<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------- ------------------
Commission File No. 333-30469
EQUALITY BANCORP, INC.
----------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 43-1785126
- ------------------------------------ --------------------------------
(State or other jurisdiction (I.R.S. Employer ID Number)
of incorporation or organization)
9920 WATSON ROAD, ST. LOUIS, MO 63126
- ------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
Issuer's telephone number, including area code (314) 965-7090
---------------------
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding at August 13, 1999
- -------------------------------- ---------------------------------------
Common Stock, Par Value $0.01 2,520,684
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 7
Operation
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
<PAGE> 3
<TABLE>
EQUALITY BANCORP, INC.
Consolidated Balance Sheets
June 30, 1999 and March 31, 1999
(Unaudited)
<CAPTION>
June 30, March 31,
1999 1999
-------- ---------
<S> <C> <C>
Assets
------
Cash, primarily interest-bearing demand accounts $ 1,849,900 6,449,613
Interest-bearing deposits 990,000 1,085,000
Investment securities:
Available for sale, at fair value 100,006,667 81,635,339
Held to maturity, at cost 600,000 600,000
Mortgage-backed securities available
for sale, at fair value 81,004,717 90,810,783
Loans receivable, net 102,200,161 90,230,677
Investment in real estate 58,054 58,054
Stock in Federal Home Loan Bank 7,430,700 6,911,100
Mortgage servicing rights 1,679,161 1,479,631
Office properties and equipment, net 6,876,046 6,451,357
Accrued interest receivable and other assets 3,228,355 2,725,620
------------ -----------
305,923,761 288,437,174
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Savings deposits 128,675,146 128,953,826
Accrued interest payable on savings deposits 199,880 200,280
Borrowed money 150,962,052 132,010,050
Advance payments by borrowers for taxes and insurance 134,696 69,634
Income tax payable 507,079 203,588
Deferred income taxes 78,871 873,343
Accrued expenses and other liabilities 641,788 518,723
------------ -----------
Total liabilities 281,199,512 262,829,444
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value per share;
200,000 shares authorized; none issued -- --
and outstanding
Common stock, $.01 par value per share;
4,000,000 shares authorized; 2,520,684
and 2,519,793 shares issued and outstanding
at June 30, 1999 and March 31, 1999, respectively 25,207 25,198
Additional paid-in capital 16,120,234 16,108,269
Retained earnings - substantially restricted 11,360,125 11,255,324
Accumulated other comprehensive income (loss) (693,393) 139,464
Treasury stock, at cost, 45,760 and 18,500 shares respectively (409,099) (166,431)
Unearned restricted stock awards (580,131) (619,325)
Unearned ESOP shares (1,098,694) (1,134,769)
------------ -----------
Total stockholders' equity 24,724,249 25,607,730
------------ -----------
$305,923,761 288,437,174
============ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
1
<PAGE> 4
<TABLE>
EQUALITY BANCORP, INC.
Consolidated Statements of Income
Three months ended June 30, 1999 and 1998
(Unaudited)
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Interest income:
Loans receivable $1,824,517 2,072,260
Investment securities 1,614,286 1,100,274
Mortgage-backed securities 1,255,743 967,326
Interest-bearing deposits 9,920 125,317
Other 109,633 96,293
---------- ---------
Total interest income 4,814,099 4,361,470
---------- ---------
Interest expense:
Savings deposits 1,373,683 1,322,750
Advances from the Federal Home Loan Bank 1,820,977 1,545,387
Other borrowed money 11,802 13,178
---------- ---------
Total interest expense 3,206,462 2,881,315
---------- ---------
Net interest income 1,607,637 1,480,155
Provision for losses on loans -- --
---------- ---------
Net interest income after pro-
vision for losses on loans 1,607,637 1,480,155
---------- ---------
Noninterest income:
Gain on sale of mortgage loans 331,133 438,284
Loan servicing fees and late charges 311,123 292,577
Gain on sale of investment and mortgage-
backed securities available for sale 30,703 6,397
Equity in loss of joint venture -- (37,236)
Rental income 36,326 25,661
Other 141,606 110,571
---------- ---------
Total noninterest income 850,891 836,254
---------- ---------
Noninterest expense:
Salaries and employee benefits 1,159,866 1,037,719
Occupancy 183,612 115,019
Data processing 91,131 73,181
Advertising 79,536 84,104
Federal insurance premiums 18,512 18,260
Other 511,105 408,292
---------- ---------
Total noninterest expense 2,043,762 1,736,575
---------- ---------
Income before income tax expense 414,766 579,834
Income tax expense 169,440 228,889
---------- ---------
Net income 245,326 350,945
========== =========
Basic earnings per share $ .10 .15
========== =========
Diluted earnings per share $ .10 .15
========== =========
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE> 5
<TABLE>
EQUALITY BANCORP, INC.
