THIS DOCUMENT IS A COPY OF THE ANNUAL REPORT OF FORM 10KSB FILED ON
9/29/1998 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION
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, 1998
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
(State or Other Jurisdiction of Incorporation or Organization)
35-1942803
(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. $6,725,000.
As of September 17, 1998, there were issued and outstanding
782,100 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 of
September 17, 1998, was $10,869,282. (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, 1998.
Part III of Form 10-KSB - Portions of the Proxy Statement for the 1998
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 "Regulation - 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, 1998, the Company had assets of approximately $92.5 million,
deposits of approximately $60.5 million and stockholders' equity of
approximately $12.9 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 head quartered 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 primarily serves communities located in
St. Joseph County, Indiana.
Sobieski Federal has been, and intends to continue to be, a
community-oriented financial institution offering 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 mort-gage loans for
retention in its portfolio. In addition, the Association originates a
limited number of construction loans, consumer loans and real estate-
backed small business commercial loans. During both fiscal 1998 and 1997,
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 share- holder 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 antici- pated," "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 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 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 events or circumstances after the
date of such statements or to reflect the occurrence of antici- pated or
unanticipated events.
Lending Activities
General. The Association has historically originated primarily fixed-rate
one-to-four fami- ly 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
mortgage loans. Such loans are primarily for terms of up to 30 years.
While the Association primarily focuses its lending activities on the
origination of loans se cured by first mortgages on owner-occupied
one-to-four family residences, to a much lesser ex- tent, it also
originates construction and consumer loans. During fiscal 1998 and 1997
the Association purchased participation interests in commercial loans
funded during fiscal 1998 with one to five-year FHLB advances and during
fiscal 1997 with short-term advances from the FHLB. The Association has
in the past purchased participations of the Small Business Administration
("SBA")and originated a limited number of commercial real estate loans.
Substantially all fo the Association's loans are orginated in its market
area. At June 30, 1998, the Association's net loan portfolio totaled
$76.6 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, 1998, the maximum amount which the Association could loan
to any one borrower and the bor-rower's related entities was $1,620,000.
At June 30, 1998, 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 $1,406,000. As of June 30, 1998, this loan was preforming in
accordance with its terms.
All of the Association's lending is subject to its written underwriting
standards and loan origination procedures. Decisions on loan applications
are made on the basis of detailed applica- tions and property valuations.
Properties securing real estate loans made by Sobieski Federal are
generally appraised by Board-approved independent appraisers. In the
loan approval process, Sobieski Federal assesses the borrower's ability
to repay the loan, the adequacy of the proposed collateral, the employment
stabilitity of the borrower and the credit worthiness of the borrower.
The Association requires evidence of marketable title and lien position
or appropriate title insurance (except on certain home equity loans) on
all loans secured by real property. The Association also requires fire
and extended coverage casualty insurance in amounts at least equal to
the lesser of the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. As required
by federal regulations, the Association also requires flood insurance to
protect the property securing its interest if property is located in a
designated flood area.
Loan Portfolio Composition. The following information presents the
composition of the Company's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred loan fees
and allowances for loan losses) as of the dates indicated.
<TABLE>
<CAPTION>
At June 30
1998 1997 1996
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to-four family.$ 68,616 88.0% $ 55,714 89.5% $ 48,748 89.8%
Commercial ........ 2,405 3.1 2,455 4.0 2,783 5.1
Construction . 1,032 1.3 869 1.4 797 1.5
Total real estate
loans 72,053 92.4 59,038 94.9 52,328 96.4
Other Loans:
Deposit loans ....... 147 .2 147 .2 176 .3
Commercial business
loans .... 5,753 7.4 3,059 4.9 1,783 3.3
Total other loans .. 5,900 7.6 3,206 5.1 1,959 3.6
Total loans ...... 77,953 100.0% 62,244 100.0% 54,287 100.0%
Less:
Loans in process ... 1,016 - 882 - 802 -
Deferred loan fees
(costs) ............ (16) - 27 - 171 -
Allowance for loan
losses .............. 240 - 200 - 200 -
Total loans, net . $76,713 - $61,135 - $ 53,114 -
</TABLE>
The following table shows the composition of the Company's loan portfolio
by fixed and adjustable-rate loans at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
1998 1997 1996
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One-to four-family $ 56,198 72.1% $ 51,031 82.0% $ 46,952 86.5%
Construction .... 1,032 1.3 869 1.4 636 1.2
Total real estate
loans . 57,230 73.4 51,900 83.4 47,588 87.7
Consumer .......... 147 .2 147 .2 176 .3
Commercial business 2,649 3.4 1,899 3.1 --- ---
Total fixed-rate
loans ............. 60,026 77.0 53,946 86.7 47,764 88.0
Adjustable-Rate Loans:
Real estate:
One-to-four family 12,418 15.9 4,683 7.5 1,796 3.3
Commercial .... 2,405 3.1 2,455 3.9 2,783 5.1
Construction .... --- --- --- --- 161 .3
Total real estate
loans............. 14,823 19.0 7,138 11.4 4,740 8.7
Commercial business 3,104 4.0 1,160 1.9 1,783 3.3
Total adjustable-
rate loans ....... 17,927 23.0 8,298 13.3 6,523 12.0
Total loans ...... 77,953 100.0% 62,244 100.0% 54,287 100.0%
Less:
Loans in process .. 1,016 -- 882 -- 802 --
Deferred loan fees
(costs)... ......... (16) -- 27 -- 171 --
Allowance for loan
losses ............ 240 -- 200 -- 200 --
Total loans, net . $76,713 - $ 61,135 - $ 53,114 -
</TABLE>
The following schedule illustrates the amortization schedule by
contractual maturity of the Company's loan portfolio at June 30, 1998.
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>
<CAPTION>
Real Estate
One-to-Four SBA Commercial
Family Commercial Construction(2) Consumer Business Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Due during
the twelve
months
ending
June 30,
1999 (1) $ 5,369 $ 45 $ 1,032 $ 60 $1,824 $ 8,330
2000 6,209 49 --- 65 1,558 7,881
2001 3,127 53 --- 22 829 4,031
2002 and
2003. 7,428 120 --- --- 236 7,784
2004 to
2008 ... 21,391 399 --- --- 1,047 22,837
2009 to
2023 ... 25,092 1,739 --- --- 259 27,090
Total . $68,616 $2,405 $ 1,032 $ 147 $5,753 $ 77,953
Weighted
average
interest
rate .... 7.71% 8.33% 7.49% 8.35% 8.71% 7.80%
</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 $60.0 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 pri-marily 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, 1998, the Company's
one-to-four family residential mortgage loan portfolio totaled
$68.6 million, or 88.0%, of the Company's gross loan portfolio.
The Association currently offers fixed-rate and ARM loans. For the year
ended June 30, 1998, the Association originated $23.3 million of one-to-four
family real estate loans. At June 30, 1998, the Association had
$12.4 million of one-to-four family adjustable-rate mortgage loans,
and $56.2 million of one-to-four family fixed-rate mortgage loans.
The Association currently originates fixed-rate loans with terms of
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 Associa- tion currently originates one-to-five
year ARM loans, with up to a 30-year amortization schedule, with a stated
interest rate margin over the one-year Contant Maturity
Treasury Index. These loans provide for a 1.5% maximum annual cap
and a cap over the life of the loan of 5.25%. 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 97% 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 docu- mented pursuant to the guidelines of the
Federal Home Loan Mortgage Corporation ("FHLMC"). The Association
currently 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, 1998, the Association's
second mortgage loans and home equity loans totaled $658,000 and
$2.7 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, 1998, the Association's construction loan portfolio
totaled $1,032,000, or 1.3% 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 97% 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 pro- gress 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, 1998 totaled $2.4 million. These loans consist of participation
certificates guaranteed by the SBA. As of June 30, 1998, 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, 1998 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
($34,000 or 23.1% of total consumer loans at June 30, 1998), they do not
entail great risk because they are fully secured by savings deposit
accounts with bal- ances 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, 1998 totaled $5.8 million or 7.4%
of the Company's gross loan portfolio. These loans are originated
internally or purchased participations originated by other financial
institutions. The loans are secured by collateral consisting of autos,
trucks, an airplane and other assets. All of these loans were performing
in accordance with their terms at June 30, 1998. 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, 1998, the Association originated $30.7 million in
loans. Originations consisted of
$23.3 million in one-to-four family real estate loans,
$32,000 of consumer loans and $7.3 million in nonresidential real estate
loans.
Loan originations during the year ended June 30, 1998 were significantly
higher than the prior year. The Association believes the increase is
attributable to the higher level of refinancing as customers sought to
take advantage of historically low interest rates on fixed-rate loans.
The Association currently retains its loan originations in its portfolio
and currently follows a policy of not selling loan originations in the
secondary market.
During fiscal 1998, the Association purchased $3.9 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 C and D of the Notes to
Consolidated Financial Statements. Virtual- ly 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>
<CAPTION>
Year Ended June 30,
1998 1997 1996
(In Thousands)
Originations:
<S> <C> <C> <C>
One-to-four family real
estate .................. $ 23,300 $ 15,081 $11,376
Consumer loans ............. 32 22 56
Non-residential real estate
and commercial...... 7,348 1,114 ---
Total originations ........ 30,680 16,217 11,432
Purchases:
Purchases of mortgage-
backed securities ......... --- --- 3,018
Purchases of commercial
business loans......... 3,944 3,030 ---
Total purchases ........... 3,944 3,030 3,018
Repayments:
Loans ..................... (18,748) (11,226) (8,427)
Mortgage-backed securities . (2,295) (2,126) (2,136)
Other, net ................ (167) (134) (95)
Total repayments........... (21,210) (13,486) (10,658)
Net increase ............ $ 13,414 $ 5,761 $ 3,792
</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 delinquen- cy 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 pro- posed 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, manage- ment 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, 1998.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One-to-four
family 8 $ 349 0.5% 7 $188 0.3% 15 $537 0.8%
Consumer (1) - - - % - - - % - - - %
Total ... 8 $ 349 0.5% 7 $188 0.3% 15 $537 0.8%
</TABLE>
(1) All delinquent consumer loans are secured by savings deposits in the
Association.
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 $112,000 of accruing
loans more than 90 days delinquent at June 30, 1998.
<TABLE>
<CAPTION>
At June 30,
1998 1997 1996 1995 1994
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One-to-four family ........ $76 $ 118 $ 90 $ 35 $ 220
Consumer .................. --- 8 --- 6 98
Total ..................... 76 126 90 41 318
Foreclosed assets:
One-to-four family ........ --- 11 --- 19 104
Total ..................... --- 11 --- 19 104
Total non-performing assets 76 $ 137 $ 90 $ 60 $ 422
Total as a percentage of
total assets ............... .08% .17% .12% .08% .57%
</TABLE>
For the year ended June 30, 1998, 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, 1998, the Association had $76,000 of non-accruing loans
consisting of four one-to-four family delinquent loans.
