans which increased from $1.7 million in 1998 to $2.7
million in 1999, increased loan servicing fees and late charges which
increased $65,000 from $547,000 in 1998 to $611,000 in 1999, increased gain
on sale of real estate of $147,000 due to Equality Commodity Corporation's
sale of its 50% ownership interest in WC Joint Venture, a direct investment,
and one investment property, and increased gain on sale of investments of
$125,000 from $41,000 in 1998 to $166,000 in 1999. The increase of $950,000,
or 55.2%, on gain on sale of mortgage loans was due to a continued
improvement in market interest rates during calendar year 1999. In 1999,
ESB, through EMC, sold $184.8 million of mortgage loans as compared to $105.4
million in 1998. The increased sales volume of $79.4 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
$65,000, or 11.8%, due primarily to an increase in the average servicing
portfolio of EMC. Average loan servicing by EMC increased $29.2 million, or
8.6%, from $340.1 million in 1998 to $369.2 million in 1999.
NONINTEREST EXPENSE
Noninterest expense $1.9 million, or 33.4%, to $7.6 million in
1999 from $5.7 million in 1998, due primarily to increased salaries and
employee benefits of $1.1 million, or 33.3%, from $3.4 million in 1998 to
$4.5 million in 1999, increased advertising expenses of $158,000, or 128.0%,
from $124,000 in 1998 to $282,000 in 1999 and increased other expenses of
$486,000, or 37.3%, from $1.3 million in 1998 to $1.8 million in 1999.
Increased salary and employee benefits are the direct result of increased
commissions paid to mortgage loan origination personnel of $169,000, or
42.5%, from $398,000 in 1998 to $567,000 in 1999, general wage increases and
an increase in five bank personnel to staff the new Washington branch
facility, in addition to ESOP and MRP compensation expenses which increased
$308,000 in 1999 as compared to 1998. Advertising expenses increased as a
result of marketing promotions during 1999 for ESB's relocated bank office,
newly opened Washington, Missouri facility and overall promotion of ESB.
Other expenses increased due primarily to an increase in expenses totaling
$155,000 in connection with professional
38
<PAGE> 41
services and taxes for Equality with no comparable items in 1998, increases in
supplies and services associated with increased mortgage loan activity and an
increased number of ESB branch facilities.
INCOME TAXES
Income tax expense decreased $70,000, or 9.0%, to $708,000 in 1999 from
$778,000 in 1998. The decrease was the result of the decrease in income
before income tax expense of $180,000. The effective tax rate was
approximately 38.5% and 38.6% in 1999 and 1998, respectively.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO MARCH 31, 1997
NET INCOME
Net income increased $734,000, or 145.5%, to $1.2 million in 1998 from
$505,000 in 1997. The increase was primarily the result of increased net
interest income of $457,000, or 10.2%, increased noninterest income of
$498,000 or 20.9%, and reduced noninterest expense of $320,000, or 5.3%,
offset by increased income taxes of $474,000, or 156.3%. 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 ESB was assessed a one-time FDIC insurance
premium of $789,000 on September 30, 1996. The net of tax effect reduced
fiscal 1997 net income by $481,000. There was no comparable item in 1998.
INTEREST INCOME
Interest income increased $1.1 million, or 7.9%, from $13.6 million in
1997 to $14.7 million in 1998. Interest on loans receivable increased by
$655,000, or 8.8%, to $8.1 million in 1998 as compared to $7.4 million in
1997. This increase was primarily due to an increase in the average balance
of loans outstanding from $98.3 million in 1997 to $107.3 million in 1998,
offset by a decrease in the yield on loans from 7.58% in 1997 to 7.55% in
1998. The higher average balance of loans outstanding in 1998 reflects an
increase in consumer and commercial business lending. Interest on investment
securities increased $817,000, or 20.8%, from $3.9 million in 1997 to $4.7
million in 1998 due to an increase in the average balance of investment
securities from $63.7 million in 1997 to $77.4 million in 1998, offset by a
decrease in the yield on investment securities from 6.17% in 1997 to 6.13% in
1998. Interest income on mortgage-backed securities decreased $377,000, or
24.6% from $1.5 million in 1997 to $1.2 million in 1998 due to a decrease in
the yield on mortgage-backed securities from 7.03% in 1997 to 6.86% in 1998,
accompanied by a decrease in the average balances from $21.8 million in 1997
to $16.8 million in 1998.
INTEREST EXPENSE
Interest expense increased $613,000, or 6.7%, to $9.7 million in 1998
from $9.1 million in 1997. The increase resulted primarily from increased
average savings deposit balances and average increased FHLB advances. Average
deposit balances increased from $122.7 million in 1997 to $126.6 million in
1998, accompanied by a decrease in the weighted average cost of deposits from
4.63% in 1997 to 4.45% in 1998, due to the effects of increased average
passbook balances, which carry substantially lower interest rates than
certificates of deposit.
Average advances from the FHLB increased from $61.9 million in 1997 to
$76.2 million in 1998. 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 from 5.46% in
1997 to 5.29% in 1998 due to lower cost borrowing programs offered by the
FHLB.
PROVISION FOR LOSSES ON LOANS
Provision for losses on loans increased $66,000, or 131.0%, to $116,000
in 1998 from $50,000 in 1997. The provision for loan losses is determined by
management as the amount to be added to the allowance for loan losses after
net charge-offs have been deducted to bring the allowance to a level which is
considered adequate to absorb losses inherent in the loan portfolio. The
increased provision in 1998 was the result of management's decision to
increase the allowance due to the increase in commercial business loans,
which generally have more risk than residential mortgage loans. ESB's
allowance for loan losses totaled $374,000 at March 31, 1998 and $283,000 at
March 31, 1997. The
39
<PAGE> 42
allowance for loan losses is established through a provision for loan losses
charged to expense. While ESB maintains its allowance for losses at a level
which it considers to be adequate, there can be no assurances that further
additions will not be made to the allowance or that such losses will not exceed
the estimated amounts.
NONINTEREST INCOME
Noninterest income increased $498,000, or 20.9%, to $2.9 million in 1998
from $2.4 million in 1997. The increase is due primarily to gain on sale of
mortgage loans which increased from $1.1 million in 1997 to $1.7 million in
1998. Also, during 1997, ECC sold a 26 unit residential property at a gain
of $106,000 with no comparable gain in 1998. The increase of $602,000, or
53.7%, on gain on sale of mortgage loans was due to a continued improvement
in market rates during 1998. In 1998, ESB, through EMC, sold $105.4 million
of mortgage loans as compared to $77.8 million in 1997.
NONINTEREST EXPENSE
Noninterest expense decreased $320,000, or 5.3%, to $5.7 million in 1998
from $6.0 million in 1997. During 1997, legislation was passed by Congress to
capitalize the SAIF and ESB was assessed a one-time FDIC premium of
$789,000. During 1998, federal deposit insurance premiums decreased
$135,000, or 62.4%, from $216,000 in 1997 to $81,000 in 1998 as a result of
reduced premiums from approximately 23 basis points to six basis points in
connection with the SAIF recapitalization. Salaries and employee benefits
increased $482,000, or 16.5%, from $2.9 million in 1997 to $3.4 million in
1998. Increased salary and employee benefits are the direct result of
increased commissions paid to mortgage loan origination personnel, general
wage increases and an increase in commercial loan production personnel. ESB
began a commercial lending function in early 1997 and increased the number of
personnel to five at March 31, 1999. Occupancy expense increased $52,000 as
a result of expenses related to an increase in the number of office
properties and roofing repairs made to office properties.
INCOME TAXES
Income tax expense increased $474,000, or 156.3%, to $778,000 in 1998
from $303,000 in 1997. The effective combined federal and state tax rate was
approximately 38.6% and 37.5% in 1998 and 1997, respectively.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133) which 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. Equality is currently evaluating the requirements and impact of SFAS
133.
ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE
SECURITIZATION OF MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING
ENTERPRISE
In October 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise (SFAS 134) which conforms the subsequent accounting for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise with the subsequent accounting for securities retained after the
securitization of other types of assets by a nonmortgage banking enterprise.
SFAS 134 is effective for the first fiscal quarter beginning after December
15, 1998. Since Equality has not retained any of the mortgage loans it
securitized, SFAS 134 is not expected to have an impact on its consolidated
financial position and results of operations.
40
<PAGE> 43
YEAR 2000 COMPLIANCE
Equality's operations are heavily dependent on the use of computer
systems. The Year 2000 issue centers around the inability of some computer
systems to properly read and interpret dates because many existing computers
and computer programs have been developed to use two digits rather than four
to refer to a year. The risk of system failure and data processing errors may
be the result of this issue.
Equality estimates it will incur costs of approximately $148,000 to
prepare for the century date change. As of March 31, 1999, direct and
indirect expenditures have been approximately $82,500. This includes internal
and external costs that will be expensed as well as capital expenditures that
will be capitalized. Costs include, but are not limited to: salary expenses,
outside service fees (i.e., legal, audit, consulting), hardware and software
expenditures and equipment costs. Funding for Year 2000 costs have been, and
will continue to be, derived from normal operating cash flow.
Equality has focused its efforts on addressing those systems it deems to
be critical to ongoing operations. The company-wide project for addressing
the Year 2000 issue was segmented into five phases, as recommended by
regulators. With regard to internal, mission critical systems, the present
state of each phase was estimated at March 31, 1999 as follows:
<TABLE>
<CAPTION>
Expected Percent
Phase Completion Date Complete
----- --------------- --------
<S> <C> <C>
Awareness December 31, 1997 100%
Assessment June 30, 1998 100
Renovation December 31, 1998 100
Testing March 31, 1999 100
Implementation September 30, 1999 90
</TABLE>
In addition to addressing the readiness of internal systems, Equality
continues to assess the readiness of its major vendors, suppliers, customers
and business partners. Though such efforts have been diligent, there can be
no guarantee that the systems these outside parties supply will be fully
functional in the Year 2000. Such failures could have a material adverse
effect on Equality.
Equality is developing business resumption contingency plans for the
purpose of assuring that core business processes will continue to operate in
the Year 2000. The plan will address failures such as payment system
failures, data processing system failures, increased cash withdrawals,
telecommunication failures, disruption in services provided by outside
parties and customer failures. The contingency plan provides for reasonable
alternatives to potential failures and the establishment of an implementation
strategy, including timeliness and responsibility assignments.
The foregoing discussion of Year 2000 issues is based on management's
most current assessment and estimates. The information utilizes multiple
assumptions of future events, including, but not limited to, the continued
availability of certain resources, the third party efforts and other factors.
There can be no guarantee that the estimates included herein will be
achieved, and actual costs and results could differ materially from the
estimates currently anticipated by Equality.
41
<PAGE> 44
ITEM 7. FINANCIAL STATEMENTS
- ------------------------------
Index to Consolidated Financial Statements
- ------------------------------------------
Independent Auditors' Report 43
Consolidated Balance Sheets 44
Consolidated Statements of Income 45
Consolidated Statements of Stockholders' Equity 46
Consolidated Statements of Cash Flows 47
Consolidated Statements of Comprehensive Income 48
Notes to Consolidated Financial Statements 49
42
<PAGE> 45
[letterhead of KPMG]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Equality Bancorp, Inc.
