**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

** **

| **ý** |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                              |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                                                                                                                   |
|       |   | **For the fiscal year ended  December 31, 2003**                                                                                                                                                                                                                                                       |
|       |   |                                                                                                                                                                                                                                                                                                   |
| **o**      |   | **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: 1-13605**

 

**EFC BANCORP, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                    |   | **36-4193304**                    |
|-----------------------------------------------------------------|--------|-----------------------------------|
| (State or other jurisdiction of incorporation or  organization) |   | (IRS Employer Identification no.) |
|                                                            |   |                              |
| **1695 Larkin Avenue, Elgin, Illinois**                         |   | **60123**                         |
| (Address of principal executive offices)                        |   | (Zip code)                        |

 

Registrant’s telephone number, including area code: **(847) 741-3900**

Securities registered pursuant to Section 12(b) of the Act: **None**

Securities registered pursuant to Section 12(g) of the Act:

 

| **Common Stock, par value $.01 per share** |   | **The American Stock Exchange**             |
|--------------------------------------------|--------|---------------------------------------------|
| (Title of Class)                           |   | (Name of each Exchange on which registered) |

 

Indicateby check mark whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý    No o

 

Indicateby check mark if disclosure of delinquent filers in response to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Park III of this Form 10-K or any amendment tothis Form 10-K. o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Act). Yes oNo ý

 

Theaggregate market value of voting stock held by non-affiliates of theregistrant, i.e., persons other than directors and executive officers of theregistrant was $57,600,000 as of March 8, 2004 based upon the average bid andasked price of such common equity as of the last business day of registrant’smost recently completed second fiscal quarter.

 

The number of shares ofCommon Stock outstanding as of March 8, 2004 is 4,599,763.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

**Portions of the Annual Report and ProxyStatement for the 2004 Annual Meeting of Stockholders are incorporated byreference into Part II and III of this Form 10-K.**

 

 

----

 

**INDEX**

 
| **PART I**     |      |                                                                                             |
|----------------|-----------|--------------------------------------------------------------------------------------------------|
|           |      |                                                                                             |   |
|           | Item 1.   | Business                                                                                         |   |
|           |      |                                                                                             |   |
|           | Item 2.   | Properties                                                                                       |   |
|           |      |                                                                                             |   |
|           | Item 3.   | Legal Proceedings                                                                                |   |
|           |      |                                                                                             |   |
|           | Item 4.   | Submission of Matters to a Vote of  Security Holders                                             |   |
|           |      |                                                                                             |   |
| **PART II**    |      |
|           |      |                                                                                             |   |
|           | Item 5.   | Market for the Company’s Common  Equity and Related Stockholder Matters                     |   |
|           |      |                                                                                             |   |
|           | Item 6.   | Selected Financial Data                                                                          |   |
|           |      |                                                                                             |   |
|           | Item 7.   | Management’s Discussion and Analysis  of Financial Condition and Results of Operations      |   |
|           |      |                                                                                             |   |
|           | Item 7A.  | Quantitative and Qualitative  Disclosures About Market Risk                                      |   |
|           |      |                                                                                             |   |
|           | Item  8.  | Financial  Statements and Supplementary Data                                                     |   |
|           |      |                                                                                             |   |
|           | Item  9.  | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure            |   |
|           |      |                                                                                             |   |
|           | Item 9A.  | Controls and  Procedures                                                                         |   |
|           |      |                                                                                             |   |
| **PART III**   |      |
|           |      |                                                                                             |   |
|           | Item  10. | Directors  and Executive Officers of the Registrant                                              |   |
|           |      |                                                                                             |   |
|           | Item 11.  | Executive Compensation                                                                           |   |
|           |      |                                                                                             |   |
|           | Item  12. | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |   |
|           |      |                                                                                             |   |
|           | Item  13. | Certain  Relationships and Related Transactions                                                  |   |
|           |      |                                                                                             |   |
| **PART IV**    |      |
|           |      |                                                                                             |   |
|           | Item  14. | Principal  Accountant Fees and Services                                                          |   |
|           |      |                                                                                             |   |
|           | Item  15. | Exhibits,  Financial Statement Schedules, and Reports on Form 8-K                                |   |
|           |      |                                                                                             |   |
| **SIGNATURES** |      |

 

2

----

 

**PART I**

 

**Item 1.Business****.**

 

**General**

 

EFCBancorp, Inc. (also referred to as the “Company” or “Registrant”), wasincorporated under Delaware law in October 1997.  The Registrant was formed to acquire Elgin Financial Savings Bankand subsidiaries, Elgin, Illinois, (the “Bank”) as part of the Bank’sconversion from a mutual to a stock form of organization (the“Conversion”).  In connection with theConversion, the Company issued an aggregate of 7,491,434 shares of its commonstock, par value $0.01 per share (“Common Stock”) at a purchase price of $10per share, of which 6,936,513 shares were issued in a subscription offering and554,921 shares were issued to the Elgin Financial Foundation (the“Foundation”), a charitable foundation established by the Bank.  The Company received approval to become asavings and loan holding company and is subject to regulation by the Office ofThrift Supervision (“OTS”) and the Securities and Exchange Commission (“SEC”).   The Company’s acquisition of the Bankoccurred on April 3, 1998.

 

TheBank is a community-oriented savings institution that was originally organizedin 1924 as a federally-chartered mutual savings and loan association.  The Bank reorganized in the 1980s to becomeElgin Federal Financial Center, a federally-chartered mutual savingsassociation, and again in 1996 to become Elgin Financial Center, S.B., anIllinois state-chartered mutual savings bank. In 1998, the Bank changed its name to Elgin Financial Savings Bank.  Most recently, in October 2002 the Bankchanged its name to EFS Bank.  TheBank’s principal business consists of the acceptance of retail deposits fromthe general public in the areas surrounding its full-service branch offices andthe investment of those deposits, together with funds generated from operationsand borrowings, primarily in one- to four-family residential mortgage loansand, to a lesser extent, multi-family and commercial real estate loans,construction and land loans, commercial business loans, home equity loans, andautomobile and passbook savings loans. The Bank generally originates all of its loans for investment.  The Bank also invests primarily ingovernment insured or guaranteed mortgage-backed securities, U.S. Governmentobligations and municipal securities. The Bank’s revenues are derived principally from the interest on itsmortgage, consumer and commercial business loans and securities and fromservicing fees.  The Bank’s primarysources of funds are retail savings deposits and, to a lesser extent, advancesfrom the Federal Home Loan Bank of Chicago (the “FHLB-Chicago”).

 

**Market Area**

 

Headquarteredin largely suburban Kane County, Illinois, the Bank has been, and intends tocontinue to be, a community-oriented financial institution offering a varietyof financial services to meet the needs of the communities it serves.  The Bank currently operates fourfull-service banking facilities in Elgin and four full service facilitieslocated in West Dundee, East Dundee, Huntley and Carpentersville,Illinois.  The Bank’s primary lendingand deposit gathering area is concentrated around the areas where itsfull-service banking facilities are located which the Bank generally considersto be its primary market area.

 

Elginis located on U.S. Interstate 90 (the Northwest tollway) in the Fox RiverValley approximately 38 miles northwest of downtown Chicago and 25 miles westof O’Hare International Airport. Interstate 90 provides easy access to the City of Chicago and is a majorcorridor of suburban growth for Chicago. The economy in the Bank’s primary market area has historically benefitedfrom the growth of the Chicago suburbs into Kane, Western Cook and McHenryCounties with an influx of new residents and employers.  Other employment and economic activity isprovided by a variety of wholesale and retail trade, hospitals and a riverboatgambling facility located on the Fox River in Elgin.

 

**Competition**

 

TheBank faces significant competition both in making loans and in attractingdeposits.  The State of Illinois has ahigh density of financial institutions, many of which are branches ofsignificantly larger institutions, which have greater financial resources thanthe Bank, all of which are competitors of the Bank to varying degrees.  The Bank’s competition for loans comesprincipally from savings banks, savings and loan associations, commercialbanks, mortgage banking companies, credit unions, insurance companies and otherfinancial service companies.  Its mostdirect competition for deposits has historically come from savings and loanassociations, savings banks, commercial banks and credit unions.  The Bank faces additional competition fordeposits from non-depository competitors such as the mutual fund industry,securities and brokerage firms and insurance companies.  Competition may also increase as a result ofthe lifting of restrictions on the interstate operations of financialinstitutions.  There are approximately21 financial institutions with operations in Elgin and approximately 51 financialinstitutions

 

3

----

 

with operations in the Bank’s primary marketarea.

 

**Lending Activities**

 

***Loan Portfolio Composition.**** *The types ofloans that the Bank may originate are subject to federal and state laws andregulations.  Interest rates charged bythe Bank on loans are affected principally by the demand for such loans, thesupply of money available for lending purposes and the rates offered by itscompetitors.  These factors are, inturn, affected by general and economic conditions, monetary policies of thefederal government, including the Federal Reserve Board (“FRB”), legislativetax policies and governmental budgetary matters.

 

TheBank’s loan portfolio primarily consists of first mortgage loans secured byone- to four-family residences most of which are located in its primary marketarea.  At December 31, 2003, the Bank’sgross loan portfolio totaled $720.8 million, of which $467.0 million were one-to four-family residential mortgage loans, or 64.8% of total loans.  At such date, the remainder of the loanportfolio consisted of $52.2 million of multi-family loans, or 7.3% of totalloans; $109.4 million of commercial real estate loans, or 15.2% of total loans;$36.4 million of construction and land loans, or 5.0% of total loans; $22.6million of commercial loans, or 3.1% of total loans; and $33.3 million ofconsumer loans, or 4.6% of total loans, consisting of $27.5 million of homeequity lines of credit, $4.3 million of secured and unsecured personal loansand $1.5 million of automobile loans. The Bank sold loans totaling $20.8 million and $13.2 million during theyears ended December 31, 2003 and December 31, 2002, respectively.  At December 31, 2003, 39.0% of the Bank’smortgage loans had adjustable interest rates, most of which were indexed to theone year Constant Maturity Treasury (“CMT”) Index.

 

4

----

 

Thefollowing table sets forth the composition of the Bank’s loan portfolio indollar amounts and in percentages of the respective portfolios at the datesindicated.

 
|                       |   | **At  December 31,**   |    |
|----------------------------|--------|-----------------------------|---------|
|                       |   | **2003**                    |    | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                       |   | **Amount**                  |    | **Percent********of Total** |   | **Amount** |   | **Percent********of Total** |   | **Amount** |   | **Percent********of Total** |   | **Amount** |   | **Percent********of Total** |   | **Amount** |   | **Percent********of Total** |   |
|                       |   | **(Dollars  in thousands)** |    |
| Mortgage  loans:           |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One-  to four-family       |   | $                           | 466,931 |   | 64.8 | % | $ | 405,953 |   | 67.6 | % | $ | 375,452 |   | 69.6 | % | $ | 326,739 |   | 70.7 | % | $ | 283,300 |   | 71.2 | % |
| Multi-family               |   | 52,249                      |    | 7.3 |   | 42,498 |   | 7.1 |   | 58,093 |   | 10.8 |   | 50,965 |   | 11.0 |   | 44,843 |   | 11.3 |   |
| Commercial  real estate    |   | 109,426                     |    | 15.2 |   | 52,155 |   | 8.7 |   | 42,813 |   | 7.9 |   | 29,729 |   | 6.5 |   | 30,870 |   | 7.8 |   |
| Construction  and land     |   | 36,356                      |    | 5.0 |   | 41,323 |   | 6.9 |   | 16,285 |   | 3.0 |   | 16,025 |   | 3.5 |   | 13,981 |   | 3.5 |   |
| Total  mortgage loans      |   | 664,962                     |    | 92.3 |   | 541,929 |   | 90.3 |   | 492,643 |   | 91.3 |   | 423,458 |   | 91.7 |   | 372,994 |   | 93.8 |   |
| Other  loans:              |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Home  equity loans         |   | 27,497                      |    | 3.8 |   | 21,160 |   | 3.5 |   | 14,689 |   | 2.7 |   | 11,972 |   | 2.6 |   | 10,002 |   | 2.5 |   |
| Commercial                 |   | 22,603                      |    | 3.1 |   | 33,315 |   | 5.6 |   | 30,046 |   | 5.6 |   | 25,240 |   | 5.5 |   | 13,320 |   | 3.4 |   |
| Auto  loans                |   | 1,471                       |    | .2 |   | 1,116 |   | .2 |   | 764 |   | .1 |   | 615 |   | .1 |   | 484 |   | .1 |   |
| Loans  on savings accounts |   | 229                         |    | — |   | 1,017 |   | .1 |   | 335 |   | .1 |   | 216 |   | — |   | 421 |   | .1 |   |
| Other                      |   | 4,066                       |    | .6 |   | 1,889 |   | .3 |   | 1,160 |   | .2 |   | 455 |   | .1 |   | 556 |   | .1 |   |
| Total  other loans         |   | 55,866                      |    | 7.7 |   | 58,497 |   | 9.7 |   | 46,994 |   | 8.7 |   | 38,498 |   | 8.3 |   | 24,783 |   | 6.2 |   |
| Total  loans receivable    |   | 720,828                     |    | 100.0 | % | 600,426 |   | 100.0 | % | 539,637 |   | 100.0 | % | 461,956 |   | 100.0 | % | 397,777 |   | 100.0 | % |
| Less:                      |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred  loan fees, net   |   | 190                         |    |   |   | 247 |   |   |   | 311 |   |   |   | 280 |   |   |   | 225 |   |   |   |
| Allowance  for loan losses |   | 3,754                       |    |   |   | 3,141 |   |   |   | 2,255 |   |   |   | 1,881 |   |   |   | 1,545 |   |   |   |
| Loans  receivable, net     |   | $                           | 716,884 |   |   |   | $ | 597,038 |   |   |   | $ | 537,071 |   |   |   | $ | 459,795 |   |   |   | $ | 396,007 |   |   |   |

 

5

----

 

***Loan Originations.****  *The Bank’smortgage lending activities are conducted by its loan personnel operating atits eight branch offices as well as through participation and loan acquisitionprograms.  All loans originated by theBank are underwritten by the Bank pursuant to the Bank’s policies andprocedures.  The Bank originates bothadjustable-rate and fixed-rate mortgage loans, commercial loans, and consumerloans.  The Bank’s ability to originatefixed- or adjustable-rate loans is dependent upon the relative customer demandfor such loans, which is affected by the current and expected future level ofinterest rates.  It is the generalpolicy of the Bank to retain loans originated in its portfolio.