Other Loans of Concern. At June 30, 1998, 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 "sub- standard," "doubtful" or "loss."
An asset is considered "substandard" if it is inadequately pro- tected 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
continu ance 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 recognize 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 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 additional 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, 1998, the Association had classified a
total of $88,000 of its assets as substandard, $0 as doubtful, and $16,000
as loss. At June 30, 1998, total classified assets comprised $104,000 or
0.8% of the Company's capital, or 0.11% of the Company's total assets.
Allowance for Loan Losses. The allowance for loan losses is established
through a provi- sion 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 classifi- cations
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 recognized 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 bal- ance 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 intergral 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, 1998, the Association had a total allowance for losses on
loans of $240,000 representing 317% of total non-performing loans and
.31% 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>
<CAPTION>
Year Ended June 30,
1998 1997 1996
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period ..... $200 $200 $200
Charge-offs: (1)
One-to-four family ................ --- --- ---
Recoveries:(1)
One-to-four family ................ --- --- ---
Provision charged to operations ... 40 --- ---
Balance at end of period ......... $240 $200 $200
Ratio of net charge-offs to
Average loans outstanding during
the period ........... ---% ---% ---%
Ratio of net charge-offs to
Average non-performing assets
during the period ............. ---% ---% ---%
</TABLE>
(1) Excludes net gain on sale of real estate owned in the amount of
$2,521 for the year ended June 30, 1998. These gains were included in
other noninterest income.
The distribution of the Company's allowance for losses on loans at
the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
At June 30,
1998 1997 1996
Percent Percent Percent
LoanLossTotalofTotal LoanLossTotalofTotal LoanLossTotalofTotal
AllowanceLoans Loans AllowanceLoans Loans AllowanceLoans Loans
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-
Four
family $ 25 $68,616 89.2% $ 12 $55,693 90.80% $ 8 $48,575 91.11%
Unallocated
215 8,337 10.8 188 5,642 9.20 192 4,739 8.89
Total
(1)... $ 240 $76,953 100.0% $ 200 $61,335 100.0% $200 $53,314 100.0%
</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 avail- ability of funds and comparative yields
on investments in relation to the return on loans. Historic- ally, the
Association has generally maintained liquid assets at levels above the
minimum require- ments 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 main- tained. At June 30, 1998, the Association's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits
and current borrowings) was 5.39%.
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'
accept- ances, repurchase agreements and federal funds. Subject to various
restrictions, federally char- tered savings institutions may also invest
their assets in commercial paper, investment grade cor-porate 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 Direc-tors, 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 consist 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 securi-ties. All securities transactions are disclosed to the Board
of Directors at their next regular meet-ing.
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 secu-rities 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, 1998, the amortized
cost of the Association's mortgage-backed securities
was $10.55 million and the market value of these mortgage-backed
securities was $10.48 million at that date.
At June 30, 1998, $9.9 million or 94% 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 $.6 million have
been classified as available-for-sale and are included in the financial
statements at fair value. 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, 1998.
As of June 30, 1998, all of the Association's mortgage-backed securities
were backed by government sponsored agency programs. Accordingly, management
believes that the Associa- tion'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 Asso- ciation ("FNMA"), FHLMC and
the Government National Mortgage Association ("GNMA"). The FNMA, FHLMC and
GNMA certificates are modified pass-through mortgage-backed secu- rities
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 mort- gages issued by those
government-sponsored entities. As a result, the interest rate risk
charac- teristics of the underlying pool of mortgages, i.e., fixed rate
or adjustable rate, as well as prepay- ment risk, are passed on to the
certificate holder. FNMA and FHLMC generally provide the certi- ficate
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
enhancments 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 gurarantee fee and the retention of a servicing spread
by the loan servicer), in the event that the portion of the Association's
assets consisting or mortgage-backed investments increase in
the future, the Association's assets yields would be adversly affected.
Mortgage-backed securities are also more liquid that 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 geographic
distribution of hte underlying mortgage loans, may alter the prepayment
rate of such mortgage loans and so affect to the prepayment speed, and value
of such securities. There is also reinvestment risk associated with the cash
flows from such secutities. In addition, the market value of such securities
may be adversely affected by changed in interest rates.
The adjustable rate and/or short maturity of the Association's
portfolio is de- signed to minimize that risk.
Investment Securities and Other Interest-Earning Assets. At June 30, 1998,
Sobieski Federal's interest-bearing deposits with financial institutions
totaled $443,000, or .5% of total assets, and its investment securities,
consisting of U.S. Treasury obligations, totaled $.5 million, or .5% of
total assets. In addition, as of such date, the Association had an
investment of $922,500 in FHLB stock, satisfying its requirement for
membership in the FHLB of Indianapolis. It is the Association's general
policy to puchase securities which are U.S. Government securities or
federal agency obligations or other issues that are rated investment grade.
At June 30, 1998, the average term to maturity or repricing of the
securities portfolio (excluding FHLB stock) was less than one year.
The Association's investment securities portfolio at June 30, 1998
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 States Government or its
agencies.
The following table sets forth the contractual maturities of the
Association's mortgage-backed securities at June 30, 1998.
<TABLE>
<CAPTION>
June30
1998
6Months 6Months 1to3 3to5 5to10 10to20 Over20 Balance
or Less to1Year Years Years Years Years Years Outstanding
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home Loan
Mortgage Corporation:
Adjustable-rate
$ 6 $ 7 $ 33 $ 43 $ 174 $ 999 $624 $ 1,886
Federal National
Mortgage Association:
Fixed-rate 2 2 --- --- --- --- --- 4
Adjustable-rate 27 29 136 179 733 4,346 932 6,382
Government National
Mortgage Association:
Fixed-rate 2 2 10 14 58 281 --- 367
Adjustable-rate 5 5 23 31 129 791 670 1,654
Net premiums and
discounts --- --- --- --- --- --- --- 245
$ 42 $ 45 $ 202 $267 $1,094 $6,417 $2,226 $10,538
</TABLE>
The following table sets forth the composition of the Association's
investment and mortgage-backed securities at the dates indi- cated.
<TABLE>
<CAPTION>
At June 30,
1998 1997 1996
Book % of Book % of Book % of
Value Total Value Total Value Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S.government
securities (1) .. $ 500 35.1% $ 2,297 78.3 $ 3,785 71.0%
U.S.government
securities mutual
fund ............ ---- --- --- --- 909 17.1
Subtotal.. 500 35.1 2,297 78.3 4,694 88.1
FHLB stock 923 64.9 636 21.7 636 11.9
Total investment
Securities and
FHLB stock $ 1,423 100.0% $ 2,933 100.0% $ 5,330 100.0%
Other interest-
earning assets:
Interest-bearing
deposits with
financial
institutions ... $ 443 100.0% $ 292 100.0% $ 533 80.8%
Federal funds
sold ...... --- --- --- --- 127 19.2
Total....... $ 443 100.0% $ 292 100.0% $ 660 100.0%
Mortgage-backed
securities:
GNMA..... $ 2,021 19.2% $ 3,558 26.0% $ 4,064 25.2%
FNMA..... 6,386 60.6 7,522 54.8 8,852 54.8
FHLMC.... 1,886 17.9 2,294 16.7 2,846 17.6
Subtotal.. 10,293 97.7 13,374 97.5 15,762 97.6
Unamortized
premium, net 245 2.3 336 2.5 390 2.4
Total mortgage-
backed
securities .. $10,538 100.0% $13,710 100.0% $16,152 100.0%
</TABLE>
(1)The average remaining life of U.S. government securities at
June 30, 1998 was less than one year with a weighted average yield of 5.9%.
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, inter-est 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 news-paper), 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 com-petition.
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 objec-tives. 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 af-fected by market conditions.
The following table sets forth the savings flows at the Association during
the periods indicated.
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Opening balance $59,387 $61,227 $63,142
Net deposits (withdrawals) 450 (2,332) (2,499)
Interest credited (1) 680 492 584
Ending balance $60,517 $59,387 $61,227
Net increase (decrease) $ 1,130 $(1,840) $(1,915)
Percent increase (decrease) 1.90% (3.01)% (3.03)%
</TABLE>
(1) Includes interest credited to passbook, NOW and money market deposit
accounts, but not certificates of deposit.
The following table sets forth the dollar amount of savings deposits
in the various types of deposit programs offered by the Association at
the dates indicated.
<TABLE>
<CAPTION>
At June 30,
1998 1997 1996
Percent Percent Percent
Amount ofTotal Amount ofTotal Amount ofTotal
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction and
Savings Deposits:
Passbook accounts:
June 30, 1998,
June 30, 1997 and
June 30, 1996-2.50% $13,919 23.0% $15,170 25.5% $15,909 26.0%
NOW accounts:
June 30, 1998,
June 30, 1997 and
June 30, 1996-2.75% 3,576 5.9 3,876 6.5 2,454 4.0
Money market accounts:
June 30, 1998,
June 30, 1997 and
June 30, 1996-
2.75% to 3.00% 2,060 3.4 2,172 3.7 2,272 3.7
Total Non-
Certificates 19,555 32.3 21,218 35.7 20,635 33.7
Certificates:
3.51 - 5.00% 3,588 5.9 9,039 15.3 8,942 14.6
5.01 - 6.00% 24,711 40.9 18,774 31.6 17,936 29.3
6.01 - 8.00% 12,663 20.9 10,356 17.4 13,714 22.4
Total Certificates 40,962 67.7 38,169 64.3 40,592 66.3
Total Deposits 60,517 100.0% $59,387 100.0% $61,227 100.0%
</TABLE>
The following table shows rate and maturity information for the
Association's certificates of deposit as of June 30, 1998.
<TABLE>
<CAPTION>
3.51- 5.01- 6.01- Percent
5.00% 6.00% 8.00% Total of Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts
Maturing in quarter
ending:
September 30, 1998 ... 1,923 4,146 997 7,066 17.25%
December 31, 1998 .... 1,654 3,339 1,976 6,969 17.01
March 31, 1999 ....... --- 3,153 2,811 5,964 14.57
June 30, 1999 ........ --- 1,652 4,058 5,710 13.94
September 30, 1999 ... 11 3,466 1,985 5,462 13.33
December 31, 1999 .... --- 3,024 501 3,525 8.61
March 31, 2000 ....... --- 999 --- 999 2.44
June 30, 2000 ........ --- 1,153 --- 1,153 2.81
September 30, 2000.... --- 1,015 --- 1,015 2.48
December 31, 2000..... --- 506 --- 506 1.23
March 31, 2001........ --- 414 50 464 1.13
June 30, 2001......... --- 199 --- 199 .49
Thereafter ........... --- 1,645 285 1,930 4.71
Total ................ $3,588 $24,711 $12,663 $40,962 100.0%
Percent of total .... 8.76% 60.33% 30.91% 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, 1998.