St. Louis, Missouri:
We have audited the accompanying consolidated balance sheets of Equality
Bancorp, Inc. and subsidiaries (Equality) as of March 31, 1999 and 1998, and
the related consolidated statements of income, stockholders' equity, cash
flows and comprehensive income for each of the years in the three-year period
ended March 31, 1999. These consolidated financial statements are the
responsibility of Equality's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We
did not audit the financial statements of Equality Mortgage Corporation (a
consolidated subsidiary), which statements reflect total assets constituting
3% and 6% in 1999 and 1998, respectively, and total interest income and
noninterest income constituting 20%, 19% and 16%, in 1999, 1998 and 1997,
respectively, of the related consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Equality Mortgage
Corporation, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits, and the report
of the other auditors, provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Equality Bancorp, Inc. and
subsidiaries as of March 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year
period ended March 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
St. Louis, Missouri
May 1, 1999
43
<PAGE> 46
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1999 and 1998
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Cash, primarily interest-bearing demand accounts $ 6,449,613 1,070,538
Interest-bearing deposits 1,085,000 1,378,000
Investment securities:
Available for sale, at fair value 81,635,339 68,897,156
Held to maturity, at amortized cost 600,000 2,600,000
Mortgage-backed securities available for sale,
at fair value 90,810,783 58,512,089
Loans receivable, net 90,230,677 108,415,421
Investment in real estate 58,054 734,317
Stock in Federal Home Loan Bank 6,911,100 5,200,000
Mortgage servicing rights 1,479,631 837,597
Office properties and equipment, net 6,451,357 5,574,287
Accrued interest receivable and other assets 2,725,620 2,330,908
------------ -----------
$288,437,174 255,550,313
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits $128,953,826 119,301,376
Accrued interest payable on savings deposits 200,280 134,203
Borrowed money 132,010,050 105,678,694
Advance payments by borrowers for taxes and insurance 69,634 105,950
Income taxes payable 203,588 696,192
Deferred income taxes 873,343 871,839
Accrued expenses and other liabilities 518,723 2,924,244
------------ -----------
Total liabilities 262,829,444 229,712,498
------------ -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value per share; 1,000,000
shares authorized; none issued and outstanding -- --
Common stock, $.01 and $1 par value per share;
4,000,000 shares authorized; 2,519,793 shares
and 2,505,855 shares issued and outstanding at
March 31, 1999 and 1998, respectively 25,198 25,059
Additional paid-in capital 16,108,269 15,997,241
Retained earnings 11,255,324 10,694,400
Accumulated other comprehensive income 139,464 398,219
Treasury stock, at cost; 18,500 shares (166,431) --
Unearned Employee Stock Ownership Plan shares (1,134,769) (1,277,104)
Unamortized restricted stock awards (619,325) --
------------ -----------
Total stockholders' equity 25,607,730 25,837,815
------------ -----------
$288,437,174 255,550,313
============ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
44
<PAGE> 47
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended March 31, 1999, 1998, and 1997
<CAPTION>
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 7,703,347 8,103,429 7,448,854
Investment securities and interest-bearing deposits 4,121,848 5,163,526 4,399,442
Mortgage-backed securities 5,321,365 1,153,512 1,530,005
Other 411,861 259,843 231,968
----------- ---------- ----------
Total interest income 17,558,421 14,680,310 13,610,269
----------- ---------- ----------
Interest expense:
Savings deposits 5,458,146 5,633,692 5,682,184
Advances from Federal Home Loan Bank 6,821,775 4,031,314 3,377,929
Other borrowed money 71,507 60,376 51,976
----------- ---------- ----------
Total interest expense 12,351,428 9,725,382 9,112,089
----------- ---------- ----------
Net interest income 5,206,993 4,954,928 4,498,180
Provision for losses on loans -- 115,513 50,000
----------- ---------- ----------
Net interest income after provision
for losses on loans 5,206,993 4,839,415 4,448,180
----------- ---------- ----------
Noninterest income:
Gain on sales of mortgage loans 2,673,260 1,722,985 1,120,907
Loan servicing fees and late charges 611,111 546,611 562,009
Gain on sale of investment and mortgage-
backed securities available for sale, net 166,388 41,044 7,284
Equity in loss of joint venture (54,430) (44,109) (2,433)
Rental income 142,802 126,811 172,581
Gain on sale of real estate 148,391 1,154 113,571
Other 549,710 486,988 409,880
----------- ---------- ----------
Total noninterest income 4,237,232 2,881,484 2,383,799
----------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 4,531,202 3,399,859 2,917,772
Occupancy 598,632 533,378 481,620
Data processing 332,438 261,397 192,333
Advertising 282,103 123,707 90,363
Federal insurance premiums 72,422 81,428 216,451
Savings Association Insurance Fund special assessment -- -- 788,770
Other 1,790,501 1,304,296 1,336,439
----------- ---------- ----------
Total noninterest expense 7,607,298 5,704,065 6,023,748
----------- ---------- ----------
Income before income tax expense 1,836,927 2,016,834 808,231
Income tax expense 707,647 777,668 303,459
----------- ---------- ----------
Net income $ 1,129,280 1,239,166 504,772
=========== ========== ==========
Earnings per share:
Basic $ 0.48 0.51 0.21
Diluted 0.47 0.51 0.21
=========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
45
<PAGE> 48
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended March 31, 1999, 1998, and 1997
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER COMPRE-
-------------------------- PAID-IN RETAINED HENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME
--------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, March 31, 1996 836,400 $ 836,400 2,759,797 9,402,887 (47,232)
Net income -- -- -- 504,772 --
Amortization of ESOP awards -- -- 8,751 -- --
Dividend declared on nonmutual holding
company owned common stock at
$.62 per share -- -- -- (232,983) --
Other comprehensive income (loss),
net of tax -- -- -- -- (462,291)
--------- --------- ---------- ---------- ---------
Balance, March 31, 1997 836,400 836,400 2,768,548 9,674,676 (509,523)
Net income -- -- -- 1,239,166 --
Net proceeds from sale of common
stock of Equality Bancorp, Inc. 1,322,500 13,225 12,297,206 -- --
Cancellation of Equality Savings
and Loan Association, F.A.
common stock owned by
First Missouri Financial, M.H.C. (445,000) (445,000) 445,000 -- --
Cancellation of Equality Savings
and Loan Association, F.A.
common stock owned by
minority stockholders (391,400) (391,400) 391,400 -- --
Issuance of common stock of
Equality Bancorp, Inc. to minority
stockholders of Equality Savings
and Loan Association, F.A. 1,163,402 11,634 (11,634) -- --
Capital contribution from
First Missouri Financial, M.H.C. -- -- -- 50,000 --
Exercise of stock options 19,953 200 68,716 -- --
Tax benefit of stock options exercised -- -- 10,328 -- --
Amortization of ESOP awards -- -- 27,677 -- --
Dividend declared on nonmutual
holding company owned
common stock at $.34 per share -- -- -- (128,322) --
Dividend declared on common stock of
Equality Bancorp, Inc. at $.06 per share -- -- -- (141,120) --
Other comprehensive income (loss),
net of tax -- -- -- -- 907,742
--------- --------- ---------- ---------- ---------
Balance, March 31, 1998 2,505,855 25,059 15,997,241 10,694,400 398,219
Net income -- -- -- 1,129,280 --
Exercise of stock options 13,938 139 60,594 -- --
Tax benefit of stock options exercised -- -- 4,247 -- --
Purchase of stock for restricted stock awards -- -- -- -- --
Purchase of treasury stock -- -- -- -- --
Amortization of stock awards -- -- -- -- --
Amortization of ESOP awards -- -- 46,187 -- --
Dividend declared on common stock of
Equality Bancorp, Inc. at $.24 per share -- -- -- (568,356) --
Other comprehensive income (loss),
net of tax -- -- -- -- (258,755)
--------- --------- ---------- ---------- ---------
Balance, March 31, 1999 2,519,793 $ 25,198 16,108,269 11,255,324 139,464
========= ========= ========== ========== =========
<CAPTION>
UNEARNED
EMPLOYEE
STOCK UNAMORTIZED TOTAL
OWNERSHIP RESTRICTED STOCK-
TREASURY PLAN STOCK HOLDERS'
STOCK SHARES AWARDS EQUITY
-------- --------- ----------- --------
<S> <C> <C> <C> <C>
Balance, March 31, 1996 -- (162,440) -- 12,789,412
Net income -- -- -- 504,772
Amortization of ESOP awards -- 26,600 -- 35,351
Dividend declared on nonmutual holding
company owned common stock at
$.62 per share -- -- -- (232,983)
Other comprehensive income (loss),
net of tax -- -- -- (462,291)
-------- ---------- -------- ----------
Balance, March 31, 1997 -- (135,840) -- 12,634,261
Net income -- -- -- 1,239,166
Net proceeds from sale of common
stock of Equality Bancorp, Inc. -- (1,198,060) -- 11,112,371
Cancellation of Equality Savings
and Loan Association, F.A.
common stock owned by
First Missouri Financial, M.H.C. -- -- -- --
Cancellation of Equality Savings
and Loan Association, F.A.
common stock owned by
minority stockholders -- -- -- --
Issuance of common stock of
Equality Bancorp, Inc. to minority
stockholders of Equality Savings and
Loan Association, F.A. -- -- -- --
Capital contribution from
First Missouri Financial, M.H.C. -- -- -- 50,000
Exercise of stock options -- -- -- 68,916
Tax benefit of stock options exercised -- -- -- 10,328
Amortization of ESOP awards -- 56,796 -- 84,473
Dividend declared on nonmutual
holding company owned
common stock at $.34 per share -- -- -- (128,322)
Dividend declared on common stock of
Equality Bancorp, Inc. at $.06 per share -- -- -- (141,120)
Other comprehensive income (loss),
net of tax -- -- -- 907,742
-------- ---------- -------- ----------
Balance, March 31, 1998 -- (1,277,104) -- 25,837,815
Net income -- -- -- 1,129,280
Exercise of stock options -- -- -- 60,733
Tax benefit of stock options exercised -- -- -- 4,247
Purchase of stock for restricted stock
awards -- -- (739,456) (739,456)
Purchase of treasury stock (166,431) -- -- (166,431)
Amortization of stock awards -- -- 120,131 120,131
Amortization of ESOP awards -- 142,335 -- 188,522
Dividend declared on common stock of
Equality Bancorp, Inc. at $.24 per share -- -- -- (568,356)
Other comprehensive income (loss),
net of tax -- -- -- (258,755)
-------- ---------- -------- ----------
Balance, March 31, 1999 (166,431) (1,134,769) (619,325) 25,607,730
======== ========== ======== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
46
<PAGE> 49
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 1999, 1998, and 1997
<CAPTION>
1999 1998 1997
------------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,129,280 1,239,166 504,772
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization:
Office properties and equipment 237,834 272,470 280,383
Real estate investments 7,508 11,261 17,140
Premiums and discounts, net (366,626) 26,339 216,824
Mortgage servicing rights 680,338 383,812 185,281
Stock awards 120,131 -- --
Decrease (increase) in accrued interest receivable (291,773) 52,687 (221,226)
Provision for losses on loans -- 115,513 50,000
Gain on sale of mortgage loans (2,673,260) (1,722,985) (1,120,907)
Increase (decrease) in valuation reserve on loans
held for sale (10,517) 53,652 (80,291)
Gain on sale of real estate (148,391) (1,154) (113,571)
Gain on the sale of investment and mortgage-backed
securities available for sale, net (166,388) (41,044) (7,284)
Increase (decrease) in accrued interest payable on
savings deposits 66,077 (396) 32,457
Change in income taxes payable (492,604) 596,329 228,326
Equity in loss of joint ventures 54,430 44,109 2,433
Other, net (2,429,385) 2,735,473 26,476
Origination and purchases of loans held for sale (177,318,757) (115,459,407) (69,850,656)
Proceeds from sales of loans held for sale 187,521,731 107,056,970 78,960,183
------------- ------------ -----------
Net cash provided by (used in) operating activities 5,919,628 (4,637,205) 9,110,340
------------- ------------ -----------
Cash flows from investing activities:
Net decrease (increase) in loans receivable 10,711,331 (2,546,296) (7,017,916)
Decrease in interest-bearing deposits 293,000 2,441,744 5,750,746
Principal repayments on investment securities available for sale 40,641 -- 476,709
Principal repayments on mortgage-backed securities
available for sale 33,071,367 3,134,164 4,584,586
Proceeds from maturities of investment securities
available for sale 67,770,704 66,524,057 11,935,000
Proceeds from the sale of investment securities
available for sale 41,459,748 50,716,621 28,377,443
Proceeds from the sale of mortgage-backed securities
available for sale 26,459,805 10,035,942 22,254,028
Proceeds from maturities of investment securities
held to maturity 2,000,000 2,250,000 1,000,000
Purchase of investment securities available for sale (120,808,643) (114,672,471) (72,469,418)
Purchase of mortgage-backed securities available for sale (92,917,447) (56,569,108) (14,211,212)
Proceeds from the sale of real estate acquired
through foreclosure -- 83,995 178,249
Proceeds from the sale of real estate held for investment 344,290 -- 1,071,372
Decrease in joint venture borrowings 649,047 13,865 12,513
Purchase of stock in FHLB (1,711,100) (1,850,000) (200,000)
Increase in mortgage servicing rights (1,322,372) (708,134) (437,489)
Purchase of office properties and equipment, net (1,114,904) (2,913,166) (79,135)
------------- ------------ -----------
Net cash used in investing activities (35,074,533) (44,058,787) (18,774,524)
------------- ------------ -----------
Cash flows from financing activities:
Net increase (decrease) in savings deposits 9,652,450 (3,681,578) (1,532,416)
Proceeds from FHLB advances 36,500,000 106,500,000 101,000,000
Repayment of FHLB advances (10,315,733) (65,500,000) (94,000,000)
Proceeds from other borrowed money 147,089 565,730 --
Repayment of other borrowed money -- (135,840) (56,602)
Cash dividends paid (568,356) (269,442) (232,983)
Increase (decrease) in advance payments by borrowers
for taxes and insurance (36,316) 19,174 (26,908)
Proceeds from sale of common stock -- 11,112,371 --
Capital contribution from First Missouri Financial, M.H.C. -- 50,000 --
Proceeds from exercise of stock options 60,733 68,916 --
Purchase of stock for restricted stock awards (739,456) -- --
Purchase of treasury stock (166,431) -- --
------------- ------------ -----------
Net cash provided by financing activities 34,533,980 48,729,331 5,151,091
------------- ------------ -----------
Net increase (decrease) in cash and cash equivalents 5,379,075 33,339 (4,513,093)
Cash and cash equivalents, beginning of year 1,070,538 1,037,199 5,550,292
------------- ------------ -----------
Cash and cash equivalents, end of year $ 6,449,613 1,070,538 1,037,199
============= ============ ===========
Supplemental disclosure of cash flow information:
Interest paid $ 12,285,351 9,725,778 9,079,632
Income taxes paid 1,030,012 75,958 989
Noncash transfers of loans to real estate acquired
through foreclosure -- 19,674 253,689
============= ============ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
47
<PAGE> 50
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended March 31, 1999, 1998, and 1997
<CAPTION>
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Net income $1,129,280 1,239,166 504,772
Other comprehensive income (loss):
Net unrealized gain (loss) on investment and mortgage-
backed securities available for sale, net of tax (157,258) 932,779 (457,848)
Less adjustment for loss (gain) on sale
of investment and mortgage-backed
securities available for sale realized in net
income, net of tax of $64,891, $16,007, and
$2,841 in 1999, 1998, and 1997, respectively (101,497) (25,037) (4,443)
---------- --------- --------
Total other comprehensive income (loss) (258,755) 907,742 (462,291)
---------- --------- --------
Comprehensive income $ 870,525 2,146,908 42,481
========== ========= ========
See accompanying notes to consolidated financial statements.
