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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File 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 Office Zip Code
Issuer's telephone number, including area code: (219) 271-8300
Securities Registered Under Section 12(b) of the Exchange Act:
None
Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X. NO _.
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. [ ]
State Issuer's revenues for its most recent fiscal year $8,301,000.
As of September 19, 2000, there were issued and outstanding 704,662 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 19, 2000 was
approximately $6.4 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, 2000.
Part III of Form 10-KSB - Portions of the Proxy Statement for
the 2000 Annual Meeting of Shareholders.
PART I
Item 1. Description of Business
General
Sobieski Bancorp, Inc.
Sobieski Bancorp, Inc. (the "Company") was incorporated under the laws
of the State of Delaware in December 1994 by authorization of the Board
of Directors of Sobieski Federal Savings and Loan Association of
South Bend ("Sobieski Federal" or the "Association") for the purpose
of 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. There are no
current arrangements, understandings or agreements regarding any such
acquisition. 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, 2000, the Company had consolidated assets of
approximately $110.8 million, deposits of approximately $73.9 million
and stockholders' equity of approximately $12.8 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 2000 and 1999, the Association
purchased participation interests in commercial loans funded
primarily by advances from the Federal Home Loan Bank ("FHLB") of
Indianapolis. See "Originations and Purchases of Loans and
Mortgage-Backed Securities."
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 release the result of any revisions which
may be made to any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events.
Lending Activities
General. The Association has historically originated primarily
fixed-rate, one-to-four family mortgage loans for retention in its
portfolio. Since September 1994, the Association has originated
adjustable-rate mortgage loans for retention in its portfolio. In
response to customer demand, the Association continues to originate
fixed-rate mortgage loans, 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 2000 and
1999, the Association purchased participation interests in commercial
loans funded with one to ten-year FHLB advances from the FHLB of
Indianapolis. The Association has in the past purchased participations
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, 2000, the Association's net loan portfolio
totaled $93.3 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, 2000, the maximum amount which the Association could loan
to any one borrower and the borrower's related entities was $1,570,000.
At June 30, 2000, 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 $1,380,000. As of June 30, 2000, 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 applications and property valuations.
Properties securing real estate loans made by Sobieski Federal are
generally appraised by Board-approved independent appraisers. In the
loan approval process, Sobieski Federal assesses the borrower's ability
to repay the loan, the adequacy of the proposed collateral, the
employment stability of the borrower and the credit worthiness of
the borrower.
The Association requires evidence of marketable title and lien position
or appropriate title insurance (except on certain home equity loans)
on all loans secured by real property. The Association also requires
fire and extended coverage casualty insurance in amounts at least equal
to the lesser of the principal amount of the loan or the value of
improvements on the property, depending on the type of loan. As required
by federal regulations, the Association also requires flood insurance to
protect the property securing its interest if property is located in a
designated flood area.
Loan Portfolio Composition. The following information presents
the composition of the Company's loan portfolio in dollar amounts
and in percentages before deductions for the allowances for loan
losses as of the dates indicated.
<TABLE>
<CAPTION>
At June 30,
2000 1999 1998
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
Real Estate Loans:
<S> <C> <C> <C> <C> <C> <C>
One-to-four family $70,429 75.2% $68,325 77.5% $62,729 81.5%
Commercial loans 19,143 20.4 16,869 19.1 11,402 14.8
Home equity 3,565 3.8 2,902 3.3 2,675 3.5
Other consumer loans 539 0.6 114 0.1 147 0.2
Total loans 93,676 100.0% 88,210 100.0% 76,953 100.0%
Allowance for
loan losses (395) (310) (240)
Total loans, net $93,281 $87,900 $76,713
</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,
2000 1999 1998
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
One-to four-family $65,547 70.0% $64,422 73.1% $56,230 73.1%
Consumer loans 539 .5 114 .1 147 .2
Commercial loans 8,611 9.2 4,164 4.7 2,649 3.4
Total fixed-rate loans 74,697 79.7 68,700 77.9 59,026 76.7
Adjustable-Rate Loans:
One-to-four family 4,882 5.2 3,903 4.4 6,499 8.4
Commercial loans 10,532 11.2 12,705 14.4 8,753 11.4
Home equity 3,565 3.9 2,902 3.3 2,675 3.5
Total adjustable-rate
loans 18,979 20.3 19,510 22.1 17,927 23.3
Total loans 93,676 100.0% 88,210 100.0% 76,953 100.0%
Allowance for
loan losses (395) (310) (240)
Total loans, net $93,281 $87,900 $76,713
</TABLE>
The following schedule illustrates the amortization schedule by contractual
maturity of the Company's loan portfolio at June 30, 2000. 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
Home Equity
One-to-Four Multi-Family Consumer &
Family & Commercial Deposit Loans Commercial Total
(Dollars in Thousands)
Due during
the twelve
months
ending June 30,
<S> <C> <C> <C> <C> <C>
2001 (1) $2,284 $ 490 $ 102 $ 3,459 $ 6,335
2002 2,462 541 113 3,776 6,892
2003 2,652 593 124 4,121 7,490
2004 and 2005 5,867 1,372 219 1,087 8,545
2006 to 2010 18,303 2,930 91 -0- 21,324
2011 to 2030 38,861 774 3,455 -0- 43,090
Total $70,429 $6,700 $ 4,104 $12,443 $ 93,676
Weighted
average
interest rate 7.41% 9.43% 10.23% 8.78% 7.86%
</TABLE>
(1) Includes demand loans, loans having no stated maturity and
overdraft loans.
The following table shows the amount of non-mortgage commercial
loans outstanding as of June 30, 2000, based on remaining scheduled
repayments of principal due in the periods indicated, classified
according to sensitivity to changes in interest rates due after one year.
<TABLE>
<CAPTION>
Fixed Variable
Rate Rate Total
<S> <C> <C> <C>
Maturing
After one year but
within five years 4,320 3,577 7,897
After five years 590 497 1,087
4,910 4,074 8,984
</TABLE>
The total amount of loans due after June 30, 2001 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, 2000, the Company's
one-to-four family residential mortgage loan portfolio totaled
$70.4 million, or 75.2% 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, 2000,
the Association originated $18.2 million of one-to-four family real
estate related loans. At June 30, 2000, the Association had $4.9 million
of one-to-four family adjustable-rate mortgage loans, and $65.5 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 4.50%. 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 80% of the appraised value
on fixed-rate conventional mortgages 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.
Sobieski will also loan up to 85% of the appraised value on adjustable
rate mortgages on the security property without private mortgage insurance.
Residential loans do not include prepayment penalties, are not assumable
and do not produce negative amortization. Real estate loans originated by
the Association contain a "due on sale" clause allowing the Association to
declare the unpaid principal balance due and payable upon the sale of the
security property.
The loans currently originated by the Association are typically
underwritten and documented pursuant to the guidelines of the
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, 2000, the Association's
second mortgage loans and home equity loans totaled $418,000 and
$3.6 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, 2000, the Association's construction loan
portfolio totaled $1.0 million, or 1.0% of its gross loan portfolio.
As of that date, all of these loans were secured by property located
within the Association's market area.
All of the construction loans to individuals for their residences are
structured to be converted to permanent loans at the end of the
construction phase, which typically runs from four to six months.
These construction loans have rates and terms comparable to one-to-four
family loans offered by the Association, except that during the
construction phase, the borrower pays interest only. The maximum
loan-to-value ratio of owner occupied single-family construction loans
is 80% 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 progress of the underlying
dwelling before disbursements are made. Nevertheless, construction
lending is generally considered to involve a higher level of credit
risk than one-to-four family residential lending since the risk of
loss on construction loans is dependent largely upon the accuracy of
the initial estimate of the individual property's value upon
completion of the project and the estimated cost (including interest)
of the project.
Consumer Lending. Currently, the Association is making consumer
loans. The product line includes personal lines of credit,
overdraft protection, automobile, marine, motorcycle, and
recreational vehicle loans. The revolving and overdraft lines
of credit feature variable rates of interest with the remaining
product lines featuring fixed rates having repayment terms of one
to six years.
Commercial Business Lending. Commercial adjustable-rate loans
at June 30, 2000 totaled $10.5 million or 11.2% of the Company's
gross loan portfolio. These loans consist of participation
certificates guaranteed by the SBA, participations with other
financial institutions in commercial real estate and non-real estate
loans and internally originated commercial real estate and non-real
estate loans. Unlike residential mortgage loans, which generally
are made on the basis of the borrower's ability to make repayment
from his or her employment and other income, and which are secured
by real property whose value tends to be more easily ascertainable,
commercial business loans are generally of higher risk and typically
are made on the basis of the borrower's ability to make repayment
from the cash flow of the borrower's business. As a result, the
ability of funds for the repayment of commercial business loans
may be substantially dependent on the success of the business itself
(which, in turn, may be dependent upon the general economic environment).
Fixed-rate commercial business loans at June 30, 2000 totaled
$8.6 million or 9.2% of the Company's gross loan portfolio. These
loans are originated internally or purchased participations originated
by other financial institutions.
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, 2000, the Association
originated $28.1 million in loans, as compared to $34.5 million for
the year ended June 30, 1999. Originations during fiscal 2000 consisted
of $18.3 million of one-to-four family real estate loans, and $9.8 million
in nonresidential real estate and commercial loans.
Loan originations during the year ended June 30, 2000 were lower
than the prior year. The Association believes the decrease is
attributable to the lower level of refinancing attributable to volatile
and higher interest rates. The Association generally retains its loan
originations in its portfolio with the exception of a $5.3 million loan
sale in the secondary market.
During fiscal 2000, the Association purchased $6.2 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 3 and 4 of the Notes to
Consolidated Financial Statements. Virtually all of the mortgage-backed
securities purchased by the Association have adjustable interest rate
features. See "Business - Investment Activities."
The following table shows the loan origination and purchase activities
of the Association for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
2000 1999 1998
(In Thousands)
<S> <C> <C> <C>
Originations:
One-to-four family real estate
and home equity $18,270 $23,851 $ 23,300
Deposit loans 36 36 32
Non-residential real estate
and commercial loans 9,734 10,589 7,348
Total originations 28,040 34,476 30,680
Purchases:
Purchases of commercial
business loans 6,230 5,848 3,944
Sales:
One-to-four family loans (5,297) -0- - 0 -
Repayments:
Loans (23,359) (29,088) (18,748)
Other, net (233) (181) (167)
Total repayments (23,592) (29,269) (18,915)
Net increase $ 5,381 $ 11,055 $ 15,709
</TABLE>
Asset Quality
General. When a borrower fails to make a required payment on a loan,
the Association attempts to cause the delinquency to be cured by contacting
the borrower. In the case of loans secured by real estate, a reminder
notice is sent to the borrower on all loans over 15 days delinquent.
When a loan becomes 15 days delinquent, late charges are assessed and
a notice of late charges is sent to the borrower. An additional late
notice is sent to the borrower if the delinquency is not cured within
30 days of the required payment date. If the loan becomes 60 days
delinquent and the borrower has not attempted to contact the Association
to arrange an acceptable plan to bring the loan current, the borrower is
contacted by telephone. If the borrower contacts the Association with a
reasonable explanation for the delinquency, the Association generally
will attempt to reach workable accommodations with the borrower to bring
the loan current. All pro- posed workout arrangements are evaluated on a
case by case basis, based on the best judgment of the Association's
management, considering, among other things, the borrower's past credit
history, current financial status, cooperativeness, future prospects
and the reason for the delinquency. If the loan is 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,
manageent 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, 2000.
<TABLE>
<CAPTION>
Loans Delinquent For:
60-89 Days 90 Days and Over Total Delinquent Loans
Percent Percent Percent
of Loan of Loan of Loan
Nbr Amount Category Nbr Amount Category Nbr Amount Category
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate:
One-to-four
family 42 $2,035 2.9% 9 $169 0.2% 51 $2,204 3.1%
Home equity - - - % 2 31 0.9% 2 31 0.9%
Total 42 $2,035 2.2% 11 $200 0.2% 53 $2,235 2.4%
</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, 2000.
<TABLE>
<CAPTION>
At June 30,
2000 1999 1998 1997 1996
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One-to-four family $144 $125 $ 76 $ 118 $ 90
Commercial 93 - - - -
Consumer 31 57 - 8 -
Total 268 182 76 126 90
Accruing over 90 days
past due - - 112 - -
Foreclosed assets:
One-to-four family 28 - - 11 -
Total 28 - - 11 -
Total non-performing
assets $ 296 $ 182 $ 188 $ 137 $ 90
Total as a percentage
of total assets .27% .18% .20% .17% .12%
</TABLE>
For the year ended June 30, 2000 gross interest income which
would have been recorded had the non-accruing loans been current
in accordance with their original terms amounted to $20,000.
Other Loans of Concern. During the quarter ended June 30, 2000,
the Company became aware of certain circumstances related to
a loan to a single borrower in which the Association had
purchased a participation interest. The borrower has discontinued
principal and interest payments on the loan and has filed for
Chapter 11 bankruptcy protection. Under the terms of a plan, which
has been accepted by the lead participant and the borrower and will
be submitted to the bankruptcy court for approval, the collateral of
this loan will be surrendered to the lead participant and will be sold.
Management believes the proceeds from the sale of this collateral will
be sufficient to repay principal and interest on the outstanding loans.
