<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ------------------ to ----------------
Commission File No. 333-30469
EQUALITY BANCORP, INC.
----------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 43-1785126
---------------------------- ---------------------------
(State or other jurisdiction (I.R.S. Employer ID Number)
of incorporation or organization)
9920 WATSON ROAD, ST. LOUIS, MO 63126
------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
Issuer's telephone number, including area code (314) 965-7090
--------------
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding at February 12, 1999
- ----------------------------- ---------------------------------------
Common Stock, Par Value $0.01 2,519,793
Traditional Small Business Disclosure Format (Check one): Yes No X
----- -----
<PAGE> 2
<TABLE>
INDEX TO FORM 10-QSB
<CAPTION>
PAGE NO.
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated Balance Sheets 1
- Consolidated Statements of Income 2
- Consolidated Statement of Stockholders' Equity 3
- Consolidated Statements of Cash Flows 4
- Consolidated Statements of Comprehensive Income 5
- Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of 8
Operation
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
</TABLE>
<PAGE> 3
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and March 31, 1998
(Unaudited)
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
<S> <C> <C>
Assets
- ------
Cash, primarily interest-bearing demand accounts $ 8,238,424 1,070,538
Interest-bearing deposits 1,184,000 1,378,000
Investment securities:
Available for sale, at fair value 54,995,099 68,897,156
Held to maturity, at amortized cost 600,000 2,600,000
Mortgage-backed securities available
for sale, at fair value 102,581,680 58,512,089
Loans receivable, net 102,854,967 108,415,421
Investment in real estate 272,275 734,317
Stock in Federal Home Loan Bank 6,521,600 5,200,000
Mortgage servicing rights 1,293,846 837,597
Office properties and equipment, net 6,260,657 5,574,287
Accrued interest receivable and other assets 4,308,237 2,330,908
------------- -----------
289,110,785 255,550,313
============= ===========
Liabilities and Stockholders' Equity
------------------------------------
Savings deposits 126,714,012 119,301,376
Accrued interest payable on savings deposits 175,802 134,203
Advances from the Federal Home Loan Bank 130,291,090 104,000,000
Other borrowed money 4,000,000 1,678,694
Advance payments by borrowers for taxes and insurance 110,272 105,950
Income tax payable 276,019 696,192
Deferred income taxes 859,064 871,839
Accrued expenses and other liabilities 674,733 2,924,244
------------- -----------
Total liabilities 263,100,992 229,712,498
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value per share;
200,000 shares authorized; none issued -- --
Common stock, $.01 par value per share; 4,000,000
shares authorized; 2,519,793 and 2,505,855
shares issued and outstanding at December 31,
1998 and March 31, 1998, respectively 25,198 25,059
Additional paid-in capital 16,099,443 15,997,241
Retained earnings - substantially restricted 11,105,468 10,694,400
Accumulated other comprehensive income 378,237 398,219
Unamortized restricted stock awards (427,591) --
Unearned ESOP shares (1,170,962) (1,277,104)
------------- -----------
Total stockholders' equity 26,009,793 25,837,815
------------- -----------
$ 289,110,785 255,550,313
============= ===========
See accompanying notes to consolidated financial statements.
</TABLE>
1
<PAGE> 4
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Three and nine months ended December 31, 1998 and 1997
(Unaudited)
<CAPTION>
Three months Nine months
ended December 31 ended December 31
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $1,922,850 2,121,504 5,886,832 6,074,273
Investment securities 680,764 1,398,182 2,744,844 3,685,156
Mortgage-backed securities 1,609,043 150,251 3,869,489 539,781
Interest bearing deposits 107,133 129,579 319,242 317,263
Other 106,847 63,014 309,756 182,858
---------- --------- ---------- ----------
Total interest income 4,426,637 3,862,530 13,130,163 10,799,331
---------- --------- ---------- ----------
Interest expense:
Savings deposits 1,409,298 1,481,588 4,076,673 4,314,352
Advances from the Federal Home Loan Bank 1,789,485 968,533 5,060,189 2,750,463
Other borrowed money 21,909 17,852 51,804 45,123
---------- --------- ---------- ----------
Total interest expense 3,220,692 2,467,973 9,188,666 7,109,938
---------- --------- ---------- ----------
Net interest income 1,205,945 1,394,557 3,941,497 3,689,393
Provision for losses on loans -- -- -- (24,313)
---------- --------- ---------- ----------
Net interest income after pro-
vision for losses on loans 1,205,945 1,394,557 3,941,497 3,665,080
---------- --------- ---------- ----------
Noninterest income:
Gain on sale of mortgage loans 806,966 365,291 2,003,426 984,852
Loan servicing fees and late charges 352,290 233,032 938,982 705,777
Equity in loss of joint venture -- (27,618) (54,430) (44,109)
Rental income 43,640 24,488 112,927 81,866
Gain on sale of real estate 146,655 -- 146,655 --
Gain (loss) on sale of investment and
mortgage backed securities
available for sale 116 (954) 37,052 47,951
Other 171,675 141,140 402,047 339,343
---------- --------- ---------- ----------
Total noninterest income 1,521,342 735,379 3,586,659 2,115,680
---------- --------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 1,186,785 830,955 3,354,568 2,436,367
Occupancy 175,014 152,652 433,171 403,163
Data processing 84,501 62,471 236,838 177,116
Advertising 54,419 32,182 249,477 81,648
Federal insurance premiums 17,396 19,208 53,999 58,118
Other 740,061 431,470 1,834,407 1,163,672
---------- --------- ---------- ----------
Total noninterest expense 2,258,176 1,528,938 6,162,460 4,320,084
---------- --------- ---------- ----------
Income before income tax expense 469,111 600,998 1,365,696 1,460,676
Income tax expense 179,695 236,804 528,895 572,053
---------- --------- ---------- ----------
Net income $ 289,416 364,194 836,801 888,623
========== ========= ========== ==========
Basic earnings per share $ .12 .15 .35 .36
========== ========= ========== ==========
Diluted earnings per share $ .12 .15 .35 .36
========== ========= ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE> 5
<TABLE>
Consolidated Statement of Stockholders' Equity
Nine months ended December 31, 1998
(Unaudited)
