<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 2000
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. [ ]
State issuer's revenues for its most recent fiscal year: $24,350,117.
State the aggregate market value of the voting and nonvoting common
equity held by nonaffiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price as of June 22,
2000: $16,619,947.
State the number of shares outstanding of each of the issuer's classes of
common equity: As of May 31, 2000, there were issued and outstanding
2,538,880 shares of the issuer's common stock.
Transitional Small Business Disclosure Format (Check One):
Yes No X
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<PAGE> 2
EQUALITY BANCORP, INC.
2000 ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I Page
<S> <C>
Item 1. Description of Business 1
Item 2. Description of Properties 32
Item 3. Legal Proceedings 33
Item 4. Submission of Matters to a Vote of Security Holders 33
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 33
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 34
Item 7. Financial Statements 46
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 83
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance With Section 1b(a) of the Exchange Act 83
Item 10. Executive Compensation 84
Item 11. Security Ownership of Certain Beneficial Owners and Management 86
Item 12. Certain Relationships and Related Transactions 87
Item 13. Exhibits and Reports on Form 8-K 88
SIGNATURES 90
</TABLE>
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
--------------------------------
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, 2000, Equality had total assets of
$323.3 million, deposit accounts of $140.9 million and total stockholders'
equity of $19.9 million.
ESB is a Missouri chartered savings bank regulated by the Missouri Division
of Finance (Division) and by the Federal Deposit Insurance Corporation (FDIC)
and its deposits are insured by the FDIC through the Savings Association
Insurance Fund (SAIF). ESB was originally chartered in 1884. ESB conducts
its business through six full-service branch offices and two additional
limited-service loan-production offices. ESB's main office is located at
4131 South Grand Boulevard, St. Louis, Missouri 63118-3464, and its telephone
number is (314) 352-3333.
On October 22, 1993, Equality Savings and Loan Association (the Association
and the predecessor of ESB) (i) reorganized into a mutual holding company and
changed its name to First Missouri Financial, M.H.C. (the Mutual Holding
Company) and (ii) transferred substantially all of its assets and all of its
liabilities to the Association, which sold a minority interest in its common
stock to depositors of the Association and various stock compensation plans
(the Mutual Holding Company Reorganization). A total of 380,000 shares of
newly issued common stock were sold at $10.00 per share. An additional
11,400 authorized but unissued shares were later sold to the Association's
1993 Management Recognition Plan (MRP) at $10.00 per share. The Association
received net proceeds of approximately $3.2 million from the sale of its
common stock. On June 13, 1995, the Association converted from a
Missouri-chartered-stock-savings-and-loan association to a
federally-chartered-stock-savings-and-loan association. On December 28,
1999, ESB converted from a federally chartered stock-based savings
association to a Missouri-chartered savings bank.
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) managing 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 banks in that
it gathers deposits from its local community and uses these funds, along with
FHLB advances, to invest primarily in residential one- to four-family
mortgage loans, U.S. Government and agency securities, mortgage-backed
securities and corporate obligations and, to a lesser extent, multifamily and
commercial real estate, consumer and commercial business loans.
Notwithstanding these traditional thrift attributes, ESB's operations are
distinct in one respect in that it conducts its residential mortgage lending
business primarily through a wholly-owned mortgage-banking subsidiary -
Equality Mortgage Corporation (EMC).
Operating through ESB's 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 Chairman of EMC. Leonard O. Wolter, Senior Vice President of ESB, is
EMC's President. Mr. Wolter, in consultation with Mr. Fellhauer and Michael
A. Deelo, ESB's Chief Financial Officer, manages the day to day operations of
EMC. These individuals have over 50 years combined experience in the
mortgage-banking business. The following description includes detailed
information regarding the business of ESB and EMC.
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LENDING AND MORTGAGE-BANKING ACTIVITIES
ESB concentrates its business in residential mortgage finance, which
involves the origination, purchase and sale of residential real estate loans
secured by one- to four-family, owner-occupied residential properties. In
the past, and to a much lesser degree, ESB has originated conventional loans
secured by multifamily residential dwellings and commercial real estate
projects. ESB also originates short-term consumer loans, primarily loans
secured by savings deposits, home equity and second mortgage loans, direct
automobile loans and student loans, and, since early 1997, commercial
business loans.
LOAN ORIGINATIONS. During the first several years of its existence, EMC
originated primarily government mortgage loans (Federal Housing
Administration and Veterans Administration 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 an increasing amount of
commercial, consumer and other non-mortgage loans.
Today, EMC, using its 44 employees (including 13 commissioned loan
originators), underwrites residential mortgage loans, which are secured by
properties located primarily in the St. Louis metropolitan area. In
addition, through ESB's Affordable Housing Program, EMC provides mortgage
financing to low- and moderate-income families, which provides ESB with an
effective way to attract customers in its local market area. During fiscal
2000, EMC originated mortgage loans totaling $86.9 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 2000, EMC purchased mortgage loans totaling $773,000.
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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 25.4% and 40.4%,
respectively, of EMC's total noninterest income for the fiscal year ended
March 31, 2000. EMC contributed approximately 13.2% to Equality's total
interest income and other income for the year ended March 31, 2000.
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 generally sold with servicing released, for which EMC generally
receives an additional servicing fee of approximately 1.5% of the aggregate
loan amount. EMC sells conventional mortgage loans (non-FHA and VA) and
retains the servicing.
At March 31, 2000, EMC serviced $334.4 million in residential mortgage
loans (of which $85.0 million was for ESB). Loan servicing fees and late
charges totaled $1.3 million, $1.3 million, and $1.0 million for fiscal years
2000, 1999 and 1998, 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, affect EMC's business focus from year to year.
As a result of the high level of residential mortgage loan originations,
EMC had 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.
In 2000, EMC sold approximately $65.0 million of GNMA servicing in a bulk
sale and recorded a gain on sale of approximately $451,000. In addition, EMC
has begun focusing on selling loans with servicing to pass rather than
retaining the servicing.
COMPOSITION OF THE LOAN PORTFOLIO. The following table sets forth the
composition of Equality's loan portfolio by type of loan as of the dates
indicated:
<TABLE>
<CAPTION>
==================================================================================================================================
At March 31,
---------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
--------------- --------------- -------------- --------------- --------------
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> $ 68,183 64.5% $54,525 60.1% $ 67,543 62.0% $69,810 72.5% $64,873 66.6%
FHA/VA 10,758 10.2 10,629 11.7 11,718 10.8 14,233 14.8 13,656 14.0
Loans held for sale 2,641 2.5 7,021 7.8 14,523 13.3 4,398 4.6 13,507 13.9
Multifamily 1,343 1.3 1,430 1.6 1,382 1.3 1,637 1.7 783 .8
Commercial 4,097 3.9 4,382 4.8 2,684 2.5 2,662 2.8 2,622 2.7
----------------------------------------------------------------------------------------------------------------------------------
Total loans secured
by real estate 87,022 82.4 77,987 86.0 97,850 89.9 92,740 96.4 95,441 98.0
----------------------------------------------------------------------------------------------------------------------------------
Consumer loans:
Loans secured by
savings deposits 257 0.2 254 0.3 391 .4 366 .4 453 .5
Property improvement 1,633 1.5 1,482 1.6 1,728 1.6 1,596 1.7 1,300 1.3
Automobiles 1,763 1.7 1,042 1.1 617 .6 122 .1 97 .1
Other consumer loans 563 0.5 268 0.4 157 .1 162 .1 96 .1
----------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 4,216 3.9 3,046 3.4 2,893 2.7 2,246 2.3 1,946 2.0
----------------------------------------------------------------------------------------------------------------------------------
Commercial
business loans 14,476 13.7 9,642 10.6 8,153 7.4 1,280 1.3 -- --
----------------------------------------------------------------------------------------------------------------------------------
Total loans 105,714 100.0% 90,675 100.0% 108,896 100.0% 96,266 100.0% 97,387 100.0%
Less:
Loans in process -- -- 3 -- --
Deferred loan fees, net 13 25 37 46 59
Unearned discounts 21 5 8 4 12
Allowance for loan losses 364 366 374 283 233
Valuation reserve on
loans held for sale -- 48 59 5 85
----------------------------------------------------------------------------------------------------------------------------------
Total loans
receivable,net $105,316 $90,231 $108,415 $95,928 $96,998
==================================================================================================================================
<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, 2000, approximately
$81.6 million, or 77.2% 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, 2000, ESB's ARM portfolio totaled approximately
$44.3 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
2000, total one- to four-family mortgage loan originations were $88.5 million
of which $17.6 million, or 19.9%, were subject to periodic interest rate
adjustments and $70.9 million, or 80.1%, 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 helps reduce ESB's exposure to interest rate risk.
In an environment of rapidly increasing interest rates, however, it is
possible for the interest rate increases to exceed the maximum allowable
adjustment on ARMs, which would negatively affect ESB's interest rate spread.
In addition, because the interest earned on ARMs, which are refinanced on a
one- to three-year cycle, varies with prevailing interest rates, such loans
do not offer ESB as predictable a cash flow as do longer-term, fixed-rate
loans.
EMC originates long-term, fixed-rate loans under guidelines established by
FNMA and FHLMC, which facilitates the sale of such loans to FNMA or FHLMC in
the secondary market. Long-term, fixed-rate mortgage loans are originated
with terms of between 10 and 30 years, amortized on a monthly basis with
principal and interest due each month. At March 31, 2000, ESB had
approximately $43.5 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, 2000, Equality had
approximately $2.6 million of loans held for sale of which $1.7 million were
adjustable rate loans and $927,000 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, 2000, ESB had no construction loans outstanding.
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Construction lending is generally considered to involve a higher degree of
credit risk than residential mortgage lending. ESB's risk of loss on a
construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction and the
estimated cost (including interest) of construction. If the estimate of
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,
2000, ESB had $1.3 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, 2000, ESB's largest multifamily residential loan was a $898,000
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, 2000, 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, 2000,
commercial real estate loans totaled approximately $4.1 million, or 3.9% 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, 2000, 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, 2000
totaled $1.4 million, which was secured by a real estate mortgage on a
shopping center located in the St. Louis metropolitan area. This loan is a
seasoned loan, having been originated in 1994. ESB's legal lending limit is
approximately $3.0 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. 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 $4.2 million at
March 31, 2000, or 3.9% of ESB's total loan portfolio.
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<PAGE> 8
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 three automobile loans with a total
outstanding principal balance of approximately $13,000, which were 90 days or
more delinquent at March 31, 2000. Consumer loans may entail greater risk
than do residential mortgage loans, particularly in the case of consumer
loans which are unsecured or secured by assets that depreciate rapidly, such
as automobiles. In the latter case, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, consumer
loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness or 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, 2000, approximately $14.4 million, or 13.7% of ESB's loan
portfolio, consisted of commercial business loans, which are primarily
secured by automobile floor planning collateral. At March 31, 2000, the
largest commercial loan in the portfolio, which was secured by floor planned
vehicles, had a principal balance of approximately $1.4 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. At March 31, 2000, ESB had two
commercial loans with an outstanding principal balance of approximately
$233,000 which were 90 days or more delinquent. These loans are secured by
commercial real estate and floor plan automobiles.
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LOAN MATURITY AND REPRICING. The following table sets forth certain
information at March 31, 2000 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 Due after Due after
Due during the 3 through 5 through 10 through Due over
year ended 5 years 10 years 15 years 15 years
March 31 after after after after
------------------------- March 31, March 31, March 31, March 31,
2001 2002 2003 2000 2000 2000 2000 Total
---------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential <F1> <F2> $3,656 1,152 1,234 1,713 15,870 11,127 48,173 82,925
Commercial 142 -- 591 1,367 427 483 1,087 4,097
Loans secured by savings
deposits 243 -- 14 -- -- -- -- 257
Property improvement 23 70 139 552 742 107 -- 1,633
Automobiles 117 432 203 993 18 -- -- 1,763
Other consumer loans 41 49 364 42 -- 67 -- 563
Commercial business loans 11,186 752 1,118 1,101 196 123 -- 14,476
---------------------------------------------------------------------------------------------------------------------------
Total loans $15,408 2,455 3,663 5,768 17,253 11,907 49,260 105,714
===========================================================================================================================
<FN>
<F1> Includes $2.6 million of loans held for sale, reported as due in one
year or less.
<F2> Includes multifamily loans totaling $1.3 million.
</TABLE>
The following table sets forth the dollar amount of all loans due after
March 31, 2001 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 $38,171 41,098
Commercial 2,453 1,502
Loans secured by savings
deposits 14 --
Property improvement 1,610 --
Automobiles 1,646 --
Other consumer loans 522 --
Commercial business loans -- 3,290
------------------------------------------------------------------------------
Total loans $44,416 45,890
==============================================================================
</TABLE>
7
<PAGE> 10
The following table sets forth total loans originated, purchased, sold and
repaid during the periods indicated:
<TABLE>
<CAPTION>
=====================================================================================================================
Year ended March 31
2000 1999 1998
---------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Total loans at beginning of period $ 90,675 108,896 96,266
Loans originated:
Residential one- to four-family 88,460 172,345 113,982
Commercial business loans 5,990 4,626 8,298
Consumer (property improvement and automobiles) 2,809 1,893 1,415
Other loans 82 165 189
---------------------------------------------------------------------------------------------------------------------
Total loans originated 97,341 179,029 123,884
Loans purchased - residential one- to four-family 773 7,374 6,059
Participation purchased - residential one- to four-family -- 817 --
Loans sold:
Whole loans:
Servicing retained (30,131) (110,079) (56,302)
Servicing released (35,030) (31,713) (21,759)
---------------------------------------------------------------------------------------------------------------------
Total loans sold (65,161) (141,792) (78,061)
Loan principal repayments (17,914) (20,593) (11,879)
Loans converted to mortgage-backed securities and sold -- (43,056) (27,373)
---------------------------------------------------------------------------------------------------------------------
Total loans at end of period $ 105,714 90,675 108,896
=====================================================================================================================
</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 refer potential customers to EMC for loans. By use of the EMC
loan officers and client contacts, ESB has been able to cover a broad market
area and offer mortgage services to an extended number of potential
customers.
The eight member Executive Loan Committee, chaired by Mr. Fellhauer, is
authorized to approve residential mortgage loans up to $500,000. Residential
mortgage loans in excess of $500,000 require full Board of Directors
approval. All residential mortgage loans are subsequently approved by the
full Board of Directors.
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 $3.0 million at March 31, 2000.
Loans and extensions of credit fully secured by readily marketable collateral
may comprise an additional 10% of unimpaired capital and surplus. At March
31, 2000, the largest aggregate amount of loans by ESB to any borrower was
approximately $2.0 million, which was secured by automobile floor planning
and personal assets.
LOAN COMMITMENTS. ESB issues commitments for fixed- and adjustable-rate
single-family residential mortgage loans conditioned upon the occurrence of
certain events. Such commitments are made in writing on specified terms and
conditions and are generally honored for up to 60 days from application,
depending on the type of transaction. ESB had outstanding loan commitments
of approximately $1.4 million at March 31, 2000. In addition, ESB offers its
commercial customers lines of credit. Any unfunded line of credit represents
a commitment to fund. All lines of credit are prime rate based and fluctuate
with changes in the prime rate. ESB had outstanding lines of credit of
approximately $4.1 million at March 31, 2000.
8
<PAGE> 11
LOAN ORIGINATION AND OTHER FEES. ESB, in most instances, receives loan
origination fees and discount "points." Loan fees and points are a percentage
of the principal amount of the mortgage loan that are charged to the borrower
for funding the loan. ESB usually charges origination fees of 1% on all real
estate loans. Fees received for originating loans are 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 $13,000 of net deferred loan fees
at March 31, 2000.
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
--------------------
2000 1999 1998
-------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Loans which are contractually past due
90 days or more <F1>:
Residential one- to four-family <F2> $471 650 853
Commercial real estate -- 51 --
Commercial business 233 -- --
Consumer 13 15 8
-------------------------------------------------------------------------------
Total 717 716 861
Personal property owned 2 4 --
Real estate owned -- -- --
-------------------------------------------------------------------------------
Total nonperforming assets $719 720 861
===============================================================================
Nonperforming loans to gross loans .68% .79% 79%
Total nonperforming assets to total assets .22 .25 .34
===============================================================================
<FN>
<F1> All loans contractually past due 90 days or more are accounted for on
a nonaccrual basis by ESB.
<F2> Includes $388,000, $486,000, and $833,000 of FHA/VA loans, the principal
and interest payments of which are insured by the FHA or guaranteed by
the VA, at March 31, 2000, 1999 and 1998, respectively.
</TABLE>
ESB had $717,000 in loans 90 days or more delinquent at March 31, 2000
which consisted of 16 one- to four-family residential mortgage loans, each
with an outstanding principal balance of less than $98,000, three consumer
automobile loans, each with an outstanding principal balance of less than
$8,000 and two commercial business loans with an outstanding principal
balance of less than $156,000.
9
<PAGE> 12
For fiscal 2000, 1999 and 1998, gross interest income which would have been
recorded had the nonaccruing loans been current in accordance with their
original terms amounted to $70,000, $62,000 and $69,000, respectively, of
which $50,000, $31,000 and $49,000, respectively, was included in interest
income.
ASSET CLASSIFICATION. The FDIC 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, FDIC 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. Assets classified as
substandard or doubtful generally 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:
<TABLE>
<CAPTION>
===========================================================================
At or for the
year ended March 31
-------------------------
2000 1999 1998
---------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Substandard and doubtful assets <F1><F2> $2,313 234 28
General loss allowances 364 366 374
Specific loss allowances -- -- --
Net charge-offs 2 8 25
===========================================================================
<FN>
<F1> Includes a $2.0 million corporate obligation, with a fair value
of $1.06 million at March 31, 2000 and a maturity date of March 15,
2003, which was investment grade when originally purchased but has
subsequently downgraded below investment grade requiring
classification of $1.0 million as substandard and $940,000 as
doubtful. However, the security continues to meet its interest
payment obligations. Management believes the decline in fair value
of this security is temporary. Equality has the ability and it is
management's intent to hold this security until maturity. There were
no other doubtful assets at March 31, 2000.
<F2> Includes "doubtful" assets of $4,000 at March 31, 1999.
</TABLE>
REAL ESTATE OWNED. Real estate acquired by ESB as a result of foreclosure
or by deed-in-lieu of foreclosure is classified as real estate owned until
sold. When property is acquired, it is recorded at fair value. ESB had no
real estate owned at March 31, 2000.
ALLOWANCE FOR LOAN LOSSES. ESB's management evaluates the need to
establish reserves against losses on loans based on estimated losses on
specific loans. 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 2000, 1999 and 1998 of approximately $0, $0 and $116,000,
respectively. At March 31, 2000, ESB had an allowance for loan losses of
$364,000, which represented .34% of total loans. Based on past Experience
and future expectations, management believes that the allowance for loan
losses is adequate.
10
<PAGE> 13
The following table sets forth an analysis of ESB's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
============================================================================================================
Year ended March 31
2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance at beginning of period $ 366 374 283 233 217
Provision charged to expense -- -- 116 50 31
Net charge-offs:
Residential one- to four-family -- -- (25) -- (15)
Automobiles (2) (8) -- -- --
------------------------------------------------------------------------------------------------------------
Balance at end of period $ 364 366 374 283 233
============================================================================================================
Ratio of allowance to total loans outstanding
at the end of the period .34% .40% .34% .29% .24 %
Ratio of net charge-offs to average loans
outstanding during the period -- .01 .02 -- .02
Allowance for loan losses to total
nonperforming assets 50.60 50.80 43.40 39.90 30.40
Allowance for loan losses to total
nonperforming loans 50.80 51.10 43.40 44.00 34.80
============================================================================================================
</TABLE>
11
<PAGE> 14
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
----------------------------------------------------------
2000 1999
-------------------------- --------------------------
Amount of Loan Percent Amount of Loan Percent
allowance amounts of allowance amounts of
for loan by total for loan by total
losses category loans losses category loans
-------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential one- to
four-family <F1> $ 200 81,582 77.2% $ 235 72,175 79.6%
Multi-family and
commercial 20 5,440 5.1 28 5,812 6.4
Property improvement 7 1,633 1.5 7 1,482 1.6
Automobiles 7 1,763 1.7 5 1,042 1.1
Other -- 820 0.8 2 522 0.7
Commercial business
loans 130 14,476 13.7 89 9,642 10.6
-------------------------------------------------------------------------------------------
Total allowance for
loan losses $ 364 105,714 100.0% $ 366 90,675 100.0%
===========================================================================================
============================================================================================================================
At March 31
------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------- -------------------------- ---------------------------
Amount of Loan Percent Amount of Loan Percent Amount of Loan Percent
allowance amount of allowance amounts of allowance amount of
for loan by total for loan by total for loan by total
losses category loans losses category loans losses category loans
----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential one- to
four-family <F1> $ 234 93,784 86.1% $ 174 88,441 91.9% $ 174 92,036 94.5%
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 .6 2 122 .1 2 97 .1
Other -- 548 .5 -- 528 .5 -- 549 1.4
Commercial business
loans 111 8,153 7.4 38 1,280 1.3 -- -- --
----------------------------------------------------------------------------------------------------------------------------
Total allowance for
loan losses $ 374 108,896 100.0% $ 283 96,266 100.0% $ 233 97,387 100.0%
============================================================================================================================
<FN>
-----------------
<F1> Includes loans held for sale.
</TABLE>
12
<PAGE> 15
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 gains and losses for trading securities (for which no securities
were so designated at March 31, 2000 or 1999) are included in earnings, while
such gains and losses for available for sale securities are excluded from
earnings and reported as a net amount as accumulated other comprehensive
income, a separate component of stockholders' equity, net of income taxes,
until realized. Unrealized gains and losses for held to maturity securities
are excluded from earnings and stockholders' equity. Gains or losses for
available for sale securities are realized and included in other noninterest
income upon sale, based on the amortized cost of the individual security
sold. All previous fair value adjustments included in accumulated other
comprehensive income are reversed upon sale. Mortgage-backed securities
represent a significant portion of the debt security portfolio. Amortization
of premiums and accretion of discounts on mortgage-backed securities are
analyzed in relation to the corresponding prepayment rates, both historical
and estimated, using a method that approximates the interest method.
