U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31,1999
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.
(Exact name of small business issuer as specified in its charter)
Delaware 35-1942803
State or other jurisdiction of IRS Employer Identification No.)
incorporation or organization)
2930 W. Cleveland Road, South Bend, Indiana 46628
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (219) 271-8300
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes[X] No [ ]
As of February 12, 2000, there were 722,162 shares of the
registrant's common stock issued and outstanding.
SOBIESKI BANCORP, INC.
AND SUBSIDIARY
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Financial Condition 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statements of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4-6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
i
PART I. Financial Information
Item 1. Financial Statements
Sobieski Bancorp, Inc. And Subsidiary
Condensed Consolidated Statements Of Financial Condition
December 31,1999 and June 30,1999
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1999 1999
(Unaudited)
<S> <C> <C>
Cash, including interest-bearing deposits
in other financial institutions of $2,422
and $ 165,940, respectively $ 2,059,712 $ 939,604
Investment securities, available-for-sale
(amortized cost of $2,009,884 and
$2,593,252, respectively) 1,963,002 2,558,128
Investment securities, held-to-maturity
(market value of approximately $1,053,400
and $190,700, respectively) 1,055,383 200,000
Mortgage-backed securities,
available-for-sale (amortized cost of
$5,162,942 and $473,166, respectively) 5,118,647 462,199
Mortgage-backed securities,
held-to-maturity (market value of
approximately $1,904,200 and
$7,397,500, respectively) 2,002,506 7,484,493
Loans, net 96,312,157 87,899,960
Federal Home Loan Bank stock, at cost 1,499,800 1,325,800
Property and equipment, net 1,900,789 1,887,169
Other assets 972,054 940,588
Total assets $112,884,050 $103,697,941
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 72,300,281 $ 64,231,053
Federal funds purchased and other
short-term borrowings 754,564 1,000,000
Federal Home Loan Bank advances 26,230,000 25,250,000
Advances from borrowers for taxes
and insurance 327,467 292,291
Accrued income taxes - 7,141
Accrued interest and other expenses 516,698 345,173
Total liabilities 100,129,010 91,125,658
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 9,251,882 9,250,990
Retained earnings, substantially
restricted 7,582,062 7,318,955
Net unrealized depreciation of
available-for-sale securities ( 82,014) ( 30,420)
16,761,590 16,549,185
Less: Treasury stock, at cost,
257,066 and 251,198 shares,
respectively 3,609,122 3,545,139
Unallocated Employee Stock
Ownership Plan shares;
39,743 and 43,176 shares,
respectively 397,428 431,763
Total stockholders' equity 12,755,040 12,572,283
Total liabilities and
stockholders' equity $112,884,050 $103,697,941
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
Sobieski Bancorp, Inc. And Subsidiary
Condensed Consolidated Statements Of Income
for the three and six months ended December 31,1999 and 1998
<TABLE>
<CAPTION>
Three Months Six Months
Ended December 31, Ended December 31,
1999 1998 1999 1998
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest Income:
Loans $ 1,813,654 $1,650,020 $3,556,380 $3,217,800
Mortgage-backed securities 103,838 132,340 208,428 273,471
Investment securities 67,538 7,721 129,262 14,126
Interest-bearing deposits 21,366 69,348 31,346 116,394
Total interest income 2,006,396 1,859,429 3,925,416 3,621,791
Interest expense:
Interest on deposits 837,214 781,644 1,598,263 1,530,267
Interest on borrowings 349,556 309,044 694,731 603,719
Total interest expense 1,186,770 1,090,688 2,292,994 2,133,986
Net interest income 819,626 768,741 1,632,422 1,487,805
Provision for loan losses 15,000 25,000 50,000 40,000
Net interest income after
provision for loan losses 804,626 743,741 1,582,422 1,447,805
Non-interest income:
Fees and service charges 54,699 36,101 108,510 75,470
Other income 68 5,320 115 5,368
Total non-interest income 54,767 41,421 108,625 80,838
Non-interest expenses:
Compensation and benefits 315,562 275,577 603,354 558,563
Occupancy and equipment 95,933 77,770 183,200 151,436
Federal deposit insurance
premiums 8,930 8,818 18,759 18,002
Advertising and promotion 12,055 12,321 21,013 22,193
Service bureau expense 49,560 39,792 101,761 77,543
Other operating expenses 104,619 107,492 203,642 175,942
Total non-interest expenses 586,659 521,770 1,131,729 1,003,679
Income before income taxes 272,734 263,392 559,318 524,964
Provision for income taxes 112,500 115,000 230,700 224,400
Net income 160,234 148,392 328,618 300,564