<CAPTION>
Accumulated Total
Common Stock Additional other com- Unamortized stock-
------------ paid-in Retained prehensive restricted Unearned holders'
Shares Amount capital earnings income stock awards ESOP shares equity
------ ------ ---------- -------- ----------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1998 2,505,855 $ 25,059 15,997,241 10,694,400 398,219 -- (1,277,104) $25,837,815
Net income 836,801 836,801
Exercise of stock
options 13,938 139 50,266 50,405
Management Recognition
Plan (MRP) stock
awards (496,661) (496,661)
Amortization of re-
stricted stock awards 69,070 69,070
Amortization of
ESOP awards 51,936 106,142 158,078
Dividend declared
on common stock
at $.18 per share (425,733) (425,733)
Change in other
comprehensive
income (19,982) (19,982)
--------- -------- ---------- ---------- ------- -------- ---------- -----------
Balance, Dec. 31,
1998 2,519,793 $ 25,198 16,099,443 11,105,468 378,237 (427,591) (1,170,962) $26,009,793
========= ======== ========== ========== ======= ======== ========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE> 6
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Nine months ended December 31, 1998 and 1997
(Unaudited)
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 836,801 888,623
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization:
Office properties and equipment 166,847 183,872
Real estate investments 7,508 8,446
Premiums and discounts, net (208,341) 103,676
Mortgage servicing rights 508,433 202,006
Restricted stock awards 69,070 --
Decrease (increase)in accrued interest receivable 6,176 (252,643)
Gain on sale of investment in real estate (146,655) --
Gain on sale of investment and mortgage-backed
securities available for sale (37,052) (47,951)
Increase (decrease) in accrued interest payable on savings deposits 41,599 (3,383)
Change in income tax payable (420,173) 496,095
Equity in loss of joint ventures 54,430 44,109
Other, net (4,186,845) (431,821)
Origination and purchase of loans held for sale (133,419,390) (71,806,705)
Proceeds from sales of loans held for sale 126,725,334 62,834,905
------------- -----------
Net cash used in operating activities (10,002,258) (7,780,771)
------------- -----------
Cash flow from investing activities:
Net change in loans receivable 12,252,494 (6,085,310)
Decrease in interest-bearing deposits 194,000 2,097,870
Principal repayments on investment securities, AFS 33,968 97,074
Principal repayments on mortgage-backed securities, AFS 22,183,823 1,849,654
Proceeds from the sale of investment securities, AFS 15,767,256 48,059,502
Proceeds from the maturity of investment securities, AFS 57,520,704 30,830,000
Proceeds from the sale of mortgage-backed securities, AFS 18,053,568 5,887,892
Proceeds from the maturity of investment securities, HTM 2,000,000 1,250,000
Purchase of investment securities, AFS (58,533,316) (97,869,845)
Purchase of mortgage-backed securities, AFS (84,969,267) --
Decrease in joint venture borrowings 649,048 10,082
Purchase of stock in FHLB (1,321,600) (700,000)
Increase in cost of mortgage servicing rights (964,682) (367,440)
Purchase of office properties and equipment, net (853,217) (2,499,773)
------------- -----------
Net cash used in investing activities (17,987,221) (17,440,294)
------------- -----------
Cash flow from financing activities:
Net increase (decrease) in savings deposits 7,412,636 (6,336,647)
Proceeds from Federal Home Loan Bank advances 36,500,000 83,500,000
Repayment of Federal Home Loan Bank advances (10,208,910) (65,500,000)
Proceeds from other borrowed money 2,321,306 2,751,196
Cash dividends paid (425,733) (128,322)
Proceeds from stock offering -- 11,281,520
Return of capital from mutual holding company -- 50,000
Proceeds from exercise of stock options 50,405 --
Stock purchased for restricted stock awards (496,661) --
Increase in advance payments by borrowers
for taxes and insurance 4,322 (11,253)
------------- -----------
Net cash provided by financing activities 35,157,365 25,606,494
------------- -----------
Net increase in cash and cash equivalents 7,167,886 385,429
Cash and cash equivalents, beginning of period 1,070,538 1,037,199
------------- -----------
Cash and cash equivalents, end of period $ 8,238,424 1,422,628
============= ===========
Supplemental disclosure of cash flow information:
Interest paid $ 9,147,067 7,113,321
Income taxes paid, net 960,012 (75,958)
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE> 7
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Nine months ended December 31, 1998 and 1997
(Unaudited)
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net Income $ 836,801 888,623
Other comprehensive income:
Net unrealized gain on investment and mortgage-backed
securities available for sale, net of tax 2,620 816,699
Less adjustment for gain on sale of investment and
mortgage-backed securities available for sale,
net realized in net income, net of tax of $14,450
and $18,701 for the nine months ended December 31,
1998 and 1997, respectively (22,602) (29,250)
--------- ---------
Total other comprehensive income (loss) (19,982) 787,449
--------- ---------
Comprehensive income $ 816,819 1,676,072
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE> 8
EQUALITY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with instructions for Form 10-QSB and,
therefore, do not include information for footnotes necessary for
a complete presentation of financial position, results of
operations, and cash flows in conformity with generally accepted
accounting principles. However, all adjustments (consisting only
of normal recurring accruals) which, in the opinion of management,
are necessary for a fair presentation of the consolidated
financial statements have been included in the results of
operations for the three and nine months ended December 31, 1998
and 1997.
Operating results for the nine months ended December 31, 1998 are not
necessarily indicative of the results that may be expected for the
year ending March 31, 1999.
(2) Principles of Consolidation
---------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Equality Bancorp, Inc. and its wholly owned
subsidiary, Equality Savings Bank (the Bank) as well as Equality
Savings Bank's wholly owned subsidiaries, Equality Commodity
Corporation (ECC) and Equality Mortgage Corporation (EMC). All
significant intercompany accounts and transactions have been
eliminated in consolidation.