<TABLE>
<CAPTION>
Maturity
(In Thousands)
3 months Over3to Over6to Over12
or less 6 months 12 months months Total
<S> <C> <C> <C> <C> <C>
Certificates of
deposit less than
$100,000 ........ $ 6,844 $ 6,468 $ 9,620 $14,114 $37,046
Certificates of
deposit of
$100,000 or more 222 501 2,054 1,139 3,916
Total certificates
of deposit ..... $ 7,066 $ 6,969 $11,674 $15,253 $40,962
</TABLE>
Borrowings. Although deposits are the Association's primary source of
funds, the Associ- ation 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, 1998, the Association had borrowings of $18.45 mil-lion.
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
$1.8 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, 1998,
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
competi- tion 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 withdrawl privileges.
Employees
At June 30, 1998, the Association had a total of 24 full-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 Company who is not also a director is set forth below.
Marsha Nafrady, age 44. Ms. Nafrady is secretary/treasurer of the
Association. In that capacity she oversees teller operations of the
Cleveland main branch facility, serves as Secretary to the Board of
Directors and is responsible for the recordkeeping of the Company.
Ms. Nafrady joined the Association in 1973.
Arthur Skale, age 56. Mr. Skale is currently the 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.
Gregory J. Matthews, age 38. Mr. Matthews joined the Company in March 1998
as Vice President and Chief Operations Officer. He is responsible for retail
banking, operations, informa-tion systems and Year 2000 preparedness.
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 Govern-ment. 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 exami-nation 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. The OTS is currently conducting an
examination as of June 30, 1998. 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, 1998 was $26,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Association and
the 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 actions, 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 pre-scribed 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 fed-eral 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, 1998,
the Association's lending limit under this restriction was
$1,620,000. 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 establish-ing 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 stan-dards 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 pre-miums
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 un-sound 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 insur-ance premiums, ranging from 0% to .27%
of deposits, based upon their level of capital and super-visory 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 deter-mines 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 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 main-tain the reserve ratio of the
BIF at 1.25% of BIF insured deposits. The FDIC has revised the pre-mium
schedule of BIF insured institutions to provide a range of .04% to .31%
of deposits in anti-cipation of the BIF achieving its statutory reserve
ratio. As a result, such institutions generally will pay lower insurance
premiums than SAIF insured institions. The revisions became effective in
the third quarter of 1996.
The FDIC is authorized to increase assessment rates, on a semiannaul
basis, if it deter-mines 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 bor-rowed 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 Insur-ance 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 revi-sions 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 ad-justed. 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 that 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
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
recapital-ize the SAIF. It also provides for the merger of the BIF and SAIF
on January 1, 1999 if no savings associations then exist. The special
assesment 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 Associa-tion's
results of operations for the year ended June 30, 1997. As a result of the
special assess-ment, the Association's fiscal 1998 deposit insurance
premiums were reduced to $37,000 based
upon its insured deposits. 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 inter-est 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 demestic deposits. The assestment 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 tan-gible 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
ex-cludes 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, 1998, 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 pur-poses 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
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 con-solidated for GAAP
purposes. For excludable subsidiaries the debt and equity investments in
such subsidiaries are deducted from assets and capital. At June 30, 1998,
the Association did not have any active subsidiaries.
At June 30, 1998 the Association had tangible capital of $9.2 million,
or 10.2% of adjusted total assets, which is approximately $7.9 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 provi-sions 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. A June 30, 1998
the Association had no intangibles which were subject to these tests.
At June 30, 1998, the Association had core capital equal to $9.2 million,
or 10.2% of adjusted total assets, which is $6.5 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 sup-plementary capital. Supplementary
capital consists of certain permanent and maturing capital in-struments 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. At June 30, 1998, the Association had no capital
instruments that qualify as supplementary capital and $240,000 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 cal-culating 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 Associa-tion had no such exclusions from
capital and assets at June 30, 1998.
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 in-herent 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 pre-sent 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 is assets and a total capital ratio in excess of
of 12% is exempt from this requirement unless the OTS determines otherwise.
On June 30, 1998, the Association had risk-based capital of $9.4 million
(including $9.2 million in core capital and $240,000 in general loss
reserves) and risk-weighted assets of $45.6 million or total capital of
20.7% of risk-weighted assets. This amount was $5.8 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 gen-erally required to take action
to restrict the activities of an "undercapitalized association" (gener-ally
defined to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capi-tal 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
insti-tution, establish a branch or engage in any new activities, and
generally may not make capital dis-tributions. 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 guar-antee 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 under-capitalized" (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; divesituture, 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 under-capitalized associations. In addition, the OTS must
appoint a receiver (or conservator with the concurrence of the FDIC) for
savings associations, 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
opera-tions 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 cate-gory 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 regulations 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-tired approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which included dividends, stock redemptions or repurchases, cas-out mergers
and other transactions charged to the capital account (see
"Regulation - 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
associa-tion 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 re-quirements 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 distri-bution 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 proposed to make capital distribution and
Tier 2 associations that proposed 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
need only submit written notice to the OTS 30 days prior to such distribuiton.
As a subsidiary of the Holding Company, the Association will also be required
to give the OTS 30 days' notice prior to delclairng any dividend on its
stock. The OTS may object ot the distribution during the 30-day period based
on the safety and soundness concerns. See "Regulation-Regulatory Capital
Requirements".
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 Discusssion and Analysis of Financial Condition and Results
of Operations of Liquidity and Capital Resources." This liquid asset ratio
requrirement may vary for time to time (between 4% and 10%) depending upon
ecomomic conditions and savings flows of all savings associations. At the
present time, the minimum liquid asset ratio is 4%. At June 30, 1998 the
Association was in compliance with the requirement, with an overall liquid
asset ratio of 5.3%.
Accounting
An OTS policy statement applicable to all savings associations clarifies and
reemphasizes that the investment activies of a savings association must be
in compliace with approved and documented investment policies and strategies,
and must 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 docu-mentation. 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 alter-native, 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 resi-dential housing related loans and investments.
At June 30, 1998, the Association met the test and has always met the QTL
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 re-qualify and converts to a
national bank charter, it must remain SAIF-insured until the FDIC per-mits
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
banking 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
pre-payment 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 com-pany and become
subject to all restrictions on bank holding companies. See "Regulation-
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 access the
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.
Due to the heightened attention being given to the CRA in recent years,
he Association may be required to devote additional funds for investment
and lending in its local community. The Association was examined for CRA
compliance in January 1997 and received a rating of satis-factory.
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 con-trol 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 con-flict 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 indi-viduals.
Holding Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory over-sight 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 autho-rity
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 acti-vity other than those
approved for multiple savings and loan holding companies or their
subsidi-aries. 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 the activities authorized for a unitary or
multiple savings and loan holding company. See "Regulation - 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.
How-ever, such interstate acquisitions are permitted based on specific
state authorization or in a super-visory 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 prin-cipal stockholders) of the Company may not be resold
without registration or unless sold in ac-cordance with certain resale
restrictions. If the Company meets specified current public informa-tion
requirements, each affiliate of the Company is able to sell in the public
market, without regis-tration, 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, 1998, 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
"Regulation - 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 pri-marily 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 ad-vances 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, 1998, the Association had $923,000 of
FHLB stock, which was in com-pliance with this requirement. During fiscal
1998 and prior years the Association received sub-stantial dividends on its
FHLB stock. The dividends averaged 7.84% for fiscal year 1998. For the
years ended June 30, 1998 and 1997, dividends paid by the FHLB of
Indianapolis to the Asso-ciation totaled $63,000 and $44,000,
respectively.
Under federal law the FHLB's 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 of 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 Internal 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 federal 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 com-puted 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, re-pealed 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 liqui-dates, 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 1998 or 1999 if it
originates the same principal amount of mortgage loans that it had
originated in the six years before 1998. 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 begining after 1986 and before 1996,
corporations, including savings associations such as the Association, are
also subjuect 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 absord 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 Asso-ciation 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, 1998. 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, pro-perty taxes, charitable
contributions, tax exempt interest and bad debt. Other applicable
Indiana taxes includes 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, 1998. 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, 1998 was
approximately $1,923,500 See Note E of the Notes to Consoli-dated
Financial Statements.
Total
Year Approximate
Leased Square Net Book Value at
Location or Acquired Footage June 30, 1998
Main Office:
2930 West Cleveland Road 1995 10,080 $1,417
South Bend, Indiana 46628
Branch Offices:
4606 Western Avenue 1978 1,600 $ 4
Belleville Shopping Center
740 S. Walnut Street 1952 1,900 $ 22
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 data 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, 1998 was
$51,300.
Item 3. Legal Proceedings
The Company and Sobieski Federal are involved, from time to time,
as plaintiff or defen-dant 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 proceed-ings, 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, 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 46 of the attached 1998 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Pages 6 to 18 of the attached 1998 Annual Report to Stockholders are
herein incor-porated by reference.
Item 7. Financial Statements
The following pages of the attached 1998 Annual Report to Stockholders
are herein incor-porated by reference.
Report of Independent Accountants Page 19
Consolidated Statements of Financial Condition as of Page 20
June 30, 1998 and 1997
Consolidated Statements of Income for the years ended Page 21
June 30, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the Page 22
years ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows for the years Page 23
ended June 30, 1998, 1997 and 1996
Notes to Consolidated Financial Statements Pages 24 - 45
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 1998
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 per-sons owning more than 10% of a registered class of
the Company's equity securities, to file peri-odic reports of ownership
and changes in ownership with the Securities and Exchange Commis-sion 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 compiled with during fiscal 1998.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein
by reference from the Company's definitive Proxy Statement for the 1998
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 1998 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 1998 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 PricewaterhouseCoopers 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, 1998.
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 28, 1998 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 28, 1998 Date: September 28, 1998
/s/ George J. Aranowski /s/ Leonard J. Dobosiewicz
George J. Aranowski, Director Leonard J. Dobosiewicz, Director
Date: September 28, 1998 Date: September 28, 1998
/s/ Joseph F. Nagy /s/ Arthur Skale
Joseph F. Nagy, Director Arthur Skale, Chief FinancialOfficer
(Principal Financial and Accounting
Officer)
Date: September 28, 1998 Date: September 28, 1998
/s/ Thomas F. Gruber
Thomas F. Gruber, President and
Chief Executive Officer and Director
(Principal Executive Officer)
Date: September 28, 1998
INDEX TO EXHIBITS
Exhibit Number
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
Exhibit 13
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 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 profit ability 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 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 port-
folio retention. In addition, the Association continues to
purchase participation interests in com- mercial loans. The
participation interests are purchased according to the
Association's established underwriting standards. The loans
underlying the participation interests are performing in accord-
ance with their terms. At June 30, 1998, the ratio of Sobieski
Federal's nonperforming assets to total assets was .20% and the
ratio of its allowance for loan losses to nonperforming loans
was 127.66%. Historically, the loans originated by Sobieski
Federal were principally fixed-rate, one- to-four family
mortgage loans, while its investments in mortgage-backed
securities have been principally in adjustable rate products. At
June 30, 1998, $62.7 million, or 71.7%, of the Association's
combined mortgage loans and mortgage-backed securities portfolio
had fixed rates of interest and $24.8 million, or 28.3%, 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 com- pressed spreads during periods of rising interest
rates and improved net interest income resulting from larger
spreads during periods of declining interest 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 de- crease 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 primarily from deposits and short-term advances
from the FHLB. At June 30, 1998, Sobieski Federal had $62.1 million
in long-term fixed-rate loans and $14.6 million in adjustable-rate
loans. 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 Office of Thrift Supervision ("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 to add an interest-rate
risk component to an institution's risk-based capital require-
ment. 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 an
institution's exposure to interest rate fluctuations as a result
of the other regulators' conclusions, the OTS under any scenario
will likely require that an institution have adequate Board and
senior management oversight and a comprehensive process for
managing interest rate risk.