Consolidated Statement of Stockholders' Equity
Three months ended June 30, 1999
(Unaudited)
<CAPTION>
Accumu-
lated
other
compre- Unamortized Total
Common Stock Additional hensive restricted stock-
------------ paid-in Retained income Treasury stock Unearned holders'
Shares Amount capital earnings (loss) stock awards ESOP shares equity
------ ------ ---------- -------- ------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March
31, 1999 2,519,793 $25,198 16,108,269 11,255,324 139,464 (166,431) (619,325) (1,134,769) $25,607,730
Net income 245,326 245,326
Exercise of
stock options 891 9 3,291 3,300
Purchase of
Treasury
stock, at cost (242,668) (242,668)
Amortization
of restricted
stock awards 39,194 39,194
Amortization
of ESOP awards 8,674 36,075 44,749
Dividend
declared on
common stock
at $.06 per
per share (140,525) (140,525)
Change in
accumulated
other
comprehensive
income (loss) (832,857) (832,857)
--------- ------- ---------- ---------- -------- -------- -------- ---------- -----------
Balance, June
30, 1999 2,520,684 $25,207 16,120,234 11,360,125 (693,393) (409,099) (580,131) (1,098,694) $24,724,249
========= ======= ========== ========== ======== ======== ======== ========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE> 6
<TABLE>
EQUALITY BANCORP, INC.
Consolidated Statements of Cash Flows
Threee months ended June 30, 1999 and 1998
(Unaudited)
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 245,326 350,945
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization:
Office properties and equipment 104,620 19,582
Real estate investments -- 2,815
Premiums and discounts, net (237,357) (87,330)
Mortgage servicing rights 153,610 113,357
Restricted stock awards 39,194 --
Increase in accrued interest receivable (371,453) (247,721)
Gain on sale of investment and mortgage-backed
securities available for sale (30,703) (6,397)
Increase (decrease) in accrued interest payable on savings deposits (400) 5,678
Change in income tax payable 41,501 (530,179)
Equity in loss of joint ventures -- 37,236
Other, net (78,821) (2,328,485)
Origination and purchase of loans held for sale (35,383,194) (38,389,649)
Proceeds from sales of loans held for sale 28,206,371 40,133,663
------------ -----------
Net cash provided by (used in) operating activities 7,311,306 (926,485)
------------ -----------
Cash flow from investing activities:
Net change in loans receivable (4,771,815) 4,781,666
Decrease in interest-bearing deposits 95,000 99,000
Principal repayments on investment securities, AFS 5,146 14,088
Principal repayments on mortgage-backed securities, AFS 7,568,074 4,044,543
Proceeds from the sale of investment securities, AFS 2,018,000 --
Proceeds from the maturity of investment securities, AFS 15,110,000 16,285,000
Proceeds from the sale of mortgage-backed securities, AFS 1,278,561 6,244,094
Proceeds from the maturity of investment securities, HTM -- 1,000,000
Purchase of investment securities, AFS (35,547,815) (13,236,875)
Purchase of mortgage-backed securities, AFS -- (28,222,140)
Decrease in joint venture borrowings -- 3,294
Purchase of stock in Federal Home Loan Bank (519,600) (1,000,000)
Increase in cost of mortgage servicing rights (353,140) (298,458)
Purchase of office properties and equipment, net (529,309) (232,714)
------------ -----------
Net cash used in investing activities (15,646,898) (10,518,502)
------------ -----------
Cash flow from financing activities:
Net decrease in savings deposits (278,680) (630,222)
Proceeds from Federal Home Loan Bank advances 18,000,000 30,000,000
Repayment of Federal Home Loan Bank advances (108,434) (10,000,000)
Proceeds from other borrowed money 1,060,436 861,730
Cash dividends paid (140,525) (141,821)
Purchase of treasury stock (242,668) --
Proceeds from exercise of stock options 3,300 42,805
Increase in advance payments by borrowers
for taxes and insurance 65,062 29,694
------------ -----------
Net cash provided by financing activities 18,358,491 20,162,186
------------ -----------
Net increase (decrease) in cash and cash equivalents (4,599,713) 8,717,199
Cash and cash equivalents, beginning of period 6,449,613 1,070,538
------------ -----------
Cash and cash equivalents, end of period $ 1,849,900 9,787,737
============ ===========
Supplemental disclosure of cash flow information:
Interest paid $ 3,206,862 2,875,637
Income taxes paid, net 110,452 760,012
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE> 7
<TABLE>
EQUALITY BANCORP, INC.
