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, 1999
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. [x]
State Issuer's revenues for its most recent fiscal year $7,566,000.
As of September 22, 1999, there were issued and outstanding
722,132 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 22, 1999, was approximately $7.6 million.
(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, 1999.
Part III of Form 10-KSB - Portions of the Proxy Statement for
the 1999 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 Sav- ings and Loan
Association of South Bend ("Sobieski Federal" or the "Association")
for the pur- pose of acquiring 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").
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.
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, 1999, the Company had assets of approximately $103.7 million,
deposits of approximately $64.2 million and stockholders' equity of
approximately $12.6 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 stock savings and loan
association headquartered in South Bend, Indiana. Sobieski Federal
was originally chartered under the laws of the State of Indiana in
1893 and converted to a federally chartered mutual savings and loan
association in 1936. Its deposits are insured up to the maximum allowable
amount by the Federal Deposit Insurance Corporation (the "FDIC") under
the Savings Association Insurance Fund (the "SAIF"). Through its main
office and two branch offices, Sobieski Federal 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 mortgage loans for
retention in its portfolio. In addition, the Association originates
construction loans, consumer loans and real estate-backed small business
commercial loans. During both fiscal 1999 and 1998, the Association
purchased participation interests in commercial loans funded primarily
by advances from the Federal Home Loan Bank ("FHLB") of Indianapolis.
Forward-Looking Statements
When used in this Form 10-KSB and in future filings by the Company
with the Securities and Exchange Commission (the "SEC"), in the
Company's press releases or other public or shareholder communications,
and in oral statements made with the approval of an authorized executive
officer, the words or phrases "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project", "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 re- lease 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 family mortgage loans for retention in its portfolio. Since
September 1994, the Association has begun to originate adjustable-rate
mortgage loans for retention in its portfolio. However, in response to
customer demand, the Association continues to originate fixed-rate
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 secured by first mortgages on owner-occupied
one-to-four family residences, to a much lesser extent, it also originates
construction and consumer loans. During fiscal 1999 and 1998, the
Association purchased participation interests in commercial loans funded
with one to five-year FHLB advances from the FHLB of Indianapolis. The
Association has in the past purchased parti-cipations of the Small
Business Administration (the "SBA") and originated a limited number of
commercial real and non-real estate secured loans. Substantially all of
the Association's loans are originated in its market area.
At June 30, 1999, the Association's net loan portfolio totaled
$87.9 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, 1999, the maximum amount which the Association could loan
to any one borrower and the borrower's related entities was $1,713,000.
At June 30, 1999, 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 $1,412,000. As of June 30, 1999, this loan was performing 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
stability of the borrower and the credit worthiness of the borrower.
The Association requires evidence of marketable title and lien position
or appropriate title insurance (except on certain home equity loans) on
all loans secured by real property. The Association also requires fire
and extended coverage casualty insurance in amounts at least equal to the
lesser of the principal amount of the loan or the value of improvements
on the property, depending on the type of loan. As required by federal
regulations, the Association also requires flood insurance to protect
the property securing its interest if property is located in a designated
flood area.
Loan Portfolio Composition. The following information presents the
composition of the Company's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred loan fees
and allowances for loan losses) as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
1999 1998 1997
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to-four family .........$68,325 76.6% $62,697 80.4% $54,572 87.7%
Commercial ...................9,882 11.1 5,649 7.3 2,455 3.9
Construction .................1,531 1.7 1,032 1.3 869 1.4
Home equity...................2,875 3.2 2,675 3.4 1,142 1.8
Total real estate loans..... 82,613 92.6 72,053 92.4 59,038 94.8
Other Loans:
Deposit loans ................. 114 .1 147 .2 147 .2
Commercial business loans ....6,462 7.3 5,753 7.4 3,059 5.0
Total other loans ............6,576 7.4 5,900 7.6 3,206 5.2
Total loans ............... 89,189 100.0% 77,953 100.0% 62,244 100.0%
Loans in process ......... (994) (1,016) (882)
Deferred loan costs (fees) .. 15 16 (27)
Allowance for loan losses ... (310) (240) (200)
Total loans, net .......... $87,900 $76,713 $61,135
</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,
1999 1998 1997
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 ...... $64,422 72.2% $56,198 72.1% $51,031 82.0%
Construction ................1,431 1.6 1,032 1.3 869 1.4
Total real estate loans ....65,853 73.8 57,230 73.4 51,900 83.4
Deposit loans ............. 114 .1 147 .2 147 .2
Commercial business .... .. 4,164 4.7 2,649 3.4 1,899 3.1
Total fixed-rate loans ... 70,131 78.6 60,026 77.0 53,946 86.7
Adjustable-Rate Loans:
Real estate:
One-to-four family ......... 3,903 4.4 6,499 8.3 3,541 5.7
Commercial ............... 9,882 11.1 5,649 7.3 2,455 3.9
Construction ........... 100 .1 --- --- --- ---
Home equity............... 2,875 3.2 2,675 3.4 1,142 1.8
Total real estate loans... 16,760 18.8 14,823 19.0 7,138 11.4
Commercial business ....... 2,298 2.6 3,104 4.0 1,160 1.9
Total adjustable-rate loans 19,058 21.4 17,927 23.0 8,298 13.3
Total loans ............... 89,189 100.0% 77,953 100.0% 62,244 100.0%
Loans in process ........... (994) (1,016) (882)
Deferred loan costs (fees).. 15 16 (27)
Allowance for loan losses ... (310) (240) (200)
Total loans, net ..........$87,900 $76,713 $61,135
</TABLE>
The following schedule illustrates the amortization schedule by
contractual maturity of the Company's loan portfolio at June 30, 1999.
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
Multi-Family
One-to-Four and Home Deposit Commercial
Family Commercial Construction(2) Equity Loans Business Total
(Dollars in Thousands)
Due during the twelve
months ending June 30,
<S> <C> <C> <C> <C> <C> <C> <C>
2000 (1) ..$2,407 $ 624 $ 114 $ 174 $ 67 $2,128 $ 5,514
2001 ... 2,599 779 15 189 47 2,129 5,758
2002 ... 2,803 837 16 206 - 1,369 5,231
2003 and
2004..... 6,288 1,559 36 470 - 410 8,763
2005 to
2009...... 19,260 3,484 116 1,600 - 426 24,886
2010 to
2029 ..... 34,968 2,599 1,234 236 - - 39,037
Total ... $68,325 $9,882 $ 1,531 $2,875 $ 114 $6,462 $89,189
Weighted
average
interest
rate .... 7.50% 7.21% 7.33% 8.65% 8.02% 8.35% 7.56%
</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, 2000 that have predetermined
interest rates is $61.9 million.
One-to-Four Family Residential Mortgage and Home Equity Lending.
Residential loan originations are generated by the Association's
marketing efforts, its present customers, walk-in customers and referrals
from real estate brokers. Historically, the Association has focused its
lending efforts primarily on the origination of fixed-rate loans secured
by first mortgages on owner-occupied, single-family residences in its
market area. In September 1994, the Association began to originate
adjustable rate mortgage ("ARM") loans. At June 30, 1999, the Company's
one-to-four family residential mortgage loan portfolio totaled
$68.3 million, or 76.6% of the Company's gross loan portfolio.
The Association currently offers fixed-rate and adjustable rate mortgage
and home equity loans. For the year ended June 30, 1999, the Association
originated $23.9 million of one-to-four family real estate related loans.
At June 30, 1999, the Association had $3.9 million of one-to-four family
adjustable-rate mortgage loans, and $64.4 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 also offers adjustable-rate mortgage loans at rates
and on terms determined in accordance with market and competitive factors.
The Association 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 Constant 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
Freddie Mac. 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, 1999, the Association's
second mortgage loans and home equity loans totaled $496,000 and
$2.9 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, 1999, the Association's construction loan portfolio totaled
$1.5 million, or 1.7% 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 con- verted 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 private
mortgage insurance ("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 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
lend- ing is generally considered to involve a higher level of credit
risk than one-to-four family resi- dential 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, 1999 totaled $9.9 million or 11.1% of the Company's gross
loan portfolio. These loans consist of participation certificates
guaranteed by the SBA of $2.2 million, participations with other financial
institutions in commercial real estate loans of $1.5 million and internally
originated commercial real estate loans and credit lines totaling
$6.2 million. As of June 30, 1999, all of these loans were performing
in accordance with their terms and Sobieski Federal has not experienced
any losses on these loans.
Deposit-Backed Lending. Deposit loans at June 30, 1999 totaled $114,000
or approximately .1% of the Company's gross loan portfolio. These loans
consisted of share loans secured by deposit accounts. Even though some
of these loans are currently delinquent ($20,000, or 17.5% of total deposit
loans at June 30, 1999), they do not entail great risk because they are
fully secured by savings deposit accounts with balances exceeding the
amount of the loan. Management believes the delinquencies primarily result
from timing factors wherein borrowers are waiting for certificates to
mature to repay the loans. Historically, losses from consumer loans have
been non-existent.
Commercial Business Lending. Commercial business loans at June 30, 1999
totaled $6.5 million or 7.3% 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, airplanes and other business assets. All
of these loans were performing in accordance with their terms at
June 30, 1999. See "Business-Asset Quality".
Originations and Purchases of Loans 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, 1999, the Association originated $34.5 million in
loans. Originations consisted of $23.9 million of one-to-four family real
estate loans, $36,000 of deposit loans and $10.6 million in nonresidential
real estate and commercial loans.
Loan originations during the year ended June 30, 1999 were 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
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 1999, the Association purchased $5.9 million of
participation interests in commercial loans funded by advances from
the FHLB of Indianapolis. 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,
1999 1998 1997
(In Thousands)
<S> <C> <C> <C>
Originations:
One-to-four family real estate
and home equity $23,851 $23,300 $15,081
Deposit loans ........ 36 32 22
Non-residential real estate
and commercial loans 10,589 7,348 1,114
Total originations ....... 34,476 30,680 16,217
Purchases:
Purchases of commercial
business loans........... 5,848 3,944 3,030
Total purchases ......... 5,848 3,944 3,030
Repayments:
Loans ................... (29,088) (18,748) (11,226)
Mortgage-backed securities .. (2,489) (2,295) (2,126)
Other, net .................. (181) (167) (134)
Total repayments.............. (31,758) (21,210) (13,486)
Net increase ............... $ 8,566 $ 13,414 $ 5,761
</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
delin-quent. 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 delin- quent 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 his- tory, current financial status,
cooperativeness, future prospects and the reason for the delinquen- cy.
If the loan is more than 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, 1999.
<TABLE>
<CAPTION>
Loans Delinquent For:
60-89 Days 90 Days and Over Total Delinquent Loans
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
One-to-four
family 18 $551 0.8% 4 $125 0.2% 22 $676 1.0%
Home
equity..... - - - % 3 57 2.0% 3 57 2.0%
Total ..... 18 $551 0.6% 7 $182 0.2% 25 $733 0.8%
</TABLE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in the Association's loan
portfolio. Loans are placed on non-accrual status when the collection
of principal and/or interest becomes doubtful. Foreclosed assets include
assets acquired in settlement of loans. The Association had no accruing
loans more than 90 days delinquent at June 30, 1999.
<TABLE>
<CAPTION>
At June 30,
1999 1998 1997 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One-to-four family ..$125 $76 $118 $ 90 $ 35
Consumer ............ 57 - 8 - 6
Total ............... 182 76 126 90 41
Foreclosed assets:
One-to-four family .. - - 11 - 19
Total ............... - - 11 - 19
Total non-performing
assets ..............$182 $76 $137 $ 90 $ 60
Total as a percentage
of total assets .... .18% .08% .17% .12% .08%
</TABLE>
For the year ended June 30, 1999, gross interest income which would
have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $7,000.
Other Loans of Concern. At June 30, 1999, 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 borrowers 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 continuance as
assets without the establishment of a specific loss reserve is not
warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for
loan losses in an amount deemed prudent by management. General
allowances represent loss allowances which have been established to
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 as classified or to charge-off
such amount. An institution's determination as to the classification of
its assets and the amount of its valuation allowances is subject to review
by the regulatory authorities, who may order the establishment of addition
general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Association
regularly reviews problem loans and real estate acquired through
foreclosure to determine whether such assets require classification
in accordance with applicable regulations. On the basis of management's
review of its assets, at June 30, 1999, the Association had classified a
total of $182,000 of its assets as substandard, none as doubtful and none
as loss. At June 30, 1999, total classified assets comprised $182,000 or
1.4% of the Company's capital and 0.18% 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 classifications discussed
above, the estimated fair value of the underlying collateral, economic
conditions, historical loan loss experience, the amount of loans
outstanding and other factors that warrant recognition in providing for
an adequate loan loss allowance. A significant factor considered in the
unallocated allowance was the historically low level of loans other than
one-to-four family real estate loans. Management recognizes that as loan
growth continues additional provisions to the allowance may be required.