Presented below, as of June 30, 1998, 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>
<CAPTION>
Change in
Interest Rate Net Portfolio Value
(Basis Points) $ Change % Change
(Dollars in thousands)
<S> <C> <C>
+ 400 $(6,987) (62)%
+ 300 (5,107) (45)
+ 200 (3,206) (28)
+ 100 (1,408) (12)
0 - -
- 100 992 9
- 200 1,590 14
- 300 2,518 22
- 400 3,685 33
</TABLE>
Management reviews the NPV measurements on a quarterly basis. In
addition to monitoring selected measures of 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 $3.21 million at June 30, 1998.
In contrast, based on a decline in interest rates of 2.0%, the
Association's NPV was estimated to increase 14% or approximately
$1.59 million at June 30, 1998. The most significant factor
contributing to its liability sensitive position was the
Association's balance of fixed rate mortgage loans. At June 30,
1998, 81.0% 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.
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 adjustments were made. All
average balances are monthly average balances. Non-accruing
loans have been included in the table as loans carrying a zero
yield.
<TABLE>
<CAPTION?
Year Ended June 30,
1998 1997 1996
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ OutstandingEarned/Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
Interest-Earning Assets:
Loans (1) $ 68,466 $5,523 8.07 % $ 55,105 $ 4,433 8.04% $ 48,777
$4,012 8.23%
Mortgage-backed
securities 12,384 746 6.02 15,080 944 6.26 15,704
962 6.13
Investment securities
and other 1,909 144 7.54 4,813 281 5.84 7,447
441 5.92
FHLB stock 804 63 7.84 636 44 6.92 636
50 7.86
Total interest-earning
assets (1) 83,563 6,476 7.75 75,634 5,702 7.54 72,564
5,465 7.53
Non interest-earning
assets 3,982 - - 3,692 - - 4,897
- - -
Total assets $ 87,545 - - $ 79,326 - - $ 77,461
- - -
Interest-Bearing Liabilities
Savings deposits $ 14,418 361 2.50 $ 15,272 374 2.45 $ 16,028
456 2.85
NOW and MMDA accounts 5,528 115 2.08 5,286 118 2.23 4,699
129 2.74
Certificate accounts 38,861 2,280 5.87 39,352 2,290 5.82 41,250
2,432 5.90
FHLB borrowings 15,177 854 5.63 5,850 349 5.97 600
13 2.17
Total interest-bearing
liabilities 73,984 3,610 4.88 65,760 3,131 4.76 62,577
3,030 4.84
Non interest-bearing
liabilities 967 - - 126 - - 576
- -
Total liabilities 74,951 - - 65,886 - - 63,153
- -
Stockholders' equity 12,594 - - 13,440 - - 14,308
- -
Total liabilities and
stockholders' equity $ 87,545 - - $ 79,326 - - $ 77,461
- -
Net interest income - $ 2,866 - - $ 2,571 - -
$ 2,435 -
Net interest rate spread - - 2.87% - - 2.78% -
- 2.69%
Net earning assets $ 9,579 - - $ 9,874 - - $ 9,987
- -
Net yield on average
interest-earning assets - - 3.43% - - 3.40% -
- 3.36%
Average interest-earning
assets to average interest-bearing
liabilities 112.95% - - 115.02% - - 115.96%
- - -
</TABLE>
(1) Calculated net of deferred loan fees, discounts and
premiums, and loans in process.
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.
<TABLE>
<CAPTION>
Year Ended June 30,
1998 vs. 1997 1997 vs. 1996
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due To Increase
Volume Rate (Decrease) Volume Rate (Decrease)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans
$ 1,078 $ 12 $ 1,090 $ 511 $ (90) $ 421
Mortgage-backed
securities (164) (34) (198) (39) 21 (18)
Investment securities
and other (203) 66 (137) (154) (6) (160)
FHLB stock 13 6 19 - (6) (6)
Total interest-
earning assets $ 724 $ 50 $ 774 $ 318 $ (81) 237
Interest-bearing liabilities:
Savings deposits $ (21) $ 8 (13) $ (21) $ (61) (82)
NOW and MMDA accounts 5 (8) (3) 15 (26) (11)
Certificate accounts (29) 19 (10) (111) (31) (142)
FHLB borrowing 526 (21) 505 280 56 336
Total interest-bearing
liabilities $ 481 $ (2) 479 $ 163 $ (62) 101
Net interest income $ 295 $ 136
</TABLE>
Financial Condition
General.
Total assets increased $10.77 million or 13.18%, from $81.73
million at June 30, 1997 to $92.50 million at June 30, 1998. The
increase in net assets was primarily the result of a $15.58
million increase in net loans offset by reductions of $4.97
million in investment securities and mortgage- backed
securities. Funding for the asset growth primarily came from a
$8.95 million increase in FHLB advances, $1.13 million of
increased deposits and $.54 million of net income.
Cash and Cash Equivalents.
Cash and cash equivalents, consisting of cash, interest-bearing
deposits and federal funds sold increased $40,000 from $1.25
million at June 30, 1997 to $1.29 million at June 30, 1998.
Investment Securities.
Investment securities, consisting of United Statement Government
securities, decreased $1.80 million or 78.3% from $2.30 million
at June 30, 1997 to $.50 million at June 30, 1998. The decrease
resulted from the sale of $1.01 million in agency securities,
and maturities of $.80 million of treasury securities. At June
30, 1998, all of the Association's investment securities were
available for sale.
Mortgage-Backed Securities.
Mortgage-backed securities decreased $3.17 million or 23.1% from
$13.71 million at June 30, 1997 to $10.54 million at June 30,
1998. The decrease was primarily the result of $2.29 million
principal repayments and $.78 million of security sales. At June
30, 1998, $.59 million or 5.6% of the mortgage-backed securities
were classified as available for sale.
Loans, Net.
Net loans increased $15.58 million, or 25.5%, from $61.13
million at June 30, 1997 to $76.71 million at June 30, 1998.
This increase was primarily the result of increased demand and
expanded market area for residential mortgages in conjunction
with continuing efforts in origination of home equity and
mortgage-backed commercial loans along with increased
participations in commercial loans.
Deposits.
Deposits increased $1.13 million, or 1.9%, from $59.39 million
at June 30, 1997 to $60.52 million at June 30, 1998. 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, a reversal of the
outflow pattern experienced during fiscal 1996 and the first
three quarters of fiscal 1997 has occurred. 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 increased $.50 million from $12.36 million
at June 30, 1997 to $12.86 million at June 30, 1998. This
increase was primarily the result of 1998 net income of $544,000
and employee benefit stock allocations and vesting of $209,000
offset in part by cash dividends of $251,000.
Results Of Operations
General.
Net income increased $297,000 or 120.24% from $247,000 for 1997
to $544,000 for 1998. The increase in net income is due
primarily from increased net interest income of $295,000 and
lower non-interest expenses of $236,000. The decrease in
non-interest expense is primarily from the one-time special SAIF
recapitalization assessment of $414,000 included in 1997
non-interest expenses. Offsetting these positive gains, income
taxes increased by $216,000 due to a $513,000 increase in
pre-tax income.
Net interest income.
Net interest income increased $295,000 from $2.57 million in
1997 to $2.87 million in 1998. The increase was due to $7.93
million of additional average interest-earning assets at an
improved net three basis point yield. Net yield on average
interest-earning assets in 1998 increased .88% to 3.43% from
3.40% in 1997.
Interest Income.
Interest income increased $774,000, from $5.70 million for 1997
to $6.48 million for 1998. The increase was the result of $13.36
million of higher average balances in loans during the year
offset by $5.60 million of reduced investment, mortgage-backed
and other securities average balances. The change in net volume
increases added $724,000 to interest income whereas the increase
in yield added an additional $50,000. The yield on average
interest-earning assets increased 21 basis points, from 7.54%
for 1997 to 7.75% for 1998.
Interest Expense.
Interest expense increased $480,000 from $3.13 million in 1997
to $3.61 million 1998, primarily as a result of $506,000 of
additional expense related to increased FHLB advances. The
average rate paid for interest-bearing liabilities increased 12
basis points from 4.76% in 1997 to 4.88% in 1998, an increase of
2.52%. The average balance of interest-bearing liabilities for
fiscal 1998 was $73.98 million an increase of $8.22 million from
$65.76 million for fiscal 1997.
Provision for Loan Losses.
Provision for loan losses for the year ended June 30, 1998 was
$40,000. There was no provision for loan loss for the year ended
June 30, 1997. 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, additional 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 $22,000 from $226,000 in 1997 to
$248,000 in 1998, primarily from increased service charges of
$65,000 offset by reduced gains on sales of securities of
$44,000.
Noninterest Expense.
Noninterest expense decreased $240,000 or 10.13% from $2.37
million in 1997 to $2.13 million in 1998. The decrease was
primarily the result of the non-recurring $414,000 one-time
special assessment in 1997 to recapitalize the SAIF fund. As a
result of the special assessment, FDIC deposit insurance rates
have decreased from $.23 per $100 of domestic deposits to $.0582
at June 30, 1998. FDIC deposit insurance expense including the
aforementioned 1997 special assessment decreased by $459,000
from $496,000 in 1997 to $37,000 in 1998. Compensation and
related benefits increased by $221,000 in 1998. Occupancy,
advertising, service bureau and other operat- ing expense
remained relatively unchanged at $911,000 for the year ended
June 30, 1998 and $908,000 for the year ended June 30, 1997.
Income Taxes.
Income tax expense increased $216,000 from $182,000 in 1997 to
$398,000 in 1998, principally as a result of the increase in
pretax income. The effective tax rate for 1998 was 42.25% versus
42.34% in 1997.
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 its 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, 1998, the Association was in
compliance with OTS liquidity requirements, having a ratio of
5.39%.