It has been ESB's practice to maintain assets in investment securities at
levels higher than required by federal regulations. ESB's investment
securities portfolio at March 31, 2000 consisted of $600,000 in U.S.
Government and agency obligations classified as held to maturity, with a fair
value of $548,000, and $68.7 million in U.S. Government and agency
obligations classified as available for sale carried at their estimated
market value of $64.8 million, and $58.0 million in corporate bonds
classified as available for sale carried at their estimated fair value of
$55.7 million. One corporate bond, with a carrying value of $2.0 million and
a fair value of $1.06 million at March 31, 2000, which was investment grade
when purchased, has been downgraded below investment grade, as previously
discussed.
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. As of March 31, 2000, investment securities represented 37%
of total assets. ESB's regulatory liquidity ratio at March 31, 2000 was
24.0%. 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.
In an effort to increase earnings, ESB deployed a strategy in late 1997 in
order to better leverage its balance sheet. The funds received from FHLB
advances have been invested in mortgage-backed securities and investment
securities. FHLB advances obtained by ESB were generally longer-term
borrowings which contained call features. In general, the investments
purchased by ESB with these advances were medium to long-term investments,
many of which have call or prepayment features. As interest rates have
risen, FHLB advances have been called and replaced with shorter-term, but
higher-cost borrowings; however, the investments have not been called. As a
result of ESB's strategy, the increase in interest rates, FHLB advances
exceeding core deposits, and a $2.0 million corporate bond that has been
downgraded below investment grade, ESB now has considerable interest rate
risk and cannot liquidate its portfolio without a significant impact on
earnings. Management plans to reduce interest rate risk by growing the core
deposit portfolio with an emphasis on money market accounts and certificates
of deposit, lessening reliance on FHLB advances by repaying advances as they
mature, and using the proceeds from maturities of mortgage-backed securities
and investment securities to fund repayments of FHLB advances.
13
<PAGE> 16
The following table sets forth ESB's investment securities at the dates
indicated:
<TABLE>
<CAPTION>
============================================================================================================================
At March 31
----------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ---------------------------- --------------------------
Percent Percent Percent
Carrying of Fair Carrying of Fair Carrying of Fair
value portfolio value value portfolio value value portfolio value
----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
and agency
obligations:
Available for sale $ 64,806 53.5% $ 64,806 $60,500 73.6% $60,500 $68,897 96.4% $68,897
Held to maturity 600 0.5 548 600 0.7 531 2,600 3.6 2,527
Corporate obligations -
available for sale 55,682 45.9 55,682 21,047 25.6 21,047 -- -- --
Marketable equity
securities -
available for sale 88 0.1 88 88 0.1 88 -- -- --
----------------------------------------------------------------------------------------------------------------------------
$121,176 100.0% $121,124 $82,235 100.0% $82,166 $71,497 100.0% $71,424
============================================================================================================================
</TABLE>
14
<PAGE> 17
The following table sets forth the maturities and weighted average yields
of ESB's debt securities at March 31, 2000:
<TABLE>
<CAPTION>
===========================================================================================================
Less than one year One to five years Five to ten years
--------------------- --------------------- --------------------
Weighted Weighted Weighted
Carrying average Carrying average Carrying average
value yield value yield value yield
-----------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency obligations:
Available for sale $ -- --% $ 6,736 6.87% $34,838 6.82%
Held to maturity -- -- 600 4.18 -- --
Corporate obligations -
available for sale 4,182 6.18 47,448 6.76 4,052 7.21
-----------------------------------------------------------------------------------------------------------
Total $4,182 6.18% $54,784 6.75% $38,890 6.87%
===========================================================================================================
===========================================================================================================
Over ten years Total
--------------------- -----------------------------------------------
Average
Weighted remaining Weighted
Carrying average years to Carrying Fair average
value yield maturity value value yield
-----------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
agency obligations:
Available for sale $23,232 7.71% 9.4 $ 64,806 64,806 7.15%
Held to maturity -- -- 3.3 600 548 4.18
Corporate obligations -
available for sale -- -- 2.9 55,682 55,682 6.75
-----------------------------------------------------------------------------------------------------------
Total $23,232 7.71% 6.4 $121,088 121,036 6.93%
===========================================================================================================
</TABLE>
15
<PAGE> 18
MORTGAGE-BACKED SECURITIES
In order to supplement residential loan demand in its primary market area
and maintain geographic diversity in its loan portfolio, ESB has a substantial
portfolio of mortgage-backed securities that are classified as available for
sale and, accordingly, are carried at fair value. All of ESB's mortgage-backed
securities are federal agency securities.
Mortgage-backed securities represent a participation interest in a pool of
single-family or multi-family mortgages, the principal and interest payments
of which are passed from the mortgage originators through intermediaries that
pool and repackage the participation interest in the form of securities to
investors such as ESB. Such intermediaries may include quasi-governmental
agencies such as FHLMC, FNMA and GNMA that guarantee or insure the payment of
principal and interest to investors. Mortgage-backed securities generally
increase the quality of ESB's assets by virtue of the guarantees that back
them, are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of ESB.
Mortgage-backed securities typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans
with interest rates that are within an identified range and have similar
maturities. The underlying pool of mortgages can be composed of either fixed
rate mortgages, ARMs, or balloon loans. Mortgage-backed securities generally
are referred to as mortgage participation certificates or pass-through
certificates. As a result, the interest rate risk characteristics of the
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as well as
prepayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security is equal to the life of the underlying
mortgages.
The actual maturity of a mortgage-backed security varies, depending on when
the mortgagors prepay or repay the underlying mortgages. Prepayments of the
underlying mortgages may shorten the life of the investment, thereby adversely
affecting its yield to maturity and the related market value of the
mortgage-backed security. The yield is based upon the interest income and
the amortization of the premium or discount related to the mortgage-backed
security. Premiums and discounts on mortgage-backed securities are amortized
over the estimated term of the securities using a level yield method. The
prepayment assumptions used to determine the amortization period for premiums
and discounts can significantly affect the yield of the mortgage-backed
security and these assumptions are reviewed periodically to reflect the
actual prepayment. The actual prepayments of the underlying mortgages depend
on many factors, including the type of mortgages, the coupon rate, the age of
mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates.
The difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates is an important determinant in the rate of
prepayments. If the coupon rate of the underlying mortgages significantly
exceeds the prevailing market interest rates offered for mortgage loans,
refinancing generally increases and accelerates the prepayment of the
underlying mortgages. Prepayment experience is more difficult to estimate
for adjustable rate mortgage-backed securities.
Certain of ESB's mortgage-backed securities yield above-market rates of
interest and are subject to substantial risk of prepayment. In a declining
interest rate environment, ESB may experience significant prepayments of both
fixed and adjustable rate mortgage-backed and related securities. In such
instances, ESB may be unable to reinvest the cash flow from these securities
into comparable yielding investments, and would expect this reinvestment risk
to continue so long as interest rates remained relatively low. The majority
of ESB's mortgage-backed securities are yielding below-market rates of
interest due to the increase in interest rates. In a rising rate environment,
ESB may experience a slow down in prepayments and a lengthening in the expected
maturity of the mortgage-backed securities.
ESB's mortgage-backed securities are a blend of fixed-rate balloon
securities and adjustable-rate securities maturing in between one and 29
years. ESB's holdings of mortgage-backed securities have decreased in the
past year as a result of increased portfolio/lending. Because federal agency
mortgage-backed securities generally carry a yield of approximately 50 to 100
basis points below that of the corresponding type of residential loan (due to
the implied federal agency guarantee fee and the retention of a servicing
spread by the loan servicer), ESB's asset yields have been somewhat adversely
affected. Due to the existence of the federal agency guarantee on ESB's
mortgage-backed securities and the availability of adjustable-rate
mortgage-backed securities, however, ESB's credit risk has not increased.
ESB will continue to evaluate mortgage-backed securities purchases based on
its asset/liability objectives, market conditions and its alternate
investment opportunities.
16
<PAGE> 19
The following table sets forth certain information regarding carrying and
fair values and percentage of total carrying values of ESB's mortgage-backed
securities portfolio.
<TABLE>
<CAPTION>
======================================================================================================================
At March 31
------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------- ---------------------------- ----------------------------
Percent Percent Percent
Carrying of Fair Carrying of Fair Carrying of Fair
value total value value total value value total value
----------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA $36,340 56.7% $36,340 $49,365 54.4% $49,365 $28,570 48.8% $28,570
FHLMC 11,686 18.2 11,686 17,120 18.9 17,120 2,580 4.4 2,580
GNMA 16,112 25.1 16,112 24,326 26.7 24,326 27,362 46.8 27,362
----------------------------------------------------------------------------------------------------------------------
Total mortgage-
backed securities $64,138 100.0% $64,138 $90,811 100.0% $90,811 $58,512 100.0% $58,512
======================================================================================================================
</TABLE>
The following table sets forth the activity in ESB's mortgage-backed
securities during the periods indicated:
<TABLE>
<CAPTION>
============================================================================================
For the Year Ended March 31,
---------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Mortgage-backed securities:
At beginning of period $ 90,811 58,512 14,954
Purchases 5,300 92,917 56,569
Sales (10,514) (26,460) (10,036)
Repayments (18,301) (33,071) (3,134)
Premium/discount amortization, net (798) (648) (204)
Fair value adjustment (2,360) (439) 363
--------------------------------------------------------------------------------------------
End of period $ 64,138 90,811 58,512
============================================================================================
</TABLE>
17
<PAGE> 20
The composition and maturities of ESB's mortgage-backed securities
portfolio are indicated in the following table at March 31, 2000:
<TABLE>
<CAPTION>
===========================================================================================================
Less than one year One to five years Five to ten years
--------------------- --------------------- --------------------
Weighted Weighted Weighted
Carrying average Carrying average Carrying average
value yield value yield value yield
-----------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
FNMA $29 8.14% $ 306 6.25% $4,731 6.15%
FHLMC -- -- 3,459 6.01 708 6.10
GNMA -- -- -- -- -- --
-----------------------------------------------------------------------------------------------------------
Total mortgage-
backed securities $29 8.14% $3,765 6.03% $5,439 6.14%
===========================================================================================================
===========================================================================================================
Over ten years Total
--------------------- -----------------------------------------------
Average
Weighted remaining Weighted
Carrying average years to Carrying Fair average
value yield maturity value value yield
-----------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
FNMA $31,274 7.01% 16.5 $36,340 36,340 6.89%
FHLMC 7,519 6.16 21.3 11,686 11,686 6.11
GNMA 16,112 6.60 26.2 16,112 16,112 6.60
-----------------------------------------------------------------------------------------------------------
Total mortgage-
backed securities $54,905 6.77% 21.7 $ 4,138 64,138 6.68%
===========================================================================================================
</TABLE>
18
<PAGE> 21
At March 31, 2000, ESB did not hold any security of an issuer (other than
U.S. Government and agency securities) which had an aggregate fair value in
excess of 10% of ESB's stockholders' equity at the dates indicated.
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
GENERAL. Deposits and advances from the FHLB of Des Moines are the primary
source of ESB's funds for lending and other investment purposes. In addition,
ESB derives funds from loan principal repayments. Loan repayments are a
relatively stable source of funds while deposit inflows and outflows may be
significantly influenced by the general level of interest rates and money
market conditions.
DEPOSIT ACCOUNTS. Local deposits are and traditionally have been the
primary source of ESB's funds for use in lending and other general business
purposes. Deposits are attracted from within ESB's primary market area
(metropolitan St. Louis) through an offering of a variety of financial
accounts including savings, checking, money market, certificates of deposit,
retirement plan accounts and commercial checking. The account terms vary by
type of account according to minimum balance requirements, interest rate and
the length of time the account must remain open without incurring a penalty
for withdrawal of the funds as well as other factors. ESB relies on the
location of its offices, customer satisfaction and other references as its
primary sources of deposit solicitation. To a lesser degree, local media
advertising is used in the seeking of deposit funds.
In determining the individual characteristics of its deposit accounts, ESB
considers the products and rates offered by the competition, the
attractiveness of the product to its customer base, the profitability of the
product to ESB and the effect the account will have on the asset liability
mix of the institution. Attractive, convenient locations and quality service
are ESB's benchmark of success. ESB does not use brokered deposits.
19
<PAGE> 22
The following table sets forth information concerning ESB's savings
deposits at the dates indicated.
<TABLE>
<CAPTION>
=======================================================================================================================
2000 1999 1998
--------------------------- -------------------------- ---------------------------
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 $ 10,348 7.34% 1.23% $ 8,123 6.30% 2.25% $ 8,370 7.02% 1.86%
Passbook 20,074 14.26 2.51 20,767 16.10 2.51 19,762 16.57 2.51
Money market demand 12,459 8.85 4.34 8,237 6.39 4.31 5,517 4.62 3.07
Noninterest checking 8,707 6.18 -- 7,959 6.17 -- 6,920 5.80 --
Certificates of Deposit:
28-91 days - Fixed-term,
fixed-rate 17 0.01 3.00 16 0.01 3.00 30 0.02 2.95
6 months - Fixed-term,
fixed-rate 2,570 1.82 4.38 2,106 1.63 4.04 2,271 1.90 4.00
9 months - Fixed-term,
fixed-rate 5,458 3.87 4.69 11,738 9.10 5.00 8,054 6.75 5.26
12 months - Fixed-term,
fixed-rate 12,832 9.11 5.15 9,646 7.48 4.86 8,036 6.74 5.14
18 months - Fixed term,
fixed rate 12,506 8.88 6.28 -- -- -- -- -- --
24 months - Fixed-term,
fixed-rate 8,749 6.21 5.34 8,441 6.55 5.36 7,467 6.26 5.50
36 months - Fixed-term,
fixed-rate 3,938 2.80 5.67 3,229 2.51 5.51 3,029 2.54 5.57
48 months - Fixed-term,
fixed-rate 11,710 8.31 5.57 15,759 12.22 5.87 12,955 10.86 6.36
60 months - Fixed-term,
fixed-rate 7,242 5.14 5.54 7,611 5.90 5.67 12,869 10.79 5.61
24 months - Fixed-term,
variable-rate 705 0.50 4.80 980 0.76 4.80 639 0.54 5.50
5 - 20 years - Fixed-term,
fixed-rate
(Guaranteed Account) 142 0.10 8.92 132 0.10 8.92 122 0.10 8.92
1-60 months - Negotiated rate 1,599 1.13 5.84 2,112 1.64 5.79 2,214 1.86 6.12
Retirement Accounts (IRAs):
12 months - Fixed-term,
fixed-rate 1,015 0.72 4.86 1,123 0.87 4.85 883 0.74 5.00
18 months - Fixed-term,
fixed rate 3,388 2.40 6.04 -- -- -- -- -- --
24 months - Fixed-term,
fixed-rate 1,524 1.08 5.38 957 0.74 5.30 1,004 0.84 5.39
36 months - Fixed-term,
fixed-rate 1,004 0.71 5.79 711 0.55 5.48 734 0.62 5.53
48 months - Fixed-term,
fixed-rate 5,338 3.79 5.37 9,518 7.38 5.87 10,848 9.09 6.53
60 months - Fixed-term,
fixed-rate 8,891 6.31 5.55 9,065 7.03 5.64 6,944 5.82 5.86
120 months - Fixed-term,
fixed-rate 436 0.31 10.00 422 0.33 10.00 395 0.33 10.00
24 months - Fixed-term,
variable-rate 233 0.17 4.80 302 0.24 4.80 238 0.19 5.50
-----------------------------------------------------------------------------------------------------------------------
$140,885 100.00% 4.39% $128,954 100.00% 4.37% $119,301 100.00% 4.49%
=======================================================================================================================
</TABLE>
20
<PAGE> 23
The following table indicates the amount of ESB's jumbo certificates of
deposit by time remaining until maturity as of March 31, 2000. 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 $ 369
Three through six months --
Six through twelve months 430
Over twelve months 800
----------------------------------------------------------------------------
$1,599
============================================================================
</TABLE>
DEPOSIT FLOW
The following table sets forth the balances of savings deposit in the
various types of savings accounts offered by ESB at March 31, 2000, 1999
and 1998:
<TABLE>
<CAPTION>
=====================================================================================================================
At March 31
--------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- ----------------------------- -----------------------------
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 $ 8,707 6.18% $ 748 $ 7,959 6.17% $1,039 $ 6,920 5.80% $ 1,927
NOW accounts 10,348 7.34 2,225 8,123 6.30 (247) 8,370 7.02 1,200
Passbook
accounts 20,074 14.25 (693) 20,767 16.10 1,005 19,762 16.57 (1,815)
Money market
demand 12,459 8.84 4,222 8,237 6.39 2,720 5,517 4.62 (618)
Fixed-rate
certificates 88,359 62.72 5,772 82,587 64.05 4,732 77,855 65.26 (4,370)
Variable-rate
certificates 938 0.67 (343) 1,281 0.99 404 877 0.73 (6)
---------------------------------------------------------------------------------------------------------------------
Total $140,885 100.00% $11,931 $128,954 100.00% $9,653 $119,301 100.00% $(3,682)
=====================================================================================================================
</TABLE>
CERTIFICATES OF DEPOSIT BY RATES
The following table sets forth the certificates of deposits classified by
rates at March 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
===============================================================================
At March 31
2000 1999 1998
-------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Less than 3.00% $ -- -- 3
3.00% to 3.99% 17 16 26
4.00% to 4.99% 24,331 17,288 3,214
5.00% to 5.99% 35,357 49,393 48,216
6.00% to 6.99% 28,850 13,634 15,122
7.00% to 7.99% 164 2,982 11,634
8.00% and greater 579 555 517
-------------------------------------------------------------------------------
Total $89,298 83,868 78,732
===============================================================================
</TABLE>
21
<PAGE> 24
Certificate of deposit accounts at March 31, 2000, 1999 and 1998 are
scheduled to mature as indicated in the following table.
<TABLE>
<CAPTION>
========================================================================================================
2000 1999 1998
------------------ ------------------ ------------------
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 $34,467 38.6% $46,479 55.4% $42,430 53.9%
Second year 25,804 28.9 12,329 14.7 21,282 27.0
Third year 14,420 16.1 4,943 5.9 6,832 8.7
Fourth year 7,312 8.2 13,109 15.6 4,563 5.8
Thereafter 7,295 8.2 7,008 8.4 3,625 4.6
--------------------------------------------------------------------------------------------------------
Total $89,298 100.0% $83,868 100.0% $78,732 100.0%
========================================================================================================
</TABLE>
The following table sets forth the savings activities of ESB for the
periods indicated.
<TABLE>
<CAPTION>
===================================================================================
For the Year Ended March 31,
----------------------------
2000 1999 1998
-----------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Beginning balance $128,954 119,301 122,983
Net increase (decrease) before
interest credited 7,398 5,354 (8,121)
Interest credited 4,533 4,299 4,439
-----------------------------------------------------------------------------------
$140,885 128,954 119,301
===================================================================================
</TABLE>
BORROWINGS
Deposits and advances from the FHLB of Des Moines are the primary source of
funds for ESB. At March 31, 2000, ESB had $159.7 million in FHLB of Des
Moines advances outstanding and maintained a line of credit of approximately
$12,332,000 available from the FHLB of Des Moines. During fiscal year 2000,
ESB utilized FHLB advances to provide for increased investment in loans
receivable and investment securities. As previously mentioned, ESB deployed
a strategy in late 1997 in order to better leverage its balance sheet. The
funds received from FHLB advances have been invested in mortgage-backed
securities and investment securities. FHLB advances obtained by ESB were
generally longer-term borrowings which contained call features. In general,
the investments purchased by ESB with these advances were medium to long-term
investments, many of which have call or prepayment features. As interest
rates have risen, FHLB advances have been called and replaced with
shorter-term, but higher-cost borrowings, however, the investments have not
been called. As a result of ESB's strategy, the increase in interest rates,
FHLB advances exceeding core deposits, and a $2.0 million corporate bond that
has been downgraded below investment grade, ESB now has considerable interest
rate risk and cannot liquidate its portfolio without a significant impact on
earnings. Management plans to reduce interest rate risk by growing the core
deposit portfolio with an emphasis on money market accounts and certificates
of deposit, lessening reliance on FHLB advances by repaying advances as they
mature, and using the proceeds from maturities of mortgage-backed securities
to fund repayments of FHLB advances.
EMC maintains a custodial borrowing relationship at an unaffiliated bank
secured by investment securities with an amortized cost of approximately
$4.7 million and a fair value of approximately $4.0 million at March 31,
2000. At March 31, 2000, there was $1.7 million outstanding on this
note payable.
22
<PAGE> 25
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,
-----------------------------------
2000 1999 1998
-----------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Weighted average rate at March 31:
FHLB of Des Moines borrowings 5.95% 5.37% 5.32%
Note payable to bank 2.25 2.25 2.25
ESOP debt <F1> -- -- --
Maximum amount of borrowings outstanding
at any month-end:
FHLB of Des Moines borrowings $171,779 130,396 104,000
Note payable to bank 4,000 4,000 4,000
ESOP debt <F1> -- -- 136
Approximate average borrowings outstanding
with respect to:
FHLB of Des Moines borrowings $156,654 125,994 76,208
Note payable to bank 2,964 3,108 3,085
ESOP debt <F1> -- -- 68
Approximate weighted average rate paid on:
FHLB of Des Moines borrowings 5.55% 5.41% 5.29%
Note payable to bank 2.36 2.28 1.90
ESOP debt <F1> -- -- 8.50
=====================================================================================================
<FN>
<F1> ESOP debt was assumed by Equality in connection with its conversion in
December 1997.