Real estate properties acquired through foreclosure are recorded at the
lower of cost or fair value minus estimated cost to sell. If fair value
at the date of foreclosure is lower than the balance of the related loan,
the difference will be charged-off to the allowance for loan losses at the
time of transfer. Valuations are periodically updated by management and if
the value declines, a specific provisions for losses on such property is
established by a charge to operations.
Although management believes that it uses the best information available
to determine the allowance, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if
circumstances differ substantially from the assumptions used in making
the final determination. Future additions to the Association's allowance
for loan losses will be the result of periodic loan, property and
collateral reviews and thus cannot be predicted in advance. In addition,
federal regulatory agencies, as an integral part of the examination
process, periodically review the Association's allowance for loan losses.
Such agencies may require the Association to recognize additions to the
allowance level based upon their judgment of the information available
to them at the time of their examination. At June 30, 1999, the
Association had a total allowance for losses on loans of $310,000
representing 170% of total non-performing loans and .35% 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,
1999 1998 1997
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of
period ........................ $240 $200 $200
Charge-offs:
One-to-four family ............ --- --- ---
Recoveries:
One-to-four family ............ --- --- ---
Provision charged to
operations .................... 70 40 ---
Balance at end of period ...... $310 $240 $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>
The distribution of the Company's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
At June 30,
1999 1998 1997
Percent Percent Percent
of of of
Loan Loss Total Total Loan Loss Total Total Loan Loss Total Total
Allowance Loans Loans Allowance Loans Loans Allowance Loans Loans
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to
- -four
family $ 12 $68,325 77.4% $ 25 $62,698 81.5% $ 12 $55,693 90.80%
Home
equity.. 6 2,875 3.3 - - - - - -
Unalloc-
ated ... 292 17,010 19.3 215 14,255 18.5 188 5,642 9.20
Total(1) $310 $88,210 100.0% $240 $76,953 100.0% $200 $61,335 100.0%
</TABLE>
(1) Total loans represent the amount before deducting the loan loss
allowance.
Investment Activities
General. Sobieski Federal must maintain minimum levels of investments
that qualify as liquid assets under OTS regulations. Liquidity may
increase or decrease depending upon the availability of funds and
comparative yields on investments in relation to the return on loans.
Historically, the Association has generally maintained liquid assets
at levels above the minimum requirements imposed by the OTS regulations
and at levels believed adequate to meet the requirements of normal
operations, including repayments of maturing debt and potential deposit
outflows. Cash flow projections are regularly reviewed and updated to
assure that adequate liquidity is maintained. At June 30, 1999, the
Association's liquidity ratio (liquid assets as a percentage of net
withdrawable savings deposits and current borrowings) was 13.6%.
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 three outside directors, Robert J. Urbanski, Joseph F. Nagy,
and Richard J. Cullar, plus President and Chief Executive Officer
Thomas F. Gruber and Vice President of Finance Arthur Skale. Subject to
the policies established by the Board of Directors, President Gruber
and Vice President Skale are authorized to purchase and sell securities.
All securities transactions are reported to the Board of Directors at
their next regular meeting.
Mortgage-Backed Securities. The Association purchases mortgage-backed
securities to supplement residential loan production and as part of its
asset/liability strategy. The type of 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
securities purchased by the Association over the last several years have
had adjustable rates of interest. At June 30, 1999, the amortized cost of
the Association's mortgage-backed securities was $7.96 million and the
market value of these mortgage-backed securities was $7.86 million at
that date.
At June 30, 1999, $7.48 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 $.48 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, 1999.
As of June 30, 1999, 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 Fannie Mae, Freddie Mac and the Government National Mortgage
Association ("GNMA"). The Fannie Mae, Freddie Mac and GNMA certificates
are modified pass-through mortgage-backed securities that represent
undivided interests in underlying pools of fixed-rate, or certain types
of adjustable rate, predominantly single-family and, to a lesser extent,
multi-family residential mortgages issued by those government-sponsored
entities. As a result, the interest rate risk characteristics of the
underlying pool of mortgages, i.e., fixed rate or adjustable rate, as
well as prepayment risk, are passed on to the certificate holder.
Fannie Mae and Freddie Mac generally provide the certificate holder a
guarantee of timely payments of interest and ultimate collection of
principal, whether or not collected. GNMA's guarantee to the holder
is timely payments of principal and interest, backed by the full faith
and credit of the U.S. Government.
Mortgage-backed securities generally yield less than the loans that
underlie such securities, because of the cost of payment guarantees
or credit enhancements that reduce credit risk to holders. Since federal
agency mortgage-backed securities generally carry a yield approximately
50 to 100 basis points below that of the corresponding type of residential
loan (due to the implied federal agency guarantee fee and the retention
of a servicing spread by the loan servicer), in the event that the
proportion of the Association's assets consisting of mortgage-backed
investments increase in the future, the Association's assets yields
would be adversely affected. Mortgage-backed securities are also more
liquid than individual mortgage loans and may be used to collateralize
obligations of the Association. In general, mortgage-backed securities
issued or guaranteed by Fannie Mae and Freddie Mac are weighted at no
more than 20% for risk-based capital purposes, and mortgage-backed
securities issued or guaranteed by GNMA are weighted at 0% for risk-based
capital purposes, compared to an assigned risk weighing of 50% to 100%
for whole residential mortgage loans.
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, such securities remain subject to the risk
that a fluctuating interest rate environment, along with other factors
such as the geographic distribution of the underlying mortgage loans,
may alter the prepayment rate of such mortgage loans and so affect to
the prepayment speed, and value, of such securities. Mortgage-backed
securities involve a risk that actual prepayments will differ from
estimated prepayments over the life of the security which may require
adjustments to the amortization of any premium or accretion of any
discount relating to such instruments, thereby reducing the net yield
on such securities. There is also reinvestment risk associated with
the cash flows from such securities. In addition, the market value of
such securities may be adversely affected by changes in interest rates.
The adjustable rate and/or short maturity of the Association's portfolio
is designed to minimize that risk.
Investment Securities and Other Interest-Earning Assets. At June 30, 1999,
Sobieski Federal's interest-bearing deposits with financial institutions
totaled $166,000, or .16% of total assets, and its investment securities,
consisting of U.S. Government, agency and municipal securities, totaled
$2.8 million, or 2.7% of total assets. In addition, as of such date, the
Association had an investment of $1.3 million in FHLB stock, satisfying
its requirement for membership in the FHLB of Indianapolis. It is the
Association's general policy to purchase securities which are
U.S. Government securities or federal agency obligations or other
issues that are rated investment grade. At June 30, 1999, the weighted
average maturity of the securities portfolio (excluding FHLB stock)
was 3.2 years.
The Association's investment securities portfolio at June 30, 1999
contained no 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, 1999.
<TABLE>
<CAPTION>
6 6 1 to 3 5 10 Over June 30,1999
Months Months 3 to 5 to 10 to 20 20 Balance
or Less to 1 Year Years Years Years Years Years Outstanding
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal Home
Loan Mortgage
Corporation:
Adjustable
- -rate ......... $ 7 $ 7 $ 34 $ 44 $ 172 $ 917 $348 $1,529
Federal National
Mortgage Association:
Adjustable
- -rate ......... 26 27 130 169 678 3,761 - 4,791
Government National
Mortgage Association:
Fixed-rate ....... 1 1 7 10 45 198 - 262
Adjustable-rate .. 5 5 23 30 121 687 352 1,223
Net premiums and
discounts ........ - - - - - - - 141
$39 $40 $194 $253 $1,016 $5,563 $700 $7,946
</TABLE>
The following table sets forth the composition of the Association's
investment and mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
1999 1998 1997
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%
U. S. agency
securities..... 2,196 53.8 - - - -
Municipal
securities.... 562 13.7 - - - -
Subtotal ...... 2,758 67.5 500 35.1 2,297 78.3
FHLB stock .... 1,326 32.5 923 64.9 636 21.7
Total investment
securities and
FHLB stock .... $4,084 100.0% $ 1,423 100.0% $ 2,933 100.0%
Other interest
- -earning assets:
Interest-bearing
deposits with
financial
institutions . $ 166 100.0% $ 443 100.0% $ 292 100.0%
Mortgage-backed
securities:
GNMA ....... $1,485 18.7% $ 2,021 19.2% $ 3,558 26.0%
FNMA ....... 4,791 60.3 6,386 60.6 7,522 54.8
FHLMC ...... 1,529 19.2 1,886 17.9 2,294 16.7
Subtotal ... 7,805 98.2 10,293 97.7 13,374 97.5
Unamortized
premium, net . 141 1.8 245 2.3 336 2.5
Total mortgage
- -backed
securities . $7,946 100.0% $10,538 100.0% $13,710 100.0%
</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 direct
mail, company newsletter, promotions and newspaper), competitive
pricing policies and customer service to attract and retain these
deposits. Sobieski Federal solicits deposits from its market area
only, does not use brokers to obtain deposits and currently, does
not engage in any type of premium, gift or promotional programs beyond
the advertising vehicles mentioned above. The flow of deposits is
influenced significantly by general economic conditions, changes in
money market and prevailing interest rates and competition.
The Association continues to be susceptible to short-term fluctuations
in deposit flows as customers have become more interest rate conscious.
The Association endeavors to manage the pricing of its deposits in
keeping with its asset/liability management and profitability objectives.
The ability of the Association to attract and maintain savings accounts
and certificates of deposit, and the rates paid on these deposits, has
been and will continue to be significantly affected by market conditions.
The following table sets forth the savings flows at the Association
during the periods indicated.
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Opening balance ............... $60,517 $59,387 $61,227
Net deposits (withdrawals) ... 3,061 450 (2,332)
Interest credited (1) ......... 653 680 492
Ending balance ................ $64,231 $60,517 $59,387
Net increase (decrease)........$ 3,714 $ 1,130 $(1,840)
Percent increase (decrease) ... 6.14% 1.90% (3.01)%
</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,
1999 1998 1997
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction and
Savings Deposits:
Passbook accounts:
June 30, 1999,
June 30, 1998 and
June 30, 1997-
2.50% .......... $14,350 22.4% $ 13,919 23.0% $15,170 25.5%
NOW accounts:
June 30, 1999,
June 30, 1998 and
June 30, 1997-
2.25 - 2.75% ... 3,468 5.4 3,576 5.9 3,876 6.5
Money market
accounts:
June 30, 1999,
June 30, 1998 and
June 30, 1997-
2.75% to 3.00% .. 2,129 3.3 2,060 3.4 2,172 3.7
Total Non-
Certificates .. 19,947 31.1 19,555 32.3 21,218 35.7
Certificates:
2.01 - 5.00% .. 13,258 20.6 3,588 5.9 9,039 15.3
5.01 - 6.00% .. 28,143 43.8 24,711 40.9 18,774 31.6
6.01 - 8.00% .. 2,883 4.5 12,663 20.9 10,356 17.4
Total
certificates .. 44,284 68.9 40,962 67.7 38,169 64.3
Total deposits $64,231 100.0% $60,517 100.0% $59,387 100.0%
</TABLE>
The following table shows rate and maturity information for the
Association's certificates of deposit as of June 30, 1999.
<TABLE>
<CAPTION>
2.01- 5.01- 6.01- Percent
5.00% 6.00% 7.25% Total of Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts
maturing in quarter
ending:
September 30, 1999.. $ 2,812 $ 4,476 $2,034 $ 9,322 21.0%
December 31, 1999... 2,951 5,532 516 8,999 20.3
March 31, 2000...... 1,326 3,629 - 4,955 11.2
June 30, 2000....... 1,273 3,316 49 4,638 10.5
September 30, 2000.. 2,474 1,957 - 4,431 10.0
December 31, 2000... 1,707 1,247 - 2,954 6.7
March 31, 2001...... 475 1,369 - 1,844 4.2
June 30, 2001....... 76 741 - 817 1.8
September 30, 2001.. - 531 118 649 1.5
December 31, 2001... 59 425 67 551 1.2
March 31, 2002...... - 557 99 656 1.5
June 30, 2002....... - 430 - 430 1.0
Thereafter.......... 105 3,933 - 4,038 9.1
Total .............. $13,258 $28,143 $2,883 $44,284 100.0%
Percent of total ... 29.9% 63.6% 6.5% 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, 1999.