 

Duringthe years ended December 31, 2003 and 2002, the Bank originated $93.6 millionand $87.2 million of fixed-rate one- to four-family residential mortgage loans,respectively, and for the years ended December 31, 2003 and 2002, the Bankoriginated $62.5 million and $15.9 million of adjustable-rate one- tofour-family residential mortgage loans, respectively, all of which wereretained by the Bank.  Based upon theBank’s investment needs and market opportunities, the Bank participates andpurchases loans, consisting of one-to-four family, multi-family and commercialreal estate mortgage loans, and construction loans secured by property locatedin Illinois, southern Wisconsin and, to a lesser extent, in Minnesota, and had$167.6 million of purchased loan participation interests at December 31, 2003.

 

Thefollowing tables set forth the Bank’s loan originations, purchases andprincipal repayments for the periods indicated.  All loans originated by the Bank are generally held forinvestment.

 
|                                       |   | **For the  Year Ended December 31,** |    |
|--------------------------------------------|--------|-------------------------------------------|---------|
|                                       |   | **2003**                                  |    | **2002** |   | **2001** |   |
|                                       |   | **(In thousands)**                        |    |
| Gross loans (1):                           |   |                                      |    |   |   |   |   |
| Balance outstanding at beginning of period |   | $                                         | 600,426 |   | $ | 539,637 |   | $ | 461,956 |   |
| Loans originated (2):                      |   |                                      |    |   |   |   |   |
| One-to four-family residential             |   | 156,087                                   |    | 103,136 |   | 107,360 |   |
| Multi-family                               |   | 3,537                                     |    | 7,015 |   | 6,792 |   |
| Commercial real estate                     |   | 76,666                                    |    | 4,111 |   | 14,932 |   |
| Construction and land                      |   | 19,383                                    |    | 31,023 |   | 30,821 |   |
| Home equity                                |   | 27,402                                    |    | 18,240 |   | 13,231 |   |
| Commercial business                        |   | 8,915                                     |    | 9,102 |   | 28,932 |   |
| Auto loans                                 |   | 1,016                                     |    | 881 |   | 549 |   |
| Loans on savings accounts                  |   | 221                                       |    | 1,141 |   | 423 |   |
| Other                                      |   | 6,333                                     |    | 4,535 |   | 3,545 |   |
| Total loans originated                     |   | 299,560                                   |    | 179,184 |   | 206,585 |   |
| Loans purchased                            |   | 110,231                                   |    | 79,620 |   | 65,161 |   |
| Total loans originated and purchased       |   | 409,791                                   |    | 258,804 |   | 271,746 |   |
| Less:                                      |   |                                      |    |   |   |   |   |
| Principal repayments                       |   | (268,417                                  | )       | (178,008 | ) | (189,802 | ) |
| Loans sold                                 |   | (20,838                                   | )       | (13,217 | ) | (10,519 | ) |
| Transfers to real estate owned             |   | —                                    |    | (1,986 | ) | — |   |
| Change in loans in process                 |   | (134                                      | )       | (4,804 | ) | 6,256 |   |
| Total loans receivable at end of period    |   | $                                         | 720,828 |   | $ | 600,426 |   | $ | 539,637 |   |

 

----

(1)          Gross loans exclude unearned discounts,deferred loan fees and the allowance for loan losses.

(2)          Amounts for each period include loans inprocess at period end.

 

6

----

 

***Loan Maturity and Repricing.***  Thefollowing table shows the contractual maturity of the Bank’s loan portfolio atDecember 31, 2003.  The table does notinclude prepayments, scheduled principal amortization or repricing ofadjustable rate loans.  Prepayments andscheduled principal amortization on mortgage loans totaled $268.4 million,$178.0 million and $189.8 million for the years ended December 31, 2003,2002 and 2001, respectively.

** **
|                                |   | **At December 31, 2003**               |    |
|-------------------------------------|--------|----------------------------------------|---------|
|                                |   | **One- to********Four-********Family** |    | **Multi-********Family** |   | **Commercial  Real Estate** |   | **Construction********and Land** |   | **Home  Equity** |   | **Commercial********Business** |   | **Auto********Loans** |   | **Loans on********Savings********Accounts** |   | **Other** |   | **Total********Loans********Receivable** |   |
|                                |   | **(In thousands)**                     |    |
| Amounts  due:                       |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Within  one year                    |   | $                                      | 6,805   |   | $ | 6,012 |   | $ | 13,093 |   | $ | 7,658 |   | $ | 414 |   | $ | 5,472 |   | $ | 29 |   | $ | 119 |   | $ | 2,941 |   | $ | 42,543 |   |
| After  one year:                    |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| More  than one year tothree years   |   | 2,810                                  |    | 10,396 |   | 29,950 |   | 16,991 |   | 2,626 |   | 6,902 |   | 866 |   | 110 |   | 240 |   | 70,891 |   |
| More  than three years tofive years |   | 6,327                                  |    | 15,479 |   | 39,965 |   | 10,599 |   | 675 |   | 8,311 |   | 576 |   | — |   | 246 |   | 82,178 |   |
| More  than five years to 10Years    |   | 18,775                                 |    | 11,018 |   | 15,385 |   | 764 |   | 1,661 |   | 1,674 |   | — |   | — |   | 76 |   | 49,353 |   |
| More  than 10 years to 20Years.     |   | 153,264                                |    | 3,117 |   | 10,049 |   | 66 |   | 22,121 |   | 219 |   | — |   | — |   | 562 |   | 189,398 |   |
| More  than 20 years                 |   | 278,950                                |    | 6,227 |   | 984 |   | 278 |   | — |   | 25 |   | — |   | — |   | 1 |   | 286,465 |   |
| Total  due afterDecember  31, 2004  |   | 460,126                                |    | 46,237 |   | 96,333 |   | 28,698 |   | 27,083 |   | 17,131 |   | 1,442 |   | 110 |   | 1,125 |   | 678,285 |   |
| Total  amount due (gross)           |   | $                                      | 466,931 |   | $ | 52,249 |   | $ | 109,426 |   | $ | 36,356 |   | $ | 27,497 |   | $ | 22,603 |   | $ | 1,471 |   | $ | 229 |   | $ | 4,066 |   | 720,828 |   |
| Less:                               |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred  loan fees, net            |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 190 |   |
| Allowance  for loan losses          |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 3,754 |   |
| Total  loans, net                   |   |                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 716,884 |   |

 

Thefollowing table sets forth at December 31, 2003, the dollar amount of grossloans receivable contractually due after December 31, 2004, and whether suchloans have fixed interest rates or adjustable interest rates.

 
|                      |   | **Due After December 31, 2004** |    |
|---------------------------|--------|---------------------------------|---------|
|                      |   | **Fixed**                       |    | **Adjustable** |   | **Total** |   |
|                      |   | **(In thousands)**              |    |
| Mortgage loans:           |   |                            |    |   |   |   |   |
| One- to four-family       |   | $                               | 277,473 |   | $ | 182,653 |   | $ | 460,126 |   |
| Multi-family              |   | 22,320                          |    | 23,917 |   | 46,237 |   |
| Commercial real estate    |   | 63,732                          |    | 32,601 |   | 96,333 |   |
| Construction and land     |   | 26,191                          |    | 2,507 |   | 28,698 |   |
| Total mortgage loans      |   | 389,716                         |    | 241,678 |   | 631,394 |   |
| Home equity               |   | —                          |    | 27,083 |   | 27,083 |   |
| Commercial                |   | 11,353                          |    | 5,778 |   | 17,131 |   |
| Auto loans                |   | 1,253                           |    | 189 |   | 1,442 |   |
| Loans on savings accounts |   | 110                             |    | — |   | 110 |   |
| Other                     |   | 714                             |    | 411 |   | 1,125 |   |
| Total loans               |   | $                               | 403,146 |   | $ | 275,139 |   | $ | 678,285 |   |

 

***One- to Four-Family Lending. ***The Bank currently offers both fixed-rate andadjustable-rate mortgage (“ARM”) loans with maturities up to 30 years securedby one- to four-family residences which are generally located in the Bank’sprimary market area. One- to four-family mortgage loan originations aregenerally obtained from the Bank’s in-house loan representatives,

 

7

----

 

mortgage brokers, from existing or pastcustomers, through advertising, and through referrals from local builders, realestate brokers and attorneys.  AtDecember 31, 2003, the Bank’s one- to four-family mortgage loans totaled $467.0million, or 64.8%, of total loans.  Ofthe one- to four-family mortgage loans outstanding at that date, 60.3% werefixed-rate mortgage loans and 39.7% were ARM loans.

 

TheBank currently offers fixed-rate mortgage loans with terms from 10 to 30years.  These loans have generally beenpriced at current market rates for such loans. The Bank currently offers a number of ARM loans with terms of up to 30years and interest rates which adjust every one, two or three years from theoutset of the loan or which adjust annually after a two, three or five yearinitial fixed period.  The interestrates for the Bank’s ARM loans are indexed to the one-year CMT Index.  The Bank originates ARM loans with initiallydiscounted rates, often known as “teaser rates.”  The Bank’s ARM loans generally provide for periodic (not morethan 2%) and overall (not more than 6%) caps on the increase or decrease in theinterest rate at any adjustment date and over the life of the loan.  However, interest rates on the Bank’s residentialARM loans may never adjust to be less than the initial rate of interest chargedon any such loan.

 

Theorigination of adjustable-rate residential mortgage loans, as opposed tofixed-rate residential mortgage loans, helps reduce the Bank’s exposure toincreases in interest rates.  However,adjustable-rate loans generally pose credit risks not inherent in fixed-rateloans, primarily because as interest rates rise, the underlying payments of theborrower rise, thereby increasing the potential for default.  Periodic and lifetime caps on interest rateincreases help to reduce the risks associated with adjustable-rate loans butalso limit the interest rate sensitivity of such loans.

 

TheBank has also purchased one-to-four family first mortgage loans generally outof our primary market area.  As ofDecember 31, 2003, the Bank had $97.6 million of these loans.  In addition, the Bank sold loans totaling$20.8 million and $13.2 million for the years ended December 31, 2003 and 2002,respectively.

 

***Multi-Family and Commercial RealEstate Lending.***** **The Bank originates multi-family andcommercial real estate loans that are generally secured by five or more unitapartment buildings and properties used for business purposes such as smalloffice buildings or retail facilities located in the Bank’s primary marketarea.  The Bank’s multi-family andcommercial real estate underwriting policies provide that such real estateloans may be made in amounts up to 80% of the appraised value of the property,subject to the Bank’s current loans-to-one-borrower limit, which at December31, 2003 was $19.5 million.  The Bank’smulti-family and commercial real estate loans may be made with terms up to 25years and are offered with interest rates that adjust periodically.  In reaching its decision on whether to makea multi-family or commercial real estate loan, the Bank considers the netoperating income of the property, the borrower’s expertise, credit history andprofitability and the value of the underlying property. The Bank has generallyrequired that the properties securing these real estate loans have debt servicecoverage ratios (the ratio of earnings before debt service to debt service) ofat least 1.20x.  Environmental impactsurveys are generally required for all commercial real estate loans.  Generally, all multi-family and commercialreal estate loans made to corporations, partnerships and other businessentities require personal guarantees by the principals.  On an exception basis, the Bank may notrequire a personal guarantee on such loans depending on the creditworthiness ofthe borrower and the amount of the down payment and other mitigatingcircumstances.  The Bank continues toemphasize commercial real estate lending. The Bank’s multi-family real estate loan portfolio at December 31, 2003was $52.2 million, or 7.3% of total loans, and the Bank’s commercial realestate loan portfolio at such date was $109.4 million, or 15.2% of totalloans.  The largest multi-family orcommercial real estate loan in the Bank’s portfolio (excluding loanparticipation interests) at December 31, 2003 was a $4.9 millioncommercial real estate loan secured by a golf course located in Algonquin,Illinois.

 

TheBank also purchases up to 90% participation interests in multi-family,commercial real estate and construction loans secured by real estate, most ofwhich is located outside of the Bank’s primary market area in southernWisconsin and Minnesota.  Whendetermining whether to participate in such loans, the Bank will underwrite itsparticipation interest according to its own underwriting standards. The Bankwill generally hedge against participating in problematic loans byparticipating in those loans that have been in existence for at least one totwo years and, accordingly, possess an established payment history.  At December 31, 2003, the Bank had$26.1 million in multi-family real estate loan participation interests, or50.0% of multi-family loans and 3.6% of total loans.  In addition, the Bank had $43.9 million in commercial real estateloan participation interests as of the same date.

