58
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1997
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 Number 0-25518
SOBIESKI BANCORP, INC.
(Name of Small Business Issuer in its Charter)
Delaware 35-1942803
(State or Other Jurisdiction of Incorporation or Organization)
(IRS Employer Identification Number)
2930 West Cleveland Road, South Bend, Indiana
46628
(Address of Principal Executive Offices)
(Zip Code)
Issuer's telephone number, including area code: (219) 271-8300
Securities Registered Under Section 12(b) of the Exchange Act:
None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the Issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve 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 disclosure of delinquent filers in response to Item
405 of Regulation S-B is not 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.
$5,928,000.
As of September 16, 1997, there were issued and outstanding
759,632 shares of the Issuer's Common Stock. The aggregate
market value of the voting stock held by non-affiliates of the
Issuer, computed by reference to the average of the bid and asked
price of such stock as September 16, 1997, was $12,271,000. (The
exclusion from such amount of the market value of the shares
owned by any person shall not be deemed an admission by the
Issuer that such person is an affiliate of the Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-KSB - Portions of Annual Report to
Stockholders for the Fiscal Year ended June 30, 1997.
Part III of Form 10-KSB - Portions of the Proxy Statement
for the 1997 Annual Meeting of Shareholders.
PART I
Item 1. Description of Business
General.
Sobieski Bancorp, Inc.
Sobieski Bancorp, Inc. (the "Company") was incorporated
under the laws of the State of Delaware in December 1994 by
authorization of the Board of Directors of Sobieski Federal
Savings and Loan Association of South Bend ("Sobieski Federal" or
the "Association") for the purpose of becoming a unitary savings
and loan holding company that acquired all of the outstanding
stock of Sobieski Federal issued upon the conversion of Sobieski
Federal from the mutual to the stock form of ownership (the
"Conversion").
As a Delaware corporation, the Company is authorized to
engage in any activity permitted by Delaware General Corporation
Law. The Company is a unitary savings and loan holding company.
Through the unitary holding company structure, it is possible to
expand the size and scope of the financial services offered
beyond those currently offered by the Association. The holding
company structure also provides the Company with greater
flexibility than the Association would have to diversify its
business activities, through existing or newly formed
subsidiaries, or through acquisitions or mergers of both mutual
and stock thrift institutions as well as other companies.
Although there are no current arrangements, understandings or
agreements regarding any such acquisition, the Company is in a
position to take advantage of any favorable acquisition
opportunities that may arise. Future activities of the Company,
other than the continuing operations of Sobieski Federal, will be
funded through the portion of the net proceeds of the stock
conversion retained by the Company, dividends from Sobieski
Federal, principal and interest collections on loans purchased
from Sobieski Federal and through borrowings from third parties.
See "Regulation - Holding Company Regulation" and "-Federal and
State Taxation." Activities of the Company may also be funded
through sales of additional securities or income generated by
other activities of the Company. At this time, there are no
plans regarding such activities.
At June 30, 1997, the Company had assets of approximately
$81.7 million, deposits of approximately $59.4 million and
stockholders' equity of approximately $12.4 million.
The executive office of the Company is located at 2930 West
Cleveland Road, South Bend, Indiana 46628, telephone (219) 271-
8300.
Sobieski Federal Savings and Loan Association of South Bend
Sobieski Federal is a federally chartered mutual savings and
loan association headquartered in South Bend, Indiana. Sobieski
Federal was originally chartered under the laws of the State of
Indiana in 1893 and converted to a federally chartered mutual
savings and loan association in 1936. Its deposits are insured
up to the maximum allowable amount by the Federal Deposit
Insurance Corporation (the "FDIC") under the Savings Association
Insurance Fund (the "SAIF"). Through its main office and two
branch offices, Sobieski Federal serves communities located in
St. Joseph County, Indiana.
Sobieski Federal has been, and intends to continue to be, a
community-oriented financial institution offering selected
financial products and services to meet the needs of the
communities it serves. The Association attracts deposits from
the general public and uses such deposits, together with other
funds, to originate primarily one-to-four family, fixed-rate and
variable-rate residential mortgage loans for retention in its
portfolio. In addition, the Association originates a limited
number of construction loans, consumer loan, and real estate-
backed small business commercial loans. During both fiscal 1997
and 1996, the Association purchased participation interests in
commercial loans funded primarily by advances from the Federal
Home Loan Bank ("FHLB") of Indianapolis.
Forward-Looking Statements
When used in this Form 10-KSB and in future filings by the
Company with the Securities and Exchange Commission (the "SEC"),
in the Company's press releases or other public or shareholder
communications, and in oral statements made with the approval of
an authorized executive officer, the words or phrases "will
likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties,
including, among other things, changes in economic conditions in
the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition, that could cause actual
results to differ materially from historical earnings and those
presently anticipated or projected. The Company wishes to
caution readers not to place undue reliance on any such forward-
looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above
could affect the Company's financial performance and could cause
the Company's actual results for future periods to differ
materially from any opinions or statements expressed with respect
to future periods in any current statements.
The Company does not undertake-and specifically declines any
obligation-to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect events
or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
Lending Activities
General. The Association has historically originated
primarily fixed-rate one- to four- family mortgage loans for
retention in its portfolio. Since September 1994, the
Association has begun to originate adjustable-rate mortgage loans
for retention in its portfolio. However, in response to customer
demand, the Association continues to originate fixed rate-rate
mortgage loans. Such loans are primarily for terms of up to 20
years.
While the Association primarily focuses its lending
activities on the origination of loans secured by first mortgages
on owner-occupied one-to-four family residences, to a much lesser
extent, it also originates construction and consumer loans.
During fiscal 1997 and 1996 the Association purchased
participation interests in commercial loans funded with short-
term advances from the FHLB. The Association has in the past
purchased participations of the Small Business Administration
(the "SBA") and originated a limited number of commercial real
estate loans. Substantially all of the Association's loans are
originated in its market area. At June 30, 1997, the
Association's net loan portfolio totaled $61.1 million.
The loan committee, comprised of three members of the Board
on a three-month rotating basis, has authority to approve loans
up to $250,000; any loans over $250,000 must be approved by the
entire Board of Directors.
Under regulations of the Office of Thrift Supervision (the
"OTS"), the Association's loans-to-one-borrower limit is
generally limited to the greater of 15% of unimpaired capital and
surplus or $500,000. See "Regulation - Federal Regulation of
Savings Associations." At June 30, 1997, the maximum amount
which the Association could loan to any one borrower and the
borrower's related entities was $1,554,000. At June 30, 1997,
the Association had no loans with aggregate outstanding balances
in excess of this amount. At that date, the Association's
largest lending relationship to a single borrower or group of
related borrowers totaled $1,399,000.
All of the Association's lending is subject to its written
underwriting standards and loan origination procedures.
Decisions on loan applications are made on the basis of detailed
applications and property valuations. Properties securing real
estate loans made by Sobieski Federal are generally appraised by
Board-approved independent appraisers. In the loan approval
process, Sobieski Federal assesses the borrower's ability to
repay the loan, the adequacy of the proposed collateral, the
employment stability of the borrower and the credit worthiness of
the borrower.
The Association requires evidence of marketable title and
lien position or appropriate title insurance (except on certain
home equity loans) on all loans secured by real property. The
Association also requires fire and extended coverage casualty
insurance in amounts at least equal to the lesser of the
principal amount of the loan or the value of improvements on the
property, depending on the type of loan. As required by federal
regulations, the Association also requires flood insurance to
protect the property securing its interest if property is located
in a designated flood area.
Loan Portfolio Composition. The following information presents the
composition of the Company's loan portfolio in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowances for loan losses) as of the dates indicated.
<TABLE>
At June 30,
1997 1996 1995
Amount Percent Amount Percent Amount
Percent
(Dollars in Thousands)
Real Estate Loans:
<S> <C> <C> <C> <C> <C> <C>
One- to-four family ....... $55,714 89.5% $48,748 89.8% $47,276 93.1%
Commercial ................ 2,455 4.0 2,783 5.1 3,123 6.1
Construction .............. 869 1.4 797 1.5 225 .4
Total real estate loans 59,038 94.9 52,328 96.4 50,624 99.6
Other Loans:
Deposit loans ............. 147 .2 176 .3 168 .3
Commercial business loans . 3,059 4.9 1,783 3.3 11 .1
Total other loans ......... 3,206 5.1 1,959 3.6 179 .4
Total loans ............... 62,244 100.0% 54,287 100.0% 50,803 100.0%
Less:
Loans in process .......... 882 802 224
Deferred fees and discounts 27 171 270
Allowance for loan losses 200 200 200
Total loans receivable, net $61,135 $53,114 $50,109
</TABLE>
The following table shows the composition of the Company's loan portfolio by
fixed- and adjustable-rate loans at the dates indicated.
<TABLE>
At June 30,
1997 1996 1995
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
<S> <C> <C> <C> <C> <C> <C>
One- to-four family ..... $51,031 82.0% $46,952 86.5% $45,729 90.0%
Commercial .............. --- --- --- --- 314 .6
Construction ............ 869 1.4 636 1.2 --- ---
Total real estate loans 51,900 83.4 47,588 87.7 46,043 90.6
Consumer ................ 147 .2 176 .3 168 .3
Commercial business ..... 1,899 3.1 --- --- --- ---
Total fixed-rate loans .. 53,946 86.7 47,764 88.0 46,211 90.9
Adjustable-Rate Loans:
Real estate:
One-to-four family ...... 4,683 7.5 1,796 3.3 1,547 3.1
Commercial .............. 2,455 3.9 2,783 5.1 2,809 5.5
Construction ............ --- --- 161 .3 225 .4
Total Real estate loans 7,138 11.4 4,740 8.7 4,581 9.0
Commercial business ..... 1,160 1.9 1,783 3.3 11 .1
Total adjustable-rate loans 8,298 13.3 6,523 12.0 4,592 9.1
Total loans ............. 62,244 100.0% 54,287 100.0% 50,803 100.0%
Less:
Loans in process ........ 882 802 224
Deferred fees and discounts 27 171 270
Allowance for loan losses 200 200 200
Total loans receivable, net $ 61,135 $53,114 $50,109
</TABLE>
The following schedule illustrates the amortization schedule by contractual
maturity of the Company's loan portfolio at June 30, 1997. Loans which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The schedule does reflect scheduled principal
amortization but does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses.
<TABLE>
Real Estate
One- to-Four
Commercial
Family Commercial Construction(2) Consumer
Business Total (Dollars in
Thousands)
Due during the twelve
months ending June 30,
<S> <C> <C> <C> <C> <C>
1998 (1) ............... $ 9,120 $ 145 $ 869 $ 47 $1,213
$ 11,394
1999 ................... 2,441 155 --- 50 53
2,699
2000 ................... 2,641 168 --- 50 50
2,909
2001 and 2002 .......... 5,951 383 --- --- 1,743
8,077
2003 to 2007 ........... 20,525 1,229 --- --- ---
21,754
2008 to 2022 ........... 15,036 375 --- --- ---
15,411
Total .................. $55,714 $ 2,455 $ 869 $ 147 $3,059
$ 62,244
Weighted average interest
rate ...... 7.83% 8.33% 8.12% 7.16% 8.62%
7.89%
</TABLE>
(1) Includes demand loans, loans having no stated maturity and overdraft
loans.
(2) Represents construction/permanent loans.
The total amount of loans due after June 30, 1998 that have predetermined
interest rates is $49.6 million.
One- to-Four Family Residential Mortgage Lending. Residential
loan originations are generated by the Association's marketing
efforts, its present customers, walk-in customers and referrals
from real estate brokers. Historically, the Association has
focused its lending efforts primarily on the origination of
fixed-rate loans secured by first mortgages on owner-occupied,
single-family residences in its market area. In September 1994,
the Association began to originate adjustable rate mortgage
("ARM") loans. At June 30, 1997, the Company's one-to-four
family residential mortgage loan portfolio totaled $55.7 million,
or 89.5% of the Company's gross loan portfolio.
The Association currently offers fixed-rate and ARM loans.
For the year ended June 30, 1997, the Association originated
$15.1 million of one-to-four family real estate loans. At June
30, 1997, the Association had $4.7 million of adjustable-rate
mortgage loans, and $51.0 million of fixed-rate mortgage
residential loans.
The Association currently originates fixed-rate loans with
terms to maturity up to 30 years. Interest rates charged on
these fixed-rate loans are priced on a regular basis according to
market conditions. The Association has recently begun to offer
adjustable-rate mortgage loans at rates and on terms determined
in accordance with market and competitive factors. The
Association currently originates one-year ARM loans, with up to
30-year amortization schedule, with a stated interest rate margin
over the one-year Constant Maturity Treasury Index. These loans
provide for a 2.0% maximum annual cap and a cap over the life of
the loan of 6.0%. As a consequence of using caps, the interest
rates on these loans may not be as rate sensitive as is the
Association's cost of funds. Currently, all ARM loans originated
provide for an interest rate floor below which the interest rate
charged may not fall.
Borrowers with adjustable-rate mortgage loans are qualified
at the fully indexed rate. Adjustable-rate loans decrease the
risk to the Association associated with changes in interest rates
but involve other risks, primarily because as interest rates
rise, the payment by the borrower may rise to the extent
permitted by the terms of the loan, thereby increasing the
potential for default. At the same time, the market value of the
underlying property may be adversely affected by higher interest
rates.
Currently, Sobieski Federal will loan up to 85% of the
appraised value of the security property without private mortgage
insurance ("PMI") on owner occupied one- to-four family loans and
up to 95% with PMI on the sale price of such security properties.
Residential loans do not include prepayment penalties, are not
assumable and do not produce negative amortization. Real estate
loans originated by the Association contain a "due on sale"
clause allowing the Association to declare the unpaid principal
balance due and payable upon the sale of the security property.
The loans currently originated by the Association are
typically underwritten and documented pursuant to the guidelines
of the Federal Home Loan Mortgage Corporation ("FHLMC"). The
Association retains all loans originated in its portfolio.
The Association also originates a limited amount of second
mortgage and home equity lines of credit. At June 30, 1997, the
Association's second mortgage loans and home equity loans totaled
$860,000 and $1.1 million, respectively. Second mortgage loans
have fixed or variable rates of interest and have terms up to 15
years. Home equity loans have adjustable interest rates and
terms of up to 12 years. These loans are underwritten using
similar guidelines as for single family mortgage lending.
Residential Construction Lending. To a limited extent, the
Association also originates loans for the construction of one- to-
four family residences. At June 30, 1997, the Association's
construction loan portfolio totaled $869,000, or 1.4% of its
gross loan portfolio. As of that date, all of these loans were
secured by property located within the Association's market area.
All of the construction loans to individuals for their
residences are structured to be converted to permanent loans at
the end of the construction phase, which typically runs from four
to six months. These construction loans have rates and terms
comparable to one- to-four family loans offered by the
Association, except that during the construction phase, the
borrower pays interest only. The maximum loan-to-value ratio of
owner occupied single-family construction loans is 85% without
PMI and 95% with PMI. Residential construction loans are
generally underwritten pursuant to the same guidelines for
originating permanent residential loans.
Construction loans are obtained primarily from walk-in
customers and builder and realtor referrals. The application
process includes submission to the Association of plans and costs
of the project to be constructed. These items are used as a
basis to determine the appraised value of the subject property.
Loans are based on the lesser of current appraised value or the
cost of construction (land plus building).
The Association's construction loan agreements generally
provide that loan proceeds are disbursed in increments as
construction progresses. The Association periodically reviews
the progress of the underlying dwelling before disbursements are
made. Nevertheless, construction lending is generally considered
to involve a higher level of credit risk than one- to four-family
residential lending since the risk of loss on construction loans
is dependent largely upon the accuracy of the initial estimate of
the individual property's value upon completion of the project
and the estimated cost (including interest) of the project.
Commercial Real Estate Lending. Commercial real estate
loans at June 30, 1997 totaled $2.5 million. These loans consist
of participation certificates guaranteed by the SBA. As of June
30, 1997, all of these participation certificates were performing
in accordance with their terms and Sobieski Federal has not
experienced any losses on these loans.
Consumer and Commercial Business Lending. To a much lesser
extent, Sobieski Federal has engaged in both consumer and
commercial business lending.
Consumer loans at June 30, 1997 totaled $147,000, or
approximately .2% of its gross loan portfolio. These loans
consisted of share loans secured by deposit accounts. Even
though some of these loans are currently delinquent ($22,000 or
15.0% of total consumer loans at June 30, 1997), they do not
entail great risk because they are fully secured by savings
deposit accounts with balances exceeding the amount of the loan.
Management believes the delinquencies primarily result from
timing factors wherein borrowers are waiting for certificates to
mature to repay the loans. Historically, losses from consumer
loans have been non-existent.
Commercial business loans at June 30, 1997 totaled $3.1
million or 4.9% of the Company's gross loan portfolio. These
loans are purchased participations originated by other financial
institutions. The loans are secured by collateral consisting of
autos, trucks and an airplane. All of these loans were
performing in accordance with their terms at June 30, 1997. See
"Business-Asset Quality".
Originations and Purchases of Loan and Mortgage-Backed Securities
Loan originations are developed from continuing business
with depositors and borrowers, soliciting realtors, builders,
walk-in customers and small business entities.
While the Association originates both adjustable-rate and
fixed-rate loans, its ability to originate loans to a certain
extent is dependent upon the relative customer demand for loans
in its market, which is affected by the interest rate
environment, among other factors. For the year ended June 30,
1997, the Association originated $16.2 million in loans.
Originations consisted of $15.1 million in one-to-four family
real estate loans, $22,000 of consumer loans and $1.1 million in
nonresidential real estate loans.
Loan originations during the year ended June 30, 1997 were
significantly higher than the prior year. The Association
believes the increase is attributable to the lower interest level
of refinancing as customers sought to take advantage of
historically low interest rates on fixed rate loans. The
Association retains its loan originations in its portfolio and
has followed a policy of not selling loan originations in the
secondary market.
During fiscal 1997, the Association purchased $3.0 million
of participation interests in commercial loans funded by advances
from the FHLB. These purchases were made to increase income,
increase liquidity spread, and assist in short-term interest rate
risk management.
In order to supplement its lending activities, the
Association invests funds in mortgage-backed securities. See
Notes B and C of the Notes to Consolidated Financial Statements.
Virtually all of the mortgage-backed securities purchased by the
Association have adjustable interest rate features. See
"Business - Investment Activities."
The following table shows the loan origination and purchase
activities of the Association for the periods indicated.
<TABLE>
Year Ended June 30,
1997 1996 1995
(In Thousands)
Originations:
<S> <C> <C> <C>
One- to-four family real estate $15,081 $11,376 $ 3,045
Consumer loans ................ 22 56 75
Non-residential real estate ... 1,114 --- ---
Total originations ............ 16,217 11,432 3,120
Purchases:
Purchases of mortgage-backed
securities .......... --- 3,018 1,270
Purchases of SBA certificates .. --- --- 2,451
Purchases of commercial business
loans 3,030 --- ---
Total purchases ................ 3,030 3,018 3,721
Repayments:
Loans .......................... (11,226) (8,427) (6,605)
Mortgage-backed securities ..... (2,126) (2,136) (1,840)
Other, net ..................... (134) (95) (71)
Total repayments (13,486) (10,658) ( 8,516)
Net increase (decrease) ........ $ 5,761 $ 3,792 $(1,675)
</TABLE>
Asset Quality
General. When a borrower fails to make a required payment
on a loan, the Association attempts to cause the delinquency to
be cured by contacting the borrower. In the case of loans
secured by real estate, a reminder notice is sent to the borrower
on all loans over 15 days delinquent. When a loan becomes 15
days delinquent, late charges are assessed and a notice of late
charges is sent to the borrower. An additional late notice is
sent to the borrower if the delinquency is not cured within 30
days of the required payment date. If the loan becomes 60 days
delinquent and the borrower has not attempted to contact the
Association to arrange an acceptable plan to bring the loan
current, the borrower is contacted by telephone. If the borrower
contacts the Association with a reasonable explanation for the
delinquency, the Association generally will attempt to reach
workable accommodations with the borrower to bring the loan
current. All proposed workout arrangements are evaluated on a
case by case basis, based on the best judgment of the
Association's management, considering, among other things, the
borrower's past credit history, current financial status,
cooperativeness, future prospects and the reason for the
delinquency. If the loan is in excess of 90 days delinquent, the
loan will be referred to the Association's legal counsel for
collection. In all cases, if the Association believes that its
collateral is at risk and added delay would place the
collectibility of the balance of the loan in further question,
management may refer loans for collection even sooner than the 90
days described below.