</TABLE>
48
<PAGE> 51
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Following are the significant accounting policies which Equality
Bancorp, Inc. and subsidiaries (Equality) follow in preparing and
presenting their consolidated financial statements:
REORGANIZATION TO A STOCK CORPORATION
On December 1, 1997, First Missouri Financial, M.H.C., a
federally chartered mutual holding company whose primary asset
was 445,000 shares, or 53.2%, of the total issued and outstanding
shares of Equality Savings and Loan Association, F.A. (the
Association), completed its conversion (the Conversion) from a
mutual holding company to a Delaware stock corporation (Equality
Bancorp, Inc.) with Equality Savings and Loan Association, F.A.,
changing its name to Equality Savings Bank (ESB). At the date of
the Conversion, Equality completed the sale of 1,322,500 shares
of common stock, $.01 par value, at a price of $10.00 per share
to the Association's depositors, Employee Stock Ownership Plan
(ESOP), and minority stockholders in a subscription offering.
Net proceeds from the sale of common stock were $11,112,371,
after deducting $914,569 of offering expenses and $1,198,060
related to the sale of 119,806 shares to the ESOP.
In conjunction with the subscription offering, an additional
1,163,402 shares of common stock were issued by Equality to
convert 391,400 shares of the Association's common stock held by
minority stockholders into common stock of Equality. Each share
of common stock in the above transaction was converted into the
right to receive 2.9724 shares of Equality's common stock. All
prior year per share data has been restated to give effect to
this exchange of common stock.
BUSINESS
Equality provides a full range of banking services to individual
and corporate customers from its home office and four branch
locations in the St. Louis area. In addition, Equality provides
mortgage lending services from five locations. Equality is
subject to competition from other financial institutions, is
subject to the regulations of certain regulatory agencies, and
undergoes periodic examinations by those regulatory authorities.
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. In the
normal course of business, Equality encounters two significant
types of risk: economic and regulatory. Economic risk is
comprised of interest rate risk, credit risk and market risk.
Equality is subject to interest rate risk to the degree that its
interest-bearing liabilities reprice on a different basis than
its interest-earning assets. Credit risk is the risk of default
on Equality's loan portfolio that results from the borrowers'
inability or unwillingness to make contractually required
payments. Market risk reflects changes in the value of
collateral underlying loans receivable and the value of
Equality's investment in real estate.
(Continued)
49
<PAGE> 52
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
Management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare the
consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from
those estimates. The determination of the allowance for loan
losses is based on estimates that are particularly susceptible to
changes in the economic environment and market conditions. This
balance may be adjusted in the future based on such changes, or
based on the results of regulatory examinations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Equality Bancorp, Inc. and its wholly owned subsidiary, Equality
Savings Bank. Equality Savings Bank has two wholly owned
subsidiaries, Equality Commodity Corporation (ECC) and Equality
Mortgage Corporation (EMC). All significant intercompany
accounts and transactions have been eliminated in consolidation.
ECC operates under the name of Equality Insurance Agency and
Flood Information Specialists and is a wholly owned subsidiary of
ESB. ECC's services and activities include sales of multiple
lines of insurance to the general public and the issuance of
flood plain certificates. EMC operates as a mortgage banker and
is a wholly owned subsidiary of ESB.
RESTRICTED CASH
Included in cash is $98,740 and $145,164 at March 31, 1999 and
1998, respectively, which consist of assistance funds held by EMC
on behalf of mortgagors participating in a subsidy program. The
subsidy is passed through to the investors monthly.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
At the time of purchase, investment and mortgage-backed
securities are classified as available for sale or held to
maturity. Held to maturity securities are those securities which
Equality has the ability and intent to hold until maturity. All
equity securities, and debt securities not classified as held to
maturity, are classified as available for sale.
Available for sale securities are recorded at fair value. Held
to maturity securities are recorded at amortized cost, adjusted
for the amortization of premiums or discounts. Unrealized gains
and losses, net of the related tax effect, on available for sale
securities are excluded from earnings and reported as a separate
component of stockholders' equity until realized. Gains and
losses on the sale of available for sale securities are
determined using the specific identification method.
A decline in the fair value of any available for sale or held to
maturity security below cost that is deemed to be other than
temporary is charged to earnings and results in the establishment
of a new cost basis for the security.
(Continued)
50
<PAGE> 53
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
LOANS RECEIVABLE AND RELATED FEES
Loans receivable, other than loans held for sale, are carried at
cost because Equality has both the intent and the ability to hold
them for the foreseeable future. Mortgage loans held for sale are
valued at the lower of cost or market, on an aggregate loan
basis. Interest is credited to income as earned; however,
interest receivable is accrued only if deemed collectible. Loans
are placed on nonaccrual status when management believes that the
borrower's financial condition, after consideration of economic
conditions and collection efforts, is such that collection of
interest is doubtful. A loan remains on nonaccrual status until
the loan is current as to payment of both principal and interest
and/or the borrower demonstrates the ability to pay and remain
current.
EMC derives income primarily from the origination and subsequent
sale of mortgage loans and from the servicing of mortgage loans.
EMC recognizes the fees charged as income upon receipt of
proceeds from the sale of the mortgage from the investor.
Mortgages are sold at such times as management deems advisable.
EMC's activities are performed primarily in the St. Louis
metropolitan area.
EMC capitalizes the cost of originated mortgage servicing rights
retained as assets. The cost of the mortgage servicing rights is
being amortized over periods ranging up to eight years using the
straight-line method. A valuation allowance is established when
the carrying value of the mortgage servicing rights exceeds the
fair value.
The allowance for loan losses is increased by provisions charged
to expense and is reduced by loan charge-offs, net of recoveries.
Management utilizes a systematic, documented approach in
determining the appropriate level of the allowance for loan
losses. Management's approach, which provides for general and
specific valuation allowances, considers numerous factors
including general economic conditions, loan portfolio
composition, prior loss experience, independent appraisals and
such other factors which, in management's judgment, deserve
current recognition in estimating loan losses. Management
believes the allowance for loan losses is adequate to absorb
possible losses in the loan portfolio. While management uses
available information to recognize loan losses, future additions
to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review
the allowance for loan losses. Such agencies may require
Equality to increase the allowance for loan losses based on their
judgment about information available to them at the time of their
examination.
PREMIUMS AND DISCOUNTS
Premiums and discounts on investment securities, mortgage-backed
securities and purchased loans and unearned discounts on property
improvement loans are amortized using the interest method over
the period to maturity, adjusted for anticipated prepayments.
FUNDS HELD FOR INVESTORS
EMC holds funds belonging to investors in separate bank accounts
which are offset by liabilities for escrow and other fiduciary
funds. These funds and the related liabilities are not included
in the consolidated balance sheets. These amounts totaled
$2,931,756 and $2,649,381 at March 31, 1999 and 1998,
respectively.
(Continued)
51
<PAGE> 54
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
At March 31, 1999 and 1998, escrow funds related to loans
serviced by EMC for ESB totaled $537,434 and $635,143,
respectively, and are included in savings deposits in the
consolidated balance sheets.
INVESTMENT IN REAL ESTATE
Investment in real estate includes real estate held for
investment, investment in a real estate joint venture and real
estate acquired through foreclosure.
Real estate held for investment is recorded at the lower of cost,
net of accumulated depreciation, or net realizable value.
Depreciation is charged to expense using the straight-line method
over an estimated useful life of 30 years.
Equality accounts for its investment in the real estate joint
venture using the equity method.
Real estate acquired through foreclosure is initially recorded at
fair value. If the fair value of the real estate declines
subsequent to foreclosure, the difference is recorded as a
valuation allowance through a charge to expense. Subsequent
increases in fair value are recorded through a reversal of the
valuation allowance. Expenses incurred in maintaining the
properties are charged to expense.
Profit on sales of real estate is recognized when title has
passed, minimum down payment requirements have been met, the
terms of any notes received are such to satisfy initial and
continuing payment requirements, and Equality is relieved of any
requirement for continued involvement in the real estate.
STOCK IN FEDERAL HOME LOAN BANK
Equality, as a member of the Federal Home
Loan Bank System administered by the Federal Housing Finance Board,
is required to maintain an investment in the capital stock of the
Federal Home Loan Bank of Des Moines (FHLB) in an amount equal to
the greater of 1% of Equality's total mortgage-related assets at
the beginning of each year, 0.3% of Equality's total assets at the
beginning of each year or 5% of advances from the FHLB to Equality.
The stock is recorded at cost which represents redemption value.
OFFICE PROPERTIES AND EQUIPMENT
Land is carried at cost. Office buildings and improvements,
furniture and equipment and automobiles are carried at cost, less
accumulated depreciation and amortization. Depreciation and
amortization are charged to expense using the straight-line
method over the estimated useful lives of the related assets.
Useful lives are 10 to 50 years for office buildings and
improvements, 7 to 10 years for furniture and equipment and 5
years for automobiles.
(Continued)
52
<PAGE> 55
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
INCOME TAXES
Equality files a consolidated federal income tax return.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date.
RECLASSIFICATIONS
Certain reclassifications of 1998 and 1997 information have been
made to conform with the 1999 presentation. Such
reclassifications have no effect on previously reported net income.
EARNINGS PER SHARE
Basic earnings per share was computed based upon weighted average
common shares outstanding of 2,371,240, 2,414,131 and 2,440,906
for 1999, 1998 and 1997, respectively. Diluted earnings per
share was computed based upon weighted average common shares and
dilutive potential common shares outstanding of 2,404,607,
2,443,395 and 2,455,228 for 1999, 1998 and 1997, respectively.