As of June 30, 2000 management has classified this loan, totaling
$1,013,175, as impaired and, in July of 2000, placed the loan on
nonaccrual status.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered
by the OTS to be of lesser quality, as "substandard," "doubtful" or
"loss." An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor
or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic
that the weaknesses present make "collection or liquidation in full"
on the basis of currently existing facts, conditions and values,
"highly questionable and improbable." Assets classified as "loss"
are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific
loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for
loan losses in an amount deemed prudent by management. General
allowances represent loss allowances which have been established
to 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 additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Association
regularly reviews problem loans and real estate acquired through foreclosure
to determine whether such assets require classification in accordance with
applicable regulations. On the basis of management's review of its assets,
at June 30, 2000, the Association had classified a total of $268,000 of
its assets as substandard, none as doubtful and none as loss. At
June 30, 2000, total classified assets comprised $268,000 or 2.1% of
the Company's capital and 0.24 % of the Company's total assets.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of
the risk inherent in its loan portfolio and changes in the nature and
volume of its loan activity, including those loans which are being
specifically monitored by management. Such evaluation, which includes a
review of loans for which full collectibility may not be reasonably
assured, considers, among other matters, the loan classifications discussed
above, the estimated fair value of the underlying collateral, economic
conditions, historical loan loss experience, the amount of loans outstanding
and other factors that warrant recognition in providing for an adequate loan
loss allowance. A significant factor considered in the unallocated allowance
was the historically low level of loans other than one-to-four family real
estate loans. Management recognizes that as loan growth continues
additional provisions to the allowance may be required.
Real estate acquired in settlement of loans is initially recorded
at fair market value at the date of acquisition, establishing a new
cost basis by a charge to the allowance for loan losses, 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.
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, 2000, the Association had a total allowance
for losses on loans of $395,000 representing 148% of total
non-performing loans and .42% of the Association's loans, net.
See Note 4 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,
2000 1999 1998
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of period $310 $240 $200
Charge-offs:
Commercial Loans 35 --- ---
Recoveries: --- --- ---
Provision charged to
operations 120 70 40
Balance at end of period $395 $310 $240
Ratio of net charge-offs
to average loans outstanding
during the period 0.04% ---% ---%
Ratio of net charge-offs
to average non-performing
assets during the period 13.7% ---% ---%
</TABLE>
The distribution of the Company's allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
At June 30,
2000 1999 1998
Percent Percent Percent
Loan of Ttl Loan of Ttl Loan of Ttl
Allowance Amt Loans Allowance Amt Loans Allowance Amt Loans
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four
family $ 191 $70,429 75.2% $ 179 $68,325 77.5% $ 176 $62,729 81.5%
Commercial
loans 116 19,143 20.4 97 16,869 19.1 53 11,402 14.8
Home equity 12 3,565 3.8 13 2,902 3.3 10 2,675 3.5
Other consumer
loans 5 539 0.6 1 114 0.1 1 147 0.2
Unallocated 71 N/A N/A 20 N/A N/A -0- N/A N/A
Total (1) $395 $93,676 100.0% $310 $88,210 100.0% $240 $76,953 100.0%
</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, 2000, the Association's liquidity ratio
(liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 21.7%.
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury
obligations, securities of various federal agencies, certain certificates of
deposit of insured banks and savings institutions, certain bankers'
acceptances, repurchase agreements and federal funds. Subject to various
restrictions, federally chartered savings institutions may also invest
their assets in commercial paper, investment grade corporate debt securities
and mutual funds whose assets conform to the investments that a federally
chartered savings institution is otherwise authorized to make directly.
Generally, the investment policy of the Association, as established by
the Board of Directors, is to invest funds among various categories of
investments and maturities based upon the Association's liquidity needs,
asset/liability management policies, investment quality, marketability
and performance objectives. The Investment Committee consists of 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 securities 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, 2000, the amortized cost of
the Association's mortgage-backed securities was $5.56 million and the
market value of these mortgage-backed securities was $5.40 million at
that date.
At June 30, 2000, $1.84 million or 33% 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 $3.72 million have been classified
as available-for-sale and are included in the financial statements at
fair value. See Note 3 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, 2000.
As of June 30, 2000, all of the Association's mortgage-backed securities
were backed by government sponsored agency programs. Accordingly, management
believes that the Association's mortgage-backed securities are generally
resistant to credit problems.
The Association's mortgage-backed securities portfolio consists of
securities issued under government-sponsored agency programs, including
those of the 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 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, 2000,
Sobieski Federal's interest-bearing deposits with financial institutions
totaled $688,000, or .62% of total assets, and its investment securities,
consisting of U.S. Government, agency and municipal securities, totaled
$4.9 million, or 4.4% of total assets. In addition, as of such date, the
Association had an investment of $1.5 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, 2000, the weighted average maturity of the
securities portfolio (excluding FHLB stock) was 10.0 years.
The Association's investment securities portfolio at June 30, 2000
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 maturities of the Association's
investment portfolio at June 30, 2000.
<TABLE>
<CAPTION>
Maturities (In Thousands)
After One Year After Five Years
Within But Within But Within After
One Year Five Years Ten Years Ten Years
<S> <C> <C> <C> <C>
U.S. Treasury and
U.S. Government Agency
securities (1) 9 2,403 179 1,262
Obligations of states
and political
Subdivisions (2) - 292 462 250
Mortgage-backed
securities (3) 64 361 830 4,241
Equity Securities - - - 25
73 3,056 1,471 5,778
Weighted average
yield (1) 6.46% 6.69% 6.06% 6.59%
</TABLE>
(1) SBA agency securities are based on contractual maturities.
(2) Yields are presented ona non-tax equivalent basis.
(3) Based on weighted average contractual maturities.
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,
2000 1999 1998
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 $ 401 6.3% $ - - % $ 500 35.1%
U. S. agency
securities 3,452 54.1 2,196 53.8 - -
Municipal
securities 1,004 15.7 562 13.7 - -
Equity securities 25 .4 - - - -
Subtotal 4,882 76.5 2,758 67.5 500 35.1
FHLB stock 1,500 23.5 1,326 32.5 923 64.9
Total investment
securities
and FHLB stock $ 6,382 100.0% $ 4,084 100.0% $ 1,423 100.0%
Other interest
-earning assets:
Interest-bearing
deposits with
financial
institutions $ 688 100.0% $ 166 100.0% $ 443 100.0%
Mortgage-backed
securities:
GNMA $ 684 12.5% $ 1,485 18.7% $ 2,021 19.2%
FNMA 3,909 71.1 4,791 60.3 6,386 60.6
FHLMC 809 14.7 1,529 19.2 1,886 17.9
Subtotal 5,402 98.3 7,805 98.2 10,293 97.7
Unamortized
premium, net 94 1.7 141 1.8 245 2.3
Total mortgage
-backed
securities $5,496 100.0% $ 7,946 100.0% $10,538 100.0%
</TABLE>
Sources of Funds
General. The Association's primary sources of funds are deposits, payment
of principal and interest on loans, interest earned on mortgage-backed
securities, investment securities, interest earned on interest-bearing
deposits with other financial institutions and other funds provided from
operations.
Deposits. Sobieski Federal offers a variety of deposit accounts having
a wide range of interest rates and terms. The Association's deposits
consist of passbook, NOW, checking, money market deposit and certificate
accounts. The current certificate accountproduct offerings range
in terms from 7 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>
2000 1999 1998
<S> <C> <C> <C>
Opening balance $64,231 $60,517 $59,387
Net deposits 9,236 3,061 450
Interest credited (1) 461 653 680
Ending balance $73,928 $64,231 $60,517
Net increase $ 9,697 $ 3,714 $ 1,130
Percent increase 15.10% 6.14% 1.90%
</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 average savings
deposits and the average weighted rate paid in the various types of
deposit programs offered by the Association for the years indicated.
<TABLE>
<CAPTION>
2000 1999 1998
% Avg % Avg % Avg
Avg of Rate Avg of Rate Avg of Rate
Amount Total Paid Amount Total Paid Amount Total Paid
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction and
Savings Deposits:
Now and MMDA
accounts 6,116 8.5% 1.86% 6,249 9.6% 1.70% 5,528 9.4% 2.08%
Savings deposits 13,920 19.3% 2.51% 14,227 21.8% 2.49% 14,418 24.5% 2.50%
Total
non-certificates 20,036 27.8% 2.31% 20,476 31.4% 2.25% 19,946 33.9% 2.38%
Certificates 52,174 72.2% 5.52% 44,687 68.6% 5.71% 38,861 66.1% 5.87%
Total average
deposits 72,210 100.0% 4.63% 65,163 100.0% 4.62% 58,807 100.0% 4.69%
</TABLE>
The following table shows rate and maturity information for the
Association's certificates of deposit as of June 30, 2000.
<TABLE>
<CAPTION>
Percent
Total of Total
(Dollars in Thousands)
<S> <C> <C>
Certificate accounts maturing in:
12 months or less $ 23,275 43.0%
Over 12 months to 36 months 28,240 52.1
Over 36 months 2,659 4.9
Total $ 54,174 100.0%
</TABLE>
The following table indicates the amount of the Association's
certificates of deposit of $100,000 and over by time remaining until
maturity as of June 30, 2000.
<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
of $100,000 or more 1,063 923 2,057 13,048 17,091
</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, 2000, the Association
had borrowings of $22.9 million.
Earnings, Stockholders' Equity and Dividend Information. The following
table sets forth earnings, earnings related data and per share data:
<TABLE>
<CAPTION>
2000 1999 1998
(In thousands except per share data)
<S> <C> <C> <C>
Average stockholders' equity $12,710 $12,695 $12,594
Net income $ 667 $ 597 $ 544
Return on average stockholders' equity 5.25% 4.70% 4.32%
Basic earnings per share $ 1.00 $ 0.86 $ 0.76
Cash dividends declared per share $ 0.32 $ 0.32 $ 0.32
Dividend payout percentage 32% 37% 42%
</TABLE>
Service Corporation Activities
As a federally chartered savings association, Sobieski Federal is permitted
by OTS regulations to invest up to 2% of its assets, or approximately
$2.2 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, 2000,
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 inter-branch deposit and withdrawal privileges.
Employees
At June 30, 2000, 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 46. 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 59. 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. Mr. Skale previously served for three years
as vice president, treasurer and chief financial officer at
SJS Bancorp, Inc. in St. Joseph, Michigan. He also previously
worked for 11 years as an auditor and chief financial officer
at NBD F&M Bank, NA, Benton Harbor, Michigan.
Gregory J. Matthews, age 40. Mr. Matthews joined the Company in
March 1998 as Vice President and Chief Operations Officer.
He is responsible for retail banking, operations, and information
systems. Mr. Matthews worked for 19 years in operations and
funds management at 1st Source Bank
in South Bend, most recently as vice president of
the Funds Management Division.
REGULATION
General
Sobieski Federal is a federally chartered savings and loan association,
the deposits of which are federally insured and backed by the full faith
and credit of the United States Government. Accordingly, Sobieski Federal
is subject to broad federal regulation and oversight extending to all its
operations. The Association is a member of the FHLB of Indianapolis and is
subject to certain limited regulation by the Board of Governors of the
Federal Reserve System ("Federal Reserve Board"). As the savings and loan
holding company of the Association, the Holding Company also is subject to
federal regulation and oversight. The Association is a member of the Savings
Association Insurance Fund ("SAIF") and the deposits of the Association are
insured by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over the Association.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, the Association is required
to file periodic reports with the OTS and is subject to periodic
examinations by the OTS and the FDIC. The last regular OTS examinations
of the Association were as of June 1998 and September 1999. The OTS
conducted 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, 2000 was $31,000.
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, 2000, the Association's lending limit under this restriction
was $1,570,000. The Association is in compliance with the
loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has
adopted guidelines establishing safety and soundness standards
on such matters as loan underwriting and documentation, asset quality,
earnings standards, internal controls and audit systems, interest rate
risk exposure and compensation and other employee benefits. Any
institution which fails to comply with these standards must submit
a compliance plan. A failure to submit a plan or to comply with an
approved plan will subject the institution to further enforcement action.
Insurance of Accounts and Regulation by the FDIC
Sobieski Federal is a member of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the United States
Government. As insurer, the FDIC imposes deposit insurance 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 unsound condition.
Regulatory Capital Requirements
Federally insured savings associations, such as the Association, are
required to maintain a minimum level of regulatory capital. The OTS has
established capital standards, including a tangible capital requirement,
a leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings associations. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose
capital requirements for national banks. The OTS is also authorized to
impose capital requirements in excess of these standards on individual
associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital
generally includes common stockholders' equity and retained income,
and certain noncumulative perpetual preferred stock and related income
and excludes unrealized appreciation or depreciation on securities
available for sale. In addition, all intangible assets, other than a
limited amount of purchased mortgage-servicing rights, must be deducted
from tangible capital. At June 30, 2000, 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, 2000, the Association did not have any active subsidiaries.
At June 30, 2000 the Association had tangible capital of $10.1 million,
or 9.2% of adjusted total assets, which is approximately $8.4 million
above the minimum requirement of 1.5% of adjusted total assets in effect
on that date.
The capital standards also require core capital equal to at least 3%
of adjusted total assets (as defined by regulation). Core capital
generally consists of tangible capital plus certain intangible assets,
including supervisory goodwill (which is phased-out over a five-year period)
and a limited amount of purchased credit card relationships. As a result
of the prompt corrective action provisions of FDICIA discussed below,
however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At June 30, 2000,
the Association had no intangibles which were subject to these tests.
At June 30, 2000, the Association had core capital equal to
$10.1 million, or 9.2% of adjusted total assets, which is
$6.8 million above the minimum leverage ratio requirement of
3% as in effect on that date.