 

Loanssecured by multi-family and commercial real estate properties generally involvelarger principal amounts and a greater degree of risk than one- to four-familyresidential mortgage loans. Because payments on loans secured by multi-familyand commercial real estate properties are often dependent on successfuloperation or management of the properties, repayment of such

 

8

----

 

loans may be subject to adverse conditions inthe real estate market or the economy. The Bank seeks to minimize these risks through its underwritingstandards.

 

***Construction and Land Lending. ***The Bank originates fixed-rate constructionloans for the development of residential property primarily located in theBank’s market area.  Construction loansare offered primarily to experienced local developers operating in the Bank’sprimary market area and, to a lesser extent, to individuals for the constructionof their residence.  The majority of theBank’s construction loans are originated or participation interests purchasedprimarily to finance the construction of one- to four-family, owner-occupiedresidential real estate and multi-family real estate properties located in theBank’s primary market area as well as southern Wisconsin and Minnesota.  Construction loans are generally offeredwith terms up to 12 months and may be made in amounts up to 80% of theappraised value of the property, as improved. Construction loan proceeds are disbursed periodically in increments asconstruction progresses and as inspections by the Bank’s lending personnelwarrant.

 

TheBank also originates fixed-rate land loans to local developers for the purposeof developing the land for sale.  Suchloans are secured by a lien on the property, are limited to 75% of theappraised value of the secured property and have terms of up to threeyears.  The principal of the loan isreduced as lots are sold and released. The Bank’s land loans are generally secured by properties located in itsprimary market area.  Generally, if theborrower is a corporation, partnership or other business entity, personalguarantees by the principals are required.

 

TheBank originated $19.4 million, $31.0 million and $30.8 million of constructionand land loans for the years ended December 31, 2003, 2002 and 2001,respectively.  At December 31, 2003, theBank’s largest construction or land loan was a performing loan with a$8.2 million balance secured by 36 acres of vacant land for development inAlgonquin, Illinois.  This loan wasgranted to a joint venture, of which the Bank’s wholly-owned subsidiary, EFSService Corporation, is involved.  Formore information see the Subsidiary Activities section of this report.  At December 31, 2003, the Bank had $36.4million of construction and land loans, which amounted to 5.0% of the Bank’stotal loans.

 

Constructionand land financing is generally considered to involve a higher degree of creditrisk than long-term financing on improved, owner-occupied real estate.  Risk of loss on a construction loan isdependent largely upon the accuracy of the initial estimate of the property’svalue at completion of construction or development compared to the estimatedcost (including interest) of construction and other assumptions, including theestimated time to sell residential properties. If the estimate of value proves to be inaccurate, the Bank may beconfronted with a project, when completed, having a value that is insufficientto assure full repayment.

 

***Commercial Busines*****s*Lending. ***The Bank also originates commercial businessloans in the forms of term loans and lines of credit to small- and medium-sizedbusinesses operating in the Bank’s primary market area.  Equipment, leases, inventory, accountsreceivable, and marketable securities generally secure such loans; however, theBank also makes unsecured commercial business loans.  The maximum amount of a commercial business loan is limited bythe Bank’s loans-to-one-borrower limit which, at December 31, 2003, was $19.5million.  Depending on the collateralused to secure the loans, commercial loans are made in amounts up to 80% of thevalue of the property securing the loan. Term loans are generally offered with fixed rates of interest and termsof up to 10 years.  All term loans fullyamortize during the term of such loan. Business lines of credit have adjustable rates of interest and terms ofup to one year.  Business lines ofcredit adjust on a daily basis and are indexed to the prime rate as publishedin *The Wall Street Journal*.  The Bank also issues both secured andunsecured letters of credit to business customers of the Bank.  Acceptable collateral includes an assigneddeposit account with the Bank, real estate or marketable securities.  Letters of credit have a maximum term of 36months.

 

Inmaking commercial business loans, the Bank considers primarily the financialresources of the borrower, the borrower’s ability to repay the loan out of netoperating income, the Bank’s lending history with the borrower and the value ofthe collateral.  Generally, if theborrower is a corporation, partnership or other business entity, personalguarantees by the principals are required. However, personal guarantees may not be required on such loans dependingon the creditworthiness of the borrower and other mitigatingcircumstances.  The Bank continues toemphasize commercial business loans. The Bank’s largest commercial loan at December 31, 2003 was $2.0million.  At such date, the Bank had$13.7 million of unadvanced commercial lines of credit.  At December 31, 2003, the Bank had $22.6million of commercial business loans, which amounted to 3.1% of the Bank’stotal loans.  The Bank originated $8.9million, $9.1 million and $28.9 million in commercial business loans for theyears ended December 31, 2003, 2002 and 2001, respectively.

 

Unlikemortgage loans, which generally are made on the basis of the borrower’s abilityto make repayment from his or her

 

9

----

 

employment or other income, and are securedby real property which value tends to be more easily ascertainable, commercialloans are of higher risk and typically are made on the basis of the borrower’sability to make repayment from the cash flow of the borrower’s business.  As a result, the availability of funds forthe repayment of commercial loans may be substantially dependent on the successof the business itself.  Further, anycollateral securing such loans may depreciate over time, may be difficult toappraise and may fluctuate in value.

 

***Consumer Lending.***Consumer loans at December 31, 2003 amountedto $33.3 million, or 4.6% of the Bank’s total loans, and consistedprimarily of home equity lines of credit and, to a significantly lesser extent,secured and unsecured personal loans and new and used automobile loans.  Such loans are generally originated in theBank’s primary market area and generally are secured by real estate, depositaccounts, personal property and automobiles.

 

Substantiallyall of the Bank’s home equity lines of credit are secured by second mortgageson owner-occupied single-family residences located in the Bank’s primary marketarea.  At December 31, 2003, these loanstotaled $27.5 million, or 3.8% of the Bank’s total loans and 82.7% of consumerloans.  Home equity lines of creditgenerally have adjustable-rates of interest, which adjust on a monthlybasis.  The unused home equity lines ofcredit totaled $28.6 million at December 31, 2003.  The adjustable-rate of interest charged on such loans is indexedto the prime rate as reported in *The WallStreet Journal*.  Home equitylines of credit generally have an 18% lifetime limit on interest rates.  Generally, the maximum combined LTV ratio onhome equity lines of credit is 89.9%. The underwriting standards employed by the Bank for home equity lines ofcredit include a determination of the applicant’s credit history and anassessment of the applicant’s ability to meet existing obligations and paymentson the proposed loan and the value of the collateral securing the loan.  The stability of the applicant’s monthlyincome may be determined by verification of gross monthly income from primaryemployment and, additionally, from any verifiable secondary income.  Creditworthiness of the applicant is ofprimary consideration.

 

TheBank also originates other types of consumer loans consisting of secured andunsecured personal loans and new and used automobile loans.  Secured personal loans are generally securedby deposit accounts.  Unsecured personalloans generally have a maximum borrowing limitation of $25,000 and generallyrequire a debt ratio of 38%.  Automobileloans have a maximum borrowing limitation of 80% of the sale price of theautomobile, except that existing customers of the Bank who meet certainunderwriting criteria may borrow up to 100% of the sale price of theautomobile.  At December 31, 2003,personal loans (both secured and unsecured) totaled $4.3 million or 0.6% of theBank’s total loans and 12.9% of consumer loans; and automobile loans totaled$1.5 million, or 0.2% of total loans and 4.4% of consumer loans.

 

Withrespect to automobile loans, full-time employees of the Bank, other thanexecutive officers and directors, who satisfy certain lending criteria and thegeneral underwriting standards of the Bank receive an interest rate 1% lessthan that which is offered to the general public; provided, however, that thediscounted interest rate is at no time less than 75 basis points above theBank’s overall cost of funds, rounded to the highest quarter percentage point.

 

Loanssecured by rapidly depreciable assets such as automobiles or that are unsecuredentail greater risks than one- to four-family residential mortgage loans.  In such cases, repossessed collateral for adefaulted loan may not provide an adequate source of repayment of theoutstanding loan balance, since there is a greater likelihood of damage, lossor depreciation of the underlying collateral. Further, consumer loan collections on these loans are dependent on theborrower’s continuing financial stability and, therefore, are more likely to beadversely affected by job loss, divorce, illness or personal bankruptcy.  Finally, the application of various federaland state laws, including federal and state bankruptcy and insolvency laws, maylimit the amount which can be recovered on such loans in the event of adefault.

 

***Loans-to-One Borrower Limitations.***** **The IllinoisSavings Bank Act imposes limitations on the aggregate amount of loans that anIllinois chartered savings bank can make to any one borrower.  Under the Illinois Savings Bank Act thepermissible amount of loans-to-one borrower is the greater of $500,000 (for asavings bank meeting its minimum capital requirements) or 25% of a savingsbank’s total capital plus general loan loss reserves.  In addition, a savings bank may make loans in an amount equal toan additional 10% of the savings bank’s capital plus general loan loss reservesif the loans are 100% secured by readily marketable collateral.  Under Illinois law, a savings bank’s capitalconsists of capital stock and noncumulative perpetual preferred stock, relatedpaid-in capital, retained earnings and other forms of capital deemed to bequalifying capital by the Federal Deposit Insurance Corporation (the “FDIC”).  Illinois law also permits an institutionwith capital in excess of 6% of assets to request permission of the IllinoisCommissioner of Banks and Real Estate (the “Commissioner”) to lend up to 30% ofthe institution’s total capital and general loan loss reserves to one borrowerfor the development of residential housing properties within Illinois.  At December 31, 2003, the Bank’s ordinarylimit on loans-to-one borrower under the Illinois Savings Bank Act was $19.5million.

 

10

----

 

The 30% limitation equaled $23.4 million atthat date.  At December 31, 2003, theBank’s five largest groups of loans-to-one borrower ranged from $4.8 million to$8.6 million, with the largest single loan in such groups being a $8.6 millionloan secured by land located in Algonquin, Illinois.  At December 31, 2003, there were no loans exceeding the 25%limitation.  A substantial portion ofeach large group of loans is secured by real estate.

 

***Loan Approval Procedures andAuthority.***** **The Board of Directors establishes thelending policies and loan approval limits of the Bank.  The Board of Directors has established theLoan Committee (the “Committee”) of the Board, which considers and approves allloans within its designated authority as established by the Board.  In addition, the Board of Directors hasauthorized certain officers of the Bank (the “designated officers”) to considerand approve all loans within their designated authority as established by theBoard.

 

***Underwriting. ***With respect to loans originated by the Bank,it is the general policy of the Bank to retain such loans in itsportfolio.  The Bank does not have apolicy of underwriting its loans in conformance with the Federal NationalMortgage Association (“FNMA”) or Federal Home Loan Mortgage Corporation(“FHLMC”) guidelines.  Upon receipt of acompleted loan application from a prospective borrower, a credit report isordered and certain other information is verified by an independent creditagency.  If necessary, additionalfinancial information may be required. An appraisal of real estate intended to secure a proposed loan generallyis required to be performed by the Bank’s “in-house” appraisers or outsideappraisers approved by the Bank.  Forproposed mortgage loans, the Board annually approves independent appraisersused by the Bank and approves the Bank’s appraisal policy.  The Bank’s policy is to obtain title andhazard insurance on all mortgage loans and flood insurance when necessary andthe Bank may require borrowers to make payments to a mortgage escrow accountfor the payment of property taxes.

 

AtDecember 31, 2003, the Bank’s ratio of nonperforming loans to total loans was0.39%, and its ratio of nonperforming assets to total assets was 0.31%.  The Bank did not have any real estate ownedat December 31, 2003.  Net charge-offsamounted to $14,000 in 2002.  There wereno charge-offs in 2003.  See “DelinquentLoans, Classified Assets and Real Estate Owned.”

 

TheBank’s one- to four-family lending policy permits the investment in mortgage loanswhere the borrower’s monthly mortgage and prorated real estate tax paymentswere less than 32% of the borrower’s gross income, and where the borrower’stotal monthly obligations did not exceed 43% of the borrower’s gross income.  It is also the general practice of the Banknot to require private mortgage insurance, though the Bank retains the right torequire such insurance on any loan with a loan to value ratio in excess of80.0%.  All loans with loan to value ratiosin excess of 89.9% must have private mortgage insurance, with the exception ofits “First-Time Home Buyer” and “American Dream Loan” programs.  In addition, the Bank had historicallypriced its one- to four- family loans with loan to value ratios of between80.0% and 89.9% at 25 basis points higher than loans with loan to value ratiosof less than 80.0%, again in an effort to control the origination of suchloans.  The Bank believes that itsunderwriting standards are sufficient to allow it to adequately assess thecreditworthiness of prospective borrowers. There can be no assurances, however, that increasing the permissibledebt coverage ratios and loan-to-value ratios permitted for borrowers will notresult in the Bank experiencing increased delinquencies and defaults on loans.