(3) Earnings Per Share
------------------
Equality Bancorp, Inc. (the Company) adopted the provisions of Statement
of Accounting Standards No. 128, Earnings Per Share (SFAS 128) on
------------------
December 31, 1997. This statement replaced the previously
reported earnings per share with basic and diluted earnings per
share. Basic earnings per share excludes any dilutive effect of
options and convertible securities. Diluted earnings per share
considers the effects of options and convertible securities. All
prior period earnings per share data have been restated to conform
with the requirements of SFAS 128. Earnings per share information
has also been adjusted to reflect the second-step conversion of
Equality Savings and Loan Association, F.A. and the exchange of
each share of its common stock for 2.9724 shares of the Company's
common stock which occurred on December 1, 1997.
Basic earnings per share for the nine month periods ended December 31,
1998 and 1997 was computed based upon net income for the period
using weighted average common shares outstanding of 2,369,359 and
2,437,549, respectively. For the three month periods ended
December 31, 1998 and 1997, basic earnings per share were computed
6
<PAGE> 9
EQUALITY BANCORP, INC. AND SUBSIDIARY
based upon net income for the period using weighted average common
shares outstanding of 2,377,377 and 2,412,057, respectively.
Diluted earnings per share for the nine month periods ended December 31,
1998 and 1997 was computed based upon net income for the period
using weighted average common shares and dilutive potential common
shares outstanding of 2,403,403 and 2,443,301, respectively. Stock
options are the only dilutive potential common shares. For the
three month periods ended December 31, 1998 and 1997, dilutive
earnings per share average common shares outstanding of 2,407,667
shares and 2,417,906 shares, respectively.
7
<PAGE> 10
EQUALITY BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
The following discussion reviews the financial condition and results of
operations of Equality Bancorp, Inc., and its subsidiary, Equality
Savings Bank, with subsidiaries, as of December 31, 1998 and for the
three and nine months then ended.
The Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of
such statements.
CHANGES IN FINANCIAL CONDITION
The total assets of the Company increased $33.6 million, or 13.1%, to $289.1
million at December 31, 1998 from $255.6 million at March 31, 1998.
This increase in asset size primarily relates to increased investment in
mortgage-backed securities and cash reserves which were funded through
Federal Home Loan Bank of Des Moines (FHLB) advances and the proceeds
from maturities of investment securities.
Cash, primarily interest bearing demand accounts, increased $7.2 million, or
669.6%, to $8.2 million at December 31, 1998 from $1.1 million at
March 31, 1998. This increase is primarily the result of increased FHLB
advances, decreased investment securities, and accelerated mortgage loan
prepayments offset by increased mortgage-backed securities.
Interest bearing deposits decreased $194,000, or 14.1%, to $1.2 million at
December 31, 1998 from $1.4 million at March 31, 1998. The decrease is
due to the maturity of two certificates of deposit at other financial
institutions. The Company is consciously reducing its investment in
this area as certificates of deposit mature.
Investment securities available for sale decreased $13.9 million, or 20.2%,
to $55.0 million at December 31, 1998 from $68.9 million at March 31,
1998. The decrease is due primarily to $58.5 million of purchases of
securities offset by $57.5 million of maturities and sales proceeds of
$15.8 million.
Investment securities held to maturity decreased $2.0 million, or 76.9%, to
$600,000 at December 31, 1998 from $2.6 million at March 31, 1998. The
decrease is the result of the maturity of such securities.
Mortgage-backed securities available for sale increased $44.1 million, or
75.3%, to $102.6 million at December 31, 1998 from $58.5 million at
March 31, 1998. This increase is the result of purchases of securities
totaling $85.0 million, offset by normal principal repayments of $22.2
million and sales proceeds of $18.1 million.
Loans receivable, net, decreased $5.6 million, or 5.1%, from $108.4 million
at March 31, 1998, to $102.9 million at December 31, 1998. Loans held
for investment decreased $12.3
8
<PAGE> 11
EQUALITY BANCORP, INC. AND SUBSIDARY
million, or 13.0%, to $81.6 million at December 31, 1998 from $93.9
million at March 31, 1998. This decrease reflects accelerated principal
repayments due to refinancing, the result of low mortgage interest
rates. Loans held for sale increased $6.7 million, or 46.1%, to $21.2
million at December 31, 1998 from $14.5 million at March 31, 1998. This
increase is the result of EMC mortgage loan originations totaling $133.4
million and mortgage loan purchases of $1.5 million, offset by mortgage
loan sales of $126.7 million for the nine months ended December 31,
1998.
The following table sets forth composition of the Company's loan portfolio in
dollars and in percentages of total loans at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1998
----------------- --------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One to four family:
Conventional $ 54,313 52.6% $ 67,543 62.0%
FHA/VA 9,174 8.8 11,718 10.8
Loans held for sale 21,217 20.5 14,523 13.3
Multifamily 1,292 1.2 1,382 1.3
Commercial 3,739 3.6 2,684 2.5
-------- ----- -------- -----
Total Real Estate Loans 89,735 86.7 97,850 89.9
Commercial Business Loans 10,526 10.2 8,153 7.4
-------- ----- -------- -----
Consumer Loans:
Loans secured by savings deposits 281 .3 391 .4
Property improvement loans 1,610 1.6 1,728 1.6
Automobile loans 924 .9 617 .6
Other consumer loans 261 .3 157 .1
-------- ----- -------- -----
Total Consumer Loans 3,076 3.1 2,893 2.7
-------- ----- -------- -----
Total Loans 103,337 100.0% 108,896 100.0%
===== =====
LESS:
Loans in process -- 3
Deferred loan fees 27 37
Unearned discounts 28 8
Allowance for loan losses 366 374
Valuation reserve on loans held
for sale 61 59
-------- --------
Total loans receivable, net $102,855 $108,415
======== ========
</TABLE>
9
<PAGE> 12
EQUALITY BANCORP, INC. AND SUBSIDIARY
Office properties and equipment increased $686,000, or 12.3%, to $6.3 million
at December 31, 1998 from $5.6 million at March 31, 1998. The increase
resulted from additional improvements to the Bank's branch network
during the nine months ended December 31, 1998 including the relocation
of a limited use branch into a full service location and the opening of
a new branch in Washington, Missouri.