<TABLE>
<CAPTION>
Maturity
(In Thousands)
3 months Over 3 to Over 6 to Over 12
or less 6 months 12 months months Total
<S> <C> <C> <C> <C> <C>
Certificates of deposit
less than $100,000 ..... $8,507 $7,828 $8,966 $14,690 $39,991
Certificates of deposit
of $100,000 or more .... 815 1,171 627 1,680 4,293
Total certificates
of deposit ............. $9,322 $8,999 $9,593 $16,370 $44,284
</TABLE>
Borrowings. Although deposits are the Association's primary source
of funds, the Association may utilize FHLB advances or other borrowings
to support lending activities and to assist the Association's
asset/liability management strategy when they are a less costly
source of funds and may be invested at a positive interest rate
spread or when the Association desires additional capacity to fund
loan demand. At June 30, 1999, the Association had borrowings of
$26.3 million.
Service Corporation Activities
As a federally chartered savings bank, Sobieski Federal is permitted
by OTS regulations to invest up to 2% of its assets, or approximately
$2.1 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, 1999,
Sobieski Federal had no active service corporation activities.
Competition
Sobieski Federal faces strong competition, both in originating real
estate loans and in attracting deposits. Competition in originating
real estate loans comes primarily from commercial banks, savings
institutions, mortgage bankers and credit unions located in the
Association's market area. Commercial banks, savings institutions
and credit unions provide vigorous competition in consumer lending.
The Association competes for real estate and other loans principally
on the basis of the quality of services it provides to borrowers, the
interest rates and loan fees it charges, and the types of loans it
originates. See "Business - Lending Activities."
The Association attracts all of its deposits through its retail
banking offices, primarily from the communities in which those
retail banking offices are located. Therefore, competition for
those deposits is principally from commercial banks, savings banks,
brokerage firms and credit unions located in these communities. The
Association competes for these deposits by offering a variety of
account alternatives at competitive rates and by providing convenient
business hours, branch locations and interbranch deposit and withdrawal
privileges.
Employees
At June 30, 1999, the Association had a total of 25 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 45. 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 58. 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 39. 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 examinations
of the Association were as of February 1997 and June 1998. The OTS will
be conducting a compliance examination as of August 31, 1999. When
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's total assets, to fund the operations of
the OTS. The Association's OTS assessment for the fiscal year ended
June 30, 1999 was $38,000.
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 action, including
misleading or untimely reports filed with the OTS. Except under certain
circumstances, public disclosure of final enforcement actions by the OTS
is required.
In addition, the investment, lending and branching authority of the
Association is 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 federal associations in loans
secured by non-residential real property may not exceed 400% of total
capital, except with approval of the OTS. Federal savings associations
are also generally authorized to branch nationwide. The Association is
in compliance with the noted restrictions.
The Association's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of
unimpaired capital and surplus (except for loans fully secured by
certain readily marketable collateral, in which case this limit is
increased to 25% of unimpaired capital and surplus). At June 30, 1999,
the Association's lending limit under this restriction was $1,713,000.
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 or for any other reason deemed necessary
by the FDIC.
In order to equalize the deposit insurance premium schedules for BIF
and SAIF-insured institutions, the FDIC imposed a one-time special
assessment on all SAIF-assessable deposits as of March 31, 1995 pursuant
to federal legislation enacted on September 30, 1996. The Association's
special assessment, which was $414,000, was paid in November 1996. This
special assessment significantly increased the Company's noninterest
expense and adversely affected the Company's results of operations for
the year ended June 30, 1997. Effective January 1, 1997, the premium
schedule for BIF and SAIF-insured institutions ranged from 0 to 27 basis
points. However, SAIF-insured institutions are required to pay a
Financing Corporation (FICO) assessment, in order to fund the interest
on bonds issued to resolve thrift failures in the 1980's, equal to 6.48
basis points for each $100 in domestic deposits, while BIF-insured
institutions pay an assessment equal to 1.52 basis points for each $100
in domestic deposits. The assessment is expected to be reduced to 2.43
basis points no later than January 1, 2000, when BIF-insured institutions
fully participate in the assessment. These assessments, which may be
revised based upon the level of BIF and SAIF deposits, will continue
until the bonds mature in the year 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, 1999, the Association did not have
any intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. Under these regulations
certain subsidiaries are consolidated for capital purposes and others
are excluded from assets and capital. In determining compliance with
the capital requirements, all subsidiaries engaged solely in activities
permissible for national banks or engaged in certain other activities
solely as agent for its customers are "includable" subsidiaries that
are consolidated for capital purposes in proportion to the association's
level of ownership, including the assets of includable subsidiaries in
which the association has a minority interest that is not consolidated
for GAAP purposes. For excludable subsidiaries the debt and equity
investments in such subsidiaries are deducted from assets and capital.
At June 30, 1999, the Association did not have any active subsidiaries.
At June 30, 1999 the Association had tangible capital of $9.4 million,
or 9.1% of adjusted total assets, which is approximately $7.8 million
above the minimum requirement of 1.5% of adjusted total assets in effect
on that date.
The capital standards also require core capital equal to at least 3%
of adjusted total assets (as defined by regulation). Core capital
generally consists of tangible capital plus certain intangible assets,
including supervisory goodwill (which is phased-out over a five-year
period) and a limited amount of purchased credit card relationships.
As a result of the prompt corrective action 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. At June 30, 1999, the Association had no intangibles which were
subject to these tests.
At June 30, 1999, the Association had core capital equal to $9.4 million,
or 9.1% of adjusted total assets, which is $6.3 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, 1999, the
Association had no capital instruments that qualify as supplementary
capital and $310,000 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. The Association had no such exclusions from capital
and assets at June 30, 1999.
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.
On June 30, 1999, the Association had risk-based capital of $9.7 million
(including $9.4 million in core capital and $310,000 in general loss
reserves) and risk-weighted assets of $53.5 million or total capital of
18.1% of risk-weighted assets. This amount was $5.4 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 institution, establish a branch or engage in any new
activities, and generally may not make capital distributions. The OTS
is authorized to impose the additional restrictions, discussed below,
that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that
it will enter into a limited capital maintenance 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 undercapitalized" (i.e., Tier 1 risk-based or core
capital ratios of less than 3% or a risk-based capital ratio of less
than 6%) must be made subject to one or more of additional specified
actions and operating restrictions mandated by FDICIA. These actions
and restrictions include requiring the issuance of additional voting
securities; limitations on asset growth; mandated asset reduction;
changes in senior management; divestiture, merger or acquisition of the
association; restrictions on executive compensation; and any other
action the OTS deems appropriate. An association that becomes "critically
undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject
to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition,
the OTS must appoint a receiver (or conservator with the concurrence of
the FDIC) for a savings association, with certain limited exceptions,
within 90 days after it becomes critically undercapitalized.
Any undercapitalized association is also subject to other possible
enforcement actions by the OTS or the FDIC. Such actions could include
a capital directive, a cease-and-desist order, civil money penalties,
the establishment of restrictions on all aspects of the association's
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 percent-age 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 on savings institutions
with respect to their ability to make distributions of capital, which
include dividends, stock redemptions or repurchases, cash-out mergers
and other transactions charged to the capital account.
Generally, savings institutions, such as the Association, that before
and after the proposed distribution remain well-capitalized, may make
capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date period plus retained net income
for the two preceding years. However, an institution deemed to be in
need of more than normal supervision by the OTS may have its dividend
authority restricted by OTS. The Association may pay dividends in
accordance with this general authority.
Savings institutions proposing to make any capital distribution
need not submit written notice to the OTS prior to such distribution
unless they are, as is the Association, a subsidiary of a holding
company, or would not remain well-capitalized following the distribution.
Savings institutions that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution or propose
to exceed these net income limitations must obtain OTS approval prior to
making such distribution. The OTS may object to the distribution during
that 30-day period based on safety and soundness concerns.
Liquidity
All savings associations, including Sobieski Federal, are required
to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or
less. For a discussion of what the Association includes in liquid
assets, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources." This
liquid asset ratio requirement may vary from time to time (between 4%
and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset
ratio is 4%. At June 30, 1999, the Association was in compliance with
the requirement, with an overall liquid asset ratio of 13.60%.
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in
accordance with GAAP. Under the policy statement, management must
support its classification of an accounting for loans and securities
(i.e., whether held for investment, sale or trading) with appropriate
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 alternative, the savings association may maintain
60% of its assets in those assets specified in Section 7701(a)(19) of the
Internal Revenue Code. Under either test, such assets primarily consist
of residential housing related loans and investments. At June 30, 1999,
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 permits
it to transfer to the Bank Insurance Fund. If an association that fails
the test has not yet requalified and has not converted to a national bank,
its new investments and activities are limited to those permissible for
both a savings association and a national bank, and it is limited to
national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings
and is subject to national bank limits for payment of dividends.
If such association has not requalified or converted to a national bank
within three years after the failure, it must divest of all investments
and cease all activities not permissible for a national bank. In
addition, it must repay promptly any outstanding FHLB borrowings,
which may result in 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 company
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 assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of
certain applications, such as a merger or the establishment of a branch,
by Sobieski Federal. An unsatisfactory rating may be used as the basis
for the denial of an application by the OTS.
Due to the heightened attention being given to the CRA in recent years,
the Association may be required to devote additional funds for investment
and lending in its local community. The Association was examined for CRA
compliance in January 1997 and received a rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association or its subsidiaries
and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates. In addition, certain of
these transactions are restricted to a percentage of the association's
capital. Affiliates of the Association include the Company and any company
which is under common control with the Association. In addition, a savings
association may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of most
affiliates. The Association's subsidiaries are not deemed affiliates,
however; the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to 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 authority
over the Holding Company and its non-savings association subsidiary which
also permits the OTS to restrict or prohibit activities that are determined
to be a serious risk to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally
is not subject to activity restrictions. If the Company acquires control
of another savings association as a separate subsidiary, it would become
a multiple savings and loan holding company, and the activities of the
Company and any of its subsidiaries (other than the Association or any
other SAIF-insured savings association) would become subject to such
restrictions unless such other associations each qualify as a QTL and
were acquired in a supervisory acquisition.
If the Association fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly
or through its other subsidiaries, any business 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 are 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 common stock of the Company is registered with the SEC under the
Securities Exchange 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, 1999, 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 advances are required to provide
funds for residential home financing.
As a member, the Association is required to purchase and maintain stock
in the FHLB of Indianapolis. At June 30, 1999, the Association had
$1.3 million of FHLB stock, which was in compliance with this
requirement. During fiscal 1999 and prior years, the Association
received substantial dividends on its FHLB stock. The dividends averaged
8.0% for fiscal year 1999. For the years ended June 30, 1999 and 1998,
dividends paid by the FHLB of Indianapolis to the Association totaled
$95,000 and $63,000, 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 in the Association's capital.
Federal and State Taxation
Prior to the enactment of certain 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 liquidates, pays a dividend in excess of earnings and profits
or redeems stock. Post fiscal 1987 bad debt reserve accumulations are
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
alterna-tive minimum taxable income. For taxable years beginning after
1986 and before 1996, corpora-tions, including savings associations such
as the Association, are also subject to an environmental tax equal to
0.12% of the excess of alternative minimum taxable income for the taxable
year (determined without regard to net operating losses and the deduction
for the environmental tax) over $2 million.
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, 1999. 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 are subject to an 8.5%
franchise tax, imposed by the State of Indiana, on the net income of
financial (including thrift) institutions, exempting them from the current
gross income, supplemental net income and intangible taxes. Net income for
franchise tax purposes will constitute federal taxable income before net
operating loss deductions and special deductions, adjusted for certain
items, including Indiana income taxes, property taxes, charitable
contributions, tax exempt interest and bad debt. Other applicable Indiana
taxes include sales, use and property taxes.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file
an annual report with and pay an annual fee to the State of Delaware.
The Company is also subject to an annual franchise tax imposed by the
State of Delaware.
Item 2. Description of Property
The Association conducts its business through its main office and two
branch offices located in South Bend, Indiana. The following table sets
forth information relating to each of the Association's offices as of
June 30, 1999. 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, 1999 was approximately
$1,887,000. See Note E of the Notes to Consoli-dated Financial Statements.