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, 1998 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 of June 30, 1998
(dollars in thousands):
Actual Percent Required Percent Excess
Core $ 9,203 10.23 $ 2,698 3.0 $ 6,505
Tangible 9,203 10.23 1,349 1.5 7,854
Risk-based 9,443 20.69 3,651 8.0 5,792
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, 1998, the Association had a
core capital ratio of 10.23% and met the requirement for a "well
capitalized" institution.
Accounting Developments
Statement of Financial Accounting Standards ("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 former presentation of
primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and 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 diluted EPS computation. SFAS 128 is
effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. This
statement required the restatement of all prior-period EPS
data presented. The Company adopted this statement during the
third quarter of fiscal 1998.
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 liquidations 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 did not
have any significant impact on the Company's historical
financial statements.
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income," and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 130 will require the Company to report
comprehensive income in its financial statements. Comprehensive
income includes net income and certain transactions that are
reported as a separate component of shareholders' equity, such
as net unrealized appreciation of available-for-sale securities.
SFAS No. 131 changes the manner in which public companies report
selected segment information in annual reports and requires
companies to report selected segment information in interim
financial reports. Companies will be required to report
financial and descriptive information about the Company's
operating segments. The Company will adopt SFAS Nos. 130 and 131
in the first quarter of fiscal 1999. These statements will
increase disclosure only and are not expected to have any
significant effect on the Company's consolidated financial
position or results of operations.
Other Matters
The Company is aware of the current concerns by consumers and
the business community of reliance upon computer software
programs that do not properly recognize the year 2000 in date
formats, often referred to as the "Year 2000 Problem". The
Year 2000 Problem is the result of soft- ware being written
using two digits rather than four digits to define the
application year (i.e., "98" rather than "1998"). The Company is
highly dependent on computer systems because of significant
transaction volumes and date dependency for interest
calculations on financial instruments such as loans and
deposits. A failure of the Company's computer systems could
result in disruptions of operations, including among other
things, temporary inability to process transactions, send
statements or otherwise engage in routine business transactions
on a daily basis.
The Company has developed a plan to prepare for the Year 2000.
Started in 1997, the plan includes an inventory of software
applications, communication with third party vendors and suppli-
ers and the obtaining of certification of compliance with third
party providers. The Company has a comprehensive, written plan,
which is regularly updated and monitored by management and the
Board of Directors. Plan status is regularly reviewed by
management of the Company and reported at least quarterly to the
Board. As of June 30, 1998, it is estimated that the plan is
over 50% complete.
The Company will continue to assess the impact of the Year 2000
Problem on the remainder of its computer-based systems and
applications throughout 1998. The Company's goal is to perform
tests of its systems and applications during 1998 and have all
systems and applications Year 2000 compliant by December 31,
1998, allowing 1999 to be used for full validation testing. If,
as a result of testing, further work is required, the Company
anticipates completing that work prior to December 31, 1999.
In April of 1998, the Company budgeted $60,000 to remediate Year
2000 issues through December 31, 1999. These costs primarily
will consist of renovation and upgrading of its computer
systems and testing of equipment and programs for Year 2000
compliance. The Company is investing in new or upgraded
technology that has definable value lasting beyond 2000. In
these in- stances, where Year 2000 compliance is merely
ancillary, the Company may capitalize and depreciate such an
asset over its estimated useful life.
In addition to reviewing its own computer operating systems and
applications, the Company has initiated formal communications
with its significant suppliers to determine the extent to which
the Company's interface systems are vulnerable to those third
parties' failure to resolve their own Year 2000 issues. There is
no assurance that the systems of other companies on which the
Company's systems rely will be timely converted. If such
modifications and conversions are not made, or are not completed
timely, the Year 2000 issue could have an adverse impact on
operations of the Company. Therefore, the Company is in the
process of developing a contingency plan as to not disrupt
operations should its suppliers not be timely converted.
The Company's significant suppliers are an online computer
services firm (provides data processing services), the Federal
Home Loan Bank of Indianapolis and utility services. The
representations from these firms are that they are all making
efforts to become Year 2000 compliant by December 31, 1998 and
to test and validate their systems during 1999. The Company
continues to monitor the process of these suppliers by
requesting regular updates of the suppliers' progress and
believes that these suppliers will be Year 2000 compliant before
December 31, 1999. The Management of the Company does know of
alternative suppliers for the services provided by these
entities, but believes a conversion to these suppliers of the
Company's data processing capabilities during 1999 will be very
difficult to accomplish before the Year 2000.
The Company currently has several significant borrowers to which
it has made direct loans or holds a participation interest.
Management of the Company is communicating with these borrow-
ers about Year 2000 issues and does not expect any Year 2000
problems of these borrowers will have an adverse effect on the
Company.
Based on currently available information, management does not
presently anticipate that the costs to address the Year 2000
issues will have an adverse impact on the Company's financial
conditions, results of operations or liquidity.
The costs of the project and the date on which the Company
believes it will complete the Year 2000 modifications are based
on management's best estimates. There can be no assurance that
these estimates will be achieved and actual results could differ
from those anticipated. Specific factors that might cause
differences include, but are not limited to, the ability of
other companies on which the Company's systems rely to modify or
convert their systems to be Year 2000 compliant, and/or the
ability to locate and correct all relevant computer codes.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Sobieski Bancorp, Inc.:
In our opinion, the accompanying consolidated statements of
financial condition and the related consolidated statements of
income, of stockholders' equity and of cash flows present
fairly, in all material respects, the consolidated financial
position of Sobieski Bancorp, Inc. and subsidiary at June 30,
1998 and 1997, and the consolidated results of their operations
and their cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted
accounting principles. 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 of these statements in
accordance with generally accepted auditing standards which
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, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
South Bend, Indiana
August 20, 1998
Consolidated Statements Of Financial Condition
at June 30, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Cash, including interest-bearing deposits
in other financial institutions
of $442,725 and $94,477, respectively $ 1,291,42 $ 1,251,373
Certificates of deposit - 198,000
Investment securities, available-for-sale
(amortized cost of $499,267 and
$1,299,335, respectively) 499,720 1,297,148
Investment securities, held-to-maturity
(fair value of approximately
$1,012,900 in 1997) - 1,000,000
Mortgage-backed securities,
available-for-sale (amortized cost
of $603,381 and $1,790,203, respectively) 594,550 1,780,210
Mortgage-backed securities,
held-to-maturity (fair value of
approximately $9,888,300 and
$11,617,500, respectively)
9,943,105 11,929,352
Loans, net 76,712,631 61,134,644
Real estate owned - 11,037
Federal Home Loan Bank
stock, at cost 922,500 636,000
Property and equipment, net 1,923,506 2,028,310
Other assets 594,281 466,672
Deferred income taxes 14,849 -
Total assets $ 92,496,568 $ 81,732,746
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 60,517,246 $ 59,386,630
Federal Home Loan Bank
advances 18,450,000 9,500,000
Advances from borrowers for
taxes and insurance 374,627 260,439
Accrued income taxes 105,735 80,628
Accrued interest and
other expenses 184,565 132,077
Deferred income taxes - 12,177
Total liabilities 79,632,173 69,371,951
Commitments (Note M)
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 9,217,094 9,147,176
Retained earnings,
substantially restricted 6,963,420 6,670,543
Net unrealized depreciation
of available-for-sale
securities (5,529) (7,356)
16,184,645 15,820,023
Less:Treasury stock, at cost,
201,821 and 206,368 shares,
respectively 2,816,402 2,879,878
Unallocated Employee Stock
Ownership Plan shares;
50,385 and 57,935 shares,
respectively 503,848 579,350
Total stockholders' equity 12,864,395 12,360,795
Total liabilities and
stockholders' equity $ 92,496,568 $ 81,732,746
</TABLE>
The accompanying notes are a part of the consolidated financial
statements.
Consolidated Statements Of Income
for the years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest income:
Loans $ 5,523,327 $ 4,433,288 $ 4,012,220
Mortgage-backed securities
746,308 944,274 962,464
Interest-bearing deposits 43,812 43,665 267,071
Investments and other 163,197 281,103 222,913
Total interest income 6,476,644 5,702,330 5,464,668
Interest expense:
Interest on deposits 2,755,923 2,782,319 3,016,692
Interest on borrowings 854,515 348,563 12,896
Total interest expense 3,610,438 3,130,882 3,029,588
Net interest income 2,866,206 2,571,448 2,435,080
Provision for loan losses 40,000 - -
Net interest income after
provision for loan losses 2,826,206 2,571,448 2,435,080
Non-interest income:
Fees and service charges 221,685 156,443 162,303
Gain on sale of securities 19,728 63,535 -
Other income 6,958 5,567 9,247
Total non-interest income 248,371 225,545 171,550
Non-interest expenses:
Compensation and benefits 1,185,002 964,207 962,655
Occupancy and equipment 300,818 278,747 278,576
Federal deposit insurance premiums 36,796 495,872 143,583
Advertising and promotion 43,263 30,666 41,349
Service bureau expense 110,443 98,555 107,575
Other operating expenses 456,206 500,257 524,813
Total non-interest expenses 2,132,528 2,368,304 2,058,551
Income before income taxes 942,049 428,689 548,079
Income taxes 398,000 181,500 212,800
Net income $ 544,049 $ 247,189 $ 335,279
Basic earnings per common share $ .76 $ .32 $ .39
Diluted earnings per common share $ .75 $ .32 $ .39
</TABLE>
The accompanying notes are a part of the consolidated financial
statements.
Consolidated Statements Of Stockholders' Equity
for the years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Net
Unrealized
Appreciation Unallocated
(Depreciation) Employee Total
Additional of Available- Stock Stock-
Common Paid-In Retained For-Sale Treasury Ownership holders'
Stock Capital Earnings Securities Stock Plan Shares Equity
<S>
<C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995
$9,660 $9,081,043 $6,203,323 $ 19,154 $ - $(740,600) $14,572,580
Net income
- - 335,279 - - - 335,279
Purchase of treasury stock, 71,940 shares
- - - - (909,457) - (909,457)
Common stock committed to be released for allocation to
Employee Stock Ownership Plan participants
- 18,113 - - - 64,400 82,513
Net unrealized depreciation of available-for-sale securities
- - - (26,725) - - (26,725)
Balance, June 30, 1996
9,660 9,099,156 6,538,602 (7,571) (909,457) (676,200) 14,054,190
Net income
- - 247,189 - - - 247,189
Cash dividends ($.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 available-for-sale securities
- - - 215 - - 215
Balance, June 30, 1997
9,660 9,147,176 6,670,543 (7,356) (2,879,878) (579,350) 12,360,795
Net income
- - 544,049 - - - 544,049
Cash dividends ($.32 per share)
- - (251,172) - - - (251,172)
Common stock committed to be released for allocation to
Employee Stock Ownership Plan participants
- 68,517 - - - 75,502 144,019
Treasury stock issued to vested Recognition and Retention Plan
participants
- - 1,401 - - 63,476 - 64,877
Net unrealized appreciation of available-for-sale securities
- - - 1,827 - - 1,827
Balance, June 30, 1998
$9,660 $9,217,094 $6,963,420 $(5,529) $(2,816,402) $(503,848) $12,864,395
</TABLE>
The accompanying notes are a part of the consolidated financial
statements.