</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 banks, savings and loan associations, commercial banks, savings banks
and credit unions. In addition, ESB faces increasing competition for
deposits from non-bank institutions such as brokerage firms and insurance
companies in such areas as money market funds, other mutual funds (such as
corporate and government securities funds) and annuities. ESB competes for
deposits by offering customers a variety of savings accounts, checking
accounts, certificates of deposit and a responsive, customer-oriented staff,
as well as convenient access to ESB by 24-hour automatic teller machines or
personal appointment.
23
<PAGE> 26
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.
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 permit operating margins to be maintained at
profitable levels. As a locally-based financial institution, ESB's strategy
has been to position itself as a community-oriented financial institution
that provides high quality products and services to meet the retail banking
needs of its local customer base. This strategy is designed to identify a
niche in ESB's market where it can effectively compete against much larger
institutions.
SUBSIDIARY ACTIVITIES AND JOINT VENTURES
ESB has two wholly owned subsidiaries, EMC and Equality Commodity
Corporation (ECC). ECC operates a full-service insurance agency under the
name Equality Insurance Agency (EIA). EIA provides a full array of insurance
products, including property and casualty, automobile, health and life
insurance, and, to a much lesser degree, commercial fire and casualty
insurance. EIA also offers annuities and operates Flood Information
Specialists, which issues flood plain certificates. These certificates are
required by all mortgage loan lenders and is a requirement for selling a loan
in the secondary market.
PERSONNEL
As of March 31, 2000, ESB, including subsidiaries, had 100 full-time
employees and 35 part-time employees. The employees are not represented by a
union or collective bargaining unit. ESB believes its relationship with its
employees is good.
REGULATION AND SUPERVISION
GENERAL
-------
As a state-chartered, federally insured savings bank, ESB is subject to
extensive regulation. Lending activities and other investments must comply
with various statutory and regulatory requirements, including prescribed
minimum capital standards. ESB is regularly examined by the Missouri
Division of Finance (Division) and the FDIC and files periodic reports
concerning ESB's activities and financial condition with its regulators.
ESB's relationship with depositors and borrowers also is regulated to a great
extent by both federal law and the laws of Missouri, especially in such
matters as the ownership of savings accounts and the form and content of
mortgage documents.
Federal and state banking laws and regulations govern all areas of the
operation of ESB, including reserves, loans, mortgages, capital, issuance of
securities, payment of dividends and establishment of branches. Federal and
state bank regulatory agencies also have the general authority to limit the
dividends paid by insured banks if such payments should be deemed to
constitute an unsafe and unsound practice. The respective primary federal
regulators of Equality and ESB have authority to impose penalties, initiate
civil and administrative actions and take other steps intended to prevent
banks from engaging in unsafe or unsound practices.
STATE REGULATION AND SUPERVISION
--------------------------------
As a state-chartered savings bank, ESB is subject to applicable
provisions of Missouri law and the regulations of the Division adopted
hereunder. Missouri law and regulations govern ESB's ability to take
deposits and pay interest thereon, to make loans on or invest in residential
and other real estate, to make consumer loans, to invest in securities, to
offer various banking services to its customers, and to establish branch
offices. Under state law, savings banks in Missouri also generally have all
of the powers that federal mutual savings banks have under federal laws and
regulations.
FEDERAL SECURITIES LAW. The stock of Equality is registered with the SEC
under the Securities Exchange Act of 1934, as amended (the Exchange Act). As
such, Equality is subject to the information, proxy solicitation, insider
trading restrictions and other requirements of the SEC under the Exchange
Act.
24
<PAGE> 27
FEDERAL RESERVE SYSTEM. The Federal Reserve Board (FRB) requires all
depository institutions to maintain non-interest bearing reserves at
specified levels against their transaction accounts (checking, NOW and super
NOW checking accounts). At March 31, 2000, ESB was in compliance with these
reserve requirements.
Savings banks are authorized to borrow from the Federal Reserve Bank
"discount window," but FRB regulations require associations to exhaust other
reasonable alternative sources of funds, including FHLB borrowings, before
borrowing from the FRB.
FEDERAL HOME LOAN BANK SYSTEM. ESB is a member of the FHLB of Des
Moines, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of
the FHLB System. It makes loans to members (i.e., advances) in accordance
with policies and procedures established by the board of directors of the
FHLB, which are subject to the oversight of the Federal Housing Finance
Board. All advances from the FHLB are required to be fully secured by
sufficient collateral as determined by the FHLB. In addition, all long-term
advances are required to provide funds for residential home financing. As a
member, ESB is required to purchase and maintain stock in the FHLB of Des
Moines. At March 31, 2000, ESB had $8.0 million in FHLB stock, which was in
compliance with this requirement.
INSURANCE OF DEPOSIT ACCOUNTS AND DEPOSIT INSURANCE PREMIUMS. Federal
Deposit Insurance Corporation Improvement Act (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 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."
25
<PAGE> 28
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.
PROMPT CORRECTIVE ACTION. Under the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions
that it regulates. The federal banking agencies have promulgated
substantially similar regulations to implement this system of prompt
corrective action. Under the regulations, an institution shall be deemed to
be (i) "well capitalized" if it has a total risk-based capital ratio of 10.0%
or more, has a Tier I risk-based capital ratio of 6.0% or more, has a
leverage ratio of 5.0% or more and is not subject to specified requirements
to meet and maintain a specific capital level for any capital measure; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0%
or more, has a Tier I risk-based capital ratio of 4.0% or more, has a
leverage ratio of 4.0% or more (3.0% under certain circumstances) and does
not meet the definition of "well capitalized;" (iii) "undercapitalized" if it
has a total risk-based capital ratio that is less than 8.0%, has a Tier I
risk-based capital ratio that is less than 4.0% or has a leverage ratio that
is less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less
than 6.0%, has a Tier I risk-based capital ratio that is less than 3.0% or
has a leverage ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that
is equal to or less than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next
lower category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity.
The FDIC may not, however, reclassify a significantly undercapitalized
institution as critically undercapitalized.
An institution generally must file a written capital restoration plan
that meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with the appropriate federal banking
agency within 45 days of the date that the institution receives notice or is
deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory
and discretionary restrictions on its operations.
At March 31, 2000, the ESB was categorized as "well capitalized" under
the prompt corrective action regulations of the FDIC.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking regulatory
agencies have prescribed, by regulation, standards for all insured depository
institutions relating to: (i) internal controls, information systems and
internal audit systems; (ii) loan documentation; (iii) credit underwriting;
(iv) interest rate risk exposure; (v) asset growth; (vi) asset quality; (vii)
earnings; and (viii) compensation, fees and benefits (Guidelines). The
Guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the FDIC determines that
the Bank fails to meet any standard prescribed by the Guidelines, the agency
may require the Bank to submit to the agency an acceptable plan to achieve
compliance with the standard. FDIC regulations establish deadlines for the
submission and review of such safety and soundness compliance plans.
CAPITAL REQUIREMENTS. The FDIC's minimum capital standards applicable to
FDIC-regulated banks and savings banks require the most highly-rated
institutions to meet a "Tier 1" leverage capital ratio of at least 3% of
total assets. Tier 1 (core capital) consists of common stockholders' equity,
noncumulative perpetual preferred stock and minority interests in
consolidated subsidiaries minus all intangible assets other than limited
amounts of purchased mortgage servicing rights and certain other accounting
adjustments. All other banks must have a Tier 1 leverage ratio of at least
100-200 basis points above the 3% minimum. The FDIC capital regulations
establish a minimum leverage ratio of not less than 4% for banks that are not
the most highly rated or are anticipating or experiencing significant growth.
26
<PAGE> 29
The FDIC's capital regulations require higher capital levels for banks
which exhibit more than a moderate degree of risk or exhibit other
characteristics which necessitate that higher than minimum levels of capital
be maintained. Any insured bank with a Tier 1 capital to total assets ratio
of less than 2% is deemed to be operating in an unsafe and unsound condition
pursuant to Section 8(a) of the FDIA unless the insured bank enters into a
written agreement, to which the FDIC is a party, to correct its capital
deficiency. Insured banks operating with Tier 1 capital levels below 2% (and
which have not entered into a written agreement) are subject to an insurance
removal action. Insured banks operating with lower than the prescribed
minimum capital levels generally will not receive approval of applications
submitted to the FDIC. Also, inadequately capitalized state nonmember banks
will be subject to such administrative actions as the FDIC deems necessary.
FDIC regulations also require that banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as Tier 1 capital and Tier 2 or supplementary
capital) to risk weighted assets of 8% and Tier 1 capital to risk-weighted
assets of 4%. In determining the amount of risk-weighted assets, all assets,
plus certain off balance sheet items, are multiplied by a risk-weight of 0%
to 100%, based on the risks the FDIC believes are inherent in the type of
asset or item. The components of Tier 1 capital are equivalent to those
discussed above under the 3% leverage requirement. The components of
supplementary capital currently include cumulative perpetual preferred stock,
adjustable-rate perpetual preferred stock, mandatory convertible securities,
term subordinated debt, intermediate-term preferred stock and allowance for
possible loan and lease losses. Allowance for possible loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of Tier 1 capital. The FDIC
includes in its evaluation of a bank's capital adequacy an assessment of the
exposure to declines in the economic value of the bank's capital due to
changes in interest rates. However, no measurement framework for assessing
the level of a bank's interest rate risk exposure has been codified. In the
future, the FDIC will issue a proposed rule that would establish an explicit
minimum capital charge for interest rate risk, based on the level of a bank's
measured interest rate risk exposure.
An undercapitalized, significantly undercapitalized, or critically
undercapitalized institution is required to submit an acceptable restoration
plan to its appropriate federal banking agency. The plan must specify (i)
the steps the institution will take to become adequately capitalized, (ii)
the capital levels to be attained each year, (iii) how the institution will
comply with any regulatory sanctions then in effect against the institution
and (iv) the types and levels of activities in which the institution will
engage. The banking agency may not accept a capital restoration plan unless
the agency determines, among other things, that the plan "is based on
realistic assumptions, and is likely to succeed in restoring the
institution's capital" and "would not appreciably increase the risk...to
which the institution is exposed."
The FDIA provides that the appropriate federal regulatory agency must
require an insured depository institution that is significantly
undercapitalized or is undercapitalized and either fails to submit an
acceptable capital restoration plan within the time period allowed or fails
in any material respect to implement a capital restoration plan accepted by
the appropriate federal banking agency to take one or more of the following
actions: (i) sell enough shares, including voting shares, to become
adequately capitalized; (ii) merge with (or be sold to) another institution
(or holding company), but only if grounds exist for appointing a conservator
or receiver; (iii) restrict certain transactions with banking affiliates as
if the "sister bank" requirements of Section 23A of the Federal Reserve Act
(FRA) did not exist; (iv) otherwise restrict transactions with bank or
nonbank affiliates; (v) restrict interest rates that the institution pays on
deposits to "prevailing rates" in the institution's region; (vi) restrict
asset growth or reduce total assets; (vii) alter, reduce or terminate
activities; (viii) hold a new election of directors; (ix) dismiss any
director or senior executive officer who held office for more than 180 days
immediately before the institution became undercapitalized; (x) employ
"qualified" senior executive officers; (xi) cease accepting deposits from
correspondent depository institutions; (xii) divest certain nondepository
affiliates which pose a danger to the institution; (xiii) be divested by a
parent holding company; and (xiv) take any other action which the agency
determines would better carry out the purposes of the Prompt Corrective
Action provisions. See "- Prompt Corrective Action."
The FDIC has adopted the Federal Financial Institutions Examination
Council's recommendation regarding the adoption of Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Specifically, the agencies determined that net
unrealized holding gains or losses on available for sale debt and equity
securities should not be included when calculating core and risk-based
capital ratios.
27
<PAGE> 30
FDIC capital requirements are designated as the minimum acceptable
standards for banks whose overall financial condition is fundamentally sound,
which are well-managed and have no material or significant financial
weaknesses. The FDIC capital regulations state that, where the FDIC
determines that the financial history or condition, including off-balance
sheet risk, managerial resources and/or the future earnings prospects of a
bank are not adequate and/or a bank has a significant volume of assets
classified substandard, doubtful or loss or otherwise criticized, the FDIC
may determine that the minimum adequate amount of capital for that bank is
greater than the minimum standards established in the regulation.
ESB's management believes that, under the current regulations, ESB will
continue to meet its minimum capital requirements in the foreseeable future.
However, events beyond the control of ESB, such as a downturn in the economy
in areas where ESB has most of its loans, could adversely affect future
earnings and, consequently, the ability of ESB to meet its capital
requirements.
ACTIVITIES AND INVESTMENT OF INSURED STATE-CHARTERED BANKS. The FDIA
generally limits the activities and equity investments of FDIC-insured,
state-chartered banks to those that are permissible for national banks.
Under regulations dealing with equity investments, an insured state bank
generally may not directly or indirectly acquire or retain any equity
investment of a type, or in an amount, that is not permissible for a national
bank. An insured state bank is not prohibited from, among other things, (i)
acquiring or retaining a majority interest in a subsidiary, (ii) investing as
a limited partner in a partnership the sole purpose of which is direct or
indirect investment in the acquisition, rehabilitation or new construction of
a qualified housing project, provided that such limited partnership
investments may not exceed 2% of the bank's total assets, (iii) acquiring up
to 10% of the voting stock of a company that solely provides or reinsures
directors', trustees' and officers' liability insurance coverage or bankers'
blanket bond group insurance coverage for insured depository institutions,
and (iv) acquiring or retaining the voting shares of a depository institution
if certain requirements are met.
Subject to certain regulatory exceptions, FDIC regulations provide that
an insured state-chartered bank may not, directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for
a national bank unless the FDIC has determined that such activities would
pose no risk to the insurance fund of which it is a member and the bank is in
compliance with applicable regulatory capital requirements. Any insured
state-chartered bank directly or indirectly engaged in any activity that is
not permitted for a national bank or for which the FDIC has granted and
exception must cease the impermissible activity.
AFFILIATE TRANSACTIONS. Equality and ESB are legal entities separate and
distinct. Various legal limitations restrict ESB from lending or otherwise
supplying funds to Equality (an affiliate), generally limiting such
transactions with the affiliate to 10% of the bank's capital and surplus and
limiting all such transactions to 20% of the bank's capital and surplus.
Such transactions, including extensions of credit, sales of securities or
assets and provision of services, also must be on terms and conditions
consistent with safe and sound banking practices, including credit standards,
that are substantially the same or at least as favorable to ESB as those
prevailing at the time for transactions with unaffiliated companies.
Federally insured banks are subject, with certain exceptions, to certain
restrictions on extensions of credit to their parent holding companies or
other affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from
any borrower. In addition, such banks are prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit or the
providing of any property or service.
QUALIFIED THRIFT LENDER TEST. As a result of the 10(1) Election made by
ESB in connection with its conversion to a state savings bank ESB remains
subject to the qualified thrift lender (QTL) test applicable to federal
savings associations.
All savings associations are required to meet a QTL test to avoid certain
restrictions on their operations. A savings institution that fails to become
or remain a QTL shall either convert to a national bank charter or be subject
to the following restrictions on its operations: (i) the Bank may not make
any new investment or engage in activities that would not be permissible for
national banks; (ii) the Bank may not establish any new branch office where a
national bank located in the savings institution's home state would not be
able to establish a branch office; (iii) the Bank shall be ineligible to
obtain new advances from any FHLB; and (iv) the payment of dividends by the
Bank shall be subject to the rules regarding the statutory and regulatory
dividend restrictions applicable to national banks. Also, beginning three
years after the date on which the savings institution ceases to be a QTL, the
savings institution would be prohibited from retaining any investment or
engaging in any activity not permissible for a national bank and would be
required to repay any outstanding advances to any FHLB. In addition, within
one year of the date on which a savings association controlled by a company
ceases to be a QTL, the company must register as a bank holding company and
become subject to the rules applicable to such companies. A savings
institution may requalify as a QTL if it thereafter complies with the QTL
test.
28
<PAGE> 31
Currently, the QTL test requires that either an institution qualify as a
domestic building and loan association under the Internal Revenue Code or
that 65% of an institution's "portfolio assets" (as defined) consist of
certain housing and consumer-related assets on a monthly average basis in
nine out of every 12 months. Assets that qualify without limit for inclusion
as part of the 65% requirement are loans made to purchase, refinance,
construct, improve or repair domestic residential housing and manufactured
housing; home equity loans; mortgage-backed securities (where the mortgages
are secured by domestic residential housing or manufactured housing); FHLB
stock; direct or indirect obligations of the FDIC; and loans for educational
purposes, loans to small businesses and loans made through credit cards. In
addition, the following assets, among others, may be included in meeting the
test subject to an overall limit of 20% of the savings institution's
portfolio assets: 50% of residential mortgage loans originated and sold
within 90 days of origination; 100% of consumer loans; and stock issued by
FHLMC or FNMA. Portfolio assets consist of total assets minus the sum of (i)
goodwill and other intangible assets, (ii) property used by the savings
institution to conduct its business, and (iii) liquid assets up to 20% of the
institution's total assets. At March 31, 2000, ESB was in compliance with
the QTL test.
COMMUNITY REINVESTMENT ACT. Banks are also subject to the provisions of
the Community Reinvestment Act of 1977 (CRA), which requires the appropriate
federal bank regulatory agency, in connection with its regular examination of
a bank, to assess the bank's record in meeting the credit needs of the
community serviced by the bank, including low and moderate income
neighborhoods. The regulatory agency's assessment of the bank's record is
made available to the public. Further, such assessment is required of any
bank which has applied, among other things, to establish a new branch office
that will accept deposits, relocate an existing office or merge or
consolidate with, or acquire the assets or assume the liabilities of, a
federally regulated financial institution. ESB received an "outstanding"
rating during its most recent CRA examination.
DIVIDENDS. Dividends from ESB constitute the major source of funds for
dividends, which may be paid by Equality. The amount of dividends payable by
ESB to Equality depends upon ESB's earnings and capital position, and is
limited by federal and state laws, regulations and policies.
The amount of dividends actually paid during any one period will be
strongly affected by ESB's management policy of maintaining a strong capital
position. Federal law further provides that no insured depository
institution may make any capital distribution, which would include a cash
dividend if, after making the distribution, the institution would be
"undercapitalized," as defined in the prompt corrective action regulations.
REGULATORY AGREEMENT. As a result of the FDIC's first regular
examination following ESB's conversion from a federally-chartered savings and
loan association to a state-chartered savings bank on December 28, 1999, ESB
entered into a Memorandum of Understanding (MOU) with the FDIC and the
Division on June 26, 2000. By signing the MOU, ESB has agreed to take
certain actions in response to concerns raised by the FDIC. The MOU
addresses: (1) the Board of Directors of ESB to assess ESB's management and
staffing needs to ensure proper supervision of ESB's affairs; (2) ESB to
review its earnings performance, to develop a written plan to improve
earnings performance and to prepare a revised 2001 budget reflecting remedial
actions to improve ESB's earnings; (3) ESB to implement a suitable method for
measuring and monitoring ESB's interest rate risk (IRR), establish IRR
parameters and provide for independent review of the validity of the
assumptions, data, and results of the method used; (4) ESB to develop a
written funds management policy overseen by an Asset/Liability Committee, the
membership of which shall include non-officer director representation and
which shall report to the Board of Directors, and to establish goals and
strategies for managing or improving ESB's IRR profile; (5) ESB to maintain a
Tier I Leverage Ratio of not less than 7% while the MOU is in effect; (6) ESB
to refrain from declaring or paying any dividends and/or management fees to
Equality without prior written regulatory approval; (7) ESB to present to the
FDIC and the Division periodic updates regarding ESB's asset growth
objectives, particularly in light of capital and liquidity needs; (8) ESB to
provide a revised investment policy, modify certain investment practices, and
ensure the policy is implemented and followed; (9) ESB to develop an internal
audit program and appoint an internal auditor who shall report to the Board
of Directors; (10) ESB to take steps to correct and/or eliminate violations
cited by the FDIC and the Division; (11) ESB to implement procedures to
address regulatory concerns regarding the retail sale of nondeposit
investment products by ESB; and (12) ESB to submit periodic progress reports
to the FDIC and Division regarding ESB's compliance with the MOU.
The MOU is not a formal supervisory action by the FDIC but is an
enforceable action. Failure to comply with the MOU can lead to a formal
enforcement action. ESB believes that it can comply with the MOU and is
currently taking the necessary steps to do so. Compliance with the MOU is
not expected to have a materially adverse impact on the operations and
financial condition of ESB or Equality. The MOU will remain in effect until
terminated by the Kansas City Regional Director of the FDIC.
29
<PAGE> 32
EQUALITY BANCORP, INC.
GENERAL
-------
As a result of the 10(1) Election made by ESB in connection with the
charter conversion, Equality is a unitary thrift holding company regulated by
the OTS for as long as the Bank satisfies the QTL test, rather than a bank
holding company regulated by the FRB. Accordingly, Equality is subject to
OTS regulations and filing requirements.
HOLDING COMPANY ACQUISITIONS. The HOLA and OTS regulations issued
thereunder generally prohibit a thrift holding company, without prior OTS
approval, from acquiring more than 5% of the voting stock of any other
savings association or thrift holding company or controlling the assets
thereof. They also prohibit, among other things, any director or officer of
a savings and loan holding company, or any individual who owns or controls
more than 25% of the voting shares of such holding company, from acquiring
control of any savings association not a subsidiary of such savings and loan
holding company, unless the acquisition is approved by the OTS.
HOLDING COMPANY ACTIVITIES. As a unitary thrift holding company,
Equality generally is not subject to activity restrictions under the HOLA.
If Equality acquires control of another savings association as a separate
subsidiary, it would lose its unitary thrift holding company status and would
be subject to more restrictions on its activities.
QUALIFIED THRIFT LENDER TEST. The HOLA provides that any thrift holding
company that controls a savings association that fails the QTL test must,
within one year after the date on which the Bank ceases to be a QTL, register
as and be deemed a bank holding company subject to all applicable laws and
regulations.
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.
