<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------- -------------------
Commission File No. 333-30469
EQUALITY BANCORP, INC.
----------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 43-1785126
----------------------------------------- -----------------------------
(State or other jurisdiction (I.R.S. Employer ID Number)
of incorporation or organization)
9920 WATSON ROAD, ST. LOUIS, MO 63126
------------------------------------------------------------------------------
(Address of principal executive offices) (zip code)
Issuer's telephone number, including area code (314) 965-7090
-----------------------
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding at August 11, 2000
--------------------------------- -------------------------------------
Common Stock, Par Value $0.01 2,545,282
Traditional Small Business Disclosure Format (Check one): Yes No X
----- -----
<PAGE> 2
<TABLE>
INDEX TO FORM 10-QSB
<CAPTION>
PAGE NO.
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- Consolidated Balance Sheets 1
- Consolidated Statements of Income 2
- Consolidated Statement of Stockholders' Equity 3
- Consolidated Statements of Cash Flows 4
- Consolidated Statements of Comprehensive Income 5
- Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of 7
Operation
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
<PAGE> 3
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 2000 and March 31, 2000
(Unaudited)
<CAPTION> June 30, March 31,
2000 2000
------------ -----------
<S> <C> <C>
Assets
------
Cash, primarily interest-bearing demand accounts $ 13,749,604 9,080,509
Interest-bearing deposits 198,000 198,000
Investment securities:
Available for sale, at fair value 116,519,529 120,575,542
Held to maturity, at amortized cost 600,000 600,000
Mortgage-backed securities available
for sale, at fair value 62,184,092 64,137,674
Loans receivable, net 114,019,602 105,315,729
Investment in real estate 58,054 58,054
Stock in Federal Home Loan Bank 7,285,200 7,987,100
Mortgage servicing rights 1,156,211 1,273,768
Office properties and equipment, net 7,008,424 6,935,115
Deferred tax asset 2,475,269 2,775,937
Accrued interest receivable and other assets 3,880,971 4,397,879
------------ -----------
329,134,956 323,335,307
============ ===========
Liabilities and Stockholders' Equity
------------------------------------
Savings deposits 159,739,909 140,885,244
Accrued interest payable on savings deposits 137,146 147,711
Federal Home Loan Bank advances 145,625,505 159,740,626
Other borrowed money 2,367,867 1,694,534
Advance payments by borrowers for taxes and insurance 42,152 35,800
Income tax payable 194,705 276,568
Accrued expenses and other liabilities 599,061 629,822
------------ -----------
Total liabilities 308,706,345 303,410,305
------------ -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value per share;
200,000 shares authorized; none issued -- --
Common stock, $.01 par value per share; 4,000,000
shares authorized; 2,544,094 shares issued
and outstanding at June 30, 2000 and
March 31, 2000 25,441 25,441
Additional paid-in capital 16,188,613 16,192,342
Retained earnings 11,947,728 11,849,449
Accumulated other comprehensive loss (5,098,109) (5,447,058)
Treasury stock, at cost, 160,105 and 158,055
shares at June 30, 2000 and
March 31, 2000, respectively (1,246,136) (1,233,799)
Unamortized restricted stock awards (435,788) (471,509)
Unearned ESOP shares (953,138) (989,864)
------------ -----------
Total stockholders' equity 20,428,611 19,925,002
------------ -----------
$329,134,956 323,335,307
============ ===========
See accompanying notes to consolidated financial statements.