 

**Delinquent Loans, Classified Assets and Real Estate Owned**

 

***Delinquencies, Classified Assets andReal Estate Owned.***** **Reports listing all delinquent accounts aregenerated and reviewed by management on a monthly basis and the Board ofDirectors performs a monthly review of all loans or lending relationshipsdelinquent 45 days or more.  Theprocedures taken by the Bank with respect to delinquencies vary depending onthe nature of the loan, period and cause of delinquency and whether theborrower is habitually delinquent.  Whena borrower fails to make a required payment on a loan, the Bank takes a numberof steps to have the borrower cure the delinquency and restore the loan tocurrent status.  The Bank generallysends the borrower a written notice of non-payment after the loan is first pastdue.  The Bank’s guidelines provide thattelephone, written correspondence and/or face-to-face contact will be attemptedto ascertain the reasons for delinquency and the prospects of repayment.  When contact is made with the borrower atany time prior to foreclosure, the Bank will attempt to obtain full payment,offer to work out a repayment schedule with the borrower to avoid foreclosureor, in some instances, accept a deed in lieu of foreclosure.  In the event payment is not then received orthe loan not otherwise satisfied, additional letters and telephone callsgenerally are made.  If the loan isstill not brought current or satisfied and it becomes necessary for the Bank totake legal action, which typically occurs after a loan is 90 days or moredelinquent, the Bank will commence foreclosure proceedings against any realproperty that secured the loan.  If aforeclosure action is instituted and the loan is not brought current, paid infull, or refinanced before the foreclosure sale, the property securing the loangenerally is sold at foreclosure and, if purchased by the Bank, becomes realestate owned.

 

11

----

 

Federalregulations and the Bank’s internal policies require that the Bank utilize aninternal asset classification system as a means of reporting problem andpotential problem assets.  The Bankcurrently classifies problem and potential problem assets as “Substandard,”“Doubtful” or “Loss” assets.  An assetis considered Substandard if it is inadequately protected by the current networth and paying capacity of the obligor or of the collateral pledged, ifany.  Substandard assets include thosecharacterized by the distinct possibility that the Bank will sustain some lossif the deficiencies are not corrected. Assets classified as Doubtful have all of the weaknesses inherent inthose classified Substandard with the added characteristic that the weaknessespresent make collection or liquidation in full, on the basis of currentlyexisting facts, conditions and values, highly questionable and improbable.Assets classified as Loss are those considered uncollectible and of such littlevalue that their continuance as assets, without the establishment of a specificloss reserve, is not warranted.  Assetswhich do not currently expose the Bank to a sufficient degree of risk towarrant classification in one of the aforementioned categories but possessweaknesses are required to be designated “Special Mention.”

 

Whenthe Bank classifies one or more assets, or portions thereof, as Substandard orDoubtful, it establishes a specific allowance for probable loan losses in anamount deemed appropriate by management. When the Bank classifies one or more assets, or portions thereof, asLoss, it either establishes a specific allowance for losses equal to 100% ofthe amount of the assets so classified or charges off such amount.

 

TheBank’s determination as to the classification of its assets and the amount ofits allowances for loan losses is subject to review by the FDIC andCommissioner, which can order the establishment of additional general orspecific loss allowances.  The FDIC, inconjunction with the other federal banking agencies, adopted an interagencypolicy statement on the allowance for loan and lease losses.  The policy statement provides guidance forfinancial institutions on both the responsibilities of management for theassessment and establishment of adequate allowances and guidance for bankingagency examiners to use in determining the adequacy of general valuationguidelines.  Generally, the policystatement recommends that institutions have effective systems and controls toidentify, monitor and address asset quality problems; that management has analyzedall significant factors that affect the collectibility of the portfolio in areasonable manner; and that management has established acceptable allowanceevaluation processes that meet the objectives set forth in the policystatement.   While the Bank believesthat it has established an adequate allowance for loan losses, there can be noassurance that regulators, in reviewing the Bank’s loan portfolio, will notrequest the Bank to increase at that time its allowance for loan losses,thereby negatively affecting the Bank’s financial condition and earnings atthat time.  Although management believesthat adequate specific and general loan loss allowances have been established,future provisions are dependent upon future events such as loan growth and portfoliodiversification and, as such, further additions to the level of the allowancefor loan losses may become necessary.

 

TheBank reviews and classifies its assets on a quarterly basis and the Board ofDirectors reviews the results of the reports on a quarterly basis.  The Bank classifies its assets in accordancewith the management guidelines described above.  At December 31, 2003, the Bank had $2.8 million of assets,representing 0.39% of loans receivable, or 0.31%, of assets, designated asSubstandard.  No loans were classifiedas Doubtful, Loss, or Special Mention. Loans classified Special Mention may have been delinquent in the past orhad other weaknesses, however, in management’s judgment risk of loss is notprobable.  This classificationrepresents a watch list of loans for management to closely monitor.

 

12

----

 

Thefollowing tables set forth delinquencies in the Bank’s loan portfolio past due60 days or more:

 
|                                |   | **At  December 31, 2003**         |   | **At  December 31, 2002**               |   |
|-------------------------------------|--------|-----------------------------------|--------|----------------------------------------------|--------|
|                                |   | **60-89  Days**                   |   | **90  Days or More**                         |   | **60-89  Days** |   | **90  Days or More** |   |
|                                |   | **Number********of********Loans** |   | **Principal********Balance********of Loans** |   | **Number  of********Loans** |   | **Principal********Balance********of Loans** |   | **Number********of********Loans** |   | **Principal********Balance********of Loans** |   | **Number********of********Loans** |   | **Principal********Balance********of Loans** |   |
|                                |   | **(Dollars  in thousands)**       |   |
|                                |   |                              |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One- to four-family                 |   | 8                                 |   | $                                            | 1,014  |   | 9 |   | $ | 853 |   | 5 |   | $ | 354 |   | 7 |   | $ | 865 |   |
| Commercial real estate              |   | —                            |   | —                                       |   | 1 |   | 505 |   | — |   | — |   | — |   | — |   |
| Consumer                            |   | 5                                 |   | 18                                           |   | 3 |   | 14 |   | — |   | — |   | 3 |   | 47 |   |
| Home equity                         |   | 5                                 |   | 166                                          |   | 2 |   | 77 |   | 1 |   | 11 |   | 2 |   | 126 |   |
| Commercial business                 |   | 1                                 |   | 24                                           |   | 6 |   | 1,273 |   | — |   | — |   | 1 |   | 39 |   |
| Total                               |   | 19                                |   | $                                            | 1,222  |   | 21 |   | $ | 2,722 |   | 6 |   | $ | 365 |   | 13 |   | $ | 1,077 |   |
|                                |   |                              |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Delinquent loans to total loans (1) |   |                              |   | 0.17                                         | %      |   |   | 0.38 | % |   |   | 0.06 | % |   |   | 0.18 | % |

 
|                                |   | **At  December 31, 2001**    |   |
|-------------------------------------|--------|-----------------------------------|--------|
|                                |   | **60-89  Days**                   |   | **90  Days or More** |   |
|                                |   | **Number********of********Loans** |   | **Principal********Balance********of Loans** |   | **Number********of********Loans** |   | **Principal********Balance********of Loans** |   |
|                                |   | **(Dollars  in thousands)**       |   |
|                                |   |                              |   |   |   |   |   |   |   |
| One- to four-family                 |   | 11                                |   | $ | 1,026 |   | 7 |   | $ | 620 |   |
| Commercial real estate              |   | —                            |   | — |   | 1 |   | 1,623 |   |
| Consumer                            |   | 3                                 |   | 12 |   | — |   | — |   |
| Home equity                         |   | 3                                 |   | 118 |   | 1 |   | 35 |   |
| Commercial business                 |   | 2                                 |   | 39 |   | 1 |   | 363 |   |
|                                |   |                              |   |   |   |   |   |   |   |
| Total                               |   | 19                                |   | $ | 1,195 |   | 10 |   | $ | 2,641 |   |
|                                |   |                              |   |   |   |   |   |   |   |
| Delinquent loans to total loans (1) |   |                              |   | 0.22 | % |   |   | 0.49 | % |

 

----

(1)               Total loans represent gross loans receivableless deferred loan fees and unearned discounts.

 

***Nonperforming Assets.***** Thefollowing table sets forth information regarding nonperforming loans andREO.  It is the general policy of theBank to cease accruing interest on loans 90 days or more past due and to fullyreserve for all previously accrued interest. For each of the five years ended December 31, 2003, the amount ofadditional interest income that would have been recognized on non-accrual loansif such loans had continued to perform in accordance with their contractualterms was $82,000 $198,000, $187,000, $89,000, and $46,000, respectively.

 

13

----

 
|                                                   |   | **At December 31,**   |   |
|--------------------------------------------------------|--------|----------------------------|--------|
|                                                   |   | **2003**                   |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                   |   | **(Dollars in thousands)** |   |
| Nonperforming loans:                                   |   |                       |   |   |   |   |   |   |   |   |   |
| Mortgage loans:                                        |   |                       |   |   |   |   |   |   |   |   |   |
| One- to four-family                                    |   | $                          | 853    |   | $ | 865 |   | $ | 547 |   | $ | 864 |   | $ | 1,042 |   |
| Multi-family                                           |   | —                     |   | — |   | — |   | — |   | — |   |
| Commercial real estate                                 |   | 505                        |   | — |   | 1,623 |   | 3,505 |   | 226 |   |
| Total mortgage loans                                   |   | 1,358                      |   | 865 |   | 2,170 |   | 4,369 |   | 1,268 |   |
| Other loans:                                           |   |                       |   |   |   |   |   |   |   |   |   |
| Home equity                                            |   | 89                         |   | 126 |   | — |   | — |   | — |   |
| Commercial business loans                              |   | 1,297                      |   | 1,358 |   | 402 |   | 148 |   | — |   |
| Auto loans                                             |   | 22                         |   | 8 |   | 8 |   | 15 |   | — |   |
| Other                                                  |   | 1                          |   | 39 |   | — |   | — |   | 2 |   |
| Total other loans                                      |   | 1,409                      |   | 1,531 |   | 410 |   | 163 |   | 2 |   |
| Total nonperforming loans                              |   | 2,767                      |   | 2,396 |   | 2,580 |   | 4,532 |   | 1,270 |   |
| Real estate owned                                      |   | —                     |   | 1,986 |   | — |   | 540 |   | 168 |   |
| Total nonperforming assets                             |   | $                          | 2,767  |   | $ | 4,382 |   | $ | 2,580 |   | $ | 5,072 |   | $ | 1,438 |   |
| Nonperforming loans as a percent of loans (1)          |   | 0.38                       | %      | 0.40 | % | 0.48 | % | 0.98 | % | 0.32 | % |
| Nonperforming assets as a percent of total assets  (2) |   | 0.31                       | %      | 0.56 | % | 0.38 | % | 0.87 | % | 0.28 | % |

 

----

(1)          Loans receivable, gross.

(2)          Nonperforming assets consist of nonperformingloans and REO.

 

Nonperformingloans totaled $2.8 million as of December 31, 2003, and included nine one- tofour-family loans, with an aggregate balance of $853,000, one commercial realestate loan totaling $505,000, seven commercial business loans totaling $1.3million, four automobile loans totaling $22,000, one consumer loan totaling $1,000and three home equity lines of credit totaling $89,000.

 

**Allowance for Loan Losses – Critical Accounting Policy**

 

Theallowance for loan losses is considered by management to be a criticalaccounting policy.  The allowance forloan losses is maintained through provisions for loan losses based onmanagement’s on-going evaluation of the risks inherent in its loan portfolio inconsideration of the trends in its loan portfolio, the national and regionaleconomies and the real estate market in the Bank’s primary lending area. Theallowance for loan losses is maintained at an amount management considersadequate to cover probable losses in its loan portfolio, based on informationcurrently known to management. The Bank’s loan loss allowance determinations alsoincorporate factors and analyses which consider the probable principal lossassociated with the loan, costs of acquiring the property securing the loanthrough foreclosure or deed in lieu of foreclosure.  While management estimates loan losses using the best availableinformation, no assurance can be given that future additions to the allowancewill not be necessary based on changes in economic and real estate marketconditions, further information obtained regarding problem loans,identification of additional problem loans and other factors, both within andoutside of management’s control.

 

Managementcalculates a loan loss allowance sufficiency analysis quarterly based upon theloan portfolio composition, asset classifications, loan-to-value ratios, impairmentsin the loan portfolio and other factors. The analysis is compared to actual losses, peer group comparisons andeconomic conditions.  As of December 31,2003, the Bank’s allowance for loan losses was $3.8 million, or 0.52%, of totalloans and 135.7% of nonperforming loans as compared to $3.1 million, or 0.53%,of total loans and 131.1% of nonperforming loans as of December 31, 2002.  The Bank had total nonperforming loans of$2.8 million at December 31, 2003 as compared to $2.4 million at December 31,2002 and nonperforming loans to total loans of 0.39% and 0.40% at December 31,2003 and 2002, respectively.  The Bankwill continue to monitor and modify its allowance for loan losses as conditionsdictate.  Management believes that,based on information available at December 31, 2003, the Bank’s allowance forloan losses was adequate to cover probable losses inherent in its loanportfolio at that time.  Based upon theBank’s plan to increase its emphasis on non-one- to four-family mortgagelending which consist of secured commercial loans which are generallyconsidered to involve a higher degree of risk than one- to four-family mortgagelending, the Bank has and may continue to further

 

14

----

 

increase its allowance for loan losses overfuture periods depending upon the then current conditions.  The percentage of one- to four-family loansto total loans decreased to 64.8% at December 31, 2003 from 67.6% at December31, 2002.  At the same time, thepercentage of commercial real estate loans to total loans increased to 15.2% atDecember 31, 2003 from 8.7% at December 31, 2002.  However, no assurances can be given that the Bank’s level ofallowance for loan losses will be sufficient to cover loan losses incurred bythe Bank or that future adjustments to the allowance for loan losses will notbe necessary if economic and other conditions differ substantially from theeconomic and other conditions used by management to determine the current levelof the allowance for loan losses.  Inaddition, the FDIC and the Commissioner, as an integral part of theirexamination processes, periodically review the Bank’s allowance for loanlosses.  Such agencies may require theBank to make additional provisions for estimated loan losses based uponjudgments different from those of management.

