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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1998
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission file number 333-30469
EQUALITY BANCORP, INC.
(Name of small business issuer in its charter)
DELAWARE 43-1785126
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9920 WATSON ROAD, ST. LOUIS, MISSOURI 63126
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (314) 965-7090
Securities Registered Under Section 12(b) of the Exchange Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of class)
Securities Registered Under Section 12(g) of the Exchange Act: NONE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES X NO .
----- -----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [x]
State issuer's revenues for its most recent fiscal year: $17,945,606.
-----------
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity as of June 24, 1998: $29,641,996.
-----------
State the number of shares outstanding of each of the issuer's classes
of common equity: as of May 31, 1998, there were issued and outstanding
2,505,855 shares of the issuer's common stock.
Transitional Small Business Disclosure Format (Check One):
YES NO X .
----- -----
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<TABLE>
EQUALITY BANCORP, INC.
1998 FORM 10-KSB/A ANNUAL REPORT
TABLE OF CONTENTS
<CAPTION>
PART I Page
<C> <S> <C>
Item 1. Description of Business 1
Item 2. Description of Properties 34
Item 3. Legal Proceedings 35
Item 4. Submission of Matters to a Vote of Security Holders 35
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 35
Item 6. Management's Discussion and Analysis or Plan of Operation 36
Item 7. Financial Statements 45
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 78
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With
Section 16(a) of the Exchange Act 78
Item 10. Executive Compensation 79
Item 11. Security Ownership of Certain Beneficial Owners and Management 81
Item 12. Certain Relationships and Related Transactions 82
Item 13. Exhibits and Reports on Form 8-K 82
SIGNATURES 84
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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General
Equality Bancorp, Inc. ("Equality") is a Delaware corporation which
was formed on May 14, 1997. Equality is the holding company for Equality
Savings Bank ("ESB"). Equality holds, as its only material asset, all of the
capital stock of ESB, its sole subsidiary. Equality is engaged in the
business of managing its investments and directing, planning, and
coordinating the business activities of ESB. At March 31, 1998, Equality had
total assets of $255.6 million, deposit accounts of $119.3 million, and total
stockholders' equity of $25.8 million.
ESB is a federally chartered stock-based savings association regulated
by the Office of Thrift Supervision ("OTS") and its deposits are insured by
the Federal Deposit Insurance Corporation ("FDIC") through the Savings
Association Insurance Fund ("SAIF"). ESB was originally chartered in 1884.
ESB conducts its business through three full-service branch offices and five
limited-service loan-production offices. ESB's main office is located at
4131 South Grand Boulevard, St. Louis, Missouri 63118-3464, and its
telephone number is (314) 352-3333.
On October 22, 1993, Equality Savings and Loan Association (the
"Association" and the predecessor of ESB) (i) reorganized into a mutual
holding company and changed its name to First Missouri Financial, M.H.C.
(the "Mutual Holding Company") and (ii) transferred substantially all of its
assets and all of its liabilities to the Association, which sold a minority
interest in its common stock to depositors of the Association and various
stock compensation plans (the "Mutual Holding Company Reorganization"). A
total of 380,000 shares of newly issued common stock were sold at $10.00 per
share. An additional 11,400 authorized but unissued shares were later sold
to the Association's 1993 Management Recognition Plan ("MRP") at $10.00 per
share. The Association gained net proceeds of approximately $3.2 million
from the sale of its common stock. On June 13, 1995, the Association
converted from a Missouri-chartered-stock-savings-and-loan association to a
federally-chartered-stock-savings-and-loan association.
On December 1, 1997, Equality completed the sale of 1,322,500 shares of
common stock at a price of $10.00 per share in a subscription offering. In
conjunction with the subscription offering an additional 1,163,402 shares of
common stock were issued by Equality to convert 391,400 shares of the
Association's common stock held by minority shareholders into common stock of
the Company.
Equality's business strategy includes (i) maintaining a strong capital
level, (ii) maintaining a high level of asset quality, (iii) limiting ESB's
exposure to fluctuations in interest rates, (iv) emphasizing local
originations of one-to- four-family fixed-rate mortgage loans and adjustable
rate mortgage loans ("ARMs"), and (v) continuing to emphasize high quality
customer service with a competitive service fee structure.
ESB's business is similar in many respects to other savings
associations in that it gathers deposits from its local community and uses
these funds, along with FHLB advances, to invest primarily in residential
one- to four-family mortgage loans, U.S. government and agency securities and
mortgage-backed securities and, to a lesser extent, multifamily and
commercial real estate, consumer, and commercial business loans.
Notwithstanding these traditional thrift attributes, ESB's operations are
distinct in one respect in that it conducts its residential mortgage lending
business primarily through a wholly-owned mortgage-banking subsidiary --
Equality Mortgage Corporation ("EMC").
Operating through ESB's eight full and limited service offices, EMC
acts as a conduit for the origination, purchase, and sale of residential
mortgage loans for the benefit of ESB. It funds its mortgage-banking
activities through lines of credit from ESB and an unrelated commercial bank.
EMC provides several benefits to ESB, including, among other things,
originating a variety of mortgage loan products for ESB's portfolio and
generating noninterest income for ESB through its activities in the secondary
mortgage market. ESB's President and Chief Executive Officer, Richard C.
Fellhauer, also is President of EMC. Leonard Wolter, Vice President of ESB,
is EMC's Chief Operating Officer. Mr. Wolter, in consultation with Mr.
Fellhauer and Michael A. Deelo, ESB's Chief Financial Officer, manages the
day to day operations of EMC. These individuals have 50 years combined
experience in the mortgage-banking business. The following description
includes detailed information regarding the business of ESB and EMC.
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LENDING AND MORTGAGE-BANKING ACTIVITIES
ESB concentrates its business in residential mortgage finance, which
involves the origination, purchase, and sale of residential real estate loans
secured by one- to four-family, owner-occupied residential properties. In
the past, and to a much lesser degree, ESB has originated conventional loans
secured by multifamily residential dwellings and commercial real estate
projects. ESB also originates short-term consumer loans, primarily loans
secured by savings deposits, home equity and second mortgage loans, direct
automobile loans and student loans, and, since early 1997, commercial
business loans.
LOAN ORIGINATIONS. During the first several years of its existence,
EMC originated primarily government mortgage loans (FHA and VA loans) on
behalf of ESB, while ESB originated conventional loans. But in 1989, ESB
shifted its mortgage loan origination function to EMC. However, ESB will
still on occasion originate a mortgage loan directly and it continues to
originate a limited amount of consumer and other non-mortgage loans.
Today, EMC, using its 46 employees (including 8 commissioned loan
originators), underwrites residential mortgage loans ranging in size from
$10,000 to $500,000, which are secured by properties located primarily in the
St. Louis metropolitan area. In addition, through ESB's Affordable Housing
Program, EMC provides mortgage financing to low- and moderate-income
families, which provides ESB with an effective way to attract customers in
its local market area. During 1997, EMC originated mortgage loans totaling
$109.6 million, all of which were one- to four-family loans.
LOAN SALES. Central to EMC's loan origination activity is the sale of
fixed-rate mortgage loans to the secondary mortgage market. All loans
originated by EMC satisfy the guidelines of the Federal Housing
Administration ("FHA"), the Veterans Administration ("VA"), the Federal
National Mortgage Association ("FNMA"), the Government National Mortgage
Association ("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or
various private investors so that the loans can be sold in the secondary
mortgage market. EMC has been approved under the FHA Direct Endorsement
Program and, consequently, EMC's FHA approved direct endorsement underwriters
are authorized to approve or reject FHA insured loans up to maximum amounts
established by the FHA. EMC also has been approved as a VA "automatic
approved lender," which enables designated qualified EMC personnel to approve
or reject loans on behalf of ESB.
In most cases, EMC sells in the secondary mortgage market the majority
of the fixed-rate loans it originates, while the majority of its ARM
originations are sold to ESB and retained by ESB in its portfolio. The
current strategy of selling fixed-rate loans and retaining ARMs assists ESB
in management of the interest-rate sensitivity of its assets. Moreover, the
loans retained by ESB contribute to ESB's net interest margin.
EMC's loan-origination-and-sale activities create interest rate risk
for ESB in that if interest rates decline after the loan commitment date
below the interest rate on the loan, and ESB has not hedged its interest rate
risk using a forward commitment, ESB may incur a loss when the loan is sold.
ESB manages this risk by using a computerized tracking system that allows
EMC's management to closely monitor the interest rates for all loans being
processed by EMC, reviewing the future prospects for movements in interest
rates, and entering into forward commitment contracts with FNMA, GNMA and
FHLMC for the sale of fixed-rate loans that limit the potential loss on loan
sales, but which also limit the potential gain. EMC's success in managing
the interest-rate risk associated with the origination-and-sale and
purchase-and-resale of fixed-rate mortgage loans depends primarily on the
abilities of its managers.
LOAN PURCHASES AND RESALES. In addition to originating residential
mortgage loans for sale in the secondary market, EMC also purchases loans
from other financial institutions for packaging (or securitization) and
resale in the secondary mortgage market as either whole loans or as loan
pools to FNMA, GNMA, FHLMC or other investors. Other financial institutions
may sell loans to EMC because they lack the capability or expertise to
package and sell their own loans in the secondary market. EMC performs
strict underwriting on each loan purchased based on guidelines of the federal
secondary mortgage market agencies and private investors and standards
otherwise applicable to loans originated by ESB. Immediately following the
purchase of a loan or loan package, EMC simultaneously sells the mortgage or
group of mortgages for future delivery. Accordingly, ESB does not assume
so-called pipeline risk because the loans are not held in inventory.
Pipeline risk is the hazard that market interest rates will increase before
the loan is sold, thereby reducing the price at which the loan may be sold.
During fiscal 1998, EMC purchased mortgage loans totaling $6.1 million.
EMC'S CONTRIBUTIONS TO THE BUSINESS OF EQUALITY. EMC contributes
significantly to Equality's operations by providing an additional income
stream and by providing a conduit to offer lending services to the local
community. EMC's mortgage-banking activities produce primarily two types of
income -- gain on sale of mortgage loans and loan servicing fees and late
charges. Each of these two types of income accounted for 46.8% and 31.1%,
respectively, of EMC's total income for the fiscal year ended March 31, 1998.
EMC contributed approximately 21.0% to Equality's total interest income and
other income for the year ended March 31, 1998.
Loan sales are intended to generate one-time gains, while loan
originations (whether the loans are sold or retained by ESB in portfolio)
produce loan origination fees that generally approximate 1% of the loan
amount. FHA and VA loans are
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generally sold with servicing released, for which EMC generally receives an
additional servicing fee of approximately 1.5% of the aggregate loan amount,
and, because EMC sells conventional mortgage loans (non-FHA and VA) servicing
retained, ESB's loan servicing portfolio (and the associated earnings stream)
continues to grow.
At March 31, 1998, EMC serviced $340.1 million in residential mortgage
loans (of which $85.6 million was for ESB) and has the capacity to expand its
servicing portfolio significantly through additional loan originations. EMC
earned $894,000 in servicing fee income for fiscal year 1998. Loan servicing
fees on loans serviced for institutions other than ESB totaled $673,000,
$674,000, and $603,000 for fiscal years 1998, 1997, and 1996, respectively.
The proportionate contribution made by gains on loan sales, loan origination
fees and loan servicing fees to Equality's net income varies each year
depending on interest rates, which, in turn, affects EMC's business focus
from year to year.
EMC's residential mortgage loan origination volume has increased
steadily since 1994, which has resulted in an increase in ESB's loan
portfolio. As a result, EMC has focused its efforts toward increasing its
loan servicing portfolio and increasing the associated income stream through
increased servicing retention. EMC's focus on servicing retention and
fluctuating interest rates have contributed to instability in recent years in
EMC's gains on loan sales. EMC has not, nor does it anticipate, selling a
bulk portion of its loan servicing portfolio to augment earnings.
COMPOSITION OF THE LOAN PORTFOLIO. The following table sets forth the
composition of Equality's loan portfolio by type of loan as of the dates
indicated:
<TABLE>
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<CAPTION>
At March 31,
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1998 1997 1996 1995 1994
---------------- --------------- --------------- ---------------- ---------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One- to four-family:
Conventional<F1> $ 67,543 62.0% $69,810 72.5% $64,873 66.6% $61,455 73.5% $43,608 70.1%
FHA/VA 11,718 10.8 14,233 14.8 13,656 14.0 13,616 16.3 9,396 15.1
Loans held for sale 14,523 13.3 4,398 4.6 13,507 13.9 2,971 3.5 5,109 8.2
Multifamily 1,382 1.3 1,637 1.7 783 .8 828 1.0 941 1.5
Commercial 2,684 2.5 2,662 2.8 2,622 2.7 2,975 3.5 1,298 2.1
- --------------------------------------------------------------------------------------------------------------------------
Total loans secured by
real estate 97,850 89.9 92,740 96.4 95,441 98.0 81,845 97.8 60,352 97.0
- --------------------------------------------------------------------------------------------------------------------------
Consumer loans:
Loans secured by savings
deposits 391 .4 366 .4 453 .5 448 .5 603 1.0
Property improvement 1,728 1.6 1,596 1.7 1,300 1.3 1,053 1.3 908 1.5
Automobiles 617 .6 122 .1 97 .1 126 .2 144 .2
Other consumer loans 157 .1 162 .1 96 .1 175 .2 181 .3
- --------------------------------------------------------------------------------------------------------------------------
Total consumer loans 2,893 2.7 2,246 2.3 1,946 2.0 1,802 2.2 1,836 3.0
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Commercial business loans 8,153 7.4 1,280 1.3 - - - - - -
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Total loans 108,896 100.0% 96,266 100.0% 97,387 100.0% 83,647 100.0% 62,188 100.0%
Less:
Loans in process 3 - - - -
Deferred loan fees, net 37 46 59 71 98
Unearned discounts 8 4 12 24 15
Allowance for loan losses 374 283 233 217 242
Valuation reserve on loans
held for sale 59 5 85 100 150
- --------------------------------------------------------------------------------------------------------------------------
Total loans receivable, net $108,415 $95,928 $96,998 $83,235 $61,683
==========================================================================================================================
<FN>
<F1> Includes construction loans converted to permanent loans.
</TABLE>
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Residential One- to Four-Family Loans. The primary lending activity of
ESB has been the making of mortgage loans to enable borrowers to purchase
existing homes or to construct new single-family homes. The mortgage loans
are primarily originated by EMC and are sold to ESB at par. Management
believes that this policy of focusing on single-family residential mortgage
loans has been successful in contributing to interest income while keeping
delinquencies and losses to a minimum. At March 31, 1998, approximately
$93.8 million, or 86.1% of the total loan portfolio, consisted of loans
secured by one- to four-family residential real estate. In recent years,
ESB's one- to four-family mortgage lending has been concentrated in St.
Louis City and St. Louis County.
EMC presently originates both fixed-rate mortgage loans and ARMs
secured by one- to four-family properties with loan terms of 10 to 30 years.
The ARMs have interest rates that adjust at regular intervals ranging between
one- to five-years generally based upon changes in the One-, Three- and
Five-Year Treasury Index. At March 31, 1998, ESB's ARM portfolio totaled
approximately $52.7 million. The majority of these loans provide that the
amount of any increase or decrease in the interest rate is limited to one or
two percentage points (upward or downward) per adjustment period and are
generally limited to an increase or decrease of five to eight percentage
points over the life of the loan. Borrower demand for ARMs versus fixed-rate
mortgage loans is a function of the level of interest rates, the expectation
of changes in the level of interest rates, and the difference between the
interest rates and loan fees offered for fixed-rate mortgage loans and the
first year "teaser rates" and loan fees for ARMs. The relative amount of
fixed-rate mortgage loans and ARMs that can be originated at any time is
largely determined by the demand for each in a competitive mortgage finance
environment. During 1998, total one- to four-family mortgage loan
originations were $114.0 million of which $19.3 million, or 16.9%, were
subject to periodic interest rate adjustments and $94.7 million, or 83.1%,
were long-term, fixed-rate mortgage loans.
ARMs generally involve credit risks different from those inherent in
fixed-rate mortgage loans, primarily because if interest rates rise, the
underlying payments of the borrower rise, thereby increasing the potential
for default. ESB underwrites ARMs based on the borrower's ability to repay
the loan assuming the fully indexed accrual rate on the ARM remains constant
during the loan term. As a result, the potential for a substantial increase
in delinquencies and defaults is lessened.
The retention of ARMs as opposed to fixed-rate mortgage loans in ESB's
loan portfolio helps reduce ESB's exposure to interest rate risk. In an
environment of rapidly increasing interest rates, however, it is possible for
the interest rate increase to exceed the maximum aggregate adjustment on
ARMs, which would negatively affect the spread ESB's interest income and its
cost of funds. In addition, because the interest earned on ARMs, which are
refinanced on a one- to three-year cycle, varies with prevailing interest
rates, such loans do not offer ESB as predictable a cash flow as do
longer-term, fixed-rate loans.
EMC originates long-term, fixed-rate loans under guidelines established
by FNMA and FHLMC, which facilitates the sale of such loans to FNMA or FHLMC
in the secondary market. Long-term, fixed-rate mortgage loans are originated
with terms of between 10 and 30 years, amortized on a monthly basis with
principal and interest due each month. At March 31, 1998, ESB had approximately
$47.4 million of long-term, fixed-rate mortgage loans in its portfolio. A
determination is made at the time of origination whether the loan is held for
sale. Currently, EMC is originating fixed-rate loans primarily for sale in the
secondary market. At March 31, 1998, Equality had approximately $14.5 million
of loans held for sale of which $14.3 million were fixed-rate loans.
ESB's lending policies generally limit the maximum loan-to-value ratio
on fixed-rate and adjustable-rate residential mortgage loans to 80% of the
lesser of the appraised value or purchase price of the underlying residential
property unless private mortgage insurance to cover the excess over 80% is
obtained, in which case the mortgage is limited to 95% of the lesser of
appraised value or purchase price. The loan-to-value ratio, maturity, and
other provisions of the loans made by ESB are generally reflected in the
policy of making less than the maximum loan permissible under federal
regulations, in accordance with established lending practices, market
conditions, and underwriting standards maintained by ESB. ESB requires
title, fire, and extended insurance coverage on all mortgage loans
originated. All of ESB's real estate loans contain due-on-sale clauses, and
ESB obtains appraisals on all its real estate loans from outside appraisers.
ESB also originates construction loans on residential properties
against commitments for permanent financing at the completion of
construction. Construction loans are generally for a term of six to 11
months, and bear an interest rate tied to ESB's cost of funds which varies on
the term and amount of the loan. At March 31, 1998, ESB had no construction
loans outstanding.
Construction lending is generally considered to involve a higher degree
of credit risk than residential mortgage lending. ESB's risk of loss on a
construction loan is dependent largely upon the accuracy of the initial
estimate of the
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property's value at completion of construction and the estimated cost
(including interest) of construction. If the estimate of construction cost
proves to be inaccurate, ESB may be required to advance funds beyond the
amount originally committed to permit completion of the dwelling. If the
estimate of value proves to be inaccurate, ESB may be confronted with, at or
before the maturity of the loan, loan security with a value which is
insufficient to assure full repayment. In addition, construction lending
entails the risk that the project may not be completed due to cost overruns
or changes in market conditions.
MULTIFAMILY AND COMMERCIAL REAL ESTATE LOANS. In addition to
originating one- to four-family residential real estate loans, ESB originates
loans secured by multifamily dwelling units (more than four units). At March
31, 1998, ESB had $1.4 million, or 1.3% of the total loan portfolio, secured
by multifamily dwelling units, located primarily in ESB's primary market
area. At March 31, 1998, ESB's largest multifamily residential loan was a
$928,000 loan secured by a 26-unit apartment complex. Multifamily real
estate loans are generally originated at 75% of the appraised value of the
property or selling price, whichever is less, and are generally originated
for 10- to 30-year terms with the principal amortized over 30 years. Loans
secured by multifamily residential real estate are generally larger and
involve a greater degree of risk than one-to four-family residential mortgage
loans, similar to the risks associated with commercial real estate lending.
At March 31, 1998, ESB had no multifamily loans accounted for on a nonaccrual
basis.
ESB's permanent commercial real estate loans are secured by improved
properties such as office buildings, restaurants, and various retail
operations located in ESB's primary market area. At March 31, 1998,
commercial real estate loans totaled approximately $2.7 million, or 2.5% of
ESB's total loan portfolio. ESB originates permanent loans on commercial
real estate at up to 80% of the appraised value.
Currently, it is ESB's policy to originate commercial real estate loans
only to selected borrowers known to ESB and on properties in its primary
market area. These loans generally have repayment schedules based upon a 10-
to 25-year constant payment amortization, but may have a 10-year final
maturity (balloon payment) and are currently originated with an interest rate
that floats over the prime rate. At March 31, 1998, ESB had no commercial
real estate loans accounted for on a nonaccrual basis.
The largest commercial real estate loan in the portfolio at March 31,
1998 totaled $1.5 million, which was secured by a real estate mortgage on a
shopping center located in the St. Louis metropolitan area. This loan is a
seasoned loan having been originated in 1994. ESB's legal lending limit is
approximately $3.9 million. Of primary concern in commercial real estate
lending is the borrower's creditworthiness, and the feasibility and cash flow
potential of the project. Loans secured by income properties are generally
larger and involve greater risks than residential mortgage loans because
payments on loans secured by income properties are often dependent on the
successful operation or management of the properties. As a result, repayment
of such loans may be subject to a greater extent than residential real estate
loans to adverse conditions in the real estate market or the economy.
Although many thrift institutions have had material adverse loss experience
in commercial real estate lending, ESB has sustained few losses, and those
losses were not significant relative to the size of the entire commercial
real estate loan portfolio or the mortgage loan portfolio at the time. ESB
does not presently intend to emphasize or expand this type of lending in the
future.
CONSUMER LOANS. ESB originates a wide variety of consumer loans, which
are made primarily on a secured basis to existing customers. Such loans
include loans secured by savings deposits, home equity and second mortgage
loans, direct automobile loans, and student loans. These loans are made at
both fixed- and variable-rates of interest, which adjust annually, and vary
in terms depending on the type of loan. In addition, ESB offers unsecured
consumer loans. Consumer loans totaled approximately $2.9 million at March
31, 1998, or 2.7% of ESB's total loan portfolio.
ESB applies strict underwriting standards for consumer loans. These
procedures include an assessment of the applicant's payment history on other
debts and ability to meet existing obligations and payments on the proposed
loans. Although the applicant's creditworthiness is a primary consideration,
the underwriting process also includes a comparison of the value of the
security, if any, to the proposed loan amount. ESB underwrites and
originates all of its consumer loans internally, which management believes
limits exposure to credit risks relating to loans underwritten or purchased
from brokers or other outside sources. ESB views consumer lending as a
component of its business operations because consumer loans generally have
shorter terms and higher yields, thus reducing exposure to changes in
interest rates. In addition, ESB believes that offering consumer loans helps
to expand and create stronger ties to its customer base. ESB does not
presently intend to emphasize this type of lending in the future.
ESB's consumer loan portfolio had one automobile loan with an
outstanding principal balance of approximately $8,000, which was 90 days or
more delinquent at March 31, 1998. Consumer loans may entail greater risk
than do residential mortgage loans, particularly in the case of consumer
loans which are unsecured or secured by assets that depreciate rapidly, such
as automobiles. In the latter case, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, consumer
loan collections are dependent on the
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borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
federal and state bankruptcy and insolvency laws, may limit the amount that
can be recovered on such loans. Such loans may also give rise to claims and
defenses by the borrower against ESB as the holder of the loan, and a
borrower may be able to assert claims and defenses that it has against the
seller of the underlying collateral.
COMMERCIAL BUSINESS LOANS. In early 1997, in connection with its
hiring of a new commercial lending officer, ESB began originating a limited
number of commercial business loans based on community needs. Management of
ESB expects this type of lending to increase gradually over the next several
years. Such loans include, but are not limited to, automobile dealer floor
planning, commercial use vehicles and general working capital loans. These
loans are made at both fixed and variable rates of interest and vary in terms
depending on the type of loan and collateral.
At March 31, 1998, approximately $8.2 million, or 7.4% of ESB's loan
portfolio, consisted of commercial business loans, which are primarily
secured by automobile floor planning collateral. At March 31, 1998, the
largest commercial loan in the portfolio, which was secured by floor planned
vehicles, had a principal balance of approximately $1.1 million. Unlike
residential mortgage loans, which generally are made on the basis of the
borrower's ability to make repayment based on the borrower's salary and other
income and which are secured by real property, the value of which tends to be
more easily ascertainable, commercial business loans typically are made on
the basis of the borrower's ability to make repayment from the cash flow of
the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself (which, in turn, is likely to be dependent, in
part, upon the general economic environment). ESB's commercial business
loans are usually secured by business assets, which may depreciate over time,
may be difficult to appraise and may fluctuate in value based on the success
of the business.
ESB's underwriting standards for commercial business loans include
credit file documentation and analysis of the borrower's character, capacity
to repay the loan, the adequacy of the borrower's capital and collateral as
well as an evaluation of conditions affecting the borrower. Analysis of the
borrower's past, present and future cash flows is also an important aspect of
ESB's current credit analysis. Nonetheless, such loans, are believed to
carry higher credit risk than residential mortgage loans. ESB generally
requires personal guarantees from corporate borrowers.
LOAN MATURITY AND REPRICING. The following table sets forth certain
information at March 31, 1998 regarding the dollar amount of loans maturing
in ESB's portfolio based on their contractual terms to maturity, but does not
include scheduled payments or potential prepayments. Overdrafts are reported
as due in one year or less. Loan balances do not include undisbursed loan
proceeds, unearned discounts, unearned income, and allowance for loan losses.
<TABLE>
========================================================================================================================
<CAPTION>
Due after 3 Due after 5 Due after 10 Due after
Due during the year ended through 5 through 10 through 15 15
March 31 years after years after years after years after
------------------------- March 31, March 31, March 31, March 31,
1999 2000 2001 1998 1998 1998 1998 Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential<F1><F2> $14,576 $127 $ 195 $1,876 $ 8,135 $8,902 $61,355 $ 95,166
Commercial - - 14 - 2,001 305 364 2,684
Loans secured by savings
deposits 359 17 15 - - - - 391
Property improvement 13 66 175 529 891 54 - 1,728
Automobiles 19 112 208 248 30 - - 617
Other consumer loans 98 14 17 28 - - - 157
Commercial business loans 6,075 175 1,398 505 - - - 8,153
- ------------------------------------------------------------------------------------------------------------------------
Total loans $21,140 $511 $2,022 $3,186 $11,057 $9,261 $61,719 $108,896
========================================================================================================================
<FN>
<F1> Includes $14.5 million of loans held for sale, reported as due in one
year or less.
<F2> Includes multifamily loans totaling $1.4 million.
</TABLE>
6
<PAGE> 9
The following table sets forth the dollar amount of all loans due after
March 31, 1999 which have fixed interest rates and adjustable interest rates.
<TABLE>
======================================================================================
<CAPTION>
Fixed Adjustable
rates rates
- --------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Loans secured by real estate:
Residential $29,228 $51,362
Commercial 2,252 432
Loans secured by savings
deposits 32 -
Property improvement 1,715 -
Automobiles 598 -
Other consumer loans 59 -
Commercial business loans - 2,078
- --------------------------------------------------------------------------------------
Total loans $33,884 $53,872
======================================================================================
</TABLE>
The following table sets forth total loans originated, purchased, sold,
and repaid during the periods indicated:
<TABLE>
============================================================================================================
<CAPTION>
Year ended March 31
----------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Total loans at beginning of period $ 96,266 $97,387 $83,647
Loans originated:
Residential one- to four-family 113,982 70,019 75,779
Multifamily - 950 -
Commercial business loans 8,298 1,462 -
Consumer (property improvement and automobiles) 1,415 774 666
Other loans 189 107 105
- ------------------------------------------------------------------------------------------------------------
Total loans originated 123,884 73,312 76,550
Loans purchased - residential one- to four-family 6,059 5,892 17,396
Loans sold:
Whole loans:
Servicing retained (56,302) (45,669) (49,667)
Servicing released (21,759) (15,617) (25,079)
Participation loans (servicing retained) - (185) -
- ------------------------------------------------------------------------------------------------------------
Total loans sold (78,061) (61,471) (74,746)
- ------------------------------------------------------------------------------------------------------------
Loan principal repayments (11,879) (2,486) (2,282)
Loans converted to mortgage-backed securities and sold (27,373) (16,368) (3,178)
- ------------------------------------------------------------------------------------------------------------
Total loans at end of period $108,896 $96,266 $97,387
============================================================================================================
</TABLE>
LOAN SOLICITING AND PROCESSING. Loan originations are derived
primarily through EMC loan officers' solicitation and personal visits to the
local real estate offices in the metropolitan St. Louis area as well as
current and walk-in customers. These loan officers have developed a
clientele over the years that send potential customers to EMC for loans. By
use of the EMC loan officers and client contacts, ESB has been able to cover
a broad market area and offer mortgage services to an extended number of
potential customers.