Other comprehensive income,
net of tax :
Unrealized depreciation of
available-for-sale
securities (39,014) (2,914) (51,594) (2,817)
Total comprehensive income $ 121,220 $ 145,478 $ 277,024 $ 297,747
Basic earnings per common
share $ 0.24 $ 0.21 $ 0.49 $ 0.42
Diluted earnings per
common share $ 0.24 $ 0.21 $ 0.49 $ 0.42
Dividends per common share $ 0.08 $ 0.08 $ 0.16 $ 0.16
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
Sobieski Bancorp, Inc. And Subsidiary
Condensed Consolidated Statements Of Cash Flows
for the six months ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Six Months
Ended December 31,
1999 1998
(Unaudited)
<S> <C> <C>
Cash flows provided by (used in)
operating activities:
Net income $ 328,618 $ 300,564
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of property and equipment 56,224 54,119
Provision for loan losses 50,000 40,000
Contribution to Employee Stock
Ownership Plan 42,030 55,268
Contribution to Recognition and
Retention Plan 35,562 39,966
Amortization of premiums and accretion
of discounts, net 79,743 52,249
Deferral of loan fees 564 15,774
Increase in other assets (25,668) (23,706)
Increase (decrease) in accrued income
taxes 424 (97,228)
Increase in accrued interest and other
expenses 301,836 12,904
Net cash provided by operating activities 869,333 449,910
Cash flows provided by (used in)
investing activities:
Purchase of investment securities (311,009) (782,201)
Purchase of certificates of deposits - (100,000)
Proceeds from maturities of investment
securities - 200,000
Principal reductions of mortgage-backed
securities 764,004 1,306,010
Net increase in loans made to
customers and principal collections
on loans (8,497,139) (9,350,873)
Purchase of Federal Home Loan
Bank stock (174,000) (278,000)
Purchase of property and equipment (69,844) (44,534)
Net cash used in investing activities (8,287,988) (9,049,598)
Cash flows provided by (used in)
financing activities:
Net increase in deposits 8,069,228 6,047,877
Increase (decrease) in advances
from borrowers for taxes and insurance 35,176 (48,784)
Federal Home Loan Bank advances 2,980,000 10,800,000
Repayment of Federal Home Loan
Bank advances (2,000,000) (6,000,000)
Decrease in Federal Funds purchased (300,000) -
Purchase of treasury stock (129,344) (571,303)
Cash dividends paid (116,297) (123,160)
Net cash provided by financing
activities 8,538,763 10,104,630
Increase in cash and cash equivalents 1,120,108 1,504,942
Cash and cash equivalents,
beginning of period 939,604 1,291,426
Cash and cash equivalents,
end of period $ 2,059,712 $ 2,796,368
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
Sobieski Bancorp, Inc. And Subsidiary
Notes To Condensed Consolidated Financial Statements
A. GENERAL.
The accompanying condensed consolidated financial statements include
the accounts of Sobieski Bancorp, Inc. (the "Company") and its wholly
owned subsidiary, Sobieski Federal Savings and Loan Association of
South Bend (the "Association").
The condensed consolidated financial statements included herein have
been prepared by the registrant pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations,
although the registrant believes that the disclosures are adequate to
make the information presented not misleading. In the opinion of
management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of the
Company's consolidated financial position, results of operations and
cash flows for the interim periods presented. The consolidated results
of operations for the interim periods presented are not necessarily
indicative of the results that may be expected for the full year.
The accompanying unaudited condensed consolidated financial statements
should be read in conjunction with the Company's consolidated financial
statements included in the Company's Annual Report on Form 10-KSB for
the year ended June 30, 1999.
The Company cautions that any forward looking statements contained
in this report, in a report incorporated by reference to this report
or made by management of the Company involve risks and uncertainties
and are subject to change based on various factors. Actual results
could differ materially from those expressed or implied.
B. CONVERSION TO STOCK SAVINGS LOAN ASSOCIATION
On October 4, 1994, the Board of Directors of the Association adopted
a plan of conversion to convert the Association from a federally
chartered mutual savings and loan association to a federally chartered
stock savings and loan association (the "Conversion"). The Association
obtained the required regulatory approval for the Conversion in
February 1995 and on March 22, 1995 the plan of conversion was approved
by a majority of the votes eligible to be cast by the members of the
Association.