 

Thefollowing table sets forth activity in the Bank’s allowance for loan losses forthe periods set forth in the table.

 
|                                                           |   | **At or For the Year Ended December 31,** |   |
|----------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                           |   | **2003**                                       |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                                           |   | **(Dollars in thousands)**                     |   |
|                                                           |   |                                           |   |   |   |   |   |   |   |   |   |
| Balance at beginning of year                                   |   | $                                              | 3,141  |   | $ | 2,255 |   | $ | 1,881 |   | $ | 1,545 |   | $ | 1,373 |   |
| Provision for loan losses                                      |   | 613                                            |   | 900 |   | 500 |   | 363 |   | 211 |   |
| Charge-offs                                                    |   | —                                         |   | (16 | ) | (126 | ) | (28 | ) | (41 | ) |
| Recoveries                                                     |   | —                                         |   | 2 |   | — |   | 1 |   | 2 |   |
| Balance at end of year                                         |   | $                                              | 3,754  |   | $ | 3,141 |   | $ | 2,255 |   | $ | 1,881 |   | $ | 1,545 |   |
| Allowance for loan losses as a percent of loans (1)            |   | 0.52                                           | %      | 0.52 | % | 0.42 | % | 0.41 | % | 0.39 | % |
| Allowance for loan losses as a percent of  nonperforming loans |   | 135.7                                          | %      | 131.1 | % | 87.4 | % | 41.5 | % | 112.7 | % |

 

----

(1)          Loansreceivable, gross.

 

15

----

 

The following tables set forth the Bank’spercent of allowance for loan losses to total allowance and the percent ofloans to total loans in each of the categories listed at the dates indicated.

 
|                           |   | **At December 31,**   |   |
|--------------------------------|--------|----------------------------|--------|
|                           |   | **2003**                   |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                           |   | **Amount**                 |   | **Percent of********Allowance********to Total********Allowance** |   | **Percent of  Loans in********Each********Category to  Total  Loans** |   | **Amount** |   | **Percent of********Allowance********to Total********Allowance** |   | **Percent of  Loans in********Each********Category to  Total  Loans** |   | **Amount** |   | **Percent of********Allowance********to Total********Allowance** |   | **Percent of  Loans in********Each********Category to  Total  Loans** |   | **Amount** |   | **Percent of********Allowance********to Total********Allowance** |   | **Percent of  Loans in********Each********Category to  Total  Loans** |   | **Amount** |   | **Percent of********Allowance********to Total********Allowance** |   | **Percent of  Loans in********Each********Category to  Total  Loans** |   |
|                           |   | **(Dollars in thousands)** |   |
|                           |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One- to four-family            |   | $                          | 987    |   | 26.3 | % | 64.8 | % | $ | 838 |   | 26.7 | % | 67.6 | % | $ | 765 |   | 33.9 | % | 69.6 | % | $ | 676 |   | 35.9 | % | 70.7 | % | $ | 592 |   | 38.4 | % | 71.2 | % |
| Multi-family                   |   | 157                        |   | 4.2 |   | 7.3 |   | 118 |   | 3.7 |   | 7.1 |   | 158 |   | 7.0 |   | 10.8 |   | 154 |   | 8.2 |   | 11.0 |   | 147 |   | 9.5 |   | 11.3 |   |
| Commercial real estate         |   | 1,094                      |   | 29.1 |   | 15.2 |   | 678 |   | 21.6 |   | 8.7 |   | 352 |   | 15.6 |   | 7.9 |   | 437 |   | 23.2 |   | 6.5 |   | 318 |   | 20.6 |   | 7.8 |   |
| Construction and land          |   | 363                        |   | 9.7 |   | 5.0 |   | 422 |   | 13.4 |   | 6.9 |   | 131 |   | 5.8 |   | 3.0 |   | 158 |   | 8.4 |   | 3.5 |   | 127 |   | 8.3 |   | 3.5 |   |
| Home equity                    |   | 283                        |   | 7.5 |   | 3.8 |   | 223 |   | 7.1 |   | 3.5 |   | 147 |   | 6.5 |   | 2.7 |   | 120 |   | 6.4 |   | 2.6 |   | 100 |   | 6.5 |   | 2.5 |   |
| Commercial business loans      |   | 698                        |   | 18.6 |   | 3.1 |   | 666 |   | 21.2 |   | 5.6 |   | 575 |   | 25.5 |   | 5.6 |   | 276 |   | 14.7 |   | 5.5 |   | 147 |   | 9.6 |   | 3.4 |   |
| Auto loans                     |   | 33                         |   | 0.9 |   | 0.2 |   | 24 |   | 0.8 |   | 0.2 |   | 17 |   | 0.8 |   | 0.1 |   | 15 |   | 0.8 |   | 0.1 |   | 10 |   | 0.2 |   | 0.1 |   |
| Loans on savings accounts      |   | —                     |   | — |   | — |   | — |   | — |   | 0.1 |   | — |   | — |   | 0.1 |   | — |   | — |   | — |   | — |   | — |   | 0.1 |   |
| Other                          |   | 44                         |   | 1.2 |   | 0.6 |   | 26 |   | 0.8 |   | 0.3 |   | 24 |   | 1.1 |   | 0.2 |   | 9 |   | 0.5 |   | 0.1 |   | 47 |   | 3.1 |   | 0.1 |   |
| Unallocated                    |   | 95                         |   | 2.5 |   | — |   | 146 |   | 4.7 |   | — |   | 86 |   | 3.8 |   | — |   | 36 |   | 1.9 |   | — |   | 57 |   | 3.8 |   | — |   |
| Total allowance forloan losses |   | $                          | 3,754  |   | 100.0 | % | 100.0 | % | $ | 3,141 |   | 100.0 | % | 100.0 | % | $ | 2,255 |   | 100.0 | % | 100.0 | % | $ | 1,881 |   | 100.0 | % | 100.0 | % | $ | 1,545 |   | 100.0 | % | 100.0 | % |
|                                |        |                            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

16

----

 

***Real Estate Owned.***** **At December31, 2003, the Bank did not have any real estate owned (“REO”).  When the Bank acquires property throughforeclosure or deed in lieu of foreclosure, it is initially recorded at thelower of the recorded investment in the corresponding loan or the fair value ofthe related assets at the date of foreclosure, less costs to sell.  Thereafter, if there is a furtherdeterioration in value, the Bank provides for a specific valuation allowanceand charges operations for the diminution in value.

 

***Real Estate Held For Development.***  OnJune 19, 2002, EFS Service Corporation, a wholly-owned subsidiary of the Bank,acquired approximately 16 acres of vacant land for the development of 29single-family home-sites located in West Dundee, Illinois.  The investment in this project totaled $4.2million as of December 31, 2003.  All improvementsto the land have been made.  Inaddition, there have been no sales and there were two model homes underconstruction as of the same date.

 

### **Investment Activities**

 

TheBoard of Directors sets the investment policy and procedures of the Bank.  This policy generally provides thatinvestment decisions will be made based on the safety of the investment,liquidity requirements of the Bank and, to a lesser extent, potential return onthe investments.  In pursuing theseobjectives, the Bank considers the ability of an investment to provide earningsconsistent with factors of quality, maturity, marketability and riskdiversification.  While the Board ofDirectors has final authority and responsibility for the securities investmentportfolio, the Bank has established an Investment Committee comprised of fiveDirectors to supervise the Bank’s investment activities.  The Bank’s Investment Committee meets atleast quarterly and evaluates all investment activities for safety andsoundness, adherence to the Bank’s investment policy, and assurance thatauthority levels are maintained.

 

TheBank currently does not participate in hedging programs, interest rate swaps,or other activities involving the use of derivative financial instruments.  Similarly, the Bank does not invest inmortgage-related securities which are deemed to be “high risk,” or purchasebonds which are not rated investment grade.

 

***Mortgage-Backed Securities. ***The Bank currently purchases mortgage-backedsecurities in order to:  (i) generatepositive interest rate spreads with minimal administrative expense; and (ii)lower its credit risk as a result of the guarantees provided by FHLMC, FNMA,and the Government National Mortgage Association (“GNMA”).  The Bank invests in mortgage-backedsecurities insured or guaranteed by FNMA, FHLMC and GNMA.  At December 31, 2003, mortgage-backedsecurities totaled $10.2 million, or 1.1%, of total assets and 1.2% of totalinterest earning assets, all of which was classified asavailable-for-sale.  At December 31, 2003,14.0% of the mortgage-backed securities were backed by adjustable-rate loansand 86.0% were backed by fixed-rate loans. The mortgage-backed securities portfolio had coupon rates ranging from4.0% to 10.0% and had a weighted average yield of 4.92% at December 31, 2003.

 

Mortgage-backed securities are created by the poolingof mortgages and issuance of a security with an interest rate that is less thanthe interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interestin a pool of single-family or multi-family mortgages, although the Bank focusesits investments on mortgage-backed securities backed by single-familymortgages.  The issuers of suchsecurities (generally U.S. Government agencies and government sponsoredenterprises, including FNMA, FHLMC and GNMA) pool and resell the participationinterests in the form of securities to investors such as the Bank and guaranteethe payment of principal and interest to investors.  Mortgage-backed securities generally yield less than the loansthat underlie such securities because of the cost of payment guarantees andcredit enhancements.  In addition,mortgage-backed securities are usually more liquid than individual mortgageloans and may be used to collateralize certain liabilities and obligations ofthe Bank.  Investments inmortgage-backed securities involve a risk that actual prepayments will begreater than estimated prepayments over the life of the security, which mayrequire adjustments to the amortization of any premium or accretion of anydiscount relating to such instruments thereby reducing the net yield on suchsecurities.  There is also reinvestmentrisk associated with the cash flows from such securities or in the event theissuer redeems such securities.  Inaddition, the market value of such securities may be adversely affected bychanges in interest rates.  The Bankestimates prepayments for its mortgage-backed securities at purchase to ensurethat prepayment assumptions are reasonable considering the underlyingcollateral for the mortgage-backed securities at issue and current mortgageinterest rates and to determine the yield and estimated maturity of itsmortgage-backed security portfolio.  Ofthe Bank’s $10.2 million mortgage-backed securities portfolio at December 31,2003, $34,000 with a weighted average yield of 7.63% had contractual maturitieswithin five years and $10.1 million with a weighted average yield of 4.93% hadcontractual maturities over five years. However, the actual maturity of a mortgage-backed security may be lessthan its stated maturity due to prepayments of the underlying mortgages.  Prepayments that are faster than anticipatedmay shorten the life of the security and may result in a loss of any premiumspaid and thereby reduce the net yield on such securities.  Although prepayments of underlying mortgagesdepend on many factors, the difference between the interest rates on theunderlying mortgages and the prevailing mortgage interest rates generally isthe most significant determinant of the rate of prepayments.  During periods of declining mortgageinterest rates, refinancing generally increases and accelerates the prepaymentof the underlying mortgages and the related security.  Under such circumstances, the Bank may be subject to reinvestmentrisk because, to the

 

17

----

 

extent that the Bank’smortgage-backed securities prepay faster than anticipated, the Bank may not beable to reinvest the proceeds of such repayments and prepayments at acomparable rate.

 

***U.S. Government Obligations. ***At December 31, 2003, the Bank’s U.S.Government securities portfolio totaled $36.1 million, all of which wereclassified as available-for-sale.  Suchportfolio primarily consists of medium-term (maturities of three to fifteenyears) securities.

 

***Municipal Securities.***  AtDecember 31, 2003, the Bank’s municipal security portfolio totaled $33.7million and was classified as available-for-sale.  This portfolio consists of general obligations issued bymunicipalities.

 

***Equity Investments. ***At December 31, 2003, the Bank’s equityinvestment portfolio totaled $15.5 million, all of which were classified asavailable-for-sale.  The portfolioconsists of $100,000 of common stock and $200,000 of preferred stock in a smallprivately held company specializing in interest rate risk management and website design consulting and $10.2 million and $5.0 million of FNMA and FHLMCpreferred stock, respectively.

 

***Corporate Bonds. ***At December 31, 2003, the Bank’s corporatebond portfolio totaled $5.4 million, all of which were classified asavailable-for-sale.  This portfolioconsists of highly rated corporate debt issuances.