The Executive Loan Committee, composed of Messrs. Fellhauer, Wolter,
Deelo, and Fuchs, and one ESB staff member are authorized to approve
residential mortgage loans up to $200,000. Residential mortgage loans in
excess of $200,000 require full Board of Directors approval. All residential
mortgage loans are subsequently approved by the full Board of Directors.
7
<PAGE> 10
LOANS-TO-ONE BORROWER LIMITATIONS. ESB's loans and extensions of
credit to a person outstanding at one time and not fully secured may not
exceed 15% of the unimpaired capital and surplus of ESB. This limitation
calls for a loan-to-one borrower limitation for ESB of $3.9 million at March
31, 1998. Loans and extensions of credit fully secured by readily marketable
collateral may comprise an additional 10% of unimpaired capital and surplus.
At March 31, 1998, the largest aggregate amount of loans by ESB to any
borrower was approximately $2.1 million, which was secured by automobile
floor planning and personal assets.
LOAN COMMITMENTS. ESB issues commitments for fixed- and
adjustable-rate single-family residential mortgage loans conditioned upon the
occurrence of certain events. Such commitments are made in writing on
specified terms and conditions and are honored for up to 30 days from approval,
depending on the type of transaction. ESB had outstanding loan commitments of
approximately $3.6 million at March 31, 1998.
LAW ORIGINATION AND OTHER FEES. ESB, in most instances, receives loan
origination fees and discount "points." Loan fees and points are a percentage
of the principal amount of the mortgage loan that are charged to the borrower
for funding the loan. ESB usually charges origination fees of 1% on all real
estate loans. Current accounting standards require fees received for
originating loans to be deferred and amortized into interest income over the
contractual life of the loan. Deferred fees associated with loans that are
sold are included in the gain/loss computation at the time of sale. ESB had
approximately $37,000 of net deferred loan fees at March 31, 1998.
ESB offsets all loan origination fees and certain related direct loan
origination costs against all fees and costs associated with loan
origination. The resulting net amount is deferred and amortized over the
contractual life of the related loans as an adjustment to the yield on such
loans, unless prepayments of a large group of similar loans are probable and
the timing and amount of prepayments can be reasonably estimated. ESB
offsets commitment fees against related direct costs and the resulting net
amount is recognized over the contractual life of the related loans as an
adjustment of yield if the commitment is exercised. If the commitment
expires unexercised, the fees collected are recognized as noninterest income
upon expiration of the commitment.
DELINQUENCIES. ESB's collection procedures provide that when a loan is
30 days overdue and again after an additional 15 days, the borrower will be
contacted by mail and payment requested. After a delinquency of 15 days, a
late charge is assessed. If the delinquency continues, subsequent efforts
will be made to contact the delinquent borrower. In certain instances, ESB
may modify the loan or grant a limited moratorium on loan payments to enable
reorganization of the borrower's financial affairs. If the loan continues in
a delinquent status for 90 days or more, ESB generally will initiate
foreclosure proceedings.
NONPERFORMING ASSETS AND THEIR CLASSIFICATION. The following table
sets forth information with respect to ESB's nonperforming assets for the
periods indicated. During the periods shown, ESB had no restructured loans
within the meaning of Statement of Financial Accounting Standards No. 15,
Accounting by Debtors and Creditors for Troubled Debt Restructurings:
<TABLE>
============================================================================================================
<CAPTION>
At March 31
-----------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Loans which are contractually past due
90 days or more<F1>:
Residential one- to four-family<F2> $853 $643 $669
Consumer 8 - -
- ------------------------------------------------------------------------------------------------------------
Total 861 643 669
Real estate owned - 66 97
- ------------------------------------------------------------------------------------------------------------
Total nonperforming assets $861 $709 $766
============================================================================================================
Nonperforming loans to gross loans .79% .67% .69%
Total nonperforming assets to total assets .34% .35% .39%
============================================================================================================
<FN>
<F1> All loans contractually past due 90 days or more are accounted for on a
nonaccrual basis by ESB.
<F2> Includes $833,000, $571,000, and $326,000 of FHA/VA loans, the
principal and interest payments of which are insured by the FHA or
guaranteed by the VA, at March 31, 1998, 1997, and 1996, respectively.
</TABLE>
ESB had $861,000 in loans 90 days or more delinquent at March 31, 1998
which consisted of 23 one- to four-family residential mortgage loans, each
with an outstanding principal balance of less than $99,000 and one consumer
automobile loan with an outstanding principal balance of approximately
$8,000.
8
<PAGE> 11
For fiscal 1998 and 1997, gross interest income which would have been
recorded had the nonaccruing loans been current in accordance with their
original terms amounted to $69,000 and $55,000, respectively, of which
$49,000 and $30,000, respectively, was included in interest income.
ASSET CLASSIFICATION. The OTS asset classification system conforms
with commercial banking practices and puts the establishment of loan loss
allowances on a basis consistent with the requirements of generally accepted
accounting principles. The regulations require that each insured institution
review and classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, OTS examiners have
authority to identify problem assets and, if appropriate, require them to be
classified. There are three classifications for problem assets: substandard,
doubtful, and loss. "Substandard" assets must have one or more defined
weaknesses and are characterized by the distinct possibility that the insured
institution will sustain some loss if the deficiencies are not corrected.
"Doubtful" assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation
in full on the basis of currently existing facts, conditions and values
questionable, and there is a high possibility of loss. An asset classified
"loss" is considered uncollectible and of such little value that continuance
as an asset of the institution is not warranted. The regulations have also
created a "special mention" category, described as assets which do not
currently expose an insured institution to a sufficient degree of risk to
warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require the institution to establish general
allowances for loan losses. If an asset or portion thereof is classified
loss, the insured institution must either establish specific allowances for
loan losses in the amount of 100% of the portion of the asset classified loss
or charge-off such amount. A portion of general loss allowances established
to cover possible losses related to assets classified substandard or doubtful
may be included in determining an institution's regulatory capital, while
specific valuation allowances for loan losses generally do not qualify as
regulatory capital.
ESB's classified assets, general and specific loss allowances, and
charge-offs were as follows for the
<TABLE>
<CAPTION>
At or for the
year ended March 31
----------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Substandard assets<F1> $ 28 $138 $441
General loss allowances 374 283 233
Specific loss allowances - - 3
Charge-offs 25 - 15
============================================================================================================
<FN>
<F1> Includes "doubtful" assets of $8,000 at March 31, 1998.
</TABLE>
REAL ESTATE OWNED. Real estate acquired by ESB as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate
owned until sold. When property is acquired it is recorded at fair value.
ESB had no real estate owned at March 31, 1998.
ALLOWANCE FOR LOAN LOSSES. ESB's management evaluates the need to
establish reserves against losses on loans and other assets based on
estimated losses on specific loans and on any real estate held for investment
or acquired through foreclosure when it is determined that a decline in value
has occurred. Such evaluation includes a review of all loans for which full
collectibility may not be reasonably assured and considers, among other
matters, the estimated market value of the underlying collateral of problem
loans, prior loss experience, economic conditions, and overall portfolio
quality. These provisions for losses are charged against earnings in the
year they are established. ESB established provisions for losses on loans
for fiscal 1998, 1997, and 1996 of approximately $116,000, $50,000, and
$31,000, respectively. At March 31, 1998, ESB had an allowance for loan
losses of $374,000, which represented .34 % of total loans. Based on past
experience and future expectations, management believes that the allowance
for loan losses is adequate.
9
<PAGE> 12
The following table sets forth an analysis of ESB's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
===========================================================================================================================
Year ended March 31
-----------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $283 $233 $217 $242 $ 230
Provision charged to expense 116 50 31 9 12
Charge-offs - residential one- to four-family (25) - (15) (34) -
- ---------------------------------------------------------------------------------------------------------------------------
Balance at end of period $374 $283 $233 $217 $ 242
===========================================================================================================================
Ratio of allowance to total loans outstanding
at the end of the period .34% .29% .24% .26% .39%
Ratio of net charge-offs to average loans
outstanding during the period .02% <F*> .02% .04% <F*>
Allowance for loan losses to total
nonperforming assets 43.4% 39.9% 30.4% 30.4% 56.02%
Allowance for loan losses to total
nonperforming loans 43.4% 44.0% 34.8% 32.8% 68.36%
<FN>
- ----------------------
<F*> Insignificant.
</TABLE>
10
<PAGE> 13
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated:
<TABLE>
<CAPTION>
=========================================================================================================================
At March 31
---------------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- --------------------------
Amount of Loan Percent Amount of Loan Percent Amount of Loan Percent
Allowance Amounts of Allowance Amounts of Allowance Amount of
for by total for by total for by total
Loan Loss Category loans Amount Category loans Amount Category loans
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential one- to four-
family<F1> $234 $ 93,784 86.10% $174 $88,441 91.90% $174 $92,036 94.50%
Multi-family and
commercial 19 4,066 3.8 49 4,299 4.5 41 3,405 2.7
Property improvement 7 1,728 1.6 20 1,596 1.7 16 1,300 1.3
Automobiles 3 617 0.6 2 122 0.1 2 97 0.1
Other - 548 0.5 - 528 0.5 - 549 1.4
Commercial business loans 111 8,153 7.4 38 1,280 1.3 - - -
- -------------------------------------------------------------------------------------------------------------------------
Total allowance for
loan losses $374 $108,896 100.00% $283 $96,266 100.00% $233 $97,387 100.00%
=========================================================================================================================
<CAPTION>
============================================================================================================
At March 31
-------------------------------------------------------------------
1995 1994
------------------------------- --------------------------------
Amount of Loan Percent Amount of Loan Percent
Allowance Amounts of Allowance Amount of
for by total for by total
Amount Category loans Amount Category loans
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential one- to four-
family<F1> $202 $78,042 93.3% $216 $58,113 93.40%
Multi-family and
commercial 11 3,803 3.5 24 2,239 3.6
Property improvement - 1,053 1.3 1 908 1.5
Automobiles 4 126 0.2 1 144 0.2
Other - 623 1.7 - 784 1.3
Commercial business loans - - - - - -
- ------------------------------------------------------------------------------------------------------------
Total allowance for
loan losses $217 $83,647 100.00% $242 $62,188 100.00%
============================================================================================================
<FN>
- ---------------------
<F1> Includes loans held for sale.
</TABLE>
11
<PAGE> 14
INVESTMENT ACTIVITIES
ESB classifies its investment securities and mortgage-backed securities
for financial accounting purposes into one of three categories:
Held to Maturity: includes investments in debt securities which
----------------
ESB has the positive intent and ability to hold until maturity.
Trading: includes investments in debt and equity securities
-------
purchased and held principally for the purpose of selling them in the
near term.
Available for Sale: includes investments in debt and equity
------------------
securities not classified as held to maturity or trading (i.e.,
investments that ESB has no present plans to sell in the near term but
may be sold in the future under different circumstances).
Investment and mortgage-backed securities classified as held to
maturity are measured at amortized cost, in which the amortization of
premiums and accretion of discounts, which are recognized as adjustments to
interest income, are recorded using methods approximating the interest
method. Unrealized holding gains and losses for trading securities (for
which no securities were so designated at March 31, 1998 or 1997) are
included in earnings, while such gains and losses for available for sale
securities are excluded from earnings and reported as a net amount as a
separate component of stockholders' equity, net of income taxes, until
realized. Unrealized holding gains and losses for held to maturity
securities are excluded from earnings and stockholders' equity. Gains or
losses for available for sale securities are realized and included in other
noninterest income upon sale, based on the amortized cost of the individual
security sold. All previous market value adjustments included in the
separate component of stockholders' equity are reversed upon sale.
Mortgage-backed securities represent a significant portion of the debt
security portfolio. Amortization of premiums and accretion of discounts on
mortgage-backed securities are analyzed in relation to the corresponding
prepayment rates, both historical and estimated, using a method that
approximates the interest method.
It has been ESB's practice to maintain assets in investment securities
at levels higher than required by federal regulations. ESB's investment
securities portfolio at March 31, 1998 consisted of $2.6 million in U.S.
government and agency obligations classified as held to maturity, with an
estimated market value of $2.5 million, and $68.4 million in U.S. government
and agency obligations classified as available for sale carried at their
estimated market value of $68.9 million.
The overall objective of ESB's investment portfolio is to provide a
sufficient and consistent spread over ESB's marginal cost of funds by
investing funds that are not currently required for lending purposes and to
provide a liquidity reserve in excess of regulatory requirements. ESB has
traditionally maintained an investment portfolio in the range of 15% to 20%
of total assets. ESB's regulatory liquidity ratio at March 31, 1998 was
38.3%. The portfolio is also intended to assist in managing ESB's asset and
liability interest rate sensitivity.
ESB's chief financial officer is responsible for daily management of
ESB's investment activities and is authorized to perform any Board of
Directors approved transaction necessary to achieve the objectives
established by the Board of Directors and that falls within parameters
established by the Board of Directors.
The following table sets forth ESB's investment securities at the dates
indicated:
<TABLE>
=========================================================================================================================
<CAPTION>
At March 31
-------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- ------------------------------
Carrying Percent of Market Carrying Percent of Market Carrying Percent of Market
Value Portfolio Value Value Portfolio Value Value Portfolio Value
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
agency obligations:
Available for sale $68,897 96.4% $68,897 $70,123 93.5% $70,123 $38,898 86.9% $38,898
Held to maturity 2,600 3.6 2,527 4,849 6.5 4,725 5,845 13.1 5,589
- -------------------------------------------------------------------------------------------------------------------------
$71,497 100.0% $71,424 $74,972 100.0% $74,848 $44,743 100.0% $44,487
=========================================================================================================================
</TABLE>
12
<PAGE> 15
The following table sets forth the maturities and weighted average yields of
ESB's investment securities at March 31, 1998:
<TABLE>
==========================================================================================================================
<CAPTION>
Less than one year One to five years Five to ten years Over ten years
------------------ ----------------- ----------------- --------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
agency obligations:
Available for sale $ 499 8.08% $22,685 6.24% $33,468 6.75% $12,245 7.40%
Held to maturity 2,000 3.4 - - 600 3.92 - -
- --------------------------------------------------------------------------------------------------------------------------
Total $2,499 4.32% $22,685 6.24% $34,068 6.70% $12,245 7.40%
==========================================================================================================================
<CAPTION>
=========================================================================================
Total
------------------------------------------------
Average
Remaining Weighted
Years to Carrying Market Average
Maturity Value Value Yield
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. government and
agency obligations:
Available for sale 7.7 $68,897 $68,897 6.71%
Held to maturity 1.4 2,600 2,527 3.52
- -----------------------------------------------------------------------------------------
Total 7.5 $71,497 $71,424 6.59%
=========================================================================================
</TABLE>
13
<PAGE> 16
MORTGAGE-BACKED SECURITIES
In order to supplement residential loan demand in its primary market
area and maintain geographic diversity in its loan portfolio, ESB has a
substantial portfolio of mortgage-backed securities that are classified as
available for sale and, accordingly, are carried at fair market value. All
of ESB's mortgage-backed securities are federal agency securities.
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages, the principal and interest
payments of which are passed from the mortgage originators through
intermediaries that pool and repackage the participation interest in the form
of securities to investors such as ESB. Such intermediaries may include
quasi-governmental agencies such as FHLMC, FNMA, and GNMA that guarantee or
insure the payment of principal and interest to investors. Mortgage-backed
securities generally increase the quality of ESB's assets by virtue of the
guarantees that back them, are more liquid than individual mortgage loans and
may be used to collateralize borrowings or other obligations of ESB.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans
with interest rates that are within an identified range and have similar
maturities. The underlying pool of mortgages can be composed of either fixed
rate mortgages, ARMs, or balloon loans. Mortgage-backed securities generally
are referred to as mortgage participation certificates or pass-through
certificates. As a result, the interest rate risk characteristics of the
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
prepayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security is equal to the life of the underlying
mortgages.
The actual maturity of a mortgage-backed security varies, depending on
when the mortgagors prepay or repay the underlying mortgages. Prepayments of
the underlying mortgages may shorten the life of the investment, thereby
adversely affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and
the amortization of the premium or discount related to the mortgage-backed
security. Premiums and discounts on mortgage-backed securities are amortized
over the estimated term of the securities using a level yield method. The
prepayment assumptions used to determine the amortization period for premiums
and discounts can significantly affect the yield of the mortgage-backed
security and these assumptions are reviewed periodically to reflect the
actual prepayment. The actual prepayments of the underlying mortgages depend
on many factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages, and general levels of market interest rates.
The difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates is an important determinant in the rate of
prepayments. If the coupon rate of the underlying mortgages significantly
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the
underlying mortgages. Prepayment experience is more difficult to estimate
for adjustable rate mortgage-backed securities.
Certain of ESB's mortgage-backed securities yield above-market rates of
interest and are subject to substantial risk of prepayment. In a declining
interest rate environment, ESB may experience significant prepayments of both
fixed and adjustable rate mortgage-backed and related securities. In such
instances, ESB may be unable to reinvest the cash flow from these securities
into comparable yielding investments, and would expect this reinvestment risk
to continue so long as interest rates remained relatively low.
The majority of ESB's mortgage-backed securities are fixed-rate balloon
securities due within 30 years. Depending on ESB's asset/liability mix and
future market conditions, however, ESB may determine to purchase additional
adjustable-rate mortgage-backed securities in the future. ESB's holdings of
mortgage-backed securities have increased in the past year as a result of
reduced investment securities and the inclusion of mortgage-backed securities
in Equality's asset growth plan. Because federal agency mortgage-backed
securities generally carry a yield of approximately 50 to 100 basis points
below that of the corresponding type of residential loan (due to the implied
federal agency guarantee fee and the retention of a servicing spread by the
loan servicer), ESB's asset yields could be somewhat adversely affected. Due
to the existence of the federal agency guarantee on ESB's mortgage-backed
securities and the availability of adjustable-rate mortgage-backed
securities, however, ESB's interest rate risk and credit risk would not
necessarily be increased by further increases in mortgage-backed securities
volume. ESB will continue to evaluate mortgage-backed securities purchases
based on its asset/liability objectives, market conditions, and its alternate
investment opportunities.
14
<PAGE> 17
The following table sets forth certain information regarding carrying
and market values and percentage of total carrying values of ESB's
mortgage-backed securities portfolio.
<TABLE>
==============================================================================================================================
<CAPTION>
At March 31
----------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- ----------------------------- -----------------------------
Carrying Percent of Market Carrying Percent of Market Carrying Percent of Market
Value Total Value Value Total Value Value Total Value
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA $28,570 48.8% $28,570 $7,025 47.0% $ 7,025 $16,126 57.4% $16,126
FHLMC 2,580 4.4 2,580 4,555 30.5 4,555 10,089 35.9 10,089
GNMA 27,362 46.8 27,362 3,374 22.5 3,374 1,881 6.7 1,881
- ------------------------------------------------------------------------------------------------------------------------------
Total mortgage-
backed securities $58,512 100.0% $58,512 $14,954 100.0% $14,954 $28,096 100.0% $28,096
==============================================================================================================================
</TABLE>
The following table sets forth the activity in ESB's mortgage-backed
securities during the periods indicated:
<TABLE>
==================================================================================================================
<CAPTION>
For the Fiscal Year Ended March 31,
-----------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Mortgage-backed securities:
At beginning of period $14,954 $28,096 $15,260
Purchases 56,569 14,211 24,235
Sales (10,036) (22,254) (6,898)
Repayments (3,134) (4,585) (4,022)
Premium/discount amortization, net (204) (295) (446)
SFAS 115 fair market value adjustment 363 (219) (33)
- ------------------------------------------------------------------------------------------------------------------
End of period $58,512 $14,954 $28,096
==================================================================================================================
</TABLE>
15
<PAGE> 18
The composition and maturities of ESB's mortgage-backed securities portfolio
are indicated in the following table at March 31, 1998:
<TABLE>
=========================================================================================================================
<CAPTION>
Less than one year One to five years Five to ten years Over ten years
------------------ ----------------- ----------------- --------------
Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA $130 7.25% $ 635 7.70% $ - -% $27,805 6.14%
FHLMC 232 7 886 7.82 143 6.94 1,319 6.6
GNMA - - 132 9 - - 27,230 6.5
- -------------------------------------------------------------------------------------------------------------------------
Total mortgage-
backed securities $362 7.09% $1,653 7.87% $143 6.94% $56,354 6.33%
=========================================================================================================================
<CAPTION>
======================================================================================
Total
---------------------------------------------
Average
Remaining Estimated Weighted
Years to Carrying Market Average
Maturity Value Value Yield
- --------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
FNMA 12.3 $28,570 $28,570 6.18%
FHLMC 0.4 2,580 2,580 7.08
GNMA 13.7 27,362 27,362 6.5
- --------------------------------------------------------------------------------------
Total mortgage-
backed securities 12.7 $58,512 $58,512 6.38%
======================================================================================
</TABLE>
16
<PAGE> 19
At March 31, 1998, ESB did not hold any security of an issuer (other
than U.S. government and agency securities) which had an aggregate book value
or aggregate market value in excess of 10% of ESB's stockholders' equity at
the dates indicated.
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are the primary source of ESB's funds for lending
and other investment purposes. In addition to deposits, ESB derives funds
from loan principal repayments. Loan repayments are a relatively stable
source of funds while deposit inflows and outflows may be significantly
influenced by the general level of interest rates and money market
conditions. ESB also has access to advances from the FHLB of Des Moines.
These advances can be used on a short-term basis to compensate for reductions
in the availability of funds from other sources or they may be used on a
longer term basis for general business purposes.
DEPOSIT ACCOUNTS. Local deposits are and traditionally have been the
primary source of ESB's funds for use in lending and other general business
purposes. Deposits are attracted from within ESB's primary market area
(metropolitan St. Louis) through an offering of a variety of financial
accounts including savings, checking, money market, certificates of deposit,
retirement plan accounts, and commercial checking. The account terms vary by
type of account according to minimum balance requirements, interest rate, and
the length of time the account must remain open without incurring a penalty
for withdrawal of the funds as well as other factors. ESB relies on the
location of its offices, customer satisfaction, and other references as its
primary sources of deposit solicitation. To a lesser degree, local media
advertising is used in the seeking of deposit funds.
In determining the individual characteristics of its deposit accounts,
ESB considers the products and rates offered by the competition, the
attractiveness of the product to its customer base, the profitability of the
product to ESB, and the effect the account will have on the asset liability
mix of the institution. Attractive, convenient locations and quality service
are ESB's benchmark of success. ESB does not use brokered deposits.
17
<PAGE> 20
The following table sets forth information concerning ESB's savings deposits
at the dates indicated.
<TABLE>
=================================================================================================================================
<CAPTION>
1998 1997 1996
---------------------------- --------------------------- ---------------------------
Percent Percent Percent
of Total Nominal of Total Nominal of Total Nominal
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NOW accounts $ 8,370 7.02% 1.86% $ 7,170 5.83% 2.24% $ 6,990 5.62% 2.27%
Passbook 19,762 16.57 2.51 21,577 17.55 2.51 21,831 17.53 2.51
Money market demand 5,517 4.62 3.07 6,135 4.99 3.22 6,552 5.26 2.93
Noninterest checking 6,920 5.80 0.00 4,993 4.06 0.00 3,824 3.07 0.00
Certificates of Deposit:
28-91 days - Fixed-term, fixed-rate 30 0.02 2.95 34 0.03 2.88 50 0.04 2.81
6 months - Fixed-term, fixed-rate 2,271 1.90 4.00 2,439 1.98 4.01 2,667 2.14 4.00
9 months - Fixed-term, fixed-rate 8,054 6.75 5.26 7,932 6.45 5.27 6,906 5.55 5.43
12 months - Fixed-term, fixed-rate 8,036 6.74 5.14 8,350 6.79 5.06 9,248 7.43 5.32
24 months - Fixed-term, fixed-rate 7,467 6.26 5.50 6,760 5.50 5.55 6,328 5.08 5.49
36 months - Fixed-term, fixed-rate 3,029 2.54 5.57 3,010 2.45 5.35 4,218 3.39 4.71
48 months - Fixed-term, fixed-rate 12,955 10.86 6.36 11,568 9.41 6.39 10,225 8.21 6.44
60 months - Fixed-term, fixed-rate 12,869 10.79 5.61 18,300 14.88 5.67 20,062 16.11 5.80
24 months - Fixed-term, variable-rate 639 0.54 5.50 631 0.51 5.50 904 0.73 5.50
5 - 20 years - Fixed-term, fixed-rate
(Guaranteed Account) 122 0.10 8.92 115 0.09 8.93 107 0.09 8.91
1-60 months - Negotiated rate 2,214 1.86 6.12 2,718 2.21 6.20 3,428 2.75 5.96
Retirement Accounts (IRAs):
12 months - Fixed-term, fixed-rate 883 0.74 5.00 962 0.78 5.00 1,037 0.83 5.00
24 months - Fixed-term, fixed-rate 1,004 0.84 5.39 942 0.77 5.53 809 0.65 5.53
36 months - Fixed-term, fixed-rate 734 0.62 5.53 755 0.61 5.44 940 0.75 4.89
48 months - Fixed-term, fixed-rate 10,848 9.09 6.53 10,260 8.34 6.59 8,563 6.88 6.74
60 months - Fixed-term, fixed-rate 6,944 5.82 5.86 7,710 6.27 5.87 9,293 7.46 6.08
120 months - Fixed-term, fixed-rate 395 0.33 10.00 370 0.30 10.00 346 0.28 10.00
24 months - Fixed-term, variable-rate 238 0.19 5.50 252 0.20 5.50 187 0.15 5.50
- ---------------------------------------------------------------------------------------------------------------------------------
$119,301 100.00% 4.49% $122,983 100.00% 4.63% 124,515 100.00% 4.69%
=================================================================================================================================
</TABLE>
18
<PAGE> 21
The following table indicates the amount of ESB's jumbo certificates of
deposit by time remaining until maturity as of March 31, 1998. Jumbo
certificates of deposit require minimum deposits of $100,000 and have
negotiable rates.
<TABLE>
========================================================
<CAPTION>
Certificates
Maturity period of deposit
- --------------------------------------------------------
(Dollars in thousands)
<S> <C>
Three months or less $ 550
Three through six months 300
Six through twelve months 344
Over twelve months 1,020
- --------------------------------------------------------
$2,214
========================================================
</TABLE>
DEPOSIT FLOW
The following table sets forth the balances of savings deposit in the
various types of savings accounts offered by ESB at the dates indicated.
<TABLE>
<CAPTION>
At March 31
------------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ----------------------------- ------------------------------
Percent Percent Percent
of Increase of Increase of Increase
Amount total (decrease) Amount total (decrease) Amount total (decrease)
------ ----- ---------- ------ ----- ---------- ------ ----- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-
bearing checking $ 6,920 5.80% $ 1,927 $ 4,993 4.06% $ 1,169 $ 3,824 3.07% $ 1,186
NOW accounts 8,370 7.02 1,200 7,170 5.83 180 6,990 5.62 (532)
Passbook
accounts 19,762 16.57 (1,815) 21,577 17.55 (254) 21,831 17.53 (2,047)
Money market
demand 5,517 4.62 (618) 6,135 4.99 (417) 6,552 5.26 (1,226)
Fixed-rate
certificates 77,855 65.26 (4,370) 82,225 66.86 (2,002) 84,227 67.64 5,577
Variable-rate
certificates 877 0.73 (6) 883 .71 (208) 1,091 .88 (3)
- -------------------------------------------------------------------------------------------------------------------------
Total $119,301 100.00% $(3,682) $122,983 100.00% $(1,532) $124,515 100.00% $ 2,955
=========================================================================================================================
</TABLE>
CERTIFICATES OF DEPOSIT BY RATES
The following table sets forth the certificates of deposits classified
by rates as of the dates indicated.