The Company was organized as a Delaware corporation in December 1994
for the purpose of acquiring all of the issued and outstanding capital
stock of the Association issued in the Conversion.
At the time of Conversion, the Association established a liquidation
account in an amount equal to the Association's retained earnings as
of September 30, 1994. The liquidation account will be maintained for
the benefit of depositors, as of the eligibility record date and
supplemental eligibility record date, who continue to maintain their
deposits with the Association after the Conversion. In the event of
a complete liquidation (and only in such event), each eligible
depositor will be entitled to receive a liquidation distribution from
the liquidation account, in the proportionate amount of the then current
adjusted balance for deposits then held, before any liquidation
distribution may be made with respect to the stockholders.
4
Sobieski Bancorp, Inc. And Subsidiary
Notes To Condensed Consolidated Financial Statements, Continued
Current regulations allow the Company to pay cash dividends on its
stock if its regulatory capital would not thereby be reduced below
the amount then required for the aforementioned liquidation account.
Also, capital distribution regulations limit the Company's ability
to make capital distributions which include dividends, stock redemptions,
repurchases and other transactions charged to the capital account based
on its capital level and supervisory condition.
C. ACCOUNTING POLICIES.
Securities
Securities that may be sold as part of the Association's asset/liability
or liquidity management or in response to or in anticipation of changes
in interest rates and resulting prepayment risk, or for other similar
factors, are classified as available-for-sale and carried at fair market
value. Unrealized holding gains and losses on securities classified as
available-for-sale are reported net of related deferred income taxes as
a separate component of stockholders' equity. Securities that the
Association has the ability and positive intent to hold to maturity
are classified as held-to-maturity and carried at amortized cost.
Trading securities are carried at fair market value with unrealized
holding gains and losses included in earnings. Gains and losses on
all securities transactions are recognized when sold as determined by
the identified certificate method. The Association had no trading
securities at December 31, 1999.
Allowance For Loan Losses
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risks inherent in
the Company's 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, loan classification, 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 allowance for loan
losses. A significant factor considered in the Company's allowance
is its historically low level of loans other than one-to-four family
real estate loans. The Company's allowance for loan losses and
nonaccrual loans at December 31,1999 aggregated $360,000 and $419,000,
respectively.
Earnings Per Common Share
Basic earnings per share are computed by dividing net income by the
weighted average number of shares of common stock outstanding. For
the three and six-month periods ended December 31, 1999, the weighted
average number of common shares used in the computation of basic
earnings per share were 671,572 and 670,747, respectively. The weighted
average number of common shares for the same periods in 1998 were
699,705 and 707,565.
5
Sobieski Bancorp, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements, Concluded
Diluted earnings per share are computed by dividing net income by
the weighted average number of shares of common stock outstanding plus
the dilutive effect of outstanding stock options and nonvested shares
awarded under the RRP. For the three and six-month periods ended
December 31,1999, the weighted average number of common shares used
in the computation of diluted earnings per share were 671,572 and
671,059, respectively. The weighted average number of common shares
for the same periods in 1998 were 704,222 and 714,471, respectively.
The Company accounts for the shares of common stock acquired by its
Employee Stock Ownership Plan ("ESOP") and the restricted shares
awarded under its Recognition and Retention Plan ("RRP") in accordance
with the American Institute of Certified Public Accountants Statement
of Position 93-6, "Employers' Accounting For Employee Stock Ownership
Plans", which prescribes that shares held by the ESOP and the restricted
shares awarded under the RRP are not considered in the weighted
average number of shares outstanding until such shares are released
for allocation to an ESOP participant's individual account or vested,
in the case of the RRP.
Comprehensive Income
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income," effective
July 1, 1998. SFAS No. 130 establishes 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 net
income is unrealized appreciation or depreciation on available-for-sale
investment securities.
Non-Qualified Supplemental Benefit Plans
Effective July 1, 1998, the Company established non-qualified
supplemental benefit plans for certain of its officers and directors.
These plans generally provide for the payment of supplemental
retirement benefits over a period of ten (10) years, beginning with
the later of (a) the officers's or director's attainment of a specified
retirement age; or (b) upon termination of the officer's employment with
the Company or the director's termination as a member of the Company'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 commencing July 1, 1998. The
Company also maintains life insurance contracts on the officers and
directors to provide funding for the retirement obligations.