The OTS risk-based requirement requires savings associations to
have total capital of at least 8% of risk-weighted assets. Total
capital consists of core capital, as defined above and supplementary
capital. Supplementary capital consists of certain permanent and
maturing capital instruments that do not qualify as core capital and
general valuation loan and lease loss allowances up to a maximum of
1.25% or risk-weighted assets. Supplementary capital may be used to
satisfy the risk-based requirement only to the extent of core capital.
At June 30, 2000, the Association had no capital instruments that
qualify as supplementary capital and $395,000 of general loss reserves,
which was less than 1.25% of risk-weighted assets.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a
risk weight, ranging from 0% to 100%, based on the risk inherent in
the type of asset. For example, the OTS has assigned a risk weight of
50% for prudently underwritten permanent one-to-four family first lien
mortgage loans not more than 90 days delinquent and having a loan to
value ratio of not more than 80% at origination unless insured to such
ratio by an insurer approved by the FNMA or FHLMC.
On June 30, 2000, the Association had risk-based capital of
$10.5 million (including $10.1 million in core capital and $395,000
in general loss reserves) and risk-weighted assets of $61.8 million
or total capital of 16.9% of risk-weighted assets. This amount was
$5.5 million above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain
circumstances required, to take certain actions against associations
that fail to meet their capital requirements. The OTS is generally
required to take action to restrict the activities of an
"undercapitalized association" (generally defined to be one with
less than either a 4% core capital ratio, a 4% Tier 1 risked-based
capital ratio or an 8% risk-based capital ratio). Any such association
must submit a capital restoration plan and until such plan is approved
by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may
not make capital distributions. The OTS is authorized to impose the
additional restrictions, discussed below, that are applicable to
significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that
it will enter into a limited capital maintenance guarantee with respect
to the institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core
capital ratios of less than 3% or a risk-based capital ratio of less
than 6%) must be made subject to one or more of additional specified
actions and operating restrictions mandated by FDICIA. These actions
and restrictions include requiring the issuance of additional voting
securities; limitations on asset growth; mandated asset reduction;
changes in senior management; divestiture, merger or acquisition of
the association; restrictions on executive compensation; and any other
action the OTS deems appropriate. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2%
or less) is subject to further mandatory restrictions on its activities
in addition to those applicable to significantly undercapitalized
associations. In addition, the OTS must appoint a receiver (or
conservator with the concurrence of the FDIC) for a savings association,
with certain limited exceptions, within 90 days after it becomes
critically undercapitalized.
Any undercapitalized association is also subject to other possible
enforcement actions by the OTS or the FDIC. Such actions could include
a capital directive, a cease-and-desist order, civil money penalties,
the establishment of restrictions on all aspects of the association's
operations or the appointment of a receiver or conservator or a forced
merger into another institution.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such
category if the institution is engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on
Sobieski Federal may have a substantial adverse effect on the
Association's operations and profitability and the value of the
Company's Common Stock. The Company's Common Stock has 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, 2000, the Association was in
compliance with the requirement, with an overall liquid asset
ratio of 21.7%.
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance
with GAAP. Under the policy statement, management must support its
classification of an accounting for loans and securities (i.e., whether
held for investment, sale or trading) with appropriate documentation.
The Association is in compliance with this policy statement.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than 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, 2000, 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 September 1999 and received a
rating of satisfactory.
Transactions with Affiliates
Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms as
favorable to the association as transactions with non-affiliates.
In addition, certain of these transactions are restricted to a percentage
of the association's capital. Affiliates of the Association include the
Company and any company which is under common control with the Association.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the
securities of most affiliates. The Association's subsidiaries are not
deemed affiliates, however; the OTS has the discretion to treat subsidiaries
of savings associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS.
These conflict of interest regulations and other statutes also impose
restrictions on loans to such persons and their related interests. Among
other things, such loans must be made on terms substantially the same as
for loans to unaffiliated individuals.
Holding Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory 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 activity other than
those approved for multiple savings and loan holding companies or
their subsidiaries. In addition, with one year of such failure the
Company must register as, and will become subject to, the restrictions
applicable to bank holding companies. The activities authorized for a
bank holding company are more limited than are the activities authorized
for a unitary or multiple savings and loan holding company. See
"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. However,
such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings
association.
Federal Securities Law
The 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 principal stockholders) of the Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the
public market, without registration, a limited number of shares
in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions
to maintain non-interest bearing reserves at specified levels against
their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 2000, 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 FHLB's that administer the home financing
credit function of savings associations. Each FHLB serves as a
reserve or central bank for its members within its assigned
region. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLB system. It makes
loans to members (i.e., advances) in accordance with policies
and procedures established by the board of directors of the FHLB.
These policies and procedures are subject to the regulation and
oversight of the Federal Housing Finance Board. All advances from
the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are
required to provide funds for residential home financing.
As a member, the Association is required to purchase and maintain
stock in the FHLB of Indianapolis. At June 30, 2000, the Association
had $1.5 million of FHLB stock, which was in compliance with this
requirement. During fiscal 2000 and prior years, the Association
received substantial dividends on its FHLB stock. The dividends
averaged 8.1% for fiscal year 2000. For the years ended
June 30, 2000 and 1999, dividends paid by the FHLB of Indianapolis
to the Association totaled $116,000 and $95,000, 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 or other 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
In addition to the regular income tax, corporations, including
savings associations such as the Association, generally are subject
to a minimum tax. An alternative minimum tax is imposed at a minimum
tax rate of 20% on alternative minimum taxable income, which is the
sum of a corporation's regular taxable income (with certain adjustments)
and tax preference items, less any available exemption. The alternative
minimum tax is imposed to the extent it exceeds the corporation's regular
income tax and net operating losses can offset no more than 90% of
alternative minimum taxable income. For taxable years beginning after
1986 and before 1996, corporations, including savings associations
such as the Association, are also subject to an environmental tax
equal to 0.12% of the excess of alternative minimum taxable income
for the taxable year (determined without regard to net operating losses
and the deduction for the environmental tax) over $2 million.
The Association files federal income tax returns on a fiscal year
basis using the accrual method of accounting. The Company files
consolidated federal income tax returns with the Association and
its subsidiaries. Savings associations, such as the Association,
that file federal income tax returns as part of a consolidated group
are required by applicable Treasury regulations to reduce their
taxable income for purposes of computing the percentage bad debt
deduction for losses attributable to activities of the non-savings
association members of the consolidated group that are functionally
related to the activities of the savings association member.
The Association has not been audited by the IRS with respect to
federal income tax returns through June 30, 2000. 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, 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, 2000. 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, 2000 was approximately $1,869,000. See Note 5 of the
Notes to Consolidated Financial Statements.
Total
Year Approximate
Leased Square Net Book Value at
Location or Acquired Footage June 30, 2000
(In Thousands)
Main Office:
2930 West Cleveland Road 1995 10,080 $1,348
South Bend, Indiana 46628
Branch Offices:
4606 Western Avenue 1978 1,600 $ 1
Belleville Shopping Center
740 S. Walnut Street 1952 1,900 $ 17
Sobieski Federal believes that its current facilities including its main
office facilities are adequate to meet the present and foreseeable needs
of the Association and the Company.
The Association maintains an on-line database 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, 2000 was $115,000.
Item 3. Legal Proceedings
The Company and Sobieski Federal are involved, from time to
time, as plaintiff or defendant in various legal actions arising
in the normal course of their businesses. While the ultimate
outcome of these proceedings cannot be predicted with certainty,
it is the opinion of management, after consultation with counsel
representing Sobieski Federal and the Company in the proceedings, that
the resolution of these proceedings should not have a material effect
on the Company's results of operations on a consolidated basis.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended
June 30, 2000.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 49 of the attached 2000 Annual Report to Stockholders
is herein incorporated by reference.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Pages 6 to 16 of the attached 2000 Annual Report to Stockholders
are herein incorporated by reference.
Item 7. Financial Statements
The following pages of the attached 2000 Annual Report to Stockholders
are herein incorporated by reference.
Report of Independent Accountants Page 17
Consolidated Statements of Financial Condition at Page 18
June 30, 2000 and 1999
Consolidated Statements of Income Page 19
for the years ended June 30, 2000, 1999, and 1998
Consolidated Statements of Comprehensive Income for the Page 20
years ended June 30, 2000, 1999, and 1998
Consolidated Statements of Changes Stockholders' Equity Page 21-22
for the years ended June 30, 2000, 1999, and 1998
Consolidated Statements of Cash Flows for the years Page 23-24
ended June 30, 2000, 1999, and 1998
Notes to Consolidated Financial Statements Pages 25 - 48
In addition, the independent accountants report of
PricewaterhouseCoopers LLP dated September 7, 1999 is filed as
Exhibit 99 and is incorporated herein by reference.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
The information required by Item 304 of regulation S-B (regarding
the change in the Company's accountants) was previously reported in
a current report on Form 8-K filed on April 26, 2000.
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 2000 Annual Meeting of Shareholders, a copy of which has
been filed with the Securities and Exchange Commission.
Executive Officers
Information concerning the executive officers of the Company is
incorporated herein by reference from "Executive Officers of the
Company" contained in Part I of this Form 10-KSB.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company's officers
and directors, and persons owning more than 10% of a registered
class of the Company's equity securities, to file periodic reports
of ownership and changes in ownership with the Securities and
Exchange Commission 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 2000, except for the inadvertent
failure by Gregory J. Matthews, Vice President and Chief Operating
Officer of the Association, to timely report on Form 5 two transactions
which occurred during fiscal 2000.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein
by reference from the Company's definitive Proxy Statement for the
2000 Annual Meeting of Shareholders, a copy of which has been filed
with the Securities and Exchange Commission.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's
definitive Proxy Statement for the 2000 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 2000 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 **
Sobieski Bancorp, Inc. Fee Continuation Plan for
Retired Directors ***
Sobieski Federal Savings and Loan Association Fee
Continuation Plan For Retired Directors ***
Sobieski Federal Savings and Loan Association
Supplemental Executive Retirement Plan ***
Employment contract with Thomas F. Gruber
Incorporated by
reference in
09/30/97 10-QSB
11 Statement re computation of per share earnings None
13 Annual Report to Security Holders 13
16 Letter re change in certifying accountant Contained in
Form 8-K
filed on
April 26, 2000
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 Crowe, Chizek and Company, LLP 23
24 Power of Attorney Not Required
27 Financial Data Schedule 27
99 Report of PricewaterhouseCoopers LLP 99
** 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.
*** Filed as exhibits with the September 30, 1999 10-QSB filing.
(b) Reports on Form 8-K:
Current reports on Form 8-K filed by the Company during the three
months ended June 30, 2000 were:
On April 26, 2000, the Company filed a notice of change in accountants.
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, 2000
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, 2000 Date: September 24, 2000
/s/ George J. Aranowski /s/ Leonard J. Dobosiewicz
George J. Aranowski, Director Leonard J. Dobosiewicz, Director
Date: September 24, 2000 Date: September 24, 2000
/s/ Joseph F. Nagy /s/ Richard J.Cullar
Joseph F. Nagy, Director Richard J. Cullar, Director
Date: September 24, 2000 Date: September 24, 2000
/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, 2000 Date: September 24, 2000
INDEX TO EXHIBITS
Exhibit
Number
13 Annual Report to Security Holders
21 Subsidiaries of the Registrant
23 Consent of Crowe, Chizek and Company, LLP
27 Financial Data Schedule
99 Report of PricewaterhouseCoopers LLP
Exhibit 13
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 investments.
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 purchase 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 2000 and 1999, 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,
2000 1999 1998 1997 1996
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial
Condition Data:
Total Assets $110,833 $103,698 $92,497 $81,733 $78,863
Loans, net 93,281 87,900 76,713 61,135 53,114
Securities
available for sale 5,621 3,021 1,094 3,077 5,539
Securities held
to maturity 4,757 7,684 9,944 12,930 15,307
Deposits 73,928 64,231 60,517 59,387 61,227
Federal Home Loan
Bank advances 21,500 25,250 18,450 9,500 3,000
Stockholders'
equity 12,816 12,572 12,864 12,361 14,054
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
2000 1999 1998 1997 1996
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected
Operations Data:
Total interest
income $8,084 $7,258 $6,476 $5,702 $5,465
Total interest
expense 4,765 4,244 3,610 3,131 3,030
Net interest
income 3,319 3,014 2,866 2,571 2,435
Provision for
loan losses 120 70 40 - -
Net interest income
after provision
for loan losses 3,199 2,944 2,826 2,571 2,435
Fees and service
charges 204 204 118 156 163
Gain (loss) on
sales of securities (17) - 20 64 -
Other non-interest
income 31 4 7 6 9
Total non-interest
income 218 208 145 226 172
Total non-interest
expenses 2,301 2,141 2,029 2,368 2,059
Income before
income taxes 1,116 1,011 942 429 548
Income taxes 449 414 398 182 213
Net income $ 667 $ 597 $ 544 $ 247 $ 335
Earnings per
common share:
Basic $ 1.00 $ .86 $ .76 $ .32 $ .39
Diluted $ 1.00 $ .85 $ .75 $ .32 $ .39
</TABLE>
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Year Ended June 30,
2000 1999 1998 1997 1996
<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) .60% .58% .62% .31% .43%
Return on equity
(ratio of net
income to average
equity) 5.25 4.70 4.32 1.84 2.34
Net interest rate
spread 2.67 2.62 2.87 2.78 2.69
Net interest
margin (1) 3.09 3.08 3.43 3.40 3.36
Ratio of operating
expense to
average total assets 2.06 2.10 2.32 2.99 2.62
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 109.56 110.72 112.95 115.02 115.96
Quality Ratios:
Non-performing
assets to total
assets at end
of period .24 .18 .20 .15 .12
Allowance for loan
losses to
non-performing loans
at end of period 147.54 170.33 127.66 158.52 221.43
Allowance for loan
losses to
loans receivable,
net,at end of period .42 .35 .31 .33 .38
Capital Ratios:
Equity to total assets
at end of period 11.56 12.12 13.91 15.12 17.82
Average equity to
average assets 11.37 12.44 14.39 16.94 18.47
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, in filings by the Company with the
Securities and Exchange Commission, in the Company's press releases,
in other public or shareholder communications or in oral statements made
with the approval of an authorized executive officer, the words or phrases
"will likely result," "are expected to," "will continue," "is anticipated,
" "estimate," "project," "believe" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties including, among other things, changes in
economic conditions, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area, credit
risks of lending activities and competition. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The Company wishes to
advise readers that the factors noted above could affect the Company's
financial performance and could cause the Company's actual results for
future periods to differ materially from those anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to
"forward-looking statements" to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
General
The principal business of Sobieski Federal consists of attracting deposits
from the general public and investing those funds in the origination of
one-to-four family residential mortgage loans, consumer loans, construction
loans and commercial loans. The Company also invests in mortgage-backed
securities, which are insured or guaranteed by federal agencies, investment
securities, consisting primarily of obligations of the U.S. Government,
municipal securities or U.S. agency obligations, 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. Non-interest
expense is principally operating expenses, including compensation and
benefits, federal deposit insurance premiums, advertising and promotion,
service bureau data processing, and occupancy and equipment costs.