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 at ESB began in the tax year ended March 31, 1999
and will continue ratably through the tax year ending March 31, 2004. At
March 31, 2000, ESB had bad debts deducted for tax purposes in excess of the
base year reserve of approximately $163,000. 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, 2000, retained earnings included
approximately $2.6 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.
30
<PAGE> 33
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 11 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%.
31
<PAGE> 34
ITEM 2. DESCRIPTION OF PROPERTIES
---------------------------------
ESB conducts its business through six full-service offices. ESB's main
office is located at 4131 South Grand Boulevard, St. Louis, Missouri. ESB
owns all six of its offices in fee and they are unencumbered.
<TABLE>
<CAPTION>
========================================================================================================================
Lease
Net expira-
Year Owned or Total book tion Square
Location opened leased investment value date footage
------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
MAIN OFFICE:
4131 South Grand Boulevard 1944 Owned $ 3,209<F1> 1,543 -- 21,740
St. Louis, Missouri 63118
BRANCHES:
Marborough Branch 1998 Owned 1,224 1,020 -- 2,912
7809 Watson Road
St. Louis, Missouri 63119
South County Branch 1987 Owned 2,022 1,319 -- 4,545
5400 South Lindbergh Boulevard
St. Louis, Missouri 63123
Washington Branch 1998 Owned 1,437 1,371 -- 1,859
801 Franklin Street
Washington, MO 63090
St. Peters Branch 1999 Leased 187 163 2009 4,500
583 Mid Rivers Mall Drive
St. Peters, Missouri 63376
Arnold Branch 1999 Owned 1,049 1,020 -- 2,500
1532 Jeffco Boulevard
Arnold, MO 63010
LOAN OFFICES:
Florissant Loan Office 1992 Leased 20 9 2001 1,306
2620 North Lindbergh
Florissant, Missouri 63033
West County Loan Office 1993 Leased 3 2 2000 1,200
14334 South Outer Forty
Chesterfield, Missouri 63017
------------------------------------------------------------------------------------------------------------------------
<FN>
<F1> Includes investment in future branches of $743,000.
</TABLE>
In December 1997, ESB purchased a building in Fenton, Missouri, for the
purpose of branch expansion. The Fenton branch office is currently subject to
use restriction, and is expected to be operational in the third quarter of
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 $6.9 million at March 31, 2000.
32
<PAGE> 35
ESB uses an outside data processing firm to process customer records and
monetary transactions, post deposit and general ledger entries and record
activity in installment lending. EMC uses a second outside data processing
firm to process loan servicing and loan originations.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
Equality is, from time to time, a party to legal proceedings arising in
the ordinary course of its business, including legal proceedings to enforce
its rights. 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, 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------
The common stock of Equality Bancorp, Inc. is traded on the American
Stock Exchange under the symbol "EBI." The stock was issued on December 1,
1997 at $10.00 per share. Equality paid a quarterly dividend of $.06 per
share during the quarters ended June 30, 1999, September 30, 1999, December
31, 1999 and March 31, 2000. As of May 31, 2000, there were 970 stockholders
of record and 2,538,880 issued and 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. As previously discussed in
this report, the FDIC and the Division required the Board of Directors of ESB
to enter into a memorandum of understanding, which, among other things,
requires ESB to refrain from declaring or paying any dividends without prior
written regulatory approval.
33
<PAGE> 36
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
GENERAL
Equality Bancorp, Inc. (Equality or the Company) is the holding company for
Equality Savings Bank (ESB). Equality 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 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's principal objective is to achieve long-term profitability while
reducing its exposure to fluctuating market interest rates and has employed
various strategies intended to minimize the adverse effect of interest rate
risk on future operations. Progress has been made toward restructuring the
composition of the loan portfolio, and liquidity has been accumulated in
investments in investment-grade corporate obligations and in U.S. Government
and agency notes and bonds.
Adjustable-rate mortgages, shorter-term consumer loans and commercial
business loans are among the products 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. Equality also relies on Federal Home Loan Bank advances as a
primary source of funds in its asset and liability management program.
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.
34
<PAGE> 37
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,
--------------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- ------------------------------ ---------------------------------
INTEREST INTEREST INTEREST
AVERAGE AND YIELD/ AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE<F1> DIVIDENDS COST BALANCE<F1> DIVIDENDS COST BALANCE<F1> DIVIDENDS COST
----------- --------- ------ ----------- ---------- ------ ----------- --------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans <F2> $ 84,854 6,202 7.31% $ 86,630 6,519 7.53% $ 99,335 7,341 7.39%
Consumer loans <F2> 3,434 327 9.52 3,001 295 9.83 2,677 232 8.67
Commercial business loans <F2> 12,652 1,225 9.68 9,164 889 9.70 5,249 530 10.10
-------- ------- -------- ------- -------- -------
Total loans receivable 100,940 7,754 7.68 98,795 7,703 7.80 107,261 8,103 7.55
Investment securities 115,373 8,145 7.06 63,001 3,722 5.91 77,443 4,748 6.13
Interest-bearing deposits 3,804 69 1.81 10,686 400 3.74 10,474 416 3.97
Mortgage-backed securities 76,216 4,570 6.00 89,298 5,321 5.96 16,805 1,153 6.86
FHLB stock 7,894 505 6.40 6,337 412 6.50 3,894 260 6.68
-------- ------- -------- ------- -------- -------
Total interest-earning
assets $304,227 21,043 6.92 $268,117 17,558 6.55 $215,877 14,680 6.80
======== ------- ====== ======== ------- ====== ======== ------- ======
Interest-bearing liabilities:
Passbook savings $ 20,809 523 2.51% $ 20,244 506 2.50% $ 27,229 663 2.43%
Checking 17,379 246 1.42 15,460 195 1.26 13,487 193 1.43
Money market accounts 10,038 396 3.95 7,047 236 3.35 5,401 150 2.78
Certificates of deposit 83,516 4,431 5.31 80,587 4,521 5.61 80,529 4,628 5.75
-------- ------- -------- ------- -------- -------
Total savings deposits 131,742 5,596 4.25 123,338 5,458 4.43 126,646 5,634 4.45
FHLB advances 156,654 8,695 5.55 125,994 6,822 5.41 76,208 4,031 5.29
Other interest-bearing
liabilities 2,964 70 2.36 3,108 71 2.28 3,153 60 1.90
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities $291,360 14,361 4.93 $252,440 12,351 4.89 $206,007 9,725 4.72
======== ------- ======== ------- ======== -------
Net interest income $ 6,682 $ 5,207 $ 4,955
======= ======= =======
Interest rate spread 1.99 1.66 2.08
====== ====== ======
Net interest margin <F3> 2.20% 1.94% 2.30%
====== ====== ======
Ratio of average
interest-earning assets
to average interest-bearing
liabilities 104.42% 106.21% 104.79%
====== ====== ======
<FN>
<F1> Average balances are computed on a monthly basis (month-end balances).
<F2> Average balances include loans 90 days or more past due; however, interest is not accrued on these loans as they
are accounted for on a nonaccrual basis.
<F3> Net interest income divided by average interest-earning assets.
</TABLE>
35
<PAGE> 38
ANALYSIS OF CHANGES IN NET INTEREST INCOME DUE TO CHANGES IN VOLUME AND
CHANGES IN RATES
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>
2000 COMPARED TO 1999 1999 COMPARED TO 1998
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
---------------------------------------- --------------------------------------
RATE/ RATE/
RATE VOLUME VOLUME NET RATE VOLUME VOLUME NET
---- ------ ------ --- ---- ------ ------ ---
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans <F1> $(187) (134) 4 (317) 139 (939) (22) (822)
Consumer loans <F1> (9) 42 (1) 32 31 28 4 63
Commercial business
loans <F1> (2) 339 (1) 336 (21) 395 (15) 359
----- ----- --- ----- ---- ----- ---- ------
Total loans
receivable (198) 247 2 51 149 (516) (33) (400)
Investment securities 726 3,094 603 4,423 (170) (885) 29 (1,026)
Interest-bearing
deposits (206) (258) 133 (331) (24) 98 (90) (16)
Mortgage-backed
securities 33 (779) (5) (751) (152) 4,974 (654) 4,168
FHLB stock (7) 102 (2) 93 (7) 163 (4) 152
----- ----- --- ----- ---- ----- ---- ------
Total net change
in income on
interest-earning
assets 348 2,406 731 3,485 (204) 3,834 (752) 2,878
----- ----- --- ----- ---- ----- ---- ------
Interest-bearing
liabilities:
Passbook savings 3 14 -- 17 18 (170) (5) (157)
Checking 24 24 3 51 (23) 28 (3) 2
Money market accounts 42 100 18 160 31 46 9 86
Certificates of
deposit (245) 164 (9) (90) (113) 3 3 (107)
----- ----- --- ----- ---- ----- ---- ------
Total savings
deposits (176) 302 12 138 (87) (93) 4 (176)
FHLB advances 171 1,660 42 1,873 91 2,634 66 2,791
Other interest-bearing
liabilities 2 (3) -- (1) 12 (1) -- 11
----- ----- --- ----- ---- ----- ---- ------
Total net change
in expense on
interest-bearing
liabilities (3) 1,959 54 2,010 16 2,540 70 2,626
----- ----- --- ----- ---- ----- ---- ------
Net change in
interest income $ 351 447 677 1,475 (220) 1,294 (822) 252
===== ===== === ===== ==== ===== ==== ======
<FN>
<F1> Does not include interest on loans 90 days or more past due as interest
has not been accrued. All loans contractually past due 90 days or more
are accounted for on a nonaccrual basis.
</TABLE>
36
<PAGE> 39
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; advances from the FHLB;
repayments, prepayments and maturities of outstanding loans; maturities of
investment securities and other short-term investments; and funds provided
from operations. While scheduled loan repayments and maturing investment
securities and short-term investments are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by the
movement of interest rates in general, economic conditions and competition.
ESB manages the pricing of its deposits to maintain a deposit balance deemed
appropriate and desirable. In addition, Equality invests in short-term
investment securities and interest-earning assets which provide liquidity to
meet lending requirements. ESB also utilizes other borrowing sources,
primarily advances from the FHLB which totaled $159.7 million at March 31,
2000. Although ESB's deposits have historically represented the majority of
its total liabilities, FHLB advances exceeded deposits as of March 31, 2000
and 1999.
At March 31, 2000, ESB had approximately $5.5 million in outstanding
commitments to originate loans, approximately $1.3 million of which were
adjustable rate mortgage loans, and $4.1 million were adjustable rate unused
commercial lines of credit based on the prime rate.
Liquidity management is both a daily and long-term function. Excess liquidity
is generally invested in short-term investments such as cash and cash
equivalents, and U.S. Government agency securities. On a longer-term basis,
ESB invests in various loans, mortgage-backed securities, and investment
securities. ESB uses its sources of funds primarily to meet its ongoing
commitments to pay maturing savings certificates and savings withdrawals,
fund loan commitments and maintain an investment securities portfolio.
Management of ESB believes that ESB has adequate resources, including
principal prepayments and repayments of loans and maturing investments, to
fund all of its commitments to the extent required. Based upon its historical
run-off experience, management believes that a significant portion of
maturing deposits will remain with ESB.
Certificates of deposit scheduled to mature in one year or less at March 31,
2000 totaled $34.5 million. Based upon management's experience and
familiarity with the customers involved and Equality's pricing policy
relative to that of its perceived competitors, management believes Equality
will retain a significant portion of these deposits.
In an effort to increase earnings, ESB deployed a strategy in late 1997 in
order to better leverage its balance sheet. The funds received from FHLB
advances have been invested in mortgage-backed securities and investment
securities. FHLB advances obtained by ESB were generally longer-term
borrowings which contained call features. In general, the investments
purchased by ESB with these advances were medium to long-term investments,
many of which have call or prepayment features. As interest rates have
risen, FHLB advances have been called and replaced with shorter-term, but
higher-cost borrowings, however, the investments have not been called. As a
result of ESB's strategy, the increase in interest rates, FHLB advances
exceeding core deposits, and a $2.0 million corporate bond that has been
downgraded below investment grade, ESB now has considerable interest rate
risk and can not liquidate its portfolio without a significant impact on
earnings. Management plans to reduce interest rate risk by growing the core
deposit portfolio with an emphasis on money market accounts and certificates
of deposit, lessening reliance on FHLB advances by repaying advances as they
mature, and using the proceeds from maturities of mortgage-backed securities
and investment securities to fund repayments of FHLB advances. As of March
31, 2000, Equality's ratio of equity to assets (end of year) was 6.16%
compared to 8.88% as of March 31, 1999. The decrease in this ratio is
primarily the result of the leverage strategy employed in late 1997.
37
<PAGE> 40
As a result of ESB's charter change on December 28, 1999 from a
federally-chartered thrift to a Missouri-chartered savings bank, ESB is
required to maintain specific amounts of regulatory capital under federal
regulations. The capital regulations require institutions to have Tier 1
leverage capital equal to 4.0% of adjusted total assets (as defined by
regulation), a minimum Tier 1 risk-based capital ratio of 4.0% of risk-based
total assets, and a total risk-based capital ratio of 8.0% of risk-based assets
(as defined by regulation). The risk-based capital requirement is calculated
based on the credit risk presented by both on-balance-sheet assets and
off-balance-sheet commitments and obligations. Assets are assigned a
credit-risk weighting based upon their relative risk ranging from 0% for assets
backed by the full faith and credit of the United States or that pose no credit
risk to the institution to 100% for assets such as delinquent or repossessed
assets.
The following table sets forth certain information concerning ESB's
regulatory capital as of March 31, 2000.
<TABLE>
<CAPTION>
REGULATORY CAPITAL
----------------------------------------------
TIER I TIER I TOTAL
LEVERAGE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL
-------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Stockholders' equity $24,144 24,144 24,144
Additional capital item - general loan
loss reserves -- -- 364
------- ------ ------
Total regulatory capital 24,144 24,144 24,508
Minimum capital requirement 13,292 6,464 12,928
------- ------ ------
Excess regulatory capital $10,852 17,680 11,580
======= ====== ======
Regulatory capital ratio 7.27% 14.94% 15.17%
======= ====== ======
</TABLE>
Management believes that under current regulations, ESB will continue to meet
its minimum capital requirements in the foreseeable future. Events beyond the
control of ESB could adversely affect future earnings and as a result, the
ability of ESB to meet its future minimum capital requirements.
On June 26, 2000, ESB entered into a Memorandum of Understanding (MOU) with
the Federal Deposit Insurance Corporation and the Missouri Division of
Finance. The MOU, discussed in more detail in note 2 to the consolidated
financial statements, addresses that, among other things, ESB is to maintain
a Tier I leverage ratio of not less than 7% while the MOU is in effect and is
to refrain from declaring or paying any dividends without prior written
regulatory approval.
CHANGES IN FINANCIAL CONDITION
The total assets of Equality increased approximately $34.9 million, or 12.1%,
to $323.3 million at March 31, 2000 from $288.4 million at March 31, 1999.
This increase in asset size primarily relates to an increase in cash,
investment securities and loans receivable which were funded through
increased savings deposits, FHLB advances, the proceeds from repayment of
mortgage loans and mortgage-backed securities.
Cash, primarily interest bearing demand accounts, increased $2.7 million, or
42.2%, to $9.1 million at March 31, 2000 from $6.4 million at March 31, 1999.
This increase is primarily the result of increased savings deposits and FHLB
advances and decreased mortgage-backed securities, offset by increased
investment securities and loans receivable.
38
<PAGE> 41
Interest bearing deposits decreased $887,000, or 81.8%, to $198,000 at March
31, 2000 from $1.1 million at March 31, 1999. The decrease is due to the
maturity of nine certificates of deposit at other financial institutions. The
Company is consciously reducing its investment in this area as certificates
of deposit mature.
Investment securities available for sale increased $39.0 million, or 47.8%,
to $120.6 million at March 31, 2000 from $81.6 million at March 31, 1999.
This increase is due primarily to $91.9 million of purchases of securities
offset by $21.2 million of maturities, sales proceeds of $27.0 million, and a
mark to market adjustment of $6.2 million to reflect the unrealized loss on
investment securities at March 31, 2000. The increase in investment
securities is a result of management shifting funds from the sale and
maturity of mortgage-backed securities due to higher yields on investment
securities. Unrealized losses on investment securities are a result of an
increase in interest rates and the downgrade of a $2.0 million corporate bond
held by ESB. Included in investment securities is a $2.0 million corporate
obligation, with a fair value of $1.06 million at March 31, 2000 and a
maturity date of March 15, 2003, which was investment grade when originally
purchased but has subsequently downgraded below investment grade; however,
the security continues to meet its interest payment obligations. Management
believes the decline in the fair value of this security is temporary.
Equality has the ability and it is management's intent to hold this security
until maturity.
Investment securities held to maturity totaled $600,000 at March 31, 2000 and
March 31, 1999.
Mortgage-backed securities available for sale decreased $26.7 million, or
29.4%, to $64.1 million at March 31, 2000 from $90.8 million at March 31,
1999. This decrease is the result of principal repayments of $18.3 million,
sales proceeds of $10.5 million, and a mark to market adjustment of $2.7
million to reflect the unrealized loss on mortgage-backed securities at March
31, 2000 partially offset by purchases of $5.3 million. As noted above,
funds from mortgage-backed securities sales and maturities have been shifted
to investment securities. Unrealized losses on mortgage-backed securities
are a result of an increase in interest rates.
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 EBS's mortgage-backed securities are yielding below- market rates of
interest due to the increase in interest rates. In a rising rate
environment, ESB may experience a slow down in prepayments and a lengthening
in the expected majority of the mortgage-backed securities.
Loans receivable, net, increased $15.1 million, or 16.7%, to $105.3 million
at March 31, 2000, from $90.2 million at March 31, 1999. Loans held for
investment increased $19.5 million, or 23.4%, to $102.7 million at March 31,
2000 from $83.2 million at March 31, 1999. This increase reflects Equality's
efforts to prudently increase its loan portfolio while developing an expanded
retail banking presence in its market area. Loans held for sale decreased
$4.4 million, or 62.9%, to $2.6 million at March 31, 2000 from $7.0 million
at March 31, 1999. This decrease is the result of EMC mortgage loan
originations totaling $86.9 million and mortgage loan purchases of $773,000,
offset by net mortgage loan sales of $92.0 million at March 31, 2000.
Office properties and equipment increased $484,000, or 7.5%, to $6.9 million
at March 31, 2000 from $6.5 million at March 31, 1999. The increase resulted
from additional improvements to the Bank's branch network including the
opening of new full service branches in St. Peters, Missouri and Arnold,
Missouri as well as improvements to the Fenton, Missouri facility which is
planned to open in the summer of 2000.
Savings deposits increased $11.9 million, or 9.2%, to $140.9 million at March
31, 2000 from $129.0 million at March 31, 1999. Interest credited in 2000 was
approximately $4.5 million.
39
<PAGE> 42
FHLB advances increased $29.5 million, or 22.7%, to $159.7 million at March
31, 2000 from $130.2 million at March 31, 1999. Proceeds from these advances
were used to fund purchases of investment securities and the origination of
loans receivable.
Other borrowed money decreased $131,000, or 7.2%, to $1.7 million at March
31, 2000 from $1.8 million at March 31, 1999. These short-term borrowings
relate primarily to a warehouse line of credit established with an
unaffiliated bank and maintained by EMC, the proceeds of which were invested
solely in residential mortgage loans.
Total stockholders' equity decreased $5.7 million, or 22.2%, to $19.9 million
at March 31, 2000 from $25.6 million at March 31, 1999. The decrease was
primarily attributable to the Company's purchase of treasury stock of $1.1
million, payment of quarterly dividends totaling $558,000, and a mark to
market adjustment on securities available for sale of $5.6 million, offset by
net income of $1.2 million, a reduction in ESOP indebtedness of $145,000, and
a reduction of unamortized restricted stock awards of $148,000. The mark to
market adjustment on securities available for sale is the result of an
increase in interest rates and the downgrade of a $2.0 million corporate bond
held by ESB.
FISCAL YEAR ENDED MARCH 31, 2000 COMPARED TO MARCH 31, 1999
NET INCOME
Net income increased $23,000, or 2.0%, to $1.2 in 2000 from $1.1
million in 1999. The increase was primarily the result of increased net
interest income of $1.5 million, or 28.3%, offset by decreased
noninterest income of $931,000, or 22.0%, increased noninterest expense
of $491,000, or 6.5%, and increased income taxes of $31,000, or 4.4%.
NET INTEREST INCOME
Interest income increased $3.4 million, or 19.3%, to $21.0 million in
2000 from $17.6 million in 1999. Interest on loans receivable increased
by $50,000, or 0.7% to $7.8 million in 2000. This increase was the
result of an increase in the average balance of loans outstanding of
$2.1 million from $98.8 million in 1999 to $100.9 million in 2000,
offset by a decrease in the yield on loans from 7.80% in 1999 to 7.68%
in 2000. The higher average balance of loans outstanding reflects an
increase in secured commercial lending offset by a decrease in the
mortgage lending portfolio. Interest on investment securities increased
$4.4 million, or 118.9%, from $3.7 million in 1999 to $8.1 million in
2000, due to an increase in the average balance of investment
securities of $52.4 million from $63.0 million in 1999 to $115.4
million in 2000. As previously discussed, the increase in investment
securities is a result of the Company's leverage strategy and also a
result of shifting funds from the sale or maturity of mortgage-backed
securities. The yield on investment securities increased from 5.91% in
1999 to 7.06% in 2000. Interest income on mortgage-backed securities
decreased $751,000, or 14.1%, from $5.3 million in 1999 to $4.6 million
in 2000 due to a decrease in the average balances of $13.1 million from
$89.3 million in 1999 to $76.2 million in 2000, and an increase in the
yield on mortgage-backed securities from 5.96% in 1999 to 6.00% in
2000.