Compensation expense associated with these agreements aggregated
$20,900 and $24,300 for the six-month periods ended December 31, 1999
and 1998, respectively.
6
Item 2. Management's Discussion And Analysis of Financial
Condition And Results of Operations
Forward-Looking Statements
When used in this Form 10-QSB 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 release the result of any revisions which
may be made to any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
Financial Condition
The Company's total assets increased $9.2 million during the six
months ended December 31, 1999 to $112.9 million from $103.7 million
at June 30, 1999. This increase was mainly due to increases in net
loans of $8.4 million and interest-bearing demand deposits in other
financial institutions of $1.1 million, offset by a decrease of
$0.6 million in the securities portfolio. The increase
in loans was a result of purchasing participation interests in
commercial loans, and originations for commercial, home equity and
mortgage loans.
The Company's total liabilities increased $9.0 million from
$91.1 million at June 30, 1999 to $100.1 million at December 31, 1999.
The increase was primarily from $8.1 million of deposit growth and
$1.0 million in increased Federal Home Loan Bank ("FHLB") advances
and was primarily used to fund the new originated loans and
purchases of participation interests in commercial loans.
Deposits increased from $64.2 million at June 30, 1999 to
$72.3 million at December 31, 1999. The deposit increase was
the result of continued competitive market pricing of our deposits.
Stockholders' equity increased by $190,000 to $12.76 million
at December 31, 1999 from $12.57 million at June 30, 1999,
principally the result of $329,000 of net income, offset by
$116,000 of cash dividends paid and $129,000 of treasury stock
purchases.
7
Item 2. Management's Discussion And Analysis of Financial
Condition And Results of Operations, Continued.
Results of Operations
General. The Company recorded net income for the three months
ended December 31, 1999 of $160,000 which is an increase of
$12,000 over net income of $148,000 for the same period in 1998.
For the six months ended December 31, 1999, net income was $329,000
which is an increase of $28,000 over the reported net income of
$301,000 for the comparable period in the prior year.
Net Interest Income. The Company's net income is primarily dependent
upon net interest income. Net interest income was $820,000 and
$1.63 million for the three and six-month periods ended December
31, 1999, respectively, as compared to $769,000 and $1.49 million
for the same periods in the prior year. The increase of $51,000
and $140,000 for the three and six-month periods, respectively,
was primarily a result of increased income earned on loans offset
in part by decreased non-loan interest, increases in interest paid
on deposits, interest paid on increased FHLB advances, and other
borrowings. The increase in interest income earned on loans was
generated by increased loan volume offset by lower loan rates.
Interest expense for the three and six-month periods ended
December 31,1999 was $1.19 million and $2.29 million, respectively,
as compared to $1.09 million and $2.13 million for the comparable
periods in the prior year. The increase in interest expense for
the three and six-month periods ended December 31, 1999 was
attributable to increased deposit, FHLB advance, and other borrowing
levels along with higher rates paid on deposits.
Provisions for Loan Losses. During the three and six-months ended
December 31, 1999, the Company had provisions of $15,000 and $50,000,
respectively, as compared to $25,000 and $40,000 for the same periods
in the prior year. At December 31, 1999, the Company's allowance for
loan losses totaled $360,000 or .37% of net loans and 86% of total
non-performing loans.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions
could result in adjustments and net income could be significantly
affected if circumstances differ substantially from the assumptions
used in making the final determination. Future additions to the
Company'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 their oversight process, periodically
review the Company's allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance based
upon their judgment of the information available to them at the
time of their examination.
Non-Interest Income. Non-interest income consists primarily of
fees and service charges on deposit accounts and other income.
Non-interest income increased $14,000 to $55,000 for the three
months ended December 31, 1999 as compared to $41,000 for the same
period last year and increased $28,000 to $109,000 for the six
months ended December 31, 1999 from $81,000 for the same period
in 1998. These increases were due primarily to increased fee
income and service charges on customer accounts along with added
letter of credit fee income.
8
Item 2. Management's Discussion And Analysis of Financial
Condition And Results of Operations, Continued
Non-Interest Expenses. Non-interest expenses were $587,000 and
$1.13 million for the three and six-month periods ended
December 31, 1999, respectively, compared to $522,000 and
$1.00 million for the same periods last year. The increase
of $130,000 for the six-month period ended December 31,1999
compared to the same period last year was due to higher compensation,
occupancy, service bureau Year- 2000 costs, professional services and
other administrative expense. Other expenses remaining relatively
the same were FDIC insurance and advertising.