Earnings of Sobieski Federal are also affected significantly by general
economic and competitive conditions, particularly changes in general
interest rate levels.
Business Strategy
Sobieski Federal has concentrated its lending efforts on the origination
of one-to-four family mortgage loans along with home equity loans and
mortgage-backed 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. At June 30, 2000,
the ratio of Sobieski Federal's nonperforming assets to total assets was
.24% and the ratio of its allowance for loan losses to nonperforming loans
was 147.54%. Historically, the loans originated by Sobieski Federal have
been 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, 2000, $63.3 million, or 79.4%, of
the Association's combined single-family mortgage loans and mortgage-backed
securities portfolio had fixed rates of interest and $16.4 million, or
20.6%, had adjustable interest rates. The Association's business strategy
emphasizes retail deposits along with FHLB advances as its principal sources
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 implemented
primarily by (i) emphasizing the origination of one-to-four family
residential mortgage lending, home equity lending, consumer 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 compressed interest spreads during periods
of rising interest rates and improved net interest income resulting from
larger interest 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 decrease interest rate sensitivity, Sobieski
Federal originates variable-rate home equity products and adjustable
mortgage-backed commercial loans along with purchased participation interests
in adjustable rate commercial loans. The funding for these originations and
purchases has come primarily from deposits and advances from the FHLB. At
June 30, 2000, Sobieski Federal had $73.5 million in long-term fixed-rate
loans and $19.8 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, 2000, is an analysis of the Association's
interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts in the yield curve, in 100 basis point increments,
up and down 300 basis points in accordance with OTS regulations. As
illustrated in the table, NPV is more sensitive to rising rates than
declining rates. This occurs principally because, as rates rise, the market
value of fixed-rate loans decline due to the rate increase. When rates
decline, the Association does not experience as significant a rise in market
value for these loans because borrowers prepay at relatively high rates.
The following table is based on assets and liabilities of the Association only.
Change in
Interest Rate Net Portfolio Value
(Basis Points) $ Change % Change
(Dollars in thousands)
+ 300 $ (5,193) (45)%
+ 200 (3,475) (30)
+ 100 (1,700) (15)
0 - -
- 100 1,262 11
- 200 1,520 13
- 300 1,631 14
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 30% decrease representing a dollar decrease in equity value of
approximately $3,475 million at June 30, 2000. In contrast, based on a
decline in interest rates of 2% the Association's NPV was estimated to
increase 13% or approximately $1,520 million at June 30, 2000. The most
significant factor contributing to its liability sensitive position was
the Association's balance of fixed rate mortgage loans. At June 30, 2000,
75.5% of the Association's loan portfolio was comprised of long-term,
fixed-rate mortgage loans.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table.
For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as ARM loans,
have features which restrict changes in interest rates on a short-term basis
and over the life of the asset. Further, in the event of a change in
interest rates, expected rates of prepayments on loans and early withdrawals
from certificates could likely deviate significantly from those assumed in
calculating the table.
Impact Of Inflation And Changing Prices
The consolidated financial statements and notes thereto presented herein
have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the
change in the relative purchasing power of money over time due to inflation.
The impact of inflation is reflected in the increased cost of the Company's
operations. Nearly all the assets and liabilities of the Company are
financial in nature, 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 through its
asset/liability management strategy may tend to minimize the effects of
changes in interest rates on the Company's performance. Changes in
interest rates do not necessarily move to the same extent as changes in
the prices 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.
Year 2000
The Company has not experienced any significant problems as a result
of the Year 2000 rollover, and is not aware of any customers that have
experienced material Year 2000 problems. The Company followed a plan to
identify all critical business processes and established a priority schedule
for assessment of each process. As the Company worked through its Year 2000
plan, any hardware, software, equipment or vendor provided services that
were identified as not Year 2000 compliant were either upgraded or retired
prior to the Year 2000 rollover. While no Year 2000 problems have been
identified to date, the Company will continue to monitor its systems for
any Year 2000 related issues.
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,
2000 1999
Avg Int Avg Int
Out Earned/ Yield/ Out Earned/ Yield/
Bal Paid Rate Bal Paid Rate
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1) $ 93,554 $7,244 7.74% $84,186 $6,512 7.74%
Securities available
for sale 5,096 285 5.60 2,425 142 5.86
Securities held to
maturity 7,160 439 6.12 9,949 509 5.12
FHLB stock 1,441 116 8.05 1,181 95 8.04
Total interest-earning
assets (1) 107,251 8,084 7.54 97,741 7,258 7.43
Non interest-earning
assets 4,572 4,323
Total assets $111,823 $102,064
Interest-bearing
liabilities:
Savings deposits $ 13,920 349 2.51 $ 14,227 354 2.49
NOW and MMDA accounts 6,116 114 1.86 6,249 106 1.70
Certificate accounts 52,174 2,879 5.52 44,687 2,553 5.71
FHLB advances and federal
funds purchased 25,680 1,423 5.54 23,117 1,231 5.33
Total interest-bearing
liabilities 97,890 4,765 4.87 88,280 4,244 4.81
Non interest-bearing
liabilities 1,223 1,089
Total liabilities 99,113 89,369
Stockholders'equity 12,710 12,695
Total liabilities
and stockholders' equity $111,823 $102,064
Net interest income $3,319 $3,014
Net interest rate
spread 2.67% 2.62%
Net earning assets $ 9,361 $ 9,461
Net yield on average
interest-earning assets 3.09% 3.08%
Average interest-earning
assets to average
interest-bearing
liabilities 109.56% 110.72%
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
1998
Avg Int
Out Earned/ Yield/
Bal Paid Rate
<S> <C> <C> <C>
Interest-earning assets:
Loans (1) $68,466 $5,523 8.07%
Securities available
for sale 2,115 131 6.18
Securities held to
maturity 12,178 759 6.24
FHLB stock 804 63 7.84
Total interest-earning
assets (1) 83,563 6,476 7.75
Non interest-earning
assets 3,982
Total assets $87,545
Interest-bearing
liabilities:
Savings deposits $14,418 361 2.50
NOW and MMDA accounts 5,528 115 2.08
Certificate accounts 38,861 2,280 5.87
FHLB advances and federal
funds purchased 15,177 854 5.63
Total interest-bearing
liabilities 73,984 3,610 4.88
Non interest-bearing
liabilities 967
Total liabilities 74,951
Stockholders' equity 12,594
Total liabilities
and stockholders' equity $87,545
Net interest income $2,866
Net interest rate
spread 2.87%
Net earning assets $ 9,579
Net yield on average
interest-earning assets 3.43%
Average interest-earning
assets to average
interest-bearing
liabilities 112.95%
</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 asset 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,
2000 vs. 1999 1999 vs. 1998
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 $725 $ 7 $732 $1,224 $(235) $989
Securities available
for sale 150 (7) 143 18 (7) 11
Securities held to
maturity (159) 89 (70) (126) (124) (250)
FHLB stock 21 0 21 30 2 32
Total interest-
earning assets $737 $89 $826 $1,146 $(364) $782
Interest-bearing
liabilities:
Savings deposits $ (8) $ 3 $ (5) $ (5) $ (2) $ (7)
NOW and MMDA accounts (2) 10 8 14 (23) (9)
Certificate accounts 414 (88) 326 334 (61) 273
FHLB advances and
federal funds purchased 141 51 192 425 (48) 377
Total interest-bearing
liabilities $545 $(24) 521 $768 $(134) 634
Net interest income $305 $148
</TABLE>
Financial Condition
General
Total assets increased $7.13 million or 6.9%, from $103.70 million at
June 30, 1999 to $110.83 million at June 30, 2000. The increase in total
assets was primarily the result of a $5.4 million increase in net loans and
$1.8 million increase in cash and cash equivalents. Funding for the asset
growth primarily came from $9.7 million of increased deposits and $.67 million
of net income, offset by a $3.8 million decrease in FHLB advances.
Cash and Cash Equivalents
Cash and cash equivalents, consisting of cash, interest-bearing deposits
and federal funds sold increased $1.80 million from $.94 million at
June 30, 1999 to $2.74 million at June 30, 2000 due to normal fluctuations
in these accounts.
Securities
Securities available for sale and held to maturity decreased $.327 million
or 3.1% from $10.7 million at June 30, 1999 to $10.4 million at
June 30, 2000. This decrease was primarily due to sales of securities
totaling $.9 million, principal repayments on mortgage backed securities
totaling $1.7 million, net amortization of securities purchase premiums of
$.1 million and net decrease in unrealized loss on securities of $.1 million
offset by purchases of securities of $1.1 million and the internal
reclassification of certain securities from loans. At June 30, 2000,
the Company had classified approximately $5.6 million or 54% of its
securities as available for sale and approximately $4.8 million or 46% of
its securities as held to maturity.
Loans, Net
Net loans increased $5.38 million, or 6.12%, from $87.90 million at
June 30, 1999 to $93.28 million at June 30, 2000. This increase, net
of $5.3 million of loans sold, was primarily the result of increased
demand and expanded market area for residential mortgages in conjunction
with continuing efforts in origination of home equity and mortgage-backed
commercial loans along with increased participations in commercial loans.
Deposits
Deposits increased $9.70 million, or 15.10%, from $64.23 million at
June 30, 1999 to $73.93 million at June 30, 2000. The Association
actively continues pursuing a deposit retention and growth program
including public fund deposits. The program offers more competitive special
short-term and long-term certificates of deposit. Monitoring of local market
rates, special certificate offerings and wholesale alternatives will continue
to be utilized as management focuses on viable funding sources.
Stockholders' Equity
Stockholders' equity increased $.25 million from $12.57 million at
June 30, 1999 to $12.82 million at June 30, 2000. This increase was
primarily the result of net income of $667,000 and employee benefit plan
stock allocations and vesting of $145,000 offset by treasury stock
purchases of $324,000 and cash dividends of $174,000.
Results Of Operations
2000 Compared with 1999
General
Net income increased $70,000 or 11.7% from $597,000 in 1999 to
$667,000 in 2000. The increase in net income is due primarily from
increased net interest income of $305,000 offset by increased non-interest
expenses including loan loss provisions of $110,000 and increased income
taxes of $35,000.
Net interest income
Net interest income increased $305,000 from $3.01 million in 1999 to
$3.32 million in 2000. The increase was due primarily to $9.5 million
of higher average interest-earning assets augmented by a higher net
interest yield during 2000 of .01% from 3.08% in 1999 to 3.09% in 2000.
Interest Income
Interest income increased $826,000 from $7.26 million for 1999 to
$8.08 million for 2000. The increase was the result of $9.37 million of
higher average balances in loans during the year and by $.14 million of
other securities (including FHLB stock) average balances. The increase
in net volume added $737,000 to interest income and yield increases added
$89,000. The yield on average interest-earning assets increased 11 basis
points, from 7.43% in 1999 to 7.54% in 2000.
Interest Expense
Interest expense increased $521,000 from $4.24 million in 1999 to
$4.76 million in 2000, primarily as a result of $414,000 of additional
interest expense related to increased certificates of deposit and $141,000
of added expense related to increased FHLB advances. The average rate paid
for interest-bearing liabilities increased 6 basis points from 4.81% in 1999
to 4.87% in 2000. The average balance of interest-bearing liabilities for
fiscal 2000 was $97.89 million representing an increase of $9.61 million
from $88.28 million for fiscal 1999.
Provision for Loan Losses
Provision for loan losses was $120,000 for the year ended June 30, 2000
and $70,000 for the year ended June 30, 1999. The Company maintains an
allowance for loan losses based upon management's periodic evaluation of
non-performing loans, inherent risks in the loan portfolio, economic conditions
and past experience. Management does expect that as loan growth continues,
additional provision for loan losses may be required.
During the quarter ended June 30, 2000, the Company became aware of
certain circumstances related to a loan to a single borrower in which the
Association had purchased a participation interest. The borrower has
discontinued principal and interest payments on the loan and has filed
for Chapter 11 bankruptcy protection. Under the terms of a plan, which
has been accepted by the lead participant and the borrower and will be
submitted to the bankruptcy court for approval, the collateral of this loan
will be surrendered to the lead participant and will be sold. Management
believes the proceeds from the sale of this collateral will be sufficient
to repay principal and interest on the outstanding loans. As of June 30, 2000
management has classified this loan, totaling $1,013,175, as impaired and,
in July of 2000, placed the loan on nonaccrual status.