<TABLE>
==========================================================================================
<CAPTION>
At March 31
-------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Less than 3.00% $ 3 $ 8 $ 19
3.00% to 3.99% 26 251 1,344
4.00% to 4.99% 3,214 3,925 6,553
5.00% to 5.99% 48,216 49,200 43,120
6.00% to 6.99% 15,122 17,083 19,200
7.00% to 7.99% 11,634 12,155 14,630
8.00% and greater 517 486 453
- ------------------------------------------------------------------------------------------
Total $78,732 $83,108 $85,319
==========================================================================================
</TABLE>
19
<PAGE> 22
Certificate of deposit accounts at March 31, 1998, 1997, and 1996 are
scheduled to mature as indicated in the following table.
<TABLE>
<CAPTION>
=========================================================================================================
1998 1997 1996
-------------------- ------------------- -------------------
Percent Percent Percent
of of of
Amount total Amount total Amount total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Within one year $42,430 53.9% $36,335 43.7% $32,402 38.0%
Second year 21,282 27.0 22,832 27.5 16,287 19.1
Third year 6,832 8.7 16,693 20.1 18,727 21.9
Fourth year 4,563 5.8 4,949 6.0 15,464 18.1
Thereafter 3,625 4.6 2,299 2.7 2,439 2.9
- ---------------------------------------------------------------------------------------------------------
Total $78,732 100.0% $83,108 100.0% $85,319 100.0%
=========================================================================================================
</TABLE>
The following table sets forth the savings activities of ESB for the
periods indicated.
<TABLE>
<CAPTION>
==============================================================================================
For the Fiscal Year Ended March 31,
-----------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $122,983 $124,515 $121,560
Net decrease before interest credited (8,121) (5,811) (1,331)
Interest credited 4,439 4,279 4,286
- ----------------------------------------------------------------------------------------------
$119,301 $122,983 $124,515
==============================================================================================
</TABLE>
BORROWINGS
While deposits are the primary source of funds for ESB, advances from
the FHLB of Des Moines are necessary periodically to supplement the funds
required for operations. At March 31, 1998, ESB had $104.0 million in FHLB
of Des Moines advances outstanding. During fiscal year 1998, ESB utilized
FHLB advances to offset deposit outflows to provide for increased
originations of portfolio loans and increased investment in mortgage-backed
securities.
EMC maintains a custodial borrowing relationship at an unaffiliated
bank secured by investment securities with an amortized cost and a market
value of approximately $4.0 million at March 31, 1998. At March 31, 1998,
there was $1.7 million outstanding on this note payable.
20
<PAGE> 23
The following table sets forth certain information regarding borrowings
by ESB at the end of and during the periods indicated.
<TABLE>
<CAPTION>
==============================================================================================
At and For the Year Ended March 31,
-----------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Weighted average rate at March 31:
FHLB of Des Moines borrowings 5.32% 5.34% 5.52%
Note payable to bank 2.25 2.25 2.25
ESOP debt - 9.50 9.25
Maximum amount of borrowings outstanding
at any month-end:
FHLB of Des Moines borrowings $104,000 $67,000 $62,000
Note payable to bank 4,000 4,000 3,000
ESOP debt 136 158 193
Approximate average borrowings outstanding
with respect to:
FHLB of Des Moines borrowings $ 76,208 $61,917 $46,000
Note payable to bank 3,085 2,259 2,194
ESOP debt 68 150 1,801
Approximate weighted average rate paid on:
FHLB of Des Moines borrowings 5.29% 5.46% 5.96%
Note payable to bank 2.25 2.25 2.25
ESOP debt 8.50 9.25 9.73
- ----------------------------------------------------------------------------------------------
</TABLE>
COMPETITION
Equality has been, and intends to continue to be, a community-oriented
financial intermediary offering a wide variety of financial services to meet
the needs of the communities it serves. Equality is headquartered in St.
Louis, Missouri. It currently operates through ESB and EMC using eight full
and limited service offices in the St. Louis area.
ESB faces intense competition both in making loans and in attracting
deposits. The St. Louis area has a large number of financial institutions,
many of which have greater financial resources, name recognition and market
presence than ESB, and all of which are competitors of ESB to varying
degrees. Particularly intense competition exists for deposits and in all of
the lending activities engaged in by ESB and EMC.
EMC's competition for loans comes principally from national, regional
and local mortgage-banking companies, commercial banks, other savings and
loan associations, savings banks, insurance companies, finance companies and
credit unions. Thus, no assurances can be made that EMC will be able to
maintain its current level of such loans. ESB competes for mortgage loans
principally through EMC. Competition is based on a combination of interest
rates and loan fees charged in addition to the availability of special issues
such as the Affordable Housing Program. The efficiency and quality of the
service provided also plays a significant role in EMC's competitive position.
ESB's most direct competition for deposits historically has come from
other savings and loan associations, commercial banks, savings banks and
credit unions. In addition, ESB faces increasing competition for deposits
from non-bank institutions such as brokerage firms and insurance companies in
such areas as money market funds, other mutual funds (such as corporate and
government securities funds) and annuities. ESB competes for deposits by
offering customers a variety of savings accounts, checking accounts,
certificates of deposit, and a responsive, customer-oriented staff, as well
as convenient access to ESB by 24-Hour Teller Machines or personal
appointment.
Trends toward the consolidation of the banking industry and the lifting
of interstate banking and branching restrictions may make it more difficult
for smaller institutions, such as ESB, to compete effectively with large,
national and regional banking institutions.
21
<PAGE> 24
Smaller institutions such as ESB will be forced to either compete with
larger institutions on pricing of products and services, or to identify and
operate in a "niche" that will allow for operating margins to be maintained
at profitable levels. As a locally-based financial institution, ESB's
strategy has been to position itself as a community-oriented financial
institution that provides high quality products and services to meet the
retail banking needs of its local customer base. This strategy is designed
to identify a niche in ESB's market where it can effectively compete against
much larger institutions.
SUBSIDIARY ACTIVITIES AND JOINT VENTURES
ESB has two wholly owned subsidiaries, EMC and Equality Commodity
Corporation ("ECC"). ECC operates a full-service insurance agency under the
name Equality Insurance Agency ("EIA") and owns one income-producing property
and participates in a real estate joint venture. EIA provides a full array
of insurance products, including property and casualty, automobile, health
and life insurance, and, to a much lesser degree, commercial fire and
casualty insurance. EIA also offers annuities and operates Flood Information
Specialists, which issues flood plain certificates. These certificates are
required by all mortgage loan lenders and is a requirement for selling a loan
in the secondary market.
In 1986, ECC purchased a 14-unit complex located in south St. Louis
near Hampton Village. The property produces a stable income stream. At
March 31, 1998, the property had a net book value of $222,000.
ECC has a 50% interest in a real estate joint venture, WC Joint
Venture. WC Joint Venture owns two properties in St. Louis County,
Missouri. Tenants at the properties include DDA, Suburban Journal, and IBT,
Inc.
ESB is required to deduct from capital its investment in ECC because
ECC is considered a "nonincludable" subsidiary as a result of its real estate
investment activities. ESB intends to continue to divest itself of various
properties in an orderly and prudent manner, taking advantage of more
favorable economic conditions.
PERSONNEL
As of March 31, 1998, ESB, including subsidiaries, had 89 full-time
employees and 39 part-time employees. The employees are not represented by a
union or collective bargaining unit. ESB believes its relationship with its
employees are good.
REGULATION AND SUPERVISION
GENERAL
-------
ESB is chartered under federal law by the OTS. It is a member of the
FHLB System, and its deposit accounts are insured up to legal limits by the
FDIC under the SAIF. The OTS is charged with overseeing and regulating ESB's
activities and monitoring its financial condition. This regulatory framework
sets parameters for ESB's activities and operations and grants the OTS
extensive discretion with regard to its supervisory and enforcement powers
and examination policies. ESB files periodic reports with the OTS concerning
its activities and financial condition, must obtain OTS approval prior to
entering into certain transactions or initiating new activities, and is
subject to periodic examination by the OTS to evaluate ESB's compliance with
various regulatory requirements.
Equality is a savings and loan holding company and, like ESB, is
subject to regulation by the OTS. As part of this regulation, Equality is
required to file certain reports with, and is subject to periodic examination
by, the OTS.
PENDING FINANCIAL MODERNIZATION LEGISLATION
-------------------------------------------
On May 13, 1998, the U.S. House of Representatives passed a sweeping
financial modernization bill, H.R. 10, The Financial Services Act of 1998, by
a vote of 214 to 213. The bill was first proposed by the Clinton
Administration on May 21, 1997. The final House version differs in many
significant respects from the Administration's proposed bill. The House bill
has been sent to the U.S. Senate for its consideration. The Senate began
hearings on the legislation on June 17, 1998. If passed by the Senate, the
bill would not become law unless it is signed by the President. As of the
date of its passage by the House, there were only 30 or so legislative days
left in the 105th Congress, which many observers believe is an inadequate
amount of time for the Senate to act on the legislation in the 1998
legislative year. In addition, the Administration has commented publicly
that it will not support the legislation in the form passed by the House.
Accordingly, whether the bill
22
<PAGE> 25
will pass in the near future remains uncertain and the ultimate form the
legislation might take if enacted cannot be predicted at this time.
The bill, among other things, addresses the ongoing debate concerning
mixing banking and commerce. Under the proposal, banks could affiliate with
insurance and securities companies in a holding company structure, subject to
functional regulation. Much of the debate concerning the legislation has
centered on whether non-banking activities can be conducted through
subsidiaries of the bank, rather than only through holding companies. In this
regard, H.R. 10 requires banks to move non-banking activities to holding
companies regulated by the Board of Governors of the Federal Reserve System,
thereby removing them from under the bank. Securities activities would be
regulated by the Securities and Exchange Commission, and state regulators
would oversee insurance activities. The proposal provides for further study
of the issues relating to merging the SAIF and BIF. If adopted, the
legislation would represent the most significant overhaul of financial
services laws since the 1930s when the Glass-Steagall Act of 1933 was
enacted.
With respect to the thrift industry, H.R. 10 does not contain
provisions eliminating the federal thrift charter and requiring all federal
thrifts to convert into national banks within two years. The bill allows
unitary thrift holding companies to continue operating, but prevents any new
unitary thrifts from being formed after March 31, 1998. Prior versions of
the bill would have eliminated the federal thrift charter, while allowing
existing unitary thrift holding companies to retain their status and
affiliations with nonfinancial enterprises and to engage in all currently
permissible activities.
FEDERAL SAVINGS ASSOCIATION REGULATION
--------------------------------------
BUSINESS ACTIVITIES. The activities of savings associations are
governed by the Home Owners' Loan Act, as amended (the "HOLA"), and, in
certain respects, the Federal Deposit Insurance Act (the "FDI Act"). The
HOLA and the FDI Act were amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and the Federal Deposit
Insurance Corporation Improvement Act of 1991 ("FDICIA"). FIRREA was enacted
for the purpose of resolving problem savings associations, establishing a new
thrift insurance fund, reorganizing the regulatory structure applicable to
savings associations, and imposing bank-like standards on savings
associations. FDICIA, among other things, requires that federal banking
regulators intervene promptly when a depository institution experiences
financial difficulties, mandates the establishment of a risk-based deposit
insurance assessment system, and requires imposition of numerous additional
safety and soundness operational standards and restrictions. FIRREA and
FDICIA both contain provisions affecting numerous aspects of the operations
and regulations of federally-insured savings associations and empowers the
OTS and the FDIC, among other agencies, to promulgate regulations
implementing its provisions.
QUALIFIED THRIFT LENDER TEST. In September 1996, the Economic Growth
and Regulatory Paperwork Reduction Act of 1996 became law (the "Economic
Growth Act of 1996"). In the past, savings associations were required to
satisfy a qualified thrift lender test ("QTL" test) by maintaining 65% of
their portfolio assets (defined as all assets minus intangible assets,
property used by the association in conducting its business and liquid assets
equal to 20% of total assets) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed securities) on a monthly basis in nine out of every twelve
months.
The Economic Growth Act of 1996 liberalized the QTL test for savings
associations by permitting them to satisfy a similar-but-different 60% asset
test under the Internal Revenue Code. Alternatively, savings associations
may meet the QTL test by satisfying a more liberal 65% asset test that
allows an institution to include small business, credit card, agriculture and
education loans as qualified investments for purposes of the test.
Furthermore, consumer loans now count as qualified thrift investments up to
20% of portfolio assets. On April 3, 1997, OTS issued a final rule that
implements provisions of the Economic Growth Act of 1996, including the
amended QTL test.
If a federal savings association fails the QTL test, it must convert to
a bank or conform its activities to those permitted to a national bank (but
which activities also are not inconsistent with the powers permitted to a
savings association), particularly as they relate to investments, branching
and dividends, and it also shall not be eligible for new advances from any
Federal Home Loan Bank. A federal savings association that fails the QTL
test may requalify.
BRANCHING. A federally-chartered savings association, like ESB, can
establish branches in any state or states in the United States and its
territories, subject to a few exceptions. The exercise by the OTS of its
authority to permit interstate branching by federal savings associations is
preemptive of any state law purporting to address the subject of branching by
a federal savings association.
23
<PAGE> 26
COMMERCIAL AND CONSUMER LENDING AUTHORITY. Before the Economic Growth
Act of 1996, federal savings associations were able to lend up to 10% of
their assets in commercial business loans (i.e., secured or unsecured loans
for commercial, corporate, business, or agricultural purposes) and, subject
to OTS approval for a higher amount, up to 400% of their capital in
commercial real estate loans. In addition, federal savings associations were
permitted to make consumer loans (i.e., loans for personal, family or
household purposes) in an amount not to exceed 35% of their assets.
The Economic Growth Act of 1996 amended the commercial-lending-asset
limit by increasing the ceiling from 10% to 20%, but provides that amounts in
excess of 10% may be used only for small business loans. Moreover, the new
law exempts credit card and educational loans from any percentage of asset
limitations applicable to consumer loans. The interim final rule issued by
the OTS on November 27, 1996, defines a "small business loan" as one which
meets the Small Business Administration size eligibility standards. This
definition also applies for purposes of the new QTL test.
Effective October 30, 1996, the OTS (as part of its regulatory
streamlining project) amended its lending regulations for federal savings
associations to remove the requirement that commercial loans made at the
service corporation level be aggregated with the 10% of assets limit on
commercial lending.
LOANS TO ONE BORROWER. Under HOLA, savings associations are generally
subject to the national bank limits regarding loans to one borrower.
Generally, savings associations may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of the association's
unimpaired capital and surplus, where the borrowing is not fully secured by
readily-marketable collateral. An additional amount may be lent, equal to
10% of the association's unimpaired capital and surplus, if such additional
borrowing is secured by readily-marketable collateral at least equal to the
amount of such additional funds. At March 31, 1998, ESB had no outstanding
loans or commitments that exceeded the loans to one borrower limit at the
time made or committed.
BROKERED DEPOSITS. Well-capitalized savings associations that are not
troubled are not subject to brokered deposit limitations.
Adequately-capitalized associations are able to accept, renew or roll over
brokered deposits but only (i) with a waiver from the FDIC and (ii) subject
to the limitation that they do not pay an effective yield on any such deposit
that exceeds by more than (a) 75 basis points the effective yield paid on
deposits of comparable size and maturity in such association's normal market
area for deposits accepted in its normal market area or (b) 120 basis points
of the current yield on similar maturity U.S. Treasury obligations or, in the
case of any deposit at least half of which is uninsured, 130% of such Treasury
yield. Undercapitalized associations are not permitted to accept brokered
deposits and may not solicit deposits by offering an effective yield that
exceeds by more than 75 basis points the prevailing effective yields on
insured deposits of comparable maturity in the association's normal market
area or in the market area in which such deposits are being solicited. ESB is
not presently soliciting brokered deposits.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings associations and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers, and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on
an insured association. Civil penalties cover a wide range of violations and
actions. Criminal penalties for most financial association crimes include
fines and imprisonment. In addition, regulators have substantial discretion
to impose enforcement action on an association that fails to comply with its
regulatory requirements, particularly with respect to amounts of capital.
Possible enforcement action ranges from requiring the preparation of a
capital plan or imposition of a capital directive to receivership,
conservatorship or the termination of deposit insurance. Under the FDI Act,
the FDIC has the authority to recommend to the Director of OTS enforcement
action be taken with respect to a particular savings association. If action
is not taken by the Director, the FDIC has authority to take enforcement
action under certain circumstances.
ASSESSMENTS. Savings associations are required by OTS regulation to
pay assessments to the OTS to fund the operations of the OTS. The general
assessment paid on a semi-annual basis is computed based upon the savings
association's total assets, including consolidated subsidiaries, as reported
in the association's latest quarterly thrift financial report.
FEDERAL HOME LOAN BANK SYSTEM. ESB is a member of the FHLB System,
which consists of 12 regional FHLB's. The FHLB provides a central credit
facility primarily for member associations. ESB, as a member of the FHLB-Des
Moines, is required to acquire and hold shares of capital stock in that FHLB
in an amount at least equal to 1% of the aggregate principal amount of its
unpaid residential mortgage loans and similar obligations at the beginning of
each year, or 1/20 of its advances (borrowings) from the FHLB-Des Moines,
whichever is greater. ESB is in compliance with this requirement, with
24
<PAGE> 27
an investment in FHLB-Des Moines stock at March 31, 1998 of $5.2 million.
FHLB advances must be secured by specified types of collateral and may be
obtained only for the purpose of purchasing or funding new residential
housing finance assets.
OTS CAPITAL REQUIREMENTS. The OTS capital regulations require savings
associations to meet three capital standards: a 1.5% tangible capital
standard, a 3% leverage ratio (or core capital ratio), and an 8% risk-based
capital standard.
Tangible capital is defined as common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related
earnings, certain nonwithdrawable accounts and pledged deposits of mutual
savings associations, and minority interests in equity accounts of fully
consolidated subsidiaries, less intangible assets (other than certain
mortgage servicing rights) and certain equity and debt investments in
nonqualifying subsidiaries.
Core capital is defined as common stockholders' equity (including
retained earnings), certain noncumulative perpetual preferred stock and
related surplus, minority interests in equity accounts of consolidated
subsidiaries, certain nonwithdrawable accounts and pledged deposits of mutual
savings associations, certain amounts of goodwill resulting from prior
regulatory accounting practices, less intangible assets (other than certain
mortgage servicing rights) and certain equity and debt investments in
nonqualifying subsidiaries.
The OTS capital regulation requires that in meeting the leverage ratio,
tangible and risk-based capital standards, savings associations must deduct
investments in and loans to subsidiaries engaged in activities not
permissible for a national bank (a "nonqualifying subsidiary"). At March 31,
1998, ECC was considered a nonqualifying subsidiary.
In April 1991, the OTS issued a proposal to amend its regulatory
capital regulation to establish a 3% leverage ratio (defined as the ratio of
core capital to adjusted total assets) for associations in the strongest
financial and managerial condition, with a 1 CAMEL Rating (the highest rating
of the OTS for savings associations). For all other associations, the
minimum core capital leverage ratio would be 3% plus at least an additional
100 to 200 basis points. In determining the amount of additional capital
under the proposal, the OTS would assess both the quality of risk management
systems and the level of overall risk in each individual association through
the supervisory process on a case-by-case basis. Associations that failed
the new leverage ratio would be required to file with the OTS a capital plan
that details the steps they would take to reach compliance. If enacted in
final form as proposed, management does not believe that the proposed
regulation would have a material effect on ESB's operations.
Although the OTS has not adopted this regulation in final form,
generally a savings association that has a leverage capital ratio of less
than 4% will be deemed to be "undercapitalized" under the OTS prompt
corrective action regulations and consequently can be subject to various
limitations on activities.
The OTS' risk-based capital standard requires that savings associations
maintain a ratio of total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of 8%. In calculating total
capital, a savings association must deduct reciprocal holdings of depository
institution capital instruments, all equity investments and that portion of
land loans and nonresidential construction loans in excess of 80%
loan-to-value ratio and its interest rate risk component (as discussed
below), in addition to the assets that must be deducted in calculating core
capital. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
of 0% to 100%, as assigned by the OTS capital regulation based on the risks
OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed above
under the 3% leverage standard. The components of supplementary capital
include cumulative preferred stock, long-term perpetual preferred stock,
mutual capital certificates, certain nonwithdrawable accounts and pledged
deposits, certain net worth certificates, income capital certificates,
certain perpetual subordinated debt, mandatory convertible subordinated debt,
certain intermediate-term preferred stock, certain mandatorily redeemable
preferred stock and allowance for loan and lease losses. Allowance for loan
and lease losses includable in supplementary capital is limited to a maximum
of 1.25%. Overall, the amount of capital counted toward supplementary
capital cannot exceed 100% of core capital. At March 31, 1998, ESB met each
of its capital requirements.
FDICIA required that the OTS (and other federal banking agencies)
revise risk-based capital standards, with appropriate transition rules, to
ensure that they take account of interest rate risk, concentration of risk
and the risks of nontraditional activities.
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The OTS' interest rate risk component became effective on January 1,
1994. Under the rule, savings associations with "above normal" interest
rate risk exposure would be subject to a deduction from total capital for
purposes of calculating their risk-based capital requirements. A savings
association's interest rate risk is measured by the decline in the net
portfolio value of its assets (i.e., the difference between incoming and
outgoing discounted cash flows from assets, liabilities and off-balance sheet
contracts) that would result from a hypothetical 200-basis point increase or
decrease in market interest rates (except when the three-month Treasury bond
equivalent yield falls below 4%, then the decrease would be equal to one-half
of that Treasury rate) divided by the estimated economic value of the
association's assets, as calculated in accordance with guidelines set forth
by the OTS. A savings association whose measured interest rate risk exposure
exceeds 2% must deduct an interest rate component in calculating its total
capital under the risk-based capital rule. The interest rate risk component
is an amount equal to one-half of the difference between the association's
measured interest rate risk and 2%, multiplied by the estimated economic
value of the association's assets. That dollar amount is deducted from an
association's total capital in calculating compliance with its risk-based
capital requirement. Savings associations with assets of less than $300
million and risk-based capital ratios in excess of 12% are not subject to the
interest rate risk component. The rule also provides that the Director of
the OTS may waive or defer an association's interest rate risk component.
LIQUIDITY. ESB is required to maintain an average daily balance of
liquid assets (e.g., cash, accrued interest on liquid assets, certain time
deposits, savings accounts, bankers' acceptances, specified United States
Government, state or federal agency obligations, shares of certain mutual
funds and certain corporate debt securities and commercial paper) equal to
not less than a specified percentage of the average daily balance of its net
withdrawal deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within
the range of 4% to 10% depending upon economic conditions and the savings
flows of member associations; this requirement is currently 4%. The OTS
requires that the average daily balance of liquid assets be determined
calculated using the amount of the institution's liquidity base as the end of
the preceding calendar quarter or the average daily balance of its liquidity
base during the preceding quarter The OTS may determine the adequacy of an
institution's liquidity on a case-by-case basis, using as a standard that
level of liquidity necessary to ensure that the institution operates on a
"safe and sound" basis. The OTS may initiate enforcement actions for failure
to meet these liquidity requirements.
INSURANCE OF DEPOSIT ACCOUNTS AND DEPOSIT INSURANCE PREMIUMS. FDICIA
required the FDIC to establish a risk-based assessment system for insured
depository associations that takes into account the risks attributable to
different categories and concentrations of assets and liabilities. Under the
rule, the FDIC assigns an association to one of three capital categories
consisting of (i) "well capitalized," (ii) "adequately capitalized" or (iii)
"undercapitalized", and one of three supervisory subcategories. The
supervisory subgroup to which an association is assigned is based on a
supervisory evaluation provided to the FDIC by the association's primary
federal regulator and information which the FDIC determines to be relevant to
the association's financial condition and the risk posed to the deposit
insurance funds (which may include, if applicable, information provided by
the association's state supervisor). An association's assessment rate
depends on the capital category and supervisory category to which it is
assigned. There are nine assessment risk classifications (i.e., combinations
of capital groups and supervisory subgroups) to which different assessment
rates are applied. Assessment rates range from 23 basis points for an
association in the highest category (i.e., well-capitalized and healthy) to
31 basis points for an association in the lowest category (i.e.,
undercapitalized and of substantial supervisory concern).
The SAIF and the BIF were required by law to achieve and maintain a
ratio of insurance reserves to total insured deposits equal to 1.25%. The
BIF reached this required reserve ratio during 1995, while some predictions
indicated the SAIF would not reach this target until the year 2002. The SAIF
had not grown as quickly as the BIF for many reasons, but in large part
because almost half of SAIF premiums had to be used to retire bonds issued by
the Financing Corporation ("FICO Bonds") in the late 1980's to recapitalize
the Federal Savings and Loan Insurance Corporation. Until 1995, the SAIF and
BIF deposit insurance premium rate schedules had been identical. But in-mid
1995, the FDIC issued final rules modifying its assessment rate schedules for
SAIF and BIF member institutions, which required SAIF-insured institutions to
pay a significantly higher deposit premium than their BIF-insured
counterparts. Thrift industry representatives argued that this significant
premium differential caused savings associations to operate at a competitive
disadvantage to their BIF-insured bank counterparts.
On September 30, 1996, President Clinton signed the Deposit Insurance
Funds Act of 1996 ("DIFA") that was part of the omnibus spending bill enacted
by Congress at the end of its 1996 session. DIFA mandated that the FDIC
impose a special assessment on the SAIF-assessable deposits of each insured
depository institution at a rate applicable to all such institutions that
the FDIC determined would cause the SAIF to achieve its designated reserve
ratio of 1.25% as of October 1, 1996. In response to this legislation, in
order to recapitalize the SAIF, on October 10, 1996, the FDIC adopted a final
rule governing the payment of a SAIF special assessment in the amount of 65.7
basis points. SAIF-insured institutions were
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required to pay the assessment by November 27, 1996. In response to the
recapitalization of the SAIF, the FDIC announced on December 11, 1996 that
deposit insurance rates for most savings associations insured under the SAIF
would be lowered to zero effective January 1, 1997, thereby equalizing SAIF
insurance premiums with those paid by BIF-insured institutions.
DIFA mandates the merger of the SAIF and BIF, effective January 1,
1999, but only if no insured depository institution is a savings association
on that date. The combined deposit insurance fund, if the funds are merged,
will be called the "Deposit Insurance Fund", or "DIF".
Before DIFA, federal regulators and thrift industry trade groups were
predicting that a default would occur on the FICO Bonds as early as 1998, as
SAIF-assessable deposits continued to decline. DIFA amends The Federal Home
Loan Bank Act to impose the FICO assessment against both SAIF and BIF
deposits beginning after December 31, 1996. But the assessment imposed on
insured depository institutions with respect to any BIF-assessable deposit
will be assessed at a rate equal to one-fifth of the rate (approximately 1.3
basis points) of the assessments imposed on insured depository institutions
with respect to any SAIF-assessable deposit (approximately 6.7 basis points).
The FICO assessment for 1996 was paid entirely by SAIF-insured institutions.
BIF-insured banks will pay the same FICO assessment as SAIF-insured
institutions beginning as of the earlier of December 31, 1999 or the date as
of which the last savings association ceases to exist.
LIMITATION ON CAPITAL DISTRIBUTIONS. The OTS regulations impose
limitations upon all capital distributions by savings associations, such as
cash dividends, payments to repurchase or otherwise acquire its shares,
payments to shareholders of another association in a cash-out merger and
other distributions charged against capital. The regulations establish three
tiers of associations. An association that exceeds all fully phased-in
capital requirements before and after the proposed capital distribution
("Tier 1 Association") and has not been advised by the OTS that it is in need
of more than normal supervision, could, after prior notice but without the
approval of the OTS, make capital distributions during a calendar year up to
the higher of (a) 100% of its net income to date during the calendar year
plus the amount that would reduce by one-half its "surplus capital ratio"
(the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year or (b) 75% of its net reserve over the most
recent four-quarter period. Any additional capital distributions would
require prior regulatory approval. In computing the association's
permissible percentage of capital distributions, previous distributions made
during the prior four quarter period must be included. As of March 31, 1998,
ESB met the requirements of a Tier 1 Association. In the event ESB's capital
fell below its fully phased-in requirement or the OTS notified it that it was
in need of more than normal supervision, ESB's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any association, which would otherwise be
permitted by regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
On March 9, 1998, the issued a Notice of Proposed Rulemaking that, if
adopted in final form, would amend its capital distribution regulation. The
proposed rule updates, simplifies, and streamlines the capital distribution
regulation to reflect OTS's implementation of the system of prompt corrective
action established under FDICIA.