Savings deposits increased $7.4 million, or 6.2%, to $126.7 million at
December 31, 1998 from $119.3 million at March 31, 1998. The increase
is due primarily to deposits taken at the Bank's newly opened branch
location in Washington, Missouri of $2.6 million in addition to deposit
inflow, the result of the Bank's advertising and marketing efforts
during 1998. Interest credited during the nine months ended December
31, 1998 was approximately $3.2 million.
FHLB advances increased $26.3 million, or 25.3%, to $130.3 million at
December 31, 1998 from $104.0 million at March 31, 1998. Proceeds from
these advances were used to fund purchases of mortgage-backed
securities.
Other borrowed money increased $2.3 million, or 138.3%, to $4.0 million at
December 31, 1998 from $1.7 million at March 31, 1998. These short term
borrowings relate to a warehouse line of credit established with an
independent bank and maintained by EMC, the proceeds of which were
invested solely in residential mortgage loans.
Total stockholders' equity increased $172,000, or 0.7%, to $26.0 million at
December 31, 1998 from $25.8 million at March 31, 1998. The increase
was primarily attributable to the Company's net income of $837,000 and a
reduction in ESOP indebtedness of $106,000 for the nine months ended
December 31, 1998 offset by the Company's funding of a portion of its
Management Recognition Plan (MRP), net of amortization, totaling
$428,000 during the period August, 1998 through December, 1998 and
payment of three quarterly dividends totaling $426,000.
10
<PAGE> 13
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED AVERAGE BALANCE SHEET,
INTEREST AND DIVIDENDS EARNED OR PAID,
AND RELATED INTEREST YIELDS AND RATES
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST INTEREST
AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE<F1> DIVIDENDS COST<F2> BALANCE<F1> DIVIDENDS COST<F2>
- -------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans Receivable<F3> $102,183 $ 1,923 7.53% $108,568 $ 2,122 7.82%
Investment securities 47,705 681 5.71 91,648 1,398 6.10
Mortgage-backed securities 108,727 1,609 5.92 8,080 150 7.43
Interest-bearing deposits 11,575 107 3.70 8,897 130 5.84
Investment in FHLB 6,522 107 6.56 3,700 63 6.81
-------- ------- -------- -------
Total interest-earning
assets 276,712 4,427 6.40 220,893 3,863 7.00
------- -------
Other assets 15,332 10,279
-------- --------
Total assets 292,044 231,172
======== ========
Interest bearing liabilities:
Regular savings 19,966 36,689
NOW accounts 17,502 13,590
Money market accounts 6,824 5,565
Certificates of deposit 82,794 79,595
-------- --------
Total savings deposits 127,086 1,409 4.43 135,439 1,482 4.38
FHLB advances 130,326 1,790 5.49 74,000 968 5.23
Other interest-bearing
liabilities 3,897 22 2.26 3,399 18 2.12
-------- ------- -------- -------
Total interest bearing
liabilities 261,309 3,221 4.93 212,838 2,468 4.64
------- -------
Other liabilities 4,596 452
-------- --------
Total liabilities 265,905 213,290
Stockholders' equity 26,139 17,882
-------- --------
Total liabilities and
stockholders' equity $292,044 $231,172
======== ========
Net interest income $1,206 $1,395
======= =======
Interest rate spread 1.47% 2.36%
==== ====
Net interest margin<F4> 1.74% 2.53%
==== ====
Ratio of average interest-
earning assets to
average interest-bearing
liabilities 1.06X 1.04X
==== ====
<FN>
<F1>Average balances are computed on a monthly basis (month-end balances).
<F2>Annualized.
<F3>Does not include interest on loans 90 days or more past due.
<F4>Net interest income divided by average interest-earning assets.
</TABLE>
11
<PAGE> 14
EQUALITY BANCORP, INC. AND SUBSIDIARY
THREE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
NET INCOME
Net income decreased $75,000, or 20.5%, to $289,000 for the three months
ended December 31, 1998 from $364,000 for the three months ended
December 31, 1997. The decrease was primarily the result of increased
noninterest expense of $729,000, or 47.7%, and decreased net interest
income of $189,000, or 13.5%, offset by increased noninterest income of
$786,000, or 106.9%, and decreased income taxes of $57,000, or 24.1%,
for the three months ended December 31, 1998.
INTEREST INCOME
Interest income increased $564,000, or 14.6%, to $4.4 million for the three
months ended December 31, 1998 from $3.9 million for the three months
ended December 31, 1997. The increase is primarily due to increased
average mortgage-backed securities of $100.6 million to $108.7 million
for the three months ended December 31, 1998 from $8.1 million for the
three months December 31, 1997 offset by decreased average investment
securities of $43.9 million to $47.7 million for the three months ended
December 31, 1998 from $91.6 million for the three months ended December
31, 1997 and decreased average loans receivable of $6.4 million to
$102.2 million for the three months ended December 31, 1998 from $108.6
million for the three months ended December 31, 1997. The weighted
average yield on total interest-earning assets decreased to 6.40% for
the three months ended December 31, 1998 from 7.00% for the three months
ended December 31, 1997 due to the investment of proceeds of mortgage
loan repayments and investment securities maturities at current market
rates.
INTEREST EXPENSE
Interest expense increased $753,000, or 30.5%, to $3.2 million for the three
months ended December 31, 1998 from $2.5 million for the three months
ended December 31, 1997. The increase is primarily due to increased
average FHLB advances of $56.3 million to $130.3 million for the three
months ended December 31, 1998 from $74.0 million for the three months
ended December 31, 1997 offset by decreased average savings deposits of
$8.4 million to $127.1 million for the three months ended December 31,
1998 from $135.4 million for the three months ended December 31, 1997.