</TABLE>
1
<PAGE> 4
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
Three months ended June 30, 2000 and 1999
(Unaudited)
<CAPTION>
2000 1999
---------- ---------
<S> <C> <C>
Interest income:
Loans receivable $2,181,803 1,824,517
Investment securities 2,234,579 1,614,286
Mortgage-backed securities 1,096,509 1,255,743
Interest-bearing deposits 35,579 9,920
Other 129,762 109,633
---------- ---------
Total interest income 5,678,232 4,814,099
---------- ---------
Interest expense:
Savings deposits 1,713,698 1,373,683
Advances from the Federal Home Loan Bank 2,273,056 1,820,977
Other borrowed money 11,242 11,802
---------- ---------
Total interest expense 3,997,996 3,206,462
---------- ---------
Net interest income 1,680,236 1,607,637
Provision for losses on loans -- --
---------- ---------
Net interest income after pro-
vision for losses on loans 1,680,236 1,607,637
---------- ---------
Noninterest income:
Gain on sale of mortgage loans 244,344 331,133
Loan servicing fees and late charges 249,152 311,123
Gain on sale of investment and mortgage-
backed securities available for sale 174 30,703
Rental income 42,226 36,326
Other 229,682 141,606
---------- ---------
Total noninterest income 765,578 850,891
---------- ---------
Noninterest expense:
Salaries and employee benefits 1,125,749 1,159,866
Occupancy 196,180 183,612
Data processing 99,606 91,131
Advertising 131,980 79,536
Federal insurance premiums 7,207 18,512
Other 507,531 511,105
---------- ---------
Total noninterest expense 2,068,253 2,043,762
---------- ---------
Income before income tax expense 377,561 414,766
Income tax expense 143,481 169,440
---------- ---------
Net income 234,080 245,326
========== =========
Basic earnings per share $ .10 $ .10
========== =========
Diluted earnings per share $ .10 $ .10
========== =========
See accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE> 5
<TABLE>
EQUALITY BANCORP, INC. AND SUBSIDIARY
Consolidated Statement of Stockholders' Equity
Three months ended June 30, 2000
(Unaudited)
<CAPTION>
Accumu-
lated
other Unamor-
Addi- compre- tized- Total
Common Stock tional hensive restricted Unearned stock-
------------ paid-in Retained income Treasury stock ESOP holders'
Shares Amount capital earnings (loss) stock awards shares equity
------ ------ ------- -------- ------- -------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
March 31, 2000 2,544,094 $25,441 16,192,342 11,849,449 (5,447,058) (1,233,799) (471,509) (989,864) $19,925,002
Net income 234,080 234,080
Dividend paid
on unvested
stock options 3,159 3,159
Purchase of
Treasury stock,
at cost (12,337) (12,337)
Amortization
of restricted
stock awards 35,721 35,721
Amortization of
ESOP awards (6,888) 36,726 29,838
Dividend declared
on common stock
at $.06 per
share (135,801) (135,801)
Change in
accumulated
other
comprehensive
income (loss),
net of tax 348,949 348,949
--------- ------- ---------- ---------- ---------- ---------- -------- -------- -----------
Balance,
June 30, 2000 2,544,094 $25,441 16,188,613 11,947,728 (5,098,109) (1,246,136) (435,788) (953,138) $20,428,611
========= ======= ========== ========== ========== ========== ======== ======== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
3
<PAGE> 6
<TABLE>
EQUALITY BANCORP, INC.
Consolidated Statements of Cash Flows
Three months ended June 30, 2000 and 1999
(Unaudited)
<CAPTION>
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 234,080 245,326
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization:
Office properties and equipment 101,822 104,620
Premiums and discounts, net (362,083) (237,357)
Restricted stock awards 35,721 39,194
Mortgage servicing rights 122,374 153,610
Increase in accrued interest receivable (127,722) (371,453)
Gain on sale of mortgage loans (244,344) (331,133)
Gain on sale of investment and mortgage-backed
securities available for sale (174) (30,703)
Decrease in accrued interest payable on savings deposits (10,565) (400)
Change in income tax payable (81,863) 41,501
Other, net 724,518 (78,821)
Origination and purchase of loans held for sale (23,057,795) (35,379,780)
Proceeds from sales of loans held for sale 21,628,401 28,534,090
------------ -----------
Net cash provided by (used in) operating activities (1,037,630) 7,311,306
------------ -----------
Cash flows from investing activities:
Net change in loans receivable (7,047,607) (4,771,815)
Decrease in interest-bearing deposits -- 95,000
Principal repayments on investment securities, AFS 936 5,146
Principal repayments on mortgage-backed securities, AFS 2,228,623 7,568,074
Proceeds from the sale of investment securities, AFS 6,957,510 2,018,000
Proceeds from the maturity of investment securities, AFS 1,650,000 15,110,000
Proceeds from the sale of mortgage-backed securities, AFS -- 1,278,561
Purchase of investment securities, AFS (3,875,780) (35,547,815)
Sale (purchase) of stock in Federal Home Loan Bank 701,900 (519,600)
Increase in cost of mortgage servicing rights (4,817) (353,140)
Purchase of office properties and equipment, net (175,131) (529,309)
------------ -----------
Net cash provided by (used in) investing activities 435,634 (15,646,898)
------------ -----------
Cash flows from financing activities:
Net increase (decrease) in savings deposits 18,854,665 (278,680)
Proceeds from Federal Home Loan Bank advances -- 18,000,000
Repayment of Federal Home Loan Bank advances (14,115,121) (108,434)
Proceeds from other borrowed money 673,333 1,060,436
Cash dividends paid (135,801) (140,525)
Purchase of treasury stock (12,337) (242,668)
Proceeds from exercise of stock options -- 3,300
Increase in advance payments by borrowers
for taxes and insurance 6,352 65,062
------------ -----------
Net cash provided by financing activities 5,271,091 18,358,491
------------ -----------
Net increase (decrease) in cash and cash equivalents 4,669,095 (4,599,713)
Cash and cash equivalents, beginning of period 9,080,509 6,449,613
------------ -----------
Cash and cash equivalents, end of period $ 13,749,604 1,849,900
============ ===========
Supplemental disclosure of cash flow information:
Interest paid $ 4,092,421 3,206,862
Income taxes paid, net 193,606 110,452
See accompanying notes to consolidated financial statements.