Consolidated Statements of Comprehensive Income
Three months ended June 30, 1999 and 1998
(Unaudited)
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Net Income $ 245,326 350,945
Other comprehensive income (loss):
Net unrealized gain (loss) on investment and mortgage-
backed securities available for sale, net of tax (814,128) 37,657
Less adjustment for gain on sale of investment and
mortgage-backed securities available for sale
realized in net income, net of tax of $11,974
and $2,495 for the three months ended June 30,
1999 and 1998, respectively (18,729) (3,902)
--------- -------
Total other comprehensive income (loss) (832,857) 33,755
--------- -------
Comprehensive income (loss) $(587,531) 384,700
========= =======
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE> 8
EQUALITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with instructions for Form 10-QSB and,
therefore, do not include information for footnotes necessary for a
complete presentation of financial position, results of operations,
and cash flows in conformity with generally accepted accounting
principles. However, all adjustments (consisting only of normal
recurring accruals) which, in the opinion of management, are
necessary for a fair presentation of the consolidated financial
statements have been included in the results of operations for the
three months ended June 30, 1999 and 1998.
Operating results for the three months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the
year ending March 31, 2000.
(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
------------------
Basic earnings per share for the three month periods ended June 30,
1999 and 1998 were computed based upon net income for the period
using weighted average common shares outstanding of 2,350,538 and
2,358,040, respectively.
Diluted earnings per share for the three month periods ended June 30,
1999 and 1998 were computed based upon net income for the period
using weighted average common shares and dilutive potential common
shares outstanding of 2,377,871 and 2,394,875, respectively. Stock
options are the only dilutive potential common shares.
6
<PAGE> 9
EQUALITY BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
The following discussion reviews the financial condition and results of
operations of Equality Bancorp, Inc., and its subsidiary, Equality
Savings Bank, with subsidiaries, as of June 30, 1999 and for the
three months then ended.
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances
after the date of such statements.
CHANGES IN FINANCIAL CONDITION
The total assets of the Company increased $17.5 million, or 6.1%, to $305.9
million at June 30, 1999 from $288.4 million at March 31, 1999. This
increase in asset size primarily relates to an increase in investment
securities and loans receivable which were funded through Federal Home
Loan Bank of Des Moines (FHLB) advances, the proceeds from repayment of
mortgage-backed securities, and cash reserves.
Cash, primarily interest bearing demand accounts, decreased $4.6 million, or
71.3%, to $1.8 million at June 30, 1999 from $6.4 million at March 31,
1999. This decrease is primarily the result of increased investment
securities and loans receivable offset by increased FHLB advances and
decreased mortgage-backed securities.
Interest bearing deposits decreased $95,000, or 8.8%, to $990,000 at June 30,
1999 from $1.1 million at March 31, 1999. The decrease is due to the
maturity of one certificate of deposit at another financial
institution. The Company is consciously reducing its investment in
this area as certificates of deposit mature.
Investment securities available for sale increased $18.4 million, or 22.5%,
to $100.0 million at June 30, 1999 from $81.6 million at March 31,
1999. The increase is due primarily to $35.5 million of purchases of
securities offset by $15.1 million of maturities and sales proceeds of
$2.0 million.
Investment securities held to maturity totaled $600,000 at June 30, 1999 and
March 31, 1999, respectively.
Mortgage-backed securities available for sale decreased $9.8 million, or
10.8%, to $81.0 million at June 30, 1999 from $90.8 million at March
31, 1999. This decrease is the result of normal principal repayments
of $7.6 million, sales proceeds of $1.3 million, and a mark to market
adjustment of $757,000 to reflect the unrealized loss on
mortgage-backed securities for the three months ended June 30, 1999.