 

Thefollowing table sets forth the composition of the carrying value of the Bank’savailable-for-sale investment and mortgage-backed securities portfolios indollar amounts and in percentages at the dates indicated:

 
|                             |   | **At  December 31,**   |    |
|----------------------------------|--------|-----------------------------|---------|
|                             |   | **2003**                    |    | **2002** |   | **2001** |   |
|                             |   | **Amount**                  |    | **Percent  of********Total** |   | **Amount** |   | **Percent  of********Total** |   | **Amount** |   | **Percent  of********Total** |   |
|                             |   | **(Dollars  in thousands)** |    |
| Investment securities:           |   |                        |    |   |   |   |   |   |   |   |   |   |   |
|                             |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| U.S. Government obligations      |   | $                           | 36,064  |   | 35.7 | % | $ | 32,842 |   | 31.8 | % | $ | 38,288 |   | 46.4 | % |
| Equity investments               |   | 15,512                      |    | 15.4 |   | 10,521 |   | 10.2 |   | 7,277 |   | 8.8 |   |
| Municipal securities             |   | 33,650                      |    | 33.4 |   | 35,608 |   | 34.5 |   | 23,050 |   | 28.0 |   |
| Corporate bonds                  |   | 5,430                       |    | 5.4 |   | 9,011 |   | 8.7 |   | — |   | — |   |
| Total investment securities      |   | 90,656                      |    | 89.9 |   | 87,982 |   | 85.2 |   | 68,615 |   | 83.2 |   |
|                             |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:      |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| FHLMC                            |   | 3,044                       |    | 3.0 |   | 6,734 |   | 6.5 |   | 5,730 |   | 7.0 |   |
| GNMA                             |   | 5,013                       |    | 5.0 |   | 4,687 |   | 4.6 |   | 4,641 |   | 5.6 |   |
| FNMA                             |   | 2,108                       |    | 2.1 |   | 3,835 |   | 3.7 |   | 3,485 |   | 4.2 |   |
| Total mortgage-backed securities |   | 10,165                      |    | 10.1 |   | 15,256 |   | 14.8 |   | 13,856 |   | 16.8 |   |
| Total securities                 |   | $                           | 100,821 |   | 100.0 | % | $ | 103,238 |   | 100.0 | % | $ | 82,471 |   | 100.0 | % |

 

18

----

 

Thefollowing table sets forth the Bank’s securities activities for the periodsindicated.  All investment securities inthe Bank’s portfolio are classified as available-for-sale.

 
|                                                                      |   | **For the Year  Ended December 31,** |    |
|---------------------------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                                      |   | **2003**                                  |    | **2002** |   | **2001** |   |
|                                                                      |   | **(In thousands)**                        |    |
|                                                                      |   |                                      |    |   |   |   |   |
| **Beginning balance**                                                     |   | $                                         | 103,238 |   | $ | 82,471 |   | $ | 73,525 |   |
| Investment securities purchased                                           |   | 48,075                                    |    | 45,058 |   | 40,602 |   |
| Mortgage-backed securities purchased                                      |   | 2,549                                     |    | 7,170 |   | 10,436 |   |
| **Less:**                                                                 |   |                                      |    |   |   |   |   |
| Sale of investment securities                                             |   | 15,350                                    |    | — |   | 4,033 |   |
| Principal repayments on mortgage-backed securities                        |   | 7,363                                     |    | 5,593 |   | 5,979 |   |
| Maturities of investment securities                                       |   | 29,700                                    |    | 27,548 |   | 32,414 |   |
| Gain on sale of investment securities                                     |   | (816                                      | )       | — |   | (33 | ) |
| Net amortization of premium                                               |   | (101                                      | )       | (9 | ) | 151 |   |
| Change in net unrealized gains (losses) on  available-for-sale securities |   | 1,343                                     |    | (1,689 | ) | (452 | ) |
| **Ending balance**                                                        |   | $                                         | 100,821 |   | $ | 103,238 |   | $ | 82,471 |   |

 

Thefollowing table sets forth at the dates indicated certain information regardingthe amortized cost and market values of the Bank’s investment andmortgage-backed securities, all of which were classified as available-for-sale.

 
|                             |   | **At  December 31,** |    |
|----------------------------------|--------|---------------------------|---------|
|                             |   | **2003**                  |    | **2002** |   | **2001** |   |
|                             |   | **Amortized  Cost**       |    | **Fair  Value** |   | **Amortized  Cost** |   | **Fair  Value** |   | **Amortized  Cost** |   | **Fair  Value** |   |
|                             |   | **(In  thousands)**       |    |
| Investment securities:           |   |                      |    |   |   |   |   |   |   |   |   |   |   |
| U.S. Government obligations      |   | $                         | 36,081  |   | $ | 36,064 |   | $ | 32,111 |   | $ | 32,842 |   | $ | 37,519 |   | $ | 38,288 |   |
| Equity investments               |   | 16,238                    |    | 15,512 |   | 10,247 |   | 10,521 |   | 7,313 |   | 7,277 |   |
| Municipal securities             |   | 32,558                    |    | 33,650 |   | 34,765 |   | 35,608 |   | 23,488 |   | 23,050 |   |
| Corporate bonds                  |   | 5,039                     |    | 5,430 |   | 8,871 |   | 9,011 |   | — |   | — |   |
| Total investment securities      |   | 89,916                    |    | 90,656 |   | 85,994 |   | 87,982 |   | 68,320 |   | 68,615 |   |
| Mortgage-backed securities:      |   |                      |    |   |   |   |   |   |   |   |   |   |   |
| GNMA                             |   | 5,058                     |    | 5,013 |   | 4,661 |   | 4,687 |   | 4,611 |   | 4,641 |   |
| FNMA                             |   | 2,081                     |    | 2,108 |   | 3,796 |   | 3,835 |   | 3,453 |   | 3,485 |   |
| FHLMC                            |   | 3,040                     |    | 3,044 |   | 6,718 |   | 6,734 |   | 5,708 |   | 5,730 |   |
| Total mortgage-backed securities |   | 10,179                    |    | 10,165 |   | 15,175 |   | 15,256 |   | 13,772 |   | 13,856 |   |
| Total securities                 |   | $                         | 100,095 |   | $ | 100,821 |   | $ | 101,169 |   | $ | 103,238 |   | $ | 82,092 |   | $ | 82,471 |   |

 

19

----

 

Thetable below sets forth certain information regarding the carrying value,weighted average yields and contractual maturities of the Bank’s securitiesportfolio, excluding equity securities, all of which were classified asavailable-for-sale, as of December 31, 2003. The yields on tax-exempt securities have not been calculated on a taxequivalent basis.

 
|                            |   | **At  December 31, 2003**   |   |
|---------------------------------|--------|-----------------------------|--------|
|                            |   | **One Year  or Less**       |   | **More than  One  Year to Five Years** |   | **More than  Five  Years to Ten Years** |   | **More than  Ten  Years** |   | **Total** |   |
|                            |   | **Carrying  Value**         |   | **Weighted  Average  Yield** |   | **Carrying  Value** |   | **Weighted  Average  Yield** |   | **Carrying  Value** |   | **Weighted  Average  Yield** |   | **Carrying  Value** |   | **Weighted  Average  Yield** |   | **Carrying  Value** |   | **Weighted  Average  Yield** |   |
|                            |   | **(Dollars  in thousands)** |   |
|                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed  securities:    |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FHLMC                           |   | $                           | — |   | — | % | $ | — |   | — | % | $ | 212 |   | 7.65 | % | $ | 2,832 |   | 4.81 | % | $ | 3,044 |   | 5.01 | % |
| GNMA                            |   | —                      |   | — |   | — |   | — |   | 210 |   | 9.10 |   | 4,803 |   | 4.17 |   | 5,013 |   | 4.38 |   |
| FNMA                            |   | 31                          |   | 7.50 |   | 3 |   | 9.00 |   | — |   | — |   | 2,074 |   | 6.15 |   | 2,108 |   | 6.06 |   |
| Total mortgage-backedsecurities |   | 31                          |   | 7.50 |   | 3 |   | 9.00 |   | 422 |   | 8.37 |   | 9,709 |   | 4.78 |   | 10,165 |   | 4.92 |   |
|                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Municipal securities            |   | 500                         |   | 3.00 |   | 1,125 |   | 3.88 |   | 4,250 |   | 3.97 |   | 27,775 |   | 5.49 |   | 33,650 |   | 5.21 |   |
| Corporate bonds                 |   | —                      |   | — |   | 5,430 |   | 6.90 |   | — |   | — |   | — |   | — |   | 5,430 |   | 6.90 |   |
| U.S. Government Obligations     |   | —                      |   | — |   | — |   | — |   | 29,010 |   | 4.59 |   | 7,054 |   | 4.57 |   | 36,064 |   | 4.59 |   |
| Total securities                |   | $                           | 500    |   | 3.00 |   | $ | 6,555 |   | 6.38 |   | $ | 33,260 |   | 4.51 |   | $ | 34,829 |   | 5.30 |   | $ | 75,144 |   | 5.03 |   |

 

**Sources of Funds**

 

***General.**** *Deposits,repayments and prepayments of loans, cash flows generated from operations andFHLB advances are the primary sources of the Bank’s funds for use in lending,investing and for other general purposes.

 

***Deposits.**** *The Bankoffers a variety of deposit accounts with a range of interest rates andterms.  The Bank’s deposit accountsconsist of savings, retail checking/NOW accounts, commercial checking accounts,money market accounts, club accounts and certificate of deposit accounts.  The Bank offers certificate of depositaccounts with balances in excess of $100,000 at preferential rates (jumbocertificates) and also offers Individual Retirement Accounts (“IRAs”) and otherqualified plan accounts.

 

AtDecember 31, 2003, the Bank’s deposits totaled $596.8 million, or 73.8%, ofinterest-bearing liabilities.  For theyear ended December 31, 2003, the average balance of core deposits (savings,NOW, money market and non-interest-bearing checking accounts) totaled $340.4million, or 60.0% of total average deposits. At December 31, 2003, the Bank had a total of $245.1 million incertificates of deposit, of which $126.1 million had maturities of one year orless reflecting the shift in deposit accounts from savings accounts toshorter-term certificate accounts that has occurred in recent years.  For the year ended December 31, 2003, theaverage balance of core deposits represented approximately 57.0% of totaldeposits and average certificate accounts represented 38.0%, as compared to theaverage balance of core deposits representing 54.4% of total deposits andaverage certificate accounts representing 36.1% of deposits for the year endedDecember 31, 2002.  Although the Bankhas a significant portion of its deposits in core deposits, management monitorsactivity on the Bank’s core deposits and, based on historical experience andthe Bank’s current pricing strategy, believes it will continue to retain alarge portion of such accounts.  TheBank is not limited with respect to the rates it may offer on deposit products.

 

AtDecember 31, 2003, the Bank had brokered deposits totaling $16.0 millioncompared to $6.1 million at December 31, 2002.

 

Theflow of deposits is influenced significantly by general economic conditions,changes in money market rates, prevailing interest rates and competition.  The Bank’s deposits are obtainedpredominantly from the areas in which its branch offices are located.  The Bank relies primarily on customerservice and long-standing relationships with customers to attract and retainthese deposits; however, market interest rates and rates offered by competingfinancial institutions affect the Bank’s ability to attract and retaindeposits.  The Bank uses traditionalmeans of advertising its deposit products, including radio and print media

 

20

----

and generally does not solicitdeposits from outside its market area. While certificate accounts in excess of $100,000 are accepted by theBank, and may be subject to preferential rates, the Bank does not actively solicitsuch deposits as such deposits are more difficult to retain than core deposits.

 

At December 31, 2003, the Bank hadoutstanding $106.5 million in certificate of deposit accounts in amounts of$100,000 or more, maturing as follows:

 
| **Maturity  Period**          |   | **Amount**                  |    | **Weighted  Average  Rate** |   |
|-------------------------------|--------|-----------------------------|---------|-----------------------------|--------|
|                          |   | **(Dollars  in thousands)** |    |
|                          |   |                        |    |                        |   |
| Three months or less          |   | $                           | 17,374  |                        | 2.80   | % |
| Over three through six months |   | 17,468                      |    | 2.65                        |   |
| Over six through 12 months    |   | 24,646                      |    | 2.54                        |   |
| Over 12 months                |   | 47,026                      |    | 3.37                        |   |
| Total                         |   | $                           | 106,514 |                        | 2.97   |   |

 

Thefollowing table sets forth the distribution of the Bank’s deposit accounts forthe periods indicated and the weighted average interest rates on each categoryof deposits presented.

 
|                          |   | **At  December 31, 2003**   |    | **At  December 31, 2002**  |   |
|-------------------------------|--------|-----------------------------|---------|---------------------------------|--------|
|                          |   | **Balance**                 |    | **Percent  of Total  Deposits** |   | **Weighted  Average  Rate** |   | **Balance** |   | **Percent  of Total  Deposits** |   | **Weighted  Average  Rate** |   |
|                          |   | **(Dollars  in thousands)** |    |
|                          |   |                        |    |                            |   |   |   |   |   |   |   |   |   |
| Money market accounts         |   | $                           | 145,530 |                            | 24.39  | % | 1.84 | % | $ | 140,857 |   | 26.87 | % | 2.73 | % |
| Passbook savings accounts     |   | 127,929                     |    | 21.44                           |   | 1.56 |   | 106,599 |   | 20.34 |   | 2.28 |   |
| NOW accounts                  |   | 39,122                      |    | 6.56                            |   | 0.72 |   | 34,201 |   | 6.52 |   | 1.01 |   |
| Non interest-bearing accounts |   | 39,037                      |    | 6.54                            |   | — |   | 32,655 |   | 6.23 |   | — |   |
| Total                         |   | 351,618                     |    | 58.92                           |   | 1.41 |   | 314,312 |   | 59.96 |   | 2.11 |   |
| Certificates of deposit       |   | 245,146                     |    | 41.08                           |   | 3.10 |   | 209,878 |   | 40.04 |   | 3.63 |   |
| Total deposits                |   | $                           | 596,764 |                            | 100.00 | % | 2.11 |   | $ | 524,190 |   | 100.00 | % | 2.72 |   |

 
|                          |   | **At  December 31, 2001** | ** ** |
|-------------------------------|--------|--------------------------------|------------|
|                          |   | **Balance**                    |       | **Percent  of Total  Deposits** | ** ** | **Weighted  Average  Rate** | ** ** |
|                          |   | **(Dollars  in thousands)**    | ** ** |
|                          |   |                           |       |   |   |   |   |
| Money market accounts         |   | $                              | 106,850    |   | 25.44 | % | 4.00 | % |
| Passbook savings accounts     |   | 84,889                         |       | 20.21 |   | 3.11 |   |
| NOW accounts                  |   | 30,646                         |       | 7.29 |   | 1.07 |   |
| Non interest-bearing accounts |   | 23,286                         |       | 5.54 |   | — |   |
| Total                         |   | 245,671                        |       | 58.48 |   | 2.81 |   |
| Certificates of deposit       |   | 174,413                        |       | 41.52 |   | 5.76 |   |
| Total deposits                |   | $                              | 420,084    |   | 100.00 | % | 4.22 |   |