</TABLE>
4
<PAGE> 7
<TABLE>
EQUALITY BANCORP, INC.
Consolidated Statements of Comprehensive Income
Three months ended June 30, 2000 and 1999
(Unaudited)
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Net Income $ 234,080 245,326
Other comprehensive income (loss):
Net unrealized gain (loss) on investment and mortgage-
backed securities available for sale, net of tax 349,055 (814,128)
Less adjustment for gain on sale of investment and
mortgage-backed securities available for sale
realized in net income, net of tax of $68
and $11,974 for the three months ended June 30,
2000 and 1999, respectively (106) (18,729)
--------- --------
Total other comprehensive income (loss) 348,949 (832,857)
--------- --------
Comprehensive income (loss) $ 583,029 (587,531)
========= ========
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE> 8
EQUALITY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with instructions for Form 10-QSB and,
therefore, do not include information for footnotes necessary for a
complete presentation of financial position, results of operations,
and cash flows in conformity with generally accepted accounting
principles. However, all adjustments (consisting only of normal
recurring accruals) which, in the opinion of management, are
necessary for a fair presentation of the consolidated financial
statements have been included in the results of operations for the
three months ended June 30, 2000 and 1999.
Operating results for the three months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the
year ending March 31, 2001.
(2) Principles of Consolidation
---------------------------
The accompanying unaudited consolidated financial statements include the
accounts of Equality Bancorp, Inc. and its wholly owned subsidiary,
Equality Savings Bank (the Bank) as well as Equality Savings Bank's
wholly owned subsidiaries, Equality Commodity Corporation (ECC) and
Equality Mortgage Corporation (EMC). All significant intercompany
accounts and transactions have been eliminated in consolidation.
(3) Earnings Per Share
------------------
Basic earnings per share for the three month periods ended June 30, 2000
and 1999 were computed based upon net income for the period using
weighted average common shares outstanding of 2,267,387 and
2,350,538, respectively.
Diluted earnings per share for the three month periods ended June 30,
2000 and 1999 were computed based upon net income for the period
using weighted average common shares and dilutive potential common
shares outstanding of 2,280,731 and 2,377,871, respectively.
6
<PAGE> 9
EQUALITY BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
The following discussion reviews the financial condition and results of
operations of Equality Bancorp, Inc., and its subsidiary, Equality Savings
Bank, with subsidiaries, as of June 30, 2000 and for the three months then
ended.
The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of
such statements.
CHANGES IN FINANCIAL CONDITION
The total assets of the Company increased $5.8 million, or 1.8%, to
$329.1 million at June 30, 2000 from $323.3 million at March 31, 2000.
This increase in asset size primarily relates to an increase in cash and
loans receivable which were funded through increased savings deposits, the
proceeds from the sales of investment securities, and the proceeds from
repayment of mortgage loans and mortgage-backed securities.
Cash, primarily interest bearing demand accounts, increased $4.7 million, or
51.4%, to $13.7 million at June 30, 2000 from $9.1 million at March 31,
2000. At June 30, 2000, cash was being accumulated to repay a FHLB advance
maturing July 14, 2000. This increase is also the result of decreased
investment securities and mortgage-backed securities partially offset by
increased loans receivable.
Interest bearing deposits totaled $198,000 at June 30, 2000 and March 31,
2000.
Investment securities available for sale decreased $4.1 million, or 3.4%,
to $116.5 million at June 30, 2000 from $120.6 million at March 31, 2000.
The decrease is due primarily to $3.9 million of purchases of securities
and a mark to market adjustment of $231,000 to reflect the unrealized gain
on investment securities during the three months ended June 30, 2000,
offset by $1.7 million of maturities and sales proceeds of $7.0 million.
The decrease in investment securities is the result of management's efforts
to shift funds from investing in securities to investing in loans
receivable. Included in investment securities is a $2.0 million corporate
obligation, with a fair value of $1.3 million at June 30, 2000 and maturity
date 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 June 30, 2000 and
March 31, 2000.
Mortgage-backed securities available for sale decreased $2.0 million, or
3.0%, to $62.2 million at June 30, 2000 from $64.1 million at March 31,
2000. This decrease is the result of principal repayments of $2.2 million,
offset by a mark to market adjustment of $341,000 to reflect the unrealized
gain on mortgage-backed securities during the three months ended June 30,
2000.