Weighted average cost of funds increased to 4.93% for the three months
ended December 31, 1998 from 4.64% for the three months ended December
31, 1997.
PROVISION FOR LOSSES ON LOANS
The Company had no provision for losses on loans for the three month periods
ended December 31, 1998 or December 31, 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 Bank's allowance for loan
losses totaled $366,000 at December 31, 1998 and $374,000 at March 31,
1998, respectively. The allowance for loan losses is established
through a provision for loan losses charged to expense. While the Bank
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 $786,000, or 106.9%, to $1.5 million for the
three months ended December 31, 1998 from $735,000 for the three months
ended December 31, 1997. This
12
<PAGE> 15
EQUALITY BANCORP, INC. AND SUBSIDIARY
increase was due primarily to increased gain on sale of loans of
$442,000, or 120.9%, to $807,000 for the three months ended December 31,
1998 from $365,000 for the three months ended December 31, 1997,
increased loan servicing fees and late charges of $119,000, or 51.2%, to
$352,000 for the three months ended December 31, 1998 from $233,000 for
the three months ended December 31, 1997 and increased gain on sale of
real estate of $147,000 to $147,000 for the three months ended December
31, 1998. During the period, ECC sold its 50% ownership interest in WC
Joint Venture, a direct investment. There was no comparable item for
the three months ended December 31, 1997. For the three months ended
December 31, 1998, the Company, through EMC, sold $48.5 million of
mortgage loans as compared to sales of $24.9 million for the three
months ended December 31, 1997. The increased volume of sales resulted
in increased gain on sale for the comparable periods. As a result of
increased volume due to the declining interest rate environment which
has significantly increased refinancings and the Company's efforts at
retaining servicing on loans sold, the average loan servicing portfolio
increased $18.3 million, or 5.5%, to $351.4 million for the three months
ended December 31, 1998 from $333.0 million for the three months ended
December 31, 1997.
NONINTEREST EXPENSE
Noninterest expense increased $729,000, or 47.7%, to $2.3 million for the
three months ended December 31, 1998 from $1.5 million for the three
months ended December 31, 1997. The increase was due primarily to
increased salary and employee benefits of $356,000, or 42.8%, to $1.2
million for the three months ended December 31, 1998 from $831,000 for
the three months ended December 31, 1997, increased advertising expense
of $22,000, or 69.1%, to $54,000 for the three months ended December 31,
1998 from $32,000 for the three months ended December 31, 1997 and
increased other expenses of $309,000, or 71.5%, to $740,000 for the
three months ended December 31, 1998 from $431,000 for the three months
ended December 31, 1997. Salary and employee benefits increased
primarily due to increased commissions paid to loan officers of $95,000
on increased mortgage loan originations and an increase of five Bank
personnel to staff both the new Washington, Missouri branch facility as
well as additional employment needs and six EMC personnel, including two
commissioned loan officers. In addition, ESOP and MRP compensation
expenses increased $96,000 to $96,000 for the three months ended
December 31, 1998 reflecting contributions by the Company with no
comparable items in 1997. Advertising expense increased as a result of
increased marketing promotions during the three months ended December
31, 1998 for the Bank. General operating expenses increased due to
increased amortization of originated mortgage servicing rights (OMSR) of
$165,000 to $249,000 for the three months ended December 31, 1998 from
$84,000 for the three months ended December 31, 1997.
INCOME TAXES
Income tax expense decreased $57,000, or 24.1%, to $180,000 for the three
months ended December 31, 1998 from $237,000 for the three months ended
December 31, 1997. This decrease was primarily due to a decrease in
income before income tax of $132,000, or 21.9%. The effective tax rate
was approximately 38.3% and 39.4% for the three month periods ended
December 31, 1998 and 1997, respectively.
13
<PAGE> 16
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED AVERAGE BALANCE SHEET,
INTEREST AND DIVIDENDS EARNED OR PAID,
AND RELATED INTEREST YIELDS AND RATES
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
- -------------------------------------------------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST INTEREST
AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE<F1> DIVIDENDS COST<F2> BALANCE<F1> DIVIDENDS COST<F2>
- -------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable<F3> $100,966 $5,887 7.77% $106,287 $6,074 7.62%
Investment securities 59,094 2,745 6.19 77,172 3,685 6.37
Mortgage-backed securities 87,807 3,869 5.88 10,035 540 7.17
Interest-bearing deposits 11,658 319 3.65 10,855 317 3.90
Investment in FHLB 6,232 310 6.63 3,514 183 6.94
-------- ------ -------- ------
Total interest-earning
assets 265,757 13,130 6.59 207,863 10,799 6.93
------ ------
Other assets 12,884 8,893
-------- --------
Total assets 278,641 216,756
======== ========
Interest bearing liabilities:
Regular savings 20,163 29,716
NOW accounts 15,602 13,288
Money market accounts 6,526 5,516
Certificates of deposit 79,575 81,088
-------- --------
Total savings deposits 121,866 4,077 4.46 129,608 4,314 4.44
FHLB advances 124,586 5,060 5.42 68,056 2,751 5.39
Other interest-bearing
liabilities 3,261 52 2.13 2,650 45 2.26
-------- ------ -------- ------
Total interest bearing
liabilities 249,713 9,189 4.91 200,314 7,110 4.73
------ ------
Other liabilities 2,775 1,643
-------- --------
Total liabilities 252,488 201,957
Stockholders, equity 26,153 14,799
-------- --------
Total liabilities and
stockholders' equity $278,641 $216,756
======== ========
Net interest income $3,941 $3,689
====== ======
Interest rate spread 1.68% 2.20%
==== ====
Net interest margin<F4> 1.98% 2.37%
==== ====
Ratio of average interest-
earning assets to
average interest-bearing
liabilities 1.06x 1.04x
==== ====
<FN>
<F1>Average balances are computed on a monthly basis (month-end balances).
<F2>Annualized.
<F3>Does not include interest on loans 90 days or more past due.