 

21

----

 

Thefollowing table presents, by various rate categories, the amount of certificateof deposit accounts outstanding at the dates indicated.

 
|                       |   | **Period to  Maturity  from December 31, 2003** |    |                   |   |                     |   |
|----------------------------|--------|-------------------------------------------------|---------|------------------------|--------|--------------------------|--------|
|                       |   | **Less  than  One  Year**                       |    | **One to  Two  Years** |   | **Two to  Three  Years** |   | **Three to  Four  Years** |   | **Four  to Five  Years** |   | **Total  December 31,  2003** |   |   |   |
|                       |
| **At  December 31,**       |
| **2002**                   |   | **2001**                                        |
|                       |   | **(In thousands)**                              |    |
|                       |   |                                            |    |                   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| Certificate accounts:      |   |                                            |    |                   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| 4.00% or less              |   | $                                               | 108,151 |                   | $      | 24,093                   |   | $ | 42,735 |   | $ | 13,937 |   | $ | 6,051 |   | $ | 194,967 |   | $ | 141,431 |   | $ | 54,005 |   |
| 4.01 to 5.00%              |   | 15,581                                          |    | 7,540                  |   | 17,438                   |   | 2,498 |   | 458 |   | 43,515 |   | 52,196 |   | 47,689 |   |
| 5.01 to 6.00%              |   | 2,162                                           |    | 1,081                  |   | 427                      |   | 297 |   | — |   | 3,967 |   | 9,658 |   | 48,724 |   |
| 6.01 to 7.00%              |   | 173                                             |    | 2,424                  |   | —                   |   | — |   | — |   | 2,597 |   | 6,141 |   | 23,455 |   |
| 7.01 to 8.00%              |   | —                                          |    | 100                    |   | —                   |   | — |   | — |   | 100 |   | 452 |   | 540 |   |
|                       |   |                                            |    |                   |   |                     |   |   |   |   |   |   |   |   |   |   |   |
| Total at December 31, 2003 |   | $                                               | 126,067 |                   | $      | 35,238                   |   | $ | 60,600 |   | $ | 16,732 |   | $ | 6,509 |   | $ | 245,146 |   | $ | 209,878 |   | $ | 174,413 |   |

 

***Borrowed Funds.**** *The followingtable sets forth certain information regarding the Bank’s borrowed funds at orfor the years ended on the dates indicated:

 
|                                                         |   | **At or For  the Year Ended  December 31,** |    |
|--------------------------------------------------------------|--------|--------------------------------------------------|---------|
|                                                         |   | **2003**                                         |    | **2002** |   | **2001** |   |
|                                                         |   | **(Dollars  in thousands)**                      |    |
|                                                         |   |                                             |    |   |   |   |   |
| FHLB advances:                                               |   |                                             |    |   |   |   |   |
| Average balance outstanding                                  |   | $                                                | 188,617 |   | $ | 172,575 |   | $ | 164,783 |   |
| Maximum amount outstanding at any month-end  during the year |   | $                                                | 210,700 |   | $ | 175,200 |   | $ | 175,200 |   |
| Balance outstanding at end of year                           |   | $                                                | 204,700 |   | $ | 171,700 |   | $ | 175,200 |   |
| Weighted average interest rate during the  year              |   | 4.96                                             | %       | 5.35 | % | 5.45 | % |
| Weighted average interest rate at end of  year               |   | 4.66                                             | %       | 5.27 | % | 5.28 | % |

 

**Subsidiary Activities**

 

***EFS Service Corporation. ***Fox Valley Service Corporation of Elgin wasrenamed EFS Service Corporation (“EFSSC”) in October 2002 and is the Bank’swholly-owned subsidiary which was incorporated in 1974 for the purpose ofentering into joint venture real estate development projects.  On June 19, 2002, EFSSC purchasedapproximately 16 acres of land to be developed into 29 home-sites forsingle-family residences.  All landimprovements have been made.  As ofDecember 31, 2003, there were no sales, two model homes were under constructionand the total investment was $4.2 million. In addition, EFSSC currently owns a single parcel of real estate valuedat $92,000.  In addition, EFSSCentered into two 50/50 joint venture agreements in 2003, known as Algonquin 80LLC and Algonquin 36 LLC.  Algonquin 80LLC is 80 acres of vacant land in Algonquin, Illinois to be sold andsubsequently developed into residential properties.  The Bank has made a loan to the joint venture in the amount of$7.4 million at December 31, 2003 primarily for the acquisition of theland.  Algonquin 36 LLC consists of 36acres of vacant land in Algonquin, Illinois. The strategy is for the joint venture to develop the parcel intocommercial properties.  The Bank hasmade a loan to the joint venture in the amount of $8.2 million at December 31,2003 primarily for the acquisition of the land.

 

***EFS Financial Services, Inc.*** FoxValley Financial Services, Inc. was renamed EFS Financial Services, Inc.(“EFSFS”) in October 2002 and is the wholly owned subsidiary of EFS ServiceCorporation.  EFSFS is a servicecorporation that offers a wide variety of financial products and services forindividuals and businesses, which includes various investment and insuranceproducts.  EFSFS has four salespeoplewho are employed on a commission basis.

 

***Computer Dynamics Group, Inc. ***Computer Services Dynamics, Inc. was renamedComputer Dynamics Group, Inc. (“CDGI”) in 2002 and is the Company’s majorityowned subsidiary, which was purchased on January 7, 2002, at a cost of$420,000.  CDGI is an informationtechnology consulting/services company with main offices in West Chicago,Illinois, and generally services clients located in the Chicago metropolitanarea.

 

22

----

 

**Personnel**

 

Asof December 31, 2003, the Bank had 141 full-time employees and 47 part-timeemployees.  A collective bargaining unitdoes not represent the employees and the Bank considers its relationship withits employees to be good.

 

**REGULATION AND SUPERVISION**

 

**General**

 

TheBank is an Illinois State chartered savings bank and its deposit accounts areinsured up to applicable limits by the FDIC under the Savings AssociationInsurance Fund (“SAIF”).  The Bank issubject to extensive regulation by the Commissioner, as its charteringauthority, and by the FDIC, as the deposit insurer.  The Bank must file reports with the Commissioner and the FDICconcerning its activities and financial condition, in addition to obtainingregulatory approvals prior to entering into certain transactions such asestablishing branches and mergers with, or acquisitions of, other depositoryinstitutions.  There are periodicexaminations by the Commissioner and the FDIC to assess the Bank’s compliancewith various regulatory requirements and financial condition.  This regulation and supervision establishesa framework of activities in which a savings bank can engage and is intendedprimarily for the protection of the insurance fund and depositors.  The regulatory structure also gives theregulatory authorities extensive discretion in connection with theirsupervisory and enforcement activities and examination policies, includingpolicies with respect to the classification of assets and the establishment ofadequate loan loss reserves for regulatory purposes.  Any change in such regulation, whether by the Commissioner, theFDIC or through legislation, could have a material adverse impact on theCompany and the Bank and their operations and stockholders.  The Holding Company is also required to filecertain reports with, and otherwise comply with the rules and regulations, ofthe OTS, the Commissioner and of the Securities and Exchange Commission (“SEC”)under the federal securities laws. Certain of the regulatory requirements applicable to the Bank and to theHolding Company are referred to below or elsewhere herein.

 

TheCommissioner has established a schedule for the assessment of “supervisoryfees” upon all Illinois savings banks to fund the operations of theCommissioner.  These supervisory feesare computed on the basis of each savings bank’s total assets (includingconsolidated subsidiaries) and are payable at the end of each calendarquarter.  A schedule of fees has alsobeen established for certain filings made by Illinois savings banks with theCommissioner.  The Commissioner alsoassesses fees for examinations conducted by the Commissioner’s staff, basedupon the number of hours spent by the Commissioner’s staff performing theexamination.  During the year endedDecember 31, 2003, the Bank paid approximately $96,000 in supervisory fees andexpenses.

 

**Regulations**

 

***Capital Requirements. ***Under the Illinois law and the regulations ofthe Commissioner, an Illinois savings bank must maintain a minimum level ofcapital equal to the highest of 3% of total assets or the amount required tomaintain insurance of deposits by the FDIC. The Commissioner has the authority to require an Illinois savings bankto maintain a higher level of capital if deemed necessary based on the savingsbank’s financial condition, history, management or earnings prospects.

 

TheFDIC has also adopted risk-based capital guidelines to which the Bank issubject.  The Bank is required tomaintain certain levels of regulatory capital in relation to regulatoryrisk-weighted assets.  Risk-basedcapital ratios are determined by allocating assets and specified off-balancesheet items to four risk-weighted categories ranging from 0% to 100%, withhigher levels of capital being required for the categories perceived asrepresenting greater risk.  Theguidelines divide a savings bank’s capital into two tiers.  The first tier (“Tier I”) includes commonequity, retained earnings, certain non-cumulative perpetual preferred stock(excluding auction rate issues) and minority interests in equity accounts ofconsolidated subsidiaries, less goodwill and other intangible assets (exceptmortgage servicing rights and purchased credit card relationships subject tocertain limitations).  Recent regulatoryamendments require the deduction from Tier 1 capital of a percentage of thecarrying value of investments in equity securities of non-financial companiesacquired after March 13, 2000. Supplementary (“Tier II”) capital includes, among other items, cumulativeperpetual and long-term limited-life preferred stock, mandatory convertiblesecurities, certain hybrid capital instruments, term subordinated debt, aportion of pretax net unrealized holding gains on available-for-sale equitysecurities with readily determinable fair values and the allowance for loanlosses, subject to certain limitations, less required deductions.  Savings banks are required to maintain atotal risk-based capital ratio of 8%, of which at least 4% must be Tier Icapital.

 

Inaddition, the FDIC has established regulations prescribing a minimum Tier Ileverage ratio.  These regulationsprovide for a minimum Tier I leverage ratio of 3% for banks that meet certainspecified criteria, including that they have the highest

 

23

----

 

examination rating and are notexperiencing or anticipating significant growth.  All other banks are required to maintain a Tier I leverage ratioof 3% plus an additional cushion of at least 1%.  The FDIC may, however, set higher leverage and risk-based capitalrequirements on individual institutions when particular circumstances warrant.

 

The following is a summaryof the Bank’s regulatory capital at December 31:

 
|                                  |   | **2003** |   | **2002** |   |
|---------------------------------------|--------|----------|--------|----------|--------|
| Total Capital to Total Assets         |   | 8.35     | %      | 8.96     | %      |
| Total Capital to Risk-Weighted Assets |   | 11.74    | %      | 13.41    | %      |
| Tier I Leverage Ratio                 |   | 8.27     | %      | 8.92     | %      |
| Tier I to Risk-Weighted Assets        |   | 11.60    | %      | 12.82    | %      |

 

The FDIC and the other federal banking agencies, have adopted aregulation providing that the agencies will take account of the exposure of abank’s capital and economic value to changes in interest rate risk in assessinga bank’s capital adequacy.

 

***Standards for Safety andSoundness. ***The federal banking agencies have adoptedfinal regulations and Interagency Guidelines Establishing Standards for Safetyand Soundness to implement safety and soundness standards.  The Guidelines set forth the safety andsoundness standards that the federal banking agencies use to identify andaddress problems at insured depository institutions before capital becomesimpaired.  If the appropriate federalbanking agency determines that an institution fails to meet any standardprescribed by the Guidelines, the agency may require the institution to submitto the agency an acceptable plan to achieve compliance with the standard.

 

***Lending Restrictions. ***The Bank is prohibited by Illinois frommaking secured or unsecured loans for business, corporate, commercial oragricultural purposes representing in the aggregate an amount in excess of 15%of its total assets, unless the Commissioner authorizes in writing a higherpercentage limit for such loans upon the request of an institution.

 

The Bank is also subject to a loans-to-one borrower limitation.  Under the Illinois law, the total loans andextensions of credit by the Bank to any person outstanding at one time must notexceed the greater of $500,000 or 25% of the Bank’s total capital plus generalloan loss reserves.  In addition, theBank may make loans in an amount equal to an additional 10% of the Bank’scapital plus general loan loss reserves if secured by readily marketablecollateral.

 

***Dividend Limitations.***** **Under theISBA, dividends may only be declared when the total capital of the Bank isgreater than that required by Illinois law. Dividends may be paid by the Bank out of its net profits.  The written approval of the Commissionermust be obtained, however, before a savings bank having total capital of lessthan 6% of total assets may declare dividends in any year in an amount in excessof 50% of its net profits for that year. A savings bank may not declare dividends in excess of its net profits inany year without the approval of the Commissioner.  Finally, the Bank will be unable to pay dividends in an amountwhich would reduce its capital below the greater of (i) the amount required bythe FDIC capital regulations or otherwise specified by the FDIC, (ii) theamount required by the Commissioner or (iii) the amount required for theliquidation account to be established by the Bank in connection with the Bank’sconversion.  The Commissioner and theFDIC also have the authority to prohibit the payment of any dividends by theBank if the Commissioner or the FDIC determines that the distribution wouldconstitute an unsafe or unsound practice.