<TABLE>
<CAPTION>
Consolidated Statements Of Cash Flows
for the years ended June 30, 1998, 1997 and 1996
1998 1997 1996
<S> <C> <C> <C>
Cash flows provided by
(used in) operating
activities:
Net income $ 544,049 $ 247,189 $ 335,279
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization 119,130 111,156 106,811
Provision for loan
losses 40,000 - -
Loss on disposition of
equipment - 1,165 775
(Gain) loss on sale of
real estate owned, net (2,521) - 3,865
(Gain) on sale of
securities (19,728) (63,535) -
Deferred income taxes (29,000) 28,000 39,500
Contribution to Employee
Stock Ownership Plan 144,019 138,345 82,513
Contribution to Recognition
and Retention Plan 64,877 47,507 -
Amortization of premiums
and accretion of
discounts, net 110,082 61,944 81,062
Amortization of deferred
loan fees (20,033) (144,532) (99,110)
Loan fees (costs)
deferred, net (22,578) - 750
(Increase) decrease in
other assets (127,609) 90,372 (17,118)
Increase (decrease) in
accrued income taxes 25,107 (48,677) 114,240
Increase (decrease) in
accrued interest and
other expenses 52,488 (55,965) 6,478
Net cash provided by
operating activities 878,283 412,969 655,045
Cash flows provided by
(used in) investing
activities:
Purchase of certificates
of deposit - - (198,000)
Proceeds from maturity of
certificates of deposit 198,000 - 793,000
Proceeds from maturity of
investment securities 800,000 1,500,000 -
Proceeds from sales of
investment securities 1,006,563 938,028 -
Proceeds from sales of
mortgage-backed
securities 781,420 289,121 -
Purchase of investment
securities - (12,415) (2,150,574)
Purchase of mortgage-
backed securities - - (3,018,040)
Principal reductions of
mortgage-backed
securities 2,294,799 2,125,933 2,136,444
Net (increase) in
loans made to
customers and principal
collections on loans (15,739,769) (7,887,055) (2,906,404)
Proceeds from sale of
real estate owned 177,951 - 15,197
Purchase of property
and equipment (14,326) (29,932) (73,383)
Purchase of Federal
Home Loan Bank stock (286,500) - -
Net cash (used in)
investing activities (10,781,862) (3,076,320) (5,401,760)
Cash flows provided by
(used in) financing
activities:
Net increase (decrease)
in deposits 1,130,616 (1,840,053) (1,914,965)
Increase (decrease)
in advances from
borrowers for taxes
and insurance 114,188 (4,092) (71,954)
Federal Home Loan
Bank advances 31,600,000 6,900,000 3,000,000
Federal Home Loan
Bank payments (22,650,000) (400,000) -
Purchase of treasury
stock - (2,011,403) (909,457)
Cash dividends (251,172) (115,248) -
Net cash provided by
financing activities 9,943,632 2,529,204 103,624
Increase (decrease) in
cash and cash
equivalents 40,053 (134,147) (4,643,091)
Cash and cash equivalents,
beginning of year 1,251,373 1,385,520 6,028,611
Cash and cash equivalents,
end of year $ 1,291,426 $ 1,251,373 $ 1,385,520
</TABLE>
The accompanying notes are a part of the consolidated financial
statements.
A. ORGANIZATION AND ACCOUNTING POLICIES.
The following is a summary of the significant accounting
policies followed in the preparation of the consolidated
financial statements of Sobieski Bancorp, Inc. and its
subsidiary (individually and collectively referred to as
"Sobieski"), Sobieski Federal Savings and Loan Association of
South Bend (the "Association").
Organization
Sobieski 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. Sobieski'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. Deposit insurance
premiums after December 31, 1996 decreased to approximately .06%
from the .23% of deposits previously paid by Sobieski.
Principles of Consolidation
The consolidated financial statements include the accounts of
Sobieski and its subsidiary. All significant intercompany
accounts and transactions have been eliminated in consolidation.
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.
The allowance for loan losses is a material estimate that is
particularly susceptible to change in the near term. While
management uses available information to recognize losses on
loans, future additions to the allowance or write-downs may be
necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance
for loan losses. Such agencies could re- quire Sobieski to
recognize additions to the allowance or write-downs based on
their judgment of information available to them at the time of
their examination.
A. ORGANIZATION AND ACCOUNTING POLICIES, Continued.
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 component of stockholders'
equity). Sobieski had no trading securities at June 30, 1998 and
1997.
Gains and losses on all securities transactions are recognized
when sold as determined by the identified certificate method.
Loans
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.
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.
Allowance for Loan Losses
The allowance for loan losses is an estimate used by management
in the preparation of Sobieski's consolidated 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.
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.
A. ORGANIZATION AND 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
Sobieski and its subsidiary 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. Sobieski 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 resulted in taxable income
of approximately $295,000, representing the excess of Sobieski'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 pur- poses ratably over a six-year period. There was no
effect of this change on Sobieski'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.
Sobieski's retained earnings as of June 30, 1998 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
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share." This statement establishes standards
for computing and presenting earnings per share, simplifies the
standards for computation and makes the calculation comparable
to international accounting standards. "Primary" earnings per
share was replaced by "basic" earnings per share and SFAS No.
128 re- quires both "basic" and "diluted" earnings per share be
presented on the face of the income statement. SFAS No. 128 is
effective for periods beginning after December 15, 1997 and re-
quires restatement of prior period earnings per share upon
adoption. Basic earnings per share is computed by dividing net
income by the weighted average number of shares of common
stock outstanding which were as follows: 1998 - 712,808; 1997 -
770,098 and 1996 - 864,621. Diluted earnings per share is
computed by dividing net income by the weighted average number
of shares of common stock outstanding plus the dilutive effect
of outstanding stock options. The weighted average number of
common shares, increased for the dilutive effect of stock
options, used in the computation of diluted earnings per share
were as follows: 1998 - 727,999; 1997 - 776,441 and 1996 -
868,834.
A. ORGANIZATION AND ACCOUNTING POLICIES, Concluded.
Sobieski accounts for the shares of common stock acquired by the
Employee Stock Ownership Plan ("ESOP") and the restricted shares
awarded under the Recognition and Retention Plan ("RRP") in
accordance with American Institute of Certified Public
Accountants ("AICPA") 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 of common stock outstanding until such shares are
committed for allocation to an ESOP participant's individual
account or vested, in the case of the RRP.
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, 1998, 1997 and 1996 are as follows:
Years Ended June 30,
1998 1997 1996
Supplemental disclosures
Of cash flow information:
Cash paid during the years
for:
Interest $ 3,592,989 $ 3,154,873 $ 3,033,648
Income taxes 360,000 202,177 59,060
Noncash investing and
financing activities:
Loans transferred to
real estate owned 164,393 11,037 -
B. CONVERSION TO STOCK SAVINGS AND LOAN ASSOCIATION.
On October 4, 1994, the Board of Directors of Sobieski Federal
Savings and Loan Association of South Bend adopted a Plan of
Conversion (the "Conversion") to convert from a
federally-chartered mutual savings and loan association to a
federally chartered stock savings and loan association.
Sobieski Bancorp, Inc. was organized as a Delaware corporation
in December 1994 for the purpose of acquiring all of the issued
and outstanding capital stock of Sobieski Federal Savings and
Loan Association of South Bend issued in the Conversion.
In connection with the Conversion, on March 30, 1995 Sobieski
sold 966,000 shares of its common stock, par value $.01 per
share, including 77,280 shares acquired by the newly formed
ESOP, for $10 per share.
B. CONVERSION TO STOCK SAVINGS AND LOAN ASSOCIATION, Concluded.
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 of the Association (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 Sobieski 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 Sobieski'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.
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, 1998 are as follows:
Available-For-Sale
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Aggregate
Cost Gains Losses Fair Value
U.S. Treasury
obligations $ 499,267 $ 484 $ (31) $ 499,720
Mortgage-backed
securities 603,381 678 (9,509) 594,550
Total $1,102,648 $1,162 $(9,540) $1,094,270
Held-To-Maturity
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Aggregate
Cost Gains Losses Fair Value
Mortgage-backed
securities $9,943,105 $74,518 $(129,323) $9,888,300
The amortized cost and estimated aggregate fair value of
investment securities and mortgage-backed securities at June
30, 1998, 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.
C.INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES,
Continued
Available-For-Sale Held-To-Maturity
Estimated Estimated
Amortized Aggregate Amortized Aggregate
Cost Fair Value Cost Fair Value
Due in one year
or less $ 499,267 $ 499,720 $ - $ -
Mortgage-backed
securities 603,381 594,550 9,943,105 9,888,300
Total $1,102,648 $1,094,270 $9,943,105 $9,888,300
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
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
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
There were no purchases of available-for-sale securities in
1998. Purchases of available-for- sale securities for the years
ended June 30, 1997 and 1996 totaled $12,415 and $2,621,645,
respectively. There were no purchases of held-to-maturity
securities in 1998 or 1997. Purchases of held-to-maturity
securities for the year ended June 30, 1996 totaled $2,546,969.
C.INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES,
Concluded.
Proceeds from the sales of available-for-sale securities for the
years ended June 30, 1998 and 1997 totaled $781,420 and
$1,227,149, respectively, with gross realized gains on those
sales of $13,165 and $63,535, respectively. Proceeds from the
sale of a held-to-maturity security during the year ended June
30, 1998 totaled $1,006,563, with a gross realized gain of
$6,563. This security was sold as it was within three months of
maturity. There were no sales of investment securities or
mortgage-backed securities during the year ended June 30, 1996.
As required by the Federal Home Loan Bank of Indianapolis,
Sobieski must hold FHLB stock equal to at least 5% of
outstanding advances. As of June 30, 1998 and 1997, Sobieski was
in compliance with this requirement.
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.
D. LOANS.
Loans consisted of the following:
June 30,
1998 1997
One-to-four family mortgage
loans $ 68,616,471 $ 55,714,150
Construction and commercial
mortgage loans 6,785,532 3,928,023
Share loans 146,589 146,561
Small Business Administration
pass-through certificates 2,404,601 2,454,856
77,953,193 62,243,590
Less: Undisbursed portion of
loans in process 1,016,495 882,268
Allowance for loan losses 240,000 200,000
Deferred loan fees (costs), net (15,933) 26,678
Loans, net $ 76,712,631 $ 61,134,644
Sobieski grants loans to its officers and directors in the
normal course of its business. Management believes that these
loans do not involve more than normal risk of collectibility.