Noninterest Income
Noninterest income increased $10,000 from $208,000 in 1999 to $218,000
in 2000 primarily resulting from increased other operating income.
Noninterest Expense
Noninterest expense increased $160,000 or 7.43% from $2.14 million in 1999
to $2.30 million in 2000. The increased expenditures are the result of
increased compensation and benefits, occupancy and equipment and service
bureau costs, offset by reduced FDIC insurance premiums and lower other
operating expenses.
Income Taxes
Income tax expense increased $35,000 from $414,000 in 1999 to $449,000
in 2000, principally as a result of the increase in pretax income. The
effective tax rate for 2000 was 40.2% versus 41.0% in 1999.
1999 Compared with 1998
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 offset 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 $782,000 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
$1.54 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 $364,000. 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 $634,000 from $3.61 million in 1998 to
$4.24 million in 1999, primarily as a result of $425,000 of additional
interest expense related to increased FHLB advances and $334,000 of added
expense related to increased certificates of deposit. 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 representing 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 management's periodic evaluation of
non-performing loans, inherent risks in the loan portfolio, economic
conditions and past experience. Management does expect that as loan growth
continues, additional provisions for loan losses may be required.
Noninterest Income
Noninterest income increased $63,000 from $145,000 in 1998 to $208,000 in
1999, primarily from increased service charges and letter of credit fee income.
Noninterest Expense
Noninterest expense increased $110,000 or 5.2% from $2.03 million in 1998 to
$2.14 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 consistent 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
securities and temporary cash investments, and funds provided by operations.
While scheduled loan and mortgage-backed securities repayments and maturities
of securities 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 securities, fund maturing certificates of deposit
and other savings deposit withdrawals, to invest in other interest-earning
assets, maintain liquidity, and meet operating expenses. Management believes
that loan and security 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 4% of its withdrawable deposits plus short-term borrowings.
At June 30, 2000, the Association was in compliance with OTS liquidity
requirements, having a ratio of 21.7%.
The Association is required by the 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, 2000 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, 2000
(dollars in thousands):
Actual Percent Required Percent Excess
Core $ 10,073 9.23% $ 4,367 4.0% $ 5,706
Tangible 10,073 9.23 1,637 1.5 8,436
Risk-based 10,468 16.94 4,945 8.0 5,523
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, 2000, the Association had a core capital ratio of 9.23% and met
the requirement for a "well capitalized" institution.
REPORT OF INDEPENDENT ACCOUNTANTS
Shareholders and Board of Directors
Sobieski Bancorp, Inc.
South Bend, Indiana
We have audited the accompanying consolidated statement of financial
condition of Sobieski Bancorp, Inc. and Subsidiary as of June 30, 2000
and the related consolidated statements of income, comprehensive income,
changes in stockholders' equity and cash flows for the year ended
June 30, 2000. 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 audit. The consolidated financial
statements of Sobieski Bancorp, Inc. and Subsidiary as of June 30, 1999 and
for each of the two years in the period then ended were audited by other
auditors whose report dated September 7, 1999, expressed an unqualified
opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sobieski
Bancorp, Inc. and Subsidiary as of June 30, 2000 and the results of their
operations and their cash flows for the year ended June 30, 2000 in conformity
with generally accepted accounting principles.
As disclosed in Note 3, on October 1, 1999 the Company changed its method
of accounting for derivative instruments and hedging activities to comply
with new accounting guidance.
Crowe, Chizek and Company LLP
South Bend, Indiana
July 28, 2000
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,049,769 $ 773,664
Interest-bearing deposits in
other financial institutions 688,291 165,940
Total cash and cash equivalents 2,738,060 939,604
Securities available for sale 5,621,083 3,020,327
Securities held to maturity
(fair value of $4,614,324 and
$7,588,200, respectively) 4,756,547 7,684,493
Loans, net of allowance for
loan losses of $395,000
in 2000 and $310,000 in 1999 93,280,665 87,899,960
Federal Home Loan Bank
stock, at cost 1,499,800 1,325,800
Accrued interest receivable 589,198 578,685
Property and equipment, net 1,868,802 1,887,169
Other assets 478,942 361,903
Total assets $ 110,833,097 $103,697,941
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities
Deposits $ 73,928,167 $ 64,231,053
Federal funds purchased 1,400,000 1,000,000
Federal Home Loan Bank advances 21,500,000 25,250,000
Advances from borrowers for
taxes and insurance 337,294 292,291
Accrued interest payable 388,354 114,762
Accrued expenses and other
liabilities 463,675 237,552
Total liabilities 98,017,490 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;
713,200 and 740,700 shares
outstanding,
respectively 9,660 9,660
Additional paid-in capital 9,252,680 9,250,990
Retained earnings, substantially
restricted 7,812,384 7,318,955
Accumulated other comprehensive
income (loss) (100,744) (30,420)
Treasury stock, at cost, 252,800
and 225,300 shares, respectively (3,508,846) (3,184,409)
Unearned Recognition and
Retention Plan (RRP)
shares; 20,629 and 25,898
shares, respectively (286,434) (360,730)
Unallocated Employee Stock
Ownership Plan (ESOP)
shares; 36,309 and 43,176
shares, respectively (363,093) (431,763)
Total stockholders' equity 12,815,607 12,572,283
Total liabilities and
stockholders' equity $110,833,097 $103,697,941
</TABLE>
CONSOLIDATED STATEMENTS OF INCOME
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Interest income:
Loans $7,243,426 $6,511,633 $5,523,327
Securities - taxable 754,799 645,193 909,505
Interest-bearing deposits 52,609 83,405 43,812
Securities - tax exempt 32,635 18,101 -
Total interest income 8,083,469 7,258,332 6,476,644
Interest expense:
Interest on deposits 3,341,665 3,013,634 2,755,923
Interest on borrowings 1,423,265 1,231,016 854,515
Total interest expense 4,764,930 4,244,650 3,610,438
Net interest income 3,318,539 3,013,682 2,866,206
Provision for loan losses 120,000 70,000 40,000
Net interest income after
provision for loan losses 3,198,539 2,943,682 2,826,206
Non-interest income
Fees and service charges 203,912 204,050 118,005
Gain (loss) on sales of
securities (16,823) - 19,728
Other income 30,785 4,286 6,958
Total non-interest income 217,874 208,336 144,691
Non-interest expense
Compensation and benefits 1,214,817 1,068,116 1,081,322
Occupancy and equipment 355,966 337,024 300,818
Federal deposit insurance
premiums 26,226 38,445 36,796
Advertising and promotion 44,302 41,756 43,263
Service bureau expense 156,052 122,529 110,443
Other operating expenses 503,309 533,626 456,206
Total non-interest expense 2,300,672 2,141,496 2,028,848
Income before income taxes 1,115,741 1,010,522 942,049
Income taxes 448,512 414,000 398,000
Net income $ 667,229 $ 596,522 $ 544,049
Basic earnings per
common share $ 1.00 $ .86 $ .76
Diluted earnings per
common share $ 1.00 $ .85 $ .75
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Net income $ 667,229 $ 596,522 $ 544,049
Other comprehensive
income (loss):
Unrealized gains (losses)
on securities
available for sale (114,849) (41,217) 22,753
Net cumulative effect of
adoption of SFAS 133 (18,424) - -
Reclassification adjustments
for (gains)losses included
in net income 16,823 - (19,728)
Tax effects 46,126 16,326 (1,198)
Total other comprehensive
income (loss) (70,324) (24,891) 1,827
Comprehensive income $ 596,905 $ 571,631 $ 545,876
</TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Accumulated
Addl Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock
<S> <C> <C> <C> <C> <C>
Balance July 1,1997 $ 9,660 $ 9,147,176 $6,670,543 $ (7,356) $(2,385,519)
Net income - - 544,049 - -
Cash dividends
($.32 per share) - - (251,172) - -
7,550 common shares
committed to be
released under
the ESOP - 68,517 - - -
4,528 shares issued
to vested
Recognition and
Retention Plan
participants - 1,401 - - -
Net unrealized
appreciation
of available
for sale securities - - - 1,827 -
Balance June 30,1998 9,660 9,217,094 6,963,420 (5,529) (2,385,519)
Net income - - 596,522 - -
Cash dividends
($.32 per share) - - (240,987) - -
Purchase of treasury
stock, 54,300 shares - - - - (798,890)
7,209 common shares
committed to be
released under the
ESOP - 34,489 - - -
5,022 shares issued
to vested
Recognition and
Retention Plan
participants - (593) - - -
Net unrealized
depreciation
of available
for sale securities - - - (24,891) -
Balance June 30,1999 9,660 9,250,990 7,318,955 (30,420) (3,184,409)
</TABLE>
<TABLE>
<CAPTION>
Unallocated
Employee
Stock
Unearned Ownership Total
RRP Plan Stockholders'
Shares Shares Equity
<S> <C> <C> <C>
Balance July 1,1997 $(494,359) $(579,350) $12,360,795
Net income - - 544,049
Cash dividends
($.32 per share) - - (251,172)
7,550 common shares
committed to be
released under
the ESOP - 75,502 144,019
4,528 shares issued
to vested
Recognition and
Retention Plan
participants 63,476 - 64,877
Net unrealized
appreciation
of available
for sale securities - - 1,827
Balance June 30,1998 (430,883) (503,848) 12,864,395
Net income - - 596,522
Cash dividends
($.32 per share) - - (240,987)
Purchase of treasury
stock, 54,300 shares - - (798,890)
7,209 common shares
committed to be
released under the
ESOP - 72,085 106,574
5,022 shares issued
to vested
Recognition and
Retention Plan
participants 70,153 - 69,560
Net unrealized
depreciation
of available
for sale securities - - (24,891)
Balance June 30,1999 (360,730) (431,763) 12,572,283
</TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
Accumulated
Addl Other
Common Paid-in Retained Comprehensive Treasury
Stock Capital Earnings Income (Loss) Stock
<S> <C> <C> <C> <C> <C>
Balance June 30,1999 $ 9,660 $9,250,990 $7,318,955 $ (30,420) $(3,184,409)
Net income - - 667,229 - -
Cash dividends
($.32 per share) - - (173,800) - -
Purchase of
treasury stock,
27,500 shares - - - - (324,437)
6,867 common shares
committed to be
released under
the ESOP - 8,823 - - -
5,269 shares issued
to vested
Recognition and
Retention Plan
participants - (7,133) - - -
Net unrealized
depreciation
of available
for sale securities - - - (70,324) -
Balance June 30,2000 $ 9,660 $9,252,680 $7,812,384 $(100,744) $(3,508,846)
</TABLE>
<TABLE>
<CAPTION>
Unallocated
Employee
Stock
Unearned Ownership Total
RRP Plan Stockholders'
Shares Shares Equity
<S> <C> <C> <C>
Balance June 30,1999 $(360,730) $(431,763) $12,572,283
Net income - - 667,229
Cash dividends
($.32 per share) - - (173,800)
Purchase of treasury
stock, 27,500 shares - - (324,437)
6,867 common shares
committed to be
released under the
ESOP - 68,670 77,493
5,269 shares issued
to vested
Recognition and
Retention Plan
participants 74,296 - 67,163
Net unrealized
depreciation
of available
for sale securities - - (70,324)
Balance June 30,2000 $(286,434) $(363,093) $12,815,607
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Cash flows from operating
activities
Net income $ 667,229 $ 596,522 $ 544,049
Adjustments to reconcile net
income to net cash from
operating activities
Depreciation 113,401 109,662 119,130
Provision for loan losses 120,000 70,000 40,000
Gain on sale of real estate owned, net (14,652) - (2,521)
(Gain) Loss on sale of securities 16,823 - (19,728)
Loss on sale of loans 29,296 - -
Deferred income taxes (40,634) (67,200) (29,000)
Release of Employee Stock
Ownership Plan shares 77,493 106,574 144,019
Vesting of Recognition and
Retention Plan shares 67,163 69,560 64,877
Amortization of premiums
and accretion of
discounts, net 104,074 106,744 110,082
Net change in
Accrued interest receivable (10,513) (66,324) (95,720)
Other assets (3,720) (185,111) (19,712)
Accrued interest payable 273,592 26,556 17,449
Accrued expenses and other
liabilities 226,123 35,458 47,969
Net cash from operating
activities 1,625,675 802,441 920,894
Cash flows from investing
activities
Proceeds from maturity of
certificate of deposit - - 198,000
Proceeds from maturity of securities - 500,000 800,000
Proceeds from sales of securities 973,369 - 1,787,983
Purchase of securities (1,158,358) (2,800,952) -
Principal reductions of
mortgage-backed securities 1,657,561 2,489,049 2,294,799
Net increase in loans (12,288,583)(11,257,329)(15,782,380)
Proceeds from sale of real
estate owned 66,721 - 177,951
Proceeds from sales of loans 5,297,225 - -
Purchase of property and equipment (95,034) (73,325) (14,326)
Purchase of Federal Home Loan
Bank stock (174,000) (403,300) (286,500)
Net cash from investing activities (5,721,099)(11,545,857)(10,824,473)
Cash flows from financing activities
Net change in deposits 9,697,114 3,713,807 1,130,616
Increase (decrease) in
advances from borrowers for
taxes and insurance 45,003 (82,336) 114,188
Increase in federal funds purchased 400,000 1,000,000 -
Federal Home Loan Bank advances 10,000,000 14,500,000 31,600,000
Federal Home Loan Bank payments (13,750,000) (7,700,000)(22,650,000)
Purchase of treasury stock (324,437) (798,890) -
Cash dividends (173,800) (240,987) (251,172)
Net cash from financing activities 5,893,880 10,391,594 9,943,632
Net change in cash and cash
equivalents 1,798,456 (351,822) 40,053
Cash and cash equivalents
at beginning of year 939,604 1,291,426 1,251,373
Cash and cash equivalents
at end of year $ 2,738,060 $ 939,604 $ 1,291,426
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Supplemental disclosures of cash
flow information
Cash paid for:
Interest $4,492,338 $4,221,655 $3,592,989
Income taxes 490,000 577,588 360,000
Transfer of:
Loans to real estate owned 80,229 - 164,393
Land to land held for sale - 53,896 -
Securities held to maturity to
securities available for sale 2,599,416 - -
Securities available for sale to
securities held to maturity 554,389 - -
</TABLE>
NOTE 1 - ORGANIZATION AND ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed
in the preparation of the consolidated financial statements of Sobieski
Bancorp, Inc. and its subsidiary (individually and collectively referred
to as "Sobieski" or the "Company"), Sobieski Federal Savings and Loan
Association of South Bend (the "Association").