Interest expense increased $2.0 million, or 16.1%, from $12.4 million
in 1999 to $14.4 million in 2000. The increase resulted primarily from
increased average deposits and FHLB advances. Average deposit balances
increased $8.4 million from $123.3 million in 1999 to $131.7 million in
2000. The weighted average cost of deposits decreased from 4.43% in
1999 to 4.25% in 2000. The increase in average savings deposits is
primarily due to ESB's opening of three new branch facilities and
deposit marketing efforts.
Average advances from the FHLB increased $30.7 million from $126.0
million in 1999 to $156.7 million in 2000. The increase is primarily
the result of borrowings used to fund increased investment securities
and loans receivable. The weighted average cost of advances increased
from 5.41% in 1999 to 5.55% in 2000. The weighted average rate for
FHLB advances was 5.95% at March 31, 2000.
40
<PAGE> 43
Net interest margin was 2.20% for the year ended March 31, 2000 and
1.94% for the year ended March 31, 1999. While the Company's leverage
strategy has increased net margin and net interest income, it has
caused Equality to have considerable interest rate risk. Although
interest rates have increased, the increase in net interest margin has
been offset by lower yields on loans as a result of lending competition
and adjustable rate mortgages and a result of higher yields on FHLB
advances as lower cost borrowings have been called or have matured.
The retention of adjustable rate mortgages helps reduce ESB's exposure
to interest rate risk. In an environment of rapidly increasing
interest rates, however, it is possible for the interest rate increases
to exceed the maximum allowable adjustment on adjustable rate
mortgages, which would negatively affect ESB's interest rate spread.
In addition, because the interest earned on adjustable rate mortgages,
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.
Management's efforts to reduce interest rate risk through less reliance
on FHLB advances and using maturities of investment securities and
mortgage-backed securities to fund the repayment of advances could
result in a reduction of net interest income and net interest margin in
the future. In addition, if management is forced to sell investment
securities to meet liquidity needs, market losses could result.
PROVISION FOR LOSSES ON LOANS
The Company had no provision for losses on loans in 2000 or 1999. 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. ESB's
allowance for loan losses totaled $364,000 at March 31, 2000 and
$366,000 at March 31, 1999. The allowance for loan losses is
established through a provision for loan losses charged to expense.
While ESB maintains its allowance for losses at a level which it
considered to be adequate, there can be no assurances that further
additions will not be made to the allowance or that such losses will
not exceed the estimated amounts.
NONINTEREST INCOME
Noninterest income decreased $931,000, or 22.0%, from $4.2 million in
1999 to $3.3 million in 2000. The decrease is due primarily to gain on
sales of mortgage loans which decreased $1.2 million from $2.0 million
in 1999 to $771,000 in 2000, decreased gain on sale of investment
securities which decreased $209,000 from $166,000 in 1999 to a loss of
$43,000 in 2000, and decreased loan servicing fees and late charges of
$36,000 offset by a gain on sale of mortgage servicing rights of
$451,000, no equity in loss of joint ventures which decreased $54,000
as a result of the Company's sale of its joint venture interest in
1998, and increased other noninterest income of $135,000. In 2000, ESB,
through EMC, sold $87.7 million of mortgage loans as compared to $177.3
million in the comparable period in 1999. The decreased sales volume of
$89.6 million resulted in decreased gain on sale of mortgage loans and
a corresponding decrease in fees related to reduced originations. Gain
on sale of mortgage servicing rights was $451,000 in 2000, as a result
of the sale of $65.0 million of GNMA servicing, with no comparable sale
in 1999. As a result, the loan servicing portfolio of EMC decreased
$34.9 million, or 9.5%, from $369.3 million, of which $297.8 million
was serviced for unaffiliated institutions at March 31, 1999 to $334.4
million at March 31, 2000, of which $249.4 million was serviced for
unaffiliated institutions.
While management does not believe ESB will be required to sell
investment securities to meet liquidity needs, market losses could be
incurred if ESB would be required to do so.
NONINTEREST EXPENSE
Noninterest expense increased $491,000, or 6.5%, from $7.6 million in
1999 to $8.1 million in 2000 due primarily to increased occupancy
expenses of $253,000, or 42.2%, from $599,000 in 1999 to $851,000 in
2000, increased data processing expenses of $110,000, or 33.0%, from
41
<PAGE> 44
$332,000 in 1999 to $442,000 in 2000, increased advertising expense of
$78,000, or 27.5%, from $282,000 in 1999 to $360,000 in 2000, and
increased other expenses of $83,000, or 4.6%, from $1.8 million in 1999
to $1.9 in 2000 offset by decreased salary and employee benefits of
$29,000, or 0.6%, which decreased primarily due to reduced commissions
paid of $250,000, or 44.0%, for comparable periods, as a result of
reduced loan originations, partially offset by an increase of ESB
personnel to staff two newly opened branch facilities in St. Peters,
Missouri, and Arnold, Missouri, as well as additional employment needs
in ESB's subsidiaries. The increase in occupancy, data processing and
other expenses in 2000 compared to 1999 is also reflective of the new
branches which have been opened.
INCOME TAXES
Income tax expense increased $31,000, or 4.4%, from $708,000 in 1999 to
$739,000 in 2000. The increase was the result of the increase in income
before income tax expense of $54,000 in 2000. The effective tax rate
was approximately 38.5% and 39.1% in 1999 and 2000, respectively.
FISCAL YEAR ENDED MARCH 31, 1999 COMPARED TO MARCH 31, 1998
NET INCOME
Net income decreased $110,000, or 8.9%, to $1.1 million in 1999 from
$1.2 million in 1998. The decrease was primarily the result of
increased noninterest expense of $1.9 million, or 33.4%, offset by
increased net interest income of $252,000, or 5.1%, increased
noninterest income of $1.4 million, or 47.1%, decreased provision for
losses on loans of $116,000, or 100.0%, and decreased income taxes of
$70,000, or 9.0%.
NET INTEREST INCOME
Interest income increased $2.9 million, or 19.6%, to $17.6 million in
1999 from $14.7 million in 1998. Interest on loans receivable decreased
by $400,000, or 4.9%, to $7.7 million in 1999 as compared to $8.1
million in 1998. This decrease was the result of a decrease in the
average balance of loans outstanding of $8.5 million from $107.3
million in 1998 to $98.8 million in 1999, offset by an increase in the
average yield on loans from 7.55% in 1998 to 7.80% in 1999. The lower
average balance of loans outstanding for 1999 reflects a decrease in
mortgage loan portfolio lending and increased repayments due to low
interest rates, offset by increased secured commercial lending.
Interest on investment securities decreased $1.0 million, or 20.2%,
from $4.7 million in 1998 to $3.7 million in 1999, due to a decrease in
the average balance of investment securities of $14.4 million from
$77.4 million in 1998 to $63.0 million in 1999. During the same period
the yield on investment securities decreased from 6.13% in 1998 to
5.91% in 1999. Interest income on mortgage-backed securities increased
$4.2 million, or 361.3%, from $1.2 million in 1998 to $5.3 million in
1999 due to an increase in the average balances of mortgage-backed
securities of $72.5 million from $16.8 million in 1998 to $89.3 million
in 1999, offset by a decrease in the yield on mortgage-backed
securities from 6.86% in 1998 to 5.96% in 1999.
Interest expense increased $2.6 million, or 27.0%, to $12.4 million in
1999 from $9.7 million in 1998. The increase resulted primarily from
increased FHLB advances. Average advances from the FHLB increased $49.8
million from $76.2 million in 1998 to $126.0 million in 1999. The
increase was primarily the result of borrowings used to fund increased
investments in mortgage-backed securities. The weighted average cost of
FHLB advances increased from 5.29% in 1998 to 5.41% in 1999. Average
deposit balances decreased $3.3 million from $126.6 million in 1998 to
$123.3 million in 1999. During the same period, the weighted average
cost of deposits decreased from 4.45% to 4.43% due to a higher
concentration of money market demand accounts and a 14 basis point
decrease in the average cost of certificates of deposit.
Net interest margin was 1.94% for the year ended March 31, 1999 and
2.30% for the year ended March 31, 1998. The decrease in net interest
margin is a result of a highly competitive lending environment, a
decrease in adjustable rate mortgages due to refinancing activity in
the lower interest rate environment and the Company's leverage
strategy.
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<PAGE> 45
PROVISION FOR LOSSES ON LOANS
Provision for losses on loans was $-0- in 1999 as compared to $116,000
in 1998. The provision for loan losses is determined by management as
the amount to be added to the allowance for loan losses after net
charge-offs have been deducted to bring the allowance to a level which
is considered adequate to absorb losses inherent in the loan portfolio.
ESB's allowance for loan losses totaled $366,000 at March 31, 1999 and
$374,000 at March 31, 1998. The allowance for loan losses is
established through a provision for loan losses charged to expense.
While ESB maintains its allowance for losses at a level which it
considered to be adequate, there can be no assurances that further
additions will not be made to the allowance or that such losses will
not exceed the estimated amounts.
NONINTEREST INCOME
Noninterest income increased $1.4 million, or 47.1%, to $4.2 million in
1999 from $2.9 million in 1998. The increase is due primarily to gain
on sales of mortgage loans which increased from $1.7 million in 1998 to
$2.0 million in 1999, increased loan servicing fees and late charges
which increased $370,000 from $920,000 in 1998 to $1.3 million in 1999,
increased gain on sale of real estate of $147,000 due to Equality
Commodity Corporation's sale of its 50% ownership interest in WC Joint
Venture, a direct investment, and one investment property, and
increased gain on sale of investments of $125,000 from $41,000 in 1998
to $166,000 in 1999. The increase of $645,000, or 55.2%, on gain on
sales of mortgage loans was due to a continued improvement in market
interest rates during calendar year 1999. In 1999, ESB, through EMC,
sold $184.8 million of mortgage loans as compared to $105.4 million in
1998. The increased sales volume of $79.4 million resulted in increased
gain on sales of mortgage loans due to the condition of the secondary
mortgage market. Loan servicing fees and late charges increased
$370,000, or 40.2%, due primarily to an increase in the average
servicing portfolio of EMC. Average loan servicing by EMC increased
$29.2 million, or 8.6%, from $340.1 million in 1998 to $369.2 million
in 1999.
NONINTEREST EXPENSE
Noninterest expense increased $1.9 million, or 33.4%, to $7.6 million
in 1999 from $5.7 million in 1998, due primarily to increased salaries
and employee benefits of $1.1 million, or 33.3%, from $3.4 million in
1998 to $4.5 million in 1999, increased advertising expenses of
$158,000, or 128.0%, from $124,000 in 1998 to $282,000 in 1999 and
increased other expenses of $486,000, or 37.3%, from $1.3 million in
1998 to $1.8 million in 1999. Increased salary and employee benefits
are the direct result of increased commissions paid to mortgage loan
origination personnel of $169,000, or 42.5%, from $398,000 in 1998 to
$567,000 in 1999, general wage increases and an increase in five bank
personnel to staff the new Washington branch facility, in addition to
ESOP and MRP compensation expenses which increased $308,000 in 1999 as
compared to 1998. Advertising expenses increased as a result of
marketing promotions during 1999 for ESB's relocated bank office, newly
opened Washington, Missouri facility, and overall promotion of ESB.
Other expenses increased due primarily to an increase in expenses
totaling $155,000 in connection with professional services and taxes
for Equality with no comparable items in 1998, increases in supplies
and services associated with increased mortgage loan activity and an
increased number of ESB branch facilities.
INCOME TAXES
Income tax expense decreased $70,000, or 9.0%, to $708,000 in 1999 from
$778,000 in 1998. The decrease was the result of the decrease in income
before income tax expense of $180,000. The effective tax rate was
approximately 38.5% and 38.6% in 1999 and 1998, respectively.
43
<PAGE> 46
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133) which
establishes standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. In June 1999, the FASB issued
SFAS 137, Accounting for Derivative Instruments and Hedging Activities
- Deferral of the Effective Date of FASB Statement No. 133, an
Amendment of FASB Statement No. 133, which defers the effective date of
SFAS 133 from fiscal years beginning after June 15, 1999 to fiscal
years beginning after June 15, 2000. Initial application should be as
of the beginning of an equity's fiscal quarter; on that date, hedging
relationships must be designated and documented pursuant to the
provisions of SFAS 133, as amended. Earlier application of all of the
provisions is encouraged but is permitted only as of the beginning of
any fiscal quarter that begins after the issuance date of SFAS 133, as
amended. Additionally, SFAS 133, as amended, should not be applied
retroactively to financial statements of prior periods. Equality is
currently evaluating the requirements and impact of SFAS 133.
YEAR 2000 COMPLIANCE
Equality's operations are heavily dependent on the use of computer systems.
The Year 2000 issue centers around the inability of some computer systems to
properly read and interpret dates because many existing computers and
computer programs have been developed to use two digits rather than four to
refer to a year. The risk of system failure and data processing errors may be
the result of this issue.
Equality initially estimated costs of approximately $148,000 to prepare for
the century date change. As of March 31, 2000, direct and indirect
expenditures have been approximately $92,500. This includes internal and
external costs that were expensed as well as capital expenditures that were
capitalized. Costs include, but are not limited to salary expenses, outside
service fees (i.e., legal, audit, consulting), hardware and software
expenditures and equipment costs. Funding for Year 2000 costs has been
derived from normal operating cash flow.
Equality focused its efforts on addressing those systems it deems to be
critical to ongoing operations. The company-wide project for addressing the
Year 2000 issue was segmented into five phases, as recommended by regulators.
With regard to internal, mission critical systems, the present state of each
phase was estimated at March 31, 2000 as follows:
<TABLE>
<CAPTION>
COMPLETION DATE/
EXPECTED PERCENT
PHASE COMPLETION DATE COMPLETE
----- --------------- --------
<S> <C> <C>
Awareness December 31, 1997 100%
Assessment June 30, 1998 100
Renovation December 31, 1998 100
Testing March 31, 1999 100
Implementation September 30, 1999 100
</TABLE>
In addition to addressing the readiness of internal systems, Equality
assessed the readiness of its major vendors, suppliers, customers and
business partners. Though such efforts have been diligent, there can be no
guarantee that the systems these outside parties supply will be fully
functional in the Year 2000. Such failures could have a material adverse
effect on Equality.
44
<PAGE> 47
Equality developed business resumption contingency plans for the purpose of
assuring that core business processes will continue to operate in the Year
2000. The plan addressed failures such as payment system failures, data
processing system failures, increased cash withdrawals, telecommunication
failures, disruption in services provided by outside parties and customer
failures. The contingency plan provides for reasonable alternatives to
potential failures and the establishment of an implementation strategy,
including timeliness and responsibility assignments.
To date, Equality has not experienced any significant disruptions to its
financial or operating activities caused by failure of computerized systems
resulting from Year 2000 issues. Management does not expect Year 2000 issues
to have a material adverse effect on Equality's operations or financial
results in 2000.
45
<PAGE> 48
ITEM 7. FINANCIAL STATEMENTS
-----------------------------
Index to Consolidated Financial Statements
------------------------------------------
Independent Auditors' Report 47
Consolidated Balance Sheets 48
Consolidated Statements of Income 49
Consolidated Statements of Stockholders' Equity 50
Consolidated Statements of Cash Flows 51
Consolidated Statements of Comprehensive Income (Loss) 52
Notes to Consolidated Financial Statements 53
46
<PAGE> 49
[letterhead of KPMG]
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Equality Bancorp, Inc.
St. Louis, Missouri:
We have audited the accompanying consolidated balance sheets of Equality
Bancorp, Inc. and subsidiaries (Equality) as of March 31, 2000 and 1999, and
the related consolidated statements of income, stockholders' equity, cash
flows and comprehensive income (loss) for each of the years in the three-year
period ended March 31, 2000. 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
2% and 3% in 2000 and 1999, respectively, and total interest income and
noninterest income constituting 13%, 20% and 19%, in 2000, 1999 and 1998,
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, 2000 and 1999, and the results of their
operations and their cash flows for each of the years in the three-year
period ended March 31, 2000, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
St. Louis, Missouri
June 26, 2000
47
<PAGE> 50
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2000 and 1999
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
ASSETS
Cash, primarily interest-bearing demand accounts $ 9,080,509 6,449,613
Interest-bearing deposits 198,000 1,085,000
Investment securities:
Available for sale, at fair value 120,575,542 81,635,339
Held to maturity, at amortized cost (fair value of $548,000
at March 31, 2000 and $531,000 at March 31, 1999) 600,000 600,000
Mortgage-backed securities available for sale,
at fair value 64,137,674 90,810,783
Loans receivable, net 105,315,729 90,230,677
Investment in real estate 58,054 58,054
Stock in Federal Home Loan Bank 7,987,100 6,911,100
Mortgage servicing rights 1,273,768 1,479,631
Office properties and equipment, net 6,935,115 6,451,357
Deferred tax asset 2,775,937 --
Accrued interest receivable and other assets 4,397,879 2,725,620
------------ -----------
$323,335,307 288,437,174
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits $140,885,244 128,953,826
Accrued interest payable on savings deposits 147,711 200,280
Borrowed money 161,435,160 132,010,050
Advance payments by borrowers for taxes and insurance 35,800 69,634
Income taxes payable 276,568 203,588
Deferred income taxes -- 873,343
Accrued expenses and other liabilities 629,822 518,723
------------ -----------
Total liabilities 303,410,305 262,829,444
------------ -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value per share; 1,000,000
shares authorized; none issued and outstanding -- --
Common stock, $.01 par value per share;
4,000,000 shares authorized; 2,544,094 shares
and 2,519,793 shares issued at March 31, 2000
and 1999, respectively 25,441 25,198
Additional paid-in capital 16,192,342 16,108,269
Retained earnings 11,849,449 11,255,324
Accumulated other comprehensive income (loss) (5,447,058) 139,464
Treasury stock, at cost; 158,055 shares and 18,500 shares
at March 31, 2000 and 1999, respectively (1,233,799) (166,431)
Unearned Employee Stock Ownership Plan shares (989,864) (1,134,769)
Unamortized restricted stock awards (471,509) (619,325)
------------ -----------
Total stockholders' equity 19,925,002 25,607,730
------------ -----------
$323,335,307 288,437,174
============ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
48
<PAGE> 51
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended March 31, 2000, 1999, and 1998
<CAPTION>
2000 1999 1998
----------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans receivable $ 7,753,559 7,703,347 8,103,429
Investment securities and interest-bearing deposits 8,214,465 4,121,848 5,163,526
Mortgage-backed securities 4,570,590 5,321,365 1,153,512
Other 504,838 411,861 259,843
----------- ---------- ----------
Total interest income 21,043,452 17,558,421 14,680,310
----------- ---------- ----------
Interest expense:
Savings deposits 5,596,459 5,458,146 5,633,692
Advances from Federal Home Loan Bank 8,694,309 6,821,775 4,031,314
Other borrowed money 70,382 71,507 60,376
----------- ---------- ----------
Total interest expense 14,361,150 12,351,428 9,725,382
----------- ---------- ----------
Net interest income 6,682,302 5,206,993 4,954,928
Provision for losses on loans -- -- 115,513
----------- ---------- ----------
Net interest income after provision
for losses on loans 6,682,302 5,206,993 4,839,415
----------- ---------- ----------
Noninterest income:
Gain on sales of mortgage loans 771,172 1,994,800 1,349,712
Loan servicing fees and late charges 1,253,125 1,289,571 919,884
Gain on sale of mortgage servicing rights 451,298 -- --
Gain (loss) on sale of investment and mortgage-
backed securities available for sale, net (43,016) 166,388 41,044
Equity in loss of joint venture -- (54,430) (44,109)
Rental income 189,470 142,802 126,811
Gain on sale of real estate -- 148,391 1,154
Other 684,616 549,710 486,988
----------- ---------- ----------
Total noninterest income 3,306,665 4,237,232 2,881,484
----------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 4,502,096 4,531,202 3,399,859
Occupancy 851,325 598,632 533,378
Data processing 441,995 332,438 261,397
Advertising 359,607 282,103 123,707
Federal insurance premiums 70,150 72,422 81,428
Other 1,873,340 1,790,501 1,304,296
----------- ---------- ----------
Total noninterest expense 8,098,513 7,607,298 5,704,065
----------- ---------- ----------
Income before income tax expense 1,890,454 1,836,927 2,016,834
Income tax expense 738,544 707,647 777,668
----------- ---------- ----------
Net income $ 1,151,910 1,129,280 1,239,166
=========== ========== ==========
Earnings per share:
Basic $ 0.50 0.48 0.51
Diluted 0.49 0.47 0.51
=========== ========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
49
<PAGE> 52
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended March 31, 2000, 1999, and 1998
<CAPTION>
UNEARNED
ACCUMULATED EMPLOYEE
OTHER COM- STOCK UNAMORTIZED TOTAL
COMMON STOCK ADDITIONAL PREHENSIVE OWNERSHIP RESTRICTED STOCK
-------------------- PAID-IN RETAINED INCOME TREASURY PLAN STOCK HOLDERS'
SHARES AMOUNT CAPITAL EARNINGS (LOSS) STOCK SHARES AWARDS EQUITY
--------- --------- ---------- ---------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
March 31, 1997 836,400 $ 836,400 2,768,548 9,674,676 (509,523) -- (135,840) -- 12,634,261
Net income -- -- -- 1,239,166 -- -- -- -- 1,239,166
Net proceeds
from sale of
common stock
of Equality
Bancorp, Inc. 1,322,500 13,225 12,297,206 -- -- -- (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. (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 -- -- -- -- 50,000
Exercise of
stock options 19,953 200 68,716 -- -- -- -- -- 68,916
Tax benefit
of stock
options
exercised -- -- 10,328 -- -- -- -- -- 10,328
Amortization of
ESOP awards -- -- 27,677 -- -- -- 56,796 -- 84,473
Dividend
declared
on nonmutual
holding
company
owned common
stock at
$.34 per share -- -- -- (128,322) -- -- -- -- (128,322)
Dividend
declared
on common
stock of
Equality
Bancorp,
Inc.at
$.06 per
share -- -- -- (141,120) -- -- -- -- (141,120)
Other
comprehensive
income
(loss),
net of tax -- -- -- -- 907,742 -- -- -- 907,742
--------- --------- ---------- ---------- ---------- ---------- ---------- -------- ----------
Balance,
March 31,
1998 2,505,855 25,059 15,997,241 10,694,400 398,219 -- (1,277,104) -- 25,837,815
Net income -- -- -- 1,129,280 -- -- -- -- 1,129,280
Exercise of
stock options 13,938 139 60,594 -- -- -- -- -- 60,733
Tax benefit
of stock
options
exercised -- -- 4,247 -- -- -- -- -- 4,247
Purchase of
stock for
restricted
stock awards -- -- -- -- -- -- -- (739,456) (739,456)
Purchase of
treasury stock -- -- -- -- -- (166,431) -- -- (166,431)
Amortization
of stock
awards -- -- -- -- -- -- -- 120,131 120,131
Amortization of
ESOP awards -- -- 46,187 -- -- -- 142,335 -- 188,522
Dividend
declared
on common
stock of
Equality
Bancorp, Inc.