Loans receivable, net, increased $8.7 million, or 8.3%, to $114.0 million at
June 30, 2000, from $105.3 million at March 31, 2000. Loans held for
investment increased $7.0 million, or 6.9%, to $109.7 million at June 30,
2000 from $102.7 million at March 31, 2000. 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 increased $1.7 million, or 63.4%, to $4.3 million at June 30,
2000 from $2.6 million at
7
<PAGE> 10
EQUALITY BANCORP, INC.
March 31, 2000. This increase is the result of EMC mortgage loan
originations totaling $23.1 million, offset by mortgage loan sales of
$21.6 million at June 30, 2000.
The following table sets forth composition of the Company's loan portfolio in
dollars and in percentages of total loans at the dates indicated:
<TABLE>
<CAPTION>
JUNE 30, 2000 MARCH 31, 2000
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
----- ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One to four family:
Conventional $ 73,541 64.3% $ 68,183 64.5%
FHA/VA 12,573 11.0 10,758 10.2
Loans held for sale 4,315 3.8 2,641 2.5
Multifamily 1,220 1.1 1,343 1.3
Commercial 3,176 2.8 4,097 3.9
Total Real Estate Loans 94,825 82.9 87,022 82.4
-------- ----- -------- -----
Commercial Business Loans 14,573 12.7 14,476 13.7
-------- ----- -------- -----
Consumer Loans:
Loans secured by savings deposits 221 0.2 257 0.2
Property improvement loans 1,749 1.5 1,633 1.5
Automobile loans 2,627 2.3 1,763 1.7
Other consumer loans 439 0.4 563 0.5
-------- ----- -------- -----
Total Consumer Loans 5,036 4.4 4,216 3.9
-------- ----- -------- -----
Total Loans 114,434 100.0% 105,714 100.0%
LESS:
Deferred loan fees 41 21
Unearned discounts 10 13
Allowance for loan losses 363 364
-------- --------
Total loans receivable, net $114,020 $105,316
======== ========
</TABLE>
Office properties and equipment increased $73,000, or 1.1%, to $7.0 million
at June 30, 2000 from $6.9 million at March 31, 2000. The increase
resulted from additional improvements to the Bank's future full-service
branch in Fenton, Missouri, scheduled to open in the third quarter
of 2000.
Savings deposits increased $18.9 million, or 13.4%, to $159.7 million at
June 30, 2000 from $140.9 million at March 31, 2000. Interest credited
during the three months ended June 30, 2000 was approximately $1.4 million.
Savings deposits have increased as a result of specific marketing tactics
directed to that effort as well as to replace borrowed funds with savings
deposit relationships.
FHLB advances decreased $14.1 million, or 8.8%, to $145.6 million at June 30,
2000 from $159.7 million at March 31, 2000. FHLB advances were decreased
as a result of marketing efforts directed at increasing savings deposits
and the associated banking relationships.
8
<PAGE> 11
EQUALITY BANCORP, INC.
Other borrowed money increased $673,000, or 39.7%, to $2.4 million at
June 30, 2000 from $1.7 million at March 31, 2000. These short term
borrowings relate to a warehouse line of credit established with an
independent bank and maintained by EMC, the proceeds of which were
invested solely in residential mortgage loans.
Total stockholders' equity increased $504,000, or 2.5%, to $20.4 million
at June 30, 2000 from $19.9 million at March 31, 2000. The increase was
primarily attributable to net income of $234,000, a reduction in ESOP
indebtedness of $37,000, a reduction of unamortized restricted stock awards
of $36,000, and a mark to market adjustment to reflect unrealized gain on
securities available for sale of $349,000, offset by the Company's purchase
of treasury stock of $12,000 and payment of quarterly dividends totaling
$136,000.
9
<PAGE> 12
<TABLE>
EQUALITY BANCORP, INC.