When a loan becomes delinquent 90 days or more, the
Association will place the loan on non-accrual status. The loan
will remain on a non-accrual status as long as the loan is 90
days delinquent.
The following table sets forth the Association's loan
delinquencies by type, by amount and by percentage of type as of
June 30, 1997
<TABLE>
Loans Delinquent For:
60-89 Days 90 Days and Over Total Delinquent Loans
Percent Percent Percent
of Loan of Loan of Loan
NumberAmountCategory NumberAmountCategory NumberAmountCategory
(Dollars in Thousands)
Real Estate:
<S> <C><C> <C> <C> <C> <C> <C> <C> <C>
One- to-four family 4 $ 61 0.1% 4 $ 188 0.2% 8 $179 0.3%
Consumer (1) ...... - - 0.0% 1 8 5.4% 1 8 5.4%
Total ............. 4 $ 61 0.1% 5 $126 0.2% 11 $187 0.3%
(1) All delinquent consumer loans are secured by savings deposits
in the Association.
</TABLE>
Non-Performing Assets. The table below sets forth the
amounts and categories of non-performing assets in the
Association's loan portfolio. Loans are placed on non-accrual
status when the collection of principal and/or interest becomes
doubtful. Foreclosed assets include assets acquired in
settlement of loans. The Association had no accruing loans more
than 90 days delinquent at the dates shown.
<TABLE>
At June 30,
1997 1996 1995 1994 1993
(Dollars in Thousands)
Non-accruing loans:
<S> <C> <C> <C> <C> <C>
One-to-four family .....$ 118 $ 90 $ 35 $ 220 $ 424
Consumer ............... 8 --- 6 98 29
Total .................. 126 90 41 318 453
Foreclosed assets:
One- to-four family .... 11 --- 19 104 16
Total .................. 11 --- 19 104 16
Total non-performing
assets .................$ 137 $ 90 $ 60 $ 422 $ 469
Total as a percentage of
total assets ........... .17% .12% .08% 0.57% 0.64%
</TABLE>
For the year ended June 30, 1997, gross interest income
which would have been recorded had the non-accruing loans been
current in accordance with their original terms amounted to
$8,000.
At June 30, 1997, the Association had $126,000 of non-
accruing loans consisting of four one-to-four family delinquent
loans and one consumer loan.
Other Loans of Concern. At June 30, 1997, there were no
loans not included in the table or discussed above where known
information about the possible credit problems of borrowers
caused management to have doubts as to the ability of the
borrower to comply with present loan repayment terms and which
may result in disclosure of such loans in the future.
Classified Assets. Federal regulations provide for the
classification of loans and other assets, such as debt and equity
securities considered by the OTS to be of lesser quality, as
"substandard," "doubtful" or "loss." An asset is considered
"substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those
characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified "substandard" with the
added characteristic that the weaknesses present make "collection
or liquidation in full" on the basis of currently existing facts,
conditions and values, "highly questionable and improbable."
Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without
the establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as
either substandard or doubtful, it may establish general
allowances for loan losses in an amount deemed prudent by
management. General allowances represent loss allowances which
have been established to recognized the inherent risk associated
with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an
insured institution classifies problem assets as "loss," it's
required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to
charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation
allowances is subject to review by the regulatory authorities,
who may order the establishment of addition general or specific
loss allowances.
In connection with the filing of its periodic reports with
the OTS and in accordance with its classification of assets
policy, the Association regularly reviews problem loans and real
estate acquired through foreclosure to determine whether such
assets require classification in accordance with applicable
regulations. On the basis of management's review of its assets,
at June 30, 1997, the Association had classified a total of
$126,000 of its assets as substandard, $0 as doubtful, and $0 as
loss. At June 30, 1997, total classified assets comprised
$126,000 or 1.4% of the Association's capital, or 0.17% of the
Association's total assets.
Allowance for Loan Losses. The allowance for loan losses is
established through a provision for loan losses based on
management's evaluation of the risk inherent in its loan
portfolio and changes in the nature and volume of its loan
activity, including those loans which are being specifically
monitored by management. Such evaluation, which includes a
review of loans for which full collectibility may not be
reasonably assured, considers among other matters, the loan
classifications discussed above, the estimated fair value of the
underlying collateral, economic conditions, historical loan loss
experience, the amount of loans outstanding and other factors
that warrant recognition in providing for an adequate loan loss
allowance. A significant factor considered in the unallocated
allowance was the historically low level of loans other than one-
to-four family real estate loans. Management recognizes that as
loan growth continues additional provisions to the allowance may
be required.
Real estate properties acquired through foreclosure are
recorded at the lower of cost or fair value minus estimated cost
to sell. If fair value at the date of foreclosure is lower than
the balance of the related loan, the difference will be charged-
off to the allowance for loan losses at the time of transfer.
Valuations are periodically updated by management and if the
value declines, a specific provisions for losses on such property
is established by a charge to operations.
Although management believes that it uses the best
information available to determine the allowance, unforeseen
market conditions could result in adjustments and net earnings
could be significantly affected if circumstances differ
substantially from the assumptions used in making the final
determination. Future additions to the Association's allowance
for loan losses will be the result of periodic loan, property and
collateral reviews and thus cannot be predicted in advance. In
addition, federal regulatory agencies, as an integral part of the
examination process, periodically review the Association's
allowance for loan losses. Such agencies may require the
Association to recognize additions to the allowance level based
upon their judgment of the information available to them at the
time of their examination. At June 30, 1997, the Association had
a total allowance for losses on loans of $200,000 representing
159% of total non-performing loans and .21% of the Association's
loans, net. See Note D of the Notes to Consolidated Financial
Statements.
The following table sets forth an analysis of the
Association's allowance for loan losses.
<TABLE>
Year Ended June 30,
1997 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period .. $200 $200 $200
Charge-offs: (1)
One- to-four family --- --- 10
Recoveries:(1)
One- to-four family --- --- ---
Provision charged to
operations --- --- 10
Balance at end of period . $200 $200 $200
Ratio of net charge-offs to average
loans outstanding during the period ---% ---% .02%
Ratio of net charge-offs to average
non-performing assets during the
period ............. ---% ---% 4.88%
</TABLE>
(1) Excludes net gain on sale of real estate owned in the amount
of $8,611 for the year ended June 30, 1995. These gains were
included in other operating expenses or other noninterest income.
The distribution of the Company's allowance for losses on
loans at the dates indicated is summarized as follows:
<TABLE>
At June 30,
1997 1996 1995
Percent Percent
Percent
Loan Loss Total of Total Loan Loss Total of Total Loan Loss Total
of Total
AllowanceLoans Loans Allowance Loans Loans Allowance Loans
Loans
(Dollars in thousands)
One- to four-
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<C>
family ......$ 12 $55,693 90.80% $ 8 $48,575 91.11% $ 4 $47,276
93.97%
Unallocated .. 188 5,642 9.20 192 4,739 8.89 196 3,022
6.03
Total (1)..... $ 200 $ 61,335 100.0% $200 $53,314 100.0% $200 $50,309
100.0%
</TABLE>
(1) Total loans represent the amount before deducting the loan loss allowance.
Investment Activities
General. Sobieski Federal must maintain minimum levels of
investments that qualify as liquid assets under OTS regulations.
Liquidity may increase or decrease depending upon the
availability of funds and comparative yields on investments in
relation to the return on loans. Historically, the Association
has generally maintained liquid assets at levels above the
minimum requirements imposed by the OTS regulations and at levels
believed adequate to meet the requirements of normal operations,
including repayments of maturing debt and potential deposit
outflows. Cash flow projections are regularly reviewed and
updated to assure that adequate liquidity is maintained. At June
30, 1997, the Association's liquidity ratio (liquid assets as a
percentage of net withdrawable savings deposits and current
borrowings) was 6.07%.
Federally chartered savings institutions have the authority
to invest in various types of liquid assets, including United
States Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and
savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest their
assets in commercial paper, investment grade corporate debt
securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is
otherwise authorized to make directly.
Generally, the investment policy of the Association, as
established by the Board of Directors, is to invest funds among
various categories of investments and maturities based upon the
Association's liquidity needs, asset/liability management
policies, investment quality, marketability and performance
objectives. The Investment Committee consists of two outside
directors, Robert J. Urbanski and Joseph F. Nagy, plus President
and Chief Executive Officer Thomas F. Gruber and Vice President
of Finance Arthur Skale. Subject to the policies established by
the Board of Directors, President Gruber and Vice President
Skale are authorized to purchase and sell securities. All
securities transactions are disclosed to the Board of Directors
at their next regular meeting.
Mortgage-Backed Securities. The Association purchases
mortgage-backed securities to supplement residential loan
production and as part of its asset/liability strategy. The type
of securities purchased is based upon the Association's
asset/liability management strategy and balance sheet objectives.
For instance, substantially all of the mortgage-backed
investments purchased by the Association over the last several
years have had adjustable rates of interest. At June 30, 1997,
the amortized cost of the Association's mortgage-backed
securities was $13.7 million and the market value of these
mortgage-backed securities was $13.4 million at that date.
At June 30, 1997, $11.9 million or 87% of the Association's
mortgage-backed securities have been classified as held-to-
maturity and, accordingly, are included in its financial
statements at amortized cost. Mortgage-backed securities with an
amortized cost of $1.8 million have been classified as available-
for-sale and are included in the financial statements at fair
value. The Association's investment securities portfolio was
$2.3 million at June 30, 1997. Of that amount, $1.3 million or
56% was classified as available-for-sale and $1.0 million or 44%
was classified as held-to-maturity. See Note C of the Notes to
Consolidated Financial Statements for additional information
regarding the amortized cost and approximate market value of the
Association's mortgage-backed securities as of June 30, 1997.
As of June 30, 1997, all of the Association's mortgage-
backed securities were backed by government sponsored agency
programs. Accordingly, management believes that the
Association's mortgage-backed securities are generally resistant
to credit problems.
The Association's mortgage-backed securities portfolio
consists of securities issued under government-sponsored agency
programs, including those of the Federal National Mortgage
Association ("FNMA"), FHLMC and the Government National Mortgage
Association ("GNMA"). The FNMA, FHLMC and GNMA certificates are
modified pass-through mortgage-backed securities that represent
undivided interests in underlying pools of fixed-rate, or certain
types of adjustable-rate, predominantly single-family and, to a
lesser extent, multi-family residential mortgages issued by those
government-sponsored entities. 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. FNMA and FHLMC generally
provide the certificate holder a guarantee of timely payments of
interest and ultimate collection of principal, whether or not
collected. GNMA's guarantee to the holder is timely payments of
principal and interest, backed by the full faith and credit of
the U.S. Government.
Mortgage-backed securities generally yield less than the
loans that underlie such securities, because of the cost of
payment guarantees or credit enhancements that reduce credit risk
to holders. Since federal agency mortgage-backed securities
generally carry a yield 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), in the event that the
proportion of the Association's assets consisting of mortgage-
backed investments increase in the future, the Association's
assets yields would be adversely affected. Mortgage-backed
securities are also more liquid than individual mortgage loans
and may be used to collateralize obligations of the Association.
In general, mortgage-backed securities issued or guaranteed by
FNMA and FHLMC are weighted at no more than 20% for risk-based
capital purposes, and mortgage-backed securities issued or
guaranteed by GNMA are weighted at 0% for risk-based capital
purposes, compared to an assigned risk weighing of 50% to 100%
for whole residential mortgage loans.
While mortgage-backed securities carry a reduced credit risk
as compared to whole loans, such securities remain subject to the
risk that a fluctuating interest rate environment, along with
other factors such as the geographic distribution of the
underlying mortgage loans, may alter the prepayment rate of such
mortgage loans and so affect to the prepayment speed, and value,
of such securities. Mortgage-backed securities involve a risk
that actual prepayments will differ from estimated prepayments
over the life of the security which may require adjustments to
the amortization of any premium or accretion of any discount
relating to such instruments, thereby reducing the net yield on
such securities. There is also reinvestment risk associated with
the cash flows from such securities. In addition, the market
value of such securities may be adversely affected by changes in
interest rates. The adjustable rate and/or short maturity of the
Association's portfolio is designed to minimize that risk.
Investment Securities and Other Interest-Earning Assets. At
June 30, 1997, Sobieski Federal's interest-bearing deposits with
financial institutions totaled $94,000, or .1% of total assets,
and its investment securities, consisting of U.S. Treasury
obligations totaled $2.3 million, or 2.8% of total assets. In
addition, as of such date, the Association had a $636,000
investment in FHLB stock, satisfying its requirement for
membership in the FHLB of Indianapolis. It is the Association's
general policy to purchase securities which are U.S. Government
securities or federal agency obligations or other issues that are
rated investment grade. At June 30, 1997, the average term to
maturity or repricing of the securities portfolio (excluding FHLB
stock) was less than two years.
The Association's investment securities portfolio at June
30, 1997 contained neither tax-exempt securities nor securities
of any issuer with an aggregate book value in excess of 10% of
the Association's equity capital, excluding those issued by the
United State Government or its agencies.
The following table sets forth the contractual maturities of the
Association's mortgage-backed securities at June 30, 1997.
<TABLE>
6 Months 6 Months 1 to 3 3 to 5 5 to 10 10 to 20 Over 20
June 30, 1997
or Less to 1 Year Years Years Years Years Years Balance
Outstanding
(In Thousands)
Federal Home Loan Mortgage Corporation:
<S> <C> <C> <C> <C> <C> <C> <C>
<C>
Fixed-rate .................$ 2 $ 2 $ 7 $ 9 $ 33 $ 11 $ --- $
64
Adjustable-rate ............ 39 40 133 164 425 1,429 ---
2,230
Federal National Mortgage Association:
Fixed-rate .................. 3 3 13 7 21 9 ---
56
Adjustable-rate ............. 112 111 459 485 1,592 4,707 ---
7,466
Government National Mortgage Association:
Fixed-rate ................. 9 9 42 49 162 608 507
1,386
Adjustable-rate ............ 24 24 97 108 324 972 623
2,172
Net premiums and discounts . --- --- --- --- --- --- ---
336
$189 $ 189 $ 751 $822 $2,557 $7,736 $1,130
$13,710
</TABLE>
The following table sets forth the composition of the Association's
investment and mortgage-backed securities at the dates indicated.
<TABLE>
At June 30,
.
1997 1996 1995
Book % of Book % of Book %
of
Value Total Value Total Value
Total (Dollars
in Thousands)
Investment securities:
<S> <C> <C> <C> <C> <C> <C>
U. S. government securities (1) $ 2,297 78.3 $ 3,785 71.0% $ 1,704
53.1%
U. S. government securities
mutual fund ................... --- --- 909 17.1 870 27.1
Subtotal ...................... 2,297 78.3 4,694 88.1 2,574 80.2
FHLB stock .................... 636 21.7 636 11.9 636 19.8
Total investment securities
and FHLB stock ................ $ 2,933 100.0% $ 5,330 100.0% $ 3,210
100.0%
Other interest-earning assets:
Interest-bearing deposits with
financial institutions ........ $ 292 100.0% $ 533 80.8% $ 2,371
43.3%
Federal funds sold ............ --- --- 127 19.2 3,111 56.7
Total ......................... $ 292 100.0% $ 660 100.0% $ 5,482
100.0%
Mortgage-backed securities:
GNMA ......................... $ 3,558 26.0% $ 4,064 25.2% $ 2,494
16.2%
FNMA .......................... 7,522 54.8 8,852 54.8 9,165 59.7
FHLMC ......................... 2,294 16.7 2,846 17.6 3,311 21.6
Subtotal ...................... 13,374 97.5 15,762 97.6 14,970 97.5
Unamortized premium, net . . .. 336 2.5 390 2.4 394 2.5
Total mortgage-backed securities$ 13,710 100.0% $ 16,152 100.0% $15,364
100.0%
</TABLE>
(1)The average remaining life of U.S. government securities June 30, 1997 was
less than two years.
The composition and maturities of the investment securities
portfolio, excluding FHLB stock, are indicated in the following
table.
<TABLE>
June 30, 1997
Less than 1 to 5 5 to 10
1 Year Years Years Total
Book Value Book Value Book Value Book Value
(Dollars in Thousands)
<S> <C> <C> <C>
U.S. Government
securities .... $ 800 $ 497 $1,000 $2,297
Total ......... $ 800 $ 497 $1,000 $2,297
Weighted average
yield ........ 4.81% 5.97% 8.00% 6.45%
</TABLE>
Sources of Funds
General. The Association's primary sources of funds are
deposits, payment of principal and interest on loans, interest
earned on mortgage-backed securities, investment securities,
interest earned on interest-bearing deposits with other financial
institutions, and other funds provided from operations.
Deposits. Sobieski Federal offers a variety of deposit
accounts having a wide range of interest rates and terms. The
Association's deposits consist of passbook, NOW, checking, money
market deposit and certificate accounts. The certificate
accounts currently range in terms from 91 days to four years.
The Association relies primarily on advertising (including
television, radio, and newspaper), competitive pricing policies
and customer service to attract and retain these deposits.
Sobieski Federal solicits deposits from its market area only,
does not use brokers to obtain deposits and currently, does not
engage in any type of premium, gift or promotional programs
beyond the advertising vehicles mentioned above. The flow of
deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates
and competition.
The Association has become more susceptible to short-term
fluctuations in deposit flows as customers have become more
interest rate conscious. The Association endeavors to manage the
pricing of its deposits in keeping with its asset/liability
management and profitability objectives. The ability of the
Association to attract and maintain savings accounts and
certificates of deposit, and the rates paid on these deposits,
has been and will continue to be significantly affected by market
conditions.
The following table sets forth the savings flows at the
Association during the periods indicated.
<TABLE>
1997 1996 1995
.
<S> <C> <C> <C>
Opening balance ............. $61,227 $63,142 $67,092
Net withdrawals ............. (2,332) (2,499) (4,603)
Interest credited (1) ....... 492 584 653
Ending balance .............. $59,387 $61,227 $63,142
Net decrease ................ $ (1,840) $ (1,915) $ (3,950)
Percent decrease ............ (3.01)% (3.03)% (5.89)%
</TABLE>
(1) Includes interest credited to passbook, NOW and money market
deposit accounts, but not certificates of deposit.
The following table set forth the dollar amount of savings deposits in the
various types of deposit programs offered by the Association at the dates
indicated.