<F4>Net interest income divided by average interest-earning assets.
</TABLE>
14
<PAGE> 17
EQUALITY BANCORP, INC. AND SUBSIDIARY
NINE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
NET INCOME
Net income decreased $52,000, or 5.8%, to $837,000 for the nine months ended
December 31, 1998 from $889,000 for the nine months ended December 31,
1997. The decrease was primarily the result of increased noninterest
expense of $1.8 million, or 42.6%, offset by increased net interest
income of $252,000, or 6.8%, increased noninterest income of $1.5
million, or 69.5%, decreased provision for losses on loans of $24,000,
or 100.0%, and decreased income taxes of $43,000, or 7.5%.
INTEREST INCOME
Interest income increased $2.3 million, or 21.6%, to $13.1 million for the
nine months ended December 31, 1998 from $10.8 million for the nine
months ended December 31, 1997. Interest on loans receivable decreased
by $187,000, or 3.1%, to $5.9 million for the nine months ended December
31, 1998. This decrease was the result of a decrease in the average
balance of loans outstanding of $5.3 million from $106.3 million for the
nine months ended December 31, 1997 to $101.0 million for the nine
months ended December 31, 1998, offset by an increase in the yield on
loans from 7.62% for the nine months ended December 31, 1997 to 7.77%
for the nine months ended December 31, 1998. The lower average balance
of loans outstanding for the nine months ended December 31, 1998
reflects a decrease in mortgage loan portfolio lending and increased
repayments due to declining interest rates offset by increased secured
commercial lending. Interest on investment securities decreased
$940,000, or 25.5%, from $3.7 million for the nine months ended December
31, 1997 to $2.7 million for the nine months ended December 31, 1998,
due to a decrease in the average balance of investment securities of
$18.1 million from $77.2 million for the nine months ended December 31,
1997 to $59.1 million for the nine months ended December 31, 1998.
During the same period the yield on investment securities decreased from
6.37% for the nine months ended December 31, 1997 to 6.19% for the nine
months ended December 31, 1998. Interest income on mortgage-backed
securities increased $3.3 million, or 616.9%, from $540,000 for the nine
months ended December 31, 1997 to $3.9 million for the nine months ended
December 31, 1998 due to an increase in the average balances of $77.8
million from $10.0 million for the nine months ended December 31, 1997
to $87.8 million for the nine months ended December 31, 1998, offset by
a decrease in the yield on mortgage-backed securities from 7.17% for the
nine months ended December 31, 1997 to 5.88% for the nine months ended
December 31, 1998.
INTEREST EXPENSE
Interest expense increased $2.1 million, or 29.2%, to $9.2 million for the
nine months ended December 31, 1998 from $7.1 million for the nine
months ended December 31, 1997. The increase resulted primarily from
increased average FHLB advances. Average deposit balances decreased
$7.7 million from $129.6 million for the nine months ended December 31,
1997 to $121.9 million for the nine months ended December 31, 1998.
During the same nine month periods, the weighted average cost of
deposits increased from 4.44% to 4.46% due to a higher concentration of
money market demand accounts. The decrease in average savings deposits
is primarily due to decreased average passbook balances.
Average advances from the FHLB increased $56.5 million from $68.1 million for
the nine months ended December 31, 1997 to $124.6 million for the nine
months ended December 31, 1998. The increase was primarily the result
of borrowings used to fund increased investments in mortgage-backed
securities. The weighted average cost of advances increased from
15
<PAGE> 18
EQUALITY BANCORP, INC. AND SUBSIDIARY
5.39% for the nine months ended December 31, 1997 to 5.42% for the nine
months ended December 31, 1998.
PROVISION FOR LOSSES ON LOANS
Provision for losses on loans decreased $24,000 for the nine months ended
December 31, 1998 from $24,000 for the nine months ended December 31,
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 Bank's allowance for loan losses totaled $366,000 at December 31,
1998 and $374,000 at March 31, 1998, respectively. The allowance for
loan losses is established through a provision for loan losses charged
to expense. While the Bank 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 $1.5 million, or 69.5%, to $3.6 million for the
nine months ended December 31, 1998 from $2.1 million for the nine
months ended December 31, 1997. The increase is due primarily to gain
on sale of mortgage loans which increased from $1.0 million for the nine
months ended December 31, 1997 to $2.0 million for the nine months ended
December 31, 1998, increased loan servicing fees and late charges which
increased $233,000 from $706,000 for the nine months ended December 31,
1997 to $939,000 for the nine months ended December 31, 1998 and
increased gain on sale of real estate of $147,000 due to ECC's sale of
its 50% ownership interest in WC Joint Venture, a direct investment.
There was no comparable item for the nine months ended December 31,
1997. The increase of $1.0 million, or 103.4%, on gain on sale of
mortgage loans was due to a continued improvement in market interest
rates during the nine months ended December 31, 1998. For the nine
months ended December 31, 1998, the Bank, through EMC, sold $126.7
million of mortgage loans as compared to $62.8 million in the comparable
period in 1997. The increased sales volume of $63.9 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 $233,000, or 33.0%, due primarily to an increase in the
average servicing portfolio of EMC. Average loan servicing by EMC
increased $18.1 million, or 5.5%, from $330.9 million for the nine
months ended December 31, 1997 to $349.0 million for the nine months
ended December 31, 1998.