Loans receivable, net, increased $12.0 million, or 13.3%, to $102.2 million
at June 30, 1999, from $90.2 million at March 31, 1999. Loans held for
investment increased $4.8 million, or 5.7%, to $88.0 million at June
30, 1999 from $83.3 million at March 31, 1999. This
7
<PAGE> 10
EQUALITY BANCORP, INC.
increase reflects Equality's efforts to prudently increase its loan
portfolio while developing an expanded retail banking presence in its
market area. Loans held for sale increased $7.2 million, or 103.4%, to
$14.2 million at June 30, 1999 from $7.0 million at arch 31, 1999. This
increase is the result of EMC mortgage loan originations totaling $35.4
million and mortgage loan purchases of $1.5 million, offset by mortgage
loan sales of $28.2 million for the three months ended June 30, 1999.
The following table sets forth composition of the Company's loan portfolio in
dollars and in percentages of total loans at the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, 1999 MARCH 31, 1999
------------- --------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One to four family:
Conventional $ 54,870 53.5% $54,525 60.1%
FHA/VA 14,449 14.1 10,629 11.7
Loans held for sale 14,198 13.8 7,021 7.8
Multifamily 1,269 1.2 1,430 1.6
Commercial 4,258 4.1 4,382 4.8
-------- ----- ------- -----
Total Real Estate Loans 89,044 86.8 77,987 86.0
Commercial Business Loans 10,452 10.2 9,642 10.6
-------- ----- ------- -----
Consumer Loans:
Loans secured by savings deposits 237 .2 254 .3
Property improvement loans 1,416 1.4 1,482 1.6
Automobile loans 1,247 1.2 1,042 1.2
Other consumer loans 227 .2 268 .3
-------- ----- ------- -----
Total Consumer Loans 3,127 3.0 3,046 3.4
-------- ----- ------- -----
Total Loans 102,623 100.0% 90,675 100.0%
===== =====
LESS:
Deferred loan fees 18 25
Unearned discounts 23 5
Allowance for loan losses 366 366
Valuation reserve on loans held
for sale 16 48
-------- -------
Total loans receivable, net $102,200 $90,231
======== =======
</TABLE>
8
<PAGE> 11
EQUALITY BANCORP, INC.
Office properties and equipment increased $425,000, or 6.6%, to $6.9 million
at June 30, 1999 from $6.5 million at March 31, 1999. The increase
resulted from additional improvements to the Bank's branch network
during the three months ended June 30, 1999 including the opening of a
new full service branch in St. Peters, Missouri.
Savings deposits decreased $279,000, or 0.2%, to $128.7 million at June 30,
1999 from $129.0 million at March 31, 1999. The decrease is due
primarily to deposit outflow. Interest credited during the three months
ended June 30, 1999 was approximately $1.1 million.
FHLB advances increased $17.9 million, or 13.7%, to $148.1 million at June
30, 1999 from $130.2 million at March 31, 1999. Proceeds from these
advances were used to fund purchases of investment securities and the
origination of loans receivable.
Other borrowed money increased $1.1 million, or 58.1%, to $2.9 million at
June 30, 1999 from $1.8 million at March 31, 1999. 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 decreased $883,000, or 3.5%, to $24.7 million at
June 30, 1999 from $25.6 million at March 31, 1999. The decrease was
primarily attributable to the Company's purchase of treasury stock of
$243,000, payment of a quarterly dividend totaling $141,000, and a mark
to market adjustment on securities available for sale of $833,000,
offset by net income of $245,000, a reduction in ESOP indebtedness of
$36,000, and a reduction of unamortized restricted stock awards of
$39,000.
9
<PAGE> 12
<TABLE>
EQUALITY BANCORP, INC.