UNAUDITED CONSOLIDATED AVERAGE BALANCE SHEET,
INTEREST AND DIVIDENDS EARNED OR PAID,
AND RELATED INTEREST YIELDS AND RATES
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------------------------------------------------
INTEREST INTEREST
AVERAGE AND YIELD/ AVERAGE AND YIELD/
BALANCE<F1> DIVIDENDS COST<F2> BALANCE<F1> DIVIDENDS COST<F2>
-------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans Receivable<F3> $111,516 $2,182 7.83 $ 97,037 $1,825 7.52%
Investment securities 127,437 2,234 7.01 93,704 1,614 6.89
Mortgage-backed securities 65,326 1,096 6.71 84,419 1,256 5.95
Interest-bearing deposits 8,399 36 1.71 2,864 10 1.40
Investment in FHLB 7,519 130 6.92 7,084 109 6.15
-------- ------ -------- ------
Total interest-earning
assets 320,197 5,678 7.10 285,108 4,814 6.76
------ ------
Other assets 5,396 12,681
-------- --------
Total assets 325,593 297,789
======== ========
Interest bearing liabilities:
Regular savings 19,450 21,042
NOW accounts 19,674 16,222
Money market accounts 12,706 8,426
Certificates of deposit 102,740 82,601
-------- --------
Total savings deposits 154,570 1,714 4.44 128,291 1,373 4.28
FHLB advances 149,664 2,273 6.07 139,279 1,821 5.23
Other interest-bearing
liabilities 2,239 11 1.97 2,423 12 1.98
-------- ------ -------- ------
Total interest bearing
liabilities 306,473 3,998 5.22 269,993 3,206 4.75
------ ------
Other liabilities (1,025) 2,553
-------- --------
Total liabilities 305,448 272,546
Stockholders' equity 20,145 25,243
-------- --------
Total liabilities and
stockholders' equity $325,593 $297,789
======== ========
Net interest income $1,680 $1,608
====== ======
Interest rate spread 1.88% 2.01%
====== ======
Net interest margin<F4> 2.10 2.26%
====== ======
Ratio of average interest-
earning assets to
average interest-bearing
liabilities 1.04X 1.06X
==== ====
<FN>
<F1> Average balances are computed on a monthly basis (month-end balances).
<F2> Annualized.
<F3> Does not include accrued interest on loans 90 days or more past due.
<F4> Net interest income divided by average interest-earning assets.
</TABLE>
10
<PAGE> 13
EQUALITY BANCORP, INC.
THREE MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
NET INCOME
Net income decreased $11,000, or 4.6%, to $234,000 for the three months ended
June 30, 2000 from $245,000 for the three months ended June 30, 1999. The
decrease was primarily the result of decreased noninterest income of
$85,000, or 10.0%, and increased noninterest expense of $24,000, or 1.2%,
offset by increased net interest income of $73,000, or 4.5%, and decreased
income taxes of $26,000, or 15.3%, for the three months ended June 30, 2000.
INTEREST INCOME
Interest income increased $864,000, or 18.0%, to $5.7 million for the three
months ended June 30, 2000 from $4.8 million for the three months ended
June 30, 1999. The increase is primarily due to increased average
investment securities of $33.7 million to $127.4 million for the three
months ended June 30, 2000 from $93.7 million for the three months
ended June 30, 1999 and increased average loans receivable of $14.5 million
to $111.5 million for the three months ended June 30, 2000 from $97.0
million for the three months June 30, 1999, offset by decreased average
mortgage-backed securities of $19.1 million to $65.3 million for the three
months ended June 30, 2000 from $84.4 million for the three months ended
June 30, 1999. The weighted average yield on total interest-earning assets
increased to 7.10% for the three months ended June 30, 2000 from 6.76% for
the three months ended June 30, 1999 due to the investment of proceeds of
mortgage loan and mortgage-backed securities repayments and investment
securities sales and maturities into loans receivable and investment
securities at current market rates.
INTEREST EXPENSE
Interest expense increased $792,000, or 24.7%, to $4.0 million for the three
months ended June 30, 2000 from $3.2 million for the three months ended
June 30, 1999. The increase is primarily due to increased average FHLB
advances of $10.4 million to $149.7 million for the three months ended
June 30, 2000 from $139.3 million for the three months ended June 30,
1999 and increased average savings deposits of $26.3 million to $154.6
million for the three months ended June 30, 2000 from $128.3 million
for the three months ended June 30, 1999. This increase is due primarily to
the opening of three new branch facilities and increased general marketing
efforts. Weighted average cost of funds increased to 5.22% for the three
months ended June 30, 2000 from 4.75% for the three months ended June
30,1999, which reflect increased general market interest rates on deposits
and FHLB advances.
PROVISION FOR LOSSES ON LOANS
The Company had no provision for losses on loans for the three month periods
ended June 30, 2000 or June 30, 1999. The provision for loan losses is
determined by management as the amount to be added to the allowance for
loan losses after net charge-offs have been deducted to bring the
allowance to a level which is considered adequate to absorb losses
inherent in the loan portfolio. The Bank's allowance for loan losses
totaled $363,000 at June 30, 2000 and $364,000 at March 31, 2000. The
allowance for loan losses is established through a provision for loan
losses charged to expense. While the Bank maintains its allowance for
losses at a level which it considered to be adequate, there can be no
assurances that further additions will not be made to the allowance or
that such losses will not exceed the estimated amounts.