NONINTEREST EXPENSE
Noninterest expense increased $1.8 million, or 42.6%, to $6.2 million for the
nine months ended December 31, 1998 from $4.3 million for the nine
months ended December 31, 1997 due primarily to increased salaries and
employee benefits of $918,000, or 37.7%, from $2.4 million for the nine
months ended December 31, 1997 to $3.4 million for the nine months ended
December 31, 1998, increased advertising expenses of $168,000, or
205.6%, from $82,000 for the nine months ended December 31, 1997 to
$249,000 for the nine months ended December 31, 1998 and increased other
expenses of $671,000 or 57.6%, from $1.2 million for the nine months
ended December 31, 1997 to $1.8 million for the nine months ended
December 31, 1998. Increased salary and employee benefits are the
direct result of increased commissions paid to mortgage loan origination
personnel of $198,000, or 80.8%, from $245,000 for the nine months ended
December 31, 1997 to $443,000 for the nine months ended December 31,
1998, general wage increases and an increase of five Bank personnel to
staff both the new Washington branch facility as well as additional
employment needs and six EMC personnel as a result of increased mortgage
lending activity in 1998 in addition to ESOP and MRP compensation
expenses which increased $246,000 for the nine months ended December 31,
1998 reflecting
16
<PAGE> 19
EQUALITY BANCORP, INC. AND SUBSIDIARY
contributions by the Company with no comparable items in 1997. Data
processing expense increased $60,000 as a result of expenses related to
an increase in the number of office properties and Year 2000 compliance
expenses. Advertising expenses increased as a result of marketing
promotions during the nine months ended December 31, 1998 for the Bank's
relocated bank office, newly opened Washington, Missouri facility and
overall promotion of the Bank. Other expenses increased due primarily
to an increase in the amortization of originated mortgage servicing
rights (OMSR) which increased $306,000, or 151.7%, from $202,000 for the
nine months ended December 31, 1997 to $508,000 for the nine months
ended December 31, 1998 caused by refinancing or repayment of mortgage
loans which had OMSR, removing certain fixed assets from service
totaling $24,000, expenses totaling $130,000 in connection with
professional services and taxes for the Company with no comparable items
in 1997, and increases in supplies and services associated with
increased mortgage loan activity and an increased number of Bank branch
facilities.
INCOME TAXES
Income tax expense decreased $43,000, or 7.5%, to $529,000 for the nine months
ended December 31, 1998 from $572,000 for the nine months ended
December 31, 1997. The decrease was the result of the decrease in
income before income tax expense of $95,000. The effective tax rate was
approximately 38.7% and 39.2% for the nine month periods ended December
31, 1998 and 1997, respectively.
NONPERFORMING ASSETS
At December 31, 1998, nonperforming assets were approximately $1.0 million,
which represents an increase of $148,000, or 17.2%, as compared to March
31, 1998. A summary of nonperforming assets by category is summarized
as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
(in thousands)
<S> <C> <C>
Nonaccruing loans:
One to four family <F1> $ 935 853
Commercial real estate 51 --
Consumer and other 23 8
------ ---
Total nonaccruing loans 1,009 861
Repossessed assets -- --
------ ---
Total nonperforming assets $1,009 861
====== ===
Nonaccruing loans as a percent of net loans .98% .79%
====== ===
Nonaccruing loans as a percent of
total assets .35% .34%
====== ===
Nonperforming assets as a percent of
total assets .35% .34%
====== ===
<FN>
<F1> Includes $822,000 and $833,000 of FHA/VA loans, the principal and
interest payments of which are either issued by FHA or guaranteed by the
VA at December 31, 1998 and March 31, 1998, respectively.
</TABLE>
Loans are placed on nonaccrual status when either principal or interest is
more than 90 days past due or at such time when contractual amounts due
are deemed uncollectible, whichever is sooner. Interest accrued and
unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. Subsequent payments are either
17
<PAGE> 20
EQUALITY BANCORP, INC. AND SUBSIDIARY
applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of
the loan.
LIQUIDITY AND CAPITAL RESOURCES
The Office of Thrift Supervision (OTS) requires minimum levels of liquid
assets. OTS regulations presently require the Bank to maintain an
average daily balance of liquid assets equal to a monthly average of not
less than 4.0% of net withdrawable accounts plus short-term borrowings.
Such requirements may be changed from time to time by the OTS to reflect
changing economic conditions. Such investments are intended to provide
a source of relatively liquid funds upon which the Bank may rely, if
necessary, to fund deposit withdrawals and other short-term funding
needs. The Bank's regulatory liquidity at December 31, 1998 was 27.1%.
The Bank's primary sources of funds consist of deposits bearing market rates
of interest and loan repayments. Other potential sources of funds
available to the Bank include borrowings from FHLB. At December 31,
1998, the Bank had such outstanding FHLB borrowings of $130.3 million.
The Bank uses its liquidity resources principally to meet ongoing
commitments, to fund maturing certificates of deposit and deposit
withdrawals, to invest, to fund existing and future loan commitments, to
maintain liquidity, and to meet operating expenses. Management believes
that loan repayments and other sources of funds will be adequate to meet
and exceed the Bank's liquidity needs, including meeting its commitments
to buy or fund loans. At December 31, 1998, the Bank had approximately
$8.1 million in outstanding commitments to originate loans,
approximately $64,000 million of which were adjustable rate loans. The
interest rate on fixed rate commitments ranged from 6.50% to 7.125% at
December 31, 1998. The majority of the loans will be sold into the
secondary market upon origination.
REGULATORY CAPITAL
Federally insured savings associations such as the Bank are required to
maintain a minimum level of regulatory capital. The capital regulations
require institutions to have tangible capital equal to 1.5% of total
adjusted assets (as defined by regulation), a minimum core capital ratio
of 3% of adjusted total assets, and a risk-based capital ratio of 8% of
risk-based assets (as defined by regulation). The risk-based capital
requirement is calculated based on the credit risk presented by both
on-balance-sheet assets and off-balance-sheet commitments and
obligations. Assets are assigned a credit-risk weighting based upon
their relative risk ranging from 0% for assets backed by the full faith
and credit of the United States or that pose no credit risk to the
institution to 100% for assets such as delinquent or repossessed assets.