<TABLE>
<CAPTION>
Total
Year Approximate Net Book
Leased Square Value at
Location or Acquired Footage June 30, 1999
<S> <C> <C> <C>
Main Office:
2930 West Cleveland Road 1995 10,080 $1,388
South Bend, Indiana 46628
Branch Offices:
4606 Western Avenue 1978 1,600 $ 2
Belleville Shopping Center
740 S. Walnut Street 1952 1,900 $ 17
</TABLE>
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, 1999 was $87,000.
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, 1999.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 47 of the attached 1999 Annual Report to Stockholders is
herein incorporated by reference.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Pages 7 to 19 of the attached 1999 Annual Report to Stockholders are
herein incor-porated by reference.
Item 7. Financial Statements
The following pages of the attached 1999 Annual Report to Stockholders
are herein incorporated by reference.
Report of Independent Accountants Page 20
Consolidated Statements of Financial Condition at Page 21
June 30, 1999 and 1998
Consolidated Statements of Income and Comprehensive Page 22
Income for the years ended June 30, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the Page 23
years ended June 30, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years Page 24
ended June 30, 1999, 1998 and 1997
Notes to Consolidated Financial Statements Pages 25 - 46
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Directors
Information concerning directors of the Company is incorporated herein
by reference from the Company's definitive Proxy Statement for the 1999
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 complied with during
fiscal 1999.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein
by reference from the Company's definitive Proxy Statement for the
1999 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 manage-ment is incorporated herein by reference from
the Company's definitive Proxy Statement for the 1999 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 1999 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 23
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 incorporated by 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, 1999.
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 24, 1999 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 24, 1999 Date: September 24, 1999
/s/ George J. Aranowski /s/ Leonard J. Dobosiewicz
George J. Aranowski, Director Leonard J. Dobosiewicz, Director
Date: September 24, 1999 Date: September 24, 1999
/s/ Joseph F. Nagy /s/ Richard J. Cullar
Joseph F. Nagy, Director Richard J. Cullar, Director
Date: September 24, 1999 Date: September 24, 1999
/s/ Thomas F. Gruber /s/ Arthur Skale
Thomas F. Gruber, President and Arthur Skale, Chief Financial Officer
Chief Executive Officer and Director (Principal Financial and Accounting
(Principal Executive Officer) Officer)
Date: September 24, 1999 Date: September 24, 1999
INDEX TO EXHIBITS
Exhibit
Number
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
22 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
Exhibit 13
TABLE OF CONTENTS
Management Letter . . . . . . . . . . . . . . . . . . 1
Corporate Profile . . . . . . . . . . . . . . . . . . . 4
Selected Financial Information . . . . . . . . . . . . 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 7
Report of Independent Accountants . . . . . . . . . . 20
Consolidated Financial Statements . . . . . . . . . . . 21
Stockholder Information . . . . . . . . . . . . . . . . 47
Corporate Information . . . . . . . . . . . . . . . . 48
To Our Stockholders:
On behalf of the Board of Directors and officers of Sobieski
Bancorp, Inc., we are pleased to report on the Company's operations
and fiscal performance for the year ended June 30, 1999.
Fiscal 1999 represented a year of significant growth and improved
earnings. The Company's sub- sidiary, Sobieski Federal Savings and
Loan Association of South Bend, continued to diversify its operations
from a traditional thrift to a solid community bank serving the greater
South Bend area.
Sobieski Bancorp and its subsidiary recorded net income during fiscal
1999 of $596,522, a 9.6% increase over net income of $544,049 for the
same period a year ago. Basic earnings per share for fiscal 1999 were
$.86, representing a 13% increase over the $.76 basic earnings per share
for the same period a year ago.
During fiscal 1999, total assets of the Company grew by $11.20 million,
or 12.1%, to $103.70 million at June 30, 1999 from $92.50 million at
that date the previous year.
Sobieski realized an increase of $11.19 million, or 14.6%, in its
overall loan portfolio, from $76.71 million at the end of fiscal 1998
to $87.90 million at June 30, 1999. Loan growth was the result of a
favorable interest rate environment plus Sobieski's continued effort
to reach a larger portion of the local residential mortgage market
and to gradually change the Company's balance sheet through the offering
of commercial and consumer loan products.
The Company's residential mortgage loan portfolio increased from
$62.70 million at June 30, 1998 to $68.33 million at June 30, 1999.
Residential mortgage loans represented 76.6% of total loans at the
end of the 1999 fiscal year, compared with 80.4% at the same period
the previous year.
Commercial loans to small businesses in our local market and
participations purchased through other lending institutions totaled
$16.34 million as of June 30, 1999 (18.3% of total loans), com- pared
with $11.40 million held in commercial loans (14.6% of total loans) at
the end of the previ- ous fiscal year.
Consumer/home equity loan balances were $2.87 million at June 30, 1999
(3.2% of total loans), compared with $2.67 million (3.4% of total loans)
at that date the previous year.
During fiscal 1999, the Company's net interest income after provision
for loan losses increased by $118,000, or 4.18%, over the same period
a year ago. The increase was the result of $14.18 million of additional
average interest-earning assets, offset by a decline in net interest
yield of 35 basis points from 3.43% in fiscal 1998 to 3.08% in fiscal
1999.
The allowance for loan losses during the fiscal year ended June 30, 1999
increased by $70,000 to $310,000, compared with an increase in the
allowance of $40,000 the previous year. The allow- ance as a percentage
of total loans was .35% at June 30, 1999 compared to .31% of total loans
outstanding at June 30, 1998.
Interest income increased $780,000 from $6.48 million for fiscal 1998
to $7.26 million for the year ended June 30, 1999. The increase was the
result of $15.72 million of higher average bal- ances in loans during
the fiscal year offset for $1.92 million of reduced average balances in
invest- ment, mortgage-backed and other securities. The increase in net
volume added $1.15 million to interest income, offset by a decreased
yield of $366,000. The yield on average interest-earning assets decreased
32 basis points from 7.75% for fiscal 1998 to 7.43% for the year ended
June 30, 1999.
While the Company continues to face the challenge of funding new loan
production, a deposit retention and growth program had positive results
during the past year. For the year ended June 30, 1999, the Association
realized a growth in deposits of $3.71 million, or 6.1%. Total deposits
at June 30, 1999 were $64.23 million, compared with $60.52 million at
the same date the previous year.
To supplement the funding of its loan volume, the Association borrowed
$6.8 million from the Federal Home Loan Bank during fiscal 1999,
bringing its total FHLB advances to $25.25 million at June 30, 1999.
Interest expense increased by $630,000, from $3.61 million in fiscal
1998 to $4.24 million in fiscal 1999, primarily the result of additional
expense related to higher levels of deposits and increased FHLB advances.
The average rate paid for interest-bearing liabilities decreased seven
basis points from 4.88% in fiscal 1998 to 4.81% in fiscal 1999.
Non-interest income increased by $59,000 from $248,000 in fiscal 1998
to $307,000 in fiscal 1999, primarily from increased service charges
and letter of credit fee income, offset by a reduc- tion in security
gains compared with the previous year. The Company is continuing to
focus on improving non-interest income with emphasis on loan fees,
transaction account fees and other service fees.
Non-interest expense increased $110,000, or 5.2%, from $2.13 million
in fiscal 1998 to $2.24 million in fiscal 1999. The increase is
primarily the result of higher compensation and related ben- efit
expenses, plus additional expenditures attributable to the Year 2000
system conversion and training, maintenance and facility repairs, as
well as increased professional and consulting service expenditures.
We continued to add to the depth and experience of our management team.
During the past year, Andrew D. Ujdak joined the Company in a new
position of Supervisor of Lending Operations and New Product Development.
Mr. Ujdak has nine years experience in retail banking and small
busi- ness financial services at 1st Source Bank in South Bend. At
Sobieski, Mr. Ujdak is supervising internal training and loan operations
while taking a lead role in developing Sobieski's entrance into the
secondary mortgage market.
The Company has continued to develop and implement its Year 2000 plan.
The plan, started in 1997, has involved the expenditures of some $60,000
and includes identification,, renovation and testing of mission critical
systems; inventory, upgrading and testing of the Company's computer
systems; communication with third-party providers, and the development
of contingency proce- dures. As of June 30, 1999, it is estimated that
the plan is ninety-eight percent complete.
The Company's Board of Directors and management refocused attention
on its business plan during the past year to better position Sobieski
for growth in the near future. The plan is designed to build on Sobieski
Federal's 105 years of continued operation in the South Bend area. The
em- phasis has been on controlled, profitable growth through diversified,
community banking opera- tions for families and small businesses.
New checking account and debit card programs have been established.
Systems are being imple- mented to provide customers with the convenience
of direct on-line banking services, as well as additional financial
products.
The primary focus continues to be placed on enhancement of shareholder
value through improved performance and earnings by the Association, plus
ongoing stock repurchase and dividend pro- grams. The Company repurchased
54,300 shares of its common stock during fiscal 1999 at an average per
share price of $14.71. Annualized cash dividends paid during fiscal 1999
totaled $.32 per share.
The Company's goals continue to be oriented towards improvement of
earnings per share and return on equity. Looking forward, we enter the
new millennium with confidence that Sobieski is in a stronger position
than ever before to grow the Company's asset and earnings base through
diversification of service-oriented, community banking operations. We
thank you for your con- tinued support and confidence.
Robert J. Urbanski Thomas F. Gruber
Chairman of the Board President and Chief Executive Officer
CORPORATE PROFILE
Business Conducted by Sobieski Bancorp, Inc.
Sobieski Bancorp, Inc. (the "Company" or "Bancorp") is a Delaware
corporation that was organized in December 1994. Bancorp, as a unitary
savings and loan holding company, generally is not restricted in the
types of business activities in which it may engage, provided that its
wholly- owned subsidiary, Sobieski Federal Savings and Loan Association
of South Bend ("Sobieski Federal" or the "Association") retains a specified
amount of its assets in housing-related invest- ments. The holding company
structure facilitates diversification into non-banking activities. There
are no present plans, however, regarding such activities.
The Company's activities to date have been limited to its investment
in Sobieski Federal, the pur- chase of loans from Sobieski Federal,
and a loan to the Company's Employee Stock Ownership Plan (the "ESOP")
which enabled the ESOP to purchase shares of stock of the Company in its
initial public offering. The loans and transactions bear interest rates
and have terms and conditions which prevailed in the market at the time
of such transactions.
Business Conducted by Sobieski Federal Savings and Loan Association
of South Bend Sobieski Federal is a federally chartered stock savings
and loan association located in South Bend, Indiana, conducting business
through three full service offices in South Bend. The Association was
formed in 1893. Its deposits are insured up to the maximum allowable
limit by the Federal Deposit Insurance Corporation (the "FDIC") under
the Savings Association Insurance Fund (the "SAIF").
Sobieski Federal is a community-oriented financial institution
offering selected financial products and services to meet the needs
of the communities it serves. The Association attracts deposits from
the general public and uses such deposits, together with other funds,
to originate primarily one-to-four family, fixed-rate and adjustable-rate
residential mortgage loans for retention in its portfolio. In addition,
the Association originates construction loans, consumer loans and real
estate-backed and other secured small business commercial loans. During
both fiscal 1999 and 1998, the Association purchased participation
interests in commercial loans funded primarily by advances from the
Federal Home Loan Bank ("FHLB") of Indianapolis.
SELECTED FINANCIAL INFORMATION
The following consolidated financial data does not purport to be
complete and is qualified in its entirety by reference to the more
detailed financial information contained elsewhere herein. Such
consolidated financial data should be read in conjunction with the
consolidated financial statements, including notes thereto, included
elsewhere in this Annual Report.