<TABLE>
At June 30,
1997 1996
1995
Percent Percent
Percent
Amount of Total Amount of Total Amount
of Total
(Dollars in Thousands)
Transaction and Savings Deposits:
Passbook accounts:
June 30, 1997, June 30, 1996 and June 30, 1995-
<S> <C> <C> <C> <C> <C>
<C>
2.50% ................................. $15,170 25.5% $15,909 26.0% $16,342
25.9%
NOW accounts:
June 30, 1997, June 30, 1996 and June 30, 1995-
2.75% ................................. 3,876 6.5 2,454 4.0 2,357
3.7
Money market accounts:
June 30, 1997, June 30, 1996 and June 30, 1995-
2.75% to 3.00% ..................... 2,172 3.7 2,272 3.7 2,360
3.7
Total Non-Certificates ............. 21,218 35.7 20,635 33.7 21,059
33.3
Certificates:
3.51 - 4.00% ....................... 262 .4 318 .5 5,425
8.6
4.01 - 6.00% ....................... 27,551 46.4 26,560 43.4 23,930
37.9
6.01 - 8.00% ....................... 10,355 17.4 13,714 22.4 12,728
20.2
Total Certificates ................. 38,168 64.3 40,592 66.3 42,083
66.7
Total Deposits ..................... $59,386 100.0% $61,227 100.0% $63,142
100.0%
</TABLE>
The following table shows rate and maturity information for the
Association's certificates of deposit as of June 30, 1997.
<TABLE>
3.51- 4.01- 6.01- Percent
4.00% 6.00% 8.00% Total of Total
(Dollars in Thousands)
Certificate accounts maturing
in quarter ending:
<S> <C> <C> <C> <C> <C>
September 30, 1997 .$ 262 $ 5,864 $ 256 $ 6,382 16.72%
December 31, 1997 .. --- 4,933 468 5,401 14.15
March 31, 1998 ..... --- 3,977 134 4,111 10.77
June 30, 1998 ...... --- 2,835 143 2,978 7.80
September 30, 1998 . --- 3,333 1,050 4,383 11.48
December 31, 1998 .. --- 1,204 1,836 3,040 7.96
March 31, 1999 ..... --- 119 2,855 2,974 7.79
June 30, 1999 ...... --- 55 3,008 3,063 8.03
September 30, 1999 . --- 654 606 1,260 3.30
December 31, 1999 .. --- 614 --- 614 1.61
March 31, 2000 ..... --- 1,018 --- 1,018 2.67
June 30, 2000 ...... --- 1,049 --- 1,049 2.75
Thereafter ......... --- 1,896 --- 1,896 4.97
Total ..............$ 262 $27,551 $10,356 $38,169 100.0%
Percent of total ... .69% 72.18% 27.13% 100.0%
</TABLE>
The following table indicates the amount of the
Association's certificates of deposit by time remaining until
maturity as of June 30, 1997.
Maturity
(In Thousands)
3 months Over 3 to Over 6 to Over 12
or less 6 months 12 months months Total
Certificates of
deposit less
than $100,000
$ 6,266 $4,901 $6,647 $18,119 $35,933
Certificates of
deposit of
$100,000 or more
116 501 442 1,177 2,236
Total certificates
of deposit .............
$ 6,382 $5,402 $7,089 $19,296 $38,169
Borrowings. Although deposits are the Association's primary
source of funds, the Association may utilize FHLB advances or
other borrowings to support lending activities and to assist the
Association's asset/liability management strategy when they are a
less costly source of funds and may be invested at a positive
interest rate spread or when the Association desires additional
capacity to fund loan demand. At June 30, 1997, the Association
had borrowings of $9.5 million.
Service Corporation Activities
As a federally chartered savings bank, Sobieski Federal is
permitted by OTS regulations to invest up to 2% of its assets, or
approximately $1.5 million in the stock of, or loans to, service
corporation subsidiaries. Sobieski Federal may invest an
additional 1% of its assets in service corporations where such
additional funds are used for inner-city or community development
purposes and up to 50% of its total capital in conforming loans
to service corporations in which it owns more than 10% of the
capital stock. In addition to investments in service
corporations, federal associations are permitted to invest an
unlimited amount in operating subsidiaries engaged solely in
activities in which a federal association may engage in directly.
At June 30, 1997, Sobieski Federal had no active service
corporation activities.
Competition
Sobieski Federal faces strong competition, both in
originating real estate loans and in attracting deposits.
Competition in originating real estate loans comes primarily from
commercial banks, savings institutions, mortgage bankers and
credit unions located in the Association's market area.
Commercial banks, savings institutions and credit unions provide
vigorous competition in consumer lending. The Association
competes for real estate and other loans principally on the basis
of the quality of services it provides to borrowers, the interest
rates and loan fees it charges, and the types of loans it
originates. See "Business - Lending Activities."
The Association attracts all of its deposits through its
retail banking offices, primarily from the communities in which
those retail banking offices are located. Therefore, competition
for those deposits is principally from commercial banks, savings
banks, brokerage firms and credit unions located in these
communities. The Association competes for these deposits by
offering a variety of account alternatives at competitive rates
and by providing convenient business hours, branch locations and
interbranch deposit and withdrawal privileges.
Employees
At June 30, 1997, the Association had a total of 20 full-
time and 4 part-time employees. The Association's employees are
not represented by any collective bargaining group. Management
considers its employee relations to be good.
Executive Officers Who Are Not Directors
The business experience of each executive officer of the
Association and the Holding Company who is not also a director is
set forth below.
Marsha Nafrady, age 43, Ms. Nafrady is secretary/treasurer
of the Association. In that capacity she oversees teller
operations of the Cleveland main branch facility. Ms. Nafrady
joined the Association in 1973.
Arthur Skale, age 56. Mr. Skale is currently Chief
Financial Officer. In that capacity, he is responsible for the
investment, cash management and budget planning of the
Association. Mr. Skale joined the Association in 1997.
REGULATION
General
Sobieski Federal is a federally chartered savings and loan
association, the deposits of which are federally insured and
backed by the full faith and credit of the United States
Government. Accordingly, Sobieski Federal is subject to broad
federal regulation and oversight extending to all its operations.
The Association is a member of the FHLB of Indianapolis and is
subject to certain limited regulation by the Board of Governors
of the Federal Reserve System ("Federal Reserve Board"). As the
savings and loan holding company of the Association, the Holding
Company also is subject to federal regulation and oversight. The
purpose of the regulation of the Holding Company and other
holding companies is to protect subsidiary savings associations.
The Association is a member of the Savings Association Insurance
Fund ("SAIF") and the deposits of the Association are insured by
the FDIC. As a result, the FDIC has certain regulatory and
examination authority over the Association.
Certain of these regulatory requirements and restrictions
are discussed below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of
savings associations. As part of this authority, the Association
is required to file periodic reports with the OTS and is subject
to periodic examinations by the OTS and the FDIC. The last
regular OTS and FDIC examinations of the Association were as of
July 1995 and February 1997, respectively. Under agency
scheduling guidelines, it is likely that another examination will
be initiated in the near future. When there examinations are
conducted by the OTS and the FDIC, the examiners may require the
Association to provide for higher general or specific loan loss
reserves.
All savings associations are subject to a semiannual
assessment, based upon the savings association total assets to
fund the operations of the OTS. The Association's OTS assessment
for the fiscal year ended June 30, 1997 was $26,000.
The OTS also has extensive enforcement authority over all
savings institutions and their holding companies, including the
Association and the Holding Company. This enforcement authority
includes, among other things, the ability to assess civil money
penalties, to issue cease- and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement
actions may be initiated for violations of laws and regulation
and unsafe or unsound practices. Other actions or inactions may
provide the basis for enforcement action, including misleading or
untimely reports filed with the OTS. Except under certain
circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority
of the Association is prescribed by federal laws and regulations,
and it is prohibited from engaging in any activities not
permitted by such laws and regulations. For instance, no savings
institution may invest in non-investment grade corporate debt
securities. In addition, the permissible level of investment by
federal associations in loans secured by non-residential real
property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also
generally authorized to branch nationwide. The Association is in
compliance with the noted restrictions.
The Association's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15%
of unimpaired capital and surplus (except for loans fully secured
by certain readily marketable collateral, in which case this
limit is increased to 25% of unimpaired capital and surplus). At
June 30, 1997, the Association's lending limit under this
restriction was $1,554,000. The Association is in compliance
with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has
adopted guidelines establishing safety and soundness standards on
such matters as loan underwriting and documentation, asset
quality, earnings standards, internal controls and audit systems,
interest rate risk exposure and compensation and other employee
benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a
plan or to comply with an approved plan will subject the
institution to further enforcement action.
Insurance of Accounts and Regulation by the FDIC
Sobieski Federal is a member of the SAIF, which is
administered by the FDIC. Deposits are insured up to applicable
limits by the FDIC and such insurance is backed by the full faith
and credit of the United States Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation
or order to pose a serious risk to the FDIC. The FDIC also has
the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines
that the institution has engaged or is engaging in unsafe or
unsound practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a
risk-based system under which all insured depository institutions
are placed into one of nine categories and assessed insurance
premiums, ranging from 0% to .27% of deposits, based upon their
level of capital and supervisory evaluation. Under the system,
institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of Tier 1 or core capital to risk-
weighted assets ("Tier 1 risk-based capital") of at least 6% and
a risk-based capital ratio of at least 10%) and considered
healthy would pay the lowest premium while institutions that are
less than adequately capitalized (i.e., core and Tier 1 risk-
based capital ratios of less than 4% or a risk-based capital
ratio of less than 8%) and considered of substantial supervisory
concern would pay the highest premium. Risk classification of
all insured institutions will be made by the FDIC for each semi-
annual assessment period.
The FDIC is authorized to increase assessment rates, on a
semiannual basis, if it determines that the reserve ratio of the
SAIF will be less than the designated reserve ratio of 1.25% of
SAIF insured deposits. In setting these increased assessments,
the FDIC must seek to restore the reserve ratio to the designated
reserve level, or such higher reserve ratio as established by the
FDIC. In addition, under FDICIA, the FDIC may impose special
assessments on SAIF members to repay amounts borrowed from the
United States Treasury or for any other reason deemed necessary
by the FDIC.
As is the case with the SAIF, the FDIC is authorized to
adjust the insurance premium rates for banks that are insured by
the Bank Insurance Fund (the "BIF") of the FDIC in order to
maintain the reserve ratio of the BIF at 1.25% of BIF insured
deposits. The FDIC has revised the premium schedule of BIF
insured institutions to provide a range of .04% to .31% of
deposits in anticipation of the BIF achieving its statutory
reserve ratio. As a result, such institutions generally will pay
lower insurance premiums than SAIF insured institutions. The
revisions became effective in the third quarter of 1996.
The FDIC is authorized to increase assessment rates, on a
semiannual basis, if it determines that the reserve ratio of the
SAIF will be less than the designated reserve ratio of 1.25% of
SAIF insured deposits. In setting these increased assessments,
the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as
established by the FDIC. The FDIC may also impose special
assessments on SAIF members to repay amounts borrowed from the
United States Treasury or for any other reason deemed necessary
by the FDIC.
For the first six months of 1995, the assessment schedule
for members of the Bank Insurance Fund ("BIF") and SAIF members
ranged from .23% to .31% of deposits. As is the case with the
SAIF, the FDIC is authorized to adjust the insurance premium
rates for banks that are insured by the BIF of the FDIC in order
to maintain the reserve ratio of the BIF at 1.25% of BIF insured
deposits. As a result of the BIF reaching its statutory reserve
ratio the FDIC revised the premium schedule for BIF insured
institutions to provide a range of .04% to .31% of deposits. The
revisions became effective in the third quarter of 1995. In
addition, the BIF rates were further revised, effective January
1996, to provide a range of 0% to .27%. The SAIF rates, however,
were not adjusted. At the time the FDIC revised the BIF premium
schedule, it noted that, absent legislative action (as discussed
below), the SAIF would not attain its designated reserve ratio
until the year 2002. As a result, SAIF insured members would
continue to be generally subject to higher deposit insurance
premiums than BIF insured institutions until, all things being
equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive
disadvantage between BIF and SAIF member institutions with
respect to deposit insurance premiums, legislation to
recapitalize the SAIF was enacted in September 1996. The
legislation provides for a one-time assessment to be imposed on
all deposits assessed at the SAIF rates, as of March 31, 1995, in
order to recapitalize the SAIF. It also provides for the merger
of the BIF and the SAIF on January 1, 1999 if no savings
associations then exist. The special assessment rate has been
established at .657% of deposits by the FDIC and the resulting
assessment of $414,000 was paid in November 1996. This special
assessment significantly increased noninterest expense and
adversely affected the Association's results of operations for
the year ended June 30, 1997. As a result of the special
assessment, the Association's deposit insurance premiums were
reduced to $37,000 based upon its current insured institutions.
These premiums are subject to change in future periods.
Effective January 1, 1997, SAIF members have the same risk-based
schedule as BIF members. The Association has effectively paid no
assessment for deposit insurance coverage commencing January 1,
1997.
All SAIF-insured institutions are required to pay an
assessment for the repayment of interest on obligations issued by
a federally chartered corporation to provide financing ("FICO")
for resolving the thrift crisis in the 1980s, in an amount equal
to 6.48 basis points for each $100 in domestic deposits. As a
result of the recent legislation discussed above, BIF-insured
institutions are also required to pay an assessment for the
repayment of interest on the FICO bonds, in an amount equal to
1.52 basis points for each $100 in domestic deposits. The
assessment on SAIF-insured institutions is expected to be reduced
to 2.43 basis points for each $100 in domestic deposits no later
than January 1, 2000, by which point BIF-insured institutions
will participate fully in the FICO bond interest repayment.
These assessments, which may be revised based upon the level of
BIF and SAIF deposits, will continue until the bonds mature in
2017.
Regulatory Capital Requirements
Federally insured savings associations, such as the
Association, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards,
including a tangible capital requirement, a leverage ratio (or
core capital) requirement and a risk-based capital requirement
applicable to such savings associations. These capital
requirements must be generally as stringent as the comparable
capital requirements for national banks. The OTS is also
authorized to impose capital requirements for national banks.
The OTS is also authorized to impose capital requirements in
excess of these standards on individual associations on a case-by-
case basis.
The capital regulations require tangible capital of at least
1.5% of adjusted total assets (as defined by regulation).
Tangible capital generally includes common stockholders' equity
and retained income, and certain noncumulative perpetual
preferred stock and related income and excludes unrealized
appreciation or depreciation on securities available for sale.
In addition, all intangible assets, other than a limited amount
of purchased mortgage servicing rights, must be deducted from
tangible capital. At June 30, 1997, the Association did not have
any intangible assets.
The OTS regulations establish special capitalization
requirements for savings associations that own subsidiaries.
Under these regulations certain subsidiaries are consolidated for
capital purposes and others are excluded from assets and capital.
In determining compliance with the capital requirements, all
subsidiaries engaged solely in activities permissible for
national banks or engaged in certain other activities solely as
agent for its customers are "includable" subsidiaries that are
consolidated for capital purposes in proportion to the
association's level of ownership, including the assets of
includable subsidiaries in which the association has a minority
interest that is not consolidated for GAAP purposes. For
excludable subsidiaries the debt and equity investments in such
subsidiaries are deducted from assets and capital. At June 30,
1997, the Association did not have any active subsidiaries.
At June 30, 1997 the Association had tangible capital of
$9.0 million, or 11.4% of adjusted total assets, which is
approximately $7.8 million above the minimum requirement of 1.5%
of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at
least 3% of adjusted total assets (as defined by regulation).
Core capital generally consists of tangible capital plus certain
intangible assets, including supervisory goodwill (which is
phased-out over a five-year period) and a limited amount of
purchased credit card relationships. As a result of the prompt
corrective action provisions of FDICIA discussed below, however,
a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its
supervisory condition is such to allow it to maintain a 3% ratio.
At June 30, 1997, the Association had no intangibles which were
subject to these tests.
At June 30, 1997, the Association had core capital equal to
$9.0 million, or 11.4% of adjusted total assets, which is $6.6
million above the minimum leverage ratio requirement of 3% as in
effect on that date.
The OTS risk-based requirement requires savings associations
to have total capital of at least 8% of risk-weighted assets.
Total capital consists of core capital, as defined above, and
supplementary capital. Supplementary capital consists of certain
permanent and maturing capital instruments that do not qualify as
core capital and general valuation loan and lease loss allowances
up to a maximum of 1.25% or risk-weighted assets. Supplementary
capital may be used to satisfy the risk-based requirement only
to the extent of core capital. The OTS is authorized to require
a savings association to maintain an additional amount of capital
for concentration of credit risk and the risk of non-traditional
activities. At June 30, 1997, the Association had no capital
instruments that qualify as supplementary capital and $200,000 of
general loss reserves, which was less than 1.25% of risk-weighted
assets.
Certain exclusions from capital and assets are required to
be made for the purpose of calculating total capital. Such
exclusions consist of equity investments (as defined by
regulation) and that portion of land loans and nonresidential
construction loans in excess of an 80% loan-to-value ratio (these
items are excluded on a sliding scale through June 30, 1994,
after which they must be excluded in their entirety) and
reciprocal holdings of qualifying capital instruments. The
Association had no such exclusions from capital and assets at
June 30, 1997.
In determining the amount of risk-weighted assets, all
assets, including certain off-balance sheet items, will be
multiplied by a risk weight, ranging from 0% to 100%, based on
the risk inherent in the type of asset. For example, the OTS has
assigned a risk weight of 50% for prudently underwritten
permanent one-to four-family first lien mortgage loans not more
than 90 days delinquent and having a loan to value ratio of not
more than 80% at origination unless insured to such ratio by an
insurer approved by the FNMA or FHLMC.
OTS regulations also require that every savings association
with more than normal interest rate risk exposure to deduct from
its total capital, for purposes of determining compliance with
such requirement, an amount equal to 50% of its interest-rate
risk exposure multiplied by the present value of its assets.
This exposure is a measure of the potential decline in the net
portfolio value of a savings association, greater than 2% of the
present value of its assets, based upon a hypothetical 200 basis
point increase or decrease in interest rates (whichever results
in a greater decline). Net portfolio value is the present value
of expected cash flows from assets, liabilities and off-balance
sheet contracts. The rule will not become effective until the
OTS evaluates the process by which savings associations may
appeal an interest rate risk deduction determination. It is
uncertain as to when this evaluation may be completed. Any
savings association with less than $300 million in assets and a
total capital ratio in excess of 12% is exempt from this
requirement unless the OTS determine otherwise.
On June 30, 1997, the Association had risk-based capital of
$9.2 million (including $9.0 million in core capital and $200,000
in general loss reserves) and risk-weighted assets of $33.32
million or total capital of 27.68% of risk-weighted assets. This
amount was $6.56 million above the 8% requirement in effect on
that date.
The OTS and the FDIC are authorized and, under certain
circumstances required, to take certain actions against
associations that fail to meet their capital requirements. The
OTS is generally required to take action to restrict the
activities of an "undercapitalized association" (generally
defined to be one with less than either a 4% core capital ratio,
a 4% Tier 1 risked-based capital ratio or an 8% risk-based
capital ratio). Any such association must submit a capital
restoration plan and until such plan is approved by the OTS may
not increase its assets, acquire another institution, establish a
branch or engage in any new activities, and generally may not
make capital distributions. The OTS is authorized to impose the
additional restrictions, discussed below, that are applicable to
significantly undercapitalized associations.
As a condition to the approval of the capital restoration
plan, any company controlling an undercapitalized association
must agree that it will enter into a limited capital maintenance
guarantee with respect to the institution's achievement of its
capital requirements.
Any savings association that fails to comply with its
capital plan or is "significantly undercapitalized" (i.e., Tier 1
risk-based or core capital ratios of less than 3% or a risk-based
capital ratio of less than 6%) must be made subject to one or
more of additional specified actions and operating restrictions
mandated by FDICIA. These actions and restrictions include
requiring the issuance of additional voting securities;
limitations on asset growth; mandated asset reduction; changes in
senior management; divestiture, merger or acquisition of the
association; restrictions on executive compensation; and any
other action the OTS deems appropriate. An association that
becomes "critically undercapitalized" (i.e., a tangible capital
ratio of 2% or less) is subject to further mandatory restrictions
on its activities in addition to those applicable to
significantly undercapitalized associations. In addition, the
OTS must appoint a receiver (or conservator with the concurrence
of the FDIC) for a savings association, with certain limited
exceptions, within 90 days after it becomes critically
undercapitalized.