COMMUNITY REINVESTMENT. The OTS, the FDIC, the Federal Reserve Board
and the OCC have jointly issued a final rule (the "Final Rule") under the
Community Reinvestment Act (the "CRA"). The Final Rule eliminates the
existing CRA regulation's twelve assessment factors and substitutes a
performance based evaluation system. The Final Rule will be phased in over a
period of time and become fully effective by July 1, 1997. Under the Final
Rule, an institution's performance in meeting the credit needs of its entire
community, including low- and moderate-income areas, as required by the CRA,
will generally be evaluated under three tests: the "lending test," the
"investment test," and the "service test."
The lending test analyzes lending performance using five criteria: (i)
the number and amount of loans in the institution's assessment area, (ii) the
geographic distribution of lending, including the proportion of lending in
the assessment area, the dispersion of lending in the assessment area, and
the number and amount of loans in low-, moderate-, middle-, and upper-income
areas in the assessment area, (iii) borrower characteristics, such as the
income level of individual borrowers and the size of businesses or farms,
(iv) the number and amount, as well as the complexity and innovativeness of
an institution's community development lending and (v) the use of innovative
or flexible lending practices in a safe and sound manner to address the
credit needs of low- or moderate-income individuals or areas. The investment
test analyzes investment performance using four criteria: (i) the dollar
amount of qualified investments, (ii) the innovativeness or complexity of
qualified investments, (iii) the responsiveness of qualified investments to
credit and community development needs, and (iv) the degree to which the
qualified investments made by the institution are not routinely provided by
private investors. The service test analyzes service performance using six
criteria: (i) the institution's branch distribution among low-, moderate-,
middle-, and upper-income areas, (ii) its record of opening and closing
branches, particularly in low- and moderate-income areas, (iii) the
availability and effectiveness of alternative systems for delivering retail
banking services,
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(iv) the range of services provided in low-, moderate-, middle- and
upper-income areas and extent to which those services are tailored to meet
the needs of those areas, (v) the extent to which the institution provides
community development services, and (vi) the innovativeness and
responsiveness of community development services provided.
An independent financial institution with assets of less than $250
million, or a financial institution with assets of less than $250 million
that is a subsidiary of a holding company with assets of less than $1
billion, will be evaluated under a streamlined assessment method based
primarily on its lending record. The streamlined test considers an
institution's loan-to-deposit ratio adjusted for seasonal variation and
special lending activities, its percentage of loans and other lending related
activities in the assessment area, its record of lending to borrowers of
different income levels and businesses and farms of different sizes, the
geographic distribution of its loans, and its record of taking action, if
warranted, in response to written complaints. In lieu of being evaluated
under the three assessment tests or the streamlined test, a financial
institution can adopt a "strategic plan" and elect to be evaluated on the
basis of achieving the goals and benchmarks outlined in the strategic plan.
TRANSACTIONS WITH RELATED PARTIES. ESB's authority to engage in
transactions with related parties or "affiliates," (i.e., any company that
controls or is under common control with an association) including the
Corporation and its non-savings-association subsidiaries or to make loans to
certain insiders, is limited by Sections 23A and 23B of the Federal Reserve
Act ("FRA"). Subsidiaries of a savings association are generally exempted
from the definition of "affiliate." Section 23A limits the aggregate amount
of transactions with any individual affiliate to 10% of the capital and
surplus of the savings association and also limits the aggregate amount of
transactions with all affiliates to 20% of the savings association's capital
and surplus. Certain transactions with affiliates are required to be secured
by collateral in an amount and of a type described in the FRA and the
purchase of low quality assets from affiliates is generally prohibited.
Section 23B provides that certain transactions with affiliates, including
loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the association as those prevailing at the time for comparable
transactions with non-affiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to non-affiliated companies. Notwithstanding Sections 23A and 23B,
FIRREA prohibits any savings association from lending to any affiliate that
is engaged in activities that are not permissible for bank holding companies
under Section 4(c) of the Bank Holding Company Act ("BHC Act"). Further, no
savings association may purchase the securities of any affiliate other than a
subsidiary.
ESB's authority to extend credit to executive officers, directors, and
10% shareholders, as well as such entities such persons control are currently
governed by Section 22(g) and 22(h) of the FRA and Regulation O promulgated
by the Federal Reserve Board. Among other things, these regulations require
such loans to be made on terms substantially similar to those offered to
unaffiliated individuals, place limits on the amount of loans ESB may make to
such persons based, in part, on ESB's capital position, and require certain
approval procedures to be followed. OTS regulations, with the exception of
minor variations, apply Regulation O to savings associations.
PROMPT CORRECTIVE REGULATORY ACTION. FDICIA establishes a system of
prompt corrective action to resolve the problems of undercapitalized
associations. Under this system, the OTS is required to take certain
supervisory actions against undercapitalized associations, the severity of
which depends upon the association's degree of undercapitalization.
Generally, subject to a narrow exception, FDICIA requires the OTS to appoint
a receiver or conservator for an association that is critically
undercapitalized. FDICIA authorizes the OTS to specify the ratio of tangible
equity to assets at which an association becomes critically undercapitalized
and requires that ratio be no less than 2% of assets.
Under OTS regulations, a savings association is considered to be
undercapitalized if it has risk-based capital of less than 8% or has a Tier 1
risk-based capital ratio that is less than 4% or has a leverage ratio that is
less than 4% or has a leverage ratio less than 3% if the savings association
is rated composite 1 under the composite numerical rating assigned to the
association by the OTS under the Uniform Financial Institutions Rating System
or an equivalent rating under a comparable rating system adopted by the OTS
in the most recent rating of which the association has been notified in
writing (the "UFIRS"). A savings association that has risk-based capital
less than 6% or a Tier 1 risk-based capital ratio that is less than 3% or a
leverage ratio that is less than 3% would be considered to be "significantly
undercapitalized." A savings association that has a tangible equity to total
assets ratio equal to or less than 2% would be deemed to be "critically
undercapitalized." Generally, a capital restoration plan must be filed with
the OTS within 45 days of the date an association receives notice that it is
undercapitalized, significantly undercapitalized or critically
undercapitalized. In addition, numerous mandatory supervisory actions become
immediately applicable to the association, including, but not limited to,
restrictions
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on growth, investment activities, capital distributions, and affiliate
transactions. In addition, the OTS could issue a capital directive to the
savings association that includes additional discretionary restrictions on
the savings association.
REAL ESTATE LENDING STANDARDS. The OTS and the other federal banking
agencies have uniform regulations prescribing real estate lending standards.
The OTS regulation requires each savings association to establish and
maintain written internal real estate lending standards consistent with safe
and sound banking practices and appropriate to the size of the institution
and the nature and scope of its real estate lending activities. The policy
must also be consistent with accompanying OTS guidelines, which include
maximum loan-to-value ratios for the following types of real estate loans:
raw land (65%), land development (75%), nonresidential construction (80%),
improved property (85%), and one- to four-family residential construction
(85%). Owner-occupied one- to four-family mortgage loans and home equity
loans do not have maximum loan-to-value ratio limits, but those with a
loan-to-value ratio at origination of 90% or greater are to be backed by
private mortgage insurance or readily marketable collateral. Institutions
are also permitted to make a limited amount of loans that do not conform to
the proposed loan-to-value limitations so long as such exceptions are
appropriately reviewed and justified. The guidelines also list a number of
lending situations in which exceptions to the loan-to-value standard are
justified.
STANDARDS FOR SAFETY AND SOUNDNESS. As required by FDICIA and
subsequently amended by the Riegle Community Development and Regulatory
Improvement Act of 1994, the federal banking regulators adopted interagency
guidelines establishing standards for safety and soundness for depository
institutions on matters such as internal controls, loan documentation, credit
underwriting, interest-rate risk exposure, asset growth, compensation and
other benefits and asset quality and earnings (the "Guidelines"). The
agencies expect to request a compliance plan from an institution whose
failure to meet one or more of the standards is of such severity that it
could threaten the safe and sound operation of the institution. FDIC
regulations enacted under FDICIA also require all depository institutions to
be examined annually by the banking regulators (but see, "Regulatory Relief
for Thrifts and Banks") and depository institutions having $500 million or
more in total assets to have an annual independent audit, an audit committee
comprised solely of outside directors, and to hire outside auditors to
evaluate the institution's internal control structure and procedures and
compliance with laws and regulations relating to safety and soundness. The
FDIC, in adopting the regulations, reiterated its belief that every
depository institution, regardless of size, should have an annual independent
audit and an independent audit committee.
FINANCIAL MANAGEMENT REQUIREMENTS. FDICIA imposes new financial
reporting requirements on all depository institutions with assets of more
than $500 million, their management, and their independent auditors. It also
establishes new rules for the composition, duties and authority of such
institutions' audit committees and boards of directors. Among other things,
all such depository institutions will be required to prepare and make
available to the public annual reports on their financial condition and
management (including statements of managements' responsibility for the
financial statements, internal controls and compliance with certain federal
banking laws and regulations relating to safety and soundness, and an
assessment by management of the effectiveness of the institution's internal
controls and procedures and the institution's compliance with such laws and
regulations). The institution's independent public accountants are required
to attest to these management assessments. Each such institution is also
required to have an audit committee composed of independent directors.
NEW THRIFT SUBSIDIARY AND EQUITY INVESTMENT RULES. On December 18,
1996, the OTS issued a final rule updating and streamlining its regulations
governing subsidiary and equity investments. The regulation recasts
operating subsidiaries and service corporations as "subordinate
organizations," revises the list of permissible activities for service
corporations, confirms federal preemption of state law regarding the
activities of operating subsidiaries and clarifies the application process
for establishing subordinate organizations. The new rule also codifies the
authority of a federal savings association to invest in certain pass-through
investments, such as limited partnerships and mutual funds.
PROPOSED RULES GOVERNING FINANCIAL DERIVATIVES. On April 23, 1998, the
OTS published a Notice of Proposed Rulemaking that, if adopted in final form,
would apply to all financial derivatives and would replace its regulations on
forward commitments, futures transactions, and financial options
transactions. The proposal would continue to permit a savings association to
engage in transactions involving financial derivatives to the extent that
these transactions are authorized under applicable law and are otherwise safe
and sound. In addition, the proposed rule would describe the
responsibilities of a savings association's board of directors and management
with respect to financial derivatives. Comments on the proposal were due
June 22, 1998. The rule defines a financial derivative as a financial
contract whose value depends on the value of one or more underlying assets,
indices, or reference rates. The most common types of financial derivatives
are futures, forward commitments, options, and swaps. A mortgage derivative
security, such as a
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collateralized mortgage obligation or a real estate mortgage investment
conduit, is not a financial derivative under the proposed rule. As of March
31, 1998, ESB did not own any financial derivatives as defined under the
proposed rule.
FEDERAL RESERVE SYSTEM
----------------------
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts), non-personal time deposits
(those which are transferable or held by a person other than a natural
person) with an original maturity of less than one and one-half years and
certain money market accounts. The Federal Reserve Board regulations
generally require that reserves of 3% must be maintained against aggregate
transaction accounts of $52 million or less (subject to adjustment by the
Federal Reserve Board) and an initial reserve of $1.6 million plus 10%
(subject to adjustment by the Federal Reserve Board between 8% and 14%)
against that portion of total transaction accounts in excess of $52 million.
The first $4.3 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. ESB is in compliance with the foregoing requirements.
The balances maintained to meet the reserve requirements imposed by the
Federal Reserve Board may be used to satisfy liquidity requirements by the
OTS. Because required reserves must be maintained in the form of either
vault cash, a non-interest-bearing account at a Federal Reserve Bank or a
pass-through account as defined by the Federal Reserve Board, the effect of
this reserve requirement is to reduce ESB's interest-earning assets.
FHLB System members are also authorized to borrow from the Federal
Reserve "discount window," but Federal Reserve Board regulations require
institutions to exhaust all FHLB sources before borrowing from a Federal
Reserve Bank.
HOLDING COMPANY REGULATION
--------------------------
Equality is considered a non-diversified, savings and loan holding
company within the meaning of the HOLA, has registered as a savings and loan
holding company with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over Equality and its non-savings association subsidiaries. Among
other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
association.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from (i) acquiring control
of, or acquiring by merger or purchase of assets, another savings association
or holding company thereof, without prior written approval of the OTS; (ii)
acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings association, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other than those permitted by
the HOLA; or (iii) acquiring or retaining control of an institution that is not
federally insured. In evaluating applications by holding companies to
acquire savings associations, the OTS must consider the financial and
managerial resources and future prospects of the company and institution
involved, the effect of the acquisition on the risk to the insurance funds,
the convenience and needs of the community and competitive factors.
As a unitary savings and loan holding company, Equality generally is
not restricted under existing laws as to the types of business activities in
which it may engage, provided that its savings association subsidiary
continues to satisfy the QTL test. Upon any acquisition by Equality of
another SAIF-insured institution (other than Equality), a federal savings
bank insured by the BIF, or a state-chartered BIF-insured savings bank
meeting the QTL test that is deemed to be a savings institution by OTS,
except for a supervisory acquisition, Equality would become a multiple
savings and loan holding company (if the acquired institution is held as a
separate subsidiary) and would be subject to extensive limitations on the
types of business activities in which it could engage. The HOLA, as amended
by the FIRREA, limits the activities of a multiple savings and loan holding
company and its non-insured institution subsidiaries primarily to activities
permissible for bank holding companies under Section 4(c)(8) of the BHC Act,
subject to the prior approval of the OTS, and activities in which multiple
savings and loan holding companies were authorized by regulation to engage in
on March 5, 1987. Such activities include mortgage banking, consumer
finance, operation of a trust company, and certain types of securities
brokerage.
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FEDERAL AND STATE TAXATION
FEDERAL TAXATION. For federal income tax purposes, Equality files a
federal income tax return based upon a tax year ended March 31. Consolidated
returns have the effect of eliminating intercompany distributions, including
dividends, from the computation of consolidated taxable income for the year
in which the distribution occurs.
Prior to 1997, if certain conditions were met, savings and loan
associations and savings banks were allowed special bad debt deductions in
determining taxable income based on either specified experience formulas or
on a percentage of taxable income before such deduction. Bad debt deductions
in excess of actual losses were tax-preference items, and were subject to a
minimum tax. ESB used the percentage of taxable income method for the year
ended March 31, 1996 in determining the bad debt deduction for tax purposes.
The special bad debt deduction accorded thrift institutions is covered
under Section 593 of the Code. The Small Business Job Protection Act of 1996
included the repeal of certain portions of Section 593 effective for tax
years beginning after December 31, 1995. As a result, ESB is no longer
allowed a percentage method bad debt deduction. The repeal of the thrift
reserve method generally requires thrift institutions to recapture into
income the portion of tax bad debt reserves accumulated since 1987 ("base
year reserve"). The recapture will generally be taken into income ratably
over six tax years. However, if ESB meets a residential loan requirement for
tax years beginning in 1997 and 1998, recapture of the reserve can be
deferred until the tax year beginning in 1999. At March 31, 1998, ESB had
bad debts deducted for tax purposes in excess of the base year reserve of
approximately $245,000. ESB has recognized a deferred income tax liability
for this amount.
Certain events covered by Code Section 593(e), which was not repealed,
will trigger a recapture of the base year reserve. The base year reserve of
thrift institutions would be recaptured if a thrift ceases to qualify as a
"bank" for federal income tax purposes. The base year reserves of thrift
institutions also remain subject to income tax penalty provisions which, in
general, require recapture upon certain stock redemptions of, and excess
distributions to, stockholders. At March 31, 1998, retained earnings included
approximately $2.9 million of base year reserves for which no deferred
federal income tax liability has been recognized.
Deferred income taxes arise from the recognition of certain items of
income and expense for tax purposes in years different from those in which
they are recognized in the consolidated financial statements.
ESB is subject to the corporate alternative minimum tax which is
imposed to the extent it exceeds ESB's regular income tax for the year. The
alternative minimum tax will be imposed at the rate of 20% of a specially
computed tax base. Included in this base will be a number of preference
items, including the following: (i) 100% of the excess of a thrift
institution's bad debt deduction over the amount that would have been
allowable on the basis of actual experience; and (ii) for years beginning in
1988 and 1989 an amount equal to one-half of the amount by which an
institution's "book income" (as specially defined) exceeds its taxable income
with certain adjustments, including the addition of preference items (for
taxable years commencing after 1989 this adjustment item is replaced with a
new preference item relating to "adjusted current earnings" as specially
computed). In addition, for purposes of the new alternative minimum tax, the
amount of alternative minimum taxable income that may be offset by net
operating losses is limited to 90% of alternative minimum taxable income.
ESB has not been audited by the IRS within the last five years. For
additional information regarding taxation, see Note 13 of Notes to
Consolidated Financial Statements.
MISSOURI TAXATION. Equality, EMC, and ECC are subject to state
corporation income tax, computed on the basis of their state taxable income,
at a rate of 7%. ESB is subject to a state financial institutions tax,
computed on the basis of its state income, at a rate of 7%.
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SELECTED FINANCIAL DATA
- -----------------------
The following information sets forth, on an historical basis, certain
selected consolidated financial data for Equality and its subsidiaries. This
summary has been derived from, and should be read in conjunction with the
audited consolidated financial statements of Equality and the related notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations.
<TABLE>
========================================================================================================================
<CAPTION>
At March 31,
---------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Financial condition data:
Total assets $255,550 $200,764 $195,768 $163,659 $147,143
Cash, interest-bearing deposits, and
investment securities 73,946 79,828 59,864 56,106 59,304
Mortgage-backed securities 58,512 14,954 28,096 15,260 16,987
Loans receivable, net 108,415 95,928 96,998 83,235 61,683
Savings deposits 119,301 122,983 124,515 121,560 132,844
Borrowed money 105,679 64,249 57,305 29,256 1,105
Stockholders' equity 25,838 12,634 12,789 11,873 12,050
Number of:
Real estate loans outstanding 1,784 1,828 1,989 1,750 1,633
Deposit accounts 14,691 14,944 15,442 15,647 16,256
Full service offices 3 3 3 3 3
Loan origination offices 5 5 3 3 2
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year ended March 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
(dollars in thousands, except earnings
per share information)
<S> <C> <C> <C> <C> <C>
Operating data:
Total interest income $14,680 $13,610 $12,275 $9,697 $9,420
Total interest expense 9,725 9,112 8,540 6,132 6,028
- ------------------------------------------------------------------------------------------------------------------------
Net interest income before
provision for losses on loans 4,955 4,498 3,735 3,565 3,392
Provision for losses on loans 116 50 31 9 12
- ------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for losses on loans 4,839 4,448 3,704 3,556 3,380
Gain on sales of mortgage loans 1,723 1,121 1,248 775 2,432
Other noninterest income 1,542 1,448 1,460 1,500 1,386
Total noninterest expense 6,087 6,209 5,341 5,321 6,073
- ------------------------------------------------------------------------------------------------------------------------
Income before income tax expense
and cumulative effect of change
in accounting principle 2,017 808 1,071 510 1,125
Income tax expense 778 303 418 188 400
- ------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect
of change in accounting principle 1,239 505 653 322 725
Cumulative effect of change in
accounting principle - - - - 188
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 1,239 $ 505 $ 653 $ 322 $ 913
========================================================================================================================
Earnings per share:
Basic $ 0.51 $ 0.21 $ 0.27 $ 0.13 $ 0.07
Diluted 0.51 0.21 0.27 0.13 0.07
========================================================================================================================
(Continued)
</TABLE>
32
<PAGE> 35
SELECTED FINANCIAL DATA, CONTINUED
<TABLE>
=========================================================================================================================
<CAPTION>
Year ended March 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Other data:
Return on average assets (net income
divided by average assets) 0.55% 0.25% 0.35% 0.20% 0.59<F1>%
Return on average equity (net income
divided by average equity) 7.07 3.98 5.18 2.79 8.92<F1>
Average equity to average assets 7.80 6.30 6.68 7.24 6.62
Equity to assets (end of year) 10.11 6.29 6.53 7.25 8.19
Dividend payout ratio 21.74 46.16 34.16 68.11 6.43
Interest rate spread (difference between
average yield on interest-earning assets
and average cost of interest-bearing
liabilities) 2.08 2.12 1.90 2.21 2.23
Net interest margin (net interest
income as a percentage of
average interest-earning assets) 2.30 2.31 2.09 2.39 2.38
Noninterest expense to total assets 2.38 3.09 2.73 3.25 4.13
Noninterest expense to average assets 2.71 3.08 2.83 3.34 3.93
Average interest-earning assets to
average interest-bearing liabilities 104.79 104.19 104.13 104.37 103.48
Allowance for loan losses to total
loans at end of period 0.34 0.29 0.24 0.26 0.39
Net charge-offs to average outstanding
loans during the period 0.02 <F*> 0.02 0.04 <F*>
Nonperforming assets to total assets 0.34 0.35 0.39 0.44 0.29
=========================================================================================================================
<FN>
<F1> Includes cumulative effect of change in accounting principle totaling
$188,408, or .12% and 1.84% of average assets and average equity,
respectively.
<F*> Insignificant
</TABLE>
33
<PAGE> 36
ITEM 2. DESCRIPTION OF PROPERTIES
- ----------------------------------
ESB conducts its business through three full-service offices. ESB's
main office is located at 4131 South Grand Boulevard, St. Louis, Missouri.
ESB owns its main office and South County Branch in fee and they are
unencumbered.
<TABLE>
<CAPTION>
Lease
Net Expira-
Year Owned or Total Book tion Square
Location Opened Leased Investment Value Date Footage
-------- ------ ------ ---------- ----- ---- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
MAIN OFFICE:
4131 South Grand Boulevard 1944 Owned $2,419 $ 887 -- 21,740
St. Louis, Missouri 63118
BRANCHES:
Marborough Branch<F1> 1998 Owned 1,352 1,066 -- 2,912
7809 Watson Road
St. Louis, Missouri 63119
South County Branch 1987 Owned 1,904 1,317 -- 4,545
5400 South Lindbergh Boulevard
St. Louis, Missouri 63123
LOAN OFFICES:
Florissant Loan Office 1992 Leased 20 10 1998 1,306
2620 North Lindbergh
Florissant, Missouri 63033
West County Loan Office 1993 Leased 3 3 1999 1,200
14334 South Outer Forty
Chesterfield, Missouri 63017
O'Fallon Loan Office 1994 Leased -- -- 1998 300
2017 Highway K
O'Fallon, MO 63366
Crestwood Loan Office 1996 Leased -- -- 1998 500
9920 Watson Road, Suite 207
Crestwood, Missouri 63126
Chesterfield Loan Office 1996 Leased -- -- 1998 500
361 Chesterfield Center
Chesterfield, Missouri 63017
<FN>
<F1> Formerly "Yorkshire Branch" which was opened in 1957 and leased until
March 1998.
</TABLE>
In May 1997, ESB purchased a building in Arnold, Missouri (which is in
Jefferson County and adjacent to St. Louis County) that ESB is remodeling as
a full-service branch office. ESB expects this office to be completed by the
summer of 1998. In addition, ESB purchased two other properties, one in
Washington, Missouri and one in Fenton, Missouri, for the purpose of branch
expansion. The Washington branch office is expected to be operational in the
summer of 1998 and the Fenton office, which is currently subject to use
restriction, is expected to be completed early in the year 2000. This
facility will be used as a training facility in the interim. With the
exception of the foregoing, ESB believes that its current facilities are
adequate to meet the present and foreseeable needs of ESB and Equality.
The net book value of ESB's investment in office properties and
equipment totaled $5.6 million at March 31, 1998.
ESB uses an outside data processing firm to process customer records
and monetary transactions, post deposit and general ledger entries, and
record activity in installment lending. EMC uses a second outside data
processing firm to process loan servicing and loan originations.
34
<PAGE> 37
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Equality is, from time to time, including legal proceedings to enforce
its rights a party to legal proceedings arising in the ordinary course of its
business. Equality is not currently a party to any legal proceedings which
could reasonably be expected to have a material adverse effect on the
financial condition or operations of Equality.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended March 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------
The common stock of Equality Bancorp, Inc. is traded on the American
Stock Exchange under the symbol "EBI." The stock was issued on December 1,
1997 at $10.00 per share. Equality paid a quarterly dividend of $.06 per
share during the quarter ended March 31, 1998. As of May 31, 1998, there
were 1,460 stockholders of record and 2,505,855 outstanding shares of common
stock.
Payment of dividends on the common stock is subject to determination
and declaration by the Board of Directors and will depend upon a number of
factors, including capital requirements, regulatory limitations on the
payment of dividends, results of operation and financial condition, tax
considerations, and general economic conditions.
35
<PAGE> 38
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------------------------------------------------------------------
GENERAL
Equality Bancorp, Inc. ("Equality" or the "Company") is the holding
company for Equality Savings Bank ("ESB"). Equality through its subsidiary
is principally engaged in the business of attracting deposits from the
general public and uses these deposits, together with other funding sources,
to originate or invest in residential and other mortgage loans and, to a
lesser extent, nonmortgage loans, investments, and other assets. Because
Equality is primarily dependent on net interest margin (interest income from
loans and investments minus interest expense on deposit accounts and borrowed
money) for earnings, the focus of the Company's planning has been to devise
and employ strategies that provide a stable, positive spread between the
yield on interest-earning assets and the cost of interest-bearing liabilities
in order to maximize the dollar amount of net interest income.
A substantial portion of Equality's operations and income are derived
from the operations of Equality Mortgage Corporation ("EMC"), a wholly-owned
subsidiary of ESB. EMC provides several benefits to Equality, including,
among other things, originating a variety of mortgage loan products for
Equality's portfolio and generating fee income for Equality through its
activities in the secondary mortgage market. EMC's mortgage banking
activities produce primarily two types of income -- gain on sale of mortgage
loans and loan servicing fees and late charges. EMC's mortgage banking
activities consist of the origination, purchase, and sale of residential
mortgage loans.
ASSET AND LIABILITY MANAGEMENT
Equality has employed various strategies intended to minimize the
adverse effect of interest rate risk on future operations. Strong progress
has been made toward restructuring the composition of the loan portfolio, and
liquidity has been accumulated in investments in U.S. government and agency
notes and bonds.
Adjustable-rate mortgages, shorter-term consumer loans, and commercial
business loans are among the tools currently utilized by Equality to
restructure the loan portfolio. The proper pricing of deposit accounts is
also significant. During periods of low or declining rates, the long-term
deposits extend attractive rates while in periods of high rates, the
short-term deposit accounts are competitively priced. This position allows
Equality to benefit from the ability to reprice as necessary based on market
conditions.
Through EMC, Equality has focused on the origination of adjustable-rate
mortgages that reprice based on fluctuations in interest rates. Fixed-rate
mortgage loan originations are generally sold in the secondary market. In
addition, EMC's loan servicing operations have been a source of noninterest
income to Equality.
36
<PAGE> 39
YIELDS EARNED AND RATES PAID
The earnings of Equality depend largely on the spread between the yield on
interest-earning assets (primarily loans and investments) and the cost of
interest-bearing liabilities (primarily deposit accounts and borrowed money),
as well as the relative size of Equality's interest-earning assets and
interest-bearing liability portfolios.
The following table sets forth, for the periods indicated, information
regarding average balances of interest-earning assets and interest-bearing
liabilities as well as the total dollar amounts of interest income from
average interest-earning assets and interest expense on average
interest-bearing liabilities, resultant yields, interest rate spread, net
interest margin, and ratio of average interest-earning assets to average
interest-bearing liabilities. Average balances for a period have been
calculated using the average of month-end balances during such period.