Related party loans, exclusive of those not exceeding $60,000 in
the aggregate to any such persons, aggregated $846,138 and
$145,000 at June 30, 1998 and 1997, respectively. Proceeds
from and payments on such loans aggregated $733,363 and $32,225,
respectively, during the year ended June 30, 1998.
D. LOANS, Concluded.
The following is a summary of activity in the allowance for loan
losses:
Years Ended June 30,
1998 1997 1996
Balance, beginning
of year $ 200,000 $ 200,000 $ 200,000
Provision charged to
expense 40,000 - -
Charge-offs - - -
Balance, end of year $ 240,000 $ 200,000 $ 200,000
Nonaccrual loans totaled approximately $188,000, $126,000 and
$90,000 at June 30, 1998, 1997 and 1996, respectively.
E. PROPERTY AND EQUIPMENT.
Property and equipment and related accumulated depreciation and
amortization consisted of the following:
June 30,
1998 1997
Land $ 169,518 $ 169,518
Office buildings 1,698,266 1,696,031
Leasehold improvements 71,481 66,927
Furniture and equipment 588,159 580,622
2,527,424 2,513,098
Less, Accumulated depreciation
and amortization 603,918 484,788
Property and equipment, net $ 1,923,506 $ 2,028,310
F. OTHER ASSETS.
Other assets consisted of the following:
June 30,
1998 1997
Accrued interest receivable:
Loans $ 444,451 $ 300,583
Mortgage-backed securities 69,159 92,092
Investment securities 8,350 23,004
Interest-bearing deposits 698 963
Prepaid expenses and other 71,623 50,030
Total $ 594,281 $ 466,672
G. DEPOSITS.
Deposits consisted of the following:
June 30,
1998 1997
Percent Percent
Amount of Total Amount of Total
NOW accounts, 2.75% $ 3,575,932 5.9% $ 3,875,715 6.5%
Money market accounts,
2.75-3.00% 2,060,436 3.4 2,171,804 3.7
Passbook accounts,
2.50% 13,918,620 23.0 15,170,287 25.5
Certificates of deposit
And IRA accounts:
3.51-5.00% 3,587,725 5.9 9,039,019 15.2
5.01-6.00% 24,711,312 40.9 18,774,255 31.6
6.01-8.00% 12,663,221 20.9 10,355,550 17.5
40,962,258 67.7 38,168,824 64.3
Total $ 60,517,246 100.0% $ 59,386,630 100.0%
The weighted average interest rates on certificates of deposit
and IRA accounts were 5.9% and 5.62% at June 30, 1998 and 1997,
respectively.
The aggregate amount of certificates of deposit and IRA accounts
with a minimum denomination of $100,000 was approximately
$3,915,800 and $2,235,600 at June 30, 1998 and 1997,
respectively. Deposits in denominations greater than $100,000
are in excess of federally insured limits.
At June 30, 1998, scheduled maturities of certificates of
deposit and IRA accounts for the years ending June 30 are as
follows:
1999 2000 2001 2002 2003 Total
3.51-5.00% $ 3,576,968 $ 10,757 $ - $ - $ - $ 3,587,725
5.01-6.00% 12,290,872 8,641,642 2,119,492 1,557,689 101,617 24,711,312
6.01-8.00% 9,842,622 2,485,867 50,000 284,732 - 12,663,221
$25,710,462 $11,138,266 $2,169,492 $1,842,421 $101,617 $40,962,258
G. DEPOSITS, Concluded.
Interest expense on deposits is summarized as follows:
Years Ended June 30,
1998 1997 1996
NOW and money market accounts $ 115,385 $ 117,653 $ 128,385
Passbook accounts 360,530 373,848 456,114
Certificates of deposit and
IRA accounts 2,280,008 2,290,818 2,432,193
Total $ 2,755,923 $ 2,782,319 $ 3,016,692
H. FEDERAL HOME LOAN BANK ADVANCES.
Advances from the Federal Home Loan Bank of Indianapolis at June
30, 1998 consisted of the following:
Variable interest rate (5.71% at June 30, 1998),
maturing on July 9, 1998 $ 700,000
Variable interest rate (5.82% at June 30, 1998),
maturing on July 20, 1998 700,000
Variable interest rate (5.768% at June 30, 1998),
maturing on July 30, 1998 900,000
Variable interest rate (6.00% at June 30, 1998),
maturing on July 30, 1998 500,000
Variable interest rate (5.74% at June 30, 1998),
maturing on August 14, 1998 1,400,000
Variable interest rate (5.736% at June 30, 1998),
maturing on September 14, 1998 3,500,000
5.31%, maturing on February 19, 2003 4,000,000
5.33%, maturing on February 26, 2003 1,750,000
5.45%, maturing on June 23, 2003 3,000,000
5.09%, maturing on June 2, 2008 2,000,000
Total $ 18,450,000
As of June 30, 1998, annual maturities of Federal Home Loan Bank
advances for each of the next five years ending June 30 are as
follows: 1999 - $7,700,000; 2000 - $0; 2001 - $0; 2002 - $0 and
2003- $8,750,000.
H. FEDERAL HOME LOAN BANK ADVANCES, Concluded.
Advances from the Federal Home Loan Bank of Indianapolis at June
30, 1997 consisted of the following:
5.92%, maturing on July 7, 1997 $ 500,000
Variable interest rate (5.79% at June 30, 1997),
maturing on July 10, 1997 700,000
5.92%, maturing on July 28,1997 900,000
Variable interest rate (6.97% at June 30, 1997),
maturing on August 11, 1997 900,000
Variable interest rate (6.97% at June 30, 1997),
maturing on August 14, 1997 500,000
Variable interest rate (5.78% at June 30, 1997),
maturing on September 8, 1997 2,000,000
Variable interest rate (6.97% at June 30, 1997),
maturing on November 26, 1997 500,000
5.81%, maturing on December 8, 1997 500,000
5.77%, maturing on May 28, 1998 1,000,000
5.75%, maturing on June 18, 1998 2,000,000
Total $ 9,500,000
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.
I. INCOME TAXES.
Income taxes consist of the following:
Years Ended June 30,
1998 1997 1996
Federal:
Current $ 332,000 $ 106,500 $ 132,300
Deferred (29,000) 28,000 39,500
303,000 134,500 171,800
State 95,000 47,000 41,000
Total $ 398,000 $ 181,500 $ 212,800
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,
1998 1997 1996
Computed statutory tax
provision $ 320,300 $ 145,800 $ 186,400
State income taxes,
net of federal
income tax benefit 62,700 31,000 27,100
Non-deductible portion
of ESOP contributions 23,300 14,100 7,200
Business meals and
entertainment 2,900 5,300 5,600
Other, net (11,200) (14,700) (13,500)
$ 398,000 $ 181,500 $ 212,800
Effective tax rate 42.2% 42.3% 38.8%
The components of the net deferred tax asset (liability) at June
30, 1998 and 1997 were as follows:
June 30,
1998 1997
Deferred tax asset (liability):
Deferred loan fees (costs) $ (7,400) $ 4,600
Allowance for loan losses 81,600 68,000
Special tax bad debt deductions (66,900) (83,700)
Depreciation and amortization (800) (11,500)
Net unrealized depreciation of
available-for-sale securities 2,849 4,823
Other, net 5,500 5,600
Net deferred tax asset (liability) $ 14,849 $ (12,177)
J. RETIREMENT AND BENEFIT PLANS.
Sobieski has a defined contribution retirement plan under
Section 401(k) of the Internal Revenue Code. Substantially all
employees of Sobieski are eligible to participate in the plan.
Under the plan, Sobieski 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, 1998, 1997 and 1996 was $6,781, $10,312 and
$13,383, respectively.
Sobieski has an ESOP for the benefit of Sobieski employees who
meet certain eligibility requirements including having completed
1,000 hours of credited service within a twelve- month period
with Sobieski. The ESOP trust acquired 77,280 shares of
Sobieski's common stock with proceeds from a loan from Sobieski.
Sobieski makes cash contributions to the ESOP on a semi-annual
basis in amounts sufficient to enable the ESOP trustee to make
its required debt service payments to Sobieski.
The promissory note payable to Sobieski by the ESOP trustee
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 continuing until December 31,
2006. The note is collateralized by the unallocated shares of
Sobieski's common stock held by the ESOP.
As the ESOP promissory note is repaid, shares of Sobieski's
common stock are released from collateral and allocated to
qualified ESOP participants based on the proportion of debt
service paid during the period. Sobieski accounts for the ESOP
in accordance with AICPA 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 $144,019, $138,345 and $82,513 for the
years ended June 30, 1998, 1997 and 1996, respectively.
Following is a summary of shares held by the ESOP trust as of
June 30, 1998:
Allocated shares 26,895
Unreleased shares 50,385
Total ESOP shares 77,280
Fair value of unreleased shares at June 30, 1998 $ 944,700
J. RETIREMENT AND BENEFIT PLANS, Concluded.
Effective July 1, 1998, Sobieski established non-qualified
supplemental benefit plans for certain of its officers and
directors. These plans generally provide for the payment of
supplemental retirement benefits over a period of ten (10)
years, beginning with the later of (a) the officer's or
director's attainment of a specified retirement age; or (b) upon
termination of the officer's employment with Sobieski or the
director's termination as a member of Sobieski's Board of
Directors. The estimated aggregate present value of these future
benefits will be accrued over the average remaining service life
of the officer and director group commencing July 1, 1998.
Sobieski will also maintain life insurance contracts on the
officers and directors to provide funding for the retirement
obligations. No compensation expense associated with these
agreements has been recorded at June 30, 1998.
K. INCENTIVE STOCK PLANS.
Sobieski has two incentive stock plans; 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 Sobieski's
common stock have been re- served for the awarding of restricted
shares to Sobieski'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 Sobieski 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, 1998 and 1997, an aggregate of
25,640 and 23,040 shares, respectively, of Sobieski's common
stock, with a market value of $318,720 and $267,020,
respectively, at the respective dates of grant, have been
awarded under the RRP. Contribution expense recognized for the
years ended June 30, 1998, 1997 and 1996 related to the award of
RRP shares was $57,778, $48,295 and $31,095, respectively.
Pursuant to the Stock Option Plan, an aggregate of 96,600 shares
of Sobieski's common stock have been reserved for the granting
of stock options and other long-term incentive awards to
Sobieski'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 Sobieski'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.