<TABLE>
<CAPTION>
At June 30,
1999 1998 1997 1996 1995
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial
Condition Data:
Total assets $103,698 $92,497 $81,733 $78,863 $78,247
Loans, net 87,900 76,713 61,135 53,114 50,109
Mortgage-backed
securities 7,947 10,538 13,710 16,152 15,364
Investment securities 2,758 500 2,297 4,694 2,574
Deposits 64,231 60,517 59,387 61,227 63,142
Federal Home Loan Bank
advances 25,250 18,450 9,500 3,000 -
Stockholders' equity 12,572 12,864 12,361 14,054 14,573
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997 1996 1995
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Operations
Data:
Total interest income $ 7,258 $ 6,476 $ 5,702 $ 5,465 $ 5,295
Total interest expense 4,244 3,610 3,131 3,030 2,798
Net interest income 3,014 2,866 2,571 2,435 2,497
Provision for loan
losses 70 40 - - 10
Net interest income
after provision
for loan losses 2,944 2,826 2,571 2,435 2,487
Fees and service
charges 303 221 156 163 139
Gain on sales of
securities - 20 64 - -
Other non-interest
income 4 7 6 9 31
Total non-interest
income 307 248 226 172 170
Total non-interest
expenses 2,240 2,132 2,368 2,059 1,735
Income before
income taxes 1,011 942 429 548 922
Income taxes 414 398 182 213 372
Net income $ 597 $ 544 $ 247 $ 335 $ 550
Earnings per
common share (1):
Basic $ .86 $ .76 $ .32 $ .39 $ .09
Diluted $ .85 $ .75 $ .32 $ .39 $ .09
</TABLE>
(1)For 1995, both basic and diluted earnings per common share data are
for the period subsequent to the Company's initial public offering which
was completed on March 30, 1995.
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year Ended June 30,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Selected Financial
Ratios and
Other Data:
Performance Ratios:
Return on assets
(ratio of net income
to average total assets) 0.58% 0.62% 0.31% 0.43% 0.74%
Return on equity
(ratio of net income
to average equity) 4.70 4.32 1.84 2.34 6.48
Net interest rate
spread 2.62 2.87 2.78 2.69 3.09
Net interest
margin (1) 3.08 3.43 3.40 3.36 3.49
Ratio of operating
expense to average
total assets 2.20 2.44 2.99 2.62 2.34
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 110.72 112.95 115.02 115.96 110.42
Quality Ratios:
Non-performing assets
to total assets at
end of period 0.18 0.20 0.15 0.12 0.08
Allowance for loan
losses to
non-performing loans
at end of period 170.33 127.66 158.52 221.43 487.80
Allowance for loan
losses to loans
receivable, net,
at end of period 0.35 0.31 0.33 0.38 0.40
Capital Ratios:
Equity to total
assets at end of
period 12.12 13.91 15.12 17.82 18.62
Average equity
to average assets 12.44 14.39 16.94 18.47 11.44
Other Data:
Number of full-service
offices 3 3 3 3 3
</TABLE>
(1) Net interest income divided by average interest-earning assets.
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," "be- lieve" 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 occur- rence 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, con- sumer
loans, construction loans and commercial loans. The Company also invests
in mortgage- backed securities, which are insured or guaranteed by federal
agencies, investment securities, con- sisting primarily of obligations of
the U.S. Government, municipal securities or U.S. agency obli- gations,
financial institution certificates of deposit insured by the FDIC, and
other liquid assets. The Company's profitability depends primarily on
its net interest income, which is the difference between interest income
earned on its loans, investments and mortgage-backed securities and the
interest expense incurred on its deposits, federal funds purchased and
FHLB borrowings. Net interest income is affected by rates received on
and the amounts of interest-earning assets and the rates paid on and
the amounts of interest-bearing liabilities.
Sobieski Federal's profitability is also affected by its provision for
loan losses, non-interest income and non-interest expense. Non-interest
income principally consists of fees and service charges on deposit
accounts and loan late payment fees. Non-interest expense is principally
operating expense, including compensation and related benefits, federal
deposit insurance premiums, adver- tising, service bureau data
processing, and occupancy costs. Earnings of Sobieski Federal are
also affected significantly by general economic and competitive conditions,
particularly changes in gen- eral 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 and other secured commercial loans for portfolio retention.
In addition, the Association continues to purchase participation interests
in commercial loans. The participation interests are purchased according
to the Association's established underwriting standards. The loans
underlying the participation interests are performing in accordance
with their terms. At June 30, 1999, the ratio of Sobieski Federal's
nonperforming assets to total assets was .18% and the ratio of its
allowance for loan losses to nonperforming loans was 170.33%. 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, 1999, $58.4 mil- lion, or 79.3%, of the Association's
combined single-family mortgage loans and mortgage-backed securities
portfolio had fixed rates of interest and $15.3 million, or 20.7%,
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 lend-
ing and 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, 1999,
Sobieski Federal had $74.7 million in long-term fixed-rate loans and
$13.2 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.
Presented below, as of June 30, 1999, is an analysis of the Association's
interest rate risk as mea- sured by changes in NPV for instantaneous and
sustained parallel shifts in the yield curve, in 100 basis point
increments, up and down 300 basis points in accordance with OTS
regulations. As illu- strated in the table, NPV is more sensitive to
rising rates than declining rates. This occurs prin- cipally 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.
Change in
Interest Rate Net Portfolio Value
(Basis Points) $ Change % Change
(Dollars in thousands)
+ 300 $-5614 $ (53)%
+ 200 -3648 (34)
+ 100 -1702 (16)
0 - -
- 100 1189 11
- 200 2151 20
- 300 3196 30
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%, was a 34% decrease representing a dollar decrease in equity value
of approximately $3.65 million at June 30, 1999. In contrast, based on a
decline in interest rates of 2% the Association's NPV was estimated to
increase 20% or approximately $2.15 million at June 30, 1999. The most
significant factor contributing to its liability sensitive position was
the Association's balance of fixed rate mortgage loans. At June 30, 1999,
78.4% 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 li- abilities 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 ear- ly
withdrawals from certificates could likely deviate significantly from
those assumed in calculat- ing 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 infla- tion is reflected in the increased cost
of the Company's operations. Nearly all the assets and liabili- ties 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 inter- est 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'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,
1999 1998 1997
Average Average Average
Outstand-Interest Outstand-Interest Outstand-Interest
ing Earned/ Yield ing Earned/ Yield ing Earned/ 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) $84,186 $6,512 7.74% $68,466 $5,523 8.07% $55,105 $4,433 8.04%
Mortgage-
backed
securities 9,226 503 5.45 12,384 746 6.02 15,080 944 6.26
Investment
securities
and other 3,148 148 4.70 1,909 144 7.54 4,813 281 5.84
FHLB
stock 1,181 95 8.04 804 63 7.84 636 44 6.92
Total
interest-
earning
assets(1) 97,741 7,258 7.43 83,563 6,476 7.75 75,634 5,702 7.54
Non interest
- -earning
assets 4,323 3,982 3,692
Total
assets $102,064 $ 87,545 $ 79,326
Interest-
bearing
liabi-
lities:
Savings
deposits $14,227 $ 354 2.49 $ 14,418 361 2.50 $15,272 374 2.45
NOW and
MMDA
accounts 6,249 106 1.70 5,528 115 2.08 5,286 118 2.23
Certificate
accounts 44,687 2,553 5.71 38,861 2,280 5.87 39,352 2,290 5.82
FHLB advances
and federal
funds
purchased 23,117 1,231 5.33 15,177 854 5.63 5,850 349 5.97
Total
interest-
bearing
liabi-
lities 88,280 4,244 4.81 73,984 3,610 4.88 65,760 3,131 4.76
Non interest
- -bearing
liabi-
lities 1,089 967 126
Total
liabi-
lities 89,369 74,951 65,886
Stock-
holders'
equity 12,695 12,594 13,440
Total
liabi-
lities
and
stock-
holders'
equity $102,064 $87,545 $79,326
Net
interest
income $3,014 $2,866 $2,571
Net
interest
rate
spread 2.62% 2.87% 2.78%
Net earning
assets $ 9,461 $9,579 $9,874
Net yield
on average
interest
- -earning
assets 3.08% 3.43% 3.40%
Average
interest-
earning
assets to
average
interest-
bearing
liabi-
lities 110.72% 112.95% 115.02%
</TABLE>
(1) Calculated net of deferred loan fees and costs 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,
1999 vs. 1998 1998 vs. 1997
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 $ 1,224 $-235 $ 989 $ 1,078 $ 12 $1,090
Mortgage-backed
securities -177 -66 -243 -164 -34 -198
Investment securities
and other 71 -67 4 -203 66 -137
FHLB stock 30 2 32 13 6 19
Total interest-
earning assets $ 1,148 $-366 782 $ 724 $ 50 774
Interest-bearing
liabilities:
Savings deposits $ -5 $ -2 -7 $ -21 $ 8 -13
NOW and MMDA
accounts 14 -23 -9 5 -8 -3
Certificate accounts 334 -61 273 -29 19 -10
FHLB advances and
federal funds purchased 425 -48 377 526 -21 505
Total interest-bearing
liabilities $ 768 $-134 634 $ 481 $ -2 479
Net interest income $ 148 $ 295
</TABLE>
Financial Condition
General.
Total assets increased $11.20 million or 12.1%, from $92.50 million at
June 30, 1998 to $103.70 million at June 30, 1999. The increase in total
assets was primarily the result of a $11.19 million increase in net loans.
Funding for the asset growth primarily came from a $6.80 million increase
in FHLB advances, $3.71 million of increased deposits and $.60 million of
net income.
Cash and Cash Equivalents.
Cash and cash equivalents, consisting of cash, interest-bearing deposits
and federal funds sold decreased $350,000 from $1.29 million at
June 30, 1998 to $.94 million at June 30, 1999.
Investment Securities.
Investment securities, consisting of U.S. Government, U.S. Government
agency and municipal securities, increased $2.26 million or 452% from
$.50 million at June 30, 1998 to $2.76 million at June 30, 1999. The
increase resulted from the purchase of $2.80 million in agency and
municipal securities, offset by maturities of $.50 million of U.S.
treasury securities. At June 30, 1999, $2.56 million or 92.7% of the
Association's investment securities were available-for-sale.
Mortgage-Backed Securities.
Mortgage-backed securities decreased $2.59 million or 24.6% from
$10.54 million at June 30, 1998 to $7.95 million at June 30, 1999.
The decrease was primarily the result of $2.49 million principal
repayments. At June 30, 1999, $.46 million or 5.8% of the mortgage-backed
securities were classified as available-for-sale.
Loans, Net.
Net loans increased $11.19 million, or 14.6%, from $76.71 million at
June 30, 1998 to $87.90 million at June 30, 1999. 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 com- mercial loans.
Deposits.
Deposits increased $3.71 million, or 6.1%, from $60.52 million at
June 30, 1998 to $64.23 million at June 30, 1999. The Association is
actively pursuing a deposit retention and growth program. The program,
implemented during the fourth quarter of fiscal 1997, offers more
competitive special short-term and long-term deposit certificates.
Under the program, a reversal of the outflow pattern experienced prior
to 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 decreased $.29 million from $12.86 million at
June 30, 1998 to $12.57 million at June 30, 1999. This decrease was
primarily the result of treasury stock purchases of $799,000 and cash
dividends of $241,000 offset by net income of $597,000 and employee
benefit plan stock allocations and vesting of $176,000.
Results Of Operations
General.
Net income increased $53,000 or 9.7% from $544,000 in 1998 to
$597,000 in 1999. The increase in net income is due primarily from
increased net interest income of $148,000 offest by increased non-interest
expenses of $108,000 and increased income taxes of $16,000.
Net interest income.
Net interest income increased $148,000 from $2.87 million in 1998 to
$3.01 million in 1999. The increase was due primarily to $14.18 million
of additional average interest-earning assets offset by a decline in net
interest yield during 1999 of .35% from 3.43% in 1998 to 3.08% in 1999.
Interest Income.
Interest income increased $780,000 from $6.48 million for 1998 to
$7.26 million for 1999. The increase was the result of $15.72 million
of higher average balances in loans during the year offset by
$1.92 million of reduced investment, mortgage-backed and other
securities average balances. The increase in net volume added
$1.15 million to interest income and was offset by a yield decrease
of $366,000. The yield on average interest-earning assets decreased
32 basis points, from 7.75% in 1998 to 7.43% in 1999.
Interest Expense.
Interest expense increased $630,000 from $3.61 million in 1998 to
$4.24 million in 1999, pri- marily as a result of $373,000 of additional
interest expense related to increased FHLB advances and $258,000 of added
expense related to increased deposits. The average rate paid for
interest- bearing liabilities decreased 7 basis points from 4.88% in
1998 to 4.81% in 1999, a decrease of 1.4%. The average balance of
interest-bearing liabilities for fiscal 1999 was $88.28 million
repre- senting an increase of $14.30 million from $73.98 million for
fiscal 1998.
Provision for Loan Losses.
Provision for loan losses was $70,000 for the year ended June 30, 1999
and $40,000 for the year ended June 30, 1998. The Company maintains an
allowance for loan losses based upon manage- ment'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, addi- tional 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 $59,000 from $248,000 in 1998 to $307,000
in 1999, primarily from increased service charges and letter of credit
fee income.