Income Taxes. Income taxes for the six months ended
December 31, 1999 were $230,700 on pre-tax income of $559,300,
an effective tax rate of 41.2%. For the six months ended
December 31, 1998, income taxes were $224,400 on pre-tax income
of $525,000, an effective tax rate of 42.7%
Liquidity and Capital Resources
The Company's principal sources of funds are deposits and principal
and interest payments on loans and investments. While scheduled
loan repayments and maturing investments are relatively predictable,
deposit flows and early loan prepayments are more influenced by
interest rates, general economic conditions and competition.
Additionally, the Company may borrow funds from the Federal Home
Loan Bank of Indianapolis ("FHLB") or utilize other borrowings of
funds based on need, comparative costs and availability at the time.
Federal regulations require the Association to maintain minimum levels
of liquid assets. The required percentage has varied from time to time
based upon the economic conditions and savings flows and is currently
4% of net withdrawable savings deposits and borrowings payable on
demand or in one year or less during the preceding calendar month.
Liquid assets for purposes of this ratio include cash, certain time
deposits, U.S. Government obligations, government agency and other
securities and obligations generally having remaining maturities of
less than five years. The Company has maintained its liquidity
ratio at levels in excess of those required. At December 31,1999,
the Association liquidity ratio was 16.2%.
At December 31, 1999, the Company had $26.2 million in outstanding
advances from the FHLB used primarily to fund purchases of
participation interests in commercial loans, internally originated
loans and other investments.
The Company uses its liquidity resources principally to meet ongoing
commitments to fund maturing certificates of deposit and deposit
withdrawals and to meet operating expenses. At December 31,1999,
the Company had outstanding commitments to extend credit which
amounted to $8.3 million (including $3.3 million in available home
equity lines of credit). Management believes that loan repayments
and other sources of funds will be adequate to meet the Company's
foreseeable liquidity needs.
At December 31,1999, the Association had tangible capital of
$9.7 million or 8.7% of adjusted total assets which was $8.0 million
above the minimum capital requirement of $1.7 million or 1.5% of
adjusted total assets.
At December 31,1999, the Association had core capital of $9.7 million
or 8.7% of adjusted total assets which was $6.3 million above the
minimum capital requirement of $3.4 million or 3.0% of adjusted total
assets.
9
Item 2. Management's Discussion And Analysis of Financial
Condition And Results of Operations, Continued
At December 31, 1999, the Association had total risk-based capital
of $10.0 million and risk-weighted assets of $63.1 million or total
risk-based capital of 15.9% of risk-weighted assets. This amount
was $5.0 million above the minimum regulatory risk-based capital
requirement of $5.0 million, or 8.0% of risk-weighted assets.
Financial Accounting Developments
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting 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.
(July 1, 2000 for the Company.) 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.
The Company adopted SFAS No. 133 effective October 1, 1999. Concurrent
with the adoption of SFAS No. 133, the Company reclassified
$5.2 million of held-to-maturity mortgage backed securities to
the available-for-sale classification. The gross unrealized
depreciation on these securities at the time of transfer was $18,200.
This transfer was made to provide greater flexibility in managing
the Company's assets and to facilitate future derivative transactions.
The adoption of SFAS No. 133 did not have any significant effect on
the Company's results of operations or financial position.
10
Item 2. Management's Discussion And Analysis of Financial
Condition And Results of Operations, Continued
Year 2000 Computer Issues
The Company was aware of the current concerns by consumers and the
business community of reliance upon computer software programs that
did not properly recognize the year 2000 in date formats, often
referred to as the "Year 2000 Problem''. The Year 2000 Problem was
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 instruments such as loans and deposits.
A failure of the Company's computer systems could have resulted in
disruptions of operations, including among other things, temporary
inability to process transactions, send statements or otherwise
engage in routine business transactions on a daily basis.
The Company developed a plan to prepare for the Year 2000. Started
in 1997, the plan included an inventory of software applications,
communication with third-party vendors and suppliers and the obtaining
of certification of compliance with third-party providers. The
Company had a comprehensive, written plan, which was regularly
updated and monitored by management and the Board of Directors.
Plan status was regularly reviewed by management of the Company
and reported at least quarterly to the Board.