UNAUDITED CONSOLIDATED AVERAGE BALANCE SHEET,
INTEREST AND DIVIDENDS EARNED OR PAID,
AND RELATED INTEREST YIELDS AND RATES
<CAPTION>
THREE MONTHS ENDED JUNE 30,
- ----------------------------------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
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> $ 97,037 $1,825 7.52% $102,881 $2,072 8.06%
Investment securities 93,704 1,614 6.89 70,766 1,100 6.22
Mortgage-backed securities 84,419 1,256 5.95 62,248 968 6.21
Interest-bearing deposits 2,864 10 1.40 13,536 125 3.69
Investment in FHLB 7,084 109 6.15 5,867 96 6.55
-------- ------ -------- ------
Total interest-earning
assets 285,108 4,814 6.76 255,298 4,361 6.83
------ ------
Other assets 12,681 11,240
-------- --------
Total assets 297,789 266,538
======== ========
Interest bearing liabilities:
Regular savings 21,042 20,310
NOW accounts 16,222 14,032
Money market accounts 8,426 6,534
Certificates of deposit 82,601 77,795
-------- --------
Total savings deposits 128,291 1,373 4.28 118,671 1,323 4.46
FHLB advances 139,279 1,821 5.23 117,333 1,545 5.27
Other interest-bearing
liabilities 2,423 12 1.98 2,588 13 2.01
-------- ------ -------- ------
Total interest bearing
liabilities 269,993 3,206 4.75 238,592 2,881 4.83
------ ------
Other liabilities 2,553 1,868
-------- --------
Total liabilities 272,546 240,460
Stockholders' equity 25,243 26,078
-------- --------
Total liabilities and
stockholders' equity $297,789 $266,538
======== ========
Net interest income $1,608 $1,480
====== ======
Interest rate spread 2.01% 2.00%
====== ======
Net interest margin<F4> 2.26% 2.32%
====== ======
Ratio of average interest-
earning assets to
average interest-bearing
liabilities 1.06X 1.07X
==== ====
<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>
10
<PAGE> 13
EQUALITY BANCORP, INC.
THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
NET INCOME
Net income decreased $106,000, or 30.1%, to $245,000 for the three months
ended June 30, 1999 from $351,000 for the three months ended June 30,
1998. The decrease was primarily the result of increased noninterest
expense of $307,000, or 17.7%, offset by increased net interest income
of $127,000, or 8.6%, increased noninterest income of $15,000, or 1.8%,
and decreased income taxes of $59,000, or 26.0%, for the three months
ended June 30, 1999.
INTEREST INCOME
Interest income increased $453,000, or 10.4%, to $4.8 million for the three
months ended June 30, 1999 from $4.4 million for the three months ended
June 30, 1998. The increase is primarily due to increased average
mortgage-backed securities of $22.2 million to $84.4 million for the
three months ended June 30, 1999 from $62.2 million for the three
months June 30, 1998 and increased average investment securities of
$23.0 million to $93.7 million for the three months ended June 30, 1999
from $70.8 million for the three months ended June 30, 1998 offset by
decreased average loans receivable of $5.8 million to $97.0 million for
the three months ended June 30, 1999 from $102.9 million for the three
months ended June 30, 1998. The weighted average yield on total
interest-earning assets decreased to 6.76% for the three months ended
June 30, 1999 from 6.83% for the three months ended June 30, 1998 due
to the investment of proceeds of mortgage loan repayments and
investment securities maturities at current market rates.
INTEREST EXPENSE
Interest expense increased $325,000, or 11.3%, to $3.2 million for the three
months ended June 30, 1999 from $2.9 million for the three months ended
June 30, 1998. The increase is primarily due to increased average FHLB
advances of $21.9 million to $139.3 million for the three months ended
June 30, 1999 from $117.3 million for the three months ended June 30,
1998 and increased average savings deposits of $9.6 million to $128.3
million for the three months ended June 30, 1999 from $118.7 million
for the three months ended June 30, 1998. Weighted average cost of
funds decreased to 4.75% for the three months ended June 30, 1999 from
4.83% for the three months ended June 30, 1998.
PROVISION FOR LOSSES ON LOANS
The Company had no provision for losses on loans for the three month periods
ended June 30, 1999 or June 30, 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. The Bank's allowance for loan losses
totaled $366,000 at June 30, 1999 and March 31, 1999. 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 $15,000, or 1.8%, to $851,000 for the three
months ended June 30, 1999 from $836,000 for the three months ended
June 30, 1998. This increase was due primarily to increased loan
servicing fees and late charges of $19,000, or 6.3%, to $311,000 for
the three months ended June 30, 1999 from $293,000 for the three months
ended June 30, 1998, increased gain on sale of investment securities of
$24,000, or 380.0%, to $31,000 for the three months ended June 30, 1999
from $6,000 for the three months ended June 30, 1998, decreased equity
in loss of joint ventures of $37,000, or 100.0%, for the
11
<PAGE> 14
EQUALITY BANCORP, INC.