Stock options are the only dilutive potential common shares.
Earnings per share information has also been adjusted to reflect
the Conversion and the exchange of each share of common stock of
Equality Savings and Loan Association, F.A. for 2.9724 shares of
Equality's common stock. Only ESOP shares committed to be
released are considered outstanding for purposes of computing
earnings per share. ESOP shares totaling 61,621, 45,014 and
14,213 are considered outstanding for earnings per share
calculation purposes at March 31, 1999, 1998 and 1997,
respectively.
TREASURY STOCK
The purchase of Equality's common stock is recorded at cost. Any
subsequent reissuance is recorded at the average cost basis of
such common stock.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For purposes of the consolidated statements of cash flows, cash
and cash equivalents consist of cash and interest-bearing demand
deposits.
COMPREHENSIVE INCOME
Equality adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, effective January 1, 1998,
which established standards for the reporting and display of
comprehensive income and its components. Equality has elected to
report comprehensive income in a separate financial statement.
(Continued)
53
<PAGE> 56
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
SEGMENT INFORMATION
In 1999, Equality adopted Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise
and Related Information, which established standards for the way
that public enterprises report information about operating
segments in annual financial statements. The services provided by
Equality are classified into two industry segments - retail
banking and mortgage banking.
The retail banking operations of Equality are executed by ESB,
while the mortgage banking operations are carried out by EMC.
Separate financial statements are maintained for each segment,
which identifies each segment's assets and net income. Revenue
from the retail banking segment is derived primarily from net
interest revenue, which includes both interest income and
expense. Revenue from the mortgage banking segment is derived
primarily from the fee income generated from gain on sale of
mortgage loans and loan servicing fees and late charges.
(2) REGULATORY CAPITAL
The capital regulations of the Office of Thrift Supervision
(OTS), as a result of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA), require savings
institutions to have minimum tangible capital equal to 1.5% of
total adjusted assets, a minimum 3% leverage (core capital)
ratio, and an 8% risk-based capital ratio. 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. As of March 31, 1999,
ESB met all OTS capital requirements.
ESB is also subject to the regulatory framework for prompt
corrective action as established by the Federal Deposit Insurance
Corporation Improvement Act (FDICIA). To be categorized as
well-capitalized, an institution must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table below. At March 31, 1999, ESB is considered well
capitalized.
(Continued)
54
<PAGE> 57
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
ESB's actual and required capital amounts and ratios at March 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------------------
TO BE WELL
MINIMUM CAPITALIZED FOR
FOR OTS CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ ------------------- ---------------------
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
----- ------ ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity
ratio to total assets 8.51% $ 24,290,744
Unrealized gain on
investment and
mortgage-backed
securities available
for sale, net of tax (139,464)
----- ------------
Tangible capital, and
ratio to adjusted
total assets 8.39% $ 24,151,280 1.50% $4,318,500
Tier I (core) capital, and
ratio to adjusted
assets 8.39% $ 24,151,280 3.00% $8,637,000 5.00% $14,395,000
Tier I capital, and ratio
to risk-weighted
assets 24.77% $ 24,151,280 6.00% $ 5,848,980
Allowance for loan
losses (general
valuation
allowance) 366,032
----- ------------
25.15% $ 24,517,312 8.00% $7,798,640 10.00% $ 9,748,300
===== ============
Total assets $288,129,000
============
Adjusted total assets $287,900,000
============
Risk-weighted assets $ 97,483,000
============
(Continued)
55
<PAGE> 58
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
<CAPTION>
1998
----------------------------------------------------------------------------
TO BE WELL
MINIMUM CAPITALIZED FOR
FOR OTS CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ ------------------- ---------------------
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
----- ------ ----- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity
ratio to total assets 9.58% $ 24,446,813
Unrealized gain on
investment and
mortgage-backed
securities available
for sale, net of tax (398,219)
Investment in and
advances to
nonincludable
subsidiaries (833,000)
----- ------------
Tangible capital, and
ratio to adjusted
total assets 9.14% $ 23,215,594 1.50% $3,810,066
Tier I (core) capital, and
ratio to adjusted
assets 9.14% $ 23,215,594 3.00% $7,620,132 5.00% $12,700,220
Tier I capital, and ratio
to risk-weighted
assets 26.93% $ 23,215,594 6.00% $ 5,171,880
Allowance for loan
losses (general
valuation
allowance) 344,200
----- ------------
27.33% $ 23,559,794 8.00% $6,895,840 10.00% $ 8,619,800
===== ============
Total assets $255,163,546
============
Adjusted total assets $254,004,407
============
Risk-weighted
assets $ 86,198,000
============
</TABLE>
(Continued)
56
<PAGE> 59
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(3) INVESTMENT SECURITIES
The amortized cost and fair value of investment securities
classified as available for sale at March 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION> GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
1999:
U.S. government and agency
obligations $59,922,329 663,274 85,362 60,500,241
Corporate obligations 21,068,452 4,558 25,642 21,047,368
----------- ------- ------- ----------
Total debt securities 80,990,781 667,832 111,004 81,547,609
Marketable equity securities 87,730 -- -- 87,730
----------- ------- ------- ----------
$81,078,511 667,832 111,004 81,635,339
=========== ======= ======= ==========
1998:
U.S. government and agency
obligations $68,359,039 548,828 10,711 68,897,156
=========== ======= ======= ==========
</TABLE>
The amortized cost and fair value of debt securities classified as
available for sale at March 31, 1999, by contractual maturity, are as
follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- -----
<S> <C> <C>
Due in one year or less $ 500,000 508,750
Due after one year through five years 26,447,914 26,696,504
Due after five years through ten years 30,525,947 30,674,495
Due after ten years 23,516,920 23,667,860
----------- ----------
$80,990,781 81,547,609
=========== ==========
</TABLE>
Proceeds from sales of investment securities during 1999, 1998
and 1997 were approximately $41.5 million, $50.7 million and
$28.4 million, respectively. During 1999, 1998 and 1997, gross
gains of $179,282, $391,171 and $77,173, respectively, and gross
losses of $-0-, $266,974 and $41,296, respectively, were
recognized on these sales.
(Continued)
57
<PAGE> 60
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
The amortized cost and fair value of investment securities
classified as held to maturity at March 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
U.S. government and agency
obligations:
1999 $ 600,000 -- 69,000 531,000
=========== ========== ========== =========
1998 $ 2,600,000 -- 73,000 2,527,000
=========== ========== ========== =========
</TABLE>
The investment security classified as held to maturity at March 31, 1999,
matures on July 30, 2003.
(4) MORTGAGE-BACKED SECURITIES
The amortized cost and fair value of mortgage-backed securities
classified as available for sale at March 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C>
1999:
FNMA $49,511,993 84,140 231,294 49,364,839
FHLMC 17,203,265 8,191 91,914 17,119,542
GNMA 24,423,724 51,481 148,803 24,326,402
----------- ------- ---------- ----------
$91,138,982 143,812 472,011 90,810,783
=========== ======= ========== ==========
Weighted average interest rate at March 31 6.28%
====
1998:
FNMA $28,524,134 71,109 25,082 28,570,161
FHLMC 2,559,036 29,439 8,305 2,580,170
GNMA 27,318,596 73,673 30,511 27,361,758
----------- ------- ---------- ----------
$58,401,766 174,221 63,898 58,512,089
=========== ======= ========== ==========
Weighted average interest rate at March 31 6.38%
====
</TABLE>
(Continued)
58
<PAGE> 61
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
The amortized cost and fair value of mortgage-backed securities
classified as available for sale at March 31, 1999, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities due to scheduled repayments and because
borrowers have the right to prepay obligations with or without
prepayment penalties. The following table does not take into
consideration the effects of scheduled repayments or the effects
of possible prepayments.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- -----
<S> <C> <C>
Due in one year or less $ 609,887 612,282
Due after one year through five years 665,829 668,176
Due after five years through ten years 6,334,109 6,283,662
Due after ten years 83,529,157 83,246,663
----------- ----------
$91,138,982 90,810,783
=========== ==========
</TABLE>
Proceeds from the sale of mortgage-backed securities during 1999,
1998 and 1997 were approximately $26.5 million, $10.0 million and
$22.3 million, respectively. During 1999, 1998 and 1997, gross
gains of $32,802, $5,880 and $97,917, respectively, and gross
losses of $45,696, $89,033 and $126,510, respectively, were
recognized on these sales.
(Continued)
59
<PAGE> 62
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(5) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Loans secured by real estate:
Residential:
One- to four-family:
Conventional $54,525,316 67,542,904
FHA and VA 10,629,163 11,718,426
Multifamily 1,429,600 1,381,749
Commercial 4,381,981 2,683,582
Loans held for sale 7,021,322 14,523,036
----------- -----------
Total loans secured by real estate 77,987,382 97,849,697
----------- -----------
Commercial business 9,642,046 8,153,453
Loans secured by savings deposits 254,014 391,010
Property improvement 1,481,520 1,727,691
Automobiles 1,042,031 616,911
Other 267,739 157,183
----------- -----------
Total loans 90,674,732 108,895,945
Less:
Loans in process -- 3,000
Deferred loan fees, net 25,086 36,840
Unearned discounts 4,999 8,029
Allowance for loan losses 366,032 374,200
Valuation reserve on loans held for sale 47,938 58,455
----------- -----------
$90,230,677 108,415,421
=========== ===========
Weighted average interest rate at March 31 7.63% 7.76%
=========== ===========
</TABLE>
Adjustable rate mortgages at March 31, 1999 and 1998 totaled
approximately $39.0 million and $53.0 million, respectively.
At March 31, 1999 and 1998, loans secured by real estate
contractually delinquent 90 days or more totaled $700,889 and
$852,715, respectively. Of these amounts, $485,574 and $833,241,
respectively, were insured by the Federal Housing Administration
or guaranteed by the Veterans Administration. No loans were
deemed by management to be impaired at March 31, 1999 or 1998.
(Continued)
60
<PAGE> 63
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
EMC had commitments to sell loans of approximately $9.0 million
and $12.0 million at March 31, 1999 and 1998, respectively.
Loans serviced by EMC at March 31, 1999, 1998 and 1996 are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
For ESB $ 71,495,259 85,638,732 90,600,283
For others 297,751,904 254,415,299 232,430,243
------------ ----------- -----------
$369,247,163 340,054,031 323,030,526
============ =========== ===========
</TABLE>
Activity in the allowance for loan losses is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year $374,200 283,000 233,000
Provision charged to expense -- 115,513 50,000
Charge-offs (8,168) (24,313) --
-------- ------- -------
Balance, end of year $366,032 374,200 283,000
======== ======= =======
</TABLE>
Following is a summary of activity for 1999 of loans made to
executive officers and directors or to entities in which such
individuals had beneficial interest. Such loans were made in the
normal course of business on substantially the same terms,
including interest and collateral requirements, as those
prevailing at the same time for comparable transactions with other
persons and did not involve more than the normal risk of
collectibility or present unfavorable features.
<TABLE>
<S> <C>
Balance at March 31, 1998 $1,507,210
Payments received (77,463)
----------
Balance at March 31, 1999 $1,429,747
==========
</TABLE>
(6) INVESTMENT IN REAL ESTATE
Investment in real estate is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Real estate held for investment $58,054 279,784
Investment in real estate joint venture:
Equity in operations -- (194,514)
Loan to real estate joint venture -- 649,047
------- --------
$58,054 734,317
======= ========
</TABLE>
At March 31, 1998, the investment in real estate joint venture
consisted of the WC Joint Venture, a 50%-owned venture formed in
1986.
(Continued)
61
<PAGE> 64
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(7) MORTGAGE SERVICING RIGHTS
The cost of mortgage servicing rights capitalized and the
resulting increase in gain on sale of mortgage loans amounted to
$1,392,501, $768,801 and $483,093 in 1999, 1998 and 1997,
respectively. Equality established an impairment reserve of
$209,964, $139,835 and $66,022 in 1999, 1998 and 1997,
respectively. The fair value of the capitalized mortgage
servicing rights was approximately $2,597,000 and $1,513,000 at
March 31, 1999 and 1998, respectively. The fair value was
estimated based on quoted market prices for mortgage servicing
rights of a similar nature. Note rate and loan type are the
predominant characteristics used to evaluate the carrying and
fair value of the capitalized mortgage servicing rights.