The Company completed testing of all its mission critical systems
and applications and had 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
consisted of renovation and upgrading of its computer systems and
testing of equipment and programs for Year 2000 compliance. The
Company has invested in new or upgraded technology that has definable
value lasting beyond the Year 2000. In these instances, where
Year 2000 compliance is merely ancillary, the Company capitalized
and depreciates assets over its estimated useful life.
In addition to reviewing its own computer operating systems and
applications, the Company initiated formal communications with its
significant suppliers to determine the extent to which the Company's
interface systems were vulnerable to those third parties' failure to
resolve their own Year 2000 issues. There was no assurance that the
systems of other companies on which the Company's systems rely would
be converted timely. If such modifications and conversions were not
made, or were not completed timely, the Year 2000 issue could have
had a material adverse impact on the operations of the Company.
Therefore, the Company developed a contingency plan as to not disrupt
operations should its suppliers not be timely converted.
11
Item 2. Management's Discussion And Analysis of Financial
Condition And Results of Operations, Concluded
Contingency planning was one of the most important steps in
Year 2000 readiness. It provided 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 thorough contingency plan was prudent to reduce risk
and potential impact of Year 2000 induced interruptions or failures
of critical business functions.
The Company had followed the FFIEC guidance, as published in a series
of interagency statements, on requirements on Year 2000 readiness.
Sobieski had completed the five phases identified: awareness,
assessment, renovation, validation and implementation for mission
critical systems including third-party providers. Sobieski had
extensively tested the critical processes in a Year 2000 environment
and their tests revealed no material Year 2000 problems.
The Sobieski Federal Business Resumption Contingency Plan facilitated
the identification of potential problems, dissemination of information,
resolution of issues and decision-making process during the identified
Year 2000 timeframe. The Sobieski management team was fully deployed
during this time period and had a Year 2000 issue been detected, the
contingency plan would have immediately been enacted to address the
problem and not interrupt customer service.
The Company's significant suppliers are an online computer services
firm (provides data processing services), the Federal Home Loan
Bank of Indianapolis and utility services. The representations
from these suppliers were that they were all making efforts to become
Year 2000 compliant by December 31, 1998 and to test and validate
their systems during 1999. The Company continued to monitor the
progress of these suppliers by requesting regular updates of the
suppliers' progress and believed that these suppliers were Year 2000
compliant before December 31, 1999. The management of the Company
did know of alternative suppliers for the services provided by these
entities, but believed a conversion to these suppliers of the
Company's data processing capabilities during 1999 would have been
very difficult to accomplish before the Year 2000.
The Company has several significant borrowers for which the Company
made direct loans or held a participation interest. Management of
the Company had communicated with these borrowers about Year 2000
issues and did not expect any material adverse effect on the Company
Year 2000 problems.
Specific factors that might have caused differences included, but were
not limited to, the ability of other companies on which the Company's
systems relied to modify or convert their systems to be year 2000
compliant, and/or the ability to locate and correct all relevant
computer codes.
The Company experienced no significant Year 2000 problems and will
address any related issues as they may affect the Company.
12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
13
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Sobieski Bancorp, Inc.
Registrant)
Date: February 12, 2000
By: ______________
Thomas F. Gruber
President and Chief Executive Officer
Date: February 12, 2000
By: ________
Arthur Skale
Chief Financial Officer
14
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 6-MO
[FISCAL-YEAR-END] 06-30-2000
[PERIOD-END] 12-31-1999
[CASH] 2,059,712
[SECURITIES] 11,639,338
[RECEIVABLES] 96,672,157
[ALLOWANCES] (360,000)
[PP&E] 2,586,607
[DEPRECIATION] (685,818)
[TOTAL-ASSETS] 112,884,050
[CURRENT-LIABILITIES] 72,300,281
[PREFERRED-MANDATORY] -0-
[PREFERRED] -0-
[COMMON] 9,660
[OTHER-SE] 12,745,380
[TOTAL-LIABILITY-AND-EQUITY] 112,884,050
<TTOTAL-REVENUES> 4,034,041
[OTHER-EXPENSES] 1,131,729
[LOSS-PROVISION] 50,000
[INTEREST-EXPENSE] 2,292,994
[INCOME-PRETAX] 559,318
[INCOME-TAX] 230,700
[NET-INCOME] 328,618
[EPS-BASIC] .49
[EPS-DILUTED] .49
</TABLE>