<TABLE>
===========================================================================================================================
<CAPTION>
Years ended March 31,
-------------------------------------------------------------------------------
1998 1997
-------------------------------------- -----------------------------------
Average Interest and Yield/ Average Interest and Yield/
balance<F1> dividends cost balance<F1> dividends cost
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans<F2> $ 99,335 $ 7,341 7.39% $ 96,113 $ 7,265 7.56%
Consumer loans<F2> 2,677 232 8.67 2,091 182 8.70
Commercial business loans<F2> 5,249 530 10.10 107 2 11.21
- ---------------------------------------------------------------------------------------------------------------------------
Total loans receivable 107,261 8,103 7.55 98,311 7,449 7.58
Investment securities 77,443 4,748 6.13 63,710 3,931 6.17
Interest-bearing deposits 10,474 416 3.97 7,738 468 6.05
Mortgage-backed securities 16,805 1,153 6.86 21,778 1,530 7.03
FHLB stock 3,894 260 6.68 3,300 232 7.03
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $215,877 $14,680 6.80% $194,837 $13,610 6.99%
===========================================================================================================================
Interest-bearing liabilities:
Passbook $ 27,229 $ 663 2.43% $ 21,846 $ 546 2.50%
Checking 13,487 193 1.43 11,325 169 1.49
Money market accounts 5,401 150 2.78 5,402 151 2.80
Certificates of deposit 80,529 4,628 5.75 84,102 4,816 5.73
- ---------------------------------------------------------------------------------------------------------------------------
Total savings deposits 126,646 5,634 4.45 122,675 5,682 4.63
FHLB advances 76,208 4,031 5.29 61,917 3,378 5.46
Other interest-bearing liabilities 3,153 60 1.90 2,409 52 2.16
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $206,007 $ 9,725 4.72% $187,001 $ 9,112 4.87%
===========================================================================================================================
Net interest income $ 4,955 $ 4,498
===========================================================================================================================
Interest rate spread 2.08% 2.12%
===========================================================================================================================
Net interest margin<F3> 2.30% 2.31%
===========================================================================================================================
Ratio of average interest-earning assets
to average interest-bearing liabilities 104.79% 104.19%
===========================================================================================================================
<CAPTION>
==================================================================================
Years ended March 31,
--------------------------------------
1996
--------------------------------------
Average Interest and Yield/
balance<F1> dividends cost
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Mortgage loans<F2> $ 90,257 $ 6,879 7.62%
Consumer loans<F2> 1,926 168 8.72
Commercial business loans<F2> - - -
- ----------------------------------------------------------------------------------
Total loans receivable 92,183 7,047 7.65
Investment securities 45,945 2,827 6.15
Interest-bearing deposits 13,290 897 6.75
Mortgage-backed securities 24,642 1,333 5.41
FHLB stock 2,438 171 7.01
- ----------------------------------------------------------------------------------
Total interest-earning assets $178,498 $12,275 6.88%
==================================================================================
Interest-bearing liabilities:
Passbook $22,398 $562 2.51%
Checking 10,884 186 1.71
Money market accounts 6,298 176 2.80
Certificates of deposit 83,463 4,805 5.76
- ----------------------------------------------------------------------------------
Total savings deposits 123,043 5,729 4.66
FHLB advances 46,000 2,742 5.96
Other interest-bearing liabilities 2,374 69 2.91
- ----------------------------------------------------------------------------------
Total interest-bearing liabilities $171,417 $ 8,540 4.98%
==================================================================================
Net interest income $ 3,735
==================================================================================
Interest rate spread 1.90%
==================================================================================
Net interest margin<F3> 2.09%
==================================================================================
Ratio of average interest-earning assets
to average interest-bearing liabilities 104.13%
==================================================================================
<FN>
<F1> Average balances are computed on a monthly basis (month-end balances).
<F2> Does not include interest on loans 90 days or more past due.
<F3> Net interest income divided by average interest-earning assets.
</TABLE>
Note: At March 31, 1998, the weighted average yields on certain interest-
earning assets and the weighted average cost on certain interest-
bearing liabilities were as follows: loans receivable, 7.76%;
mortgage-backed securities, 6.38%; investment securities, 6.59%;
total interest-earning assets, 7.06%; savings deposits, 4.49%;
borrowed money, 5.27%; total interest-bearing liabilities, 4.86%;
and interest rate spread, 2.20%.
37
<PAGE> 40
The following table sets forth the effects of changing rates and volumes on
net interest income of Equality. Information is provided with respect to (i)
effects on interest income attributable to changes in rate (changes in rate
multiplied by prior volume); (ii) effects on interest income attributable to
changes in volume (changes in volume multiplied by prior rate); and (iii)
changes in rate/volume.
<TABLE>
===========================================================================================================================
<CAPTION>
1998 compared to 1997 1997 compared to 1996
Increase (decrease) due to Increase (decrease) due to
-------------------------------- ---------------------------------
Rate/ Rate/
Rate Volume volume Net Rate Volume volume Net
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans<F1> $(162) $ 244 $ (6) $ 76 $ (54) $ 446 $ (6) $ 386
Consumer loans<F1> (1) 51 - 50 - 14 - 14
Commercial business loans<F1> - 576 (48) 528 - - 2 2
- ---------------------------------------------------------------------------------------------------------------------------
Total loans receivable (163) 871 (54) 654 (54) 460 (4) 402
Investment securities (25) 847 (5) 817 9 1,093 2 1,104
Interest-bearing deposits (161) 165 (56) (52) (93) (375) 39 (429)
Mortgage-backed securities (36) (349) 8 (377) 399 (155) (47) 197
FHLB stock (12) 42 (2) 28 - 60 1 61
- ---------------------------------------------------------------------------------------------------------------------------
Total net change in income on
interest-earning assets (397) 1,576 (109) 1,070 261 1,083 (9) 1,335
- ---------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Passbook (14) 135 (4) 117 (2) (14) - (16)
Checking (7) 29 2 24 (24) 8 (1) (17)
Money market accounts 2 - (3) (1) - (25) - (25)
Certificates of deposit 17 (205) - (188) (25) 37 (1) 11
- ---------------------------------------------------------------------------------------------------------------------------
Total savings deposits (2) (41) (5) (48) (51) 6 (2) (47)
FHLB advances (103) 780 (24) 653 (230) 949 (83) 636
Other interest-bearing liabilities (6) 16 (2) 8 (18) 1 - (17)
- ---------------------------------------------------------------------------------------------------------------------------
Total net change in expense on
interest-bearing liabilities (111) 755 (31) 613 (299) 956 (85) 572
- ---------------------------------------------------------------------------------------------------------------------------
Net change in interest income $(286) $ 821 $ (78) $ 457 $ 560 $ 127 $ 76 $ 763
===========================================================================================================================
<CAPTION>
=======================================================================================================================
1996 compared to 1995
Increase (decrease) due to
----------------------------------------
Rate/
Rate Volume volume Net
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans<F1> $(59) $1,226 $ (12) $1,155
Consumer loans<F1> 15 8 - 23
Commercial business loans<F1> - - - -
- -----------------------------------------------------------------------------------------------------------------------
Total loans receivable (44) 1,234 (12) 1,178
Investment securities 283 420 60 763
Interest-bearing deposits 280 (205) (64) 11
Mortgage-backed securities 94 412 50 556
FHLB stock (13) 95 (12) 70
- -----------------------------------------------------------------------------------------------------------------------
Total net change in income on interest-earning assets 600 1,956 22 2,578
- -----------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Passbook (47) (93) 7 (133)
Checking (15) 1 - (14)
Money market accounts 1 (89) (1) (89)
Certificates of deposit 439 188 15 642
- -----------------------------------------------------------------------------------------------------------------------
Total savings deposits 378 7 21 406
FHLB advances 118 1,623 260 2,001
Other interest-bearing liabilities (1) 2 - 1
- -----------------------------------------------------------------------------------------------------------------------
Total net change in expense on interest-bearing liabilities 495 1,632 281 2,408
- -----------------------------------------------------------------------------------------------------------------------
Net change in interest income $105 $ 324 $(259) $ 170
=======================================================================================================================
<FN>
<F1> Does not include interest on loans 90 days or more past due.
</TABLE>
38
<PAGE> 41
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, the statements
made in this annual report are forward-looking statements that involve risks
and uncertainties. Equality's actual results, financial condition, or
business could differ materially from its historical results, financial
condition, or business, or the results of operations, financial condition, or
business contemplated by such forward-looking statements.
LIQUIDITY AND CAPITAL RESOURCES
Equality's primary sources of funds are deposits, borrowings,
amortization and prepayment of loan principal (including mortgage-backed
securities) and, to a lesser extent, maturities of investment securities,
short-term investments, and operations. While scheduled loan repayments and
maturing investments are relatively predictable, deposit flows and early loan
repayments are more influenced by interest rates, general economic
conditions, and competition. Equality attempts to price its deposits to meet
its asset/liability objectives discussed above, consistent with local market
conditions. Excess balances are temporarily invested in overnight funds. In
addition, Equality is eligible to borrow funds from the Federal Home Loan
Bank of Des Moines ("FHLB").
Under Office of Thrift Supervision ("OTS") regulations, a member thrift
institution is required to maintain an average daily balance of liquid assets
(cash, certain time deposits and savings accounts, bankers' acceptances,
specified U.S. Government, state or federal agency obligations, and certain
other investments) equal to a monthly average of not less than a specified
percentage of its net withdrawable accounts plus short-term borrowings. This
liquidity requirement, which is currently 4.0%, may be changed from time to
time by the OTS to any amount within the range of 4.0% to 10.0%, depending
upon economic conditions and the savings flow of member associations.
Monetary penalties may be imposed for failure to meet liquidity requirements.
The regulatory ratio of Equality at March 31, 1998 was 38.3%.
The primary investing activity of Equality is lending. During 1998,
Equality originated $123.9 million of loans, of which $114.0 million were
residential mortgage loans, purchased $6.1 million of loans, and sold $78.1
million of loans in the secondary market. In addition, $27.4 million of
loans were converted into mortgage-backed securities and sold.
Liquidity management is both a short- and long-term responsibility of
Equality's management. Equality adjusts its investment in liquid assets
based upon management's assessment of (i) expected loan demand, (ii)
projected loan sales, (iii) expected deposit flows, (iv) yields available on
interest-bearing deposits, and (v) liquidity of its asset/liability
management program. Excess liquidity is invested generally in
interest-bearing overnight deposits and other short-term government and
agency obligations. If Equality requires funds beyond its ability to generate
them internally, it has additional borrowing capacity with the FHLB and
collateral eligible for repurchase agreements.
Equality anticipates that it will have sufficient funds available to
meet current loan commitments. At March 31, 1998, Equality had outstanding
commitments to originate loans of $3.6 million.
Certificates of deposit scheduled to mature in one year or less at
March 31, 1998 totaled $42.4 million. Based upon management's experience and
familiarity with the customers involved and Equality's pricing policy
relative to that of its perceived competitors, management believes Equality
will retain a significant portion of these deposits.
FINANCIAL CONDITION
The total assets of Equality increased approximately $54.8 million, or
27.3%, to $255.6 million at March 31, 1998 from $200.8 million at March 31,
1997. This increase in asset size primarily relates to increased
mortgage-backed securities and origination of one- to four- family mortgage
loans and commercial business loans which were funded through cash reserves,
FHLB advances, and the proceeds from sales of investment securities. Cash
reserves were generated mainly from the proceeds of the Company's common
stock offering, totaling $11.1 million.
Investment securities available for sale decreased approximately $1.2
million, or 1.7%, to $68.9 million at March 31, 1998 from $70.1 million at
March 31, 1997. This decrease is due primarily to $114.7 million of
purchases of securities, offset by $50.7 million of sales and $66.5 million
of maturities.
Investment securities held to maturity decreased $2.2 million, or
46.4%, to $2.6, million at March 31, 1998 from $4.8 million at March 31,
1997. The decrease is the result of the maturity of such securities.
39
<PAGE> 42
Mortgage-backed securities available for sale increased approximately
$43.6 million, or 291.3%, to $58.5 million at March 31, 1998 from $15.0
million at March 31, 1997. This increase is the result of purchases of
securities totaling $56.6 million, offset by normal principal repayments of
$3.1 million and sales proceeds of $10.0 million.
Loans held for investment increased approximately $2.4 million, or
2.6%, to $93.9 million at March 31, 1998 from $91.5 million at March 31,
1997. This increase reflects continued portfolio lending primarily in one-
to four- family mortgages and commercial business loans.
Loans held for sale increased approximately $10.1 million, or 230.2%,
to $14.5 million at March 31, 1998 from $4.4 million at March 31, 1997. This
increase is the result of increased one- to four- family mortgage loans
originations by EMC. Mortgage loan originations increased $43.4 million, or
65.6%, to $109.6 million in 1998 from $66.2 million in 1997.
Office properties and equipment increased $2.6 million, or 90.0%, to
$5.6 million at March 31, 1998 from $2.9 million at March 31, 1997. The
increase resulted from the purchase of four properties designed to augment
ESB's branch network. One property designed to replace a leased, limited-use
facility was opened in March, 1998 while two others are planned to expand
ESB's branch facilities during fiscal year 1999, and the third to expand the
branch network during fiscal year 2000, due to a use restriction which
expires in 2000. This facility will be leased or used for Bank training
purposes until expiration of the restriction.
Savings deposits decreased $3.7 million, or 3.0%, to $119.3 million at
March 31, 1998 from $123.0 million at March 31, 1997. The decrease is due
primarily to withdrawals totaling $3.4 million used to purchase the Company's
common stock. The remainder of the decrease represents deposit outflows.
Interest credited in 1998 was approximately $4.4 million.
Borrowed money increased $41.4 million, or 64.5%, to $105.7 million at
March 31, 1998 from $64.2 million at March 31, 1997. FHLB advances increased
$41.0 million, or 65.1%, to $104.0 million at March 31, 1998 from $63.0 million
at March 31, 1997. Proceeds from these advances were used to fund loan
originations and increased investment in securities. Other borrowed money
increased $430,000, or 34.4%, to $1.7 million at March 31, 1998 from $1.2
million at March 31, 1997. These short term borrowings relate primarily to a
warehouse line of credit established with an independent bank and maintained by
EMC, the proceeds of which were invested solely in residential mortgage loans.
Total stockholders equity increased $13.2 million, or 104.5%, to $25.8
million at March 31, 1998 from $12.6 million at March 31, 1997. The increase
was primarily attributable to the Company's sale of common stock which
totaled $11.1 million in net proceeds accompanied by net income of $1.2
million in 1998 and improvement in the fair market value of investment and
mortgage-backed securities available for sale of $908,000 at March 31, 1998
when compared to March 31, 1997.
FISCAL YEAR ENDED MARCH 31, 1998 COMPARED TO MARCH 31, 1997
NET INCOME
Net income increased $734,000, or 145.5%, to $1.2 in 1998 from $505,000
in 1997. The increase was primarily the result of increased net interest
income of $457,000, or 10.2%, increased noninterest income of $696,000, or
27.1%, and reduced noninterest expense of $121,000, or 2.0%, offset by
increased income taxes of $474,000, or 156.3%. The noninterest expense and
income tax expense fluctuations are the result of legislation passed by
Congress in September, 1996 to recapitalize the Savings Association Insurance
Fund (SAIF) in which ESB was assessed a one-time FDIC insurance premium of
$789,000 on September 30, 1996. The net of tax effect reduced fiscal 1997
net income by $481,000. There was no comparable item in 1998.
INTEREST INCOME
Interest income increased $1.1 million, or 7.9%, from $13.6 million in
1997 to $14.7 million in 1998. Interest on loans receivable increased by
$655,000, or 8.8%, to $8.1 million in 1998 as compared to $7.4 million in
1997. This increase was primarily due to an increase in the average balance
of loans outstanding from $98.3 million in 1997 to $107.3 million in 1998,
offset by a decrease in the yield on loans from 7.58% in 1997 to 7.55% in
1998. The higher average balance of loans outstanding in 1998 reflects an
increase in consumer and commercial business lending. Interest on investment
securities increased $817,000, or 20.8%, from $3.9 million in 1997 to $4.7
million in 1998 due to an increase in the average balance of investment
securities from $63.7 million in 1997 to $77.4 million in 1998, offset by a
decrease in the yield on investment securities from 6.17% in 1997 to 6.13% in
1998. Interest income on mortgage-backed securities decreased $377,000, or
40
<PAGE> 43
24.6% from $1.5 million in 1997 to $1.2 million in 1998 due to a decrease in
the yield on mortgage-backed securities from 7.03% in 1997 to 6.86% in 1998,
accompanied by a decrease in the average balances from $21.8 million in 1997
to $16.8 million in 1998.
INTEREST EXPENSE
Interest expense increased $613,000, or 6.7%, to $9.7 million in 1998
from $9.1 million in 1997. The increase resulted primarily from increased
average savings deposit balances and average increased FHLB advances. Average
deposit balances increased from $122.7 million 1997 to $126.6 million in
1998, accompanied by a decrease in the weighted average cost of deposits from
4.63% in 1997 to 4.45% in 1998, due to the effects of increased average
passbook balances, which carry substantially lower interest rates than
certificates of deposit.
Average advances from the FHLB increased from $61.9 million in 1997 to
$76.2 million in 1998. The increase was primarily the result of borrowings
used to fund increased investments in securities and mortgage loan
originations. The weighted average cost of advances decreased from 5.46% in
1997 to 5.29% in 1998 due to lower cost borrowing programs offered by the
FHLB.
PROVISION FOR LOSSES ON LOANS
Provision for losses on loans increased $66,000, or 131.0%, to $116,000
in 1998 from $50,000 in 1997. The provision for loan losses is determined by
management as the amount to be added to the allowance for loan losses after
net chargeoffs have been deducted to bring the allowance to a level which is
considered adequate to absorb losses inherent in the loan portfolio. The
increased provision in 1998 was the result of management's decision to
increase the allowance due to the increase in commercial business loans,
which generally have more risk than residential mortgage loans. ESB's
allowance for loan losses totaled $374,000 at March 31, 1998 and $283,000 at
March 31, 1997. The allowance for loan losses is established through a
provision for loan losses charged to expense. While ESB maintains its
allowance for losses at a level which it considers to be adequate, there can
be no assurances that further additions will not be made to the allowance or
that such losses will not exceed the estimated amounts.
NONINTEREST INCOME
Noninterest income increased $696,000, or 27.1%, to $3.3 million in
1998 from $2.6 million in 1997. The increase is due primarily to gain on sale
of mortgage loans which increased from $1.1 million in 1997 to $1.7 million
in 1998 and increased loan servicing fees and late charges which increased
from $747,000 in 1997 to $930,000 in 1998. Also, during 1997, ECC sold a 26
unit residential property at a gain of $106,000 with no comparable gain in
1998. The increase of $602,000, or 53.7%, on gain on sale of mortgage loans
was due to a continued improvement in market rates during 1998. In 1998, ESB,
through EMC, sold $105.4 million of mortgage loans as compared to $77.8
million in 1997. Loan servicing fees and late charges increased $183,000, or
24.5%, due primarily to an increase in the average servicing portfolio of
EMC. Loans serviced by EMC increased $17.0 million, or 5.3%, from $323.0
million at March 31, 1997 to $340.1 million at March 31, 1998.
NONINTEREST EXPENSE
Noninterest expense decreased $121,000, or 2.0%, to $6.1 million in
1998 from $6.2 million in 1997. During 1997, legislation was passed by
Congress to capitalize the SAIF and ESB was assessed a one-time FDIC premium
of $789,000. During 1998, federal deposit insurance premiums decreased
$135,000, or 62.4%, from $216,000 in 1997 to $81,000 in 1998 as a result of
reduced premiums from approximately 23 basis points to six basis points in
connection with the SAIF recapitalization. Salaries and employee benefits
increased $482,000, or 16.5%, from $2.9 million in 1997 to $3.4 million in
1998. Increased salary and employee benefits are the direct result of
increased commissions paid to mortgage loan origination personnel, general
wage increases, and an increase in commercial loan production personnel. ESB
began a commercial lending function in early 1997 and increased the number of
personnel to five at March 31, 1998. Occupancy expense increased $52,000 as
a result of expenses related to an increase in the number of office
properties and roofing repairs made to office properties. Other expenses
increased $166,000 due primarily to an increase in the amortization of
originated mortgage servicing rights (OMSR) which increased $199,000 from
$185,000 in 1997 to $384,000 in 1998 caused primarily by the refinancing of
mortgage loans due to a general decline in mortgage interest rates.
41
<PAGE> 44
INCOME TAXES
Income tax expense increased $474,000, or 156.3%, to $778,000 in 1998
from $303,000 in 1997. The effective combined federal and state tax rate was
approximately 38.6% and 37.5% in 1998 and 1997, respectively.
FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO MARCH 31, 1996
NET INCOME
Net income decreased $148,000 or 22.8%, from $653,000 in 1996 to
$505,000 in 1997. The decrease was primarily a result of legislation passed
by Congress to recapitalize the SAIF, in which ESB was assessed a
one-time-deposit-insurance premium (like all other SAIF-insured institutions)
of $789,000 on November 27, 1996, offset by an increase of $764,000, or 20.4%,
in net interest income and a reduction of $114,000, or 27.4%, in income tax
expense. Without giving effect to the special assessment, net income for the
fiscal year ended March 31, 1997 would have been $986,000, an increase of
$333,000, or 50.9%, when compared to the fiscal year ended March 31, 1996.
INTEREST INCOME
Interest income increased $1.3 million, or 10.9%, from $12.3 million in
1996 to $13.6 million in 1997. Interest on loans receivable increased by
$402,000, or 5.7%, to $7.4 million in 1997 as compared to $7.0 million in
1996. This increase was primarily due to an increase in the average balance
of loans outstanding from $92.2 million in 1996 to $98.3 million in 1997,
offset by a decrease in the yield on loans from 7.65% in 1996 to 7.58% in
1997. The higher average balance of loans outstanding in 1997 reflects an
increase in mortgage loan portfolio lending. Interest on investment
securities increased $1.1 million, or 38.9%, from $2.8 million in 1996 to
$3.9 million in 1997 due to an increase in the average balance of investment
securities from $45.9 million in 1996 to $63.7 million in 1997. During the
same period, the yield on investment securities increased from 6.15% in 1996
to 6.17% in 1997. Interest income on mortgage-backed securities increased
$197,000, or 14.8%, from $1.3 million in 1996 to $1.5 million in 1997 due to
an increase in the yield on mortgage-backed securities from 5.41% in 1996 to
7.03% in 1997, offset by a decrease in the average balances from $24.6
million in 1996 to $21.8 million in 1997.
INTEREST EXPENSE
Interest expense increased from $8.5 million in 1996 to $9.1 million in
1997. The increase of $572,000 million, or 6.7%, resulted primarily from the
increased average FHLB advances. The weighted average cost of deposits
decreased from 4.66% in 1996 to 4.63% in 1997, while average deposit balances
decreased $368,000, or 0.3%, from $123.0 million in 1996 to $122.7 million in
1997. Average advances from the FHLB increased $15.9 million, or 34.6%, to
61.9 million in 1997 compared to $46.0 million in 1996. The weighted average
cost of advances decreased 50 basis points from 5.96% in 1996 to 5.46% in
1997 due to effective borrowing programs offered by the FHLB.
PROVISION FOR LOSSES ON LOANS
Provision for losses on loans increased $19,000, or 60.1%, from $31,000
in 1996 to $50,000 in 1997. The provision for losses on loans is based on
management's evaluation of the credit risk inherent in the loan portfolio and
the amount required to be maintained in the allowance for loan losses. The
provision in 1997 was made in response to ESB's entry into the commercial
business lending area. The allowance for loan losses totaled $283,000 at
March 31, 1997 and $233,000 at March 31, 1996. Management believes the
allowance for loan losses is adequate.
NONINTEREST INCOME
Noninterest income decreased $139,000, or 5.2%, from $2.7 million in
1996 to $2.6 million in 1997. The decrease is due primarily to gain on sales
of mortgage loans that decreased from $1.2 million in 1996 to $1.1 million in
1997, and a reduction in rental income of $137,000 due to the sale of a 26
unit residential rental property in June 1996, offset by increased loan
servicing fees and late charges which increased $74,000, or 11.0%, from
$673,000 in 1996 to $747,000 in 1997. The decrease of $127,000, or 10.2%, on
gain on sales of mortgage loans was due to unfavorable market conditions
during the first and second quarters of 1996. ESB, through EMC, sold $77.8
million of mortgage loans in 1997 as compared to $77.9 million in 1996. In
addition to the minor decrease in sales volume of $100,000, gain on sale of
mortgage loans decreased compared to 1996 due to the condition of the
secondary mortgage market. Loan servicing fees and late charges increased
due primarily
42
<PAGE> 45
to an increase in the servicing portfolio of EMC. Loans serviced by EMC
increased $29.0 million, or 9.9%, from $294.0 million at March 31, 1996 to
$323.0 million at March 31, 1997.
NONINTEREST EXPENSE
Noninterest expense increased $868,000, or 16.3%, from $5.3 million in
1996 to $6.2 million in 1997, due primarily to legislation passed by Congress
to recapitalize the SAIF in which ESB was assessed a one-time insurance
premium of $789,000, as well as an increase of $136,000, or 283.3%, in
amortization of OMSR from $50,000 in 1996 to $185,000 in 1997. As a result
of the one-time assessment, ESB's premium for insurance of accounts decreased
from 23 basis points per $100 to approximately 6.5 basis points. The
increase in amortization of OMSR is the result of increased mortgage loan
refinancing activity and increased average balances subject to OMSR.
INCOME TAXES
Income tax expense decreased from $418,000 in 1996 to $303,000 in 1997.
The decrease of $115,000, or 27.4%, was the result of the decrease in income
before income tax expense of $263,000. The effective tax rate was
approximately 37.5% and 39.0% in 1997 and 1996, respectively.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, Disclosure about Segments of an
Enterprise and Related Information (SFAS 131) which establishes standards for
the way that public enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim reports issued to
shareholders. SFAS 131 is effective for financial statements for periods
beginning after December 15, 1997. Since SFAS 131 is a disclosure
requirement, it will have no impact on the Company's financial condition or
results of operations.
YEAR 2000 COMPLIANCE
Equality's Year 2000 committee has developed and presented to the Board
of Directors its action plan for Year 2000 compliance with the objective of
insuring that all computerized systems and software programs are capable of
functioning in the next century. Equality does not expect that the cost of
its Year 2000 compliance will be material to its business, financial
condition, or results of operations. Management believes that they will
achieve compliance during 1999. Management does not anticipate any material
disruption in operations as the result of any failure by Equality to be in
compliance.
EFFECT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto included have
been prepared in accordance with generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of ESB's operations. Unlike
industrial companies, nearly all of the assets and liabilities of ESB are
monetary in nature. As a result, interest rates have a greater impact on
ESB's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
43
<PAGE> 46
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ----------------------------------------------------------
ESB has employed various strategies intended to manage the effect of
interest rate risk on its future operations. Progress has been made toward
restructuring the composition of the loan portfolio, and liquidity has been
accumulated into investments in U.S. government and agency notes and bonds.
Adjustable-rate mortgages, shorter-term consumer loans and commercial
business loans are among the tools currently utilized by ESB to manage the
interest rate risk of the loan portfolio. The proper pricing of deposit
accounts is also significant. During periods of low or declining rates, the
long-term deposits extend attractive rates while in periods of high rates,
the short-term deposit accounts are competitively priced. This position
allows ESB to benefit from the ability to reprice as necessary based on
market conditions.
Through EMC, ESB has focused on the origination of adjustable-rate
mortgages that reprice based on fluctuations in interest rates. Fixed-rate
mortgage loan originations are generally sold in the secondary market. In
addition, EMC's loan servicing operations have been a significant source of
noninterest income to ESB.
The principal objective of ESB's interest rate risk management function
is to evaluate the interest rate risk included in certain balance sheet
accounts, determine the level of risk appropriate given ESB's business
strategy, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with the Board of
Directors' approved guidelines. Through such management, ESB seeks to
monitor the vulnerability of its operations to changes in interest rates.
The extent of the movement of interest rates is an uncertainty that could
have a negative effect on the earnings of ESB.
ESB's interest rate sensitivity is monitored by management, through the
use of a model produced by the FHLB of Des Moines, on a quarterly basis based
upon custom data submitted by ESB and on ESB's quarterly Thrift Financial
Reports. The model generates estimates of an immediate change in net
interest income ("NIl") and Market Value of Equity ("MVE") that would occur
in the event of an immediate change in interest rates, without giving effect
to any steps that management of ESB might take to counteract that change.
MVE is the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts. The MVE ratio,
under any interest rate scenario, is defined as the MVE in that scenario
divided by the market value of assets in the same scenario.