11
<PAGE> 14
EQUALITY BANCORP, INC.
NONINTEREST INCOME
Noninterest income decreased $85,000, or 10.0%, to $766,000 for the three
months ended June 30, 2000 from $851,000 for the three months ended
June 30, 1999. This decrease was due primarily to decreased gain on
sale of loans of $87,000, or 26.2%, to $244,000 for the three months
ended June 30, 2000 from $331,000 for the three months ended June 30,
1999, decreased loan servicing fees and late charges of $62,000, or
19.9%, to $249,000 for the three months ended June 30, 2000 from
$311,000 for the three months ended June 30, 1999, and decreased gain
on sale of investment securities of $31,000, to a negligible gain for
the three months ended June 30, 2000 from $31,000 for the three months
ended June 30, 1999, offset by increased other noninterest income of
$88,000, or 62.2%, to $230,000 for the three months ended June 30,
2000 from $142,000 for the three months ended June 30, 1999. For the
three months ended June 30, 2000, the Company, through EMC, sold $21.6
million of mortgage loans as compared to sales of $28.5 million for
the three months ended June 30, 1999. The decreased volume of sales
due to rising interest rates resulted in decreased gain on sale for
the comparable periods. During the period the average loan servicing
portfolio decreased $16.6 million, or 4.5%, to $353.4 million from
$370.0 million for the three months ended June 30, 1999.
NONINTEREST EXPENSE
Noninterest expense increased $24,000, or 1.2%, to $2.1 million for the three
months ended June 30, 2000 from $2.0 million for the three months ended
June 30, 1999. The increase was due primarily to increased occupancy
expense of $13,000, or 6.8%, to $196,000 for the three months ended
June 30, 2000 from $184,000 for the three months ended June 30, 1999,
increased data processing expenses of $9,000, or 9.3%, to $100,000 for
the three months ended June 30, 2000 from $91,000 for the three months
ended June 30, 1999, increased advertising expense of $52,000, or
65.9%, to $132,000 for the three months ended June 30, 2000 from
$80,000 for the three months ended June 30, 1999, offset by decreased
salary and employee benefits of $34,000, or 2.9%, to $1.1 million for
the three months ended June 30, 2000, from $1.2 million for the three
months ended June 30, 1999 and decreased FDIC insurance premiums of
$11,000, or 61.1%, to $7,000 for the three months ended June 30, 2000
from $19,000 for the three months ended June 30, 1999. Salary and
employee benefits decreased primarily due to a reduction of EMC
personnel. The increase in occupancy and data processing is reflective of
the new branch in Arnold, Missouri which opened in July, 1999.
INCOME TAXES
Income tax expense decreased $26,000, or 15.3%, to $143,000 for the three
months ended June 30, 2000 from $169,000 for the three months ended
June 30, 1999. This decrease was primarily due to a decrease in
income before income tax of $37,000, or 9.0%. The effective tax rate
was approximately 38.0% and 40.9% for the three month periods ended
June 30, 2000 and 1999, respectively.
12
<PAGE> 15
EQUALITY BANCORP, INC.
NONPERFORMING ASSETS
At June 30, 2000, nonperforming assets were approximately $447,000, which
represents a decrease of $272,000, or 37.8%, as compared to March 31, 2000.
A summary of nonperforming assets by category is summarized as follows:
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
-------- ---------
(in thousands)
<S> <C> <C>
Nonaccruing loans:
One to four family <F1> $408 471
Commercial business -- 233
Consumer and other 39 13
---- ---
Total nonaccruing loans 447 717
Repossessed assets -- 2
---- ---
Total nonperforming assets $447 719
==== ===
Nonaccruing loans as a percent
of net loans .39% .68%
==== ===
Nonaccruing loans as
a percent of total assets .14% .22%
==== ===
Nonperforming assets as
a percent of total assets .14% .22%
==== ===
<FN>
<F1> Includes $293,000 and $388,000 of FHA/VA loans, the principal and
interest payments of which are either issued by FHA or guaranteed by
the VA at June 30, 2000 and March 31, 2000, respectively.
</TABLE>
Loans are placed on nonaccrual status when either principal or interest is
more than 90 days past due or at such time when contractual amounts due
are deemed uncollectible, whichever is sooner. Interest accrued and
unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. Subsequent payments are either applied to the
outstanding principal balance or recorded as interest income, depending
on the assessment of the ultimate collectibility of the loan.
13
<PAGE> 16
EQUALITY BANCORP, INC.
