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Strong Buy 
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Average rating: 3.00 (Strong Buy) 1.00 - 5.00 (Strong Sell) Total: 1 members

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Apr. 26 2004, 1:18 PM ET
Nearest price: 5.77 (04/26/04)
by sturmdrang (profile)
(all of sturmdrang's ratings)
(Previous rating: Buy,
on Mar. 20 2004, 03:36 AM ET)
Update as of April 26, 2003:

Due to pending sale of its "good bank" assets/ liabilities to MFBC and the retention of its "bad bank" assets/ liabilities in SOBI and until more details are known about the "bad bank's" remaining net assets, rating is changed to "hold".

SOBI - Sobieski Bancorp. South Bend, Indiana
This $111 million thrift has had its share of problems, primarily caused by a former executive's lending practices in 2002. Losses in the past 2 1/2 years are $7.5 mil and the latest loss of $ 3.7 mil (7-12 2003) has resulted in an undercapitalized situation. In February the stock fell sharply from $12 to its current $6.80, after the most recent loss and the OTS' cease and desist order were announced.

The exam questions: is there value in Sobieski and can shareholders prosper by holding SOBI? Some considerations:
1) MV to BV: 83.4 %
2) Efficiency Ratio: 191%!!!
3) Funding: $71.4 mil customer deposits; $33.5 mil FHLB advances
4) Number of offices: 3
5) Location: South Bend is a relatively properous midwestern city, home to Notre Dame University. A commuter train travels to Chicago.
6) Deferred tax valuation reservation: Its tax NOL carryforwards were determined to be overvalued causing a $1.1 million valuation reserve to be established. This step was necessary because the return to profitability and use of the NOLs was considered less likely than more likely.
- If SOBI returns to profitability, however, this reserve could be reversed.
7) Management: A new president was installed in Dec 2002.
8) Regulatory supervision: Due to its undercapitalization, caused by the loan losses, OTS placed a cease and desist order on SOBI in February. Dividend payments have ceased.

As someone once said, the problem with cockroaches is that, if you see 3 or 4, there are normally many more hidden away. The insect exterminators have been in SOBI for a time and, given its small size, they should have located most of the problem loans and practices by now. A further signficant charge-off would surprise me, although this does not mean that the bank can return to profitability. A likely strategy would be to clean up the bank and then put it on the market. The first step is well underway.

Recommendation: The bank is undercapitalized - not bankrupt - and is under regulatory supervision. A beat-up $200 mil bank, SFBI, not far from South Bend, was sold in the spring of 2003 for 122% MV to BV. A similar price might be possible for SOBI. For patient investors, SOBI could be a BUY.

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