18
<PAGE> 21
EQUALITY BANCORP, INC. AND SUBSIDIARY
A reconciliation of stockholders' equity, as reported in the consolidated
financial statements of the Bank, to the three capital standards, as
required under the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 (FIRREA), is as follows:
<TABLE>
<CAPTION>
Regulatory Capital
----------------------------------------------
Tangible Core Risk-based
capital capital capital
----------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Stockholders' equity - $ 25,249 25,249 25,249
Accumulated other comprehensive
income (378) (378) (378)
--------- ------ ------
Adjusted stockholders' equity 24,871 24,871 24,871
Investments in and advances to
nonincludable subsidiaries (229) (229) (229)
Additional capital item - general
loan loss reserves -- -- 366
--------- ------ ------
Regulatory capital, as computed 24,642 24,642 25,008
Minimum capital requirement 4,316 8,633 7,401
--------- ------ ------
Regulatory capital in excess of
minimum capital requirement $ 20,326 16,009 17,607
========= ====== ======
Regulatory capital ratio 8.56% 8.56% 27.03%
========= ====== ======
</TABLE>
Management believes that under current regulations, the Bank will continue to
meet its minimum capital requirements in the foreseeable future. Events
beyond the control of the Bank could adversely affect future earnings
and as a result, the ability of the Bank to meet its future minimum
capital requirements.
IMPACT OF INFLATION AND CHANGING PRICES
The unaudited consolidated financial statements and related data presented
herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial
position and results of operations in the measurements of historical
dollars without considering changes in the relative purchasing power of
money over time because of inflation.
Unlike most industrial companies, virtually all of the assets and liabilities
of the Company are monetary in nature. As a result, interest rates have
a more significant impact on the Company's performance than the effects
of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the prices of goods
and services. In the present interest rate environment, the liquidity,
maturity structure, and quality of the Company's assets and liabilities
are important factors in the maintenance of acceptable performance levels.
19
<PAGE> 22
EQUALITY BANCORP, INC. AND SUBSIDIARY
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In December, 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, Disclosures about
-----------------
Segments of an Enterprise and Related Information (SFAS 131). SFAS 131
-------------------------------------------------
establishes standards for the way public business enterprises are to
report information about operating segments in annual financial
statements and requires those enterprises to report selected information
about operating segments in interim financial reports issued to
shareholders. SFAS 131 is effective for financial statements for
periods beginning after December 15, 1997. SFAS 131 is a disclosure
requirement. The adoption of SFAS 131 will not have an impact on the
Company's financial position or results of operation.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In December, 1998, the FASB issued SFAS No. 133, Accounting for Derivative
-------------------------
Instruments and Hedging Activities, (SFAS 133). SFAS 133 establishes
----------------------------------
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS 133 is effective for all fiscal years
beginning after December 15, 1999. Earlier application of SFAS 133 is
encouraged but should not be applied retroactively to financial
statements of prior periods. The Company is currently evaluating the
requirements and impact of SFAS 133.
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 the Company
does not securitize and retain mortgage loans, SFAS 134 will have no
impact on the Company's consolidated financial position and results of
operations.
YEAR 2000 COMPLIANCE
The Company's Year 2000 committee constantly monitors the readiness of the
Year 2000 project using guidance from its regulatory agencies. The
Company's action plan contains five phases: awareness, assessment,
renovation, validation and implementation.
The awareness phase and the assessment phase of the action plan have been
completed and as a result, remedial actions necessary for Year 2000
compliance have been initiated where necessary.
The core applications of the Company are performed by service bureau
providers. However, given the risks associated with noncompliance the
Company will not rely on assurances from these providers. As a result,
the renovation phase of the action plan is considered 80 percent
complete, awaiting additional testing and the validation phase, which is
primarily testing, is expected to be completed before April, 1999. The
implementation phase will be initiated once testing results are received
and analyzed
20
<PAGE> 23
EQUALITY BANCORP, INC. AND SUBSIDIARY
by the committee. Contingency plans have been developed by the
committee and can be implemented in the unlikely event that the core
application providers are not compliant with Year 2000 issues.
The Company is primarily a retail banking and mortgage banking provider
specializing in single family residential mortgages and family related
retail deposit relationships. Year 2000 risk associated with this type
of business are considered to have a minimal impact on the Company.
The Board of Directors has initially budgeted $148,000 for year 2000 issues
in addition to in-house compensation expenditures of committee members.
To date, $31,000 has been expended. The Year 2000 committee reports to
the Board of Directors on a monthly basis and management does not expect
the cost of Year 2000 compliance to be material to the business,
financial condition or results of operation of the Company.
21
<PAGE> 24
EQUALITY BANCORP, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits: None.
Reports on Form 8-K: None.
22
<PAGE> 25
EQUALITY BANCORP, INC. AND SUBSIDIARY
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUALITY BANCORP, INC.
Registrant
Date: February 12, 1999 /s/RICHARD C. FELLHAUER
----------------------------- -----------------------------------
Richard C. Fellhauer, President,
Chief Executive Officer and
Chairman of the Board
Date: February 12, 1999 /s/MICHAEL A. DEELO
----------------------------- -----------------------------------
Michael A. Deelo,
Chief Financial Officer
23
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,238
<INT-BEARING-DEPOSITS> 1,184
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 157,577
<INVESTMENTS-CARRYING> 600
<INVESTMENTS-MARKET> 544
<LOANS> 102,855
<ALLOWANCE> 366
<TOTAL-ASSETS> 289,111
<DEPOSITS> 126,714
<SHORT-TERM> 4,000
<LIABILITIES-OTHER> 2,096
<LONG-TERM> 130,291
0
0
<COMMON> 25
<OTHER-SE> 25,985
<TOTAL-LIABILITIES-AND-EQUITY> 289,111
<INTEREST-LOAN> 5,887
<INTEREST-INVEST> 6,614
<INTEREST-OTHER> 629
<INTEREST-TOTAL> 13,130
<INTEREST-DEPOSIT> 4,077
<INTEREST-EXPENSE> 9,189
<INTEREST-INCOME-NET> 3,941
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<EXPENSE-OTHER> 6,120
<INCOME-PRETAX> 1,366
<INCOME-PRE-EXTRAORDINARY> 1,366
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 837
<EPS-PRIMARY> .35
<EPS-DILUTED> .35
<YIELD-ACTUAL> 6.59
<LOANS-NON> 1,009
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 366
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 366
<ALLOWANCE-DOMESTIC> 366
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