at $.24 per
share -- -- -- (568,356) -- -- -- -- (568,356)
Other
comprehensive
income (loss),
net of tax -- -- -- -- (258,755) -- -- -- (258,755)
--------- --------- ---------- ---------- ---------- ---------- ---------- -------- ----------
Balance,
March 31,
1999 2,519,793 25,198 16,108,269 11,255,324 139,464 (166,431) (1,134,769) (619,325) 25,607,730
Net income -- -- -- 1,151,910 -- -- -- -- 1,151,910
Exercise of
stock options 24,301 243 81,818 -- -- -- -- -- 82,061
Dividends paid
on unvested
stock awards -- -- 14,184 -- -- -- -- -- 14,184
Purchase of
treasury
stock -- -- -- -- -- (1,067,368) -- -- (1,067,368)
Amortization
of stock
awards -- -- -- -- -- -- -- 147,816 147,816
Amortization
of ESOP
awards -- -- (11,929) -- -- -- 144,905 -- 132,976
Dividend
declared
on common
stock of
Equality
Bancorp, Inc.
at $.24 per
share -- -- -- (557,785) -- -- -- -- (557,785)
Other
comprehensive
income (loss),
net of tax -- -- -- -- (5,586,522) -- -- -- (5,586,522)
--------- --------- ---------- ---------- ---------- ---------- ---------- -------- ----------
Balance,
March 31,
2000 2,544,094 $ 25,441 16,192,342 11,849,449 (5,447,058) (1,233,799) (989,864) (471,509) 19,925,002
========= ========= ========== ========== ========== ========== ========== ======== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
50
<PAGE> 53
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended March 31, 2000, 1999, and 1998
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,151,910 1,129,280 1,239,166
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization:
Office properties and equipment 441,029 237,834 272,470
Real estate investments -- 7,508 11,261
Premiums and discounts, net (1,266,977) (366,626) 26,339
Mortgage servicing rights 632,055 680,338 383,812
Stock awards 147,816 120,131 --
(Increase) decrease in accrued interest receivable (726,157) (291,773) 52,687
Provision for losses on loans -- -- 115,513
Gain on sale of mortgage loans (771,172) (2,673,260) (1,722,985)
Increase (decrease) in valuation reserve on loans held for sale -- (10,517) 53,652
Gain on sale of mortgage servicing rights (451,298) -- --
Gain on sale of real estate -- (148,391) (1,154)
Gain (loss) on the sale of investment and mortgage-backed
securities available for sale, net 43,016 (166,388) (41,044)
(Decrease) increase in accrued interest payable on
savings deposits (52,569) 66,077 (396)
Change in income taxes payable 72,980 (492,604) 596,329
Equity in loss of joint venture -- 54,430 44,109
Other, net (815,950) (2,429,385) 2,735,473
Origination and purchases of loans held for sale (87,659,092) (177,318,757) (115,459,407)
Proceeds from sales of loans held for sale 92,810,614 187,521,731 107,056,970
------------ ------------ ------------
Net cash provided by (used in) operating activities 3,556,205 5,919,628 (4,637,205)
------------ ------------ ------------
Cash flows from investing activities:
Net (increase) decrease in loans receivable (19,418,651) 10,711,331 (2,546,296)
Decrease in interest-bearing deposits 887,000 293,000 2,441,744
Principal repayments on investment securities
available for sale 13,742 40,641 --
Principal repayments on mortgage-backed securities
available for sale 18,301,427 33,071,367 3,134,164
Proceeds from maturities of investment securities
available for sale 21,190,000 67,770,704 66,524,057
Proceeds from the sale of investment securities
available for sale 27,014,541 41,459,748 50,716,621
Proceeds from the sale of mortgage-backed securities
available for sale 10,517,271 26,459,805 10,035,942
Proceeds from maturities of investment securities
held to maturity -- 2,000,000 2,250,000
Purchase of investment securities available for sale (91,934,130) (120,808,643) (114,672,471)
Purchase of mortgage-backed securities available for sale (5,300,430) (92,917,447) (56,569,108)
Net increase in mortgage servicing rights (181,181) (1,322,372) (708,134)
Proceeds from the sale of mortgage servicing rights 206,287 -- --
Proceeds from the sale of real estate acquired
through foreclosure -- -- 83,995
Proceeds from the sale of real estate held for investment -- 344,290 --
Decrease in joint venture borrowings -- 649,047 13,865
Purchase of stock in FHLB (1,076,000) (1,711,100) (1,850,000)
Purchase of office properties and equipment, net (924,787) (1,114,904) (2,913,166)
------------ ------------ ------------
Net cash used in investing activities (40,704,911) (35,074,533) (44,058,787)
------------ ------------ ------------
Cash flows from financing activities:
Net increase (decrease) in savings deposits 11,931,418 9,652,450 (3,681,578)
Proceeds from FHLB advances 30,000,000 36,500,000 106,500,000
Repayment of FHLB advances (443,641) (10,315,733) (65,500,000)
Proceeds from other borrowed money -- 147,089 565,730
Repayment of other borrowed money (131,249) -- (135,840)
(Decrease) increase in advance payments by borrowers
for taxes and insurance (33,834) (36,316) 19,174
Cash dividends paid (557,785) (568,356) (269,442)
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 82,061 60,733 68,916
Purchase of stock for restricted stock awards -- (739,456) --
Purchase of treasury stock (1,067,368) (166,431) --
------------ ------------ ------------
Net cash provided by financing activities 39,779,602 34,533,980 48,729,331
------------ ------------ ------------
Net increase in cash and cash equivalents 2,630,896 5,379,075 33,339
Cash and cash equivalents, beginning of year 6,449,613 1,070,538 1,037,199
------------ ------------ ------------
Cash and cash equivalents, end of year $ 9,080,509 6,449,613 1,070,538
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 14,329,859 12,285,351 9,725,778
Income taxes paid 680,660 1,030,012 75,958
Noncash transfers of loans to real estate
acquired through foreclosure -- -- 19,674
============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
51
<PAGE> 54
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Years ended March 31, 2000, 1999, and 1998
<CAPTION>
2000 1999 1998
----------- --------- ---------
<S> <C> <C> <C>
Net income $ 1,151,910 1,129,280 1,239,166
Other comprehensive income (loss):
Net unrealized gain (loss) on investment and mortgage-
backed securities available for sale, net of tax (5,612,762) (157,258) 932,779
Less adjustment for loss (gain) on sale of investment
and mortgage-backed securities available for sale
realized in net income, net of tax (credit) of $(16,776),
$64,891, and $16,007 in 2000, 1999, and 1998,
respectively 26,240 (101,497) (25,037)
----------- --------- ---------
Total other comprehensive income (loss) (5,586,522) (258,755) 907,742
----------- --------- ---------
Comprehensive income (loss) $(4,434,612) 870,525 2,146,908
=========== ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
52
<PAGE> 55
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
(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.
On December 28, 1999, the Bank converted from a federally chartered
savings and loan association, regulated by the Office of Thrift
Supervision (OTS), to a state chartered savings bank, regulated by
the Missouri Division of Finance and the Federal Deposit Insurance
Corporation. Equality, a unitary thrift holding company, remains
regulated by the OTS.
BUSINESS
Equality provides a full range of banking services to individual and
corporate customers from its home office and five branch locations in
the St. Louis area. In addition, Equality provides mortgage lending
services from two additional 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.
53 (Continued)
<PAGE> 56
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
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 and
investment portfolios 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, the value of Equality's investment in real estate, and
the value of Equality's investment securities.
Management has made a number of estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare the consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates. The
determination of the allowance for loan losses is based on estimates
that are particularly susceptible to changes in the economic
environment and market conditions. This balance may be adjusted in
the future based on such changes, or based on the results of
regulatory examinations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Equality Bancorp, Inc. and its wholly-owned subsidiary, Equality
Savings Bank. Equality Savings Bank has two wholly-owned
subsidiaries, Equality Commodity Corporation (ECC) and Equality
Mortgage Corporation (EMC). All significant intercompany accounts and
transactions have been eliminated in consolidation.
ECC operates under the name of Equality Insurance Agency and Flood
Information Specialists and is a wholly-owned subsidiary of ESB.
ECC's services and activities include sales of multiple lines of
insurance to the general public and the issuance of flood plain
certificates. EMC operates as a mortgage banker and is a wholly-owned
subsidiary of ESB.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
At the time of purchase, investment and mortgage-backed securities
are classified as available for sale or held to maturity. Held to
maturity securities are those securities which Equality has the
ability and intent to hold until maturity. All equity securities, and
debt securities not classified as held to maturity, are classified as
available for sale.
Available for sale securities are recorded at fair value. Held to
maturity securities are recorded at amortized cost, adjusted for the
amortization of premiums or discounts. Unrealized gains and losses,
net of the related tax effect, on available for sale securities are
excluded from earnings and reported as a separate component of
stockholders' equity until realized. Gains and losses on the sale of
available for sale securities are determined using the specific
identification method.
54 (Continued)
<PAGE> 57
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
A decline in the fair value of any available for sale or held to
maturity security below cost that is deemed to be other than
temporary is charged to earnings and results in the establishment of
a new cost basis for the security.
LOANS RECEIVABLE AND RELATED FEES
Loans receivable, other than loans held for sale, are carried at cost
because Equality has both the intent and the ability to hold them for
the foreseeable future. Mortgage loans held for sale are valued at
the lower of cost or market, on an aggregate loan basis. Interest is
credited to income as earned; however, interest receivable is accrued
only if deemed collectible. Loans are placed on nonaccrual status
when management believes that the borrower's financial condition,
after consideration of economic conditions and collection efforts, is
such that collection of interest is doubtful. A loan remains on
nonaccrual status until the loan is current as to payment of both
principal and interest and/or the borrower demonstrates the ability
to pay and remain current.
EMC derives income primarily from the origination and subsequent sale
of mortgage loans and from the servicing of mortgage loans. EMC
recognizes the fees charged as income upon receipt of proceeds from
the sale of the mortgage from the investor. Mortgages are sold at
such times as management deems appropriate. EMC's activities are
performed primarily in the St. Louis metropolitan area.
EMC capitalizes the cost of originated mortgage servicing rights
retained as assets. The cost of the mortgage servicing rights is
being amortized over periods ranging up to eight years using the
straight-line method. A valuation allowance is established when the
carrying value of the mortgage servicing rights exceeds the fair
value.
The allowance for loan losses is increased by provisions charged to
expense and is reduced by loan charge-offs, net of recoveries.
Management utilizes a systematic, documented approach in determining
the appropriate level of the allowance for loan losses. Management's
approach, which provides for general and specific valuation
allowances, considers numerous factors including general economic
conditions, loan portfolio composition, prior loss experience,
independent appraisals and such other factors which, in management's
judgment, deserve current recognition in estimating loan losses.
Management believes the allowance for loan losses is adequate to
absorb probable 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.
55 (Continued)
<PAGE> 58
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
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 $3,004,227 and
$2,931,756 at March 31, 2000 and 1999, respectively.
At March 31, 2000 and 1999, escrow funds related to loans serviced by
EMC for ESB totaled $565,420 and $537,434, 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
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.
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.
56 (Continued)
<PAGE> 59
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
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 1999 and 1998 information have been made
to conform with the 2000 presentation. Such reclassifications have no
effect on previously reported net income.
EARNINGS PER SHARE
Basic earnings per share was computed based upon weighted average
common shares outstanding of 2,328,762, 2,371,240, and 2,414,131 for
2000, 1999, and 1998, respectively. Diluted earnings per share was
computed based upon weighted average common shares and dilutive
potential common shares outstanding of 2,349,442, 2,404,607, and
2,443,395 for 2000, 1999, and 1998, respectively. Stock options are
the only dilutive potential common shares.
Earnings per share information for 1998 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 78,499, 61,621, and 45,014 are considered
outstanding for earnings per share calculation purposes at March 31,
2000, 1999, and 1998, respectively.
TREASURY STOCK
The purchase of Equality's common stock is recorded at cost. Any
subsequent reissuance is recorded at the average cost basis of such
common stock.
SEGMENT INFORMATION
In 1999, Equality adopted Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of an Enterprise and Related
Information, which established standards for the way that public
enterprises report information about operating segments in annual
financial statements. The services provided by Equality are
classified into two industry segments - retail banking and mortgage
banking.
57 (Continued)
<PAGE> 60
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
The retail banking operations of Equality are executed by ESB, while
the mortgage banking operations are carried out by EMC. Separate
financial statements are maintained for each segment, which
identifies each segment's assets and net income. Revenue from the
retail banking segment is derived primarily from net interest
revenue, which includes both interest income and expense. Revenue
from the mortgage banking segment is derived primarily from the fee
income generated from gain on sale of mortgage loans and loan
servicing fees and late charges.
(2) REGULATORY CAPITAL
As a result of ESB's charter change on December 28, 1999 from a
federally-chartered thrift to a state-chartered savings bank, ESB is
required to maintain specific amounts of regulatory capital under
federal regulations. The capital regulations require institutions to
have Tier 1 leverage capital equal to 4.0% of adjusted total assets (as
defined by regulation), a minimum Tier 1 risk-based capital ratio of
4.0% of risk-based total assets, and a total risk-based capital ratio of
8.0% of risk-based assets (as defined by regulation). The risk-based
capital requirement is calculated based on the credit risk presented by
both on-balance-sheet assets and off-balance-sheet commitments and
obligations. Assets are assigned a credit-risk weighting based upon
their relative risk ranging from 0% for assets backed by the full faith
and credit of the United States or that pose no credit risk to the
institution to 100% for assets such as delinquent or repossessed assets.
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,
2000, ESB is considered well capitalized.
The actual and required capital amounts and ratios for ESB as of March
31, 2000 are as follows:
<TABLE>
<CAPTION>
2000
-----------------------------------------------------------------
TO BE WELL
CAPITALIZED UNDER
CAPITAL PROMPT CORRECTIVE
ACTUAL REQUIREMENTS ACTION PROVISION
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
======= ===== ======= ===== ======= =====
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $24,508 15.17% $12,928 8.00% $16,160 10.00%
Tier I capital
(to risk-weighted assets) 24,144 14.94 6,464 4.00 9,696 6.00
Tier I capital
(to adjusted average assets) 24,144 7.27 13,292 4.00 16,615 5.00
======= ===== ======= ==== ======= =====
</TABLE>
Management believes that under current regulations, ESB will continue to
meet its minimum capital requirements in the foreseeable future. Events
beyond the control of ESB could adversely affect future earnings and as
a result, the ability of ESB to meet its future minimum capital
requirements.
58 (Continued)
<PAGE> 61
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
As a result of the FDIC's first regular examination following ESB's
conversion from a federally-chartered savings and loan association to a
state-chartered savings bank on December 28, 1999, ESB entered into a
Memorandum of Understanding (MOU) with the FDIC and the Missouri
Division of Finance (Division) on June 26, 2000. By signing the MOU,
ESB has agreed to take certain actions in response to concerns raised by
the FDIC. The MOU addresses: (1) the Board of Directors of ESB to
assess ESB's management and staffing needs to ensure proper supervision
of ESB's affairs; (2) ESB to review its earnings performance, to develop
a written plan to improve earnings performance, and to prepare a revised
2001 budget reflecting remedial actions to improve ESB's earnings; (3)
ESB to implement a suitable method for measuring and monitoring ESB's
interest rate risk, establish interest rate risk parameters and provide
for independent review of the validity of the assumptions, data and
results of the method used; (4) ESB to develop a written funds
management policy overseen by an Asset/Liability Committee, the
membership of which shall include non-officer director representation
and which shall report to the Board of Directors, and to establish goals
and strategies for managing or improving ESB's interest rate risk
profile; (5) ESB to maintain a Tier I Leverage Ratio of not less than 7%
while the MOU is in effect; (6) ESB to refrain from declaring or paying
any dividends and/or management fees to Equality without prior written
regulatory approval; (7) ESB to present to the FDIC and the Division
periodic updates concerning ESB's asset growth objectives, particularly
in light of capital and liquidity needs; (8) ESB to provide a revised
investment policy, modify certain investment practices and ensure the
policy is implemented and followed; (9) ESB to develop an internal audit
program and appoint an internal auditor who shall report to the Board of
Directors; (10) ESB to take steps to correct and/or eliminate regulatory
violations cited by the FDIC and the Division; (11) ESB to implement
procedures to address regulatory concerns regarding the retail sale of
nondeposit investment products by ESB; and (12) ESB to submit periodic
progress reports to the FDIC and the Division regarding ESB's compliance
with the MOU.
The MOU is not a formal supervisory action by the FDIC, but is an
enforceable action. Failure to comply with the MOU can lead to
enforcement action. ESB believes that it can comply with the MOU and is
currently taking the necessary steps to do so. Compliance with the MOU
is not expected to have a materially adverse impact on the operations or
the financial condition of ESB or Equality. The MOU will remain in
effect until terminated by the Kansas City Regional Director of the
FDIC.
At March 31, 1999, ESB was subject to the capital regulations of the OTS
which, as a result of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA), require savings institutions to have
minimum tangible capital equal to 1.5% of total adjusted assets, a
minimum 3% leverage (core capital) ratio, and an 8% risk-based capital
ratio. The risk-based capital requirement is calculated based on the
credit risk presented by both on-balance-sheet assets and
off-balance-sheet commitments and obligations. Assets are assigned a
credit-risk weighting based upon their relative risk ranging from 0% for
assets backed by the full faith and credit of the United States or that
pose no credit risk to the institution to 100% for assets such as
delinquent or repossessed assets. As of March 31, 1999, ESB met all OTS
capital requirements.
59 (Continued)
<PAGE> 62
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
<CAPTION>
1999
------------------------------------------------------------------
TO BE WELL
MINIMUM CAPITALIZED FOR
FOR OTS CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------ ------------------ ------------------
RATIO AMOUNT RATIO AMOUNT RATIO AMOUNT
----- ------ ----- ------ ----- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Stockholders' equity ratio
to total assets 8.51% $ 24,290
Unrealized gain on
investment and
mortgage-backed
securities available
for sale, net of tax (139)
----- --------
Tangible capital, and ratio
to adjusted total assets 8.39 24,151 1.50% $4,319
Tier I (core) capital, and
ratio to adjusted assets 8.39 24,151 3.00 8,637 5.00% $14,395
Tier I capital, and ratio to
risk-weighted assets 24.77 24,151 6.00 5,849
Allowance for loan losses
(general valuation
allowance 366
----- --------
25.15% $ 24,517 8.00 7,799 10.00 9,748
===== ========
Total assets $288,129
Adjusted total assets 287,900
Risk-weighted assets 97,483
========
</TABLE>
60 (Continued)
<PAGE> 63
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
(3) INVESTMENT SECURITIES
The amortized cost and fair value of investment securities classified as
available for sale at March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government and agency
obligations $ 68,716,508 33,780 3,944,668 64,805,620
Corporate obligations 58,012,955 -- 2,330,763 55,682,192
------------ ------ --------- -----------
Total debt securities 126,729,463 33,780 6,275,431 120,487,812
Marketable equity securities 87,730 -- -- 87,730
------------ ------ --------- -----------
$126,817,193 33,780 6,275,431 120,575,542
============ ====== ========= ===========
</TABLE>
Included in corporate obligations at March 31, 2000 is a $2,000,000
corporate security, with a fair value of $1,060,000 at March 31, 2000
and a maturity date of March 15, 2003, which was investment grade when
originally purchased but has been subsequently downgraded below
investment grade due to restructurings of the debt issuer and an
accumulation of debt in the aggressive acquisition of businesses;
however, the security continues to meet its interest payment
obligations. Management believes the decline in fair value of this
security is temporary. Equality has the ability and it is management's
intent to hold this security until maturity.
<TABLE>
<CAPTION>
1999
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government and agency
obligations $ 59,922,329 663,274 85,362 60,500,241
Corporate obligations 21,068,452 4,558 25,642 21,047,368
------------ ------- ------- ----------
Total debt securities 80,990,781 667,832 111,004 81,547,609
Marketable equity securities 87,730 -- -- 87,730
------------ ------- ------- ----------
$ 81,078,511 667,832 111,004 81,635,339
============ ======= ======= ==========
</TABLE>
61 (Continued)
<PAGE> 64
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
The amortized cost and fair value of debt securities classified as
available for sale at March 31, 2000, by contractual maturity, are as
follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
------------ -----------
<S> <C> <C>
Due in one year or less $ 4,213,761 4,181,558
Due after one year through five years 56,419,506 54,184,533
Due after five years through ten years 40,434,621 38,889,389
Due after ten years 25,661,575 23,232,332
------------ -----------
$126,729,463 120,487,812
============ ===========
</TABLE>
Proceeds from sales of investment securities during 2000, 1999, and 1998
were approximately $27.0 million, $41.5 million, and $50.7 million,
respectively. During 2000, 1999, and 1998, gross gains of $38,662,
$179,282, and $391,171, respectively, and gross losses of $85,108, $-0-,
and $266,974, respectively, were recognized on these sales.