three months ended June 30, 1999 as compared to the three months ended
June 30, 1998, due to the Company's sale of its joint venture interest
during 1998, and increased other noninterest income of $31,000, or
28.1%, to $142,000 for the three months ended June 30, 1999 from
$111,000 for the three months ended June 30, 1998 offset by decreased
gain on sale of loans of $107,000, or 24.4%, to $331,000 for the three
months ended June 30, 1999 from $438,000 for the three months ended
June 30, 1998. For the three months ended June 30, 1999, the Company,
through EMC, sold $28.2 million of mortgage loans as compared to sales
of $40.1 million for the three months ended June 30, 1998. The
decreased volume of sales resulted in decreased gain on sale for the
comparable periods. However, the Company's efforts at retaining
servicing on loans sold increased the average loan servicing portfolio
$27.5 million, or 8.0%, to $370.0 million for the three months ended
June 30, 1999 from $342.5 million for the three months ended June 30,
1998.
NONINTEREST EXPENSE
Noninterest expense increased $307,000, or 17.7%, to $2.0 million for the
three months ended June 30, 1999 from $1.7 million for the three months
ended June 30, 1998. The increase was due primarily to increased
salary and employee benefits of $122,000, or 11.8%, to $1.2 million for
the three months ended June 30, 1999 from $1.0 million for the three
months ended June 30, 1998, increased occupancy expense of $69,000, or
59.6%, to $184,000 for the three months ended June 30, 1999 from
$115,000 for the three months ended June 30, 1998 and increased other
expenses of $103,000, or 25.2%, to $511,000 for the three months ended
June 30, 1999 from $408,000 for the three months ended June 30, 1998.
Salary and employee benefits increased primarily due to an increase of
six Bank personnel to staff three newly opened branch facilities in
Washington, Missouri, St. Peters, Missouri, and Arnold, Missouri, as
well as additional employment needs in the Bank's subsidiaries
including commission loan officers and insurance sales producers. The
increase in occupancy and other operating expenses is also reflective
of the three new branches which have been opened.
INCOME TAXES
Income tax expense decreased $59,000, or 26.0%, to $169,000 for the three
months ended June 30, 1999 from $229,000 for the three months ended
June 30, 1998. This decrease was primarily due to a decrease in income
before income tax of $165,000, or 28.5%. The effective tax rate was
approximately 40.9% and 39.5% for the three month periods ended June
30, 1999 and 1998, respectively.
12
<PAGE> 15
EQUALITY BANCORP, INC.
NONPERFORMING ASSETS
At June 30, 1999, nonperforming assets were approximately $624,000, which
represents a decrease of $96,000, or 13.3%, as compared to March 31,
1999. A summary of nonperforming assets by category is summarized as
follows:
<TABLE>
<CAPTION>
June 30, March 31,
1999 1999
-------- ---------
(in thousands)
<S> <C> <C>
Nonaccruing loans:
One to four family <F1> $610 650
Commercial real estate -- 51
Consumer and other 14 15
---- ---
Total nonaccruing loans 624 716
Repossessed assets -- 4
---- ---
Total nonperforming assets $624 720
==== ===
Nonaccruing loans as a percent of net loans .61% .79%
==== ===
Nonaccruing loans as a percent of
total assets .20% .25%
==== ===
Nonperforming assets as a percent of
total assets .20% .25%
==== ===
<FN>
<F1> Includes $362,000 and $486,000 of FHA/VA loans, the principal and
interest payments of which are either issued by FHA or guaranteed by
the VA at June 30, 1999 and March 31, 1999, respectively.
</TABLE>
Loans are placed on nonaccrual status when either principal or interest is
more than 90 days past due or at such time when contractual amounts due
are deemed uncollectible, whichever is sooner. Interest accrued and
unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. Subsequent payments are either applied to the
outstanding principal balance or recorded as interest income, depending
on the assessment of the ultimate collectibility of the loan.
LIQUIDITY AND CAPITAL RESOURCES
The Office of Thrift Supervision (OTS) requires minimum levels of liquid
assets. OTS regulations presently require the Bank to maintain an
average daily balance of liquid assets equal to a monthly average of
not less than 4.0% of net withdrawable accounts plus short-term
borrowings. Such requirements may be changed from time to time by the
OTS to reflect changing economic conditions. Such investments are
intended to provide a source of relatively liquid funds upon which the
Bank may rely, if necessary, to fund deposit withdrawals and other
short-term funding needs. The Bank's regulatory liquidity at June 30,
1999 was 24.6%.