Any undercapitalized association is also subject to other
possible enforcement actions by the OTS or the FDIC. Such
actions could include a capital directive, a cease-and-desist
order, civil money penalties, the establishment of restrictions
on all aspects of the association's operations or the appointment
of a receiver or conservator or a forced merger into another
institution.
The OTS is also generally authorized to reclassify an
association into a lower capital category and impose the
restrictions applicable to such category if the institution is
engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The imposition by the OTS or the FDIC of any of these
measures on Sobieski Federal may have a substantial adverse
effect on the Association's operations and profitability and the
value of the Common Stock purchased in the Conversion. Holding
Company shareholders do not have preemptive rights, and
therefore, if the Holding Company is directed by the OTS or the
FDIC to issue additional shares of Common Stock, such issuance
may result in the dilution in the percentage of ownership of the
Holding Company of those persons who purchased shares in the
Conversion.
Limitations on Dividends and Other Capital Distributions
OTS regulation impose various restrictions or requirements
on associations with respect to their ability to pay dividends or
make other distributions of capital. OTS regulations prohibit an
association from declaring or paying any dividends or from
repurchasing any of its stock if, as a result, the regulatory
capital of the association would be reduced below the amount
required to be maintained for the liquidation account established
in connection with its mutual to stock conversion.
The OTS utilizes a three-tiered approach to permit
associations, based on their capital level and supervisory
condition, to make capital distributions which include dividends,
stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account (see "--Regulatory
Capital Requirements").
Generally, Tier 1 associations, which are associations that
before and after the proposed distribution meet their fully
phased-in capital requirements, may make capital distributions
during any calendar year equal to the greater of 100% of net
income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital
exceeds its fully phased-in capital requirement for such capital
component, as measured at the beginning of the calendar year, or
the amount authorized for a Tier 2 association. However, a Tier
1 association deemed to be in need of more than normal
supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. The Association
meets the requirements for a Tier 1 association and has not been
notified of a need for more than normal supervision. Tier 2
associations, which are associations that before and after the
proposed distribution meet their current minimum capital
requirements, may make capital distributions of up to 75% of net
income over the most recent four quarter period.
Tier 3 associations (which are associations that do not meet
current minimum capital requirements) that propose to make any
capital distribution and Tier 2 associations that propose to make
a capital distribution in excess of the noted safe harbor level
must obtain OTS approval prior to making such distributions.
Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations
proposing to make any capital distribution need only submit
written notice to the OTS 30 days prior to such distribution. As
a subsidiary of the Holding Company, the Association will also be
required to give the OTS 30 days' notice prior to declaring any
dividend on its stock. The OTS may object to the distribution
during that 30-day period based on safety and soundness concerns.
See "-Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the
current capital distribution restrictions. The proposal
eliminates the current tiered structure and the safe-harbor
percentage limitations. Under the proposal a savings association
may make a capital distribution without notice to the OTS (unless
it is a subsidiary of a holding company) provided that it has a
CAMEL 1 or 2 rating, is not in troubled condition (as defined by
regulation) and would remain adequately capitalized (as defined
in the OTS prompt corrective action regulations) following the
proposed distribution. Savings associations that would remain
adequately capitalized following the proposed distribution but do
not meet the other noted requirements must notify the OTS 30 days
prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital
distributions that do not exceed 50% of the institution's excess
regulatory capital plus net income to date during the calendar
year. A savings association may not make a capital distribution
without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution.
As under the current rule, the OTS may object to a capital
distribution if it would constitute an unsafe or unsound
practice. No assurance may be given as to whether or in what
form the regulations may be adopted.
Liquidity
All savings associations, including Sobieski Federal, are
required to maintain an average daily balance of liquid assets
equal to a certain percentage of the sum of its average daily
balance of net withdrawable deposit accounts and borrowings
payable in one year or less. For a discussion of what the
Association includes in liquid assets, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." This liquid asset
ratio requirement may vary from time to time (between 4% and 10%)
depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid
asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain
time deposits, certain bankers acceptances and short-term United
States Treasury obligations) currently must constitute at least
1% of the association's average daily balance of net withdrawable
deposit accounts and current borrowings. Penalties may be
imposed upon associations for violations of either liquid asset
ratio requirement. At June 30, 1997, the Association was in
compliance with both requirements, with an overall liquid asset
ratio of 6.07% and a short-term liquid assets ratio of 2.47%
Accounting
An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment
activities of a savings association must be in compliance with
approved and documented investment policies and strategies, and
must be accounted for in accordance with GAAP. Under the policy
statement, management must support its classification of an
accounting for loans and securities (i.e., whether held for
investment, sale or trading) with appropriate documentation. The
Association is in compliance with this policy statement.
The OTS has adopted an amendment to its accounting
regulations, which may be made more stringent then GAAP by the
OTS, to require that transactions be reported in a manner that
best reflects their underlying economic substance and inherent
risk and that financial reports must incorporate any other
accounting regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test
All savings associations, including Sobieski Federal, are
required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a
savings association to have at least 65% of its portfolio assets
(as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling
basis. As an alternative, the savings association may maintain
60% of its assets in those assets specified in Section
7701(a)(19) of the Internal Revenue Code. Under either test,
such assets primarily consist of residential housing related
loans and investments. Such assets primarily consist of
residential housing related loans and investments. At June 30,
1997, the Association met the test and has always met QTL the
test since its effectiveness.
Any savings association that fails to meet the QTL test must
convert to a national bank charter, unless it requalifies as a
QTL and thereafter remains a QTL. If an association does not
requalify and converts to a national bank charter, it must remain
SAIF-insured until the FDIC permits it to transfer to the Bank
Insurance Fund. If an association that fails the test has not
yet requalified and has not converted to a national bank, its new
investments and activities are limited to those permissible for
both a savings association and a national bank, and it is limited
to national bank branching rights in its home state. In
addition, the association is immediately ineligible to receive
any new FHLB borrowings and is subject to national bank limits
for payment of dividends. If such association has not
requalified or converted to a national bank within three years
after the failure, it must divest of all investments and cease
all activities not permissible for a national bank. In addition,
it must repay promptly any outstanding FHLB borrowings, which may
result in prepayment penalties. If any association that fails
the QTL test is controlled by a holding company, than within one
year after the failure, the holding company must register as a
bank holding company and become subject to all restrictions on
bank holding companies. See "- Holding Company Regulation."
Community Reinvestment Act
Under the Community Reinvestment Act ("CRA"), every FDIC
insured institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate
income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions nor
does it limit an institution's discretion to develop the types of
products and services that it believes are best suited to its
particular community, consistent with the CRA. The CRA requires
the OTS, in connection with the examination of the Association,
to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its
evaluation of certain applications, such as a merger or the
establishment of a branch, by Sobieski Federal. An
unsatisfactory rating may be used as the basis for the denial of
an application by the OTS.
The federal banking agencies, including the OTS, have
recently revised the CRA regulations and the methodology for
determining an institution's compliance with the CRA. Due to the
heightened attention being given to the CRA in the past few
years, the Association may be required to devote additional funds
for investment and lending in its local community. The
Association was examined for CRA compliance in October 1994 and
received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as
favorable to the association as transactions with non-affiliates.
In addition, certain of these transactions are restricted to a
percentage of the association's capital. Affiliates of the
Association include the Company and any company which is under
common control with the Association. In addition, a savings
association may not lend to any affiliate engaged in activities
not permissible for a bank holding company or acquire the
securities of most affiliates. The Association's subsidiaries
are not deemed affiliates, however; the OTS has the discretion to
treat subsidiaries of savings associations as affiliates on a
case by case basis.
Certain transactions with directors, officers or controlling
persons are also subject to conflict of interest regulations
enforced by the OTS. These conflict of interest regulations and
other statutes also impose restrictions on loans to such persons
and their related interests. Among other things, such loans must
be made on terms substantially the same as for loans to
unaffiliated individuals.
Holding Company Regulation
The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is
subject to regulation and examination by the OTS. In addition,
the OTS has enforcement authority over the Holding Company and
its non-savings association subsidiary which also permits the OTS
to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company
generally is not subject to activity restrictions. If the
Company acquires control of another savings association as a
separate subsidiary, it would become a multiple savings and loan
holding company, and the activities of the Company and any of its
subsidiaries (other than the Association or any other SAIF-
insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL
and were acquired in a supervisory acquisition.
If the Association fails the QTL test, the Company must
obtain the approval of the OTS prior to continuing after such
failure, directly or through its other subsidiaries, any business
activity other than those approved for multiple savings and loan
holding companies or their subsidiaries. In addition, with one
year of such failure the Company must register as, and will
become subject to, the restrictions applicable to bank holding
companies. The activities authorized for a bank holding company
are more limited than are the activities authorized for a unitary
or multiple savings and loan holding company. See "--Qualified
Thrift Lender Test."
The Company must obtain approval from the OTS before
acquiring control of any other SAIF-insured association. Such
acquisitions are generally prohibited if they result in a
multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization
or in a supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of the Company is registered with the SEC under
the Securities Exchanges Act of 1934, as amended (the "Exchange
Act"). The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements
of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Company
may not be resold without registration or unless sold in
accordance with certain resale restrictions. If the Company
meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market,
without registration, a limited number of shares in any three-
month period.
Federal Reserve System
The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at
specified levels against their transaction accounts (primarily
checking, NOW and Super NOW checking accounts). At June 30,
1997, the Association was in compliance with these reserve
requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to
satisfy liquidity requirements that may be imposed by the OTS.
See "-- Liquidity."
Savings associations are authorized to borrow from the
Federal Reserve Bank "discount window," but Federal Reserve Board
regulations require associations to exhaust other reasonable
alternative sources of funds, including FHLB borrowings, before
borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Association is a member of the FHLB of Indianapolis,
which is one of 12 regional FHLBs that administer 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. These policies and procedures are subject to the
regulation and 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, the Association is required to purchase and
maintain stock in the FHLB of Indianapolis. At June 30, 1997,
the Association had $636,000 of FHLB stock, which was in
compliance with this requirement. During fiscal 1997 and prior
years the Association received substantial dividends on its FHLB
stock. The dividends averaged 7.84% for fiscal year 1997. For
both the years ended June 30, 1997 and 1996, dividends paid by
the FHLB of Indianapolis to the Association totaled $50,000.
Under federal law the FHLBs are required to provide funds
for the resolution of troubled savings associations and to
contribute to low- and moderately priced housing programs through
direct loans or interest subsidies on advantages targeted for
community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level
of FHLB dividends paid and could continue to do so in the future.
A reduction in value of the Association's FHLB stock may result
in a corresponding reduction in the Association's capital.
Federal and State Taxation
Prior to the enactment of recent legislation (discussed
below), savings associations such as the Association that met
certain definitional test relating to the composition of assets
and other conditions prescribed by the Interanl Revenue Code of
1986, as amended (the "Code"), had been permitted to establish
reserves for bad debts and to make annual additions thereto which
could, within specified formula limits, be taken as a deduction
in computing taxable income for federla income tax purposes. The
amount of the bad debt reserve deduction for "non-qualifying
loans" was computed under the experience method. The amount of
the bad debt reserve deduction for "qualifying real property
loans" (generally loans secured by improved real estate) could be
computed under either the experience method or the percentage of
taxable income method (based on an annual election).
The Small Business Job Protection Act of 1996, signed into
law on August 20, 1996, repealed the special thrift bad debt
deductions provisions. This legislation eliminates the use of
the percentage of taxable income method as a means of calculating
deductions for bad debts, allows thrifts greater flexibility in
diversifying their loan and investment portfolios and establishes
requirements for the recapture of previously untaxed bad debt
reserve accumulations. Bad debt reserve accumulations prior to
fiscal 1988 are exempt from recapture unless the Association
liquidates, pays a dividend in excess of earnings and profits or
redeems stock. Post fiscal 1987 bad debt reserve accumulations
will be taxed in equal amounts over six years beginning in fiscal
1997. The Association may defer the recapture tax in fiscal 1997
or 1998 if it originates the same principal amount of mortgage
loans that it had originated in the six years before fiscal 1997.
The Association does not expect the post fiscal 1987 recapture
tax to have a material effect on the consolidated financial
statements.
In addition to the regular income tax, corporations,
including savings associations such as the Association, generally
are subject to a minimum tax. An alternative minimum tax is
imposed at a minimum tax rate of 20% on alternative minimum
taxable income, which is the sum of a corporation's regular
taxable income (with certain adjustments) and tax preference
items, less any available exemption. The alternative minimum tax
is imposed to the extent it exceeds the corporation's regular
income tax and net operating losses can offset no more than 90%
of alternative minimum taxable income. For taxable years
beginning after 1986 and before 1996, corporations, including
savings associations such as the Association, are also subject to
an environmental tax equal to 0.12% of the excess of alternative
minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the
environmental tax) over $2 million.
To the extent earnings appropriated to a savings
association's bad debt reserves for "qualifying real property
loans" and deducted for federal income tax purposes exceed the
allowable amount of such reserves computed under the experience
method and to the extent of the association's supplemental
reserves for losses on loans ("Excess"), such Excess may not,
without adverse tax consequences, be utilized for the payment of
cash dividends or other distributions to a shareholders
(including distributions on redemption, dissolution or
liquidation) or for any other purpose (except to absorb bad debt
losses).
The Association files federal income tax returns on a fiscal
year basis using the accrual method of accounting. The Company
files consolidated federal income tax returns with the
Association and its subsidiaries. Savings associations, such as
the Association, that file federal income tax returns as part of
a consolidated group are required by applicable Treasury
regulations to reduce their taxable income for purposes of
computing the percentage bad debt deduction for losses
attributable to activities of the non-savings association members
of the consolidated group that are functionally related to the
activities of the savings association member.
The Association has not been audited by the IRS with respect
to federal income tax returns through June 30, 1997. With
respect to years examined by the IRS, either all deficiencies
have been satisfied or sufficient reserves have been established
to satisfy asserted deficiencies. In the opinion of management,
any examination of still open returns (including returns of
subsidiaries and predecessors of, or entities merged into, the
Association) would not result in a deficiency which could have a
material adverse effect on the financial condition of the
Association and its consolidated subsidiaries.
Indiana Taxation. The Company and the Association is
subject to an 8.5% franchise tax, imposed by the State of
Indiana, on the net income of financial (including thrift)
institutions, exempting them from the current gross income,
supplemental net income and intangible taxes. Net income for
franchise tax purposes will constitute federal taxable income
before net operating loss deductions and special deductions,
adjusted for certain items, including Indiana income taxes,
property taxes, charitable contributions, tax exempt interest and
bad debt. Other applicable Indiana taxes include sales, use and
property taxes.
Delaware Taxation. As a Delaware holding company, the
Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual fee to
the State of Delaware. The Company is also subject to an annual
franchise tax imposed by the State of Delaware.
Item 2. Description of Property
The Association conducts its business through its main
office and two branch offices located in South Bend, Indiana.
The following table sets forth information relating to each of
the Association's offices as of June 30, 1997. The total net
book value of the Association's premises and equipment (including
land, buildings and leasehold improvements and furniture,
fixtures and equipment) at June 30, 1997 was approximately
$2,028,300. See Note E of the Notes to Consolidated Financial
Statements.
Total
Year Approximate
Leased Square Net Book Value at
Location or Acquired Footage June 30, 1997
Main Office:
2930 West Cleveland Road 1995 10,080 $1,457
South Bend, Indiana 46628
Branch Offices:
4606 Western Avenue 1978 1,600 $ 0
Belleville Shopping Center
740 S. Walnut Street 1952 1,900 $ 25
Sobieski Federal believes that its current facilities,
including its new main office facilities are adequate to meet the
present and foreseeable needs of the Association and the Company.
The Association maintains an on-line date base with a
service bureau servicing financial institutions. The net book
value of the data processing and computer equipment utilized by
the Association at June 30, 1997 was $99,000.
Item 3. Legal Proceedings
The Company and Sobieski Federal are involved, from time to
time, as plaintiff or defendant in various legal actions arising
in the normal course of their businesses. While the ultimate
outcome of these proceedings cannot be predicted with certainty,
it is the opinion of management, after consultation with counsel
representing Sobieski Federal and the Company in the proceedings,
that the resolution of these proceedings should not have a
material effect on the Company's results of operations on a
consolidated basis.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders,
through the solicitation of proxies or otherwise, during the
quarter ended June 30, 1997.
PART II
Item 5. Market for the Issuer's Common Stock and Related
Security Holder Matters
Page 47 of the attached 1997 Annual Report to Stockholders
is herein incorporated by reference.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of
Operations
Pages 10 to 21 of the attached 1997 Annual Report to
Stockholders are herein incorporated by reference.
Item 7. Financial Statements
The following pages of the attached 1997 Annual Report to
Stockholders are herein incorported by reference.
Report of Independent Accountants Page 22
Consolidated Statements of Financial Condition
as of Page 23
June 30, 1997 and 1996
Consolidated Statements of Income for the
years ended Page 24
June 30, 1997, 1996 and 1995
Consolidated Statements of Stockholders'
Equity for the Page 25
years ended June 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for
the years Page 26
ended June 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements Pages 27-46
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial
Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters, and Control
Persons; Compliance with
Section 16(a) of the Exchange Act
Directors
Information concerning directors of the Company is
incorporated herein by reference from the Company's definitive
Proxy Statement for the 1997 Annual Meeting of Shareholders, a
copy of which has been filed with the Securities and Exchange
Commission.
Executive Officers
Information concerning the executive officers of the Company
is incorporated herein by reference from "Executive Officers of
the Company" contained in Part I of this form 10-KSB.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's
officers and directors, and persons owning more than 10% of a
registered class of the Company's equity securities, to file
periodic reports of ownership and changes in ownership with the
Securities and Exchange Commisssion and to provide the Company
with copies of such reports. Based solely upon information
provided to the Company by the directors and officers subject to
Section 16(a), all Section 16(a) filing requirements applicable
to such persons were complied with during fiscal 1997, except for
the inadvertent failure to timely file a Form 3 Initial Statement
of Beneficial Ownership by Arthur Skale, the Vice President of
Finance and Chief Financial Officer of the Company. Mr. Skale
subsequently filed the required form with the Securities and
Exchange Commission.
Item 10. Executive Compensation
Information concerning executive compensation is
incorporated herein by reference from the Company's definitive
Proxy Statement for the 1997 Annual Meeting of Shareholders, a
copy of which has been filed with the Securities and Exchange
Commission.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
Information concerning security ownership of certain
beneficial owners and management is incorporated herein by
reference from the Company's definitive Proxy Statement for the
1997 Annual Meeting of Shareholders, a copy of which has been
filed with the Securities and Exchange Commission.
Item 12. Certain Relationship and Related Transactions
Information concerning certain relationships and
transactions is incorporated herein by reference from the
Company's definitive Proxy Statement for the 1997 Annual Meeting
of Shareholders, a copy of which has been filed with the
Securities and Exchange Commission.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits:
Reference to
Prior Filing or
Regulation S-B Exhibit Number
Exhibit Number Document Attached Hereto
2 Plan of Acquisition, Reorganization,
Arrangement, None
Liquidation or Succession
4.1 Articles of Incorporation and
amendments thereto **
4.2 Bylaws **
9 Voting Trust Agreement None
10 Executive Compensation Plans and Arrangements:
Employee Stock Ownership Plan **
Stock Option and Incentive Plan **
Recognition and Retention Plan **
11 Statement re computation of per share
earnings None
13 Annual Report to Security Holders 13
16 Letter re change in certifying accountant
None
18 Letter re change in accounting principles
None
21 Subsidiaries of Registrant 21
22 Published report regarding matter
submitted to vote None
23 Consent of Coopers & Lybrand LLP None
24 Power of Attorney Not Required
27 Financial Data Schedule 27
99 Additional Exhibits None
** Filed on December 30, 1994, as exhibits to the Company's
Form S-1 registration statement (File number 3-88078). All of
such previously filed documents are hereby reference in
accordance with Item 601 of Regulation S-B.