The following table presents ESB's MVE at March 31, 1998:
<TABLE>
<CAPTION>
At March 31, 1998
---------------------------------------------------------------------------------------------------
Market Value of Equity MVE as % of PV of Assets
--------------------------------------------------------------- ------------------------
Change in Rate $ Amount $ Change % Change MVE Ratio BP Change
---------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+400 $23,383 (9,852) (29.6) 9.85 (302)
+300 25,681 (7,554) (22.7) 10.56 (231)
+200 27,905 (5,329) (16.0) 11.24 (163)
+100 29,884 (3,350) (10.1) 12.07 (80)
0 33,234 - - 12.87 -
-100 29,550 (3,644) (11.0) 11.23 (164)
-200 25,404 (7,830) (23.6) 9.63 (324)
-300 21,107 (12,127) (36.5) 7.91 (496)
-400 16,810 (16,424) (49.4) 6.22 (665)
</TABLE>
<TABLE>
<CAPTION>
At March 31, 1998
-----------------
<S> <C>
RISK MEASURES: 200 BP RATE SHOCK:
Pre-Shock MVE Ratio: MVE as % of PV of Assets 12.87
Exposure Measure: Post-Shock MVE Ratio 9.63
Sensitivity Measure: Change in MVE Ratio -324bp
</TABLE>
44
<PAGE> 47
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If ESB's assets
mature or reprice more quickly than its liabilities, ESB's MVE would increase
during periods of rising interest rates but decrease during periods of
falling interest rates. If ESB's assets mature or reprice more slowly than
its liabilities, ESB's MVE would decrease during periods of rising interest
rates but increase during periods of failing interest rates.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in MVE requires the making
of certain assumptions that may or may not reflect the manner in which actual
yields and costs respond to changes in market interest rates. In this
regard, the MVE model presented assumes that the composition of ESB's
interest sensitive assets and liabilities existing at the beginning of a
period remains constant over the period being measured and also assumes that
a particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets
and liabilities. Accordingly, although the MVE measurements provide an
indication of ESB's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on ESB's net
interest income and will differ from actual results.
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
<TABLE>
Index to Consolidated Financial Statements
- ------------------------------------------
<CAPTION>
<S> <C>
Independent Auditors' Report 46
Consolidated Balance Sheets 47
Consolidated Statements of Income 48
Consolidated Statements of Stockholders' Equity 49
Consolidated Statements of Cash Flows 50
Consolidated Statements of Comprehensive Income 51
Notes to Consolidated Financial Statements 52
</TABLE>
45
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Equality Bancorp, Inc.
St. Louis, Missouri:
We have audited the accompanying consolidated balance sheets of Equality
Bancorp, Inc. and subsidiaries (Equality) as of March 31, 1998 and 1997, and
the related consolidated statements of income, stockholders' equity, cash
flows, and comprehensive income for each of the years in the three-year
period ended March 31, 1998. These consolidated financial statements are the
responsibility of Equality's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We
did not audit the financial statements of Equality Mortgage Corporation (a
consolidated subsidiary), which statements reflect total assets constituting
6% and 3% in 1998 and 1997, respectively, and total interest income and other
income constituting 21%, 17%, and 19%, in 1998, 1997, and 1996, respectively,
of the related consolidated totals. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as
it relates to the amounts included for Equality Mortgage Corporation, is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits, and the report
of the other auditors, provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Equality Bancorp, Inc. and
subsidiaries as of March 31, 1998 and 1997, and the results of their
operations, their cash flows, and their comprehensive income for each of the
years in the three-year period ended March 31, 1998, in conformity with
generally accepted accounting principles.
s/KPMG Peat Marwick LLP
St. Louis, Missouri
May 8, 1998
46
<PAGE> 49
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 1998 and 1997
<CAPTION>
=======================================================================================================================
ASSETS 1998 1997
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash, primarily interest-bearing demand accounts $ 1,070,538 1,037,199
Interest-bearing deposits 1,378,000 3,819,744
Investment securities:
Available for sale, at market value 68,897,156 70,122,807
Held to maturity, at cost 2,600,000 4,848,587
Mortgage-backed securities available for sale,
at market value 58,512,089 14,954,025
Loans receivable, net 108,415,421 95,927,983
Investment in real estate 734,317 869,898
Stock in Federal Home Loan Bank 5,200,000 3,350,000
Mortgage servicing rights 837,597 513,275
Office properties and equipment, net 5,574,287 2,933,591
Accrued interest receivable and other assets 2,330,908 2,386,533
- -----------------------------------------------------------------------------------------------------------------------
$255,550,313 200,763,642
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits $119,301,376 122,982,954
Accrued interest payable on savings deposits 134,203 134,599
Borrowed money 105,678,694 64,248,804
Advance payments by borrowers for taxes and insurance 105,950 86,776
Income taxes payable 696,192 99,863
Deferred income taxes 871,839 196,427
Accrued expenses and other liabilities 2,924,244 379,958
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 229,712,498 188,129,381
- -----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value per share; 1,000,000
shares authorized; none issued and outstanding - -
Common stock, $.01 and $1 par value per share;
4,000,000 shares authorized; 2,505,855 shares
and 836,400 shares issued and outstanding at
March 31, 1998 and 1997, respectively 25,059 836,400
Additional paid-in capital 15,997,241 2,768,548
Retained earnings 10,694,400 9,674,676
Accumulated other comprehensive income (loss) -
unrealized gain (loss) on investment and mortgage-
backed securities available for sale, net of tax 398,219 (509,523)
Unearned Employee Stock Ownership Plan shares (1,277,104) (135,840)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 25,837,815 12,634,261
- -----------------------------------------------------------------------------------------------------------------------
$255,550,313 200,763,642
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
47
<PAGE> 50
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended March 31, 1998, 1997, and 1996
<CAPTION>
=======================================================================================================================
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 8,103,429 7,448,854 7,046,845
Investment securities and interest-bearing deposits 5,163,526 4,399,442 3,723,795
Mortgage-backed securities 1,153,512 1,530,005 1,333,153
Other 259,843 231,968 171,569
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 14,680,310 13,610,269 12,275,362
- -----------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 5,633,692 5,682,184 5,728,828
Advances from Federal Home Loan Bank 4,031,314 3,377,929 2,742,672
Other borrowed money 60,376 51,976 69,226
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 9,725,382 9,112,089 8,540,726
- -----------------------------------------------------------------------------------------------------------------------
Net interest income 4,954,928 4,498,180 3,734,636
Provision for losses on loans 115,513 50,000 31,225
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for losses on loans 4,839,415 4,448,180 3,703,411
- -----------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gain on sales of mortgage loans 1,722,985 1,120,907 1,248,346
Loan servicing fees and late charges 930,423 747,289 673,142
Gain (loss) on sale of investment and mortgage-
backed securities available for sale, net 41,044 7,284 (8,280)
Equity in loss of joint venture (44,109) (2,433) (29,634)
Rental income 126,811 172,581 309,173
Other 488,142 523,451 516,356
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest income 3,265,296 2,569,079 2,709,103
- -----------------------------------------------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 3,399,859 2,917,772 2,905,168
Occupancy 533,378 481,620 486,751
Data processing 261,397 192,333 191,739
Advertising 123,707 90,363 76,071
Federal insurance premiums 81,428 216,451 277,417
Savings Association Insurance Fund special assessment - 788,770 -
Other 1,688,108 1,521,719 1,404,130
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest expense 6,087,877 6,209,028 5,341,276
- -----------------------------------------------------------------------------------------------------------------------
Income before income tax expense 2,016,834 808,231 1,071,238
Income tax expense 777,668 303,459 417,782
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 1,239,166 504,772 653,456
=======================================================================================================================
Earnings per share:
Basic $ 0.51 0.21 0.27
Diluted 0.51 0.21 0.27
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
48
<PAGE> 51
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended March 31, 1998, 1997, and 1996
<CAPTION>
==========================================================================================================================
Accumulated other
comprehensive
income -
unrealized gain
(loss) on invest-
ment and mortgage-
Common stock Additional backed securities
--------------------------- paid-in Retained available for
Shares Amount capital earnings sale, net of tax
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, March 31, 1995 836,400 $ 836,400 2,749,477 8,972,651 (452,607)
Net income - - - 653,456 -
Amortization of stock awards - - - - -
Amortization of ESOP awards - - 10,320 - -
Dividend declared on non-
mutual holding company
owned common stock at
$.60 per share - - - (223,220) -
Change in unrealized gain (loss)
on investment and mortgage-
backed securities available
for sale, net of tax - - - - 405,375
- --------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 836,400 836,400 2,759,797 9,402,887 (47,232)
Net income - - - 504,772 -
Amortization of ESOP awards - - 8,751 - -
Dividend declared on non-
mutual holding company
owned common stock at
$.62 per share - - - (232,983) -
Change in unrealized gain (loss)
on investment and mortgage-
backed securities available
for sale, net of tax - - - - (462,291)
- --------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 836,400 836,400 2,768,548 9,674,676 (509,523)
Net income - - - 1,239,166 -
Net proceeds from sale of
common stock of Equality
Bancorp, Inc. 1,322,500 13,225 12,297,206 - -
Cancellation of Equality Savings
and Loan Association, F.A.
common stock owned by
First Missouri Financial, M.H.C. (445,000) (445,000) 445,000 - -
Cancellation of Equality Savings
and Loan Association, F.A.
common stock owned by
minority stockholders (391,400) (391,400) 391,400 - -
Issuance of common stock
of Equality Bancorp, Inc.
to minority stockholders
of Equality Savings and
Loan Association, F.A. 1,163,402 11,634 (11,634) - -
Capital contribution from
First Missouri Financial, M.H.C. - - - 50,000 -
Exercise of stock options 19,953 200 68,716 - -
Tax benefit of stock options
exercised - - 10,328 - -
Amortization of ESOP awards - - 27,677 - -
Dividend declared on nonmutual
holding company owned
common stock at $.34 per share - - - (128,322) -
Dividend declared on common
stock of Equality Bancorp,
Inc. at $.06 per share - - - (141,120) -
Change in unrealized gain (loss)
on investment and mortgage-
backed securities available
for sale, net of tax - - - - 907,742
- --------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 2,505,855 $ 25,059 15,997,241 10,694,400 398,219
==========================================================================================================================
<CAPTION>
===================================================================================
Unearned
Employee
Unamor- Stock Total
tized Ownership stock-
stock Plan holders'
awards shares equity
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, March 31, 1995 (28,500) (204,040) 11,873,381
Net income - - 653,456
Amortization of stock awards 28,500 - 28,500
Amortization of ESOP awards - 41,600 51,920
Dividend declared on non-
mutual holding company
owned common stock at
$.60 per share - - (223,220)
Change in unrealized gain (loss)
on investment and mortgage-
backed securities available
for sale, net of tax - - 405,375
- -----------------------------------------------------------------------------------
Balance, March 31, 1996 - (162,440) 12,789,412
Net income - - 504,772
Amortization of ESOP awards - 26,600 35,351
Dividend declared on non-
mutual holding company
owned common stock at
$.62 per share - - (232,983)
Change in unrealized gain (loss)
on investment and mortgage-
backed securities available
for sale, net of tax - - (462,291)
- -----------------------------------------------------------------------------------
Balance, March 31, 1997 - (135,840) 12,634,261
Net income - - 1,239,166
Net proceeds from sale of
common stock of Equality
Bancorp, Inc. - (1,198,060) 11,112,371
Cancellation of Equality Savings
and Loan Association, F.A.
common stock owned by
First Missouri Financial, M.H.C. - - -
Cancellation of Equality Savings
and Loan Association, F.A.
common stock owned by
minority stockholders - - -
Issuance of common stock
of Equality Bancorp, Inc.
to minority stockholders
of Equality Savings and
Loan Association, F.A. - - -
Capital contribution from
First Missouri Financial, M.H.C. - - 50,000
Exercise of stock options - - 68,916
Tax benefit of stock options
exercised - - 10,328
Amortization of ESOP awards - 56,796 84,473
Dividend declared on nonmutual
holding company owned
common stock at $.34 per share - - (128,322)
Dividend declared on common
stock of Equality Bancorp,
Inc. at $.06 per share - - (141,120)
Change in unrealized gain (loss)
on investment and mortgage-
backed securities available
for sale, net of tax - - 907,742
- -----------------------------------------------------------------------------------
Balance, March 31, 1998 - (1,277,104) 25,837,815
===================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
49
<PAGE> 52
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 1998, 1997, and 1996
<CAPTION>
==========================================================================================================================
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,239,166 504,772 653,456
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization:
Office properties and equipment 272,470 280,383 313,436
Real estate investments 11,261 17,140 48,163
Premiums and discounts, net 26,339 216,824 329,123
Mortgage servicing rights 383,812 185,281 49,667
Stock awards - - 28,500
Decrease (increase) in accrued interest receivable 52,687 (221,226) (153,915)
Provision for losses on loans 115,513 50,000 31,225
Increase (decrease) in valuation reserve on loans held for sale 53,652 (80,291) (14,906)
Loss (gain) on the sale of real estate acquired through
foreclosure (1,154) (7,696) 1,179
Gain on sale of real estate - (105,875) (116,482)
Gain on the sale of investment and mortgage-backed securities
available for sale, net (41,044) (7,284) (8,280)
Increase (decrease) in accrued interest payable on savings
deposits (396) 32,457 48,334
Stock dividend from FHLB - - (50,000)
Change in income taxes payable 596,329 228,326 103,943
Equity in loss of joint ventures 44,109 2,433 29,634
Other, net 2,735,473 26,476 (288,948)
Origination and purchases of loans held for sale (89,909,407) (78,083,656) (77,563,150)
Proceeds from sales of loans held for sale 79,783,985 68,974,276 67,027,634
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (4,637,205) (7,987,660) (9,531,387)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net change in loans receivable (2,546,296) 10,080,084 (3,308,774)
Decrease in interest-bearing deposits 2,441,744 5,750,746 4,508,510
Principal repayments on investment securities available for sale - 476,709 112,466
Principal repayments on mortgage-backed securities available for sale 3,134,164 4,584,586 4,021,889
Proceeds from maturities of investment securities available for sale 66,524,057 11,935,000 14,600,000
Proceeds from the sale of investment securities available for sale 50,716,621 28,377,443 31,147,503
Proceeds from the sale of mortgage-backed securities available for sale 10,035,942 22,254,028 6,897,588
Proceeds from maturities of investment securities held to maturity 2,250,000 1,000,000 1,500,000
Purchase of investment securities available for sale (114,672,471) (72,469,418) (50,052,295)
Purchase of mortgage-backed securities available for sale (56,569,108) (14,211,212) (24,234,815)
Purchase of investment securities held to maturity - - (244,062)
Proceeds from the sale of real estate acquired through foreclosure 83,995 178,249 18,427
Proceeds from the sale of real estate held for investment - 1,071,372 298,140
Decrease in joint venture borrowings 13,865 12,513 11,527
Purchase of stock in FHLB (1,850,000) (200,000) (1,700,000)
Increase in mortgage servicing rights (708,134) (437,489) (296,583)
Purchase of office properties and equipment, net (2,913,166) (79,135) (55,325)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (44,058,787) (1,676,524) (16,775,804)
- --------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in savings deposits (3,681,578) (1,532,416) 2,955,006
Proceeds from FHLB advances 106,500,000 101,000,000 143,000,000
Repayment of FHLB advances (65,500,000) (94,000,000) (112,000,000)
Net change in FHLB line of credit - - (3,000,000)
Proceeds from other borrowed money 565,730 - 91,316
Repayment of other borrowed money (135,840) (56,602) (41,600)
Cash dividends paid (269,442) (232,983) (223,220)
Increase (decrease) in advance payments by borrowers for taxes
and insurance 19,174 (26,908) 49,747
Proceeds from sale of common stock 11,112,371 - -
Capital contribution from First Missouri Financial, M.H.C. 50,000 - -
Proceeds from exercise of stock options 68,916 - -
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 48,729,331 5,151,091 30,831,249
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 33,339 (4,513,093) 4,524,058
Cash and cash equivalents, beginning of year 1,037,199 5,550,292 1,026,234
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 1,070,538 1,037,199 5,550,292
==========================================================================================================================
Supplemental disclosure of cash flow information:
Interest paid $ 9,725,778 9,079,632 8,492,392
Income taxes paid 75,958 989 225,014
Noncash transfers of loans to real estate acquired through foreclosure 19,674 253,689 72,516
Transfer of investment securities held to maturity to investment
securities available for sale - - 1,966,984
Transfer of mortgage-backed securities held to maturity to mortgage-backed
securities available for sale - - 14,265,565
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
50
<PAGE> 53
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended March 31, 1998, 1997, and 1996
=================================================================================================================
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $1,239,166 504,772 653,456
Other comprehensive income (loss):
Net unrealized gain (loss) on investment and mortgage-backed
securities available for sale, net of tax 932,779 (457,848) 400,324
Less adjustment for loss (gain) on sale of investment and
mortgage-backed securities available for sale, net realized
in net income, net of tax of $16,007, $2,841, and $(3,229)
in 1998, 1997, and 1996, respectively (25,037) (4,443) 5,051
- -----------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss) 907,742 (462,291) 405,375
- -----------------------------------------------------------------------------------------------------------------
Comprehensive income $2,146,908 42,481 1,058,831
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
51
<PAGE> 54
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998 and 1997
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies
Following are the significant accounting policies which Equality
Bancorp, Inc. and subsidiaries (Equality) follow in preparing and
presenting their consolidated financial statements:
Reorganization to a Stock Corporation
On December 1, 1997, First Missouri Financial, M.H.C., a
federally chartered mutual holding company whose primary asset
was 445,000 shares, or 53.2%, of the total issued and outstanding
shares of Equality Savings and Loan Association, F.A. (the
Association), completed its conversion (the Conversion) from a
mutual holding company to a Delaware stock corporation (Equality
Bancorp, Inc.) with Equality Savings and Loan Association, F.A.,
changing its name to Equality Savings Bank (ESB). At the date of
the Conversion, Equality completed the sale of 1,322,500 shares
of common stock, $.01 par value, at a price of $10.00 per share
to the Association's depositors, Employee Stock Ownership Plan
(ESOP), and minority stockholders in a subscription offering.
Net proceeds from the sale of common stock were $11,112,371,
after deducting $914,569 of offering expenses and $1,198,060
related to the sale of 119,806 shares to the ESOP.
In conjunction with the subscription offering, an additional
1,163,402 shares of common stock were issued by Equality to
convert 391,400 shares of the Association's common stock held by
minority stockholders into common stock of Equality. Each share
of common stock in the above transaction was converted into the
right to receive 2.9724 shares of Equality's common stock. All
prior year per share data has been restated to give effect to
this exchange of common stock.
Business
Equality provides a full range of banking services to individual
and corporate customers from its home office and two branch
locations in the St. Louis area. In addition, Equality provides
mortgage lending services from five locations. Equality is
subject to competition from other financial institutions, is
subject to the regulations of certain regulatory agencies, and
undergoes periodic examinations by those regulatory authorities.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. In
the normal course of business, Equality encounters two
significant types of risk: economic and regulatory. Economic
risk is comprised of interest rate risk, credit risk, and market
risk. Equality is subject to interest rate risk to the degree
that its interest-bearing liabilities reprice on a different
basis than its interest-earning assets. Credit risk is the risk
of default on Equality's loan portfolio that results from the
borrowers' inability or unwillingness to make contractually
required payments. Market risk reflects changes in the value of
collateral underlying loans receivable and the value of
Equality's investment in real estate.
Management has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare the
consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ
from those estimates. The determination of the allowance for
loan losses and the valuation of real estate are based on
estimates that are particularly susceptible to changes in the
economic environment and market conditions. These balances may
be adjusted in the future based on such changes, or based on the
results of regulatory examinations.
(Continued)
52
<PAGE> 55
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Principles of Consolidation
The consolidated financial statements include the accounts of
Equality Bancorp, Inc. and its wholly owned subsidiary, Equality
Savings Bank. Equality Savings Bank has two wholly owned
subsidiaries, Equality Commodity Corporation (ECC) and Equality
Mortgage Corporation (EMC). All significant intercompany
accounts and transactions have been eliminated in
consolidation.
ECC operates under the name of Equality Insurance Agency and
Flood Information Specialists and is a wholly owned subsidiary
of ESB. ECC's services and activities include sales of multiple
lines of insurance to the general public, the issuance of flood
plain certificates, and investments in real estate joint
ventures.
EMC operates as a mortgage banker and is a wholly owned
subsidiary of ESB. At March 31, 1998, EMC serviced
approximately $340.1 million in loans of which $85.6 million are
for Equality. In addition, EMC was carrying a blanket bond in
the amount of $2,280,000 and an errors and omissions policy in
the amount of $1,000,000.
Restricted Cash
Included in cash is $145,164 and $56,257 at March 31, 1998 and
1997, respectively, which consists of assistance funds held by
EMC on behalf of mortgagors participating in a subsidy program.
The subsidy is passed through to the investors monthly.
Investment and Mortgage-Backed Securities
At the time of purchase, investment and mortgage-backed
securities are classified as available for sale or held to
maturity. Held to maturity securities are those securities
which Equality has the ability and intent to hold until
maturity. All equity securities, and debt securities not
classified as held to maturity, are classified as available for
sale.
Available for sale securities are recorded at fair value. Held
to maturity securities are recorded at cost, adjusted for the
amortization of premiums or discounts. Unrealized gains and
losses, net of the related tax effect, on available for sale
securities are excluded from earnings and reported as a separate
component of stockholders' equity until realized. Gains and
losses on the sale of available for sale securities are
determined using the specific identification method.
A decline in the market value of any available for sale or held
to maturity security below cost that is deemed to be other than
temporary is charged to earnings and results in the
establishment of a new cost basis for the security.
Loans Receivable and Related Fees
Loans receivable, other than loans held for sale, are carried at
cost because Equality has both the intent and the ability to
hold them for the foreseeable future. Mortgage loans held for
sale are valued at the lower of cost or market, computed on an
aggregate loan basis. Interest is credited to income as earned;
however, interest receivable is accrued only if deemed
collectible. Loans are placed on nonaccrual status when
management believes that the borrower's financial condition,
after consideration of economic conditions and collection
efforts, is such that collection of interest is doubtful. A
loan remains on nonaccrual status until the loan is current as
to payment of both principal and interest and/or the borrower
demonstrates the ability to pay and remain current.
EMC derives income primarily from the origination and subsequent
sale of mortgage loans and from the servicing of mortgage loans.
EMC recognizes the origination fee and other fees charged on
mortgage
(Continued)
53
<PAGE> 56
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
loans as income when the loan is sold to investors. Mortgages are sold at
such times as management deems advisable. EMC's activities are performed
primarily in the St. Louis metropolitan area.
Beginning in fiscal 1997, in accordance with Statement of
Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights, an amendment of FASB Statement No. 65 (SFAS
122), EMC capitalized the cost of originated mortgage servicing
rights retained as assets. Previously, only the cost of
purchased mortgage servicing rights could be capitalized as
assets. The cost of the mortgage servicing rights is being
amortized over periods ranging up to eight years using the
straight-line method. SFAS 122 provides for a valuation
allowance when the carrying value of the mortgage servicing
rights exceeds the fair value.
The allowance for loan losses is increased by provisions charged
to expense and is reduced by loan charge-offs, net of
recoveries. Management utilizes a systematic, documented
approach in determining the appropriate level of the allowance
for loan losses. Management's approach, which provides for
general and specific valuation allowances, considers numerous
factors including general economic conditions, loan portfolio
composition, prior loss experience, independent appraisals, and
such other factors which, in management's judgment, deserve
current recognition in estimating loan losses.
Management believes the allowance for loan losses is adequate to
absorb possible losses in the loan portfolio. While management
uses available information to recognize loan losses, future
additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies,
as an integral part of their examination process, periodically
review the allowance for loan losses. Such agencies may require
Equality to increase the allowance for loan losses based on
their judgment about information available to them at the time
of their examination.
Premiums and Discounts
Premiums and discounts on investment securities, mortgage-backed
securities, and purchased loans and unearned discounts on
property improvement loans are amortized using the interest
method over the period to maturity, adjusted for anticipated
prepayments.
Funds Held for Investors
EMC holds funds belonging to investors in separate bank accounts
which are offset by liabilities for escrow and other fiduciary
funds. These funds and the related liabilities are not included
in the consolidated balance sheets. These amounts totaled
$2,649,381 and $2,604,137 at March 31, 1998 and 1997,
respectively.
At March 31, 1998 and 1997, escrow funds related to loans
serviced by EMC for ESB totaled $635,143 and $705,097,
respectively, and are included in savings deposits in the
consolidated balance sheets.
Investment in Real Estate
Investment in real estate includes real estate held for
investment, an investment in a real estate joint venture, and
real estate acquired through foreclosure.
Real estate held for investment is recorded at the lower of
cost, net of accumulated depreciation, or net realizable value.
Depreciation is charged to expense using the straight-line
method over an estimated useful life of 30 years.
(Continued)
54
<PAGE> 57
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Equality accounts for its investment in the real estate joint
venture using the equity method.
Real estate acquired through foreclosure is initially recorded
at fair value. If the fair value of the real estate declines
subsequent to foreclosure, the difference is recorded as a
valuation allowance through a charge to expense. Subsequent
increases in fair value are recorded through a reversal of the
valuation allowance. Expenses incurred in maintaining the
properties are charged to expense.
Profit on sales of real estate is recognized when title has
passed, minimum down payment requirements have been met, the
terms of any notes received are such to satisfy initial and
continuing payment requirements, and Equality is relieved of any
requirement for continued involvement in the real estate.
Stock in Federal Home Loan Bank
Equality, as a member of the Federal Home Loan Bank System
administered by the Federal Housing Finance Board, is required
to maintain an investment in the capital stock of the Federal
Home Loan Bank of Des Moines (FHLB) in an amount equal to the
greater of 1% of Equality's total mortgage-related assets at the
beginning of each year, 0.3% of Equality's total assets at the
beginning of each year, or 5% of advances from the FHLB to
Equality. The stock is recorded at cost which represents
redemption value.
Office Properties and Equipment
Land is carried at cost. Office buildings and improvements,
furniture and equipment, and automobiles are carried at cost,
less accumulated depreciation and amortization. Depreciation
and amortization are charged to expense using the straight-line
method over the estimated useful lives of the related assets.
Useful lives are 10 to 50 years for office buildings and
improvements, 7 to 10 years for furniture and equipment, and 5
years for automobiles.
Income Taxes
Equality files a consolidated federal income tax return.
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
Reclassifications
Certain reclassifications of 1997 and 1996 information have been
made to conform with the 1998 presentation. Such
reclassifications have no effect on previously reported net
income.
Earnings Per Share
Equality adopted the provisions of Statement of Financial
Accounting Standards No. 128, Earnings Per Share (SFAS 128) on
December 31, 1997. SFAS 128 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. All prior period earnings have been
restated to conform to the requirements of SFAS 128. Earnings
per share information has also been adjusted to reflect the
Conversion and the exchange of each share of common stock of
Equality Savings and Loan Association, F.A. for 2.9724 shares of
Equality's common stock. Only ESOP shares committed to be
released are considered outstanding for purposes of computing
earnings per share. ESOP shares totaling 45,014, 14,213, and
(Continued)
55
<PAGE> 58
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
10,356 are considered outstanding for earnings per share
calculation purposes at March 31, 1998, 1997, and 1996,
respectively.
Basic earnings per share was computed based upon weighted
average common shares outstanding of 2,414,131, 2,440,906, and
2,429,331 for 1998, 1997, and 1996, respectively. Diluted
earnings per share was computed based upon weighted average
common shares and dilutive potential common shares outstanding
of 2,443,395, 2,455,228, and 2,439,453 for 1998, 1997, and 1996,
respectively. Stock options are the only dilutive potential
common shares.
(2) Comprehensive Income
Equality adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, effective January 1, 1998,
which established standards for the reporting and display of
comprehensive income and its components. Equality has elected
to report comprehensive income in a separate financial
statement.
(3) Regulatory Capital
The capital regulations of the Office of Thrift Supervision
(OTS), as a result of the Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA), require savings
institutions to have minimum tangible capital equal to 1.5% of
total adjusted assets, a minimum 3% leverage (core capital)
ratio, and an 8% risk-based capital ratio. The risk-based
capital requirement is calculated based on the credit risk
presented by both on-balance-sheet assets and off-balance-sheet
commitments and obligations. Assets are assigned a credit-risk
weighting based upon their relative risk ranging from 0% for
assets backed by the full faith and credit of the United States
or that pose no credit risk to the institution to 100% for
assets such as delinquent or repossessed assets. As of March
31, 1998, ESB met all OTS capital requirements.