(8) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Land $1,583,358 1,446,688
Office buildings and improvements 4,427,565 3,215,426
Furniture and equipment 2,449,769 2,345,405
Automobiles 63,365 61,965
Property held for future expansion 1,133,574 1,691,288
---------- ---------
9,657,631 8,760,772
Less accumulated depreciation and
amortization 3,206,274 3,186,485
---------- ---------
$6,451,357 5,574,287
========== =========
</TABLE>
Depreciation and amortization expense for 1999, 1998 and 1997 was
$237,834, $272,470 and $280,383, respectively.
ESB is obligated under a certain noncancellable lease on a
property. The future minimum lease payments under this lease
totals $90,000 per year for the next 10 years.
(Continued)
62
<PAGE> 65
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(9) ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable and other assets are summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Accrued interest receivable:
Loans receivable $ 461,779 554,529
Interest-bearing deposits 4,008 3,849
Investment securities 927,600 813,496
Mortgage-backed securities 594,483 324,223
---------- ---------
Total accrued interest receivable 1,987,870 1,696,097
Accounts receivable 296,977 260,572
Prepaid expenses 164,946 229,605
Other 275,827 144,634
---------- ---------
$2,725,620 2,330,908
========== =========
</TABLE>
(10) SAVINGS DEPOSITS
Savings deposits are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ----------------------------------------
WEIGHTED WEIGHTED
AVERAGE PERCENT AVERAGE PERCENT
INTEREST OF TOTAL INTEREST OF TOTAL
AMOUNT RATE SAVINGS AMOUNT RATE SAVINGS
------------ ---- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Checking $ 16,082,858 1.13% 12.5% $ 15,289,961 1.04% 12.8%
Passbook savings 20,766,651 2.51 16.1 19,762,521 2.51 16.6
Money market 8,236,660 4.31 6.4 5,516,869 3.07 4.6
------------ ---- ----- ------------ ---- -----
Total demand
deposits 45,086,169 2.34 35.0 40,569,351 2.03 34.0
------------ ---- ----- ------------ ---- -----
Certificates of deposit:
Negotiated rate
($100,000
or more) 2,111,581 5.79 1.6 2,214,167 6.12 1.9
Other 81,756,076 5.45 63.4 76,517,858 5.76 64.1
------------ ---- ----- ------------ ---- -----
Total certificates
of deposit 83,867,657 5.46 65.0 78,732,025 5.77 66.0
------------ ---- ----- ------------ ---- -----
$128,953,826 4.37% 100.0% $119,301,376 4.49% 100.0%
============ ==== ===== ============ ==== =====
</TABLE>
(Continued)
63
<PAGE> 66
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
Certificates of deposit by interest rate ranges are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Less than 3.00% $ -- --% $ 2,792 2.50%
3.00% to 3.99% 16,307 3.00 26,404 3.00
4.00% to 4.99% 17,288,243 4.59 3,213,652 4.22
5.00% to 5.99% 49,392,324 5.40 48,216,444 5.38
6.00% to 6.99% 13,634,306 6.26 15,121,692 6.24
7.00% to 7.99% 2,981,837 7.00 11,634,441 7.00
8.00% and greater 554,640 9.75 516,600 9.75
----------- ---- ----------- -----
$83,867,657 5.46% $78,732,025 5.77%
=========== ==== =========== ====
</TABLE>
Certificates of deposit at March 31, 1999 and 1998 are scheduled
to mature as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Within one year $46,478,826 55.4% $42,429,774 53.9%
Second year 12,329,265 14.7 21,282,173 27.0
Third year 4,943,112 5.9 6,832,276 8.7
Fourth year 13,108,564 15.6 4,563,009 5.8
Thereafter 7,007,890 8.4 3,624,793 4.6
----------- ----- ----------- -----
$83,867,657 100.0% $78,732,025 100.0%
=========== ===== =========== =====
</TABLE>
Interest expense on savings deposits by type is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Checking and money market demand $ 431,004 342,468 320,394
Passbook savings 506,352 663,498 545,808
Certificates of deposit 4,520,790 4,627,726 4,815,982
---------- --------- ---------
$5,458,146 5,633,692 5,682,184
========== ========= =========
</TABLE>
(Continued)
64
<PAGE> 67
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(11) BORROWED MONEY
Borrowed money at March 31, 1999 and 1998 is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Note payable to bank $ 1,825,783 2.25% $ 1,678,694 2.25%
Advances from the FHLB:
Due in 2001 -- -- 10,000,000 5.33
Due in 2003 71,000,000 5.35 71,000,000 5.35
Due in 2008 23,000,000 5.22 23,000,000 5.22
Due in 2009 26,500,000 5.22 -- --
Due in 2014 9,684,267 6.00 -- --
------------ ---- ------------ ----
$132,010,050 5.35% $105,678,694 5.27%
============ ==== ============ ====
</TABLE>
At March 31, 1999, FHLB advances become callable, at the option
of the FHLB, as follows:
<TABLE>
<S> <C>
Presently callable $ 61,000,000
2000 10,000,000
2001 10,000,000
2002 16,500,000
2003 13,000,000
2004 19,684,267
------------
$130,184,267
===========
</TABLE>
The note payable to bank, which is tied to average collected
funds of EMC on deposit at such bank, is due April 23, 1999.
Investment securities with an amortized cost of $4,154,500 and a
fair value of $4,166,055 secure the note payable to bank at March
31, 1999. FHLB advances are secured under a blanket agreement which
assigns all FHLB stock, certain investment securities and mortgage loans
equal to 130% of the outstanding advances balance. Investment
securities with an amortized cost of $90,176,813 and a fair value
of $89,383,632 are pledged to secure advances from the FHLB at
March 31, 1999.
(12) INCOME TAXES
Prior to 1997, if certain conditions were met, savings and loan
associations and savings banks were allowed special bad debt
deductions in determining taxable income based on either
specified experience formulas or on a percentage of taxable
income before such deduction. Bad debt deductions in excess of
actual losses were tax-preference items, and were subject to a
minimum tax.
(Continued)
65
<PAGE> 68
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
Equality used the percentage of taxable income method for the year ended
March 31, 1996 in determining the bad debt deduction for tax purposes.
The special bad debt deduction accorded thrift institutions is
covered under Section 593 of the Internal Revenue Code (IRC). On
August 20, 1996, the Small Business Job Protection Act of 1996
(the Act) was signed into law. The Act included the repeal of
certain portions of Section 593 effective for tax years beginning
after December 31, 1995. As a result, ESB is no longer allowed a
percentage method bad debt deduction. The repeal of the thrift
reserve method generally requires thrift institutions to
recapture into income the portion of tax bad debt reserves
accumulated since 1987 (base year reserve). The recapture will
generally be taken into income ratably over six tax years.
However, if ESB meets a residential loan requirement for tax
years ending in 1998 and 1997, recapture of the reserve can be
deferred until the tax year ending March 31, 1999. At March 31,
1999, ESB had bad debts deducted for tax purposes in excess of
the base year reserve of approximately $204,000. ESB has
recognized a deferred income tax liability on this amount.
Certain events covered by IRC Section 593(e), which was not
repealed, will trigger a recapture of the base year reserve. The
base year reserve of thrift institutions would be recaptured if a
thrift ceases to qualify as a "bank" for federal income tax
purposes. The base year reserves of thrift institutions also
remain subject to income tax penalty provisions which, in
general, require recapture upon certain stock redemptions of, and
excess distributions to, stockholders. At March 31, 1999,
retained earnings included approximately $2.9 million of base
year reserves for which no deferred federal income tax liability
has been recognized.
The composition of income tax expense for 1999, 1998 and 1997 is
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Current:
Federal $499,690 613,427 187,974
State 45,397 69,277 23,752
-------- ------- -------
Total current 545,087 682,704 211,726
Deferred 162,560 94,964 91,733
-------- ------- -------
Total income tax expense $707,647 777,668 303,459
======== ======= =======
</TABLE>
Applicable income taxes for financial reporting purposes differ
from the amount computed by applying the statutory federal
income tax rate of 34% for the reasons noted in the table below:
<TABLE>
<CAPTION>
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Tax at statutory federal income tax rate $624,555 685,724 274,799
State income tax, net of federal tax benefit 29,962 45,723 15,676
Other, net 53,130 46,221 12,984
-------- ------- -------
$707,647 777,668 303,459
======== ======= =======
</TABLE>
(Continued)
66
<PAGE> 69
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
The components of deferred tax assets and deferred tax
liabilities at March 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Deferred tax assets:
General loan loss allowance $ 135,871 138,903
Deferred compensation 72,871 15,671
Deferred loan fees -- 5,769
Excess servicing gains 11,605 15,008
Other 1,553 7,575
---------- ---------
Total deferred tax assets 221,900 182,926
---------- ---------
Deferred tax liabilities:
Tax depreciation in excess of that recorded for
book purposes 221,266 248,027
FHLB stock dividends 154,162 154,162
Allowance for loan losses in excess of base-year reserve 69,296 83,156
Mortgage servicing rights 545,057 306,036
Available for sale securities 89,165 250,221
Other 16,297 13,163
---------- ---------
Total deferred tax liabilities 1,095,243 1,054,765
---------- ---------
Net deferred tax liability $ 873,343 871,839
========== =========
</TABLE>
The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in
which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical
taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible,
management believes it is more likely than not that Equality will
realize the benefits of these temporary differences at March 31,
1999 and, therefore, has not established a valuation reserve.
(13) EMPLOYEE STOCK OWNERSHIP PLAN, STOCK OPTION AND INCENTIVE
PLAN, MANAGEMENT RECOGNITION PLAN, OFFICERS RETIREMENT PLAN
AND 401(K) PLAN
During 1993, the Company established an employee stock ownership
plan for the exclusive benefit of participating employees.
Employees age 21 or older who have completed one year of service
are eligible to participate. The ESOP is to be funded by
contributions made in cash or common stock.
(Continued)
67
<PAGE> 70
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
In connection with the mutual holding company conversion, the
ESOP purchased 26,600 shares (3.2% of total shares issued) of the
Association's common stock at a subscription price of $10.00 per
share using funds loaned by a third party. As a result of the
Conversion, these ESOP shares were converted into 79,065 shares
based on the Exchange Ratio. In connection with the Conversion,
the ESOP purchased an additional 119,806 shares of common stock
at a subscription price of $10.00 per share using funds loaned by
Equality. During 1998, the third party loan was repaid and added
to the Equality loan which is being repaid with level principal
payments over 10 years. All shares are held in a suspense
account for allocation among the participants as the loan is
repaid. Shares released from the suspense account are allocated
among the participants based upon their pro rata annual
compensation. The purchases of the shares by the ESOP were
recorded by Equality as unearned ESOP shares in a contra equity
account. As ESOP shares are committed to be released to
compensate employees, the contra equity account is reduced and
Equality recognizes compensation expense equal to the fair market
value of the shares committed to be released. Dividends on
allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on unallocated ESOP shares are recorded as a
reduction of debt. Compensation expense related to the ESOP
totaled $187,784, $67,142 and $28,544 for 1999, 1998 and 1997,
respectively.
The ESOP shares as of March 31, 1999 are as follows:
<TABLE>
<S> <C>
Allocated shares 61,621
Unreleased shares 137,250
----------
Total ESOP shares 198,871
==========
Fair value of unreleased shares $1,166,625
==========
</TABLE>
In connection with the mutual holding company conversion, Equality
adopted the 1993 Stock Option and Incentive Plan which provided
for the granting of options for a maximum of 38,000 shares of
common stock at $10.00 per share to directors and key officers.
As a result of the Conversion, the stock options and the price per
share were converted based on the Exchange Ratio.
Equality accounts for stock-based compensation under the stock
option plan in accordance with Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and,
accordingly, recognizes no compensation expense as the exercise
price of employee stock options equals the market price of the
underlying stock on the date of grant.