LIQUIDITY AND CAPITAL RESOURCES
The Bank'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. The Bank manages the pricing of
its deposits to maintain a deposit balance deemed appropriate and
desirable. In addition, the Bank invests in short-term investment
securities and interest-earning assets which provide liquidity to meet
lending requirements. Although the Bank's deposits have historically
represented the majority of its total liabilities, the Bank also
utilizes other borrowing sources, primarily advances from the FHLB
which totaled $145.6 million at June 30, 2000. At June 30, 2000, the
Bank had approximately $964,000 in outstanding commitments to
originate loans, approximately $874,000 of which were adjustable rate
loans. The interest rate on one fixed rate commitment was 8.375% at
June 30, 2000. The majority of the loans will be sold into the
secondary market upon origination.
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, the Bank invests in various loans, mortgage-backed
securities, and investment securities. The Bank 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 the Bank
believes that the Bank 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 the Bank.
REGULATORY CAPITAL
Under federal regulations, the Bank is required to maintain specific amounts
of regulatory capital. 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.
14
<PAGE> 17
EQUALITY BANCORP, INC.
The following table sets forth certain information concerning the Bank's
regulatory capital:
<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 $ 24,371 24,371 24,371
Additional capital item - general
loan loss reserves -- -- 363
-------- ------- -------
Total regulatory capital 24,371 24,371 24,734
Minimum capital requirement 9,543 6,563 13,126
-------- ------- -------
Excess regulatory capital 14,828 17,808 11,608
======== ======= =======
Adjusted total assets $238,574 164,073 164,073
======== ======= =======
Regulatory capital ratio 10.37% 14.85% 15.08%
======== ======= =======
</TABLE>
Management believes that under current regulations, the Bank will continue to
meet its minimum capital requirements in the foreseeable future. Events
beyond the control of the Bank could adversely affect future earnings
and as a result, the ability of the Bank to meet its future minimum
capital requirements.
IMPACT OF INFLATION AND CHANGING PRICES
The unaudited consolidated financial statements and related data presented
herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial
position and results of operations in the measurements of historical
dollars without considering changes in the relative purchasing power of
money over time because of inflation.
Unlike most industrial companies, virtually all of the assets and liabilities
of the Company are monetary in nature. As a result, interest rates have
a more significant impact on the Company's performance than the effects
of general levels of inflation. Interest rates do not necessarily move
in the same direction or in the same magnitude as the prices of goods
and services. In the present interest rate environment, the liquidity,
maturity structure, and quality of the Company's assets and liabilities
are important factors in the maintenance of acceptable performance
levels.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In December, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for
--------------
Derivative Instruments and Hedging Activities, (SFAS 133). SFAS 133
---------------------------------------------
establishes standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. It requires an entity to recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. In September, 1999, the FASB
issued Statement of Financial
15
<PAGE> 18
EQUALITY BANCORP, INC.
Accounting Standards No. 137, Accounting for Derivative Instruments and
-----------------------------------------
Hedging Activities - Deferral of the Effective Date of FASB Statement
---------------------------------------------------------------------
No. 133, an Amendment of FASB Statement No. 133, which defers the
-------
effective date of SFAS 133 from fiscal years beginning after June 15,
1999 to fiscal years beginning after June 15, 2000. Earlier application
of SFAS 133, as amended, is encouraged but should not be applied
retroactively to financial statements of prior periods. The Company is
currently evaluating the requirements and impact of SFAS 133, as
amended.
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 intitially estimated costs of approximately $148,000 to prepare for
the century date change. As of June 30, 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 June 30, 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.
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.
16
<PAGE> 19
EQUALITY BANCORP, INC.
To date, Eqaulity has not experienced any significant disruptions to its
financial 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.
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>
JUNE 30, 2000
----------------------------------------------------------------------------------------------------
EQUALITY EQUALITY CORPORATE
SAVINGS MORTGAGE AND
BANK CORPORATION OTHER TOTAL
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance sheet information:
Investment and mortgage-
backed securities 179,215,891 -- 87,730 179,303,621
Loans receivable, net 111,173,806 4,304,841 (1,459,045) 114,019,602
Total assets 326,139,182 6,359,105 (3,363,331) 329,134,956
Savings deposits 160,553,486 -- (813,577) 159,739,909
Stockholders' equity 19,430,847 2,355,806 (1,358,042) 20,428,611
=========== ========= ========== ===========
Statement of income information:
Total interest income 5,574,171 94,046 10,015 5,678,232
Total interest expense 4,019,706 53,325 (75,035) 3,997,996
Net interest income 1,554,465 40,721 85,050 1,680,236
Provision for losses on loans -- -- -- --
Noninterest income 76,409 594,010 95,159 765,578
Noninterest expense 1,257,805 665,163 145,285 2,068,253
Income tax expense 148,683 (11,856) 6,654 143,481
Net income (loss) 224,386 (18,576) 28,270 234,080
=========== ========= ========== ===========
Capital expenditures 175,131 0 0 175,131
=========== ========= ========== ===========
17
<PAGE> 20
EQUALITY BANCORP, INC.