ESB is also subject to the regulatory framework for prompt
corrective action as established by the Federal Deposit
Insurance Corporation Improvement Act (FDICIA). To be
categorized as well-capitalized, an institution must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table below. At March 31, 1998, ESB
is considered well capitalized.
(Continued)
56
<PAGE> 59
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Equality's actual and required capital amounts and ratios at
March 31, 1998 and 1997 are as follows:
<TABLE>
========================================================================================================================
<CAPTION>
1998
----------------------------------------------------------------------------
To be well
capitalized
Minimum for OTS for prompt
capital adequacy corrective action
Actual purposes provisions
---------------------- ------------------ -------------------
Ratio Amount Ratio Amount Ratio Amount
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity,
and ratio to total
assets 9.58% $ 24,446,813
Unrealized gain on
investment and
mortgage-backed
securities available
for sale, net of tax (398,219)
Investment in and
advances to
nonincludable
subsidiaries (833,000)
- ------------------------------------------------------------------------------------------------------------------------
Tangible capital, and
ratio to adjusted
total assets 9.14% $ 23,215,594 1.50% $3,810,066
Tier I (core) capital,
and ratio to adjusted
total assets 9.14% $ 23,215,594 3.00% $7,620,132 5.00% $12,700,220
Tier I capital, and ratio
to risk-weighted
assets 26.93% $ 23,215,594 6.00% $ 5,171,880
Allowance for loan
losses (general
valuation allowance) 344,200
- ------------------------------------------------------------------------------------------------------------------------
Total risk-based capital,
and ratio to risk-
weighted assets 27.33% $ 23,559,794 8.00% $6,895,840 10.00% $ 8,619,800
========================================================================================================================
Total assets $255,163,546
------------
Adjusted total assets $254,004,407
------------
Risk-weighted assets $ 86,198,000
------------
<CAPTION>
(Continued)
57
<PAGE> 60
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
========================================================================================================================
1997
----------------------------------------------------------------------------
To be well
capitalized
Minimum for OTS for prompt
capital adequacy corrective action
Actual purposes provisions
---------------------- ------------------ -------------------
Ratio Amount Ratio Amount Ratio Amount
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity, and
ratio to total assets 6.29% $ 12,634,261
Unrealized loss on invest-
ment and mortgage-
backed securities
available for sale,
net of tax 509,523
Investment in and advances
to nonincludable
subsidiaries (845,000)
- ------------------------------------------------------------------------------------------------------------------------
Tangible capital, and ratio
to adjusted total assets 6.11% $ 12,298,784 1.50% $3,017,402
Tier I (core) capital, and
ratio to adjusted total
assets 6.11% $ 12,298,784 3.00% $6,034,805 5.00% $10,058,008
Tier I capital, and ratio to
risk-weighted assets 17.46% $ 12,298,784 6.00% $ 4,226,580
Allowance for loan losses
(general valuation
allowance) 283,000
- ------------------------------------------------------------------------------------------------------------------------
Total risk-based capital,
and ratio to risk-
weighted assets 17.86% $ 12,581,784 8.00% $5,635,440 10.00% $ 7,044,300
========================================================================================================================
Total assets $200,763,642
------------
Adjusted total assets $201,160,165
------------
Risk-weighted assets $ 70,443,000
------------
(Continued)
</TABLE>
58
<PAGE> 61
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(4) Investment Securities
The amortized cost and market value of investment securities classified
as available for sale at March 31, 1998 and 1997 are as follows:
<TABLE>
================================================================================================================
<CAPTION>
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and
agency obligations:
1998 $68,359,039 548,828 10,711 68,897,156
================================================================================================================
1997 $70,705,833 255,529 838,555 70,122,807
================================================================================================================
</TABLE>
The amortized cost and market value of investment securities classified
as available for sale at March 31, 1998, by contractual maturity, are as
follows:
<TABLE>
================================================================================================================
<CAPTION>
Amortized cost Market value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 492,453 499,375
Due after one year through five years 22,507,186 22,685,107
Due after five years through ten years 33,238,555 33,468,111
Due after ten years 12,120,845 12,244,563
- ----------------------------------------------------------------------------------------------------------------
$68,359,039 68,897,156
================================================================================================================
</TABLE>
Proceeds from sales of investment securities during 1998, 1997,
and 1996 were approximately $50.7 million, $28.4 million, and
$31.1 million, respectively. During 1998, 1997, and 1996, gross
gains of $391,171, $77,173 and $125,167, respectively, and gross
losses of $266,974, $41,296, and $66,252, respectively, were
recognized on these sales.
The amortized cost and estimated market value of investment
securities classified as held to maturity at March 31, 1998 and
1997 are as follows:
<TABLE>
================================================================================================================
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized market
cost gains losses value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and
agency obligations:
1998 $2,600,000 - 73,000 2,527,000
================================================================================================================
1997 $4,848,587 476 124,063 4,725,000
================================================================================================================
(Continued)
</TABLE>
59
<PAGE> 62
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The amortized cost and estimated market value of investment
securities classified as held to maturity at March 31, 1998, by
contractual maturity, are as follows:
<TABLE>
================================================================================
<CAPTION>
Estimated
Amortized market
cost value
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $2,000,000 1,989,375
Due after five years through ten years 600,000 537,625
- --------------------------------------------------------------------------------
$2,600,000 2,527,000
================================================================================
</TABLE>
(5) Mortgage-Backed Securities
The amortized cost and market value of mortgage-backed
securities classified as available for sale at March 31, 1998
and 1997 are as follows:
<TABLE>
=================================================================================================
<CAPTION>
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
----
FNMA $28,524,134 71,109 25,082 28,570,161
FHLMC 2,559,036 29,439 8,305 2,580,170
GNMA 27,318,596 73,673 30,511 27,361,758
- -------------------------------------------------------------------------------------------------
$58,401,766 174,221 63,898 58,512,089
=================================================================================================
<S> <C>
Weighted average interest rate at March 31 6.38%
----
<CAPTION>
=================================================================================================
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
----
FNMA $ 7,193,758 17,364 186,609 7,024,513
FHLMC 4,562,858 28,305 35,790 4,555,373
GNMA 3,449,668 19,702 95,231 3,374,139
- -------------------------------------------------------------------------------------------------
$15,206,284 65,371 317,630 14,954,025
=================================================================================================
<S> <C>
Weighted average interest rate at March 31 6.75%
----
(Continued)
</TABLE>
60
<PAGE> 63
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The amortized cost and market value of mortgage-backed
securities classified as available for sale at March 31, 1998,
by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities due to scheduled
repayments and because borrowers have the right to prepay
obligations with or without prepayment penalties. The following
table does not take into consideration the effects of scheduled
repayments or the effects of possible prepayments.
<TABLE>
=================================================================================================
<CAPTION>
Amortized Market
cost value
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 359,598 361,594
Due after one year through five years 1,625,184 1,653,786
Due after five years through ten years 138,485 142,857
Due after ten years 56,278,499 56,353,852
- -------------------------------------------------------------------------------------------------
$58,401,766 58,512,089
=================================================================================================
</TABLE>
Proceeds from the sale of mortgage-backed securities during
1998, 1997 and 1996 were approximately $10.0 million, $22.3
million and $6.9 million, respectively. During 1998, 1997 and
1996, gross gains of $5,880, $97,917 and $3,186, respectively,
and gross losses of $89,033, $126,510 and $70,381, respectively,
were recognized on these sales.
(Continued)
61
<PAGE> 64
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(6) Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
=================================================================================================
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans secured by real estate:
Residential:
One- to four-family:
Conventional $ 67,542,904 69,810,802
FHA and VA 11,718,426 14,233,144
Multifamily 1,381,749 1,637,293
Commercial 2,683,582 2,661,620
Loans held for sale 14,523,036 4,397,614
- -------------------------------------------------------------------------------------------------
Total loans secured by real estate 97,849,697 92,740,473
- -------------------------------------------------------------------------------------------------
Commercial business 8,153,453 1,279,641
Loans secured by savings deposits 391,010 366,082
Property improvement 1,727,691 1,595,572
Automobiles 616,911 122,403
Other 157,183 162,297
- -------------------------------------------------------------------------------------------------
Total loans 108,895,945 96,266,468
Less:
Loans in process 3,000 -
Deferred loan fees, net 36,840 46,159
Unearned discounts 8,029 4,523
Allowance for loan losses 374,200 283,000
Valuation reserve on loans held for sale 58,455 4,803
- -------------------------------------------------------------------------------------------------
$108,415,421 95,927,983
=================================================================================================
Weighted average interest rate at March 31 7.76% 7.65%
---- ----
</TABLE>
Adjustable rate mortgages at March 31, 1998 and 1997 totaled
approximately $53,000,000 and $55,000,000, respectively.
At March 31, 1998 and 1997, loans secured by real estate
contractually delinquent 90 days or more totaled $852,715 and
$642,856, respectively. Of these amounts, $833,241 and
$571,386, respectively, were insured by the Federal Housing
Administration or guaranteed by the Veterans Administration. No
loans were deemed by management to be impaired at March 31, 1998
or 1997.
EMC had commitments to sell loans of approximately $12,000,000
and $3,920,000 at March 31, 1998 and 1997, respectively.
(Continued)
62
<PAGE> 65
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Loans serviced by EMC at March 31, 1998, 1997, and 1996 are as
follows:
<TABLE>
================================================================================
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
For ESB $ 85,638,732 90,600,283 83,926,591
For others 254,415,299 232,430,243 210,037,963
- --------------------------------------------------------------------------------
$340,054,031 323,030,526 293,964,554
================================================================================
</TABLE>
Activity in the allowance for loan losses is summarized as
follows:
<TABLE>
=================================================================================================
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $283,000 233,000 216,775
Provision charged to expense 115,513 50,000 31,225
Charge-offs (24,313) - (15,000)
- -------------------------------------------------------------------------------------------------
Balance, end of year $374,200 283,000 233,000
=================================================================================================
</TABLE>
Following is a summary of activity for 1998 of loans made to
executive officers and directors or to entities in which such
individuals had beneficial interest. Such loans were made in
the normal course of business on substantially the same terms,
including interest and collateral requirements, as those
prevailing at the same time for comparable transactions with
other persons and did not involve more than the normal risk of
collectibility or present unfavorable features.
<TABLE>
================================================================================
<S> <C>
Balance at March 31, 1997 $1,152,246
New loans 490,000
Payments received (135,036)
- --------------------------------------------------------------------------------
Balance at March 31, 1998 $1,507,210
================================================================================
</TABLE>
(7) Investment in Real Estate
Investment in real estate is summarized as follows:
<TABLE>
=================================================================================================
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate held for investment $279,784 291,045
Investment in real estate joint venture:
Equity in operations (194,514) (150,405)
Loan to real estate joint venture 649,047 662,912
Real estate acquired through foreclosure - 66,346
- -------------------------------------------------------------------------------------------------
$734,317 869,898
=================================================================================================
(Continued)
</TABLE>
63
<PAGE> 66
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The investment in real estate joint venture consists of the WC
Joint Venture, a 50%-owned venture formed in 1986.
(8) Mortgage Servicing Rights
The cost of mortgage servicing rights capitalized and the
resulting increase in gain on sale of mortgage loans amounted to
$768,801, $483,093, and $317,001 in 1998, 1997, and 1996,
respectively. Equality established an impairment reserve of
$139,835, $66,022 and $20,418 in 1998, 1997 and 1996,
respectively. The fair value of the capitalized mortgage
servicing rights was approximately $1,513,000 and $979,000 at
March 31, 1998 and 1997, respectively. The fair value was
estimated based on quoted market prices for mortgage servicing
rights of a similar nature. Note rate and loan type are the
predominant characteristics used to evaluate the carrying and
fair value of the capitalized mortgage servicing rights.
(9) Office Properties and Equipment
Office properties and equipment are summarized as follows:
<TABLE>
=================================================================================================
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $1,446,688 1,146,688
Office buildings and improvements 3,215,426 2,483,865
Furniture and equipment 2,345,405 2,212,369
Automobiles 61,965 81,758
Property held for future expansion 1,691,288 -
- -------------------------------------------------------------------------------------------------
8,760,772 5,924,680
Less accumulated depreciation and
amortization 3,186,485 2,991,089
- -------------------------------------------------------------------------------------------------
$5,574,287 2,933,591
=================================================================================================
</TABLE>
Depreciation and amortization expense for 1998, 1997, and 1996
was $272,470, $280,383, and $313,436, respectively.
ESB is obligated under certain noncancellable leases on
properties. The future minimum lease payments under these
leases total $66,900 during 1999.
(Continued)
64
<PAGE> 67
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(10) Accrued Interest Receivable and Other Assets
Accrued interest receivable and other assets are summarized as
follows:
<TABLE>
================================================================================
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Accrued interest:
Loans receivable $ 554,529 487,720
Interest-bearing deposits 3,849 181,528
Investment securities 813,496 989,575
Mortgage-backed securities 324,223 89,961
- --------------------------------------------------------------------------------
Total accrued interest 1,696,097 1,748,784
Accounts receivable 260,572 346,380
Prepaid expenses 229,605 255,005
Other 144,634 36,364
- --------------------------------------------------------------------------------
$2,330,908 2,386,533
================================================================================
</TABLE>
(11) Savings Deposits
Savings deposits are summarized as follows:
<TABLE>
====================================================================================================================
<CAPTION>
1998 1997
------------------------------- ----------------------------------
Weighted Weighted
average Percent average Percent
interest of total interest of total
Amount rate savings Amount rate savings
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand deposits:
Checking $ 15,289,961 1.04% 12.8% $ 12,163,249 1.32% 9.9%
Passbook 19,762,521 2.51 16.6 21,576,722 2.51 17.5
Money market 5,516,869 3.07 4.6 6,135,128 3.22 5.0
- ---------------------------------------------------------------------------------------------------------------------
Total demand deposits 40,569,351 2.03 34.0 39,875,099 2.25 32.4
- ---------------------------------------------------------------------------------------------------------------------
Certificates of deposit:
Negotiated rate
($100,000 or more) 2,214,167 6.12 1.9 2,717,985 6.20 2.2
Other 76,517,858 5.76 64.1 80,389,870 5.75 65.4
- ---------------------------------------------------------------------------------------------------------------------
Total certificates
of deposit 78,732,025 5.77 66.0 83,107,855 5.76 67.6
- ---------------------------------------------------------------------------------------------------------------------
$119,301,376 4.49% 100.0% $122,982,954 4.63% 100.0%
=====================================================================================================================
(Continued)
</TABLE>
65
<PAGE> 68
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Certificate of deposit accounts by interest rate ranges are as
follows:
<TABLE>
=============================================================================================================
<CAPTION>
1998 1997
---------------------- ----------------------
Average Average
Amount rate Amount rate
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than 3.00% $ 2,792 2.50% 7,791 2.50%
3.00% to 3.99% 26,404 3.00 250,986 3.85
4.00% to 4.99% 3,213,652 4.22 3,925,295 4.26
5.00% to 5.99% 48,216,444 5.38 49,200,044 5.39
6.00% to 6.99% 15,121,692 6.24 17,083,022 6.20
7.00% to 7.99% 11,634,441 7.00 12,154,898 7.00
8.00% and greater 516,600 9.75 485,819 9.75
- -------------------------------------------------------------------------------------------------------------
$78,732,025 5.77% 83,107,855 5.76%
=============================================================================================================
</TABLE>
Certificate of deposit accounts at March 31, 1998 and 1997 are
scheduled to mature as follows:
<TABLE>
=============================================================================================================
<CAPTION>
1998 1997
---------------------- ----------------------
Percent Percent
Amount of total Amount of total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $42,429,774 53.9% 36,334,368 43.7%
Second year 21,282,173 27.0 22,832,417 27.5
Third year 6,832,276 8.7 16,693,320 20.1
Fourth year 4,563,009 5.8 4,948,760 5.9
Thereafter 3,624,793 4.6 2,298,990 2.8
- -------------------------------------------------------------------------------------------------------------
$78,732,025 100.0% 83,107,855 100.0%
=============================================================================================================
</TABLE>
Interest expense on savings deposits by type is summarized as
follows:
<TABLE>
===============================================================================================
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Checking and money market demand $ 342,468 320,394 362,174
Passbook 663,498 545,808 562,264
Certificates of deposit 4,627,726 4,815,982 4,804,390
- -----------------------------------------------------------------------------------------------
$5,633,692 5,682,184 5,728,828
===============================================================================================
(Continued)
</TABLE>
66
<PAGE> 69
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(12) Borrowed Money
Borrowed money at March 31, 1998 and 1997 is summarized as
follows:
<TABLE>
=========================================================================================================
<CAPTION>
1998 1997
----------------------- ----------------------
Weighted Weighted
average average
interest interest
Amount rate Amount rate
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Note payable to bank $ 1,678,694 2.25% $ 1,112,964 2.25%
Advances from the FHLB:
Due in 1998 - - 7,000,000 5.69
Due in 2001 10,000,000 5.33 - -
Due in 2002 71,000,000 5.35 56,000,000 5.30
Due in 2008 23,000,000 5.22 - -
ESOP debt - - 135,840 9.50
- ---------------------------------------------------------------------------------------------------------
$105,678,694 5.27% $64,248,804 5.30%
=========================================================================================================
</TABLE>
The note payable to bank, which is tied to average collected
funds of EMC on deposit at such bank, is due April 23, 1998.
Investment securities with an amortized cost of $4,003,702 and a
market value of $4,012,188 secure the note payable to bank at
March 31, 1998.
FHLB advances are secured under a blanket agreement which assigns
all FHLB stock, certain investment securities, and mortgage loans
equal to 150% of the outstanding advances balance. Investment
securities with an amortized cost of $65,261,913 and a market
value of $65,082,326 are pledged to secure advances from the FHLB
at March 31, 1998.
In 1993, the ESOP borrowed $266,000 to finance the acquisition of
the stock to be held in trust for future allocation to eligible
participants. The debt of the ESOP was guaranteed by ESB and was
reflected as a liability in the consolidated balance sheet. In
connection with the Conversion, an additional 119,806 shares of
Equality's stock was purchased by the ESOP using funds loaned by
Equality. In addition, the ESOP debt to another financial
institution was repaid with additional funds loaned to the ESOP
by Equality.
(13) Income Taxes
Prior to 1997, if certain conditions were met, savings and loan
associations and savings banks were allowed special bad debt
deductions in determining taxable income based on either
specified experience formulas or on a percentage of taxable
income before such deduction. Bad debt deductions in excess of
actual losses were tax-preference items, and were subject to a
minimum tax. The Company used the percentage of taxable income
method for the year ended March 31, 1996 in determining the bad
debt deduction for tax purposes.
(Continued)
67
<PAGE> 70
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The special bad debt deduction accorded thrift institutions is
covered under Section 593 of the Internal Revenue Code (IRC). On
August 20, 1996, the Small Business Job Protection Act of 1996
(the Act) was signed into law. The Act included the repeal of
certain portions of Section 593 effective for tax years beginning
after December 31, 1995. As a result, ESB is no longer allowed a
percentage method bad debt deduction. The repeal of the thrift
reserve method generally requires thrift institutions to
recapture into income the portion of tax bad debt reserves
accumulated since 1987 (base year reserve). The recapture will
generally be taken into income ratably over six tax years.
However, if ESB meets a residential loan requirement for tax
years ending in 1998 and 1997, recapture of the reserve can be
deferred until the tax year ending March 31, 1999. At March 31,
1998, ESB had bad debts deducted for tax purposes in excess of
the base year reserve of approximately $245,000. ESB has
recognized a deferred income tax liability for this amount.
Certain events covered by IRC Section 593(e), which was not
repealed, will trigger a recapture of the base year reserve. The
base year reserve of thrift institutions would be recaptured if a
thrift ceases to qualify as a "bank" for federal income tax
purposes. The base year reserves of thrift institutions also
remain subject to income tax penalty provisions which, in
general, require recapture upon certain stock redemptions of, and
excess distributions to, stockholders. At March 31, 1998,
retained earnings included approximately $2.9 million of base
year reserves for which no deferred federal income tax liability
has been recognized.
The composition of income tax expense for 1998, 1997, and 1996 is
as follows:
<TABLE>
===============================================================================================
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $613,427 187,974 273,713
State 69,277 23,752 19,111
- -----------------------------------------------------------------------------------------------
Total current 682,704 211,726 292,824
Deferred 94,964 91,733 124,958
- -----------------------------------------------------------------------------------------------
Total income tax expense $777,668 303,459 417,782
===============================================================================================
</TABLE>
Applicable income taxes for financial reporting purposes differ
from the amount computed by applying the statutory federal income
tax rate of 34% for the reasons noted in the table below:
<TABLE>
===============================================================================================
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory federal income tax rate $685,724 274,799 364,221
State income tax, net of federal tax benefit 45,723 15,676 12,613
Other, net 46,221 12,984 40,948
- -----------------------------------------------------------------------------------------------
$777,668 303,459 417,782
===============================================================================================
(Continued)
</TABLE>
68
<PAGE> 71
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The components of deferred tax assets and deferred tax
liabilities at March 31, 1998 and 1997 were as follows:
<TABLE>
===============================================================================================
<CAPTION>
1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
General loan loss allowance $ 138,903 105,050
Deferred compensation 15,671 9,409
Deferred loan fees 5,769 13,728
Excess servicing gains 15,008 20,026
Available for sale securities market valuation - 325,762
Other 7,575 9,204
- -----------------------------------------------------------------------------------------------
Total deferred tax assets 182,926 483,179
- -----------------------------------------------------------------------------------------------
Deferred tax liabilities:
Tax depreciation in excess of that recorded for
book purposes 248,027 246,172
FHLB stock dividends 154,162 154,162
Allowance for loan losses in excess of base-year reserve 83,156 81,858
Mortgage servicing rights 306,036 186,616
Available for sale securities market valuation 250,221 -
Other 13,163 10,798
- -----------------------------------------------------------------------------------------------
Total deferred tax liabilities 1,054,765 679,606
- -----------------------------------------------------------------------------------------------
Net deferred tax liability $ 871,839 196,427
===============================================================================================
</TABLE>
The ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in
which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities,
projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical
taxable income and projections for future taxable income over the
periods which the deferred tax assets are deductible, management
believes it is more likely than not that Equality will realize
the benefits of these temporary differences at March 31, 1998
and, therefore, has not established a valuation reserve.
(14) Employee Stock Ownership Plan, Stock Option and Incentive
Plan, Management Recognition Plan, Officers Retirement
Plan, and 401(k) Plan
During 1993, the Company established an employee stock ownership
plan for the exclusive benefit of participating employees.
Employees age 21 or older who have completed one year of service
are eligible to participate. The ESOP is to be funded by
contributions made in cash or common stock.
(Continued)
69
<PAGE> 72
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In connection with the mutual holding company conversion, the
ESOP purchased 26,600 shares (3.2% of total shares issued) of the
Association's common stock at a subscription price of $10.00 per
share using funds loaned by a third party. As a result of the
Conversion, these ESOP shares were converted into 79,065 shares
based on the Exchange Ratio. In connection with the Conversion,
the ESOP purchased an additional 119,806 shares of common stock
at a subscription price of $10.00 per share using funds loaned by
Equality. During 1998, the third party loan was repaid and added
to the Equality loan which is being repaid with level principal
payments over 10 years. All shares are held in a suspense
account for allocation among the participants as the loan is
repaid. Shares released from the suspense account are allocated
among the participants based upon their pro rata annual
compensation. The purchases of the shares by the ESOP were
recorded by Equality as unearned ESOP shares in a contra equity
account. As ESOP shares are committed to be released to
compensate employees, the contra equity account is reduced and
Equality recognizes compensation expense equal to the fair market
value of the shares committed to be released. Dividends on
allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on unallocated ESOP shares are recorded as a
reduction of debt. Compensation expense related to the ESOP was
$67,142, $28,544, and $32,577 for 1998, 1997, and 1996,
respectively.
The ESOP shares as of March 31, 1998 are as follows:
<TABLE>
================================================================================
<S> <C>
Allocated shares 45,014
Unreleased shares 153,857
- --------------------------------------------------------------------------------
Total ESOP shares 198,871
================================================================================
Fair value of unreleased shares 2,365,551
================================================================================
</TABLE>
In connection with the mutual holding company conversion,
Equality adopted the 1993 Stock Option and Incentive Plan which
provided for the granting of options for a maximum of 38,000
shares of common stock at $10.00 per share to directors and key
officers. As a result of the Conversion, the stock options and
the price per share were converted based on the Exchange Ratio.
Equality accounts for stock-based compensation under the stock
option plan in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees and,
accordingly, recognizes no compensation expense as the exercise
price of employee stock options equals the market price of the
underlying stock on the date of grant.
(Continued)
70
<PAGE> 73
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Information on Equality's stock options are summarized as
follows:
<TABLE>
====================================================================================================
<CAPTION>
Per share
Average price option
Shares per share price range
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding and exercisable
at March 31, 1995 71,932 $3.36 3.36
Granted 41,019 4.37 4.37
- ----------------------------------------------------------------------------------------------------
Outstanding and exercisable
at March 31, 1996 112,951 3.73 3.36 - 4.37
Granted - - -
- ----------------------------------------------------------------------------------------------------
Outstanding and exercisable
at March 31, 1997 112,951 3.73 3.36 - 4.37
Exercised 19,953 3.45 3.36 - 4.37
- ----------------------------------------------------------------------------------------------------
Outstanding and exercisable
at March 31, 1998 92,998 3.79 3.36 - 4.37
====================================================================================================
</TABLE>
Pro forma information regarding net income and earnings per share is required
by Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, and has been determined as if Equality had accounted
for its employee stock options under the fair value method. The fair value of
these options was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions for 1996;
risk-free interest rate of 8.15%, dividend yield of 1.90%, volatility factor
of the expected market price of Equality's common stock of 15.00%, and a
weighted-average expected life of the options of 7.6 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions
including the expected stock price volatility. Because Equality's employee
stock options have characteristics significantly different from those traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable measure of the fair
value of its employee stock options.
The following represents pro forma disclosures:
<TABLE>
================================================================================
<S> <C>
Net income:
As reported $653,456
Pro forma 618,185
Net income per share:
As reported:
Basic 0.27
Diluted 0.27
Pro forma:
Basic 0.26
Diluted 0.26
================================================================================
(Continued)
</TABLE>
71
<PAGE> 74
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Also in conjunction with the mutual holding company conversion
Equality established the 1993 Management Recognition Plan which
acquired 11,400 shares (2.7% of total shares issued) of common
stock at a subscription price of $10.00 per share. The MRP
provides that such common stock can be issued to employees in key
management positions to encourage such key employees to remain
with the company. As of December 31, 1995, participants had
become fully vested and the shares of stock were released to the
appropriate participants. Compensation expense related to
vesting in the MRP totaled $28,500 during 1996.
Equality maintains a retirement plan for certain officers. Upon
retirement at age 65, each participating officer will receive
$50,000 on an annual basis for a period of 10 years following
retirement. Benefits to be paid for future service will be
accrued over the remaining period of service of each officer.
The plan has been funded through the purchase of life insurance
contracts on each officer. The cash surrender value of the life
insurance contracts totaled $86,597 as of March 31, 1998, and is
included in other assets in the consolidated balance sheet.
Expense related to the plan was $39,271 for the year ended March
31, 1998.
Equality sponsors a defined contribution plan qualifying under
Section 401(k) of the Internal Revenue Code. Participants may
designate up to 15% of their annual compensation as their
contribution to the plan, which is partially matched by Equality.
Expense included in the consolidated statements of income totaled
approximately $27,064, $21,585, and $17,259, for 1998, 1997, and
1996, respectively.
(15) Disclosures About Financial Instruments
Equality is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs
of its customers. These financial instruments, which are solely
made up of commitments to extend credit, may involve, to varying
degrees, elements of credit risk in excess of the amount recognized
in the consolidated balance sheets. The contractual amounts of
these instruments reflect the extent of involvement Equality has in
this particular class of financial instruments.