(Continued)
68
<PAGE> 71
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
Information on Equality's stock options is summarized as follows:
<TABLE>
<CAPTION>
AVERAGE PER SHARE
PRICE OPTION
SHARES PER SHARE PRICE RANGE
------- --------- -----------
<S> <C> <C> <C>
Outstanding and exercisable
at March 31, 1996 112,951 $3.73 3.36-4.37
Granted -- -- --
------- ----- ---------
Outstanding and exercisable
at March 31, 1997 112,951 3.73 3.36-4.37
Exercised 19,953 3.45 3.36-4.37
------- ----- ---------
Outstanding and exercisable
at March 31, 1998 92,998 3.79 3.36-4.37
Exercised 13,938 3.61 3.36-4.37
------- ----- ---------
Outstanding and exercisable
at March 31, 1999 79,060 3.82 3.36-4.37
======= ===== =========
</TABLE>
In conjunction with the conversion, Equality established a
management recognition plan (the MRP) which acquired 65,550
shares of common stock during 1999 at an average price of $11.28
per share. The MRP provides that such common stock can be issued
to employees in key management positions to encourage such
employees to remain with Equality. Interest in the MRP for each
participant vests over a five year period. Compensation expense
related to vesting in the MRP totaled $120,131 for 1999.
Equality maintains a retirement plan for certain officers. Upon
retirement at age 65, each participating officer will receive
$50,000 on an annual basis for a period of 10 years following
retirement. Benefits to be paid for future service will be
accrued over the remaining period of service of each officer.
The plan has been funded through the purchase of life insurance
contracts on each officer. The cash surrender value of the life
insurance contracts totaled $121,636 and $86,597 at March 31,
1999 and 1998, respectively, and is included in other assets in
the consolidated balance sheet. The related accrued liability
totaled $87,600 and $42,212 at March 31, 1999 and 1998,
respectively. Compensation expense related to the plan totaled
$39,271 for both 1999 and 1998.
Equality sponsors a defined contribution plan qualifying under
Section 401(k) of the Internal Revenue Code. Participants may
designate up to 15% of their annual compensation as their
contribution to the plan, which is partially matched by Equality.
Compensation expense related to the plan totaled $24,459, $27,064
and $21,585 for 1999, 1998 and 1997, respectively.
(Continued)
69
<PAGE> 72
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(14) DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
Equality is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments, which are solely made up of
commitments to extend credit, may involve, to varying degrees, elements
of credit risk in excess of the amount recognized in the consolidated
balance sheets. The contractual amounts of these instruments reflect the
extent of involvement Equality has in this particular class of financial
instruments.
Equality's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit is represented by the contractual amount of these
instruments. Equality uses the same credit policies in making
commitments as they do for financial instruments recorded in the
consolidated balance sheets.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee.
Since certain of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Equality evaluates each
customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by Equality upon
extension of credit, is based on management's credit evaluation
of the counterparty.
At March 31, 1998, Equality had outstanding com-mitments to
originate fixed rate mortgage loans of $4.8 million (at interest
rates ranging from 6.50% to 8.00%). Commitments to extend credit
may involve elements of interest rate risk in excess of the
amount recognized in the consolidated balance sheets. Interest
rate risk on commitments to extend credit results from the
possibility that interest rates may have moved unfavorably since
the time the commitment was made.
(Continued)
70
<PAGE> 73
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
A summary of the carrying amounts and fair values of Equality's
financial instruments at March 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash, primarily interest-
bearing demand deposits $ 6,449,613 6,449,613 1,070,538 1,070,538
Interest-bearing deposits 1,085,000 1,105,697 1,378,000 1,407,542
Investment securities 82,235,339 82,166,339 71,497,156 71,424,156
Mortgage-backed securities 90,810,783 90,810,783 58,512,089 58,512,089
Loans receivable 90,230,677 90,929,267 108,415,421 109,775,798
Stock in Federal Home
Loan Bank 6,911,100 6,911,100 5,200,000 5,200,000
Accrued interest receivable 1,987,870 1,987,870 1,696,097 1,696,097
----------- ----------- ----------- -----------
$279,710,382 280,360,669 247,769,301 249,086,220
============ =========== =========== ===========
LIABILITIES
Savings deposits 128,953,826 131,196,066 119,301,376 119,794,942
Accrued interest payable
on savings deposits 200,280 200,280 134,203 134,203
Borrowed money 132,010,050 133,302,453 105,678,694 105,540,078
Advance payments by
borrowers for taxes
and insurance 69,634 69,634 105,950 105,950
----------- ----------- ----------- -----------
$261,233,790 264,768,433 225,220,223 225,575,173
============ =========== =========== ============
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate such value:
CASH, PRIMARILY INTEREST-BEARING DEMAND DEPOSITS
For cash, primarily interest-bearing demand deposits, the
carrying amount is a reasonable estimate of fair value, as such
instruments reprice in a short time period.
INTEREST-BEARING DEPOSITS
The fair value of interest-bearing deposits is based on the
discounted value of contractual cash flows. The discount rate
is estimated using the rates currently offered for deposits of
similar remaining maturity.
(Continued)
71
<PAGE> 74
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Fair values are based on quoted market prices or dealer quotes.
LOANS RECEIVABLE
Fair values are estimated for portfolios of loans receivable
with similar financial characteristics. Loans are segregated
by type such as residential, commercial and consumer. Each
loan receivable category is further segmented into fixed and
adjustable rate interest terms. The fair value of loans
receivable is calculated by discounting scheduled cash flows
through the estimated maturity using estimated market discount
rates equal to rates at which loans, similar in type, would be
originated at March 31, 1999 and 1998, respectively. Estimated
maturities are based upon the average remaining contractual
lives for each loan receivable classification.
STOCK IN FEDERAL HOME LOAN BANK
Fair value is equal to cost, which represents redemption value.
ACCRUED INTEREST RECEIVABLE, ACCRUED INTEREST PAYABLE ON
SAVINGS DEPOSITS, AND ADVANCE PAYMENTS BY BORROWERS FOR TAXES
AND INSURANCE
For accrued interest receivable, accrued interest payable on
savings deposits and advance payments by borrowers for taxes
and insurance, the carrying amount is a reasonable estimate of
fair value because of the short maturity for these financial
instruments.
SAVINGS DEPOSITS
The fair value of savings deposits with no stated maturity is
equal to the amount payable on demand. The fair value of time
deposits is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates
currently offered for savings deposits of similar remaining
maturities.
BORROWED MONEY
The fair value of borrowed money is based on the discounted
value of contractual cash flows. The discount rate is
estimated using rates on borrowed money with similar remaining
maturities.
The fair value estimates provided are made at a point in time
based on market information and information about the financial
instruments. Because no market exists for a portion of
Equality's financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial
instruments and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the fair value
estimates.
(Continued)
72
<PAGE> 75
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(15) INDUSTRY SEGMENT INFORMATION
The business segment results which follow are consistent with
Equality's internal reporting system which is consistent, in all
material respects, with generally accepted accounting principles.
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------
EQUALITY EQUALITY
SAVINGS MORTGAGE CORPORATE
BANK CORPORATION AND OTHER TOTAL
-------- ----------- --------- -----
<S> <C> <C> <C> <C>
Balance sheet information:
Investment and mortgage-
backed securities $172,958,392 -- 87,730 173,046,122
Loans receivable, net 87,676,452 6,968,384 (4,414,159) 90,230,677
Total assets 285,539,615 9,243,476 (6,345,917) 288,437,174
Savings deposits 130,028,064 -- (1,074,238) 128,953,826
Stockholders' equity 24,290,744 2,272,196 (955,210) 25,607,730
============ ========= ========== ===========
Statement of income information:
Total interest income $ 17,012,620 924,685 (378,884) 17,558,421
Total interest expense 12,417,420 635,835 (701,827) 12,351,428
------------ --------- ---------- -----------
Net interest income 4,595,200 288,850 322,943 5,206,993
Provision for losses on loans -- -- -- --
Noninterest income 863,796 3,477,136 (103,700) 4,237,232
Noninterest expense 3,949,862 3,066,286 591,150 7,607,298
Income tax expense 406,449 272,823 28,375 707,647
------------ --------- ========== ===========
Net income (loss) $ 1,102,685 426,877 (400,282) 1,129,280
============ ========= ========== ===========
Capital expenditures $ 1,010,704 104,200 -- 1,114,904
============ ========= ========== ===========
(Continued)
73
<PAGE> 76
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
<CAPTION>
1998
--------------------------------------------------------------
EQUALITY EQUALITY
SAVINGS MORTGAGE CORPORATE
BANK CORPORATION AND OTHER TOTAL
-------- ----------- --------- -----
<S> <C> <C> <C> <C>
Balance sheet information:
Investment and mortgage-
backed securities $130,009,245 -- -- 130,009,245
Loans receivable, net 105,994,297 14,456,552 (12,035,428) 108,415,421
Total assets 252,889,757 16,257,780 (13,597,224) 255,550,313
Savings deposits 120,419,074 -- (1,117,698) 119,301,376
Stockholders' equity 24,446,813 1,851,316 (460,314) 25,837,815
============ ========== =========== ===========
Statement of income information:
Total interest income $ 14,345,013 810,591 (475,294) 14,680,310
Total interest expense 9,707,997 530,656 (513,271) 9,725,382
------------ ---------- ----------- -----------
Net interest income 4,637,016 279,935 37,977 4,954,928
Provision for losses on loans 115,513 -- -- 115,513
Noninterest income 554,469 2,489,439 (162,424) 2,881,484
Noninterest expense 3,209,980 2,407,612 86,473 5,704,065
Income tax expense 635,257 141,087 1,324 777,668
------------ ---------- ----------- -----------
Net income (loss) $ 1,230,735 220,675 (212,244) 1,239,166
============ ========== =========== ===========
Capital expenditures $ 2,790,356 122,810 -- 2,913,166
============ ========== =========== ===========
<CAPTION>
1997
--------------------------------------------------------------
EQUALITY EQUALITY
SAVINGS MORTGAGE CORPORATE
BANK CORPORATION AND OTHER TOTAL
-------- ----------- --------- -----
<S> <C> <C> <C> <C>
Statement of income information:
Total interest income $ 13,080,775 702,811 (173,317) 13,610,269
Total interest expense 9,077,690 426,106 (391,707) 9,112,089
------------ ---------- ----------- -----------
Net interest income 4,003,085 276,705 218,390 4,498,180
Provision for losses on loans 50,000 -- -- 50,000
Noninterest income 360,165 1,894,184 129,450 2,383,799
Noninterest expense 3,555,631 2,125,191 342,926 6,023,748
Income tax expense 252,847 17,820 32,792 303,459
------------ ---------- ----------- -----------
Net income (loss) $ 504,772 27,878 (27,878) 504,772
============ ========== =========== ===========
Capital expenditures $ 70,919 8,216 -- 79,135
============ ========== =========== ===========
</TABLE>
(Continued)
74
<PAGE> 77
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
(16) CONTINGENCIES
The Company is involved in various litigation arising in the
ordinary course of business. In the opinion of management, at
the present time, disposition of the suits and claims will not
have a material effect on the financial position of the Company.