Noninterest Expense.
Noninterest expense increased $110,000 or 5.2% from $2.13 million in
1998 to $2.24 million in 1999. The increased expenditures are the result
of occupancy, service bureau costs and other operating expense. Other
operating expenses increased $77,000 and was primarily attributable to
Year 2000 conversion and training costs, increased maintenance and
facility repairs along with increased professional and consulting
services expenditures. Other expenses that remained con- sistent were
FDIC insurance and advertising expenditures.
Income Taxes.
Income tax expense increased $16,000 from $398,000 in 1998 to $414,000
in 1999, principally as a result of the increase in pretax income. The
effective tax rate for 1999 was 41.0% versus 42.2% in 1998.
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, 1999, the Association was in compliance with OTS
liquidity requirements, having a ratio of 16.3%.
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, 1999 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, 1999 (dollars in thousands):
Actual Percent Required Percent Excess
Core $9,353 9.13% $3,073 3.0% $6,280
Tangible 9,353 9.13 1,536 1.5 7,817
Risk-based 9,663 18.05 4,283 8.0 5,380
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, 1999, the Association had a core
capital ratio of 9.13% and met the requirement for a "well capitalized"
institution.
Accounting Developments
Effective July 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income".
SFAS No. 130 established standards for the reporting and disclosure of
comprehensive income and its components in a full year set of general
purpose financial statements. Presently, the only component of
comprehensive income not already included in the Company's net income
is unrealized appreciation or depreciation on avail- able-for-sale
investment securities.
In June 1997, SFAS No. 131, "Disclosures About Segments Of An Enterprise
and Related Infor- mation", was also issued. SFAS No. 131 established
standards for the way that public business enterprises report information
about operating segments in annual financial statements and re- quires
that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
established standards for related disclosures about products and
services, geographic areas and major customers. This statement is
effective for financial statements for periods beginning after
December 15, 1997. The Company adopted this statement for its fiscal
year beginning July 1, 1998. However, the Company has not separately
organized its business into separate segments and therefore, no
additional disclosure applies.
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, Account- ing for Derivatives Instruments and Hedging
Activities. SFAS No. 133, as modified by SFAS No. 137 in July 1999,
is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income,, depending on whether
a derivative is designated as part of a hedge transaction and, if it
is, the type of hedge transaction. Due to the Company currently having
no derivative instruments, the adoption of SFAS No. 133 is not expected
to have any sigfniciant effect on the Company's results of operations or
financial position.
Other Matters
Year 2000 Computer Issues
The Company is aware of the current concerns by consumers and the
business community of reli- ance upon computer software programs that
do not properly recognize the year 2000 in date for- mats, often
referred to as the "Year 2000 Problem''. The Year 2000 Problem is
the result of software 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 instru- ments 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 transac-
tions, 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 in- cludes an inventory of software applications,
communication with third-party vendors and sup- pliers 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, 1999, it is estimated that the
plan is over 98% 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
1999. The Company has completed testing of all its mission critical
systems and applications and has not encountered any material difficulties
during the testing process.
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 com- puter systems
and testing of equipment and programs for Year 2000 compliance and
development of a comprehensive contingency plan. The Company is investing
in new or upgraded technology that has definable value lasting beyond the
Year 2000. In these instances, where Year 2000 com- pliance is merely
ancillary, the Company may capitalize and depreciate such an asset over
its esti- mated 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
has developed a contingency plan as to not disrupt operations should
its suppliers not be timely converted.
Contingency planning is one of the most important steps in Year 2000
readiness. It provides a systematic basis for addressing an unexpected
business interruption due to a Year 2000 issue triggered by internal
or third party system failures or by external infrastructure failures.
A thor- ough contingency plan is prudent to reduce risk and potential
impact of Year 2000 induced inter- ruptions or failures of critical
business functions.
The Company has followed the FFIEC guidance, as published in a series
of interagency state- ments, on requirements on year 2000 readiness.
Sobieski has completed the five phases identified: awareness, assessment,
renovation, validation and implementation for mission critical systems
in- cluding third-party providers. Sobieski has extensively tested the
critical processes in a Year 2000 environment and there tests revealed
no material Year 2000 problems.
The Sobieski Federal Business Resumption Contingency Plan facilitates
the identification of potential problems, dissemination of information,
resolution of issues and decision-making pro- cess during the identified
Year 2000 timeframe. The Sobieski management team will be fully
de- ployed during this time period and should a Year 2000 issue be
detected, the contingency plan will be immediately enacted to address
the problem and not interrupt customer service.
The Company's significant suppliers are an online computer services
firm (provides data process- ing services), the Federal Home Loan Bank
of Indianapolis and utility services. The representa- tions from these
suppliers are that they had been making efforts to become Year 2000
compliant and to test and validate their systems during 1999. The
Company continues to monitor the pro- gress 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 would be
very difficult to accomplish before the Year 2000.
The Company currently has several significant borrowers for which
the Company has made direct loans or holds a participation interest.
Management of the Company is communicating with these borrowers about
the Year 2000 issues and does not expect any Year 2000 problems of
these bor- rowers will have an adverse effect on the Company.
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 guarantee 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
com- pliant, 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 and comprehensive income, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position
of Sobieski Ban- corp, Inc. and its subsidiary at June 30, 1999 and
1998, and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 1999 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 mis- statement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and signifi- cant
estimates made by management, and evaluating the overall financial
statement presenta- tion. We believe that our audits provide a reasonable
basis for the opinion expressed above.
September 7, 1999
Consolidated Statements Of Financial Condition
at June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
ASSETS
Cash, including interest-bearing
deposits in other financial
institutions of $165,940 and
$442,725, respectively $ 939,604 $ 1,291,426
Investment securities,
available-for-sale (amortized
cost of $2,593,252 and
$499,267, respectively) 2,558,128 499,720
Investment securities,
held-to-maturity (fair value of
approximately $190,700 in 1998) 200,000 -
Mortgage-backed securities,
available-for-sale (amortized
cost of $473,166 and $603,381,
respectively) 462,199 594,550
Mortgage-backed securities,
held-to-maturity (fair value
of approximately $7,397,500
and $9,888,300, respectively) 7,484,493 9,943,105
Loans, net 87,899,960 76,712,631
Federal Home Loan Bank stock,
at cost 1,325,800 922,500
Property and equipment, net 1,887,169 1,923,506
Other assets 845,716 594,281
Deferred income taxes 94,872 14,849
Total assets $103,697,941 $ 92,496,568
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 64,231,053 $ 60,517,246
Federal funds purchased 1,000,000 -
Federal Home Loan Bank advances 25,250,000 18,450,000
Advances from borrowers
for taxes and insurance 292,291 374,627
Accrued income taxes 7,141 105,735
Accrued interest and other
expenses 345,173 184,565
Total liabilities 91,125,658 79,632,173
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 9,250,990 9,217,094
Retained earnings, substantially
restricted 7,318,955 6,963,420
Net unrealized depreciation
of available-for-sale securities -30,420 -5,529
16,549,185 16,184,645
Less: Treasury stock, at cost,
251,198 and 201,821 shares,
respectively 3,545,139 2,816,402
Unallocated Employee Stock
Ownership Plan shares;
43,176 and 50,385 shares,
respectively 431,763 503,848
Total stockholders' equity 12,572,283 12,864,395
Total liabilities and
stockholders' equity $103,697,941 $ 92,496,568
</TABLE>
The accompanying notes are a part of the consolidated financial
statements.
Consolidated Statements Of Income And Comprehensive Income
for the years ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Interest income:
Loans $ 6,511,633 $ 5,523,327 $ 4,433,288
Mortgage-backed
securities 503,009 746,308 944,274
Interest-bearing
deposits 83,405 43,812 43,665
Investments and other 160,285 163,197 281,103
Total interest income 7,258,332 6,476,644 5,702,330
Interest expense:
Interest on deposits 3,013,634 2,755,923 2,782,319
Interest on borrowings 1,231,016 854,515 348,563
Total interest expense 4,244,650 3,610,438 3,130,882
Net interest income 3,013,682 2,866,206 2,571,448
Provision for
loan losses 70,000 40,000 -
Net interest income
after provision for
loan losses 2,943,682 2,826,206 2,571,448
Non-interest income:
Fees and service
charges 303,137 221,685 156,443
Gain on sale of
securities - 19,728 63,535
Other income 4,286 6,958 5,567
Total non-interest
income 307,423 248,371 225,545
Non-interest expenses:
Compensation and
benefits 1,167,203 1,185,002 964,207
Occupancy and
equipment 337,024 300,818 278,747
Federal deposit
insurance premiums 38,445 36,796 495,872
Advertising and
promotion 41,756 43,263 30,666
Service bureau expense 122,529 110,443 98,555
Other operating expenses 533,626 456,206 500,257
Total non-interest
expenses 2,240,583 2,132,528 2,368,304
Income before
income taxes 1,010,522 942,049 428,689
Income taxes 414,000 98,000 181,500
Net income 596,522 544,049 247,189
Other comprehensive
income, net of tax:
Unrealized appreciation
(depreciation) of
available-for-sale
securities -24,891 1,827 215
Total comprehensive
income $ 571,631 $ 545,876 $ 247,404
Basic earnings per
common share $ .86 $ .76 $ .32
Diluted earnings per
common share $ .85 $ .75 $ .32
</TABLE>
The accompanying notes are a part of the consolidated financial
statements.
Consolidated Statements Of Stockholders' Equity
for the years ended June 30, 1999, 1998 and 1997
<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,
July1,1996 $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,
June30,1997 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
($.32 per
share) - - -251,172 - - - -251,172
Common stock
committed to
be released
for allocation
to Employee
Stock Ownership
Plan
participants - 68,517 - - - 75,502 144,019
Treasury stock
issued to
vested
Recognition
and Retention
Plan
participants - 1,401 - - 63,476 - 64,877
Net unrealized
appreciation of
available-for
- -sale
securities - - - 1,827 - - 1,827
Balance,
June30,1998 9,660 9,217,094 6,963,420 -5,529 -2,816,402 -503,848 12,864,395
Net income - - 596,522 - - - 596,522
Cash dividends
($.32 per
share) - - -240,987 - - - -240,987
Purchase of
treasury stock,
54,300
shares - - - - -798,890 - -798,890
Common stock
committed to
be releaseed
for allocation
to Employee
Stock Ownership
Plan
participants - 34,489 - - - 72,085 106,574
Treasury stock
issued to
vested
Recognition and
Retention
Plan
participants - -593 - - 70,153 - 69,560
Net unrealized
depreciation of
available-for
- -sale
securities - - - -24,891 - - -24,891
Balance,
June30,1999 $9,660$9,250,990 $7,318,955 $-30,420$-3,545,139$-431,763$12,572,283
</TABLE>
The accompanying notes are a part of the consolidated financial
statements.
Consolidated Statements Of Cash Flows
for the years ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash flows provided by
(used in) operating activities:
Net income $ 596,522 $ 544,049 $ 247,189
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 109,662 119,130 111,156
Provision for loan losses 70,000 40,000 -
Loss on disposition of equipment 7,979 - 1,165
Gain on sale of real estate
owned, net - -2,521 -
Gain on sale of securities - -19,728 -63,535
Deferred income taxes -67,200 -29,000 28,000
Contribution to Employee
Stock Ownership Plan 106,574 144,019 138,345
Contribution to Recognition
and Retention Plan 69,560 64,877 47,507
Amortization of premiums and
accretion of discounts, net 106,744 110,082 61,944
Amortization of deferred loan fees -4,439 -20,033 -144,532
Loan fees (costs) deferred, net 5,124 -22,578 -
Increase in cash value of
life insurance -20,524 - -
(Increase) decrease in
other assets -230,911 -127,609 90,372
Increase (decrease) in
accrued income taxes -98,594 25,107 -48,677
Increase (decrease) in
accrued interest and
other expenses 160,608 52,488 -55,965
Net cash provided by
operating activities 811,105 878,283 412,969
Cash flows provided by
(used in) investing activities:
Proceeds from maturity of
certificates of deposit - 198,000 -
Proceeds from maturity of
investment securities 500,000 800,000 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 -2,800,952 - -12,415
Principal reductions of
mortgage-backed securities 2,489,049 2,294,799 2,125,933
Net (increase) in loans
made to customers and
principal collections on loans -11,258,014 -15,739,769 -7,887,055
Proceeds from sale of
real estate owned - 177,951 -
Purchase of property
and equipment -81,304 -14,326 -29,932
Purchase of Federal Home
Loan Bank stock -403,300 -286,500 -
Net cash (used in)
investing activities -11,554,521 -10,781,862 -3,076,320
Cash flows provided by
(used in) financing activities:
Net increase (decrease)
in deposits 3,713,807 1,130,616 -1,840,053
Increase (decrease) in
advances from borrowers for
taxes and insurance -82,336 114,188 -4,092
Federal funds purchased 1,000,000 - -
Federal Home Loan Bank
advances 14,500,000 31,600,000 6,900,000
Federal Home Loan
Bank payments -7,700,000 -22,650,000 -400,000
Purchase of treasury stock -798,890 - -2,011,403
Cash dividends -240,987 -251,172 -115,248
Net cash provided by
financing activities 10,391,594 9,943,632 2,529,204
Increase (decrease) in cash
and cash equivalents -351,822 40,053 -134,147
Cash and cash equivalents,
beginning of year 1,291,426 1,251,373 1,385,520
Cash and cash equivalents,
end of year $ 939,604 $ 1,291,426 $1,251,373
</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 (indivi- dually and
collectively referred to as "Sobieski" or the "Company"), 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 and comprehensive income
for the year ended June 30, 1997.