Nature of Operations and Industry Segments: Sobieski is a savings and loan
holding company. The Company's business is concentrated in the banking
industry segment. The business of commercial and retail banking accounts
for more than 90% of its revenues, operating income and assets. While the
Company's chief decision makers monitor the revenue stream of various
company products and services, operations are managed and financial
performance is evaluated on a company-wide basis. Accordingly, all of
the Company's banking operations are considered by management to be
aggregated into one operating segment. The Association offers individuals
and businesses a full range of banking services primarily in St. Joseph
County, Indiana and in areas immediately surrounding known as Michiana.
The Association grants commercial, real estate and consumer loans to
customers. The majority of loans are secured by business assets, commercial
and residential real estate, and consumer assets. There are no foreign
loans.
Organization: The Association is a federally chartered stock savings and
loan association and as a member of the Federal Home Loan Bank System
("FHLB") is required to maintain an investment in the capital stock of
the FHLB equal to at least 5% of outstanding advances. As of June 30, 2000
and 1999, Sobieski was in compliance with this requirement.
Principles of Consolidation: The consolidated financial statements include
the accounts of Sobieski and its wholly-owned subsidiary. All significant
intercompany balance 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. Certain estimates that
are more susceptible to change in the near term include the allowance for
loan losses and the fair value of securities and other financial instruments.
NOTE 1 - ORGANIZATION AND ACCOUNTING POLICIES (Continued)
Securities: Management determines the appropriate classification of
securities at the time of purchase. If management has the intent and the
Company has the ability at the time of purchase to hold securities until
maturity, they are classified as held to maturity and carried at amortized
historical cost. Securities to be held for indefinite periods of time and
not intended to be held to maturity are classified as available for sale and
carried at fair value, with unrealized gains and losses reported in other
comprehensive income (loss), net of tax. Securities classified as available
for sale include securities that management intends to use as part of its
asset/liability management strategy and that may be sold in response to
changes in interest rates, resultant prepayment risk, and other factors.
Premiums and discounts on securities are recognized in interest income
using the level yield method over the estimated life of the security.
Gains and losses on the sale of available for sale securities are determined
using the specific identification method. Securities are written down to
fair value when a decline in fair value is not temporary.
Loans: Loans that management has the positive intent and ability to hold
for the foreseeable future or until maturity or payoff are reported at the
principal balance outstanding, net of unearned interest, deferred loan fees
and costs, and an allowance for loan losses. Interest income is reported on
the interest method and includes amortization of net deferred loan fees and
costs over the loan term. A majority of Sobieski's loan activity is with
customers located in St. Joseph County in Northern Indiana with a
concentration in single-family residential lending. Single-family
residential loans comprised approximately 75.5% of the net loan portfolio
as of June 30, 2000.
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 income is not reported when full loan repayment is in doubt,
typically when payments are past due over 90 days, unless the loan is both
well secured and in the process of collection. Payments received on such
loans are reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for loan
losses and decreased by charge-offs less recoveries. Estimating the risk
of loss and the amount of loss on any loans is necessarily subjective.
Accordingly, management estimates the allowance balance required based on
past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral
values, economic conditions, and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be
charged-off. A problem loan is charged-off by management as a loss
when deemed uncollectible, although collection efforts continue and
future recoveries may occur.
NOTE 1 - ORGANIZATION AND ACCOUNTING POLICIES (Continued)
Loan impairment is reported when full payment under the terms is not
expected. Impairment is evaluated in total for smaller-balance loans
of similar nature such as residential mortgage and consumer loans and
on an individual loan basis for other loans. If a loan is impaired, a
portion of the allowance is allocated so that the loan is reported, net,
at the present value of estimated future cash flows using the loan's
existing rate or at the fair value of collateral if repayment is expected
solely from the collateral. Loans are evaluated for impairment when
payments are delayed, typically 90 days or more, or when it is probable
that all principal and interest amounts will not be collected according
to the original terms of the loan.
Property and Equipment: Land is carried at cost. 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. These assets are reviewed for impairment when events
indicate that their carrying value may not be recoverable from future
undiscounted cash flows. Maintenance, repairs and minor alterations are
charged to expense. Major improvements are capitalized.
Real Estate Owned: Real estate acquired in settlement of loans is initially
recorded at fair market value at the date of acquisition, establishing a new
cost basis by a charge to the allowance for loan losses, 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. Income tax expense is the total of the
current year income tax due or refundable and the change in deferred tax
assets and liabilities. Deferred tax assets and liabilities are the
expected future tax amounts for the temporary differences between
carrying amounts and tax bases of assets and liabilities, computed using
enacted tax rates. A valuation allowance, if needed, reduces deferred tax
assets to the amount expected to be realized.
Earnings Per Share: Basic earnings per common share is based on net
income divided by the weighted average number of common shares
outstanding during the period. ESOP shares are considered outstanding
for earnings per common share calculations as they are committed to be
released; unearned shares are not considered outstanding. RRP shares
are considered outstanding for earnings per common share as they become
vested. Diluted earnings per common share shows the dilutive effect of
additional potential common shares issuable under stock options and
nonvested shares issued under the RRP. Earnings and dividends per
common shares are restated for all stock splits and dividends.
NOTE 1 - ORGANIZATION AND ACCOUNTING POLICIES (Continued)
Comprehensive Income (Loss): Comprehensive income (loss) consists of
net income and other comprehensive income (loss). Other comprehensive
income (loss) includes the net changes in net unrealized gains and losses
on securities available for sale, net of tax, which is also recognized as
a separate component of stockholders' equity.
Stock Compensation: Expense for employee compensation under stock option
plans is based on Accounting Principles Board ("APB") Opinion 25, with
expense reported only if options are granted below market price at grant
date. If applicable, disclosures of net income and earnings per share
are provided as if the fair value method of Statement of Financial
Accounting Standards (SFAS) No. 123 were used for stock-based compensation.
Employee Stock Ownership Plan: The Company accounts for its employee
stock ownership plan (ESOP) in accordance with AICPA Statement of
Position (SOP) 93-6. Under SOP 93-6, the cost of shares issued to
the ESOP, but not yet allocated to participants, is presented in the
consolidated statements of financial condition as a reduction of
stockholders' equity. Compensation expense is recorded based on the
market price of the shares as they are committed to be released for
allocation to participant accounts. The difference between the market
price and the cost of shares committed to be released is recorded as
an adjustment to additional paid-in capital. Dividends on allocated
ESOP shares reduce retained earnings; dividends on unearned ESOP
shares reduce debt and accrued interest.
Cash and Cash Equivalents: For purposes of reporting cash flows,
cash and cash equivalents is defined to include the Company's cash
on hand and in other banks, federal funds sold, and interest-earning
deposits in other financial institutions with maturities of 90 days
or less. The Company reports net cash flows for customer loan and
deposit transactions, federal funds and advances from borrowers for
taxes and insurance.
Fair Values of Financial Instruments: Fair values of financial
instruments are estimated using relevant market information and
other assumptions. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments and other factors, especially in the absence of broad
markets for particular items. Changes in assumptions or in market
conditions could significantly affect such estimates.
Financial Instruments with Off-Balance Sheet Risk: The Company, in
the normal course of business, makes commitments to extend credit
which are not reflected in the consolidated financial statements.
NOTE 1 - ORGANIZATION AND ACCOUNTING POLICIES (Continued)
Loss Contingencies: Loss contingencies, including claims and legal
actions arising in the ordinary course of business, are recorded as
liabilities when the likelihood of loss is probable and an amount or
range of loss can be reasonably estimated. Management does not believe
there are now such matters that will have a material effect on the
consolidated financial statements at June 30, 2000 and 1999.
Derivatives: Under SFAS No. 133, all derivative instruments are
recorded at their fair values. If derivative instruments are designated
as hedges of fair values, both the change in the fair value of the hedge
and the hedged item are included in current earnings. Fair value adjustments
related to cash flow hedges are recorded in other comprehensive income and
reclassified to earnings when the hedged transactions are reflected in
earnings. Ineffective portions of hedges are reflected in income currently.
Reclassifications: Some items in prior year's consolidated financial
statements have been reclassified to conform with the current presentation.
NOTE 2 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators used in the
computation of the basic earnings per common share and diluted earnings
per common share is presented below:
<TABLE>
<CAPTION>
Year ended June 30,
2000 1999 1998
<S> <C> <C> <C>
Basic earnings per common share
Numerator
Net income $ 667,229 $ 596,522 $ 544,049
Denominator
Weighted average common shares
outstanding 730,514 766,244 795,099
Less: Average unallocated ESOP shares (39,743) (46,781) (54,160)
Less: Average non-vested RRP shares (22,305) (27,423) (28,131)
Weighted average common shares
outstanding for basic earnings
per common share 668,466 692,040 712,808
Basic earnings per common share $ 1.00 $ .86 $ .76
</TABLE>
NOTE 2 - EARNINGS PER SHARE (Continued)
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Diluted earnings per common share
Numerator
Net income $ 667,229 $ 596,522 $ 544,049
Denominator
Weighted average common shares
outstanding for basic earnings
per common share 668,466 692,040 712,808
Add: Dilutive effects of assumed
exercises of stock options - 4,967 12,339
Add: Dilutive effects of average
non-vested RRP shares - 1,118 2,852
Weighted average common shares and
dilutive potential common
shares outstanding 668,466 698,125 727,999
Diluted earnings per common share $ 1.00 $ .85 $ .75
</TABLE>
At June 30, 2000, stock options and non-vested RRP shares not considered
in computing diluted earnings per share because they were antidilutive
totaled 80,130 and 12,491.
NOTE 3 - SECURITIES
The amortized cost and estimated fair value of securities at June 30, 2000 are
as follows:
<TABLE>
<CAPTION>
Available For Sale
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Government and
agency securities $ 2,000,000 $ - $ (59,380) $ 1,940,620
Mortgage-backed
securities 3,718,880 18,150 (81,450) 3,655,580
Marketable equity
securities 24,883 - - 24,883
$ 5,743,763 $ 18,150 $ (140,830) $ 5,621,083
</TABLE>
NOTE 3 - SECURITIES (Continued)
<TABLE>
<CAPTION>
Held To Maturity
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
U.S. Government and
agency securities $ 1,912,287 $ 2,241 $ (41,279) $ 1,873,249
Municipal securities 1,003,608 1,379 (8,985) 996,002
Mortgage-backed
securities 1,840,652 - (95,579) 1,745,073
$ 4,756,547 $ 3,620 $ (145,843) $ 4,614,324
</TABLE>
The amortized cost and estimated fair value of securities at June 30, 2000,
by contractual maturity 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.
<TABLE>
<CAPTION>
Available For Sale Held To Maturity
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
<S> <C> <C> <C> <C>
Due after one year
through five years $ - $ - $ 692,870 $ 688,377
Due after five years
through ten years 2,000,000 1,940,620 461,463 455,563
Due after ten years - - 1,761,562 1,725,311
Mortgage-backed
securities 3,718,880 3,655,580 1,840,652 1,745,073
Marketable equity
securities 24,883 24,883 - -
$ 5,743,763 $5,621,083 $ 4,756,547 $ 4,614,324
</TABLE>
The amortized cost and estimated fair value of securities at June 30, 1999 are
as follows:
<TABLE>
<CAPTION>
Available For Sale
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
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
$ 3,066,418 $ 3 $ (46,094) $ 3,020,327
</TABLE>
NOTE 3 - SECURITIES (Continued)
<TABLE>
<CAPTION>
Held To Maturity
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
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
$ 7,684,493 $ 50,603 $ (146,896) $ 7,588,200
</TABLE>
During the year ended June 30, 2000, proceeds from the sale of available
for sale securities totaled $973,369 with gross realized losses of $16,823.
There were no sales of securities held to maturity during the year ended
June 30, 2000. 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 securities available for sale in 1998 totaled $781,420 with
gross realized gains of $13,165. Proceeds from the sale of securities
held to maturity in 1998 totaled $1,006,563 with a gross realized gain
of $6,563. This security was within three months of maturity.
The mortgage-backed securities held by Sobieski consist primarily of
FNMA, GNMA, SBA and FHLMC pass-through certificates which are issued by
each of the respective agency programs, as sponsored by the United
States Government.