(b) Reports on Form 8-K:
No current reports on Form 8-K were filed by the Company
during the three months ended June 30, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
SOBIESKI BANCORP, INC.
Date: September 23, 1997 By: /s/ Thomas F. Gruber
Thomas F. Gruber
President and Chief
Executive Officer
(Duly Authorized
Representative)
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
/s/ Robert J. Urbanski /s/ Joseph A. Gorny
Robert J. Urbanski,
Chairman of the Board Joseph A. Gorny, Director
Date: September 23, 1997 Date: September 23, 1997
/s/ George J. Aranowski
George J. Aranowski, Director Leonard J. Dobosiewicz,
Director
Date: September 23, 1997 Date: September 23, 1997
/s/ Joseph F. Nagy /s/ Arthur Skale
Joseph F. Nagy, Director Arthur Skale, Chief Financial
Officer
(Principal Financial and
Accounting Officer)
Date: September 23, 1997 Date: September 23, 1997
/s/ Thomas F. Gruber
Thomas F. Gruber
President and Chief Executive
Officer and Director
(Principal Executive Officer)
Date: September 23, 1997
INDEX TO EXHIBITS
Exhibit
Number
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
Exhibit 13
1997 ANNUAL REPORT
SOBIESKI BANCORP, INC.
TABLE OF CONTENTS
Management Letter . . . . . . . . . . . . . . . 3
Corporate Profile . . . . . . . . . . . . . . . 6
Selected Financial Information . . . . . . . . . 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . 10
Report of Independent Accountants . . . . . . . . 22
Consolidated Financial Statements . . . . . . . . 23
Stockholder Information . . . . . . . . . . . . . 47
Corporate Information . . . . . . . . . . . . . 48
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-Looking Statements
When used in this Annual Report or in filings by the
Company with the Securities and Exchange Commission, in the
Company's press releases or other public or shareholder
communications, or in oral statements made with the approval of
an authorized executive officer, the words or phrases "will
likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project," "believe" or similar
expressions are intended to identify "forward-looking statements"
within the meaning of the Private Securities Litigation Reform
Act of 1995. Such statements are subject to certain risks and
uncertainties including, among other things, changes in economic
conditions, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's
market area, credit risks of lending activities and competition.
The Company wishes to caution readers not to place undue reliance
on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the
factors noted above could affect the Company's financial
performance and could cause the Company's actual results for
future periods to differ materially from those anticipated or
projected.
The Company does not undertake, and specifically disclaims
any obligation, to publicly release the result of any revisions
which may be made to any forward-looking statements to reflect
the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.
General
The principal business of Sobieski Federal consists of
attracting deposits from the general public and investing those
funds in the origination of one-to-four family residential
mortgage loans, consumer loans, construction loans and commercial
loans. The Company also invests in mortgage-backed securities,
which are insured or guaranteed by federal agencies, investment
securities, consisting primarily of obligations of the U.S.
Government or agency obligations, financial institution
certificates of deposit fully insured by the FDIC, and other
liquid assets. The Company's profitability depends primarily on
its net interest income, which is the difference between interest
income earned on its loans, investments and mortgage-backed
securities and the interest expense incurred on its deposits and
FHLB borrowings. Net interest income is affected by rates
received on and the amounts of interest-earning assets as
contrasted to the rates paid on and the amounts of interest-
bearing liabilities.
Sobieski Federal's profitability is also affected by its
provision for loan losses, non-interest income and non-interest
expense. Non-interest income principally consists of fees and
service charges on deposit accounts and loan late payment fees.
Non-interest expense is principally operating expense, including
compensation and related benefits, federal deposit insurance
premiums, advertising, service bureau data processing, and
occupancy costs. Earnings of Sobieski Federal are also affected
significantly by general economic and competitive conditions,
particularly changes in general interest rate levels.
Business Strategy
Sobieski Federal has concentrated its lending efforts on
the origination of one-to- four family mortgage loans along with
home equity loans and mortgage-backed commercial loans for
portfolio retention. In addition, the Association continues to
purchase participation interests in commercial loans. The
participation interests are purchased according to established
underwriting standards. The loans underlying the participation
interests are performing in accordance with their terms. At June
30, 1997, the ratio of Sobieski Federal's nonperforming assets to
total assets was .15% and the ratio of its allowance for loan
losses to nonperforming loans was 158.52%. Historically, the
loans originated by Sobieski Federal were principally fixed-rate,
one-to-four family mortgage loans, while the Association's
investments in mortgage-backed securities have been principally
in adjustable rate products. At June 30, 1997, $53.8 million, or
77.5%, of the Association's combined mortgage loans and mortgage-
backed securities portfolio had fixed rates of interest and $15.6
million, or 22.5%, had adjustable interest rates. The
Association's business strategy emphasizes retail deposits along
with FHLB advances as its principal source of funds.
The Association's primary objective is to remain an
independent, community oriented financial institution serving
customers in its primary market area. The Board of Directors has
sought to accomplish this objective through the adoption of a
strategy designed to maintain profitability, a strong capital
position and high asset quality. This strategy has been effected
primarily by (i) emphasizing the origination of one-to-four
family residential mortgage lending, home equity lending and
mortgage- backed commercial lending, (ii) purchasing
participation interests in commercial loans funded by advances
from FHLB, (iii) maintaining a substantial portfolio of
adjustable-rate mortgage-backed securities and short to
intermediate term investment securities, (iv) controlling
operating expenses and (v) increasing fee income.
Asset/Liability Management
Sobieski Federal, like other financial institutions, is
vulnerable to increases in interest rates because interest-
bearing liabilities reprice more quickly than interest-earning
assets. Historically, Sobieski Federal has invested in fixed-
rate, long-term mortgage loans secured by one-to-four family
residences and its primary source of funds has been deposits with
much shorter terms to maturity. This mismatched position
generally produces lower net interest income through compressed
spreads during periods of rising rates and improved net interest
income resulting from larger spreads during periods of declining
rates. Accordingly, increases in general market interest rates
adversely impact the Association's interest rate spread and,
therefore, have a negative impact on the Company's results of
operations and financial condition.
To reduce interest rate risk through asset/liability
management, Sobieski Federal has taken steps to mitigate the
sensitivity of its interest-earning assets by investing in short
to intermediate term investments and adjustable-rate mortgage-
backed securities, which, although long-term in nature, adjust
periodically in response to changes in general levels of interest
rates. Additionally, to decrease interest rate sensitivity,
Sobieski Federal originates variable-rate home equity products
and adjustable mortgage-backed commercial loans along with
purchased participation interests in adjustable rate commercial
loans. The funding for these originations and purchases has
come from short-term advances from the FHLB. At June 30, 1997,
Sobieski Federal had $47.0 million in long-term fixed-rate
mortgages and $4.5 million in adjustable-rate mortgages. The
Association's ability to generate Adjustable-Rate Mortgage
("ARM") loans is dependent upon the current interest rate
environment and customer preferences.
Net Portfolio Analysis. The OTS provides a Net Portfolio
Value ("NPV") approach to the quantification of interest rate
risk. This approach calculates the difference between the present
value of expected cash flows from assets and the present value of
expected cash flows from liabilities, as well as cash flows from
off-balance sheet contracts.
In August 1993, the OTS issued new regulations to be
effective beginning on January 1, 1994, which were going to add
an interest-rate risk component to a bank's risk-based capital
requirement. The OTS then delayed implementation of this new
regulation pending action on the issue from the other banking
agencies. In early 1996, the other regulators (the Federal
Reserve Board, Federal Deposit Insurance Corp., and Office of the
Comptroller of the Currency) announced that their approach to
evaluating a financial institution's interest rate risk would not
include a standard model to calculate a required capital
component. While the OTS will likely review its approach to
evaluating a bank's exposure to interest rate fluctuations as a
result of the other regulators' conclusions, the OTS under any
scenario will require that a Bank have adequate board and senior
management oversight and a comprehensive process for managing
interest rate risk.
Presented below, as of June 30, 1997, is an analysis of the
Association's interest rate risk as measured by changes in NPV
for instantaneous and sustained parallel shifts in the yield
curve, in 100 basis point increments, up and down 400 basis
points in accordance with OTS regulations. As illustrated in the
table, NPV is more sensitive to rising rates than declining
rates. This occurs principally because, as rates rise, the market
value of fixed-rate loans decline due to the rate increase. When
rates decline, the Association does not experience as significant
a rise in market value for these loans because borrowers prepay
at relatively high rates. The following table is based on assets
and liabilities of the Association only.
<TABLE>
Change in
Interest Rate Net Portfolio Value
(Basis Points) $ Change % Change
(Dollars in Thousands)
<S> <C> <C>
+400 $(5,780) (59)%
+300 (4,297) (44)
+200 (2,766) (28)
+100 (1,317) (13)
0 - -
-100 912 9
-200 1,211 12
-300 1,394 14
-400 1,859 19
</TABLE>
Management reviews the NPV measurements on a quarterly
basis. In addition to monitoring selected measures on NPV,
management also monitors effects on net interest income resulting
from increases or decreases in rates. This measure is used in
conjunction with NPV measures to identify excessive interest rate
risk.
The Association's change in its NPV, based on a rise in
interest rates of 2.0%, was a 28% decrease representing a dollar
decrease in equity value of approximately $2.77 million at June
30, 1997. In contrast, based on a decline in interest rates of
2.0%, the Association's NPV was estimated to increase 9% at June
30, 1997. The most significant factor contributing to its
liability sensitive position was the Association's balance of
fixed rate mortgage loans. At June 30, 1997, 91.3% of the
Association's loan portfolio was comprised of long-term, fixed-
rate mortgage loans.
As with any method of measuring interest rate risk,
certain shortcomings are inherent in the method of analysis
presented in the foregoing table. For example, although certain
assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in
market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may
lag behind changes in market rates. Additionally, certain assets,
such as ARM loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the
asset. Further, in the event of a change in interest rates,
expected rates of prepayments on loans and early withdrawals from
certificates could likely deviate significantly from those
assumed in calculating the table.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes thereto
presented herein have been prepared in accordance with generally
accepted accounting principles, which require the measurement of
financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's
operations, Nearly all the assets and liabilities of the Company
are financial, unlike most industrial companies. As a result, the
Company's performance is directly impacted by changes in interest
rates, which are indirectly influenced by inflationary
expectations. The Company's ability to match the interest
sensitivity of its financial assets to the interest sensitivity
of its financial liabilities in its asset/liability management
may tend to minimize the effect of change in interest rates on
the Company's performance. Changes in interest rates do not
necessarily move to the same extent as changes in the price of
goods and services. In the current interest rate environment,
liquidity and the maturity structure of the Company's assets and
liabilities are critical to the maintenance of acceptable
performance levels.
<TABLE>
Net Interest Income Analysis. The primary determinant of Sobieski
Federal's earnings is net interest income, which is the difference between
interest income and interest expense. Net interest income is affected by
(1) rates received on interest-earning assets, (2) rates paid on interest-
bearing liabilities, and (3) the relative amounts of interest-earning
assets versus interest-bearing liabilities. The following table presents
for the periods indicated the total dollar amount of interest income from
average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, expressed both in
dollars and rates. No tax equivalent adjustment were made. All average
balances are monthly average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
Year Ended June 30,
1997 1996
1995
Average Interest Average Interest
Average Interest
Outstanding Earned/ Outstanding Earned/
Outstanding Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate Balance
Paid Yield/Rate
(Dollars in
Thousands)
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Loans receivable (1). . .$55,105 $4,433 8.04% $48,777 $4,012 8.23%
$49,987 $4,079 8.16%
Mortgage-backed securities15,080 944 6.26 15,704 962 6.13
15,238 836 5.49
Investment securities . . 4,813 281 5.84 7,447 441 5.92
5,592 335 5.99
FHLB stock . . . . . . . 636 44 6.92 636 50 7.86
634 45 7.10
Total interest-earning
assets(1) . . . . . . . . 75,634 5,702 7.54 72,564 5,465 7.53
71,451 5,295 7.41
Non interest-earning
assets . . . . . . . . . 3,692 4,897
2,692
Total assets. . . . . . $79,326 $77,461
$74,143
Interest-Bearing Liabilities:
Savings deposits . . . $15,272 $ 374 2.45 $16,028 456 2.85
$17,116 507 2.96
NOW and MMDA accounts . 5,286 118 2.23 4,699 129 2.74
4,838 146 3.02
Certificate accounts. . 39,352 2,290 5.82 41,250 2,432 5.90
42,756 2,145 5.02
FHLB borrowing . . . . 5,850 349 5.97 600 13 2.17
- - - -
Total interest-bearing
liabilities . . . . . . 65,760 3,131 4.76 62,577 3,030 4.84
64,710 2,798 4.32
Non interest-bearing
liabilities . . . . . 126 576
948
Total liabilities . . . 65,886 63,153
65,658
Stockholders' equity . 13,440 14,308
8,485
Total liabilities and
stockholders' equity . . $79,326 $77,461
$74,143
Net interest income . . $2,571 $2,435
$2,497
Net interest rate spread 2.78% 2.69%
3.09%
Net earning assets. . . $ 9,874 $ 9,987 $
6,741
Net yield on average
interest-earning assets 3.40% 3.36%
3.49%
Average interest-earning
assets to average
interest-bearing
liabilities . . . . . . 115.02% 115.96%
110.42%
</TABLE>
(1) Calculated net of deferred loan fees, discounts and premiums, and
loans in process.
<TABLE>
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets
and interest-bearing liabilities. It distinguishes between the changes
related to outstanding balances and those due to the changes in interest
rates. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i) changes
in volume (i.e., changes in volume multiplied by old rate) and (ii) changes
in rate (i.e., changes in rate multiplied by old volume). For purposes of
this table, changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume
and the change due to rate.
Year Ended June 30.
1996 vs. 1997 1995 vs. 1996
Increase Increase
(Decrease) Total (Decrease)
Total
Due to Increase Due to
Increase
Volume Rate (Decrease) Volume Rate
(Decrease)
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable, net . . . $ 511 $ (90) $ 421 $ (99) $ 32 $ ( 67)
Mortgage-backed securities (39) 21 (18) 26 100 126
Investment securities . . (154) (6) (160) 110 (4) 106
FHLB stock . . . . . . . . --- (6) (6) --- 5 5
Total interest-earning
assets . . . . $ 318 (81) 237 $ 37 $ 133 170
Interest-beating liabilities:
Savings deposits. . . . . (21) (61) (82) (31) (20) (51)
NOW and MMDA accounts. . . 15 (26) (11) (4) (13) (17)
Certificate accounts. . . . (111) (31) (142) (78) 365 287
FHLB borrowing. . . . . . 280 56 336 13 --- 13
Total interest-bearing
liabilities . . . . $ 163 $ (62) 101 $ (100) $ 332 232
Net interest income . . . $ 136 $ (62)
</TABLE>
Financial Condition
General. Total assets increased $2.87 million or 3.64%,
from $78.86 million at June 30,1996 to $81.73 million at June 30,
1997. The increase in assets was primarily the result of a $8.02
million increase in net loans offset by reductions of $4.84
million in investment securities and mortgage-backed securities
and $.31 million of other assets. Funding for the asset growth
primarily came from $6.50 million of FHLB advances offset by
$1.84 million in decreased deposits and common stock repurchases
of $2.01 million.
Cash and Cash Equivalents. Cash and cash equivalents,
consisting of cash, interest-bearing deposits and federal funds
sold decreased $134,000 from $1.39 million at June 30, 1996 to
$1.25 million at June 30, 1997.
Investment Securities. Investment securities, consisting of
United States Government securities and an investment in a United
States Government securities mutual fund, decreased $2.39 million
or 51% from $4.69 million at June 30, 1996 to $2.30 million at
June 30, 1997. The decrease resulted from the sale of the
Company's $.89 million interest in a mutual fund, and maturities
of $1.5 million of government securities. At June 30, 1997,
$1.30 million or 56% of the Association's investment securities
were available for sale.
Mortgage-backed Securities. Mortgage-backed securities
decreased $2.44 million or 15%, from $16.15 million at June 30,
1996 to $13.71 million at June 30, 1997. The decrease was
primarily the result of principal repayments. At June 30, 1997,
$1.78 million or 13% of the mortgage-backed securities were
classified as available for sale.
Loans Receivable, Net. Loans receivable increased $8.02
million, or 15%, from $53.11 million at June 30, 1996 to $61.13
million at June 30, 1997. This increase was primarily the result
of increased demand and expanded market area for residential
mortgages in conjunction with aggressive efforts in origination
of home equity and mortgage-backed commercial loans along with
continued participations in commercial loans.
Deposits. Deposits decreased $1.84 million, or 3.0%, from
$61.23 million at June 30, 1996 to $59.39 million at June 30,
1997. The Association is actively pursuing a deposit retention
program. The program, implemented during the fourth quarter of
fiscal 1997, offers higher rate special short-term and long-term
deposit certificates. Under the program, fourth quarter
deposits increased by $390,000, a reversal of the outflow pattern
experienced during fiscal 1996 and the first three quarters of
fiscal 1997. Monitoring of local market rates, special
certificate offerings and wholesale alternatives will continue to
be utilized as management focuses on viable funding sources.
Stockholders' Equity. Stockholders' equity decreased $1.69
from $14.05 million at June 30, 1996 to $12.36 million at June
30, 1997. This decrease was primarily the result of the
Company's stock repurchase program, partially offset by 1997 net
income.
Results of Operations
General. Net income decreased $88,000, or 26.27%, from
$335,000 for 1996 to $247,000 for 1997. The decrease in net
income resulted primarily from the expense associated with the
one-time special SAIF recapitalization assessment of $414,000.
Adjusted for the SAIF recapitalization assessment, net of related
federal and state income tax benefits, net income for 1997 would
have been $497,000, an increase of 48.36% over net income for
1996.
Net interest income. Net interest income increased
$136,000 from $2.44 million in 1996 to $2.57 million in 1997.
The increase was due to $3.07 million of additional average
interest-earning assets at an improved net four basis point
yield. Net yield on average interest-earning assets in 1997
increased 1.19% to 3.40% from 3.36% in 1996.
Interest Income. Interest income increased $237,000, from
$5.46 million for 1996 to $5.70 million for 1997. The increase
was the result of $6.33 million of higher average balances in
loans receivable during the year offset by $3.26 million of
reduced investment and mortgage-backed securities average
balances. The change due to net volume increases added $318,000
to interest income and was offset by lower rate precipitated
decreases of $81,000. The yield on average interest-earning
assets increased 1 basis point, from 7.53% for 1996 to 7.54% for
1997
Interest Expense. Interest expense increased $101,000 from
$3.03 million in 1996 to $3.13 million in 1997, primarily as a
result of $336,000 of additional expense related to increased
FHLB advances. The average rate paid for interest-bearing
liabilities decreased 8 basis points from 4.84% in 1996 to 4.76%
in 1997, a decrease of 1.65%. The average balance of interest-
bearing liabilities for fiscal 1997 was $65.76 million, an
increase of $3.18 million from $62.58 million for fiscal 1996.
Provision for Loan Losses. There was no provision for loan
losses for the year ended June 30, 1997 and the year ended June
30, 1996. The Company maintains an allowance for loan losses
based upon management's periodic evaluation of non-performing
loans, inherent risks in the loan portfolio, economic conditions
and past experience. Management does expect that as loan growth
continues, provisions for loan losses may be required. The
provisions, however, are not expected to have a material impact
on earnings.