<CAPTION>
JUNE 30, 1999
----------------------------------------------------------------------------------------------------
EQUALITY EQUALITY CORPORATE
SAVINGS MORTGAGE AND
BANK CORPORATION OTHER TOTAL
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance sheet information:
Investment and mortgage-
backed securities 181,523,654 -- 87,730 181,611,384
Loans receivable, net 99,036,661 14,180,139 (11,016,639) 102,200,161
Total assets 301,853,869 16,902,136 (12,832,244) 305,923,761
Savings deposits 129,395,784 -- (720,638) 128,675,146
Stockholders' equity 23,721,649 2,272,422 (1,269,822) 24,724,249
=========== ========== ========== ===========
Statement of income information:
Total interest income 4,709,023 172,991 (67,915) 4,814,099
Total interest expense 3,225,910 123,018 (142,466) 3,206,462
Net interest income 1,483,113 49,973 74,551 1,607,637
Provision for losses on loans -- -- -- --
Noninterest income 71,809 686,604 92,477 850,890
Noninterest expense 1,115,247 736,217 192,297 2,043,761
Income tax expense 175,913 135 (6,608) 169,440
Net income (loss) 263,762 225 (18,661) 245,326
=========== ========== ========== ===========
Capital expenditures 514,211 7,872 7,226 529,309
=========== ========== ========== ===========
</TABLE>
18
<PAGE> 21
EQUALITY BANCORP, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other information
-----------------
Regulatory Agreement
--------------------
As a result of the FDIC's first regular examination following the
Bank's conversion from a federally-chartered savings and loan
association to a state-chartered savings bank on December 28, 1999, the
Bank entered into a Memorandum of Understanding (MOU) with the FDIC and
the Division on June 26, 2000. By signing the MOU, the Bank has
agreed to take certain actions in response to concerns raised by the
FDIC. The MOU addresses: (A) the Board of Directors of the Bank to
assess its management and staffing needs to ensure proper supervision
of the Bank's affairs; (B) the Bank 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
the Bank's earnings; (C) the Bank to implement a suitable method for
measuring and monitoring its 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; (D) the Bank 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 the Bank's IRR profile; (E) the Bank to maintain a Tier I
Leverage Ratio of not less than 7% while the MOU is in effect; (F) the
Bank to refrain from declaring or paying any dividends and/or
management fees to Equality without prior written regulatory approval;
(G) the Bank to present to the FDIC and the Division periodic updates
regarding its asset growth objectives, particularly in light of capital
and liquidity needs; (H) the Bank to provide a revised investment
policy, modify certain investment practices, and ensure the policy is
implemented and followed; (I) the Bank to develop an internal audit
program and appoint an internal auditor who shall report to the Board
of Directors; (J) the Bank to take steps to correct and/or eliminate
violations cited by the FDIC and the Division; (K) the Bank to
implement procedures to address regulatory concerns regarding the
retail sale of nondeposit investment products by the Bank; and (L) the
Bank to submit periodic progress reports to the FDIC and Division
regarding the Bank'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. The Bank 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 the Bank. The MOU
will remain in effect until terminated by the Kansas City Regional
Director of the FDIC.
19
<PAGE> 22
EQUALITY BANCORP, INC.
Definitive Agreement
--------------------
On July 26, 2000, Equality signed a definitive agreement with Allegiant
Bancorp, Inc. ("Allegiant") for the acquisition of Equality by
Allegiant.
Allegiant and Equality are both headquartered in St. Louis, Missouri.
The acquisition, which is subject to shareholder and regulatory
approval, is expected to close in the second half of the year. Under
the terms of the agreement, Allegiant will exchange approximately 2.7
million shares of its common stock for all of the outstanding common
stock of Equality. Each share of Equality is to be exchanged for 1.118
shares of Allegiant. When closed, the transaction is expected to be
accretive to both Allegiant's book value and earnings per share.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits: None.
Reports on Form 8-K: None.
20
<PAGE> 23
EQUALITY BANCORP, INC.
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EQUALITY BANCORP, INC.
Registrant
Date: August 11, 2000 /s/ Richard C. Fellhauer
---------------------------- -----------------------------------
Richard C. Fellhauer, President,
Chief Executive Officer and
Chairman of the Board
Date: August 11, 2000 /s/ Michael A. Deelo
---------------------------- -----------------------------------
Michael A. Deelo,
Chief Financial Officer
21