The Bank's primary sources of funds consist of deposits bearing market rates
of interest and loan repayments. Other potential sources of funds
available to the Bank include borrowings from FHLB. At June 30, 1999,
the Bank had such outstanding FHLB borrowings of $148.1 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
13
<PAGE> 16
EQUALITY BANCORP, INC.
expenses. Management believes that loan repayments and other sources
of funds will be adequate to meet and exceed the Bank's liquidity
needs, including meeting its commitments to buy or fund loans. At June
30, 1999, the Bank had approximately $2.2 million in outstanding
commitments to originate loans, approximately $170,000 of which were
adjustable rate loans. The interest rate on fixed rate commitments
ranged from 6.75% to 8.0% at June 30, 1999. 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.
A reconciliation of stockholders' equity at June 30, 1999, as reported in the
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 $23,722 23,722 23,722
Accumulated other comprehensive
loss 693 693 693
------- ------ ------
Adjusted stockholders' equity 24,415 24,415 24,415
Additional capital item - general
loan loss reserves -- -- 366
------- ------ ------
Regulatory capital, as computed 24,415 24,415 24,781
Minimum capital requirement 4,601 9,203 10,905
------- ------ ------
Regulatory capital in excess of
minimum capital requirement $19,814 15,212 13,876
======= ====== ======
Regulatory capital ratio 7.96% 7.96% 18.18%
======= ====== ======
</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.
14
<PAGE> 17
EQUALITY BANCORP, INC.
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.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In December, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards 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. In June, 1999, the FASB
issued Statement of Financial Accounting Standards No. 137, Accounting
----------
for Derivative Instruments and Hedging Activities - Deferral of the
-------------------------------------------------------------------
Effective Date of FASB Statement No. 133, an Amendment of FASB
--------------------------------------------------------------
Statement No. 133, which defers the effective date of SFAS 133 from
-----------------
fiscal years beginning after June 15, 1999 to fiscal years beginning
after June 15, 2000. Earlier application of SFAS 133, as amended, 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, as amended.
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 has 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.
15
<PAGE> 18
EQUALITY BANCORP, INC.
To date, the awareness, assessment, renovation and validation phases of the
action plan have been completed and as a result, the implementation
phase has been initiated by the committee and is currently considered
to be 90 percent complete. Implementation is expected to be complete
by September 30, 1999. 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, $84,000 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.
16
<PAGE> 19
EQUALITY BANCORP, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits: None.
Reports on Form 8-K: None.
17
<PAGE> 20
EQUALITY BANCORP, INC.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUALITY BANCORP, INC.
Registrant
Date: August 13, 1999 /s/ Richard C. Fellhauer
--------------------------- ---------------------------------
Richard C. Fellhauer, President,
Chief Executive Officer and
Chairman of the Board
Date: August 13, 1999 /s/ Michael A. Deelo
--------------------------- ---------------------------------
Michael A. Deelo,
Chief Financial Officer
18
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,850
<INT-BEARING-DEPOSITS> 990
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 181,012
<INVESTMENTS-CARRYING> 600
<INVESTMENTS-MARKET> 560
<LOANS> 102,200
<ALLOWANCE> 366
<TOTAL-ASSETS> 305,924
<DEPOSITS> 128,675
<SHORT-TERM> 2,886
<LIABILITIES-OTHER> 1,563
<LONG-TERM> 148,076
0
0
<COMMON> 25
<OTHER-SE> 24,699
<TOTAL-LIABILITIES-AND-EQUITY> 305,924
<INTEREST-LOAN> 1,825
<INTEREST-INVEST> 2,870
<INTEREST-OTHER> 110
<INTEREST-TOTAL> 4,814
<INTEREST-DEPOSIT> 1,374
<INTEREST-EXPENSE> 1,821
<INTEREST-INCOME-NET> 1,608
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 31
<EXPENSE-OTHER> 2,044
<INCOME-PRETAX> 415
<INCOME-PRE-EXTRAORDINARY> 415
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 245
<EPS-BASIC> .10
<EPS-DILUTED> .10
<YIELD-ACTUAL> 6.76
<LOANS-NON> 624
<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>