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 eco-
nomic conditions. In addition, various regulatory agencies, as an integral
part of their exami- nation 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 judg- ment 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 earn- ings), 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, 1999, 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 con- sidered 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 prin- cipal 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, 1999 includes the income
tax benefit of approxi- mately $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
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: 1999 - 692,040; 1998 - 712,808 and 1997 - 770,098.
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:
1999 - 698,125; 1998 - 727,999 and 1997 - 776,441.
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 Account- ants ("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 par- ticipant's individual
account or vested, in the case of the RRP.
A. ORGANIZATION AND ACCOUNTING POLICIES, Concluded.
Comprehensive Income
Sobieski adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," effective July 1, 1998.
SFAS No. 130 establishes stan- dards for the reporting and disclosure
of comprehensive income and its components in a full year set of general
purpose financial statements. Presently, the only component of compre-
hensive income not already included in net income is unrealized
appreciation or depreciation on available-for-sale investment securities.
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 acti- vities for the years ended June 30, 1999, 1998 and
1997 are as follows:
Years Ended June 30,
1999 1998 1997
Supplemental disclosures of
cash flow information:
Cash paid during the years for:
Interest $4,221,655 $3,592,989 $ 3,154,873
Income taxes 577,588 360,000 202,177
Noncash investing and
financing activities:
Loans transferred to real
estate owned - 164,393 11,037
Land transferred to land
held for sale 53,896 - -
B. CONVERSION TO STOCK SAVINGS AND LOAN ASSOCIATION.
On October 4, 1994, the Board of Directors of Sobieski Federal Savings
and Loan Associa- tion 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 liquida- tion 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 distri- bution 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 aforemen- tioned 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 condi- tion.
C. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES.
The amortized cost and estimated aggregate fair value of investment
securities and mort- gage-backed securities at June 30, 1999 are as
follows:
Available-For-Sale
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Aggregate
Cost Gains Losses Fair Value
U.S. Government and
agency securities $2,014,372 $ - $-18,253 $1,996,119
Municipal securities 578,880 - -16,871 562,009
Mortgage-backed
securities 473,166 3 -10,970 462,199
Total $3,066,418 $ 3 $-46,094 $3,020,327
Held-To-Maturity
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Aggregate
Cost Gains Losses Fair Value
U.S. Government and
agency securities $ 200,000 $ - $ -9,300 $ 190,700
Mortgage-backed
securities 7,484,493 50,603 -137,596 7,397,500
Total $7,684,493 $ 50,603 $-146,896 $7,588,200
C. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES,
Continued.
The amortized cost and estimated aggregate fair value of investment
securities and mort- gage-backed securities at June 30, 1999, by
contractual maturity (except for mortgage- backed securities), are
shown in the following table. Expected maturities will differ from
contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Available-For-Sale Held-To-Maturity
Estimated Estimated
Amortized Aggregate Amortized Aggregate
Cost Fair Value Cost Fair Value
Due in one year
or less $2,014,372 $1,997,500 $ - $ -
Due after five
years through
ten years 578,880 560,628 200,000 190,700
Mortgage-backed
securities 473,166 462,199 7,484,493 7,397,500
Total $3,066,418 $3,020,327 $7,684,493 $7,588,200
The amortized cost and estimated aggregate fair value of investment
securities and mort- gage-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
C. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES, Concluded.
Purchases of available-for-sale securities in 1999, 1998 and 1997 were
$2,600,952, $-0- and $12,415, respectively. Purchases of held-to-maturity
securities in 1999 were $200,000 with no purchases in 1998 or 1997.
There were no sales of available-for-sale or held-to-maturity securities
during the year ended June 30, 1999. 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 held-to-maturity securities during the year ended
June 30, 1997.
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, 1999 and 1998, 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:
<TABLE>
<CAPTION>
June 30,
1999 1998
<S> <C> <C>
One-to-four family mortgage loans $ 68,325,456 $ 62,697,471
Construction and commercial
mortgage loans 18,500,010 12,704,532
Share loans 113,584 146,589
Small Business Administration
pass-through certificates 2,249,442 2,404,601
89,188,492 77,953,193
Undisbursed portion of
loans in process -993,780 -1,016,495
Allowance for loan losses -310,000 -240,000
Deferred loan costs, net 15,248 15,933
Loans, net $ 87,899,960 $ 76,712,631
</TABLE>
D. LOANS, Concluded.
Sobieski grants loans to its officers and directors in the normal course
of its business. Man- agement 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 $785,544 and $846,138 at June 30, 1999 and 1998, respectively.
Pro- ceeds from and payments on such loans aggregated $-0- and $60,594,
respectively, during the year ended June 30, 1999.
The following is a summary of activity in the allowance for loan
losses:
Years Ended June 30,
1999 1998 1997
Balance, beginning of year $ 240,000 $ 200,000 $ 200,000
Provision charged to expense 70,000 40,000 -
Charge-offs - - -
Balance, end of year $ 310,000 $ 240,000 $ 200,000
Nonaccrual loans totaled approximately $182,000, $188,000 and
$126,000 at June 30, 1999, 1998 and 1997, respectively.
E. PROPERTY AND EQUIPMENT.
Property and equipment and related accumulated depreciation and
amortization consisted of the following:
June 30,
1999 1998
Land $ 121,787 $ 169,518
Office buildings 1,698,771 1,698,266
Leasehold improvements 71,481 71,481
Furniture and equipment 629,447 588,159
2,521,486 2,527,424
Less, Accumulated
depreciation and
amortization 634,317 603,918
Property and equipment, net $1,887,169 $1,923,506
F. OTHER ASSETS.
Other assets consisted of the following:
June 30,
1999 1998
Accrued interest receivable:
Loans $ 482,408 $ 444,451
Mortgage-backed securities 50,344 69,159
Investment securities 58,374 8,350
Interest-bearing deposits 427 698
Prepaid expenses and other 179,743 71,623
Cash value of life insurance 20,524 -
Land held for sale 53,896 -
Total $ 845,716 $ 594,281
G. DEPOSITS.
Deposits consisted of the following:
<TABLE>
<CAPTION
June 30,
1999 1998
Percent Percent
Amount of Total Amount of Total
<S> <C> <C> <C> <C>
NOW accounts,
2.25% - 2.75% $ 3,467,589 5.4% $ 3,575,932 5.9%
Money market
accounts, 2.75-3.00% 2,128,694 3.3 2,060,436 3.4
Passbook accounts,
2.50% 14,350,716 22.4 13,918,620 23.0
Certificates of
deposit and
IRA accounts:
2.01-5.00% 13,257,545 20.6 3,587,725 5.9
5.01-6.00% 28,143,234 43.8 24,711,312 40.9
6.01-7.25% 2,883,275 4.5 12,663,221 20.9
44,284,054 68.9 40,962,258 67.7
Total $64,231,053 100.0% $60,517,246 100.0%
</TABLE>
The weighted average interest rates on certificates of deposit and
IRA accounts were 5.4% and 5.9% at June 30, 1999 and 1998, respectively.
The aggregate amount of certificates of deposit and IRA accounts with
a minimum denomi- nation of $100,000 was approximately $4,293,000 and
$3,915,800 at June 30, 1999 and 1998, respectively. Deposits in
denominations greater than $100,000 are in excess of feder- ally
insured limits.
G. DEPOSITS, Concluded.
At June 30, 1999, scheduled maturities of certificates of deposit and
IRA accounts for the years ending June 30 are as follows:
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Total
<S> <C> <C> <C> <C> <C> <C>
2.01-5.00% $ 8,362,578 $ 4,731,154 $ 58,873 $ 98,109 $ 6,831 $13,257,545
5.01-6.00% 16,952,384 5,314,946 1,942,439 3,803,751 129,714 28,143,234
6.01-7.25% 2,599,004 - 284,271 - - 2,883,275
$27,913,966 $10,046,100 $2,285,583 $3,901,860 $136,545 $44,284,054
</TABLE>
Interest expense on deposits is summarized as follows:
Years Ended June 30,
1999 1998 1997
NOW and money market
accounts $ 105,682 $ 115,385 $ 117,653
Passbook accounts 354,255 360,530 373,848
Certificates of deposit and
IRA accounts 2,553,697 2,280,008 2,290,818
Total $3,013,634 $2,755,923 $2,782,319
H. FEDERAL HOME LOAN BANK ADVANCES.
At June 30, 1999, outstanding Federal Home Loan Bank advances consisted
of fixed and variable rate advances aggregating $25,250,000 with interest
rates ranging from 4.9% to 5.49% and maturity dates ranging from 2000
to 2008.
The advances mature annually during each of the next five years as
follows:
Years Ending June 30
2000 $ 2,000,000
2001 -
2002 -
2003 8,750,000
2004 -
$10,750,000
At June 30, 1998, outstanding Federal Home Loan Bank advances
consisted of fixed and variable rate advances aggregating $18,450,000
with interest rates ranging from 5.09% to 6.00% and maturity dates
ranging from 1998 to 2008.
H. FEDERAL HOME LOAN BANK ADVANCES, Concluded.
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 Mort- gage Association or the Government
National Mortgage Association.
I. INCOME TAXES.
Income taxes consist of the following:
Years Ended June 30,
1999 1998 1997
Federal:
Current $407,200 $332,000 $106,500
Deferred -67,200 -29,000 28,000
340,000 303,000 134,500
State 74,000 95,000 47,000
Total $414,000 $398,000 $181,500
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,
1999 1998 1997
Computed statutory tax provision $343,600 $320,300 $145,800
State income taxes, net of federal
income tax benefit 48,800 62,700 31,000
Non-deductible portion of ESOP
contributions 11,700 23,300 14,100
Tax-exempt interest -5,100 - -
Business meals and entertainment 3,400 2,900 5,300
Officers' life insurance 10,600 - -
Other, net 1,000 -11,200 -14,700
$414,000 $398,000 $181,500
Effective tax rate 41.0% 42.2% 42.3%
I. INCOME TAXES, Concluded.
The components of the net deferred tax asset at June 30, 1999 and 1998
were as follows:
June 30,
1999 1998
Deferred tax asset:
Deferred loan costs $ -6,600 $ -7,400
Allowance for loan losses 105,400 81,600
Special tax bad debt deductions -50,600 -66,900
Depreciation and amortization 5,200 -800
Net unrealized depreciation of
available-for-sale securities 15,671 2,849
Deferred income 8,600 -
Accrued benefits 12,400 -
Other, net 4,801 5,500
Net deferred tax asset $ 94,872 $ 14,849
J. RETIREMENT AND BENEFIT PLANS.
Defined Contribution Plan
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, 1999, 1998 and 1997 was $14,562, $6,781 and
$10,312, re- spectively.
Employee Stock Ownership Plan
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.
J. RETIREMENT AND BENEFIT PLANS, Concluded.
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 con- tribution expense equal to the average market
value of the released shares, and the released shares become outstanding
for earnings per common share computations. Contribution ex- pense related
to the ESOP was $106,574, $144,019 and $138,345 for the years ended
June 30, 1999, 1998 and 1997, respectively.