(17) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1998 1998 1998 1999
-------- ------------- ------------ ---------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total interest income $4,361 4,343 4,426 4,428
Total interest expense 2,881 3,087 3,221 3,162
------ ------ ------ ------
Net interest income 1,480 1,256 1,205 1,266
Provision for losses
on loans -- -- -- --
Noninterest income 836 970 1,273 1,158
Noninterest expense 1,736 1,909 2,009 1,953
------ ------ ------ ------
Income before income
tax expense 580 317 469 471
Income tax expense 229 120 180 179
------ ------ ------ ------
Net income $ 351 197 289 292
====== ====== ====== ======
Earnings per share:
Basic $ 0.15 0.08 0.12 0.13
Diluted 0.15 0.08 0.12 0.12
====== ====== ====== ======
(Continued)
75
<PAGE> 78
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
<CAPTION>
QUARTER ENDED
------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1998
-------- ------------- ------------ ---------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total interest income $3,407 3,530 3,863 3,880
Total interest expense 2,304 2,338 2,468 2,615
------ ------ ------ ------
Net interest income 1,103 1,192 1,395 1,265
Provision for losses
on loans -- 24 -- 92
Noninterest income 507 756 650 968
Noninterest expense 1,302 1,373 1,444 1,584
------ ------ ------ ------
Income before income
tax expense 308 551 601 557
Income tax expense 120 215 237 206
------ ------ ------ ------
Net income $ 188 336 364 351
====== ====== ====== ======
Earnings per share:
Basic $ 0.07 0.14 0.15 0.15
Diluted 0.07 0.14 0.15 0.15
====== ====== ====== ======
</TABLE>
(18) CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The condensed balance sheet as of March 31, 1999 and 1998 and
the related condensed statements of income and cash flows for
1999 and from the date of inception through March 31, 1998 of
the Company are as follows:
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
ASSETS
Cash $ 995,648 962,144
Investment in subsidiary 24,290,744 24,446,813
Other assets 497,290 423,051
----------- ----------
Total assets $25,783,682 25,832,008
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 175,952 (5,807)
Stockholders' equity 25,607,730 25,837,815
----------- ----------
Total liabilities and stockholders' equity $25,783,682 25,832,008
=========== ===========
</TABLE>
(Continued)
76
<PAGE> 79
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1999 and 1998
CONDENSED STATEMENTS OF INCOME
<CAPTION>
FOUR MONTHS
YEAR ENDED ENDED
MARCH 31, MARCH 31,
1999 1998
---------- ------------
<S> <C> <C>
Revenue:
Interest income $ 134,243 34,007
Rental income 46,800 --
Dividends from subsidiary 1,000,000 --
Other 817 --
---------- ------------
1,181,860 34,007
---------- ------------
Expenses:
Legal 81,193 12,183
Other 74,072 13,393
---------- ------------
155,265 25,576
---------- ------------
Income before equity in undistributed
income of subsidiary 1,026,595 8,431
Equity in undistributed income of subsidiary 102,685 486,138
---------- ------------
Net income $1,129,280 494,569
========== ============
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income $1,129,280 494,569
Adjustments to reconcile net income to
net cash used in operating activities:
Equity in undistributed income of subsidiary (102,685) (486,138)
Depreciation expense 22,367 --
Amortization of ESOP awards 188,522 84,473
Amortization of stock awards 120,131 --
Increase in income taxes payable 162,184 --
Other, net (72,785) (170,927)
---------- ------------
Net cash provided by (used in) operating activities 1,447,014 (78,023)
---------- ------------
Cash flows from investing activities - investment in subsidiary -- (10,000,000)
---------- ------------
Cash flows from financing activities:
Proceeds from stock offering -- 11,112,371
Proceeds from exercise of stock options 60,733 68,916
Purchase of treasury stock (166,431) --
Purchase of stock for restricted stock awards (739,456) --
Cash dividends paid (568,356) (141,120)
---------- ------------
Net cash provided by (used in) financing activities (1,413,510) 11,040,167
---------- ------------
Net increase in cash 33,504 962,144
Cash at beginning of period 962,144 --
---------- ------------
Cash at end of period $ 995,648 962,144
=========== ============
</TABLE>
77
<PAGE> 80
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ---------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
NONE.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS , PROMOTERS AND CONTROL PERSONS,
- --------------------------------------------------------------------------
COMPLIANCE WITH SECTION 1B(A) OF THE EXCHANGE ACT
- -------------------------------------------------
The following table sets forth certain information with respect to
the persons who currently serve as members of the board of directors of
equality.
<TABLE>
<CAPTION>
Age at Position Held Director Term
Name June 29, 1999 With ESB Since Expires
---- ------------- ------------- ------- -------
<S> <C> <C> <C> <C>
Leroy C. Crook 90 Director 1965 2001
Kenneth J. Hrdlicka 56 Director 1983 2001
Michael J. Walsh 55 Director 1986 2001
Richard C. Fellhauer 57 Director, Chairman of the Board, President 1973 1999
and Chief Executive Officer
Daniel C. Aubuchon 51 Director 1981 1999
Stacey W. Braswell 55 Director 1982 1999
Berenice J. Mahacek 65 Director 1982 2000
Charles J. Wolter 81 Director 1989 2000
Michael A. Deelo 43 Director, Executive Vice President and 1994 2000
Chief Financial Officer
</TABLE>
The business experience for the past five years of each of the current
directors is as follows:
Leroy C. Crook, now retired, was a Vice President of Vess Bottling
Company.
Kenneth J. Hrdlicka has been the Director of Business Development of
Anheuser Busch, Inc. For more than the past five years.
Michael J. Walsh has been a Vice President of ECC for more than the
past five years.
Richard c. Fellhauer has been affiliated with esb since 1966 and
assumed the position of chairman of the board, president and chief executive
officer in 1982.
Daniel C. Aubuchon has been a partner with the law firm of Aubuchon,
Raniere & Lally, P.C. For more than the past five years.
Stacey W. Braswell has been a Principal stockholder and Vice President
of Blaine-Braswell and Associates, an insurance agency, for more than the
past five years.
Berenice J. Mahacek has been retired since 1996. Prior to that time
she was a Senior Vice President of ESB.
Charles J. Wolter has been the president of realty net - wolter real
estate for more than the past five years.
78
<PAGE> 81
Michael A. Deelo has been a Senior Executive Vice President and Chief
Financial Officer ofESB since 1997. Prior to that time, he served as Vice
President and Chief Financial Officer of ESB.
ASSOCIATE DIRECTORS OF ESB
ESB also has four non-voting Associate Directors who are appointed each
year by the Board of Directors. The current Associate Directors are Seymour
Bailis, James W. Caulfield, Leonard 0. Wolter and John L. Tacke. While the
Associate Directors attend the Board of Directors meetings and provide
periodic advice to the Board, they do not vote on any matters presented to
the Board for a vote.
ITEM 10. EXECUTIVE COMPENSATION
- ----------------------------------
The following tables summarize compensation information for the fiscal
years ended March 31, 1999, 1998, 1997 and 1996 with respect to ESB's
President and Chief Executive Officer. No other officers of ESB received
compensation in excess of $100,000 during the fiscal year ended March 31,
1999.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------- -----------------------------
Securities
Other Annual Restricted Underlying All other
Principal Position Year Salary Bonus Compensation<F1> Stock Awards Options Compensation<F2>
------------------ ---- ------ ----- ---------------- ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard C. Fellhauer
President & Chief 1999 $159,415 -- $ 8,400 $199,688 25,000 $9,978
Executive Officer 1998 138,000 - 10,200 -- -- 3,000
1997 141,000 - 6,700 -- -- 3,300
<FN>
- ---------------------------------
<F1> Consisting solely of directors' fees.
<F2> Represents the dollar value of matching and discretionary profit
sharing contributions pursuant to ESB's tax-qualified thrift plan and
the Employee Stock Ownership Plan (the "ESOP") contributions (based
on the value of the Common Stock on the date the Common Stock was
allocated) made by ESB for the fiscal years ended March 31, 1996,
1997, 1998 and 1999.
</TABLE>
The following tables set forth information concerning options granted
to the named executive officer in the last fiscal year and fiscal year end
values of unexercised options.
<TABLE>
<CAPTION>
Potential Realizable Value
% of Total at Assumed Annual Rate of
Number of Options Exercise Stock Price Appreciation
Securities Under- Granted to or Base for Option Term
lying Options Employees in Price Expiration ---------------
Name Granted (#) Fiscal Year ($/SH) Date 5% 10%
---- ----------- ----------- ------ ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Richard C. Fellhauer 25,000 21.14% 13.90 August 14, 2008 $218,500 553,750
</TABLE>
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End (#) at Fiscal Year End <F2>
------------------------------ -----------------------
Value
Shares Acquired Realized
Name on Exercise ($)<F1> Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard C. Fellhauer -- $ -- 29,947 25,000 $138,790 --
<FN>
- ---------------------------------
<F1> Market value of the underlying securities at the date of exercise minus
the exercise price, multiplied by the number of underlying securities.
<F2> Market value of the underlying securities at year end minus the exercise
price, multiplied by the number of underlying securities. Based upon
the closing price of the Common Stock as of March 31, 1999 of $8.50 per
share.
</TABLE>
79
<PAGE> 82
EMPLOYMENT AGREEMENT
On September 30, 1997, Equality entered into an employment agreement
with Richard C. Fellhauer, President and Chief Executive Officer of Equality.
The employment agreement provides that Mr. Fellhauer will be employed for a
36-month term. The term of the agreement may be extended for an additional
twelve-full-calendar-month period by action of the Board of Directors of
Equality annually after the Commencement Date.
Under the employment agreement, the base salary of Mr. Fellhauer will
be $132,500 per year. The Board of Directors of Equality will review Mr.
Fellhauer's base salary at least once a year and may increase that base
salary. In addition to base salary, the agreement provides for participation
in any medical, pension, profit-sharing, stock-based incentive plans or other
retirement plans, and fringe and retirement benefits offered by ESB to its
employees. Mr. Fellhauer will also be entitled to participate, on an
equitable basis, with other key management personnel of ESB in discretionary
bonuses authorized and declared by the Board of Directors of ESB.
The agreement may be terminated at any time by the Board of Directors of
Equality for conduct not constituting termination for "just cause" (e.g.,
personal dishonesty, incompetence, willful misconduct and breach of fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule or regulation, final cease-and-desist
order or any material breach of the employment agreement), or by Mr.
Fellhauer upon 90 days written notice to Equality, as the case may be. In
the event the agreement is terminated by the Board of Directors without just
cause, Equality is obligated to pay Mr. Fellhauer a severance payment equal
to the remaining amount due under the agreement. In the event Mr. Fellhauer
terminates the agreement, Equality will have no further obligations to Mr.
Fellhauer for compensation and benefits under the terms of the agreement. In
the event the agreement is terminated for just cause, Equality is obligated
to pay Mr. Fellhauer his compensation and benefits through the date of
termination of employment.
If Mr. Fellhauer is terminated or if he terminates employment for "good
reason" (e.g., due to a reduction in his duties, responsibilities or
compensation after a change in control) within one year after a "change in
control" of Equality, then Equality shall pay to Mr. Fellhauer a lump sum
equal to 2.99 times his "Base Amount," as that term is defined in Section
28OG(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code").
For purposes of the Employment Agreement, a "change in control" shall be
deemed to have occurred if: (a) a third person, including a "group" as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934 (as in
effect on the date hereof), becomes the beneficial owner of shares of
Equality having 25% or more of the total number of votes that may be cast for
the election of directors of Equality, including for this purpose any shares
beneficially owned by such third person or group as of the date hereof, or
(b) as a result of, or in connection with, any cash tender or exchange offer
or other business combination, sale of assets or contested election, or any
combination of the foregoing transactions (a "Transaction"), the persons who
were directors of Equility before the Transaction shall cease to constitute a
majority of the Board of Directors of Equality or any successor to Equality.
(In the event of any reorganization involving Eqality in a transaction
initiated by Equality in which the shareholders of Equality immediately prior
to such reorganization become the shareholders of a successor or ultimate
parent company of Equality resulting from such reorganization and the persons
who were directors of Equality immediately prior to such reorganization
constitute a majority of the Board of Directors of such successor or ultimate
parent no "change in control" shall be deemed to have taken place solely by
reason of such reorganization, notwithstanding the fact that Equality may
have become the wholly-owned subsidiary of another company in such
reorganization and members of the Board of Directors of Equality may have
become members of the Board of Directors of such successor company, and
thereafter the term "Company" for purposes of this paragraph shall refer to
such successor or or ultimate parent company.); or (c) a third person,
including a "group" as defined in Section 13(d)(3) of the Securities Exchange
Act of 1934 (as in effect on the date hereof), acquires control, as defined
in 12 C.F.R. Sec. 574.4, or any successor regulation, of Equality that would
require the filing of an application for acquisition of control or notice of
c nge in control in a manner set forth in 12 C.F.R. Sec. 574.3, or any
successor regulation.
The agreement with Mr. Fellhauer also includes a covenant which will
limit his ability under certain circumstances to compete with the business of
Equality for a period of three years following the termination of his
employment with Equality.