As of October 1, 1999, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Company does not have any derivative
instruments nor does the Company have any hedging activities. As
permitted by SFAS No. 133, the Company transferred securities with
an amortized cost of $2,599,416 and a fair value of $2,580,992 from
the held to maturity portfolio to the available for sale portfolio.
None of these securities were sold within six months of the transfer.
The Company also transferred securities with an amortized cost of $577,512
and a fair value of $554,389 from the available for sale to the held to
maturity portfolio.
NOTE 4 - LOANS, NET
<TABLE>
<CAPTION>
Loans consist of the following:
June 30,
2000 1999
<S> <C> <C>
Mortgage loans:
Secured by one-to-four family properties $ 70,428,533 $ 68,325,457
Commercial and other properties 6,700,172 5,610,435
77,128,705 73,935,892
Commercial loans:
Commercial loans 3,598,839 4,268,448
Commercial loans - participations 8,844,474 6,990,082
12,443,313 11,258,530
Consumer loans:
Home equity 3,564,479 2,901,955
Other 539,168 113,583
4,103,647 3,015,538
93,675,665 88,209,960
Less: allowance for loan losses (395,000) (310,000)
$ 93,280,665 $ 87,899,960
</TABLE>
Certain directors and executive officers of the Company and the Association,
including their associates and companies in which they are principal owners,
were loan customers of the Association. The following is a summary of loans
exceeding $60,000 in the aggregate to these individuals and their associates.
2000 1999
Balance at July 1 $ 785,544 $ 846,138
New loans 157,814 -
Repayments (76,627) (60,594)
Other changes, net (47,804) -
Balance at June 30 $ 818,927 $ 785,544
During 2000, the Company sold certain loans with a principal balance of
$5,326,521 out of portfolio on the secondary market. Proceeds from the sale
of such loans were $5,297,225.
NOTE 4 - LOANS, NET (Continued)
The following is a summary of activity in the allowance for loan losses:
Years Ended June 30,
2000 1999 1998
Balance, beginning of year $ 310,000 $ 240,000 $ 200,000
Provision charged to expense 120,000 70,000 40,000
Gross Charge-offs (35,000) - -
Balance, end of year $ 395,000 $ 310,000 $ 240,000
Nonaccrual loans totaled approximately $237,000, $182,000 and $188,000 at
June 30, 2000, 1999 and 1998, respectively.
Information regarding impaired loans follows:
2000 1999
Year end loans with no allowance for
loan losses allocated $ 1,013,175 $ -
Year end loans with allowance for
loan losses allocated 93,147 $ -
Total impaired loans $ 1,106,322 $ -
Amount of allowance allocated to
these loans $ 9,315 $ -
Average balance of impaired loans
during the year $ 276,581 $ -
Cash basis interest income
recognized during impairment $ - $ -
Interest income recognized during
impairment $ 25,217 $ -
During the quarter ended June 30, 2000, the Company became aware of certain
circumstances related to a loan to a single borrower in which the Association
had purchased a participation interest. The borrower has discontinued
principal and interest payments on the loan and has filed for Chapter 11
bankruptcy protection. Under the terms of a plan, which has been accepted
by the lead participant and the borrower and will be submitted to the
bankruptcy court for approval, the collateral of this loan will be
surrendered to the lead participant and will be sold. Management believes
the proceeds from the sale of this collateral will be sufficient to repay
principal and interest on the outstanding loans. As of June 30, 2000
management has classified this loan, totaling $1,013,175, as impaired
and, in July of 2000, placed the loan on nonaccrual status.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment and related accumulated depreciation and
amortization consisted of the following:
<TABLE>
<CAPTION>
June 30,
2000 1999
<S> <C> <C>
Land $ 121,787 $ 121,787
Office buildings 1,698,771 1,698,771
Leasehold improvements 71,481 71,481
Furniture and equipment 718,561 629,447
2,610,600 2,521,486
Less: Accumulated depreciation
and amortization (741,798) (634,317)
Property and equipment, net $ 1,868,802 $ 1,887,169
</TABLE>
NOTE 6 - DEPOSITS
Deposits consisted of the following:
<TABLE>
<CAPTION>
June 30,
2000 1999
Percent Percent
Amount of Total Amount of Total
<S> <C> <C> <C> <C>
NOW and money market accounts $ 6,068,352 8.2% 5,596,283 8.7%
Passbook accounts 13,685,664 18.5 14,350,716 22.4
Certificates of deposit and
IRA accounts 54,174,151 73.3 44,284,054 68.9
Total $ 73,928,167 100.0% $64,231,053 100.0%
</TABLE>
The aggregate amount of certificates of deposit and IRA accounts with a
minimum denomination of $100,000 was approximately $15,290,600 and
$4,293,000 at June 30, 2000 and 1999, respectively.
NOTE 6 - DEPOSITS (Continued)
At June 30, 2000, scheduled maturities of certificates of deposit and
IRA accounts for the years ending June 30, are as follows:
2001 $ 23,274,746
2002 24,370,904
2003 3,869,007
2004 2,615,102
2005 44,392
Totals $ 54,174,151
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
At June 30, 2000, outstanding Federal Home Loan Bank advances consisted
of fixed and variable rate advances aggregating $21,500,000 with interest
rates ranging from 4.90% to 7.31% and maturity dates ranging from 2001 to 2009.
The advances are required to be repaid in the year ending June 30, as follows:
2001 $ 1,000,000
2002 -
2003 3,000,000
2004 -
2005 3,000,000
Thereafter 14,500,000
$ 21,500,000
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 2009.
The advances are collateralized by all qualifying mortgage loans totaling
approximately $67,871,000 at June 30, 2000 and U.S. Treasury and Agency
securities and mortgage-backed securities issued or guaranteed by the
Federal Home Loan Mortgage Corporation, the Federal National Mortgage
Association, the Small Business Association or the Government National
Mortgage Association totaling approximately $9,349,000 at June 30, 2000.
NOTE 8 - INCOME TAXES
Income taxes consist of the following:
Years Ended June 30,
2000 1999 1998
Federal:
Current $ 361,260 $ 407,200 $ 332,000
Deferred (14,594) (67,200) (29,000)
346,666 340,000 303,000
State 101,846 74,000 95,000
Total $ 448,512 $ 414,000 $ 398,000
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:
<TABLE>
<CAPTION>
Years Ended June 30,
2000 1999 1998
<S> <C> <C> <C>
Computed statutory tax provision $ 379,352 $ 343,600 $ 320,300
State income taxes, net of federal
income tax benefit 67,200 48,800 62,700
Non-deductible portion of
ESOP contributions 3,000 11,700 23,300
Tax-exempt interest (8,600) (5,100) -
Business meals and entertainment 3,600 3,400 2,900
Officers' life insurance 2,600 10,600 -
Other, net 1,360 1,000 (11,200)
$ 448,512 $ 414,000 $ 398,000
Effective tax rate 40.2% 41.0% 42.2%
</TABLE>
NOTE 8 - INCOME TAXES (Continued)
The components of the net deferred tax asset at June 30, 2000 and 1999 were as
follows:
June 30,
2000 1999
Deferred tax asset (liabilities):
Deferred loan costs $ (5,748) $ (6,600)
Allowance for loan losses 134,300 105,400
Tax bad debt deductions (33,735) (50,600)
Depreciation and amortization 3,246 5,200
Net unrealized depreciation of
available for sale securities 41,712 15,671
Originated mortgage servicing rights (22,936) -
Deferred income - 8,600
Accrued benefits 27,081 12,400
Other, net (8,414) 4,801
Net deferred tax asset $ 135,506 $ 94,872
Federal income tax laws provided savings associations with additional
bad debt deductions through 1987, totaling $875,000 for the Association.
Accounting standards do not require a deferred tax liability to be recorded
on this amount, which liability otherwise would total $350,000 at
June 30, 2000 and 1999. If the Association was liquidated or otherwise
ceased to be a savings association or if tax laws were to change, the
$350,000 would be recorded as expense.
NOTE 9 -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, 2000, 1999 and 1998 was $12,367, $14,562 and
$6,781, respectively.
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. The Association 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.
NOTE 9 -BENEFIT PLANS (Continued)
The promissory note payable to Sobieski by the ESOP trustee bears interest
at 7.78% with interest and principal payments due in twenty-four (24)
consecutive semi-annual installments on the last day of June and December
continuing until December 31, 2006. The note is collateralized by the
unallocated shares of Sobieski's common stock held by the ESOP.
As the ESOP promissory note is repaid, shares of Sobieski's common stock
are released from collateral and allocated to qualified ESOP participants
based on the proportion of debt service paid during the period to total
debt service. Sobieski accounts for the ESOP in accordance with AICPA
Statement of Position 93-6. Accordingly, the unallocated shares pledged
as collateral are reported as a reduction of stockholders' equity in the
consolidated statements of financial condition. As shares are committed
for release from collateral, the Association records contribution expense
equal to the average market value of the released shares, and the released
shares become outstanding for earnings per common share computations.
Contribution expense related to the ESOP was $77,493 , $106,574 and $144,019
for the years ended June 30, 2000, 1999 and 1998, respectively. During
2000, participants withdrew 3,206 allocated shares from the plan.
Following is a summary of shares held by the ESOP trust as of June 30, 2000
and 1999:
2000 1999
Allocated shares 37,765 34,104
Unreleased shares 36,309 43,176
Total ESOP shares 74,074 77,280
Fair value of unreleased shares at year end $ 390,321 $ 620,655
Supplemental Retirement Plans:
Effective July 1, 1998, Sobieski established supplemental retirement plans
for its directors and certain of its officers. These plans generally
provide for the payment of supplemental retirement benefits over a period
of ten (10) years, beginning with the later of (a) the officer's or
director's attainment of a specified retirement age; or (b) upon termination
of the officer's employment or the director's termination as a member of the
Board of Directors subject to certain vesting conditions with payments to
be made at the specified retirement age. Sobieski has established a
liability in the amount of the present value of vested officer and director
benefits under these plans. Sobieski also maintains life insurance contracts
on the officers and directors. Compensation expense associated with these
supplemental retirement plans aggregated $33,721 and $36,583 for the years
ended June 30, 2000 and 1999.
NOTE 9 - BENEFIT PLANS (Continued)
Recognition and Retention Plan (RRP):
Under the RRP, an aggregate of 38,640 shares of Sobieski's common stock
have been reserved for the awarding to 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, 2000 and 1999, an aggregate of
30,502 and 27,372 shares, respectively, of Sobieski's common stock, with
a market value of $374,794 and $338,753, respectively, at the respective
dates of grant, have been awarded under the RRP. Expense recognized for
the years ended June 30, 2000, 1999 and 1998 related to the award of RRP
shares was $74,296, $70,153 and $63,476, respectively.
Stock Option Plan:
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, 2000.
Weighted-Average
Number of Exercise Price
Shares Per Share
Outstanding, July 1, 1997 52,800 $ 12.58
Granted 11,500 19.21
Outstanding, June 30, 1998 64,300 13.77
Granted 4,830 13.13
Forfeited (300) 12.63
Outstanding, June 30, 1999 68,830 13.58
Granted 12,000 11.63
Forfeited (700) 12.63
Outstanding, June 30, 2000 80,130 13.30
NOTE 9 - BENEFIT PLANS (Continued)
Options outstanding and exercisable at June 30, 2000 were as follows:
Outstanding Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Contractual Exercise Fair Value
Price Number Life Number Price of Grants
11.625 12,000 9.33 - $ 11.63 $ 2.07
12.500 19,320 6.18 11,592 12.50 3.81
12.625 32,480 5.32 26,584 12.63 3.58
13.125 4,830 8.56 966 13.13 3.70
18.125 7,500 7.33 3,000 18.13 5.43
21.250 4,000 7.73 1,600 21.25 6.18
80,130 6.63 43,742 $ 13.30
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes Option-Pricing Model using the following assumptions:
Risk free interest rate: 4.94% to 6.25%
Expected stock price volatility rate: 17.82% to 24.62%
Expected option life: 7 years
Expected dividends: 1.71% to 2.80%
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:
2000 1999 1998
Net income as reported $ 667,229 $ 596,522 $ 544,049
Pro forma net income 619,223 569,400 519,500
Basic earnings per share as reported 1.00 .86 .76
Pro forma basic earnings per share .93 .82 .73
Diluted earnings per share as reported 1.00 .85 .75
Pro forma diluted earnings per share .93 .82 .71
NOTE 10 - REGULATORY MATTERS
Sobieski Federal Savings and Loan Association is subject to various
regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on
the Association's financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Association
must meet specific capital guidelines that involve quantitative measures of
the Association's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative judgments
by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Association to maintain minimum amounts and ratios of total and
Tier I capital, as defined in the regulations, to risk-weighted assets, as
defined, and of Tier I capital to average assets, as defined. As of
June 30, 2000, the most recent notification from the Office of Thrift
Supervision categorized the Association as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Association must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios. There are no conditions or
events since that notification that management believes have changed the
Association's category.
The following are details of the Association's regulatory capital position
and the related capital requirements. Sobieski's consolidated amounts and
ratios are not considered significant for this presentation.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 2000
Risk-Based Capital
(to Risk-Weighted
Assets) $10,468 16.94% $4,945 8.0% $6,181 10.0%
Tier I Capital
(to Risk-Weighted
Assets) 10,073 16.30 2,472 4.0 3,709 6.0
Tier I Capital
(to Adjusted
Assets) 10,073 9.23 4,367 4.0 5,458 5.0
</TABLE>
NOTE 10 - REGULATORY MATTERS (Continued)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
The Qualified Thrift Lender (QTL) test requires that approximately 65%
of assets be maintained in housing-related finance and other specified
areas. If the QTL test is not met, limits are placed on growth, branching,
new investments, FHLB advances and dividends, or the Association must
convert to a commercial bank charter. Management believes that the QTL
test has been met.