Following is a summary of shares held by the ESOP trust as of
June 30, 1999:
Allocated shares 34,104
Unreleased shares 43,176
Total ESOP shares 77,280
Fair value of unreleased
shares at June 30, 1999 $620,655
Non-Qualified Supplemental Benefit Plans
Effective July 1, 1998, Sobieski established non-qualified supplemental
benefit plans for its directors and certain of its officers. These plans
generally provide for the payment of supple- mental 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 are being
accrued over the average remaining service life of the officer and director
group commenc- ing July 1, 1998. Sobieski also maintains life insurance
contracts on the officers and directors to provide funding for the
retirement obligations. Compensation expense associated with these
supplemental benefit plans aggregated $36,583 for the year ended
June 30, 1999.
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 the date of award 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, 1999 and 1998, an aggregate
of 27,372 and 25,640 shares, respectively, of Sobieski's common stock,
with a market value of $338,753 and $318,720, respectively, at the
respective dates of grant, have been awarded under the RRP. Contribution
expense recognized for the years ended June 30, 1999, 1998 and 1997
related to the award of RRP shares was $73,287, $57,778 and $48,295,
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.
The following is a summary of the activity with respect to Sobieski's
Stock Option Plan for the three years ended June 30, 1999:
Weighted-
Average
Exercise
Number of Price
Shares Per Share
Outstanding, July 1, 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
Granted 4,830 13.13
Canceled -300 12.63
Outstanding, June 30, 1999 68,830 13.58
K. INCENTIVE STOCK PLANS, Concluded.
At June 30, 1999, options exercisable under the Stock Option Plan
totaled 30,116 shares and had a weighted-average exercise price per
share of $13.10. 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. For options outstanding at June 30, 1999, the
exercise price per share ranged from $12.50 to $21.25 and the
weighted-average remaining contrac- tual life of the options was 7 years.
As of June 30, 1999, 27,770 shares of common stock were reserved for
future option grants under the Stock Option Plan compared to 32,300
shares as of June 30, 1998.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes Option-Pricing Model with the following
assumptions used for options granted under the Stock Option Plan:
Risk free interest rate 4.94% to 6.25% Volatility rate 20.0% to 24.62%
Expected life 7 years Expected dividends 1.71% to 2.18%
Pro forma net income and earnings per share, reported as if
compensation expense had been recognized under the fair value
provisions of SFAS No. 123, "Accounting For Stock-Based Compensation",
for Sobieski's stock option plan, were as follows for the years ended
June 30:
1999 1998 1997
Pro forma net income $569,400 $519,500 $225,000
Pro forma earnings per share:
Basic .82 .73 .29
Diluted .82 .71 .29
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 discre- tionary,
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.
L. REGULATORY CAPITAL, Concluded.
Quantitative measures established by regulation to ensure capital
adequacy require the Asso- ciation 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, 1999, 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, 1999:
Stockholder's equity $9,322,179
Add: Net unrealized depreciation
of available-for-sale securities 30,420
Tangible and Tier I capital 9,352,599
Add: Allowance for loan losses 310,000
Total risk-based capital $9,662,599
The following are details of the Association's regulatory capital
position and the related capi- tal requirements as of June 30, 1999.
Sobieski's consolidated amounts and ratios do not dif- fer 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) $9,663 18.05 $4,283 >8.0% $5,354 >10.0%
Tier I Capital
(to Risk-Weighted
Assets) 9,353 17.47 2,142 >4.0% 3,212 >6.0%
Tier I Capital
(to Adjusted Assets) 9,353 9.13 4,097 >4.0% 5,122 >5.0%
Tangible Capital
(to Tangible Assets) 9,353 9.13 3,073 >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 ($6,358,000 and $6,033,000 at June 30, 1999
and 1998, 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
d expiration dates or other termination clauses and may require payment of
a fee. Since many of the com- mitments 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 SFAS No. 107, "Disclosures About Fair Value of
Financial Instruments."
The estimated fair values of Sobieski's financial instruments as
of June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents $ 939,604 $ 1,291,426 $ 939,604 $ 1,291,426
Investment securities 2,758,128 499,720 2,748,828 499,720
Mortgage-backed
securities 7,946,692 10,537,655 7,859,699 10,482,850
Loans, net 87,899,960 76,712,631 87,199,569 75,295,951
Federal Home Loan
Bank stock 1,325,800 922,500 1,325,800 922,500
Liabilities:
Deposits 64,231,053 60,517,246 65,892,000 61,155,000
Federal funds
purchased 1,000,000 - 1,000,000 -
Federal Home Loan
Bank advances 25,250,000 18,450,000 25,452,000 18,971,000
</TABLE>
N. FAIR VALUE OF FINANCIAL INSTRUMENTS, Continued.
Estimated
Contract or Unrealized
Notional Amount Gain (Loss)
1999 1998 1999 1998
Off-balance-sheet
financial
instruments:
Loan commitments -
fixed rate $ 969,000 $1,916,000 $-193,000 $ 29,000
Loan commitments -
adjustable rate 5,389,000 4,117,000 -3,000 -
The following methods and assumptions were used to estimate the fair
value of Sobieski's financial instruments.
Cash and Cash Equivalents and Federal Home Loan Bank Stock:
The carrying amounts of cash and cash equivalents 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.
Loans:
Fair values are estimated for portfolios with similar financial
characteristics. Loans are segre- gated by type, such as residential
mortgages, nonresidential mortgages, commercial and con- sumer loans.
Each loan category is further segmented into fixed and variable interest
cate- gories, 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.
N. FAIR VALUE OF FINANCIAL INSTRUMENTS, Concluded.
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 cur- rently available on advances from
the Federal Home Loan Bank of Indianapolis with similar characteristics.
Federal Funds Purchased:
The carrying amounts of federal funds purchased are reasonable estimates
of their fair values.
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 commit- ments 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, 1999 and 1998.
Estimated fair value amounts have been deter- mined by Sobieski using
available market information and a selection from appropriate val- uation
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, 1999 and 1998, and its related statements of income and
cash flows for the years ended June 30, 1999, 1998 and 1997 are as
follows:
STATEMENTS OF FINANCIAL CONDITION
at June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 705,863 $ 437,601
Loans 1,969,007 2,624,037
Note receivable from subsidiary 483,000 547,400
Investment in subsidiary 9,322,179 9,197,170
Land held for sale 53,896 -
Other assets 61,858 58,808
Total assets $12,595,803 $12,865,016
LIABILITIES AND STOCKHOLDERS'
EQUITY
Liabilities:
Accrued income taxes and
other liabilities $ 23,520 $ 621
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 9,250,990 9,217,094
Retained earnings,
substantially restricted 7,318,955 6,963,420
Net unrealized depreciation
of available-for-sale
securities -30,420 -5,529
16,549,185 16,184,645
Less: Treasury stock,
at cost, 251,198 and
201,821 shares, respectively 3,545,139 2,816,402
Unallocated Employee
Stock Ownership Plan shares;
43,176 and 50,385 shares,
respectively 431,763 503,848
Total stockholders' equity 12,572,283 12,864,395
Total liabilities and
stockholders' equity $12,595,803 $12,865,016
</TABLE>
O. PARENT COMPANY FINANCIAL INFORMATION, Continued.
STATEMENTS OF INCOME
for the years ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Income:
Interest income on loans $ 165,588 $ 230,959 $ 231,082
Dividends received
from subsidiary 591,062 500,266 1,449,000
Interest on note
receivable from subsidiary 41,335 46,345 51,356
Total income 797,985 777,570 1,731,438
Expenses:
Compensation and benefits 74,791 57,900 57,900
Occupancy and equipment 6,000 6,000 6,000
Professional fees 2,887 23,622 37,349
Interest on note payable
to subsidiary - 23,303 24,006
Other operating expenses 64,551 48,831 48,159
Total expenses 148,229 159,656 173,414
Income before income taxes
and equity in undistributed
earnings of subsidiary 649,756 617,914 1,558,024
Income taxes 27,000 42,000 43,000
Income before equity
in undistributed earnings
of subsidiary 622,756 575,914 1,515,024
Equity in undistributed
earnings (losses)
of subsidiary -26,234 -31,865 -1,267,835
Net income $ 596,522 $ 544,049 $ 247,189
</TABLE>
O. PARENT COMPANY FINANCIAL INFORMATION, Concluded.
STATEMENTS OF CASH FLOWS
for the years ended June 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash flows from
operating activities:
Net income $ 596,522 $ 544,049 $ 247,189
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Equity in undistributed
losses of subsidiary 26,234 31,865 1,267,835
Noncash dividend received
from subsidiary -47,731 - -
Increase in cash value
of life insurance -6,540 - -
Decrease (increase) in
other assets 3,490 85,371 -111,453
Increase (decrease) in
accrued income taxes
and other liabilitie 22,899 -26,639 -44,852
Net cash provided by
operating activities 594,874 634,646 1,358,719
Cash flows from
investing activities:
Payments received on
note receivable from
subsidiary 64,400 64,400 64,400
Net decrease in loans
purchased from subsidiary
and principal collections
on loans 655,030 465,161 203,525
Land improvements -6,165 - -
Net cash provided by
investing activities 713,265 529,561 267,925
Cash flows from financing
activities:
Proceeds from note payable
to subsidiary - - 500,000
Payments on note
payable to subsidiar - -500,000 -
Purchase of treasury stock -798,890 - -2,011,403
Cash dividends -240,987 -251,172 -115,248
Net cash (used in)
financing activities -1,039,877 -751,172 -1,626,651
Net increase (decrease)
in cash and cash
equivalents 268,262 413,035 -7
Cash and cash equivalents:
Beginning of year 437,601 24,566 24,573
End of year $ 705,863 $ 437,601 $ 24,566
</TABLE>
These financial statements should be read in conjunction with Sobieski's
consolidated finan- cial 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, 1999 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, 1999 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
1999 and 1998. The prices reflect interdealer quotations without retail
markup, markdown or commissions, and do not necessarily reflect actual
transactions.
1999 1998
High Low Dividends High Low Dividends
First Quarter $ 18.75 $ 14.00 $ 0.08 $ 17.75 $ 14.75 $ 0.08
Second Quarter 15.50 13.00 0.08 20.38 18.00 0.08
Third Quarter 15.00 12.75 0.08 24.25 18.25 0.08
Fourth Quarter 14.88 14.38 0.08 21.25 18.75 0.08
At August 16, 1999, there were 726,132 shares of Sobieski Bancorp, Inc.
common stock issued and outstanding and there were approximately 368
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, 1999, 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 George J. Aranowski
Auditor, St. Joseph County Public Accountant
Joseph A. Gorny Richard J. Cullar
Business Owner Certified Public Accountant
Leonard J. Dobosiewicz
Maintenance Professional
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 New York Avenue, NW
Suite 200 South Bend, Indiana 46601 Seventh Floor
Mishawaka, Indiana 46545 Washington DC 20005
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Parent
Sobieski Bancorp, Inc.
Subsidiary
Sobieski Federal Savings and Loan Association
State of Incorporation
Deleware
Percentage of Ownership
100%
Exhibit 22
Consent Of Independent Accountants
We hereby consent to the incorporation by reference in the
Registration Statements on Forms S-8 ((333-40983) and (333-40985))
of Sobieski Bancorp, Inc. of our report dated September 7, 1999 on
our audits of the consolidated financial statements of Sobieski
Bancorp, Inc. and subsidiary at June 30, 1999 and 1998 and for each
of the three years in the period ended June 30, 1999, which report
appears on page 20 of the Annual Report to Stockholders which is
incorporated in this Annual Report on Form 10-KSB of Sobieski Bancorp,
Inc. for its fiscal year ended June 30, 1999.
/s/PricewaterhouseCoopers LLP
Mishawaka, Indiana
September 24, 1999
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] JUN-30-1999
[PERIOD-END] JUN-30-1999
[CASH] 939604
[SECURITIES] 12030620
[RECEIVABLES] 88209960
[ALLOWANCES] 310000
[PP&E] 2521486
[DEPRECIATION] 634317
[TOTAL-ASSETS] 103697941
[CURRENT-LIABILITIES] 64231053
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 9660
[OTHER-SE] 12562623
[TOTAL-LIABILITY-AND-EQUITY] 103697941
[TOTAL-REVENUES] 7565755
[OTHER-EXPENSES] 2240583
[LOSS-PROVISION] 70000
[INTEREST-EXPENSE] 4244650
[INCOME-PRETAX] 1010522
[INCOME-TAX] 414000
[NET-INCOME] 596522
[EPS-BASIC] .86
[EPS-DILUTED] .85
</TABLE>