Noninterest Income. Noninterest income increased $54,000
from $172,000 in 1996 to $226,000 in 1997, primarily from gains
on sales of securities.
Noninterest Expense. Noninterest expense increased
$310,000, from $2.06 million in 1996 to $2.37 million in 1997.
The primary increase was the result of the $414,000 one-time
special assessment to recapitalize the SAIF fund. The expense
recognition for the SAIF recapitalization occurred as of
September 30, 1996. As a result of the special assessment, FDIC
deposit insurance rates have decreased from $.23 per $100 of
domestic deposits to $.064 per $100 of domestic deposits. Under
the revised assessment rate, the Association expects to realize
approximately $99,000 of reduced expenses at current deposit
levels under existing regulatory ratings. Total compensation and
related benefits as well as occupancy and equipment expense
remained relatively unchanged from 1996 levels at $964,000 and
$279,000, respectively. Advertising and promotion expense
decreased by $10,000, the continued result of the 1996
reorganization of our advertising campaign. Additionally,
service bureau expense decreased by $9,000 and other operating
expense decreased by $25,000 over fiscal 1996 expenditures.
Income Taxes. Income tax expense decreased $31,000 from
$213,000 in 1996 to $182,000 in 1997, principally as a result of
a decrease in pretax income. The effective tax rate for 1997 was
42.34% versus 38.83% in 1996.
Liquidity and Capital Resources
The Association's primary sources of funds consist of
deposits, repayment and prepayment of loans and mortgage-backed
securities, maturities of investment securities and temporary
cash investments, and funds provided by operations. While
scheduled loan and mortgage-backed securities repayments and
maturities of investments are predictable sources of funds,
deposit flows and loan and mortgage-backed securities prepayments
are significantly influenced by the general level of interest
rates, economic conditions, and competition. Sobieski Federal
uses it liquidity resources to fund existing and future loan
commitments, purchase mortgage-backed securities, fund maturing
certificates of deposit and other savings deposit withdrawals, to
invest in other interest-earning assets, to maintain liquidity,
and to meet operating expenses. Management believes that loan and
mortgage-backed securities repayments
and other sources of funds will be adequate to meet Sobieski
Federal's current liquidity needs.
As a federal savings association, the Association is
required to maintain liquid assets of 5% of its withdrawable
deposits plus short-term borrowings. At June 30, 1997, the
Association was in compliance with Office of Thrift Supervision
("OTS") liquidity requirements, having a ratio of 6.07%.
The Association is required by OTS to meet minimum capital
requirements, which include tangible capital, core capital and
risk-based capital requirements. The Association's actual
capital as reported to the OTS at June 30, 1997 exceeded all
three requirements. The following chart sets forth the actual
and required minimum levels of regulatory capital for the
Association under applicable OTS regulations as to June 30,
1997(dollars in thousands):
Actual Percent Required Percent Excess
Core $ 9,026 11.4 $ 2,380 3.0 $ 6,646
Tangible 9,026 11.4 1,190 1.5 7,836
Risk-based 9,226 27.7 2,666 8.0 6,560
The OTS has proposed to increase the minimum required core
capital ratio from the current 3% level to a range of 4% to 5%
for all but the most highly rated financial institutions. While
the OTS has not taken final action on such proposal, it has
adopted a prompt corrective action regulation that classifies any
savings institution that maintains a core capital ratio of less
than 4% (3% in the event the institution was assigned a composite
1 rating in its most recent report of examination) as
"undercapitalized." As of June 30, 1997, the Association had a
core capital ratio of 11.4% and met the requirement for a "well
capitalized" institution.
Accounting And Regulatory Developments
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-
Lived Assets to be Disposed Of," was issued in March 1995 and
requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. The adoption of this
statement during fiscal 1997 had no effect on the Company's
consolidated financial statements.
SFAS No. 122, "Accounting for Mortgage Servicing Rights," was
issued in May 1995 and requires the capitalization of mortgage
servicing rights acquired through either purchase of mortgage
loan servicing or origination and sale or securitization of
mortgage loans with retention of servicing. SFAS No. 122 also
requires an analysis of capitalized mortgage servicing rights for
potential impairment based on the fair value of the rights.
Currently, the Company does not purchase or originate to sell
mortgage loans.
SFAS No. 123, "Accounting for Stock-Based Compensation," was
issued in October 1995 and established a fair value based method
of accounting for stock-based compensation plans. This statement
also establishes fair value as the measurement basis for
transactions in which an entity acquires goods or services from
non-employees in exchange for equity instruments. There was no
effect on the Company's 1997 consolidated financial statements as
this statement was adopted in 1997 on a disclosure basis only.
SFAS No. 128, "Earnings Per Share," establishes new standards for
computing and presenting earnings per share ("EPS") for publicly-
held companies. The statement replaces the current presentation
of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and fully diluted EPS on the
face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and
denominator of the fully diluted EPS computation. SFAS 128 is
effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. This
statement requires restatement of all prior-period EPS data
presented. Adoption of this statement by the Company in fiscal
1998 is not presently expected to have any significant impact on
the Company's historical presentation of EPS data.
SFAS No. 129, "Disclosure of Information about Capital
Structure," establishes standards for disclosing information
about an entity's capital structure. Such information includes
pertinent rights and privileges of securities outstanding.
Examples of information that shall be disclosed are dividend and
liquidation preferences, participation rights, call prices and
dates, conversion or exercise prices or rates and significant
terms of contracts to issue additional shares. Other disclosures
include information regarding liquidation preferences of
preferred stock and redemption requirements of redeemable stock.
SFAS 129 is effective for financial statements issued for periods
ending after December 15, 1997 and is not presently expected to
have any significant impact on the Company's historical financial
statements.
Impact of Deposit Insurance Funds Act of 1996
On September 30, 1996, President Clinton signed into law the
Deposit Insurance Funds Act of 1996, which included provisions
recapitalizing the SAIF. It provides for the eventual merger of
the thrift fund with the Bank Insurance Fund ("BIF") on January
1, 1999, provided no savings associations are then in existence,
and reallocates payment of the annual Financing Corp. ("FICO")
bond obligation. As part of the legislation, the FDIC imposed a
special one-time assessment of 65.7 basis points to be applied
against all SAIF-insured deposits as of March 31, 1995, in order
to restore the SAIF to the statutorily prescribed 1.25 percent
reserve ratio. The special assessment, which was paid in
November 1996, resulted in a $414,000 pretax charge to the
Association during its first quarter of fiscal 1997. The
assessment reduced the Company's 1997 net income by approximately
$250,000, or $0.32 per share.
Effective January 1, 1997, SAIF members will have the same risk-
based assessment schedule as BIF members. The Association has
effectively paid no assessment for deposit insurance coverage
commencing January 1, 1997. However, all SAIF and BIF
institutions, including the Company, are responsible for sharing
the cost of interest payments on the FICO bonds. The cost will
be an annualized charge of 1.3 basis points for BIF deposits and
6.4 basis points for SAIF deposits.
REPORT OF INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
To the Stockholders and Board of Directors of
Sobieski Bancorp, Inc.:
We have audited the accompanying consolidated statements of
financial condition of Sobieski Bancorp, Inc. and subsidiary as
of June 30, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Sobieski Bancorp, Inc. and subsidiary as of
June 30, 1997 and 1996, and the consolidated results of their
operations and their cash flows for each of the three years in
the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
South Bend, Indiana
August 22, 1997
Sobieski Bancorp, Inc. and Subsidiary
Consolidated Statements Of Financial Condition
as of June 30, 1997 and 1996
ASSETS 1997 1996
Cash, including interest-
bearing deposits in other
financial institutions of
$94,477 and $334,793,
respectively $ 1,251,373 $ 1,258,520
Federal funds sold - 127,000
Certificates of deposit 198,000 198,000
Investment securities,
available-for-sale
(amortized cost of
$1,299,335 and $3,167,813,
respectively) 1,297,148 3,193,784
Investment securities,
held-to-maturity (market
value of approximately
$1,012,900 and $1,497,000,
respectively) 1,000,000 1,500,000
Mortgage-backed securities,
available-for-sale (amortized
cost of $1,790,203 and
$2,383,429, respectively) 1,780,210 2,344,925
Mortgage-backed securities,
held-to-maturity (market
value of approximately
$11,617,500 and $13,424,600,
respectively) 11,929,352 13,806,725
Loans receivable, net 61,134,644 53,114,094
Real estate owned 11,037 -
Federal Home Loan Bank
stock, at cost 636,000 636,000
Property and equipment,
net 2,028,310 2,110,699
Other assets 466,672 557,044
Deferred income taxes - 15,960
Total assets $81,732,746 $ 78,862,751
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $59,386,630 $ 61,226,683
Federal Home Loan Bank
advances 9,500,000 3,000,000
Advances from borrowers
for taxes and insurance 260,439 264,531
Accrued income taxes 80,628 129,305
Accrued interest and
other expenses 132,077 188,042
Deferred income taxes 12,177 -
Total liabilities 69,371,951 64,808,561
Commitments (Notes L )
Stockholders' equity:
Preferred stock, $.01
par value: 500,000 shares
authorized; none issued - -
Common stock, $.01 par
value: 3,500,000 shares
authorized; 966,000
shares issued 9,660 9,660
Additional paid-in
capital 9,147,176 9,099,156
Retained earnings,
substantially
restricted 6,670,543 6,538,602
Net unrealized depreciation
of securities
available-for-sale (7,356) (7,571)
15,820,023 15,639,847
Less: Treasury stock,
at cost, 206,368 and
71,940 shares,
respectively 2,879,878 909,457
Unallocated Employee
Stock Ownership Plan
shares;57,935 and
67,620 shares,
respectively 579,350 676,200
Total stockholders'
equity 12,360,795 14,054,190
Total liabilities
and stockholders'
equity $ 81,732,746 $ 78,862,751
See accompanying notes to consolidated financial statements.
Sobieski Bancorp, Inc. and Subsidiary
Consolidated Statements Of Income
for the years ended June 30, 1997, 1996 and 1995
1997 1996 1995
Interest income:
Loans $ 4,433,288 $ 4,012,220 $ 4,079,101
Mortgage-backed
securities 944,274 962,464 835,981
Interest-bearing
deposits 43,665 267,071 179,173
Investments and
other 281,103 222,913 200,800
Total interest
income 5,702,330 5,464,668 5,295,055
Interest expense:
Interest on
deposits 2,782,319 3,016,692 2,798,112
Interest on
borrowings 348,563 12,896 -
Total interest
expense 3,130,882 3,029,588 2,798,112
Net interest
income 2,571,448 2,435,080 2,496,943
Provision for
loan losses - - 9,743
Net interest
income after
provision for
loan losses 2,571,448 2,435,080 2,487,200
Non-interest
income:
Fees and
service charges 156,443 162,303 139,361
Gain on sale
of securities 63,535 - -
Other income 5,567 9,247 30,469
Total non-interest
income 225,545 171,550 169,830
Non-interest expenses:
Compensation
and benefits 964,207 962,655 775,672
Occupancy and
equipment 278,747 278,576 173,084
Federal deposit
insurance premiums 495,872 143,583 152,580
Advertising and
promotion 30,666 41,349 120,967
Service bureau
expense 98,555 107,575 92,929
Other operating
expenses 500,257 524,813 419,263
Total non-interest
expenses 2,368,304 2,058,551 1,734,495
Income before
income taxes 428,689 548,079 922,535
Income taxes 181,500 212,800 372,400
Net income $ 247,189 $ 335,279 $ 550,135
Earnings per
common share(1)$ .32 $ .39 $ .09
(1) For 1995, earnings per common share is for the period
subsequent to the initial offering of common
stock which was completed on March 30, 1995.
See accompanying notes to consolidated financial statements.
Sobieski Bancorp, Inc. and Subsidiary
Consolidated Statements Of Stockholders' Equity
for the years ended June 30, 1997, 1996 and 1995
<TABLE> Net
Unrealized
Appreciation
Unallocated
(Depreciation)
Employee Total
Additional of Securities
Stock Stock-
Common Paid-in Retained Available- Treasury
Ownership holders'
Stock Capital Earnings For-Sale Stock
Plan Shares Equity
<S> <C> <C> <C> <C> <C> <C>
<C>
Balance, July 1, 1994 $ - $ - $5,653,188 $ - $ - $
- - $ 5,653,188
Net income - - 550,135 - -
- - 550,135
Proceeds from issuance
of common stock,
net of expenses 9,660 9,079,243 - - -
(772,800) 8,316,103
Common stock committed
to be released for allocation
to Employee Stock Ownership
Plan participants - 1,800 - - -
32,200 34,000
Net unrealized appreciation
of securities available-
for-sale - - - 19,154 -
- - 19,154
Balance, June 30, 1995 9,660 9,081,043 6,203,323 19,154 -
(740,600) 14,572,580
Net income - - 335,279 - -
- - 335,279
Purchase of treasury
stock, 71,940 shares - - - - (909,457)
- - (909,457)
Common stock committed
to be released for allocation
to Employee Stock Ownership
Plan participants - 18,113 - - -
64,400 82,513
Net unrealized depreciation
of securities available-
for-sale - - - (26,725) -
- - (26,725)
Balance, June 30, 1996 9,660 9,099,156 6,538,602 ( 7,571)
(909,457)(676,200) 14,054,190
Net income - - 247,189 - -
- - 247,189
Cash dividends ($.14
per share) - - (115,248) - -
- - (115,248)
Purchase of treasury
stock, 137,600 shares - - - - (2,011,403)
- - (2,011,403)
Common stock committed
to be released for allocation
to Employee Stock Ownership
Plan participants - 41,495 - - -
96,850 138,345
Treasury stock issued to
vested Recognition and
Retention Plan
participants - 6,525 - - 40,982
- - 47,507
Net unrealized
appreciation of securities
available-for-sale - - - 215 -
- - 215
Balance,
June 30, 1997 $ 9,660 $ 9,147,176 $6,670,543 $(7,356) $(2,879,878)
$(579,350) $12,360,795
</TABLE>
See accompanying notes to consolidated financial statements.
Sobieski Bancorp, Inc. and Subsidiary
<TABLE>
Consolidated Statements of Cash Flows
for the years ended June 30, 1997, 1996 and 1995
1997 1996
1995
Cash flows provided by
(used in) operating activities:
<S> <C> <C>
<C>
Net income $ 247,189 $ 335,279
$ 550,135
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 111,156 106,811
44,769
Provision for loan losses - -
9,743
Provision for losses on
real estate owned - -
13,632
(Gain) loss on disposition
of equipment 1,165 775
(7,300)
(Gain) loss on sale of real
estate owned, net - 3,865
(8,611)
(Gain) on sale of securities (63,535) -
- -
Deferred income taxes 28,000 39,500
24,000
Contribution to Employee
Stock Ownership Plan 138,345 82,513
34,000
Contribution to Recognition
and Retention Plan 47,507 -
- -
Amortization of premiums
and accretion of discounts,
net 61,944 81,062
83,053
Amortization of deferred
loan fees (144,532) (99,110)
(77,679)
Loan fees collected, net
of costs - 750
7,174
(Increase) decrease in
other assets 90,372 (17,118)
(50,484)
Increase (decrease) in
accrued income taxes (48,677) 114,240
(233,600)
Increase (decrease) in
accrued interest and
other expenses (55,965) 6,478
51,440
Net cash provided by
operating activities 412,969 655,045
440,272
Cash flows provided by
(used in) investing activities:
Purchase of certificates
of deposit - (198,000)
(694,000)
Proceeds from maturity
of certificates of deposit - 793,000
- -
Proceeds from maturity
of investment securities 1,500,000 -
- -
Proceeds from sales of
investment securities 938,028 -
- -
Proceeds from sales of
mortgage-backed securities 289,121 -
- -
Purchase of investment
securities (12,415) (2,150,574)
(49,650)
Purchase of mortgage-
backed securities - (3,018,040)
(1,270,445)
Principal reductions of
mortgage-backed
securities 2,125,933 2,136,444
1,840,372
Net (increase) decrease
in loans made to customers
and principal collections
on loans (7,887,055) (2,906,404)
1,069,633
Proceeds from sale of
real estate owned - 15,197
112,623
Proceeds from disposition
of equipment - -
7,300
Purchase of property and
equipment (29,932) (73,383)
(1,948,254)
Purchase of Federal Home
Loan Bank stock - -
(2,800)
Net cash (used in)
investing activities (3,076,320) (5,401,760)
(935,221)
Cash flows provided by
(used in) financing activities:
Net decrease in deposits (1,840,053) (1,914,965)
(3,950,208)
Increase(decrease) in
advances from borrowers
for taxes and insurance (4,092) (71,954)
63,541
Federal Home Loan Bank
advances 6,900,000 3,000,000
- -
Federal Home Loan Bank
payments (400,000) -
- -
Purchase of treasury stock(2,011,403) (909,457)
- -
Proceeds from issuance of
common stock, net - -
8,316,103
Cash dividends (115,248) -
- - .
Net cash provided by
financing activities 2,529,204 103,624
4,429,436
Increase (decrease)
in cash and cash
equivalents (134,147) (4,643,091)
3,934,487
Cash and cash
equivalents, beginning
of year 1,385,520 6,028,611
2,094,124
Cash and cash
equivalents, end of
year $ 1,251,373 $ 1,385,520
$ 6,028,611
See accompanying notes to consolidated financial
statements.
</TABLE>
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements
A. CONVERSION AND ISSUANCE OF COMMON STOCK.
On October 4, 1994, the Board of Directors of Sobieski Federal
Savings and Loan Association of South Bend (the "Association")
adopted a plan of conversion to convert the Association from a
federally chartered mutual savings and loan association to a
federally chartered stock savings and loan association (the
"Conversion"). The Association obtained the required regulatory
approval for the Conversion in February 1995 and on March 22,
1995 the plan of conversion was approved by a majority of the
votes eligible to be cast by the members of the Association.
Sobieski Bancorp, Inc. (the "Company") was organized as a
Delaware corporation in December 1994 for the purpose of
acquiring all of the issued and outstanding capital stock of the
Association to be issued in the Conversion.
In connection with the Conversion, on March 30, 1995 the Company
sold 966,000 shares of its common stock, par value $.01 per
share, including 77,280 shares acquired by the newly formed
Employee Stock Ownership Plan ("ESOP"), for $10 per share. Net
proceeds from the sale, after deducting direct issuance costs and
expenses of $571,000, aggregated $9,089,000 of which $4,542,500
was used to purchase all of the capital stock of the Association
and $772,800 was used to fund the purchase of 77,280 shares of
the Company's common stock by the ESOP.
The Company's Articles of Incorporation authorize the issuance of
4,000,000 shares of capital stock, consisting of 3,500,000 shares
of common stock, par value $.01 per share, and 500,000 shares of
preferred stock, par value $.01 per share. As of June 30, 1996
and 1995, 966,000 shares of the Company's common stock were
issued and all of the Company's preferred stock is unissued.
At the time of the Conversion, the Association established a
liquidation account in an amount equal to the Association's
retained earnings as of September 30, 1994. The liquidation
account will be maintained for the benefit of depositors, as of
the eligibility record date and supplemental eligibility record
date, who continue to maintain their deposits with the
Association after the Conversion. In the event of a complete
liquidation (and only in such event), each eligible depositor
will be entitled to receive a liquidation distribution from the
liquidation account, in the proportionate amount of the then
current adjusted balance for deposits then held, before any
liquidation distribution may be made with respect to the
stockholders.