Equality's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit is represented by the contractual amount of these
instruments. Equality uses the same credit policies in making
commitments as they do for financial instruments recorded in the
consolidated balance sheets.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee.
Since certain of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Equality evaluates each
customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by Equality upon
extension of credit, is based on management's credit evaluation
of the counterparty.
At March 31, 1998, Equality had outstanding commitments to
originate fixed rate mortgage loans of $3.6 million (at interest
rates ranging from 6.875% to 8.0%). Commitments to extend credit
may involve elements of interest rate risk in excess of the
amount recognized in the consolidated balance sheets. Interest
rate risk on commitments to extend credit results from the
possibility that interest rates may have moved unfavorably since
the time the commitment was made.
(Continued)
72
<PAGE> 75
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
A summary of the carrying amounts and fair values of Equality's
financial instruments at March 31, 1998 and 1997 is as follows:
<TABLE>
==============================================================================================================
<CAPTION>
1998 1997
---------------------- ---------------------
Carrying Fair Carrying Fair
Assets amount value amount value
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash, primarily interest-bearing
demand deposits $ 1,070,538 1,070,538 1,037,199 1,037,199
Interest-bearing deposits 1,378,000 1,407,542 3,819,744 3,853,575
Investment securities 71,497,156 71,424,156 74,971,394 74,847,807
Mortgage-backed securities 58,512,089 58,512,089 14,954,025 14,954,025
Loans receivable 108,415,421 109,775,798 95,927,983 94,395,483
Stock in Federal Home Loan Bank 5,200,000 5,200,000 3,350,000 3,350,000
Accrued interest receivable 1,696,097 1,696,097 1,748,784 1,748,784
- --------------------------------------------------------------------------------------------------------------
$247,769,301 249,086,220 195,809,129 194,186,873
==============================================================================================================
Liabilities
- --------------------------------------------------------------------------------------------------------------
Savings deposits $119,301,376 119,794,942 122,982,954 122,925,487
Accrued interest payable on savings
deposits 134,203 134,203 134,599 134,599
Borrowed money 105,678,694 105,540,078 64,248,804 63,984,429
Advance payments by borrowers for
taxes and insurance 105,950 105,950 86,776 86,776
- --------------------------------------------------------------------------------------------------------------
$225,220,223 225,575,173 187,453,133 187,131,291
==============================================================================================================
</TABLE>
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate such value:
Cash, Primarily Interest-Bearing Demand Deposits
For cash, primarily interest-bearing demand deposits, the
carrying amount is a reasonable estimate of fair value, as such
instruments reprice in a short time period.
Interest-Bearing Deposits
The fair value of interest-bearing deposits is based on the
discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of
similar remaining maturity.
Investment and Mortgage-Backed Securities
Fair values are based on quoted market prices or dealer quotes.
Loans Receivable
Fair values are estimated for portfolios of loans receivable with
similar financial characteristics. Loans are segregated by type
such as residential, commercial, and consumer. Each loan
receivable category is
(Continued)
73
<PAGE> 76
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
further segmented into fixed and adjustable rate interest terms.
The fair value of loans receivable is calculated by discounting
scheduled cash flows through the estimated maturity using
estimated market discount rates equal to rates at which loans,
similar in type, would be originated at March 31, 1998.
Estimated maturities are based upon the average remaining
contractual lives for each loan receivable classification.
Stock in Federal Home Loan Bank
Fair value is equal to cost, which represents redemption value.
Accrued Interest Receivable, Accrued Interest Payable on
Savings Deposits, and Advance Payments by Borrowers for
Taxes and Insurance
For accrued interest receivable, accrued interest payable on
savings deposits, and advance payments by borrowers for taxes and
insurance, the carrying amount is a reasonable estimate of fair
value because of the short maturity for these financial
instruments.
Savings Deposits
The fair value of savings deposits with no stated maturity is
equal to the amount payable on demand. The fair value of time
deposits is based on the discounted value of contractual cash
flows. The discount rate is estimated using the rates currently
offered for savings deposits of similar remaining maturities.
Borrowed Money
The fair value of borrowed money is based on the discounted value
of contractual cash flows. The discount rate is estimated using
rates on borrowed money with similar remaining maturities.
The fair value estimates provided are made at a point in time
based on market information and information about the financial
instruments. Because no market exists for a portion of
Equality's financial instruments, fair value estimates are based
on judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the fair value
estimates.
(16) Contingencies
The Company is involved in various litigation arising in the
ordinary course of business. In the opinion of management, at
the present time, disposition of the suits and claims will not
have a material effect on the financial position of the Company.
(Continued)
74
<PAGE> 77
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(17) Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial data for the year ended March 31,
1998 and 1997 is as follows:
<TABLE>
================================================================================================================
<CAPTION>
Quarter ended
June 30, September 30, December 31, March 31,
1997 1997 1997 1998
- ----------------------------------------------------------------------------------------------------------------
(thousands of dollars except per share data)
<S> <C> <C> <C> <C>
Total interest income $ 3,407 3,530 3,863 3,880
Total interest expense (2,304) (2,338) (2,468) (2,615)
- ----------------------------------------------------------------------------------------------------------------
Net interest income 1,103 1,192 1,395 1,265
Provision for losses on loans - (24) - (92)
Noninterest income 555 825 735 1,150
Noninterest expense (1,350) (1,442) (1,529) (1,766)
- ----------------------------------------------------------------------------------------------------------------
Income before income
tax expense 308 551 601 557
Income tax expense 120 215 237 206
- ----------------------------------------------------------------------------------------------------------------
Net income $ 188 336 364 351
- ----------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.07 0.14 0.15 0.15
Diluted 0.07 0.14 0.15 0.15
================================================================================================================
<CAPTION>
Quarter ended
June 30, September 30, December 31, March 31,
1996 1996 1996 1997
- ----------------------------------------------------------------------------------------------------------------
(thousands of dollars except per share data)
<S> <C> <C> <C> <C>
Total interest income $ 3,265 3,492 3,388 3,465
Total interest expense (2,229) (2,352) (2,304) (2,227)
- ----------------------------------------------------------------------------------------------------------------
Net interest income 1,036 1,140 1,084 1,238
Provision for losses on loans - - - (50)
Noninterest income 723 529 752 565
Noninterest expense (1,326) (2,201) (1,344) (1,338)
- ----------------------------------------------------------------------------------------------------------------
Income before income
tax expense 433 (532) 492 415
Income tax expense (benefit) 169 (207) 192 149
- ----------------------------------------------------------------------------------------------------------------
Net income (loss) $ 264 (325) 300 266
- ----------------------------------------------------------------------------------------------------------------
Earnings (loss) per share:
Basic $ 0.11 (0.13) 0.12 0.11
Diluted 0.11 (0.13) 0.12 0.11
================================================================================================================
(Continued)
</TABLE>
75
<PAGE> 78
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(18) Condensed Financial Information of Parent Company
The condensed balance sheet as of March 31, 1998 and the related
condensed statements of income and cash flows from the date of
inception through March 31, 1998 of the Company are as follows:
<TABLE>
Condensed Balance Sheet
=================================================================================================
<S> <C>
Assets
- -------------------------------------------------------------------------------------------------
Cash $ 962,144
Investment in subsidiary 24,446,813
Other assets 423,051
- -------------------------------------------------------------------------------------------------
Total assets $ 25,832,008
=================================================================================================
Liabilities and Stockholders' Equity
- -------------------------------------------------------------------------------------------------
Other liabilities $ (5,807)
Stockholders' equity 25,837,815
- -------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 25,832,008
=================================================================================================
Condensed Statement of Income
=================================================================================================
For the four
months ended
March 31, 1998
- -------------------------------------------------------------------------------------------------
Revenue - interest income $ 34,007
- -------------------------------------------------------------------------------------------------
Expenses:
Legal 12,183
Other 13,393
- -------------------------------------------------------------------------------------------------
25,576
- -------------------------------------------------------------------------------------------------
Income before equity in undistributed
income of subsidiary 8,431
Equity in undistributed income of subsidiary 486,138
- -------------------------------------------------------------------------------------------------
Net income $ 494,569
=================================================================================================
(Continued)
76
<PAGE> 79
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
=================================================================================================
Condensed Statement of Cash Flows
=================================================================================================
For the four
months ended
March 31, 1998
- -------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 494,569
Adjustments to reconcile net income to
net cash used in operating activities:
Equity in undistributed income of subsidiary (486,138)
Other, net (86,454)
- -------------------------------------------------------------------------------------------------
Net cash used in operating activities (78,023)
- -------------------------------------------------------------------------------------------------
Cash flows from investing activities - investment in subsidiary (10,000,000)
- -------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from stock offering 11,112,371
Proceeds from exercise of stock options 68,916
Cash dividends paid (141,120)
- -------------------------------------------------------------------------------------------------
Net cash provided by financing activities 11,040,167
- -------------------------------------------------------------------------------------------------
Net increase in cash 962,144
Cash at beginning of period -
- -------------------------------------------------------------------------------------------------
Cash at end of period $ 962,144
=================================================================================================
</TABLE>
77
<PAGE> 80
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- -------------------------------------------------
The following table sets forth certain information with respect to the
persons who currently serve as members of the Board of Directors of Equality.
<TABLE>
<CAPTION>
Age at Position Held Director Term
Name June 29, 1998 With ESB Since Expires
---- ------------- -------- ----- -------
<S> <C> <C> <C> <C>
LeRoy C. Crook 89 Director 1965 1998
Kenneth J. Hrdlicka 55 Director 1983 1998
Michael J. Walsh 54 Director 1986 1998
Richard C. Fellhauer 56 Director, Chairman of the Board, President 1973 1999
and Chief Executive Officer
Daniel C. Aubuchon 50 Director 1981 1999
Stacey W. Braswell 54 Director 1982 1999
Berenice J. Mahacek 64 Director 1982 2000
Charles J. Wolter 80 Director 1989 2000
Michael A. Deelo 42 Director, Executive Vice President and 1994 2000
Chief Financial Officer
</TABLE>
The business experience for the past five years of each of the current
directors is as follows:
LeRoy C. Crook, now retired, was a Vice President of Vess Bottling
Company.
Kenneth J. Hrdlicka has been the Director of Business Development of
Anheuser Busch, Inc. for more than the past five years.
Michael J. Walsh has been a Vice President of ECC for more than the
past five years.
Richard C. Fellhauer has been affiliated with ESB since 1966 and
assumed the position of Chairman of the Board, President and Chief Executive
Officer in 1982.
Daniel C. Aubuchon has been a partner with the law firm of Aubuchon,
Raniere & Lally, P.C. for more than the past five years.
Stacey W. Braswell has been a principal stockholder and Vice President
of Blaine-Braswell and Associates, an insurance agency, for more than the
past five years.
Berenice J. Mahacek has been retired since 1996. Prior to that time
she was a Senior Vice President of ESB.
78
<PAGE> 81
Charles J. Wolter has been the President of Realty Net - Wolter Real
Estate for more than the past five years.
Michael A. Deelo has been an Executive Vice President and Chief
Financial Officer of ESB sin Prior to that time, he served as Vice President
and Chief Financial Officer of ESB.
Associate Directors of ESB
ESB also has four non-voting Associate Directors who are appointed each
year by the Board of Directors. The current Associate Directors are Seymour
Bailis, James W. Caulfield, Leonard 0. Wolter and John L. Tacke. While the
Associate Directors attend the Board of Directors meetings and provide
periodic advice to the Board, they do not vote on any matters presented to
the Board for a vote.
ITEM 10. EXECUTIVE COMPENSATION
- -------------------------------
The following tables summarize compensation information for the fiscal
years ended March 31, 1998, 1997 and 1996 with respect to ESB's President and
Chief Executive Officer. No other officers of ESB received compensation in
excess of $100,000 during the fiscal year ended March 31, 1998.
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
---------------------------------------- ------------------------
Securities
Other Annual Restricted Underlying All other
Principal Position Year Salary Bonus Compensation<F1> Stock Awards Options Compensation<F2>
------------------ ---- ------ ----- ---------------- ------------ ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard C. Fellhauer
President & Chief 1998 $138,000 - $10,200 - - $3,000
Executive Officer
1997 141,000 - 6,700 - - 3,300
1996 125,000 $10,000 6,500 - - 4,700
<FN>
- --------------------
<F1> Consisting solely of directors' fees.
<F2> Represents the dollar value of matching and discretionary profit
sharing contributions pursuant to ESB's tax-qualified thrift plan and
the Employee Stock Ownership Plan (the "ESOP") contributions (based
on the value of the Common Stock on the date the Common Stock was
allocated) made by ESB for the fiscal years ended March 31, 1996,
1997 and 1998.
</TABLE>
The following table sets forth information regarding the fiscal
year-end values of unexercised options under the 1993 Stock Option and
Incentive Plan held by the named executive officer.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End<F1>
---------------------------- ----------------------------
Shares Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard C. Fellhauer 7,505 $90,173 29,947 - $344,803 -
President & Chief
Executive Officer
<FN>
- --------------------
<F1> This amount represents the difference between the market value of one
share of ESB's Common Stock on March 31, 1998 ($15.375) and the
option exercise price times the total number of shares subject to
exercisable or unexercisable options.
</TABLE>
79
<PAGE> 82
Employment Agreement
On September 30, 1997, Equality entered into an employment agreement
with Richard C. Fellhauer, President and Chief Executive Officer of
Equality. The employment agreement provides that Mr. Fellhauer will be
employed for a 36-month term. The term of the agreement may be extended for
an additional twelve-full-calendar-month period by action of the Board of
Directors of Equality annually after the Commencement Date.
Under the employment agreement, the base salary of Mr. Fellhauer will
be $132,500 per year. The Board of Directors of Equality will review Mr.
Fellhauer's base salary at least once a year and may increase that base
salary. In addition to base salary, the agreement provides for participation
in any medical, pension, profit-sharing, stock-based incentive plans or other
retirement plans, and fringe and retirement benefits offered by ESB to its
employees. Mr. Fellhauer will also be entitled to participate, on an
equitable basis, with other key management personnel of ESB in discretionary
bonuses authorized and declared by the Board of Directors of ESB.
The agreement may be terminated at any time by the Board of Directors
of Equality for conduct not constituting termination for "just cause" (e.g.,
personal dishonesty, incompetence, willful misconduct, and breach of
fiduciary duty involving personal profit, intentional failure to perform
stated duties, willful violation of any law, rule or regulation, final
cease-and-desist order or any material breach of the employment agreement),
or by Mr. Fellhauer upon 90 days written notice to Equality, as the case
may be. In the event the agreement is terminated by the Board of Directors
without just cause, Equality is obligated to pay Mr. Fellhauer a severance
payment equal to the remaining amount due under the agreement. In the event
Mr. Fellhauer terminates the agreement, Equality will have no further
obligations to Mr. Fellhauer for compensation and benefits under the terms
of the agreement. In the event the agreement is terminated for just cause,
Equality is obligated to pay Mr. Fellhauer his compensation and benefits
through the date of termination of employment.
If Mr. Fellhauer is terminated or if he terminates employment for
"good reason" (e.g., due to a reduction in his duties, responsibilities or
compensation after a change in control) within one year after a "change in
control" of Equality, then Equality shall pay to Mr. Fellhauer a lump sum
equal to 2.99 times his "Base Amount," as that term is defined in Section
28OG(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code").
For purposes of the Employment Agreement, a "change in control" shall
be deemed to have occurred if: (a) a third person, including a "group" as
defined in Section 13(d)(3) of the Securities Exchange Act of 1934 (as in
effect on the date hereof), becomes the beneficial owner of shares of
Equality having 25% or more of the total number of votes that may be cast for
the election of directors of Equality, including for this purpose any shares
beneficially owned by such third person or group as of the date hereof, or
(b) as a result of, or in connection with, any cash tender or exchange offer
or other business combination, sale of assets or contested election, or any
combination of the foregoing transactions (a "Transaction"), the persons who
were directors of Equility before the Transaction shall cease to constitute a
majority of the Board of Directors of Equality or any successor to Equality.
(In the event of any reorganization involving Eqality in a transaction
initiated by Equality in which the shareholders of Equality immediately prior
to such reorganization become the shareholders of a successor or ultimate
parent company of Equality resulting from such reorganization and the persons
who were directors of Equality immediately prior to such reorganization
constitute a majority of the Board of Directors of such successor or ultimate
parent no "change in control" shall be deemed to have taken place solely by
reason of such reorganization, notwithstanding the fact that Equality may
have become the wholly-owned subsidiary of another company in such
reorganization and members of the Board of Directors of Equality may have
become members of the Board of Directors of such successor company, and
thereafter the term "Company" for purposes of this paragraph shall refer to
such successor or or ultimate parent company.); or (c) a third person,
including a "group" as defined in Section 13(d)(3) of the Securities Exchange
Act of 1934 (as in effect on the date hereof), acquires control, as defined
in 12 C.F.R. Section 574.4, or any successor regulation, of Equality that would
require the filing of an application for acquisition of control or notice of
change in control in a manner set forth in 12 C.F.R. Section 574.3, or any
successor regulation.
The agreement with Mr. Fellhauer also includes a covenant which will
limit his ability under certain circumstances to compete with the business of
Equality for a period of three years following the termination of his
employment with Equality.
80
<PAGE> 83
Directors' Fees
Members of the Board of Directors of ESB received a fee of $600 for
each Board meeting attended. No fees are paid for attending committee
meetings of the Board. Associate directors of ESB received $500 for each
Board meeting attended. There are no directors' fees paid for attendance at
meetings of Equality.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
The following table sets forth, as of May 31, 1998, certain information
as to those persons known by Equality to be the beneficial owners of more
than 5 % of the outstanding Equality Bancorp, Inc. common stock.
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent of C
Beneficial Owner Beneficial Ownership<F1> Stock Outstanding
------------------- ------------------------ -----------------
<S> <C> <C>
Equality Employee Stock Ownership Plan Trust 198,871 7.94%
4131 South Grand Boulevard
St. Louis, Missouri 63118-3464
<FN>
- --------------------
<F1> Unless otherwise indicated, the nature of beneficial ownership for
shares shown in this column is sole voting and investment power.
</TABLE>
The following table sets forth, as of May 31, 1998, the number of
Equality Bancorp, Inc. common stock beneficially owned by each director, the
executive officer named in the Summary Compensation Table above (who is also
a director), and all directors and executive officers of Equality as a group.
<TABLE>
<CAPTION>
Amount and Nature of Percent of Common
Name of Beneficial Owner Beneficial Ownership<F1> Stock Outstanding
------------------------ ------------------------ -----------------
<S> <C> <C>
Richard C. Fellhauer 103,393 4.08%<F2>
Berenice J. Mahacek 49,151 1.96%<F2>
Daniel C. Aubuchon 13,958 <F*>
Stacey W. Braswell 20,746 <F*>
Charles J. Wolter 27,738 <F*>
LeRoy C. Crook 6,277 <F*>
Kenneth J. Hrdlicka 16,959 <F*>
Michael J. Walsh 42,817 1.71%<F2>
Michael A. Deelo 78,856 3.12%<F2>
Leonard 0. Wolter 12,671 <F*>
All directors and executive officers
as a group (10 persons) 372,566 14.45%<F3>
<FN>
- --------------------
<F*> Less than 1%
<F1> Unless otherwise indicated, the nature of beneficial ownership for
shares shown in this column is sole voting and investment power. The
beneficially owned shares set forth in this column include the
following common stock which the beneficial owner has the right to
acquire within sixty (60) days through the exercise of stock options:
Fellhauer: 29,947; Mahacek: 8,619; Braswell: 1,129; Crook: 1,129;
Hrdlicka: 1,129; Walsh: 3,745; Deelo: 20,212; L. Wolter: 6,717; and
all directors and officers as a group.
<F2> Percentage is calculated on a partially diluted basis, assuming only
the exercise of stock options by such individual which are
exercisable within 60 days.
<F3> Percentage is calculated on a fully diluted basis, assuming the
exercise of all stock options which are exercisable within 60 days.
</TABLE>
81
<PAGE> 84
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
ESB has followed the policy of offering residential mortgage loans for
the financing of personal residences, share loans and consumer loans to its
officers, directors and employees. The loans are made in the ordinary course
of business and are also made on substantially the same terms and conditions,
including interest rate and collateral, as those of comparable transactions
prevailing at the am with other persons, and do not include more than the
normal risk of collectibility or present other unfavorable features. As of
March 31, 1998, approximately $1.5 million of loans were outstanding from ESB
to executive officers and directors of ESB and their affiliates.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
<TABLE>
<S> <C>
(a) Exhibits
3(i) Articles of Incorporation, Certificate of Incorporation
of Registrant as filed in Delaware on May 14, 1997
(Incorporated by reference to the Registrant's
Registrations Statement on Form S-1, as amended (File
No. 333-30469), as originally filed with the SEC on June
30, 1997)
3(ii) Bylaws of Registrant as adopted by the Board of Directors
of Registrant on June 20, 1997 (Incorporated by reference
to the Registrant's Registrations Statement on Form S-1,
as amended (File No. 333-30469), as originally filed with
the SEC on June 30, 1997)
10.1 Equality Savings and Loan Association 1993 Stock Option and
Incentive Plan (Incorporated by reference to the
Registrant's Registrations Statement on Form S-1, as
amended (File No. 333-30469), as originally filed with the
SEC on June 30, 1997)
10.2 Credit Agreement between Registrant and Equality Savings and Loan
Association, F.A. Employee Stock Ownership Plan
(Incorporated by reference to the Registrant's
Registrations Statement on Form S-1, as amended (File No.
333-30469), as originally filed with the SEC on June 30,
1997)
10.3 Equality Bancorp, Inc. 1997 Stock Option and Incentive Plan
(Incorporated by reference to the Registrant's Registrations
Statement on Form S-1, as amended (File No. 333-30469), as
originally filed with the SEC on June 30, 1997)
10.4 Equality Bancorp, Inc. 1997 Management Development and
Recognition Plan (Incorporated by reference to the Registrant's
Registrations Statement on Form S-1, as amended (File No.
333-30469), as originally filed with the SEC on June 30, 1997)
10.5 Form of Employment Agreement to be entered into between Equality
Bancorp, Inc. and Richard C. Fellhauer (Incorporated by
reference to the Registrant's Registrations Statement on
Form S-1, as amended (File No. 333-30469), as originally
filed with the SEC on June 30, 1997)
10.6 Form of Employment Agreement to be entered into between Equality
Bancorp, Inc. and Michael A. Deelo (Incorporated by
reference to the Registrant's Registrations Statement on
Form S-1, as amended (File No. 333-30469), as originally
filed with the SEC on June 30, 1997)
10.7 Form of Employment Agreement to be entered into between Equality
Bancorp, Inc. and Leonard O. Wolter (Incorporated by
reference to the Registrant's Registrations Statement
82
<PAGE> 85
on Form S-1, as amended (File No. 333-30469), as originally
filed with the SEC on June 30, 1997)
21 List of subsidiaries of the Registant (Incorporated by
reference to the Registrant's Registrations Statement on
Form S-1, as amended (File No. 333-30469), as originally
filed with the SEC on June 30, 1997)
23(i) Consent of KPMG LLP
23(ii) Consent of Rubin, Brown, Gornstein & Co. LLP
27(i) Financial Data Schedule - March 31, 1998
27(ii) Financial Data Schedule - March 31, 1997
27(iii) Financial Data Schedule - March 31, 1996
99 Independent Auditors' Report of Rubin, Brown, Gornstein
& Co. LLP
</TABLE>
(b) Form 8-K
No reports on Form 8-K were filed during the last quarter of the
fiscal year covered by this Form 10-KSB.
83
<PAGE> 86
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, as amended,
the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EQUALITY BANCORP, INC.
Date: August 6, 1998 By: /s/ Richard C. Fellhauer
----------------------------------------------
Richard C. Fellhauer, Chairman of the
Board, President, Chief Executive
Officer and Director
In accordance with the Exchange Act, as amended, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities indicated on August 6, 1998.
<TABLE>
<S> <C>
/s/ Richard C. Fellhauer /s/ Michael A. Deelo
------------------------------------------------ ------------------------------------------------
Richard C. Fellhauer, Chairman of the Board, Michael A. Deelo, Executive Vice President,
President, Chief Executive Officer, and Director Chief Financial Officer and Director (Principal
(Principal Executive Officer) Financial Officer and Principal Accounting
Officer)
/s/ Daniel C. Aubuchon /s/ Stacey W. Braswell
------------------------------------------------ ------------------------------------------------
Daniel C. Aubuchon, Director Stacey W. Braswell, Director
/s/ LeRoy C. Crook /s/ Kenneth J. Hrdlicka
------------------------------------------------ ------------------------------------------------
LeRoy C. Crook, Director Kenneth J. Hrdlicka, Director
/s/ Berenice J. Mahacek /s/ Michael J. Walsh
------------------------------------------------ ------------------------------------------------
Berenice J. Mahacek, Director Michael J. Walsh, Director
/s/ Charles J. Wolter
------------------------------------------------
Charles J. Wolter, Director
</TABLE>
84
<PAGE> 1
Exhibit 23(i)
Independent Auditors' Consent
The Board of Directors
Equality Bancorp, Inc.:
We consent to incorporation by reference in the registration statement No.
333-43655 on Form S-8 of Equality Bancorp, Inc. (Equality) of our report
dated May 8, 1998, relating to the consolidated balance sheets of Equality
Bancorp, Inc. and subsidiaries as of March 31, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, cash flows, and
comprehensive income for each of the years in the three-year period ended
March 31, 1998, which report appears in the March 31, 1998 annual report on
Form 10-KSB of Equality.
/s/KPMG LLP
St. Louis, Missouri
May 3, 1999
<PAGE> 1
Exhibit 23(ii)
[letterhead RBG & Co.]
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion of our report dated April 20, 1998, with respect
to the financial statements of Equality Mortgage Corporation, included as an
exhibit in Equality Bancorp, Inc.'s 10-KSB.
/s/ Rubin, Brown, Gornstein & Co. LLP
May 3, 1999
St. Louis, Missouri
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,071
<INT-BEARING-DEPOSITS> 1,378
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 127,409
<INVESTMENTS-CARRYING> 2,600
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<TOTAL-ASSETS> 255,550
<DEPOSITS> 119,301
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0
0
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<INTEREST-INCOME-NET> 4,955
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<TABLE> <S> <C>
<ARTICLE> 9
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
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0
0
<COMMON> 836
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<INTEREST-OTHER> 232
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<INTEREST-DEPOSIT> 5,682
<INTEREST-EXPENSE> 9,112
<INTEREST-INCOME-NET> 4,498
<LOAN-LOSSES> 50
<SECURITIES-GAINS> 7
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<INCOME-PRETAX> 808
<INCOME-PRE-EXTRAORDINARY> 808
<EXTRAORDINARY> 0
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<NET-INCOME> 505
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<EPS-DILUTED> .21
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 5,550
<INT-BEARING-DEPOSITS> 9,570
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
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<INVESTMENTS-MARKET> 5,589
<LOANS> 96,998
<ALLOWANCE> 233
<TOTAL-ASSETS> 195,768
<DEPOSITS> 124,515
<SHORT-TERM> 1,143
<LIABILITIES-OTHER> 1,159
<LONG-TERM> 56,162
0
0
<COMMON> 836
<OTHER-SE> 11,953
<TOTAL-LIABILITIES-AND-EQUITY> 195,768
<INTEREST-LOAN> 7,047
<INTEREST-INVEST> 5,057
<INTEREST-OTHER> 172
<INTEREST-TOTAL> 12,275
<INTEREST-DEPOSIT> 5,729
<INTEREST-EXPENSE> 8,541
<INTEREST-INCOME-NET> 3,735
<LOAN-LOSSES> 31
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,341
<INCOME-PRETAX> 1,071
<INCOME-PRE-EXTRAORDINARY> 1,071
<EXTRAORDINARY> 0
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<NET-INCOME> 653
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
<YIELD-ACTUAL> 6.88
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<CHARGE-OFFS> 15
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</TABLE>
<PAGE> 1
Exhibit 99
[letterhead RBG & Co.]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Equality Mortgage Corporation
St. Louis, Missouri
We have audited the accompanying balance sheet of Equality Mortgage Corporation
as of March 31, 1998 and 1997 and the related statements of income, retained
earnings and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Equality Mortgage
Corporation as of March 31, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Rubin, Brown, Gornstein & Co. LLP
St. Louis, Missouri
April 20, 1998