The amortized cost and fair value of investment securities classified as
held to maturity at March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government and agency
obligations:
2000 $ 600,000 -- 52,000 548,000
1999 600,000 -- 69,000 531,000
========== ======== ====== =======
</TABLE>
The investment security classified as held to maturity at March 31, 2000
matures on July 30, 2003.
62 (Continued)
<PAGE> 65
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
(4) MORTGAGE-BACKED SECURITIES
The amortized cost and fair value of mortgage-backed securities
classified as available for sale at March 31, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
2000
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
FNMA $ 37,872,779 -- 1,532,626 36,340,153
FHLMC 12,108,350 -- 422,130 11,686,220
GNMA 16,844,498 -- 733,197 16,111,301
------------ -------- --------- ----------
$ 66,825,627 -- 2,687,953 64,137,674
============ ======== ========= ==========
Weighted average interest rate at March 31 6.68%
====
<CAPTION>
1999
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
FNMA $ 49,511,993 84,140 231,294 49,364,839
FHLMC 17,203,265 8,191 91,914 17,119,542
GNMA 24,423,724 51,481 148,803 24,326,402
------------ ------- ------- ----------
$ 91,138,982 143,812 472,011 90,810,783
============ ======= ======= ==========
Weighted average interest rate at March 31 6.28%
====
</TABLE>
The amortized cost and fair value of mortgage-backed securities
classified as available for sale at March 31, 2000, by contractual
maturity, are shown below. Expected maturities will differ from
contractual maturities due to scheduled repayments and because borrowers
have the right to prepay obligations with or without prepayment
penalties. The following table does not take into consideration the
effects of scheduled repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- ----------
<S> <C> <C>
Due in one year or less $ 29,253 28,933
Due after one year through five years 3,930,427 3,764,578
Due after five years through ten years 5,644,233 5,439,493
Due after ten years 57,221,714 54,904,670
----------- ----------
$66,825,627 64,137,674
=========== ==========
</TABLE>
63 (Continued)
<PAGE> 66
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
Proceeds from the sale of mortgage-backed securities during 2000, 1999,
and 1998 were approximately $10.5 million, $26.5 million, and $10.0
million, respectively. During 2000, 1999, and 1998, gross gains of
$40,012, $32,802, and $5,880, respectively, and gross losses of $36,600,
$45,696, and $89,033, respectively, were recognized on these sales.
(5) LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
------------ ----------
<S> <C> <C>
Loans secured by real estate:
Residential:
One- to four-family:
Conventional $ 68,183,215 54,525,316
FHA and VA 10,758,016 10,629,163
Multifamily 1,342,797 1,429,600
Commercial 4,096,761 4,381,981
Loans held for sale 2,640,972 7,021,322
------------ ----------
Total loans secured by real estate 87,021,761 77,987,382
Commercial business 14,475,913 9,642,046
Loans secured by savings deposits 256,856 254,014
Property improvement 1,633,263 1,481,520
Automobiles 1,762,952 1,042,031
Other 562,905 267,739
------------ ----------
Total loans 105,713,650 90,674,732
Less:
Deferred loan fees, net 20,809 25,086
Unearned discounts 13,065 4,999
Allowance for loan losses 364,047 366,032
Valuation reserve on loans held for sale -- 47,938
------------ ----------
$105,315,729 90,230,677
============ ==========
Weighted average interest rate at March 31 7.77% 7.63%
============ ==========
</TABLE>
Adjustable rate mortgages at March 31, 2000 and 1999 totaled
approximately $44.3 million and $39.0 million, respectively.
64 (Continued)
<PAGE> 67
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
At March 31, 2000 and 1999, loans secured by real estate contractually
delinquent 90 days or more totaled $626,484 and $700,889, respectively.
Of these amounts, $387,879 and $485,574, 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, 2000, 1999 or 1998.
EMC had no commitments to sell loans at March 31, 2000 and $9.0 million
in commitments to sell loans at March 31, 1999.
Loans serviced by EMC at March 31, 2000, 1999, and 1998 were
$334,391,036, $369,247,163 and $340,054,031, respectively. Of these
amounts, $249,382,195, $297,751,904 and $254,415,299 were serviced for
unaffiliated institutions at March 31, 2000, 1999 and 1998,
respectively.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year $ 366,032 374,200 283,000
Provision charged to expense -- -- 115,513
Charge-offs (3,206) (8,168) (24,313)
Recoveries 1,221 -- --
--------- ------- -------
Balance, end of year $ 364,047 366,032 374,200
========= ======= =======
</TABLE>
Following is a summary of activity for 2000 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, 1999 $ 1,429,747
New loans and advances 296,650
Payments received (159,504)
-----------
Balance at March 31, 2000 $ 1,566,893
===========
</TABLE>
65 (Continued)
<PAGE> 68
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
(6) MORTGAGE SERVICING RIGHTS
The activity in mortgage servicing rights is summarized as follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- --------- ---------
<S> <C> <C> <C>
Mortgage servicing rights:
Balance at beginning of year $ 1,689,595 977,433 592,444
Purchases 466,253 -- --
Originated 290,858 1,392,501 768,801
Amortization (632,055) (680,339) (383,812)
Sales (540,883) -- --
----------- --------- ---------
Balance at end of year, before allowance 1,273,768 1,689,595 977,433
----------- --------- ---------
Allowance for impairment of mortgage
servicing rights:
Balance at beginning of year (209,964) (139,836) (66,022)
Reductions (additions) 209,964 (70,128) (73,814)
----------- --------- ---------
Balance at end of year -- (209,964) (139,836)
----------- --------- ---------
Mortgage servicing rights, net $ 1,273,768 1,479,631 837,597
=========== ========= =========
Fair value of mortgage servicing rights $ 2,654,000 2,597,000 1,513,000
=========== ========= =========
</TABLE>
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.
(7) OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
------------ ---------
<S> <C> <C>
Land $ 1,885,358 1,583,358
Office buildings and improvements 5,070,900 4,427,565
Furniture and equipment 2,820,069 2,449,769
Automobiles 63,365 63,365
Property held for future expansion 742,726 1,133,574
------------ ---------
10,582,418 9,657,631
Less accumulated depreciation and amortization 3,647,303 3,206,274
------------ ---------
$ 6,935,115 6,451,357
============ =========
</TABLE>
Depreciation and amortization expense for 2000, 1999, and 1998 was
$441,029, $237,834, and $272,470, respectively.
66 (Continued)
<PAGE> 69
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
ESB is obligated under a certain noncancellable lease on a property
which expires on April 8, 2009. The future minimum lease payments under
this lease total $90,000 per year for the next 9 years.
(8) ACCRUED INTEREST RECEIVABLE AND OTHER ASSETS
Accrued interest receivable and other assets are summarized as
follows:
<TABLE>
<CAPTION>
2000 1999
----------- ---------
<S> <C> <C>
Accrued interest receivable:
Loans receivable $ 611,426 461,779
Interest-bearing deposits -- 4,008
Investment securities 1,605,505 927,600
Mortgage-backed securities 497,096 594,483
----------- ---------
Total accrued interest receivable 2,714,027 1,987,870
Accounts receivable 1,090,011 296,977
Prepaid expenses 233,022 164,946
Other 360,819 275,827
----------- ---------
$ 4,397,879 2,725,620
=========== =========
</TABLE>
(9) SAVINGS DEPOSITS
Savings deposits are summarized as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------------------ -------------------------------------
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 $ 19,054,570 1.23% 13.6% $ 16,082,858 1.13% 12.5%
Passbook savings 20,073,849 2.51 14.2 20,766,651 2.51 16.1
Money market 12,459,248 4.34 8.8 8,236,660 4.31 6.4
------------- ---- ----- ------------- ---- -----
Total demand deposits 51,587,667 2.44 36.6 45,086,169 2.34 35.0
------------- ---- ----- ------------- ---- -----
Certificates of deposit:
Negotiated rate
($100,000 or more) 1,598,807 5.84 1.1 2,111,581 5.79 1.6
Other 87,698,770 5.51 62.3 81,756,076 5.45 63.4
------------- ---- ----- ------------- ---- -----
Total certificates of
deposit 89,297,577 5.52 63.4 83,867,657 5.46 65.0
------------- ---- ----- ------------- ---- -----
$ 140,885,244 4.39% 100.0% $ 128,953,826 4.37% 100.0%
============= ==== ===== ============= ==== =====
</TABLE>
67 (Continued)
<PAGE> 70
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
Certificates of deposit by interest rate ranges are as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
3.00% to 3.99% $ 16,680 3.00% $ 16,307 3.00%
4.00% to 4.99% 24,331,202 4.62 17,288,243 4.59
5.00% to 5.99% 35,357,419 5.48 49,392,324 5.40
6.00% to 6.99% 28,850,239 6.23 13,634,306 6.26
7.00% to 7.99% 164,269 7.00 2,981,837 7.00
8.00% and greater 577,768 9.74 554,640 9.75
------------ ---- ------------ ----
$ 89,297,577 5.52% $ 83,867,657 5.46%
============ ==== ============ ====
</TABLE>
Certificates of deposit at March 31, 2000 and 1999 are scheduled to
mature as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------- -------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Within one year $ 34,466,576 38.6% $ 46,478,826 55.4%
Second year 25,803,920 28.9 12,329,265 14.7
Third year 14,419,530 16.1 4,943,112 5.9
Fourth year 7,312,317 8.2 13,108,564 15.6
Thereafter 7,295,234 8.2 7,007,890 8.4
------------ ----- ------------ -----
$ 89,297,577 100.0% $ 83,867,657 100.0%
============ ===== ============ =====
</TABLE>
Interest expense on savings deposits by type is summarized as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
----------- --------- ---------
<S> <C> <C> <C>
Checking and money market demand $ 648,195 431,004 342,468
Passbook savings 522,725 506,352 663,498
Certificates of deposit 4,425,539 4,520,790 4,627,726
----------- --------- ---------
$ 5,596,459 5,458,146 5,633,692
=========== ========= =========
</TABLE>
68 (Continued)
<PAGE> 71
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
(10) BORROWED MONEY
Borrowed money at March 31, 2000 and 1999 is summarized as follows:
<TABLE>
<CAPTION>
2000 1999
------------------------- --------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Note payable to bank $ 1,694,534 2.25% $ 1,825,783 2.25%
Advances from the FHLB:
Due in 2000 76,000,000 6.08 -- --
Due in 2001 25,000,000 6.88 -- --
Due in 2003, repaid -- -- 71,000,000 5.35
Due in 2008 49,500,000 5.28 23,000,000 5.22
Due in 2009, repaid -- -- 26,500,000 5.22
Due in 2013 9,240,62 6.00 9,684,267 6.00
------------- ---- ------------- ----
$ 161,435,160 5.91% $ 132,010,050 5.35%
============= ==== ============= ====
</TABLE>
At March 31, 2000, callable advances at the FHLB, all of which are due
in 2008, are as follows:
<TABLE>
<S> <C>
Presently callable $ --
2001 26,500,000
2002 --
2003 23,000,000
------------
$ 49,500,000
============
</TABLE>
The note payable to bank, which is tied to average collected funds of
EMC on deposit at such bank, is due April 24, 2000. Investment
securities with an amortized cost of $4,682,018 and a fair value of
$4,048,447 secure the note payable to bank at March 31, 2000.
FHLB advances are secured under a blanket agreement which assigns all
FHLB stock, certain investment securities equal to 105% of the
outstanding advances balance and mortgage loans equal to 130% of the
outstanding advances balance. Investment securities with an amortized
cost of $127,132,254 and a fair value of $119,544,754 are pledged to
secure advances from the FHLB at March 31, 2000. ESB maintains a line
of credit of approximately $12,332,000 available from the FHLB of Des
Moines at March 31, 2000.
(11) 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.
69 (Continued)
<PAGE> 72
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
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 at
ESB began in the tax year ended March 31, 1999 and will continue ratably
through the tax year ending March 31, 2004. At March 31, 2000, ESB had
bad debts deducted for tax purposes in excess of the base year reserve
of approximately $163,000. ESB has recognized a deferred income tax
liability on this amount.
Certain events covered by IRC Section 593(e), which was not repealed,
will trigger a recapture of the base year reserve. The base year reserve
of thrift institutions would be recaptured if a thrift ceases to qualify
as a "bank" for federal income tax purposes. The base year reserves of
thrift institutions also remain subject to income tax penalty provisions
which, in general, require recapture upon certain stock redemptions of,
and excess distributions to, stockholders. At March 31, 2000, retained
earnings included approximately $2.6 million of base year reserves for
which no deferred federal income tax liability has been recognized.
The composition of income tax expense for 2000, 1999, and 1998 is as
follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 737,870 499,690 613,427
State 78,244 45,397 69,277
--------- ------- -------
Total current 816,114 545,087 682,704
Deferred (77,570) 162,560 94,964
--------- ------- -------
Total income tax expense $ 738,544 707,647 777,668
========= ======= =======
</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>
2000 1999 1998
--------- ------- -------
<S> <C> <C> <C>
Tax at statutory federal income tax rate $ 642,754 624,555 685,724
State income tax, net of federal tax benefit 51,641 29,962 45,723
Other, net 44,149 53,130 46,221
--------- ------- -------
$ 738,544 707,647 777,668
========= ======= =======
</TABLE>
70 (Continued)
<PAGE> 73
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
The components of deferred tax assets and deferred tax liabilities at
March 31, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
2000 1999
----------- ---------
<S> <C> <C>
Deferred tax assets:
Available for sale securities $ 3,482,546 --
General loan loss allowance 135,134 135,871
Deferred compensation 86,329 72,871
Excess servicing gains 8,747 11,605
Other 890 1,553
----------- ---------
Total deferred tax assets 3,713,646 221,900
----------- ---------
Deferred tax liabilities:
Tax depreciation in excess of that recorded for
book purposes 237,309 221,266
FHLB stock dividends 154,162 154,162
Allowance for loan losses in excess of base-year reserve 55,437 69,296
Mortgage servicing rights 469,337 545,057
Available for sale securities -- 89,165
Other 21,464 16,297
----------- ---------
Total deferred tax liabilities 937,709 1,095,243
----------- ---------
Net deferred tax asset (liability) $ 2,775,937 (873,343)
=========== =========
</TABLE>
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not that Equality
will realize the benefits of these temporary differences at March 31,
2000 and, therefore, has not established a valuation reserve.
(12) 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.
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
71 (Continued)
<PAGE> 74
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
a suspense account for allocation among the participants as the loan is
repaid. Shares released from the suspense account are allocated among
the participants based upon their pro rata annual compensation. The
purchases of the shares by the ESOP were recorded by Equality as
unearned ESOP shares in a contra equity account. As ESOP shares are
committed to be released to compensate employees, the contra equity
account is reduced and Equality recognizes compensation expense equal to
the fair market value of the shares committed to be released. Dividends
on allocated ESOP shares are recorded as a reduction of retained
earnings; dividends on unallocated ESOP shares are recorded as a
reduction of debt. Compensation expense related to the ESOP totaled
$119,368, $187,784, and $67,142 for 2000, 1999, and 1998, respectively.
The ESOP shares as of March 31, 2000 are as follows:
<TABLE>
<S> <C>
Allocated shares 78,499
Unreleased shares 120,372
---------
Total ESOP shares 198,871
---------
Fair value of unreleased shares $ 782,418
=========
</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.
72 (Continued)
<PAGE> 75
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
Information on Equality's stock options is summarized as follows:
<TABLE>
<CAPTION>
AVERAGE PER SHARE
PRICE OPTION
SHARES PER SHARE PRICE RANGE
------ --------- -----------
<S> <C> <C> <C>
Outstanding and exercisable at
March 31, 1997 112,951 $ 3.73 3.36-4.37
Exercised 19,953 3.45 3.36-4.37
------- ------ ----------
Outstanding and exercisable at
March 31, 1998 92,998 3.79 3.36-4.37
Exercised 13,938 3.61 3.36-4.37
------- ------ ----------
Outstanding and exercisable at
March 31, 1999 79,060 3.82 3.36-4.37
Exercised 24,301 3.43 3.36-4.37
Forfeitures (551) 3.91 3.36-4.37
Options granted 26,850 13.02 8.00-13.90
------- ------ ----------
Outstanding and exercisable at
March 31, 2000 81,058 $ 7.00 3.36-13.90
======= ====== ==========
</TABLE>
The number of options granted that are not exercisable as of March 31,
2000 were 111,400.
In conjunction with the conversion, Equality established a management
recognition plan (the MRP) which acquired 65,550 shares of common stock
during 1999 at an average price of $11.28 per share. The MRP provides
that such common stock can be issued to employees in key management
positions to encourage such employees to remain with Equality. Interest
in the MRP for each participant vests over a five year period.
Compensation expense related to vesting in the MRP totaled $147,816 for
2000 and $120,131 for 1999.
Equality maintains a retirement plan for certain officers. Upon
retirement at age 65, each participating officer will receive $50,000 on
an annual basis for a period of 10 years following retirement. Benefits
to be paid for future service will be accrued over the remaining period
of service of each officer. The plan has been funded through the
purchase of life insurance contracts on each officer. The cash surrender
value of the life insurance contracts totaled $211,783 and $121,636 at
March 31, 2000 and 1999, respectively, and is included in other assets
in the consolidated balance sheet. The related accrued liability totaled
$136,386 and $87,600 at March 31, 2000 and 1999, respectively.
Compensation expense related to the plan totaled $39,271 for 2000, 1999
and 1998.
Equality sponsors a defined contribution plan qualifying under Section
401(k) of the Internal Revenue Code. Participants may designate up to
15% of their annual compensation as their contribution to the plan,
which is partially matched by Equality. Compensation expense related to
the plan totaled $26,442, $24,459, and $27,064 for 2000, 1999, and 1998,
respectively.
73 (Continued)
<PAGE> 76
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
(13) 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. At March 31, 2000
and 1999, Equality had outstanding commitments to extend credit of $5.5
million and $4.8 million, respectively. 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.
74 (Continued)
<PAGE> 77
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
A summary of the carrying amounts and fair values of Equality's
financial instruments at March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
2000 1999
--------------------------- ---------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ----------- ----------- -----------
ASSETS
<S> <C> <C> <C> <C>
Cash, primarily interest-
bearing demand deposits $ 9,080,509 9,080,509 6,449,613 6,449,613
Interest-bearing deposits 198,000 197,427 1,085,000 1,105,697
Investment securities 121,175,542 121,123,542 82,235,339 82,166,339
Loans receivable 105,315,729 103,618,960 90,230,677 90,929,267
Stock in Federal Home Loan
Bank 7,987,100 7,987,100 6,911,100 6,911,100
Accrued interest receivable 2,714,027 2,714,027 1,987,870 1,987,870
------------- ----------- ----------- -----------
$ 310,608,581 308,859,239 279,710,382 280,360,669
============= =========== =========== ===========
LIABILITIES
Savings deposits $ 140,885,244 140,885,244 128,953,826 131,196,066
Accrued interest payable
on savings deposits 147,711 147,711 200,280 200,280
Borrowed money 161,435,160 160,145,915 132,010,050 133,302,453
Advance payments by
borrowers for taxes
and insurance 35,800 35,800 69,634 69,634
------------- ----------- ----------- -----------
$ 302,503,915 301,214,670 261,233,790 264,768,433
============= =========== =========== ===========
</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.
75 (Continued)
<PAGE> 78
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Fair values are based on quoted market prices or dealer quotes.
LOANS RECEIVABLE
Fair values are estimated for portfolios of loans receivable with
similar financial characteristics. Loans are segregated by type such
as residential, commercial and consumer. Each loan receivable
category is further segmented into fixed and adjustable rate interest
terms. The fair value of loans receivable is calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market discount rates equal to rates at which loans,
similar in type, would be originated at March 31, 2000 and 1999.
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, but will not
be less than carrying value. 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.
76 (Continued)
<PAGE> 79
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
(14) INDUSTRY SEGMENT INFORMATION
The business segment results which follow are consistent with Equality's
internal reporting system which is consistent, in all material respects,
with generally accepted accounting principles.
<TABLE>
<CAPTION>
2000
----------------------------------------------------------
EQUALITY EQUALITY
SAVINGS MORTGAGE CORPORATE
BANK CORPORATION AND OTHER TOTAL
------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Balance sheet information:
Investment and mortgage-
backed securities $ 185,225,486 -- 87,730 185,313,216
Loans receivable, net 103,756,961 2,627,907 (1,069,139) 105,315,729
Total assets 320,923,750 5,420,707 (3,009,150) 323,335,307
Savings deposits 141,725,442 -- (840,198) 140,885,244
Stockholders' equity 18,857,512 2,374,382 (1,306,892) 19,925,002
============= ========= ========= ===========
Statement of income
information:
Total interest income $ 20,603,889 532,011 (92,448) 21,043,452
Total interest expense 14,404,790 352,869 (396,509) 14,361,150
------------- --------- --------- -----------
Net interest income 6,199,099 179,142 304,061 6,682,302
Provision for losses on loans -- -- -- --
Noninterest income 367,152 2,672,139 267,374 3,306,665
Noninterest expense 4,718,057 2,673,927 706,529 8,098,513
Income tax expense 685,245 69,168 (15,869) 738,544
------------- --------- --------- -----------
Net income (loss) $ 1,162,949 108,186 (119,225) 1,151,910
============= ========= ========= ===========
Capital expenditures $ 908,206 9,355 7,226 924,78
============= ========= ========= ===========
</TABLE>
77 (Continued)
<PAGE> 80
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
<CAPTION>
1999
----------------------------------------------------------
EQUALITY EQUALITY
SAVINGS MORTGAGE CORPORATE
BANK CORPORATION AND OTHER TOTAL
------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Balance sheet information:
Investment and mortgage-
backed securities $ 172,985,392 -- 87,730 173,046,122
Loans receivable, net 87,676,452 6,968,384 (4,414,159) 90,230,677
Total assets 285,539,615 9,243,476 (6,345,917) 288,437,174
Savings deposits 130,028,064 -- (1,074,238) 128,953,826
Stockholders' equity 24,290,744 2,272,196 (955,210) 25,607,730
============= ========= ========= ===========
Statement of income
information:
Total interest income $ 17,012,620 924,685 (378,884) 17,558,421
Total interest expense 12,417,420 635,835 (701,827) 12,351,428
------------- --------- --------- -----------
Net interest income 4,595,200 288,850 322,943 5,206,993
Provision for losses on loans -- -- -- --
Noninterest income 863,796 3,477,136 (103,700) 4,237,232
Noninterest expense 3,949,862 3,066,286 591,150 7,607,298
Income tax expense 406,449 272,823 28,375 707,647
------------- --------- --------- -----------
Net income (loss) $ 1,102,685 426,877 (400,282) 1,129,280
============= ========= ========= ===========
Capital expenditures $ 1,010,704 104,200 -- 1,114,904
============= ========= ========= ===========
</TABLE>
78 (Continued)
<PAGE> 81
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
<CAPTION>
1998
----------------------------------------------------------
EQUALITY EQUALITY
SAVINGS MORTGAGE CORPORATE
BANK CORPORATION AND OTHER TOTAL
------------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Statement of income
information:
Total interest income $ 14,345,013 810,591 (475,294) 14,680,310
Total interest expense 9,707,997 530,656 (513,271) 9,725,382
------------ --------- ------- ---------
Net interest income 4,637,016 279,935 37,977 4,954,928
Provision for losses on loans 115,513 -- -- 115,513
Noninterest income 554,469 2,489,439 (162,424) 2,881,484
Noninterest expense 3,209,980 2,407,612 86,473 5,704,065
Income tax expense 635,257 141,087 1,324 777,668
------------ --------- ------- ---------
Net income (loss) $ 1,230,735 220,675 (212,244) 1,239,166
============ ========= ======= =========
Capital expenditures $ 2,790,356 122,810 -- 2,913,166
============ ========= ======= =========
</TABLE>
(15) 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.