Current regulations allow the Company to pay dividends on its
common stock if its regulatory capital would not thereby be
reduced below the amount then required for the aforementioned
liquidation account. Also, capital distribution regulations
limit the Company's ability to make capital distributions which
include dividends, stock redemptions, repurchases and other
transactions charged to the capital account based on its capital
level and supervisory condition. Federal regulations also
preclude any repurchase of the stock of the Company for three
years after conversion except for
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued
A. CONVERSION AND ISSUANCE OF COMMON STOCK, Concluded.
purchases of qualifying shares of a director and repurchases
pursuant to an offer made on a pro-rata basis to all stockholders
and with prior approval of the Office of Thrift Supervision or
pursuant to an open-market stock repurchase program with certain
regulatory criteria.
B. ACCOUNTING POLICIES.
Organization
The Association is a federally chartered stock savings and loan
association and as a member of the Federal Home Loan Bank System
("FHLB") is required to maintain an investment in the capital
stock of the FHLB.
Deposit accounts are insured by the Federal Deposit Insurance
Corporation ("FDIC") within certain limitations. An annual
premium is required by the FDIC for the insurance of such deposit
accounts.
On September 30, 1996, Congress passed into law a
recapitalization plan for the Savings Association Insurance Fund,
the insurance fund covering deposits of savings institutions.
The recapitalization plan provided for a special one-time
assessment of .66% on certain deposits of savings institutions as
of March 31, 1995. The Association's special assessment amounted
to approximately $414,000 and is included in federal deposit
insurance premiums in the consolidated statement of income for
the year ended June 30, 1997. Future deposit insurance premiums
decreased to approximately .06% from the .23% of deposits
previously paid by the Association.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and the Association, collectively
referred to herein as "Sobieski". All significant intercompany
accounts and transactions have been eliminated. The initial
capitalization of the Company and its acquisition of the
Association took place on March 30, 1995 as more fully described
in Note A. The acquisition of the Association has been accounted
for at historical cost in a manner similar to that utilized in a
pooling of interest.
Securities
Securities are classified as either held-to-maturity and reported
at amortized cost, trading and reported at fair value (with
unrealized holding gains and losses included in current
earnings), or available-for-sale and reported at fair value (with
unrealized holding gains and losses excluded from current
earnings and reported as a separate
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued
B. ACCOUNTING POLICIES, Continued.
component of stockholders' equity). The Association had no
trading securities at June 30, 1997 and 1996.
Gains and losses on all securities transactions are recognized
when sold as determined by the identified certificate method.
Loans Receivable
Loans receivable are stated at the unpaid principal balances,
less deferred loan fees and an allowance for loan losses.
Sobieski follows the policy of charging estimated losses on loans
to the provision for loan losses in the period in which such
losses become evident.
The allowance for loan losses is an estimate used by management
in the preparation of Sobieski's financial statements. The
allowance is maintained at a level considered by management to be
adequate to provide for probable loan losses inherent in the
portfolio. Management's evaluation is based on a continuing
review of the loan portfolio and includes consideration of its
actual loan loss experience, the present and prospective
financial condition of the borrowers, balance of the loan
portfolio, and general economic conditions. An economic slow-
down in the geographic area could adversely effect the ability of
borrowers to make scheduled monthly payments and the duration of
such an economic slow-down would increase the possibility of
credit losses.
Revenue Recognition
Interest on loans is included in interest income on the accrual
method over the terms of the loans based upon principal balances
outstanding. Sobieski discontinues the accrual of interest income
on loans when payment of interest is more than 90 days
delinquent.
Loan origination and commitment fees and direct loan origination
costs are deferred, and the net deferred amount is amortized to
interest income over the contractual life of the related loans as
an adjustment to the yield.
Property And Equipment
Property and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization are
determined using the straight-line method based on the estimated
useful lives of the applicable assets which range from 3 to 39
years.
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued
B. ACCOUNTING POLICIES, Continued.
Real Estate Owned
Real estate acquired in settlement of loans is recorded at the
lower of cost (the unpaid principal balance of the loan at the
date of acquisition plus foreclosure and other related costs) or
fair market value at the date of acquisition and is subsequently
carried at the lower of cost or net realizable value. Costs of
improvements made to facilitate sale are capitalized; costs of
holding the property are charged to expense. It is Sobieski's
policy to provide valuation allowances for estimated losses
whenever, based upon management's evaluation, a significant and
permanent decline in value occurs.
Income Taxes
The Company and the Association file consolidated federal and
state income tax returns.
The Small Business Job Protection Act of 1996 (the "Act")
repealed the special tax bad debt deduction available to savings
institutions. The Association was required to change its tax bad
debt reserve method to the specific charge-off method under
Internal Revenue Code Section 585 effective for its taxable year
ended June 30, 1997. This change in method will result in
taxable income of approximately $295,000, representing the excess
of the Association's tax bad debt reserve at June 30, 1996 over
the reserve that arose in tax years beginning before July 1, 1988
(base year amount). This additional taxable income is reportable
for income tax purposes ratably over a six-year period. There
was no effect of this change on the Company's net income for the
year ended June 30, 1997 as a deferred tax liability had
previously been established for the tax effect of the excess tax
bad debt reserve over the base year amount.
The Association's retained earnings as of June 30,1997 includes
the income tax benefit of approximately $875,000 of tax bad debt
deductions, representing the base year amount, for which no
deferred income taxes have been provided.
Earnings Per Common Share
Earnings per common share for periods subsequent to the
completion of the Company's initial stock offering on March 30,
1995 is calculated by dividing net income for the period by the
weighted average number of common shares outstanding. The
Company accounts for the shares of common stock acquired by the
ESOP and the restricted shares awarded under the Recognition and
Retention Plan ("RRP") in accordance with Statement of
Position 93-6, "Employers' Accounting for Employee Stock
Ownership Plans," which prescribes that shares held by the ESOP
and the restricted shares awarded under the RRP are not
considered in the weighted average number of
shares outstanding until such shares are committed
for
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued.
B. ACCOUNTING POLICIES, Concluded.
allocation to an ESOP participant's individual account or vested,
in the case of the RRP. Accordingly, the weighted average number
of common shares outstanding for the year ended June 30, 1997 was
770,098 (864,621 shares for the year ended June 30, 1996 and
888,755 shares for the period March 30, 1995 through June 30,
1995). No adjustment has been made to the weighted average
number of common shares outstanding to reflect outstanding stock
options since the effect is not material.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
Statements Of Cash Flows
For purposes of the consolidated statements of cash flows,
Sobieski considers cash and federal funds sold to be cash and
cash equivalents.
Supplemental disclosures of cash flow information and noncash
investing and financing activities for the years ended June 30,
1997, 1996 and 1995 are as follows:
1997
1996 1995
Supplemental disclosures of cash flow
information:
Cash paid during the years for:
Interest $ 3,154,873 $3,033,648 $2,784,152
Income taxes 202,177 59,060 582,000
Noncash investing and financing
activities:
Loans transferred to real estate
owned 11,037 - 32,696
Common stock issued to
ESOP - - 772,800
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued
C. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES.
The amortized cost and estimated aggregate fair value of
investment securities and mortgage-backed securities at June 30,
1997 are as follows:
Available-For-Sale
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Aggregate
Cost Gains Losses Fair Value
Debt securities:
U.S. Treasury
obligations $ 1,299,335 $ 111 $ (2,298) $1,297,148
Mortgage-backed
securities 1,790,203 10,609 (20,602) 1,780,210
Total $ 3,089,538 $10,720 $ (22,900) $ 3,077,358
Held-To-Maturity
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Aggregate
Cost Gains Losses Fair Value
Debt securities:
U. S. Treasury
obligations $ 1,000,000 $ 12,900 $ - $ 1,012,900
Mortgage-backed
securities 11,929,352 27,288 (339,140) 11,617,500
Total $12,929,352 $ 40,188 $ (339,140) $ 12,630,400
The amortized cost and estimated aggregate fair value of debt
securities and mortgage-backed securities at June 30, 1997, by
contractual maturity (except for mortgage-backed securities), are
shown in the following table. Expected maturities will differ
from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment
penalties.
Available-For-Sale Held-To-Maturity
Estimated Estimated
Amortized Aggregate Amortized Aggregate
Cost Fair Value Cost Fair Value
Due in one
year or
less $ 801,253 $ 799,938 $ - $ -
Due after
one year through
five years 498,082 497,210 - -
Due after
five years - - 1,000,000 1,012,900
Mortgage-backed
securities 1,790,203 1,780,210 11,929,352 11,617,500
Total $ 3,089,538 $ 3,077,358 $12,929,352 $12,630,400
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued
C. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES,
Concluded.
The amortized cost and estimated aggregate fair value of
investment securities and mortgage-backed securities at June 30,
1996 are as follows:
Available-For-Sale
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Aggregate
Cost Gains Losses Fair Value
Debt securities:
U.S. Treasury
obligations $2,308,353 $ - $ (23,283) $ 2,285,070
Mortgage-
backed
securities 2,383,429 1,618 (40,122) 2,344,925
Other securities:
Federated Intermediate
Government
Trust Fund
#47 859,460 49,254 - 908,714
Total $5,551,242 $ 50,872 $ (63,405) $ 5,538,709
Held-To-Maturity
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Aggregate
Cost Gains Losses Fair Value
Debt securities:
U. S. Treasury
obligations$ 1,500,000 $ 3,323 $ (6,323) $ 1,497,000
Mortgage-backed
securities 13,806,725 - (382,125) 13,424,600
Total $15,306,725 $ 3,323 $(388,448) $ 14,921,600
Purchases of available-for-sale securities for the years ended
June 30, 1997, 1996 and 1995 totaled $12,415, $2,621,645 and
$49,650, respectively. Purchases of held-to-maturity securities
for the years ended June 30, 1997, 1996 and 1995 totaled $0,
$2,546,969 and $1,270,445, respectively. Proceeds from the sales
of available-for-sale securities for the year ended June 30, 1997
totaled $1,227,149, with gross gains of $63,535 realized on those
sales. There were no sales of investment securities or mortgage-
backed securities during the years ended June 30, 1996 and 1995.
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued
D. LOANS RECEIVABLE.
Loans receivable consisted of the following:
June 30,
1997 1996
One-to-four family
mortgage loans $ 55,714,150 $ 48,748,883
Construction and
commercial mortgage
loans 3,928,023 2,580,066
Share loans 146,561 176,379
Small Business
Administration pass-through
certificates 2,454,856 2,781,500
62,243,590 54,286,828
Less: Undisbursed
portion of loans in
process 882,268 801,524
Allowance for loan
losses 200,000 200,000
Deferred loan fees 26,678 171,210
Loans receivable, net $ 61,134,644 $ 53,114,094
Certain directors, executive officers and their families have
loans with Sobieski. Such loans, exclusive of those not exceeding
$60,000 in the aggregate to any such persons, aggregated
approximately $145,000 at June
30, 1997 (none at June 30, 1996).
The following is a summary of activity in the allowance for loan
losses:
Years Ended June 30,
1997 1996 1995
Balance,
beginning
of year $ 200,000 $ 200,000 $ 200,000
Provision
charged to
expense - - 9,743
Charge-offs - - (9,743)
Balance, end
of year $ 200,000 $ 200,000 $ 200,000
Nonaccrual loans totaled approximately $126,000, $90,000 and
$41,000 at June 30, 1997, 1996 and 1995, respectively.
E. PROPERTY AND EQUIPMENT.
Property and equipment and related accumulated depreciation and
amortization consisted of the following:
June 30,
1997 1996
Land $ 169,518 $ 162,893
Office buildings 1,696,031 1,686,978
Leasehold
improvements 66,927 68,396
Furniture and
equipment 580,622 800,672
2,513,098 2,718,939
Less, Accumulated
depreciation
and amortization 484,788 608,240
Property and
equipment, net $ 2,028,310 $ 2,110,699
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued
F. OTHER ASSETS.
Other assets consisted of the following:
June 30,
1997 1996
Accrued interest receivable:
Loans $ 300,583 $ 290,589
Mortgage-backed securities 92,092 110,308
Investment securities 23,004 42,057
Interest-bearing deposits 963 945
Prepaid expenses and other 50,030 113,145
Total $ 466,672 $ 557,044
G. DEPOSITS.
Deposits consisted of the following:
June 30,
1997 1996
Percent Percent
Amount of Total Amount of Total
NOW accounts, 2.75% $ 3,875,715 6.5% $ 2,453,936 4.0%
Money market
accounts, 2.75-3.00% 2,171,804 3.7 2,271,719 3.7
Passbook accounts,
2.50% 15,170,287 25.5 15,908,610 26.0
Certificates of deposit
and IRA accounts:
3.51-5.00% 9,039,019 15.2 8,941,931 14.6
5.01-6.00% 18,774,255 31.6 17,936,185 29.3
6.01-8.00% 10,355,550 17.5 13,714,302 22.4
38,168,824 64.3 40,592,418 66.3
Total $ 59,386,630 100.0% $61,226,683 100.0%
The weighted average interest rates on certificates of deposit
and IRA accounts were 5.62% and 5.74% at June 30, 1997 and 1996,
respectively.
The aggregate amount of certificates of deposit and IRA accounts
with a minimum denomination of $100,000 was approximately
$2,235,600 and $1,856,000 at June 30, 1997 and 1996,
respectively. Deposits in denominations greater than $100,000 are
in excess of federally insured limits.
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued
G. DEPOSITS, Concluded.
At June 30, 1997, scheduled maturities of certificates of deposit
and IRA accounts for the years ending on June 30 are as follows:
1998 1999 2000 2001 2002
3.51-5.00%$ 9,039,019 $ - $ - $ - $ -
5.01-6.00% 8,832,677 4,711,613 3,334,284 1,801,268 94,413
6.01-8.00% 1,000,489 8,748,320 606,741 - -
$18,872,185 $13,459,933 $ 3,941,025 $1,801,268 $94,413
At June 30, 1996, scheduled maturities of certificates of deposit
and IRA accounts for the years ending on June 30 are as follows:
1997 1998 1999 2000 2001 2002
3.51-5.00%$7,263,637 $1,670,354 $ - $ - $ - $7,940
5.01-6.00% 9,733,202 4,638,156 646,265 2,918,562 - -
6.01-8.00% 5,488,889 1,204,287 6,410,646 610,480 - -
$22,485,728 $7,512,797 $7,056,911 $3,529,042 $- $7,940
Interest expense on deposits is summarized as follows:
Years Ended June 30,
1997 1996 1995
NOW and money
market accounts$ 117,653 $ 128,385 $ 146,196
Passbook accounts 373,848 456,114 507,356
Certificates of
deposit and
IRA accounts 2,290,818 2,432,193 2,144,560
Total $ 2,782,319 $ 3,016,692 $ 2,798,112
H. FEDERAL HOME LOAN BANK ADVANCES.
At June 30, 1997 and 1996, Sobieski had advances from the Federal
Home Loan Bank of Indianapolis totaling $9,500,000 and
$3,000,000, respectively, with variable and fixed interest rates
ranging from 5.75% to 6.97%, respectively, as of June 30, 1997.
Advances outstanding at June 30, 1997 mature from July 1997
through June 1998.
The advances are collateralized by all mortgage loans and
mortgage-backed securities issued or guaranteed by the Federal
Home Loan Mortgage Corporation, the Federal National Mortgage
Association or the Government National Mortgage Association.
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued
I. INCOME TAXES.
Income taxes consist of the following:
Years Ended June 30,
1997 1996 1995
Federal:
Current $ 106,500 $ 132,300 $260,400
Deferred 28,000 39,500 24,000
134,500 171,800 284,400
State 47,000 41,000 88,000
Total $ 181,500 $ 212,800 $ 372,400
The provision for income taxes differs from the expected amounts
(computed by applying the federal statutory corporate income tax
rate of 34% to income before income taxes) as follows :
Years Ended June 30,
1997 1996 1995
Computed statutory
tax provision $ 145,800 $ 186,400 $ 313,700
State income
taxes, net of
federal income
tax benefit 31,000 27,100 58,100
Non-deductible
portion of ESOP
contributions 14,100 7,200 700
(Gain) loss on
sale of real estate
owned, net - 1,300 (2,900)
Business meals and
entertainment 5,300 5,600 9,600
Other, net (14,700) (14,800) (6,800)
$181,500 $212,800 $372,400
Effective tax rate 42.3% 38.8% 40.4%
The components of the net deferred tax asset(liability) at June
30, 1997 and 1996 were as follows :
June 30,
1997 1996
Deferred tax asset (liability):
Deferred loan fees $ 4,600 $ 51,000
Allowance for loan losses 68,000 68,000
Special tax bad debt deductions (83,700) (100,000)
Depreciation and amortization (11,500) 4,000
Net unrealized depreciation of
securities available-for-sale 4,823 4,960
Other, net 5,600 (12,000)
Net deferred tax asset(liability) $ (12,177) $ 15,960
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued
J. EMPLOYEE BENEFIT PLANS.
The Association has a defined contribution retirement plan under
Section 401(k) of the Internal Revenue Code. Substantially all
employees of the Association are eligible to participate in the
plan. Under the plan, the Association matches a percentage of
participating employee contributions and may also provide an
additional annual discretionary contribution. Retirement plan
expense for the years ended June 30, 1997, 1996 and 1995 was
$10,312, $13,383 and $9,262, respectively.
Effective March 30, 1995, the Association established the ESOP
for the benefit of the Association's employees who meet certain
eligibility requirements including having completed 1,000 hours
of credited service within a twelve-month period with the
Association. The ESOP trust acquired 77,280 shares of the
Company's common stock in the Company's initial public offering
with proceeds from a loan from the Company. The Association makes
cash contributions to the ESOP on a semi-annual basis sufficient
to enable the ESOP trust to make its required debt service
payments to the Company.
The promissory note payable to the Company by the ESOP trust
bears interest at 7.78% with interest and principal payments due
in twenty-four (24) consecutive semi-annual installments on the
last day of June and December commencing June 30, 1995 and
continuing until December 31, 2006. The promissory note is
collateralized by the unallocated shares of the Company's common
stock held by the ESOP.
As the ESOP promissory note is repaid, shares of the Company's
common stock are released from collateral and allocated to
qualified ESOP participants based on the proportion of debt
service paid during the period. The Company accounts for the ESOP
in accordance with Statement of Position 93-6. Accordingly, the
unallocated shares pledged as collateral are reported as a
reduction of stockholders' equity in the consolidated statements
of financial condition. As shares are committed for release from
collateral, the Association records contribution expense equal to
the average market value of the released shares, and the released
shares become outstanding for earnings per common share
computations. Contribution expense related to the ESOP was
$138,345, $82,513 and $34,000 for the years ended June 30, 1997,
1996 and 1995, respectively.
Following is a summary of shares held by the ESOP trust as of
June 30, 1997:
Allocated shares 19,345
Unreleased shares 57,935
Total ESOP shares 77,280
Fair value of unreleased shares at
June 30, 1997 $ 854,541
On October 25, 1995, the stockholders of the Company ratified the
Company's adoption of the Recognition and Retention Plan ("RRP")
and the 1995 Stock Option and Incentive Plan (the "Stock Option
Plan").
Under the RRP, an aggregate of 38,640 shares of the Company's
common stock have been reserved for the awarding of restricted
shares to the Company's directors, officers and employees.
Awards of common stock granted under the RRP vest in five equal
annual installments beginning on the first anniversary of
stockholder approval of the RRP and are subject to forfeiture in
the event the recipient terminates employment with the Company
for any reason other than death or disability. RRP shares become
free of all restrictions and are distributed to recipients on the
date on which they vest. As of June 30, 1997 and 1996, an
aggregate of 21,452 and 19,162 shares, respectively, of the
Company's common stock, with a market value of $249,714 and
$208,600, respectively, at the respective dates of grant,
have been
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued
J. EMPLOYEE BENEFIT PLANS, Concluded.
awarded under the RRP. Contribution expense recognized for the
years ended June 30, 1997 and 1996 related to the award of RRP
shares was $48,295 and $31,095, respectively.