80
<PAGE> 83
DIRECTORS' FEES
Members of the Board of Directors of ESB received a fee of $600 for each
Board meeting attended. No fees are paid for attending committee meetings of
the Board. Associate directors of ESB received $500 for each Board meeting
attended. There are no directors' fees paid for attendance at meetings of
Equality.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following table sets forth, as of May 31, 1999, certain information
as to those persons known by Equality to be the beneficial owners of more
than 5 % of the outstanding Equality Bancorp, Inc. common stock.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF C
BENEFICIAL OWNER BENEFICIAL OWNERSHIP<F1> STOCK OUTSTANDING
---------------- ------------------------ -----------------
<S> <C> <C>
Equality Employee Stock Ownership Plan Trust 193,232 7.73%
4131 South Grand Boulevard
St. Louis, Missouri 63118-3464
<FN>
- ---------------------------------
<F1> Unless otherwise indicated, the nature of beneficial ownership for
shares shown in this column is sole voting and investment power.
</TABLE>
The following table sets forth, as of May 31, 1999, the number of
Equality Bancorp, Inc. common stock beneficially owned by each director, the
executive officer named in the Summary Compensation Table above (who is also
a director) and all directors and executive officers of Equality as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF COMMON
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP<F1> STOCK OUTSTANDING
------------------------ ------------------------ -----------------
<S> <C> <C>
Richard C. Fellhauer 109,373 4.32%<F2>
Berenice J. Mahacek 49,151 1.96%(<F2>
Daniel C. Aubuchon 13,958 <F*>
Stacey W. Braswell 20,846 <F*>
Charles J. Wolter 12,671 <F*>
Leroy C. Crook 6,277 <F*>
Kenneth J. Hrdlicka 16,959 <F*>
Michael J. Walsh 43,061 1.72%<F2>
Michael A. Deelo 82,254 3.26%<F2>
Leonard O. Wolter 28,838 <F*>
All directors and executive officers
as a group (10 persons) 383,388 14.97%<F3>
<FN>
- ---------------------------------
<F*> Less than 1%
<F1> Unless otherwise indicated, the nature of beneficial ownership for
shares shown in this column is sole voting and investment power. The
beneficially owned shares set forth in this column include the following
common stock which the beneficial owner has the right to acquire within
sixty (60) days through the exercise of stock options: Fellhauer:
29,947; Braswell: 1,129; Hrdlicka: 1,129; Walsh: 1,459; Deelo: 20,212;
L. Wolter: 6,717; and all directors and officers as a group.
<F2> Percentage is calculated on a partially diluted basis, assuming only the
exercise of stock options by such individual which are exercisable
within 60 days.
<F3> Percentage is calculated on a fully diluted basis, assuming the exercise
of all stock options which are exercisable within 60 days.
</TABLE>
81
<PAGE> 84
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ----------------------------------------------------------
ESB has followed the policy of offering residential mortgage loans for the
financing of personal residences, share loans and consumer loans to its
officers, directors and employees. The loans are made in the ordinary course
of business and are also made on substantially the same terms and conditions,
including interest rate and collateral, as those of comparable transactions
prevailing at the same time with other persons, and do not include more than
the normal risk of collectibility or present other unfavorable features. At
March 31, 1999, approximately $1.4 million of loans were outstanding from ESB
to executive officers and directors of esb and their affiliates.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- --------------------------------------------
<TABLE>
<C> <S>
(a) EXHIBITS
3(i) Articles of Incorporation, Certificate of Incorporation of Registrant as filed in Delaware
on May 14, 1997 (Incorporated by reference to the Registrant's Registrations Statement on
Form S-1, as amended (File No. 333-30469), as originally filed with the SEC on June 30,
1997)
3(ii) Bylaws of Registrant as adopted by the Board of Directors of Registrant on June 20, 1997
(Incorporated by reference to the Registrant's Registrations Statement on Form S-1, as
amended (File No. 333-30469), as originally filed with the SEC on June 30, 1997)
10.1 Equality Savings and Loan Association 1993 Stock Option and Incentive Plan (Incorporated
by reference to the Registrant's Registrations Statement on Form S-1, as amended (File No.
333-30469), as originally filed with the SEC on June 30, 1997)
10.2 Credit Agreement between Registrant and Equality Savings and Loan Association, F.A.
Employee Stock Ownership Plan (Incorporated by reference to the Registrant's Registrations
Statement on Form S-1, as amended (File No. 333-30469), as originally filed with the SEC
on June 30, 1997)
10.3 Equality Bancorp, Inc. 1997 Stock Option and Incentive Plan (Incorporated by reference to
the Registrant's Registrations Statement on Form S-1, as amended (File No. 333-30469), as
originally filed with the SEC on June 30, 1997)
10.4 Equality Bancorp, Inc. 1997 Management Development and Recognition Plan (Incorporated by
reference to the Registrant's Registrations Statement on Form S-1, as amended (File No.
333-30469), as originally filed with the SEC on June 30, 1997)
10.5 Form of Employment Agreement to be entered into between Equality Bancorp, Inc. and Richard
C. Fellhauer (Incorporated by reference to the Registrant's Registrations Statement on
Form S-1, as amended (File No. 333-30469), as originally filed with the SEC on June 30,
1997)
10.6 Form of Employment Agreement to be entered into between Equality Bancorp, Inc. and Michael
A. Deelo (Incorporated by reference to the Registrant's Registrations Statement on Form
S-1, as amended (File No. 333-30469), as originally filed with the SEC on June 30, 1997)
10.7 Form of Employment Agreement to be entered into between Equality Bancorp, Inc. and Leonard
O. Wolter (Incorporated by reference to the Registrant's Registrations Statement on Form
S-1, as amended (File No. 333-30469), as originally filed with the SEC on June 30, 1997)
82
<PAGE> 85
21 List of subsidiaries of the Registant (Incorporated by reference to the Registrant's
Registrations Statement on Form S-1, as amended (File No. 333-30469), as originally filed
with the SEC on June 30, 1997)
23 Consent of KPMG LLP
23.1 Consent of Rubin, Brown, Gorstein & Co. LLP
27.1 Financial Data Schedule - March 31, 1999
27.2 Financial Data Schedule - March 31, 1998
27.3 Financial Data Schedule - March 31, 1997
99 Independent Auditors' Report of Rubin, Brown, Gornstein & Co. LLP
(b) FORM 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal year covered by this Form
10-KSB.
</TABLE>
83
<PAGE> 86
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EQUALITY BANCORP, INC.
Date: June 28, 1999 By: /s/ Richard C. Fellhauer
---------------------------------------
Richard C. Fellhauer, Chairman of the
Board, President, Chief Executive
Officer and Director
In accordance with the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on June 28, 1999.
<TABLE>
<S> <C>
/s/ Richard C. Fellhauer /s/ Michael A. Deelo
------------------------------------------------ ------------------------------------------------
Richard C. Fellhauer, Chairman of the Board, Michael A. Deelo, Executive Vice President,
President, Chief Executive Officer and Director Chief Financial Officer , Treasurer and Director
(Principal Executive Officer) (Principal Financial Officer and Principal
Accounting Officer)
/s/ Daniel C. Aubuchon /s/ Stacey W. Braswell
------------------------------------------------ ------------------------------------------------
Daniel C. Aubuchon, Director Stacey W. Braswell, Director
/s/ LeRoy C. Crook /s/ Kenneth J. Hrdlicka
------------------------------------------------ ------------------------------------------------
LeRoy C. Crook, Director Kenneth J. Hrdlicka, Director
/s/ Berenice J. Mahacek /s/ Michael J. Walsh
------------------------------------------------ ------------------------------------------------
Berenice J. Mahacek, Director Michael J. Walsh, Director
/s/ Charles J. Wolter
------------------------------------------------
Charles J. Wolter, Director
</TABLE>
84
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Equality Bancorp, Inc.:
We consent to incorporation by reference in the registration statements No.
333-43655, 333-63121, 333-79805 and 333-79807 on Form S-8 of Equality
Bancorp, Inc. (Equality) of our report dated May 1, 1999, relating to the
consolidated balance sheets of Equality Bancorp, Inc. and subsidiaries as of
March 31, 1999 and 1998, and the related consolidated statements of income,
stockholders' equity, cash flows and comprehensive income for each of the
years in the three-year period ended March 31, 1999, which report appears in
the March 31, 1999 annual report on Form 10-KSB of Equality.
/s/KPMG LLP
St. Louis, Missouri
June 28, 1999
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion of our report dated April 20, 1999, with respect
to the financial statements of Equality Mortgage Corporation, included as an
exhibit in Equality Bancorp, Inc.'s 10-KSB.
/s/RUBIN, BROWN, GORNSTEIN & CO. LLP
June 28, 1999
St. Louis, Missouri
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 6,450
<INT-BEARING-DEPOSITS> 1,085
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 172,446
<INVESTMENTS-CARRYING> 600
<INVESTMENTS-MARKET> 531
<LOANS> 90,231
<ALLOWANCE> 366
<TOTAL-ASSETS> 288,437
<DEPOSITS> 128,954
<SHORT-TERM> 1,826
<LIABILITIES-OTHER> 1,865
<LONG-TERM> 130,184
0
0
<COMMON> 25
<OTHER-SE> 25,583
<TOTAL-LIABILITIES-AND-EQUITY> 288,437
<INTEREST-LOAN> 7,703
<INTEREST-INVEST> 9,443
<INTEREST-OTHER> 412
<INTEREST-TOTAL> 17,558
<INTEREST-DEPOSIT> 5,458
<INTEREST-EXPENSE> 12,351
<INTEREST-INCOME-NET> 5,207
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 166
<EXPENSE-OTHER> 4,237
<INCOME-PRETAX> 1,837
<INCOME-PRE-EXTRAORDINARY> 1,837
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,129
<EPS-BASIC> .48
<EPS-DILUTED> .47
<YIELD-ACTUAL> 6.83
<LOANS-NON> 716
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
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<ALLOWANCE-DOMESTIC> 366
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
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<INT-BEARING-DEPOSITS> 1,378
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 127,409
<INVESTMENTS-CARRYING> 2,600
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<LOANS> 108,415
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<LIABILITIES-OTHER> 4,737
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0
0
<COMMON> 25
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<INTEREST-LOAN> 8,103
<INTEREST-INVEST> 6,317
<INTEREST-OTHER> 260
<INTEREST-TOTAL> 14,680
<INTEREST-DEPOSIT> 5,634
<INTEREST-EXPENSE> 9,725
<INTEREST-INCOME-NET> 4,955
<LOAN-LOSSES> 116
<SECURITIES-GAINS> 41
<EXPENSE-OTHER> 5,704
<INCOME-PRETAX> 2,017
<INCOME-PRE-EXTRAORDINARY> 2,017
<EXTRAORDINARY> 0
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<NET-INCOME> 1,239
<EPS-BASIC> .51
<EPS-DILUTED> .51
<YIELD-ACTUAL> 6.80
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<ALLOWANCE-DOMESTIC> 374
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,037
<INT-BEARING-DEPOSITS> 3,820
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 85,077
<INVESTMENTS-CARRYING> 4,849
<INVESTMENTS-MARKET> 4,725
<LOANS> 95,928
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<DEPOSITS> 122,983
<SHORT-TERM> 1,113
<LIABILITIES-OTHER> 897
<LONG-TERM> 63,136
0
0
<COMMON> 836
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<TOTAL-LIABILITIES-AND-EQUITY> 200,764
<INTEREST-LOAN> 7,449
<INTEREST-INVEST> 5,929
<INTEREST-OTHER> 232
<INTEREST-TOTAL> 13,610
<INTEREST-DEPOSIT> 5,682
<INTEREST-EXPENSE> 9,112
<INTEREST-INCOME-NET> 4,498
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 6,024
<INCOME-PRETAX> 808
<INCOME-PRE-EXTRAORDINARY> 808
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 505
<EPS-BASIC> .21
<EPS-DILUTED> .21
<YIELD-ACTUAL> 6.99
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</TABLE>
<PAGE> 1
Exhibit 99
INDEPENDENT AUDITORS' REPORT
Board of Directors
Equality Mortgage Corporation
St. Louis, Missouri
We have audited the accompanying balance sheet of Equality Mortgage
Corporation as of March 31, 1999 and 1998 and the related statements of
income, retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement, an audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates is made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Equality Mortgage
Corporation as of March 31, 1999 and 1998, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/S/RUBIN, BROWN, GORNSTEIN & CO. LLP
April 20, 1999