79 (Continued)
<PAGE> 82
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
(16) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data for 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1999 1999 1999 2000
-------- ------------- ------------ ---------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total interest income $ 4,814 5,247 5,486 5,497
Total interest expense 3,206 3,500 3,673 3,982
------- ----- ----- -----
Net interest income 1,608 1,747 1,813 1,515
Provision for losses on loans -- -- -- --
Noninterest income 851 758 665 1,033
Noninterest expense 2,044 2,068 2,038 1,949
------- ----- ----- -----
Income before income tax
expense 415 437 440 599
Income tax expense 170 167 175 227
------- ----- ----- -----
Net income $ 245 270 265 372
======= ===== ===== =====
Earnings per share:
Basic $ 0.10 0.12 0.11 0.17
Diluted 0.10 0.11 0.11 0.17
======= ===== ===== =====
</TABLE>
80 (Continued)
<PAGE> 83
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
<CAPTION>
QUARTER ENDED
------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1998 1998 1998 1999
-------- ------------- ------------ ---------
(THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total interest income $ 4,361 4,343 4,426 4,428
Total interest expense 2,881 3,087 3,221 3,162
------- ----- ----- -----
Net interest income 1,480 1,256 1,205 1,266
Provision for losses on loans -- -- -- --
Noninterest income 836 970 1,273 1,158
Noninterest expense 1,736 1,909 2,009 1,953
------- ----- ----- -----
Income before income tax
expense 580 317 469 471
Income tax expense 229 120 180 179
------- ----- ----- -----
Net income $ 351 197 289 292
======= ===== ===== =====
Earnings per share:
Basic $ 0.15 0.08 0.12 0.13
Diluted 0.15 0.08 0.12 0.12
======= ===== ===== =====
</TABLE>
(17) CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The condensed balance sheet as of March 31, 2000 and 1999 and the
related condensed statements of income and cash flows for the years
ended March 31, 2000 and 1999 and from the date of inception through
March 31, 1998 of the Company are as follows:
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
2000 1999
------------ ----------
ASSETS
<S> <C> <C>
Cash $ 763,939 995,648
Investment in subsidiary 18,857,512 24,290,744
Other assets 429,763 497,290
------------ ----------
Total assets $ 20,051,214 25,783,682
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 126,212 175,952
Stockholders' equity 19,925,002 25,607,730
------------ ----------
Total liabilities and stockholders' equity $ 20,051,214 25,783,682
============ ==========
</TABLE>
81 (Continued)
<PAGE> 84
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2000 and 1999
<CAPTION>
CONDENSED STATEMENTS OF INCOME
FOUR MONTHS
YEAR ENDED MARCH 31, ENDED
------------------------- MARCH 31,
2000 1999 1998
----------- --------- -----------
<S> <C> <C> <C>
Revenue:
Interest income $ 112,480 134,243 34,007
Rental income 70,750 46,800 --
Dividends from subsidiary 1,000,000 1,000,000 --
Other 7,767 817 --
----------- --------- ----------
1,190,997 1,181,860 34,007
----------- --------- ----------
Expenses:
Legal 57,277 81,193 12,183
Other 135,101 74,072 13,393
----------- --------- ----------
192,378 155,265 25,576
----------- --------- ----------
Income before equity in undistributed income of subsidiary 998,619 1,026,595 8,431
Equity in undistributed income of subsidiary 153,291 102,685 486,138
----------- --------- ----------
Net income $ 1,151,910 1,129,280 494,569
=========== ========= ==========
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income $ 1,151,910 1,129,280 494,569
Adjustments to reconcile net income to net cash used in
operating activities:
Equity in undistributed income of subsidiary (153,291) (102,685) (486,138)
Depreciation expense 22,367 22,367 --
Amortization of ESOP awards 144,905 188,522 84,473
Amortization of stock awards 147,816 120,131 --
(Decrease) increase in income taxes payable (58,160) 162,184 --
Other, net 55,836 (72,785) (170,927)
----------- --------- ----------
Net cash provided by (used in) operating activities 1,311,383 1,447,014 (78,023)
----------- --------- ----------
Cash flows from investing activities - investment in subsidiary -- -- (10,000,000)
----------- --------- ----------
Cash flows from financing activities:
Proceeds from stock offering -- -- 11,112,371
Proceeds from exercise of stock options 82,061 60,733 68,916
Purchase of treasury stock (1,067,368) (166,431) --
Purchase of stock for restricted stock awards -- (739,456) --
Cash dividends paid (557,785) (568,356) (141,120)
----------- --------- ----------
Net cash (used in) provided by financing activities (1,543,092) (1,413,510) 11,040,167
----------- --------- ----------
Net (decrease) increase in cash (231,709) 33,504 962,144
Cash at beginning of year 995,648 962,144 --
----------- --------- ----------
Cash at end of year $ 763,939 995,648 962,144
=========== ========= ==========
</TABLE>
82
<PAGE> 85
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
See Report on Form 8-K, dated March 21, 2000, reporting under Item 4 a
change in the registrant's certifying accountant to Rubin Brown Gornstein &
Co. LLP from KPMG LLP for the year commencing April 1, 2000 and ending March
31 2001.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
----------------------------------------------------------------------
COMPLIANCE WITH SECTION 1B(A) OF THE EXCHANGE ACT
-------------------------------------------------
The following table sets forth certain information with respect to the
persons who currently serve as members of the Board of Directors of Equality.
<TABLE>
<CAPTION>
=====================================================================================================================
Age at Position held Director Term
Name June 30, 2000 with ESB since expires
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LeRoy C. Crook 91 Director 1965 2001
Kenneth J. Hrdlicka 57 Director 1983 2001
Michael J. Walsh 56 Director 1986 2001
Richard C. Fellhauer 58 Director, Chairman of the Board, President 1973 2002
and Chief Executive Officer
Daniel C. Aubuchon 52 Director 1981 2002
Stacey W. Braswell 56 Director 1982 2002
Berenice J. Mahacek 66 Director 1982 2000
Charles J. Wolter 82 Director 1989 2000
Michael A. Deelo 44 Director, Senior 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 the 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. He became President and Chief Executive Officer of Equality in June
1997.
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.
83
<PAGE> 86
Charles J. Wolter has been the President of Realty Net - Wolter Real
Estate for more than the past five years. Charles J. Wolter is the father of
Leonard O. Wolter, an executive officer of Equality.
Michael A. Deelo has been a Senior Executive Vice President and Chief
Financial Officer of ESB since 1997. From August 1996 until August 1997, he
served as Executive Vice President and Chief Financial Officer of ESB. Prior
to that time, he served as Vice President and Chief Financial Officer of ESB.
He became Treasurer and Chief Financial Officer of Equality in June 1997.
ASSOCIATE DIRECTORS OF ESB
ESB also has five 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 O. Wolter, John L. Tacke, and Patricia A.
Heinrich. 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, 2000, 1999, and 1998 with respect to Equality's
President and Chief Executive Officer and Equality's Senior Executive Vice
President, Treasurer and Chief Executive Officer. No other officers of
Equality received compensation in excess of $100,000 during the fiscal year
ended March 31, 2000.
<TABLE>
<CAPTION>
====================================================================================================================================
Annual compensation Long-term compensation
---------------------------------------------- -----------------------
Restricted Securities
Other annual stock underlying All other
Principal position Year Salary Bonus compensation<F1> awards<F3> options<F4> compensation <F2>
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard C. Fellhauer
President & Chief 2000 $ 157,400 -- 8,500 -- 2,500 7,299
Executive Officer 1999 159,415 -- 8,400 199,688 25,000 9,978
1998 138,000 -- 10,200 -- -- 3,300
Michael A. Deelo
Sr. Exec. Vice 2000 $ 100,006 5,000 8,500 -- 2,000 5,177
President & Chief 1999 93,750 -- 8,400 139,781 17,500 6,650
Financial Officer 1998 81,095 -- 10,200 -- -- 5,060
====================================================================================================================================
<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, 1998, 1999 and 2000.
<F3> Represents awards of 15,000 shares of Common Stock to Mr. Fellhauer and
10,500 shares of Common Stock to Mr. Deelo under the MRP based upon the
value of such stock of $13.3125 per share as of the date of such award.
As of March 31, 2000, the value of restricted stock (15,000 shares and
10,500 shares respectively) was $6.50 per share or $97,500 for Mr.
Fellhauer in the aggregate and $68,250 for Mr. Deelo in the aggregate.
Such stock awards become nonforfeitable at the rate of 20% of total
shares per year commencing on August 14, 1999. Dividends are paid for
all shares awarded.
<F4> Represents award of options exercisable at the rate of 20% per year
commencing on August 14, 1999. The exercise price equals the average
market value of common stock on the date of grant of $13.90 for 1999
options and $8.00 for 2000 options.
</TABLE>
84
<PAGE> 87
The following tables set forth information concerning options granted to the
named executive officer in the last fiscal year and fiscal year end values of
unexercised options.
<TABLE>
<CAPTION>
===========================================================================================================================
Potential realizable value
% of Total at assumed annual rate of
Number of options Exercise stock price appreciation
securities under- granted to or base for option term
lying options employees in price Expiration ---------------
Name granted (#) fiscal year ($/SH) date 5% 10%
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Richard C. Fellhauer 2,500 12.50% 8.00 August 14, 2008 $ 12,578 31,875
Michael A. Deelo 2,000 10.00 8.00 August 14, 2008 10,062 25,500
<CAPTION>
Number of securities Value of unexercised
underlying unexercised in-the-money options
options at fiscal year end (#) at fiscal year end <F2>
------------------------------ ------------------------
Value
Shares acquired realized
Name on exercise ($)<F1> Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------- ----------- ------------- ----------- -------------
Richard C. Fellhauer 12,115 $ 35,715 22,832 22,500 $ 140,908 --
Michael A. Deelo 11,295 48,689 12,417 16,000 18,960 --
===========================================================================================================================
<FN>
<F1> Market value of the underlying securities at the date of exercise minus
the exercise price, multiplied by the number of underlying securities.
<F2> Market value of the underlying securities at year end minus the exercise
price, multiplied by the number of underlying securities. Based upon the
closing price of the Common Stock as of March 31, 2000 of $6.50 per share.
</TABLE>
EMPLOYMENT AGREEMENTS
Equality has entered into employment agreements with Richard C.
Fellhauer, President and Chief Executive Officer of Equality and ESB; Michael
A. Deelo, Executive Vice President, Treasurer and Chief Financial Officer of
Equality and Senior Executive Vice President and Chief Financial Officer of
ESB; and Leonard O. Wolter, Vice President of Equality and Senior Vice
President of ESB (each an executive, or the executives). Each employment
agreement provides that the individual will be employed for a three-year
term. Such term may be extended for additional one-year periods by action of
the Board of Directors of Equality taken on each successive anniversary of
the effective date of the employment agreement. Each of Messrs. Fellhauer,
Deelo and Wolter may terminate their employment agreements at any time upon
90 days' prior written notice to the Boards of Directors of Equality and ESB.
Under the employment agreements, the base annual salary for each
executive may be increased from time to time during the term of the
employment agreement in the sole discretion of the Board of Directors of
Equality, but the executive's salary shall not be reduced below the level
then in effect. In addition, the executive will be entitled to participate
in incentive compensation plans or arrangements as may from time to time be
established by Equality or ESB on a basis consistent with the treatment of
other executive officers of Equality or ESB, but recognizing differences in
responsibilities among executive officers. The executive also shall be
entitled to receive any other bonus or discretionary compensation payments as
the Board of Directors of Equality may determine from time to time. Pursuant
to the employment agreements, each executive also will be provided such other
benefits (including but not limited to medical, health, life and other
insurance coverage) and will be entitled to participate in such retirement
plans of Equality and ESB as are generally made available to other executive
offices of Equality or ESB. During his employment, each executive also will
be entitled to customary vacations in accordance with vacation policies and
practices of Equality or ESB prevailing from time to time, and to
reimbursement for reasonable expenses incurred on behalf of Equality or ESB
in accordance with the then-prevailing policies and practices of Equality or
ESB.
85
<PAGE> 88
Each employment agreement provides for continuing benefits in the event
the executive is terminated by Equality, other than for "just cause," or in
the event the executive voluntarily terminates the employment agreement for
"good reason." Under the employment agreement, "just cause" would include
personal dishonesty, incompetence, willful misconduct or breach of a
fiduciary duty involving personal profit in the performance of his duties
under the employment agreement, intentional and continued failure to perform
stated duties, willful violation of any law, rule or regulation (other than a
law, rule or regulation relating to a misdemeanor, traffic violation or
similar offense), final cease-and-desist order or material breach of any
provision of the employment agreement. Under the employment agreement, "good
reason" would be deemed to exist if the executive terminated his employment
because, without his express written consent, Equality breached any of the
terms of the employment agreement. In such instances, the executive
generally will continue to receive all benefits due to him under the
employment agreement through the remaining term of the agreement. If the
executive is terminated within one year after a "change of control" of
Equality, other than for just cause or if the executive terminates his
employment for any reason, then Equality will pay to the executive a lump sum
equal to 2.99 times the "Base Amount," as that term is defined in Section
280G(b)(3) of the Code, and will continue to provide coverage for the
executive and his dependents, beneficiaries and estate under all executive
benefit plans of Equality and ESB for the remainder of the term of the
employment agreement. If payments and benefits under the employment
agreements would constitute an "Excess Parachute Payment" under Section 280G
of the Code, then such payments and benefits will be reduced to one dollar
less than the maximum amount that Equality may pay under Section 280G of the
Code without losing its ability to deduct such payments for tax purposes. A
"change of control" is defined in each employment agreement to include, among
other events, the acquisition of beneficial ownership of 20% or more of the
voting power of Equality's capital stock.
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 March 31, 2000, 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 common
beneficial owner beneficial ownership<F1> stock outstanding
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Equality Employee Stock Ownership Plan Trust 188,480 7.89%
4131 South Grand Boulevard
St. Louis, Missouri 63118-3464
Richard C. Fellhauer 127,163 5.28
===============================================================================================================
<FN>
<F1> Unless otherwise indicated, the nature of beneficial ownership for shares
shown in this column is sole voting and investment power.
</TABLE>
86
<PAGE> 89
The following table sets forth, as of March 31, 2000, the amount 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 127,163 5.28% <F2>
Berenice J. Mahacek 50,551 2.12 <F2>
Daniel C. Aubuchon 15,358 <F*>
Stacey W. Braswell 22,816 <F*>
Charles J. Wolter 14,071 <F*>
LeRoy C. Crook 7,677 <F*>
Kenneth J. Hrdlicka 18,359 <F*>
Michael J. Walsh 44,845 1.88 <F2>
Michael A. Deelo 92,788 3.87 <F2>
Leonard O. Wolter 32,384 1.35 <F2>
All directors and executive officers
as a group (10 persons) 426,012 17.46 <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.
<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>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------
ESB has followed the policy of offering residential mortgage loans for
the financing of personal residences, share loans and consumer loans to its
officers, directors and employees. The loans are made in the ordinary course
of business and are also made on substantially the same terms and conditions,
including interest rate and collateral, as those of comparable transactions
prevailing at the same time with other persons, and do not include more than
the normal risk of collectibility or present other unfavorable features. At
March 31, 2000, approximately $1.6 million of loans were outstanding from ESB
to executive officers and directors of ESB and their affiliates.
87
<PAGE> 90
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
-------------------------------------------
(a) EXHIBITS
3(i) Articles of Incorporation, Certificate of Incorporation
of Registrant as filed in Delaware on May 14, 1997
(Incorporated by reference to the Registrant's
Registrations Statement on Form S-1, as amended (File
No. 333-30469), as originally filed with the SEC on June
30, 1997)
3(ii) Bylaws of Registrant as adopted by the Board of Directors
of Registrant on June 20, 1997 (Incorporated by reference
to the Registrant's Registrations Statement on Form S-1,
as amended (File No. 333-30469), as originally filed with
the SEC on June 30, 1997)
10.1 Equality Savings and Loan Association 1993 Stock Option
and Incentive Plan (Incorporated by reference to the
Registrant's Registrations Statement on Form S-1, as
amended (File No. 333-30469), as originally filed with
the SEC on June 30, 1997)
10.2 Credit Agreement between Registrant and Equality Savings
and Loan Association, F.A. Employee Stock Ownership Plan
(Incorporated by reference to the Registrant's
Registrations Statement on Form S-1, as amended (File No.
333-30469), as originally filed with the SEC on June 30,
1997)
10.3 Equality Bancorp, Inc. 1997 Stock Option and Incentive
Plan (Incorporated by reference to the Registrant's
Registrations Statement on Form S-1, as amended (File No.
333-30469), as originally filed with the SEC on June 30,
1997)
10.4 Equality Bancorp, Inc. 1997 Management Development and
Recognition Plan (Incorporated by reference to the
Registrant's Registrations Statement on Form S-1, as
amended (File No. 333-30469), as originally filed with
the SEC on June 30, 1997)
10.5 Form of Employment Agreement to be entered into between
Equality Bancorp, Inc. and Richard C. Fellhauer
(Incorporated by reference to the Registrant's
Registrations Statement on Form S-1, as amended (File No.
333-30469), as originally filed with the SEC on June 30,
1997)
10.6 Form of Employment Agreement to be entered into between
Equality Bancorp, Inc. and Michael A. Deelo (Incorporated
by reference to the Registrant's Registrations Statement
on Form S-1, as amended (File No. 333-30469), as
originally filed with the SEC on June 30, 1997)
10.7 Form of Employment Agreement to be entered into between
Equality Bancorp, Inc. and Leonard O. Wolter
(Incorporated by reference to the Registrant's
Registrations Statement on Form S-1, as amended (File No.
333-30469), as originally filed with the SEC on June 30,
1997)
21 List of subsidiaries of the Registrant (Incorporated by
reference to the Registrant's Registrations Statement on
Form S-1, as amended (File No. 333-30469), as originally
filed with the SEC on June 30, 1997)
23 Consent of KPMG LLP
23(a) Consent of Rubin, Brown, Gornstein & Co. LLP
27(i) Financial Data Schedule - March 31, 2000
27(ii) Financial Data Schedule - March 31, 1999
88
<PAGE> 91
27(iii) Financial Data Schedule - March 31, 1998
99 Independent Auditors' Report of Rubin, Brown, Gornstein &
Co. LLP
(b) FORM 8-K
1 Form 8-K, dated March 21, 2000, reporting under Item 4 a
change in the registrant's certifying accountant to Rubin Brown
Gornstein & Co. LLP from KPMG LLP for the year commencing April
1, 2000 and ending March 31, 2001.
2 Form 8-K/A, dated March 29, 2000, amending the Form 8-K dated
March 15, 2000 to incorporate additional requested information.
89
<PAGE> 92
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EQUALITY BANCORP, INC.
Date: June 29, 2000 By:
------------------------------------------
Richard C. Fellhauer, Chairman of the
Board, President, Chief Executive
Officer and Director
In accordance with the Securities Exchange Act of 1934, as amended, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on June 29, 2000.
<TABLE>
<S> <C>
/s/ Richard C. Fellhauer /s/ Michael A. Deelo
----------------------------------------------- -----------------------------------------------
Richard C. Fellhauer, Chairman of the Board, Michael A. Deelo, Executive Vice President,
President, Chief Executive Officer and Director Chief Financial Officer, Treasurer and Director
(Principal Executive Officer) (Principal Financial Officer and Principal
Accounting Officer)
/s/ Daniel C. Aubuchon /s/ Stacey W. Braswell
----------------------------------------------- -----------------------------------------------
Daniel C. Aubuchon, Director Stacey W. Braswell, Director
/s/ LeRoy C. Crook /s/ Kenneth J. Hrdlicka
----------------------------------------------- -----------------------------------------------
LeRoy C. Crook, Director Kenneth J. Hrdlicka, Director
/s/ Berenice J. Mahacek /s/ Michael J. Walsh
----------------------------------------------- -----------------------------------------------
Berenice J. Mahacek, Director Michael J. Walsh, Director
/s/ Charles J. Wolter
----------------------------------------------- -----------------------------------------------
Charles J. Wolter, Director
</TABLE>
90