K. INCENTIVE STOCK PLANS, Concluded.
The following is a summary of the activity with respect to
Sobieski's Stock Option Plan for the three years ended June 30,
1998:
Weighted-
Average
Exercise
Number of Price
Shares Per Share
Outstanding, July 1, 1995 - $ -
Granted 42,480 12.63
Outstanding, June 30, 1996 42,480 12.63
Granted 19,320 12.50
Canceled (9,000) 12.63
Outstanding, June 30, 1997 52,800 12.58
Granted 11,500 19.21
Outstanding, June 30, 1998 64,300 13.77
At June 30, 1998, options exercisable under the Stock Option
Plan totaled 17,256 shares and had a weighted-average exercise
price per share of $12.60. At June 30, 1997, options exercisable
under the Stock Option Plan totaled 6,696 shares and had a
weighted-average exercise price per share of $12.63. For options
outstanding at June 30, 1998, the exercise price per share
ranged from $12.50 to $21.25 and the weighted-average remaining
contractual life of the options was 8 years. As of June 30,
1998, 32,300 shares of common stock were reserved for future
option grants under the Stock Option Plan compared to 43,800
shares as of June 30, 1997.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes Option-Pricing Model with the
following weighted-average assumptions used for option grants
during 1998, 1997 and 1996:
Risk free interest rate 5.88% Volatility rate 20.45%
Expected life 7 years Expected dividends 1.71%
Pro forma net income and earnings per share, reported as if
compensation expense had been recognized under the fair value
provisions of Statement of Financial Accounting Standards No.
123, "Accounting For Stock-Based Compensation", for Sobieski's
stock option plans, were as follows for the years ended June 30:
1998 1997 1996
Pro forma net income $ 519,500 $ 225,000 $ 319,000
Pro forma earnings per share:
Basic .73 .29 .37
Diluted .71 .29 .37
L. REGULATORY CAPITAL.
Sobieski Federal Savings and Loan Association (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 guide- lines 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 de- fined. As of June 30,
1998, 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 mini- mum 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, 1998:
Stockholder's equity $ 9,197,170
Add: Net unrealized depreciation of
available-for-sale securities 5,529
Tangible and Tier I capital 9,202,699
Add: Allowance for loan losses 240,000
Total risk-based capital $ 9,442,699
L. REGULATORY CAPITAL, Concluded.
The following are details of the Association's regulatory
capital position and the related capital requirements as of
June 30, 1998. 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 Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
Risk-Based Capital
(to Risk-Weighted
Assets) $ 9,443 20.69 $ 3,651 > 8.0% $ 4,564 >10.0%
Tier I Capital
(to Risk-Weighted
Assets) 9,203 20.16 1,826 >4.0% 2,738 > 6.0%
Tier I Capital
to Adjusted
Assets) 9,203 10.23 3,598 > 4.0% 4,498 > 5.0%
Tangible Capital
to Tangible
Assets) 9,203 10.23 2,698 > 3.0% N/A N/A
M. 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
($6,033,000 and $1,769,000 at June 30, 1998 and 1997,
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.
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, 1998 and 1997 are as follows:
Carrying Estimated
Amount Fair Value
1998 1997 1998 1997
Assets:
Cash and cash
equivalents $ 1,291,426 $ 1,251,373 $ 1,291,426 $ 1,251,373
Certificates of
deposit - 198,000 - 198,000
Investment securities 499,720 2,297,148 499,720 2,310,048
Mortgage-backed
securities 10,537,655 13,709,562 10,482,850 13,397,710
Loans, net 76,712,631 61,134,644 85,710,951 61,521,000
Federal Home Loan
Bank stock 922,500 636,000 922,500 636,000
Liabilities:
Deposits 60,517,246 59,386,630 61,155,000 59,508,000
Federal Home Loan
Bank advances 18,450,000 9,500,000 18,971,000 9,511,000
Estimated
Contract or Unrealized
Notional Amount Gain
1998 1997 1998 1997
Off-balance-sheet
Financial instruments:
Loan commitments -
fixed rate $ 1,916,000 $ 1,331,000 $ 29,000 $ 13,000
Loan commitments -
adjustable rate 4,117,000 438,000 - -
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.
N. FAIR VALUE OF FINANCIAL INSTRUMENTS, Concluded.
Loans:
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 value 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, 1998 and
1997. 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.
Sobieski Bancorp, Inc.'s statements of financial condition at
June 30, 1998 and 1997, and its related statements of income and
cash flows for the years ended June 30, 1998, 1997 and 1996 are
as follows:
STATEMENTS OF FINANCIAL CONDITION
at June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 437,601 $ 24,566
Loans 2,624,037 3,089,198
Note receivable from subsidiary 547,400 611,800
Investment in subsidiary 9,197,170 9,018,312
Other assets 58,808 144,179
Total assets $ 12,865,016 $ 12,888,055
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Note payable to subsidiary $ - $ 500,000
Accrued income taxes and
other liabilities 621 27,260
Total liabilities 621 527,260
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 9,217,094 9,147,176
Retained earnings, substantially
restricted 6,963,420 6,670,543
Net unrealized depreciation of
available-for-sale securities (5,529) (7,356)
16,184,645 15,820,023
Less, Treasury stock, at cost,
201,821 and 206,368 shares,
respectively 2,816,402 2,879,878
Unallocated Employee Stock Ownership
Plan shares; 50,385 and 57,935 shares,
respectively 503,848 579,350
Total stockholders' equity 12,864,395 12,360,795
Total liabilities and
stockholders' equity $ 12,865,016 $ 12,888,055
</TABLE>
O. PARENT COMPANY FINANCIAL INFORMATION, Continued.
STATEMENTS OF INCOME
for the years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Income:
Interest income on loans $ 230,959 $ 231,082 $ 260,652
Dividends received from
subsidiary 500,266 1,449,000 217,350
Interest on note receivable
from subsidiary 46,345 51,356 56,366
Other interest income - - 266
Total income 777,570 1,731,438 534,634
Expenses:
Compensation and benefits 57,900 57,900 63,900
Occupancy and equipment 6,000 6,000 6,000
Professional fees 23,622 37,349 76,098
Interest on note payable to
subsidiary 23,303 24,006 -
Other operating expenses 48,831 48,159 65,800
Total expenses 159,656 173,414 211,798
Income before income taxes
and equity in undistributed
earnings of subsidiary 617,914 1,558,024 322,836
Income taxes 42,000 43,000 42,000
Income before equity in
undistributed earnings
of subsidiary 575,914 1,515,024 280,836
Equity in undistributed
earnings (losses )
of subsidiary (31,865) (1,267,835) 54,443
Net income $ 544,049 $ 247,189 $ 335,279
</TABLE>
O. PARENT COMPANY FINANCIAL INFORMATION, Concluded.
STATEMENTS OF CASH FLOWS
for the years ended June 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income $ 544,049 $ 247,189 $ 335,279
Adjustments to reconcile net
income to net cash provided
by operating activities:
Equity in undistributed
losses (earnings) of
subsidiary 31,865 1,267,835 (54,443)
Decrease (increase) in
other assets 85,371 (111,453) 2,597
Increase (decrease) in
accrued income taxes
and other liabilities (26,639) (44,852) 37,665
Net cash provided by
operating activities 634,646 1,358,719 321,098
Cash flows from investing
activities:
Payments received on note
receivable from subsidiary 64,400 64,400 96,600
Net decrease in loans
purchased from subsidiary
and principal collections
on loans 465,161 203,525 282,983
Net cash provided by
investing activities 529,561 267,925 379,583
Cash flows from financing
activities:
Proceeds from note payable
to subsidiary - 500,000 -
Payments on note payable
to subsidiary (500,000) - -
Purchase of treasury stock - (2,011,403) (909,457)
Cash dividends (251,172) (115,248) -
Net cash (used in) financing
activities (751,172) (1,626,651) (909,457)
Net increase (decrease) in
cash and cash equivalents 413,035 (7) (208,776)
Cash and cash equivalents:
Beginning of year 24,566 24,573 233,349
End of year $ 437,601 $ 24,566 $ 24,573
</TABLE>
These financial statements should be read in conjunction with
Sobieski'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 19, 1998 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 B
of Notes to Consolidated Financial Statements. The Association's
total capital at June 30, 1998 exceeded the amounts of its
liquidation account and regulatory capital requirements.
The following table sets forth the per share price range of the
Company's common stock and dividends paid for each quarter of
fiscal 1998 and 1997. The prices reflect interdealer quotations
without retail markup, markdown or commissions, and do not
necessarily reflect actual transactions.
1998 1997
High Low Dividends High Low Dividends
First Quarter $17.75 $14.75 $0.08 $12.75 $11.75 $ -
Second Quarter 20.38 18.00 0.08 17.00 12.75 -
Third Quarter 24.25 18.25 0.08 15.50 14.00 0.07
Fourth Quarter 21.25 18.75 0.08 15.25 14.50 0.07
At August 20, 1998, there were 782,000 shares of Sobieski
Bancorp, Inc. common stock issued and outstanding and there were
approximately 375 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, 1998, 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
of Sobieski Bancorp, Inc. and TransTech Electric, Co. and
Sobieski Federal Savings and Loan Chairman of the Board of
Association Sobieski Bancorp, Inc. and
Sobieski Federal Savings and Loan
Association
Joseph F. Nagy Leonard J. Dobosiewicz
Auditor, St. Joseph County Maintenance Professional
Joseph A. Gorny George J. Aranowski
Owner, Liquor Store Public Accountant
EXECUTIVE OFFICERS
Thomas F. Gruber Marsha Nafrady
President and Chief Executive Officer Secretary and Treasurer
Arthur Skale Gregory J. Matthews
Chief Financial Officer Vice President of Operations
INDEPENDENT AUDITORS GENERAL COUNSEL SPECIAL COUNSEL
PricewaterhouseCoopers LLP Kenneth Fedder,Esq. Silver,Freedman & Taff,L.L.P.
4101 Edison Lakes Parkway 205 West Jefferson Blvd. 1100 NewYork Avenue, NW
Suite 200 South Bend, Indiana 46601 Seventh Floor
Mishawaka, Indiana 46545 Washington DC 20005
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
State of Percentage
Parent Subsidiary Incorporation of Ownership
Sobieski Bankcorp, Inc. Sobieski Federal
Savings and Loan
Association
United States 100%
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] JUN-30-1998
[PERIOD-END] JUN-30-1998
[CASH] 1291426
[SECURITIES] 11959875
[RECEIVABLES] 76712631
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 0
[PP&E] 2532636
[DEPRECIATION] 0
[TOTAL-ASSETS] 92496568
[CURRENT-LIABILITIES] 79632173
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 9660
[OTHER-SE] 12854735
[TOTAL-LIABILITY-AND-EQUITY] 92496468
[SALES] 0
[TOTAL-REVENUES] 6725015
[CGS] 0
[TOTAL-COSTS] 0
[OTHER-EXPENSES] 2132528
[LOSS-PROVISION] 40000
[INTEREST-EXPENSE] 3610438
[INCOME-PRETAX] 942049
[INCOME-TAX] 398000
[INCOME-CONTINUING] 0
<DISCOUNTINUED> 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 544049
[EPS-PRIMARY] .76
[EPS-DILUTED] .75
</TABLE>