Under OTS regulations, limitations have been imposed on all "capital
distributions" by savings institutions, including cash dividends. The
regulation establishes a three-tiered system of restrictions, with the
greatest flexibility afforded to thrifts which are both well-capitalized
and given favorable qualitative examination ratings by the OTS. For
example, a thrift which is given one of the two highest examination
ratings and has "capital" equal to its fully phased-in regulatory capital
requirements (a tier 1 institution) could make capital distributions in
any year of 100% of its retained net income for the calendar year-to-date
period plus net income for the previous two calendar years (less any
dividends previously paid) as long as the Association would remain "well
capitalized", following the proposed distribution. Other thrifts would
be subject to more stringent procedural and substantive requirements, the
most restrictive being prior OTS approval of any capital distribution.
At June 30, 2000, approximately $436,000 of the Association's retained
earnings was potentially available for distribution to the Company,
without obtaining prior regulatory approval.
The Association established a liquidation account which is equal to its
total net worth as of the date of the latest audited balance sheet
appearing in the final conversion prospectus for the Company's stock
offering related to converting from a mutual to a stock ownership
structure. The liquidation account is maintained for the benefit of
eligible depositors who continue to maintain their accounts at the
Association after the conversion. The liquidation account is reduced
annually to the extent that eligible depositors have reduced their
qualifying deposits. Subsequent increases will not restore an eligible
account holder's interest in the liquidation account. In the event of
a complete liquidation, each eligible depositor will be entitled to
receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts
then held. The Association may not pay dividends that reduce
shareholders' equity below the required liquidation account balance.
NOTE 11 - 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 ($8,914,054 and $6,358,000 at June 30, 2000
and 1999, respectively). Sobieski uses the same credit policies in making
loan commitments as it does for on-balance-sheet instruments.
Loan commitments are agreements to lend to a customer as long as there is
no violation of any condition established in the contract. Loan
commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. Sobieski
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by Sobieski upon
extension of credit, is based on management's credit evaluation of the
borrower. Collateral held consists primarily of the real estate being financed.
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of Sobieski's financial instruments as of
June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Assets:
Cash and cash
equivalents $ 2,738,060 $ 2,738,060 $ 939,604 $ 939,604
Securities available
for sale 5,621,083 5,621,083 3,020,327 3,020,327
Securities held
to maturity 4,756,547 4,614,324 7,684,493 7,588,200
Loans, net 93,280,665 91,032,000 87,899,960 87,199,569
Federal Home Loan
Bank stock 1,499,800 1,499,800 1,325,800 1,325,800
Accrued interest
receivable 589,198 589,198 578,685 578,685
Liabilities:
Deposits 73,928,167 73,545,000 64,231,053 65,892,000
Federal funds
purchased 1,400,000 1,400,000 1,000,000 1,000,000
Federal Home Loan
Bank advances 21,500,000 20,256,000 25,250,000 25,452,000
Accrued interest
payable 388,354 388,354 114,762 114,762
</TABLE>
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following methods and assumptions were used to estimate the fair value
of Sobieski's financial instruments.
Cash and Cash Equivalent, Federal Home Loan Bank Stock and
Accrued Interest: The carrying amounts of cash and cash equivalents,
Federal Home Loan Bank stock and accrued interest are reasonable
estimates of their respective fair values.
Securities Available for Sale and Securities Held to Maturity:
Estimated fair values of securities available for sale and securities
held to maturity 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, Net: Fair values are estimated for portfolios with similar
financial characteristics. Loans are segregated by type, such as
residential mortgages, nonresidential mortgages, commercial and
consumer loans. Each loan category is further segmented into fixed
and variable interest categories, with residential mortgage loans
(Sobieski's largest category) further segregated by similar note rates
and maturities. Future cash flows of these loans are discounted using
the current rates at which similar loans would be made to borrowers with
similar credit rating for the same remaining maturities.
Deposits: The estimated fair value of passbook and money market accounts
and negotiable orders of withdrawal are based on their carrying amount.
Certificates of deposit and IRA accounts are segregated by original and
remaining term and estimated future cash flows are discounted using
rates currently offered for certificate and IRA accounts of similar
remaining maturity.
Federal Home Loan Bank Advances: The estimated fair values of advances
from the Federal Home Loan Bank of Indianapolis are determined by
discounting the future cash flows of outstanding advances using rates
currently available on advances from the Federal Home Loan Bank of
Indianapolis with similar characteristics.
Federal Funds Purchased: The carrying amounts of federal funds
purchased are reasonable estimates of their fair values.
Other Financial Instruments and Loan Commitments: The estimated
fair value of other financial instruments and off-balance sheet loan
commitments approximate cost and are not considered significant for
this presentation.
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
While these estimates of fair value are based on management's judgment
of the most appropriate factors, there is no assurance that were Sobieski
to have disposed of such items at June 30, 2000 and 1999, the estimated
fair values would necessarily have been achieved at those dates, since
market values may differ depending on various circumstances. The estimated
fair values at June 30, 2000 and 1999 should not necessarily be considered
to apply at subsequent dates.
In addition, other assets and liabilities of Sobieski that are not defined
as financial instruments are not included in the above disclosures, such as
premises and equipment. Also, non-financial instruments typically not
recognized in financial statements nevertheless may have value but are
not included in the above disclosures. These include, among other items,
the estimated earnings power of core deposit accounts, the trained work
force, customer goodwill and similar items.
NOTE 13 - PARENT COMPANY FINANCIAL INFORMATION
Sobieski Bancorp, Inc.'s statements of financial condition at June 30, 2000
and 1999, and its related statements of income and cash flows for the years
ended June 30, 2000, 1999 and 1998 are as follows:
STATEMENTS OF FINANCIAL CONDITION
June 30, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 783,881 $ 705,863
Loans 2,249,967 1,969,007
Note receivable from subsidiary 418,600 483,000
Investment in subsidiary 9,972,764 9,322,179
Land held for sale 53,896 53,896
Other assets 41,413 61,858
Total assets $ 13,520,521 $ 12,595,803
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities
Note payable to subsidiary $ 674,302 $ -
Accrued expenses and other
liabilities 30,613 23,520
704,915 23,520
Stockholders' equity 12,815,607 12,572,283
Total liabilities and
stockholders' equity $ 13,520,521 $ 12,595,803
</TABLE>
NOTE 13 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
STATEMENTS OF INCOME
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Income
Interest income on loans $ 138,817 $ 165,588 $ 230,959
Dividends received from
subsidiary 102,705 591,062 500,266
Interest on note receivable
from subsidiary 38,351 41,335 46,345
Total income 279,873 797,985 777,570
Expenses
Compensation and benefits 87,991 74,791 57,900
Occupancy and equipment 6,000 6,000 6,000
Professional fees 12,560 2,887 23,622
Interest on note payable
to subsidiary 11,659 - 23,303
Other operating expenses 66,688 64,551 48,831
Total expenses 184,898 148,229 159,656
Income before income taxes
and equity in undistributed
earnings of subsidiary 94,975 649,756 617,914
Income taxes 4,000 27,000 42,000
Income before equity in
undistributed earnings
of subsidiary 90,975 622,756 575,914
Equity in undistributed/
(excess distributed)
earnings of subsidiary 576,254 (26,234) (31,865)
Net income $ 667,229 $ 596,522 $ 544,049
Comprehensive income $ 596,905 $ 571,631 $ 545,876
</TABLE>
NOTE 13 - PARENT COMPANY FINANCIAL INFORMATION (Continued)
STATEMENTS OF CASH FLOWS
Years ended June 30, 2000, 1999 and 1998
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 667,229 $ 596,522 $ 544,049
Adjustments to reconcile net income
to net cash from operating
activities
Equity in undistributed/(excess)
distributed income of subsidiary (576,254) 26,234 31,865
Noncash dividend received from
subsidiary - (47,731) -
Increase in cash value of life
insurance (13,341) (6,540) -
Decrease (increase) in other assets (33,786) 3,490 85,371
Increase (decrease) in accrued expenses
and other liabilities 7,093 22,899 (26,639)
Net cash from operating activities 118,513 594,874 634,646
Cash flows from investing activities
Payments received on note receivable
from subsidiary 64,400 64,400 64,400
Net (increase) decrease in loans
purchased from subsidiary (280,960) 655,030 465,161
Land improvements - (6,165) -
Net cash from investing activities (216,560) 713,265 529,561
Cash flows from financing activities
Proceeds from note payable to subsidiary 674,302 - -
Payments on note payable to subsidiary - - (500,000)
Purchase of treasury stock (324,437) (798,890) -
Cash dividends (173,800) (240,987) (251,172)
Net cash from financing activities 176,065 (1,039,877) (751,172)
Net change in cash and cash equivalents 78,018 268,262 413,035
Cash and cash equivalents at
beginning of year 705,863 437,601 24,566
Cash and cash equivalents at
end of year $ 783,881 $ 705,863 $ 437,601
</TABLE>
ANNUAL MEETING
The Annual Meeting of Stockholders will be held at 2:00 p.m.,
South Bend, Indiana, time on October 23, 2000 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 may generally pay dividends in any
calendar year equal to net income for that year plus retained net income
for the preceding two years.
The following table sets forth the per share price range of the Company's
common stock and dividends paid for each quarter of fiscal 2000 and 1999.
The prices reflect interdealer quotations without retail markup, markdown
or commissions, and do not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
2000 1999
High Low Dividends High Low Dividends
<S> <C> <C> <C> <C> <C> <C>
First Quarter $14.50 $11.75 $0.08 $18.75 $14.00 $0.08
Second Quarter 11.88 10.00 0.08 15.50 13.00 0.08
Third Quarter 10.50 9.50 0.08 15.00 12.75 0.08
Fourth Quarter 11.56 10.00 0.08 14.88 14.38 0.08
</TABLE>
At September 15, 2000, there were 704,662 shares of Sobieski Bancorp., Inc.
common stock issued and outstanding and there were approximately 347 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, 2000, 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.
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
President and Chief Executive Officer
of Sobieski Bancorp, Inc. and Sobieski
Federal Savings and Loan Association
Robert J. Urbanski
President
TransTech Electric Co. and Chairman of the
Board of Sobieski Bancorp, Inc. and Sobieski
Federal Savings and Loan Association
Joseph F. Nagy
Auditor, St. Joseph County
George J. Aranowski
Public Accountant
Joseph A. Gorny
Business Owner
Richard J. Cullar
Certified Public Accountant
Leonard J. Dobosiewicz
Maintenance Professional
EXECUTIVE OFFICERS
Thomas F. Gruber
President and Chief Executive Officer
Marsha Nafrady
Secretary and Treasurer
Arthur Skale
Chief Financial Officer
Gregory J. Matthews
Vice President of Operations
INDEPENDENT AUDITORS
Crowe, Chizek and Company LLP
330 East Jefferson Blvd.
South Bend, Indiana 46624
GENERAL COUNSEL
Kenneth Fedder, Esq.
205 West Jefferson Blvd.
South Bend, Indiana 46601
SPECIAL COUNSEL
Silver, Freedman & Taff, L.L.P.
1100 New York Avenue, NW
Seventh Floor
Washington, DC 20005
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Parent: Sobieski Bancorp, Inc.
Subsidiary: Sobieski Federal Savings and Loan Association
State of Incorporation: United States
Percentage of Ownership: 100%
Exhibit 23
Consent Of Independent Auditors
We hereby consent to the incorporation by reference in the Registration
Statements of Sobieski Bancorp, Inc. on Forms S-8 (Registration No. 333-40983
and Registration No. 333-40985) of our report dated July 28, 2000 on the
consolidated financial statements of Sobieski Bancorp, Inc., which report
is included in the 2000 Annual Report on Form 10-KSB of Sobieski Bancorp, Inc.
/s/Crowe, Chizek and Company LLP
South Bend, Indiana
September 25, 2000
Exhibit 27
Financial Data Schedule
Period Type 12-MO
Fiscal-Year-End 06-30-2000
Period-End 06-30-2000
Cash 2,738,060
Investments 10,377,630
Loans 93,675,665
Allowances (395,000)
Other 2,567,940
PP&E 2,610,600
Depreciation (741,798)
Total-Assets 110,833,097
Deposits 73,928,167
Other 24,089,323
Preferred-Mandatory -0-
Preferred -0-
Common 9,660
Other-SE 12,805,947
Total Liabilities and SE 110,833,097
Total Income 8,301,343
Other Expenses 2,300,672
Loss Provision 120,000
Interest expense 4,764,930
Income pretax 1,115,741
Income tax 448,512
Discontinued -0-
Extraordinary -0-
Changes -0-
Net Income 667,229
EPS Basic 1.00
EPS Diluted 1.00
Net yield-interest earning assets-actual 3.09%
Loans on non accrual 268,000
Accruing loans past due 90 days or more -0-
Troubled debt restructuring -0-
Potential problem loans 1,013,000
Allowance for loan loss-beginning of period 310,000
Total charge offs 35,000
Total recoveries -0-
Loan loss allowance allocated to domestic loans 324,000
Loan loss allowance allocated to foreign loans -0-
Loan loss allowance-unallocated 71,000
Exhibit 99
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 is contained in this Annual Report on
Form 10-KSB of Sobieski Bancorp, Inc. for its fiscal
year ended June 30, 2000.
/s/PricewaterhouseCoopers LLP
Mishawaka, Indiana
September 24, 2000