Pursuant to the Stock Option Plan, an aggregate of 96,600 shares
of the Company's common stock have been reserved for the granting
of stock options and other long-term incentive awards to the
Company's directors, officers and employees. Incentive and non-
qualified stock options may be granted under the Stock Option
Plan at exercise prices of not less than the fair market value of
the Company's common stock at the date of grant, become
exercisable at the rate of 20% per year commencing on the first
anniversary of the date of grant and have terms not exceeding ten
years.
The following is a summary of the activity with respect to
Sobieski's stock option plan for the years ended June 30, 1996
and 1997.
Weighted-
Average
Exercise
Number of Price
Shares Per Share
Outstanding, July 1, 1995 - $ -
Granted 42,480 12.75
Outstanding, June 30, 1996 42,480 12.75
Granted 19,320 12.50
Canceled (9,000) 12.75
Outstanding, June 30, 1997 52,800 12.65
At June 30, 1997, options exercisable under the Company's Stock
Option Plan totaled 3,348 shares and had a weighted-average
exercise price per share of $12.75. There were no options
exercisable at June 30, 1996. For options outstanding at June
30, 1997, the exercise price per share ranged from $12.50 to
$12.75 and the weighted-average remaining contractual life of the
options was 8.6 years. As of June 30, 1997, 43,800 shares of
common stock were reserved for future option grants under the
Company's Stock Option Plan compared to 54,120 shares of June 30,
1996.
Sobieski adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting For Stock-
Based Compensation" ("SFAS No. 123"), effective July 1, 1996.
For the years ended June 30, 1997 and 1996, pro forma net income
and earnings per share, reported as if compensation expense had
been recognized under the fair value provisions of SFAS No. 123,
would have been approximately $225,000, or $.29 per share, and
$319,000, or $.37 per share, respectively. The significant
assumptions used in the calculation of the Black-Scholes value of
Sobieski's stock options were as follows:
Risk free interest rate 6.25% Volatility rate 20%
Expected life 7 years Expected dividends 2%
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued
K. REGULATORY CAPITAL.
The Association is subject to various regulatory capital
requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material
effect on the Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Association must meet specific capital
guidelines that involve quantitative measures of the
Association's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The
Association's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Association to maintain minimum amounts and
ratios of total and Tier I capital, as defined in the
regulations, to risk-weighted assets, as defined, and of Tier I
capital to average assets, as defined. As of June 30, 1997, the
most recent notification from the Office of Thrift Supervision
categorized the Association as well capitalized under the
regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Association must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios. There are no conditions or events since that
notification that management believes have changed the
Association's category.
The following represents a reconciliation between the
Association's stockholder's equity under generally accepted
accounting principles to regulatory capital at June 30, 1997:
Stockholder's equity $ 9,018,312
Add: Net unrealized depreciation of
securities available-for-sale 7,356
Tangible and Tier I capital 9,025,668
Add: Allowance for loan losses 200,000
Total risk-based capital $ 9,225,668
The following are details of the Association's regulatory capital
position and the related capital requirements as of June 30,
1997. Sobieski's consolidated amounts and ratios do not differ
materially from the Association's capital amounts and ratios.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual AdequacyPurposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
Total Capital $9,226 27.68 $ 2,666 > 8.0% $3,332 > 10%
(to Risk-Weighted Assets)
Tier I Capital 9,026 27.08 1,333 > 4.0% 1,999 > 6.0%
(to Risk-Weighted Assets)
Tier I Capital 9,026 11.37 3,173 > 4.0% 3,966 > 5.0%
(to Adjusted Assets)
Tangible Capital9,026 11.37 2,380 > 3.0% N/A N/A
(to Tangible Assets)
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued
L. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK.
Sobieski is a party to loan commitments with off-balance-sheet
risk in the normal course of business to meet the financing needs
of its customers. The loan commitments involve, to varying
degrees, elements of credit and interest rate risk in excess of
the amount recognized in the consolidated statements of
financial condition.
Sobieski's exposure to credit loss in the event of nonperformance
by the parties to the loan commitments is represented by the
contractual dollar amounts of those commitments ($1,769,000 and
$712,000 at June 30, 1997 and 1996, respectively). Sobieski uses
the same credit policies in making loan commitments as it does
for on-balance-sheet instruments.
Loan commitments are agreements to lend to a customer as long as
there is no violation of any condition established in the
contract. Loan commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Sobieski evaluates each
customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by Sobieski upon
extension of credit, is based on management's credit evaluation
of the borrower. Collateral held consists primarily of the real
estate being financed.
M. CONCENTRATION OF CREDIT RISK.
Substantially all of Sobieski's loan activity is with customers
located in St. Joseph County in Northern Indiana with a major
concentration in single-family residential lending.
Generally, loans are collateralized by real estate. The loans are
expected to be repaid from cash flow or proceeds from the sale of
selected assets of the borrowers. Sobieski's policy for requiring
collateral is dependent upon management's credit evaluation of
the borrower.
The mortgage-backed securities held by Sobieski consist primarily
of FNMA, GNMA and FHLMC pass-through certificates which are
issued by those respective agency programs, as sponsored by the
United States Government.
Interest-bearing deposits in other financial institutions consist
principally of deposits with the Federal Home Loan Bank of
Indianapolis.
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued
N. FAIR VALUE OF FINANCIAL INSTRUMENTS.
Fair value disclosures of financial instruments are made to
comply with the requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial
Instruments."
The estimated fair values of Sobieski's financial instruments as
of June 30, 1997 and 1996 are as follows:
Carrying Estimated
Amount Fair Value
1997 1996 1997 1996
Assets:
Cash and cash
equivalents $ 1,251,373 $ 1,385,520 $ 1,251,373 $1,385,520
Certificates
of deposit 198,000 198,000 198,000 198,000
Investment
securities 2,297,148 4,693,784 2,310,048 4,690,784
Mortgage-
backed
securities 13,709,562 16,151,650 13,397,710 15,769,525
Loans
receivable,
net 61,134,644 53,114,094 61,521,000 53,095,000
Federal Home
Loan Bank
stock 636,000 636,000 636,000 636,000
Liabilities:
Deposits 59,386,630 61,226,683 59,508,000 61,442,000
Federal Home Loan
Bank advances 9,500,000 3,000,000 9,511,000 3,000,000
Contract
or Estimated
Notional Unrealized
Amount Gain
1997 1996 1997 1996
Off-balance-sheet
financial instruments:
Loan commitments
- fixed rate $1,331,000 $ 610,000 $ 13,000 $ -
Loan commitments
- adjustable
rate 438,000 102,000 - -
The following methods and assumptions were used to estimate the
fair value of Sobieski's financial instruments.
Cash and cash equivalents, certificates of deposit and Federal
Home Loan Bank stock:
The carrying amounts of cash and cash equivalents, certificates
of deposit and Federal Home Loan Bank stock are reasonable
estimates of their respective fair values.
Investment securities and mortgage-backed securities:
Estimated fair values of investment securities and mortgage-
backed securities are based on quoted market prices, where
available. If quoted market prices are not available, fair
values are estimated using quoted market prices for similar
instruments.
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued
N. FAIR VALUE OF FINANCIAL INSTRUMENTS, Concluded.
Loans receivable:
Fair values are estimated for portfolios with similar financial
characteristics. Loans are segregated by type, such as
residential mortgages, nonresidential mortgages, commercial and
consumer loans. Each loan category is further segmented into
fixed and variable interest categories, with residential mortgage
loans (Sobieski's largest category) further segregated by similar
note rates and maturities. Future cash flows of these loans are
discounted using the current rates at which similar loans would
be made to borrowers with similar credit rating for the same
remaining maturities.
Deposits:
The estimated fair values of passbook and money market accounts
and negotiable orders of withdrawal are determined by discounting
estimated future cash flows using the market rates for similar
deposits. Certificates of deposit and IRA accounts are
segregated by original and remaining term and estimated future
cash flows are discounted using rates currently offered for
certificate and IRA accounts of similar remaining maturity.
Federal Home Loan Bank advances:
The estimated fair values of advances from the Federal Home Loan
Bank of Indianapolis are determined by discounting the future
cash flows of outstanding advances using rates currently
available on advances from the Federal Home Loan Bank of
Indianapolis with similar characteristics.
Loan commitments - fixed rate:
The estimated fair value of commitments to originate fixed-rate
loans is determined based on the difference between current
levels of interest rates and the committed rates. Because
Sobieski's loan commitments expire within 45-60 days of
commitment, the effect of market rate changes on the fair value
of these commitments is not significant.
Loan commitments - adjustable rate:
There is no estimated unrealized gain or loss attributable to
adjustable rate loan commitments due to their adjustable interest
rate feature.
The fair value estimates presented herein are based on pertinent
information available to management as of June 30, 1997 and 1996.
Estimated fair value amounts have been determined by Sobieski
using available market information and a selection from
appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates
presented are not necessarily indicative of the amount Sobieski
could realize in a current market exchange. The use of different
market assumptions and estimation methodologies may have a
material effect on the estimated fair value amounts.
O. PARENT COMPANY FINANCIAL INFORMATION.
The Company was organized to serve as the holding company for the
Association and began operations on March 30, 1995 in conjunction
with the Association's mutual-to-stock conversion and the
Company's initial public offering of its common stock. The
Company's statements of financial condition as of June 30, 1997
and 1996, and its related statements of income and cash flows for
the years ended June 30, 1997 and 1996 and the period from March
30, 1995 through June 30, 1995 are as follows:
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued
O. PARENT COMPANY FINANCIAL INFORMATION, Continued.
STATEMENTS OF FINANCIAL CONDITION
As of June 30, 1997 and 1996
ASSETS 1997 1996
Cash and cash
equivalents $ 24,566 $ 24,573
Loans receivable 3,089,198 3,292,723
Note receivable
from subsidiary 611,800 676,200
Investment in
subsidiary 9,018,312 10,100,080
Other assets 144,179 32,726
Total assets $ 12,888,055 $ 14,126,302
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Note payable to
subsidiary $ 500,000 $ -
Accrued income taxes 14,173 65,829
Other liabilities 13,087 6,283
Total liabilities 527,260 72,112
STOCKHOLDERS' EQUITY:
Preferred stock, $.01
par value: 500,000 shares
authorized; none issued - -
Common stock, $.01 par
value: 3,500,000 shares
authorized; 966,000
shares issued 9,660 9,660
Additional paid-in
capital 9,147,176 9,099,156
Retained earnings,
substantially
restricted 6,670,543 6,538,602
Net unrealized
depreciation of
securities
available-for-sale (7,356) (7,571)
15,820,023 15,639,847
Less: Treasury stock,
at cost, 206,368 and
71,940 shares,
respectively 2,879,878 909,457
Unallocated Employee
Stock Ownership
Plan shares; 57,935
and 67,620
shares, respectively 579,350 676,200
Total stockholders'
equity 12,360,795 14,054,190
Total liabilities and
stockholders' equity $12,888,055 $ 14,126,302
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Continued
O. PARENT COMPANY FINANCIAL INFORMATION, Continued.
STATEMENTS OF INCOME
for the years ended
June 30,1997 and 1996 and
for the period from March 30, 1995
through June 30, 1995
1997 1996 1995
Income:
Interest income
on loans $ 231,082 $ 260,652 $ 67,422
Dividends
received from
subsidiary 1,449,000 217,350 -
Interest on note
receivable from
subsidiary 51,356 56,366 15,031
Other interest
income - 266 11,689
Total income 1,731,438 534,634 94,142
Expenses:
Compensation and
benefits 57,900 63,900 5,475
Occupancy and
equipment 6,000 6,000 1,500
Professional fees 37,349 76,098 10,988
Interest on note
payable to
subsidiary 24,006 - -
Other operating
expenses 48,159 65,800 16,019
Total
expenses 173,414 211,798 33,982
Income before
income taxes and
equity in
undistributed
earnings of
subsidiary 1,558,024 322,836 60,160
Income taxes 43,000 42,000 23,830
Income before
equity in undistributed
earnings of
subsidiary 1,515,024 280,836 36,330
Equity in undistributed
earnings (losses)
of subsidiary (1,267,835) 54,443 513,805
Net income $ 247,189 $ 335,279 $ 550,135
Sobieski Bancorp, Inc. and Subsidiary
Notes To Consolidated Financial Statements, Concluded
O. PARENT COMPANY FINANCIAL INFORMATION, Concluded.
STATEMENTS OF CASH FLOWS
for the years ended
June 30, 1997 and 1996 and
for the period from March 30, 1995
through June 30, 1995
1997 1996 1995
Cash flows from
operating activities:
Net income $ 247,189 $ 335,279 $ 550,135
Adjustments to
reconcile net
income to net
cash provided by
operating activities:
Equity in undistributed
losses (earnings) of
subsidiary 1,267,835 ( 54,443) (513,805)
Decrease (increase)
in other assets (111,453) 2,597 (35,323)
Increase (decrease)
in accrued income
taxes (51,656) 41,999 23,830
Increase (decrease)
in other liabilities 6,804 (4,334) 10,615
Net cash provided by
operating activities 1,358,719 321,098 35,452
Cash flows from
investing activities:
Investment in
common stock of
subsidiary - - (4,542,500)
Payments received on
note receivable from
subsidiary 64,400 96,600 -
Net (increase) decrease
in loans purchased
from subsidiary and
principal collections
on loans 203,525 282,983 (3,575,706)
Net cash provided
by (used in)investing
activities 267,925 379,583 (8,118,206)
Cash flows from
financing activities:
Proceeds from note
payable to
subsidiary 500,000 - -
Proceeds from issuance
of common stock,
net - - 8,316,103
Purchase of treasury
stock (2,011,403) (909,457) -
Cash dividends (115,248) - -
Net cash provided by
(used in) financing
activities (1,626,651) (909,457) 8,316,103
Net increase
(decrease) in cash
and cash equivalents (7) (208,776) 233,349
Cash and cash equivalents:
Beginning of period 24,573 233,349 -
End of period $ 24,566 $ 24,573 $ 233,349
These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
SOBIESKI BANCORP, INC.
STOCKHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 2:00
p.m., South Bend, Indiana, time on October 27, 1997 at the office
of Sobieski Bancorp, Inc., 2930 W. Cleveland Road, South Bend,
Indiana 46628.
STOCK LISTING
Sobieski Bancorp, Inc. common stock is traded on the
NASDAQ System under the symbol "SOBI".
MARKET AND DIVIDEND INFORMATION
The Company's ability to pay dividends to its stockholders is
substantially dependent upon the dividends it receives from
Sobieski Federal. Under current regulations, the Association is
not permitted to pay dividends if its regulatory capital would
thereby be reduced below (1) the amount then required for the
liquidation account established in connection with the
Association's conversion from mutual to stock form, or (2) the
regulatory capital requirements imposed by the Office of Thrift
Supervision. Capital distributions are also subject to certain
limitations based on Sobieski Federal's net income. See Note A of
Notes to Consolidated Financial Statements. The Association's
total capital at June 30, 1997 exceeded the amounts of its
liquidation account and regulatory capital requirements.
The following table sets forth, for the periods shown, the
per share price range of the common stock and dividends paid for
each quarter since the common stock began trading on March 30,
1995. The prices reflect interdealer quotations without retail
markup, markdown or commissions, and do not necessarily represent
actual transactions.
1997 1996 1995
HIGH LOW Dividends HIGH LOW Dividends HIGH LOW Dividends
First
Quarter
$12.75 $11.75 $ - $12.19 $11.00 $ - $ - $ - $ -
Second
Quarter
17.00 12.75 - 13.25 12.00 - - - -
Third
Quarter(1)
15.50 14.00 0.07 13.00 12.00 - 10.25 10.00 -
Fourth
Quarter
15.25 14.50 0.07 13.00 12.00 - 11.13 10.00 -
(1) For 1995, reflects the period from March 30, 1995 through
March 31, 1995.
The stock price information set forth in the table above was
provided by the National Association of Securities Dealers, Inc.
Automated Quotation System. The average of the bid and asked
prices of Sobieski Bancorp, Inc.'s common stock on August 29,
1997 was $16.4375.
At August 29, 1997, there were 759,632 shares of Sobieski
Bancorp, Inc. common stock issued and outstanding and there were
approximately 399 holders of record.
STOCKHOLDER AND GENERAL INQUIRIES:
TRANSFER AGENT:
Thomas F. Gruber
Registrar and Transfer Co.
President and Chief Executive Officer
10 Commerce Drive
Sobieski Bancorp, Inc.
Cranford, NJ 07016
2930 W. Cleveland Road
South Bend, Indiana 46628
(219) 271-8300
ANNUAL AND OTHER REPORTS
A copy of Sobieski Bancorp, Inc.'s Annual Report on Form
10-KSB for the year ended June 30, 1997, as filed with the
Securities and Exchange Commission, may be obtained without
charge by contacting Thomas F. Gruber, President and Chief
Executive Officer, Sobieski Bancorp, Inc., 2930 W. Cleveland
Road, South Bend, Indiana (219) 271-8300.
SOBIESKI BANCORP, INC.
CORPORATE INFORMATION
COMPANY AND BANK ADDRESS
2930 W. Cleveland Road
South Bend, Indiana 46628
Telephone: (219) 271-8300
Fax: (219) 271-3269
BOARD OF DIRECTORS
Thomas F. Gruber Robert J. Urbanski
President and Chief Executive
Officer President and Co-owner,
of Sobieski Bancorp, Inc. and Trans-Tech Electric,Co.
Sobieski Federal Savings and Loan and Chairman of the
Association Board Sobieski Bancorp,
Inc. and Sobieski Federal
Savings and Loan
Association
Joseph F. Nagy Leonard J. Dobosiewicz
Auditor, St. Joseph Maintenance Professional
County
Joseph A. Gorny George J. Aranowski
Owner, Liquor Store Public Accountant
EXECUTIVE OFFICERS
Thomas F. Gruber Marsha Nafrady
President and Chief Executive Secretary and Treasurer
Officer
Arthur Skale Sharon Mrozek
Chief Financial Officer Vice President of
Operations
INDEPENDENT AUDITORS GENERAL COUNSEL
SPECIAL COUNSEL
<TABLE>
<S> <C> <C>
Coopers & Lybrand L.L.P. Kenneth Fedder, Esq. Silver,Freedman & Taff, L.L.P.
4101 Edison Lakes Parkway 205 West Jefferson Blvd.1100 New York Avenue, NW
Suite 200 South Bend, Indiana 46601 Seventh Floor
Mishawaka, Indiana 46545 Washington, DC 20005
</TABLE>
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
State of
Percentage
Parent Subsidiary
Incorporation of Ownership
Sobieski Bancorp, Inc. Sobieski Federal Savings and Loan
United States 100%
Association
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] JUN-30-1997
[PERIOD-END] JUN-30-1997
[CASH] 1251373
[SECURITIES] 16810710
[RECEIVABLES] 61134644
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 0
[PP&E] 2506019
[DEPRECIATION] 0
[TOTAL-ASSETS] 81732746
[CURRENT-LIABILITIES] 69371951
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 9660
[OTHER-SE] 12351135
[TOTAL-LIABILITY-AND-EQUITY] 81732746
[SALES] 0
[TOTAL-REVENUES] 5927875
[CGS] 0
[TOTAL-COSTS] 0
[OTHER-EXPENSES] 2368304
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 3130882
[INCOME-PRETAX] 428689
[INCOME-TAX] 181500
[INCOME-CONTINUING] 0
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 247189
[EPS-PRIMARY] .32
[EPS-DILUTED] .32
</TABLE>