 

**Prompt Corrective Regulatory Action**

 

Federal law requires, among other things, that federal bank regulatoryauthorities take “prompt corrective action” with respect to banks that do notmeet minimum capital requirements.  Forthese purposes, the law establishes various capital categories.  The FDIC has adopted regulations toimplement the prompt corrective action legislation.  Under the regulations, an institution is deemed to be“undercapitalized” if it has a total risk-based capital ratio of less than 8%,a Tier I risk-based capital ratio of less than 4%, or generally a leverageratio of less than 4%.  An institutionis deemed to be “significantly undercapitalized” if it has a total risk-basedcapital ratio of less than 6%, a Tier I risk-based capital ratio of less than3%, or a leverage ratio of less than 3%. An institution is deemed to be “critically undercapitalized” if it has aratio of tangible equity (as defined in the regulations) to total assets thatis equal to or less than 2%.

 

“Undercapitalized” banks are subject to growth, capital distribution(including dividend) and other limitations and are required to submit a capitalrestoration plan.  A bank’s compliancewith such plan must be guaranteed by any company that controls theundercapitalized institution in an amount equal to the lesser of 5.0% of theBank’s total assets when deemed

 

24

----

 

undercapitalized or the amount necessary to achieve the status ofadequately capitalized.  If an“undercapitalized” bank fails to submit an acceptable plan, it is treated as ifit is “significantly undercapitalized.” “Significantly undercapitalized” banks are subject to one or more of anumber of additional restrictions, including but not limited to an order by theFDIC to sell sufficient voting stock to become adequately capitalized,requirements to reduce total assets and cease receipt of deposits fromcorrespondent banks or dismiss directors or officers.  “Critically undercapitalized” institutions also may not make anypayment of principal or interest on certain subordinated debt or extend creditfor a highly leveraged transaction or enter into any material transactionoutside the ordinary course of business. In addition, subject to a narrow exception, the appointment of areceiver or conservator is required for a “critically undercapitalized”institution within 270 days after it obtains such status.

 

**Transactions with Affiliates**

 

Federal law governs transactions between depository institutions andtheir affiliates.  An affiliate of asavings bank is any company or entity that controls, is controlled by, or isunder common control with the savings bank, other than certain subsidiaries. Ina holding company context, at a minimum, the parent holding company of asavings bank and any companies that are controlled by such parent holdingcompany are affiliates of the savings bank. Generally, the extent to which the savings bank or its subsidiaries mayengage in “covered transactions,” including loans, with any one affiliate islimited to 10% of such savings bank’s capital stock and surplus, and there isan aggregate limit on all such transactions with all affiliates of 20% of suchcapital stock and surplus.  Federal lawalso establishes specific collateral requirements for loans or extensions ofcredit to, or guarantees, acceptances on letters of credit issued on behalf ofan affiliate.  Covered transactions anda broad list of other specified transactions also must be on termssubstantially the same, or no less favorable, to the savings bank or itssubsidiary as similar transactions with nonaffiliates.

 

Federal law also restricts a savings bank with respect to loans todirectors, executive officers, and principal stockholders.  Loans to directors, executive officers andstockholders who control, directly or indirectly, 10% or more of votingsecurities of a savings bank, and certain related interests of any of theforegoing, may not exceed the savings bank’s total capital and surplus.  Loans to directors, executive officers andprincipal shareholders must be made on terms substantially the same as offeredin comparable transactions to other persons, except that such insiders mayreceive preferential loans made pursuant to a benefit or compensation programthat is widely available to the Bank’s employees and does not give preferenceto the insider over the employees. Federal law also establishes board of director approval requirements forloans exceeding a certain amount.  Thereare additional limitations on loans to executive officers.

 

**Enforcement**

 

The Commissioner and FDIC have extensive enforcement authority overIllinois-chartered savings banks, including the Bank.  This enforcement authority includes, among other things, theability to assess civil money penalties, to issue cease and desist orders andto remove directors and officers.  Ingeneral, these enforcement actions may be initiated in response to violationsof laws and regulations and to unsafe or unsound practices.

 

The Commissioner is given authority by Illinois law to appoint aconservator or receiver for an Illinois savings bank under certaincircumstances including, but not limited to, insolvency, a substantialdissipation of assets due to violation of law, regulation, order of theCommissioner or an unsafe or unsound practice. The FDIC also has authority under federal law to appoint a conservatoror receiver for an insured savings bank under certain circumstances.

 

**Insurance of Deposit Accounts**

 

Deposits of the Bank are presently insured by the SAIF.  The FDIC maintains a risk-based assessment systemby which institutions are assigned to one of three categories based on theircapitalization and one of three subcategories based on examination ratings andother supervisory information.  Aninstitution’s assessment rate depends upon the categories to which it isassigned.  Assessment rates for SAIFmember institutions are determined semiannually by the FDIC and currently rangefrom zero basis points for the healthiest institutions to 27 basis points ofassessable deposits for the riskiest.

 

In addition to the assessment for deposit insurance, institutions arerequired to make payments on bonds issued in the late 1980s by the FinancingCorporation (“FICO”) to recapitalize the predecessor to the SAIF.  During 2003, FICO payments for SAIF membersapproximated 1.60 basis points of assessable deposits.

 

The Bank’s assessment rate for 2003 was zero.  Payments toward the FICO bonds amounted to $85,000.  The FDIC has

 

25

----

 

authority to increase insurance assessments.  A significant increase in SAIF insurance premiums would likelyhave an adverse effect on the operating expenses and results of operations ofthe Bank.  Management cannot predictwhat insurance assessment rates will be in the future.

 

Insurance of deposits may be terminated by the FDIC upon a finding thatthe institution has engaged in unsafe or unsound practices, is in an unsafe orunsound condition to continue operations or has violated any applicable law,regulation, rule, order or condition imposed by the FDIC or the OTS.  The management of the Bank does not know ofany practice, condition or violation that might lead to termination of depositinsurance.

 

**Federal Reserve System**

 

The Federal Reserve Board regulations require savings institutions to maintainnon-interest earning reserves against their transaction accounts (primarilynegotiable order of withdrawal and regular checking accounts).  The regulations generally provide thatreserves be maintained against aggregate transaction accounts as follows:  a 3% reserve ratio is assessed on nettransaction accounts up to and including $45.4 million; a 10% reserve ratio isapplied above $45.4 million.  The first$6.6 million of otherwise reservable balances (subject to adjustments by theFederal Reserve Board) are exempted from the reserve requirements.  These are adjusted annually.  The Bank complies with the foregoingrequirements.

 

**Federal Home Loan Bank System**

 

The Bank is a member of the FHLB System, which consists of 12 regionalFHLBs.  The FHLB provides a centralcredit facility primarily for member institutions.  The Bank, as a member of the FHLB, is required to acquire andhold shares of capital stock in the FHLB in an amount at least equal to 1% ofthe aggregate principal amount of its unpaid residential mortgage loans andsimilar obligations at the beginning of each year, or 1/20 of its advances(borrowings) from the FHLB, whichever is greater.  The Bank was in compliance with this requirement with an investmentin FHLB stock at December 31, 2003 of $10.9 million.

 

The FHLBs are required to provide funds for the resolution of insolventthrifts and to contribute funds for affordable housing programs.  These requirements could reduce the amountof dividends that the FHLBs pay to their members and could also result in theFHLBs imposing a higher rate of interest on advances to their members.  For the years ended December 31, 2003, 2002and 2001, dividends from the FHLB to the Bank amounted to approximately $614,000,$483,000 and $539,000, respectively.

 

**Holding Company Regulation**

 

Federal law allows a state savings bank that qualifies as a “qualifiedthrift lender” to elect to be treated as a savings association for purposes ofthe savings and loan holding company provisions of federal law.  Such election results in its holding companybeing regulated as a savings and loan holding company by the OTS rather than asa bank holding company by the Federal Reserve Board.  The Bank has made such election and has received approval fromthe OTS to become a savings and loan holding company.  The Company has registered with the OTS and is subject to OTSregulations, examinations, supervision and reporting requirements.  In addition, the OTS has enforcementauthority over the Company and its non-savings institution subsidiaries.  Among other things, this authority permitsthe OTS to restrict or prohibit activities that are determined to be a seriousrisk to the subsidiary savings institution. Additionally, the Bank is required to notify the OTS at least 30 days beforedeclaring any dividend to the Company. Because the Bank is chartered under Illinois law, the Company is alsosubject to registration with and regulation by the Commissioner.

 

As a unitary savings and loan holding company, the Company is generallynot restricted under existing laws as to the types of business activities inwhich it may engage.  TheGramm-Leach-Bliley Act of 1999 provided that no company may acquire control ofa savings association after May 4, 1999 unless it engages only in the financialactivities permitted for financial holding companies under the law or formultiple savings and loan holding companies as described below.  Further, the Gramm-Leach-Bliley Actspecifies that existing savings and loan holding companies may only engage in suchactivities.  The Gramm-Leach-Bliley Act,however, grandfathered the unrestricted authority for activities with respectto unitary savings and loan holding companies existing prior to May 4, 1999,such as the Company, so long as the Bank continues to comply with the qualifiedthrift lender test.  Upon anynon-supervisory acquisition by the Company of another savings association as aseparate subsidiary, the Company would become a multiple savings and loanholding company and would be subject to limitations on the types of businessactivities in which it could engage. Federal law limits the activities of a multiple savings and loan holdingcompany and its non-insured institution subsidiaries primarily to activitiespermissible for bank holding companies under Section 4(c)(8) of the BankHolding Company Act, subject to the prior approval of the OTS, to thosepermissible for financial holding companies and to

 

26

----

 

other activities authorized by OTS regulation.  Multiple savings and loan holding companiesare prohibited from acquiring or retaining, with certain exceptions, more than5% of a non-subsidiary company engaged in activities other than those permittedby federal law.

 

Federal law prohibits a savings and loan holding company, directly orindirectly, or through one or more subsidiaries, from merging with or acquiringmore than 5% of the voting stock of another savings institution or holdingcompany thereof without prior written approval of the OTS.  In evaluating applications by holdingcompanies to acquire savings institutions, the OTS must consider the financialand managerial resources and future prospects of the company and institutioninvolved, the effect of the acquisition on the risk to the insurance funds, theconvenience and needs of the community and competitive factors.

 

The OTS is prohibited from approving any acquisition that would resultin a multiple savings and loan holding company controlling savings institutionsin more than one state, except: (i) interstate supervisory acquisitions by savings and loan holdingcompanies; and (ii) the acquisition of a savings institution in anotherstate if the laws of the state of the target savings institution specificallypermit such acquisitions.  The statesvary in the extent to which they permit interstate savings and loan holdingcompany acquisitions.

 

In order to elect and continue to be regulated as a savings and loanholding company by the OTS, the Bank must continue to qualify as a qualifiedthrift lender.  This requires the Bankto maintain compliance with the test for a “domestic building and loanassociation,” as defined in the Internal Revenue Code, or with a QualifiedThrift Lender Test.  Under the Test, asavings institution is required to maintain at least 65% of its “portfolioassets” (total assets less: (i) specified liquid assets up to 20% of totalassets; (ii) intangibles, including goodwill; and (iii) the value of propertyused to conduct business) in certain “qualified thrift investments” (primarilyresidential mortgages and related investments, including certainmortgage-backed and related securities) in at least 9 months out of each 12month period.  A holding company of asavings institution that fails to qualify as a qualified thrift lender musteither convert to a bank holding company and thereby become subject to theregulation and supervision of the Federal Reserve Board or operate undercertain restrictions.  As of December31, 2003, the Bank maintained in excess of 65% of its portfolio assets inqualified thrift investments.  The Bankalso met the test in each of the prior 12 months and, therefore, is a qualifiedthrift lender.  Recent legislative amendmentshave broadened the scope of “qualified thrift investments” that go towardmeeting the test to fully include credit card loans, student loans and smallbusiness loans.

 

Under the Federal Change in Bank Control Act, a notice must besubmitted to the Office of Thrift Supervision if any person (including acompany), or group acting in concert, seeks to acquire “control” of a savingsand loan holding company.  Under certaincircumstances, a change of control may occur, and prior notice is required,upon the acquisition of 10% or more of the Company’s outstanding voting stock,unless the Office of Thrift Supervision has found that the acquisition will notresult in a change of control of the Company. Under the Change in Bank Control Act, the Office of Thrift Supervisionhas 60 days from the filing of a complete notice to act, taking intoconsideration certain factors, including the financial and managerial resourcesof the acquirer and the anti-trust effects of the acquisition.  Any company that acquires control would thenbe subject to regulation as a savings and loan holding company.

 

**Federal Securities Laws**

 

Shares purchased by an affiliate of the Company will be subject to theresale restrictions of Rule 144 under the Securities Act.  If the Company meets the current publicinformation requirements of Rule 144 under the Securities Act, each affiliateof the Company who complies with the other conditions of Rule 144 (includingthose that require the affiliate’s sale to be aggregated with those of certainother persons) would be able to sell in the public market, without registration,a number of shares not to exceed, in any three-month period, the greater of (i)1% of the outstanding shares of the Company or (ii) the average weekly volumeof trading in such shares during the preceding four calendar weeks.  Provision may be made in the future by theCompany to permit affiliates to have their shares registered for sale under theSecurities Act under certain circumstances.

 

 

**FEDERAL AND STATE INCOME TAXATION**

 

**Federal Taxation**

 

***General.***  TheCompany files a consolidated federal income tax return.  To the extent a member incurs a loss that isutilized to reduce the consolidated federal tax liability, that member will bereimbursed for the tax benefit utilized from the member(s) incurring federaltax liabilities.

 

27

----

 

Amounts provided for income tax expense are based upon income reportedfor financial statement purposes and do not necessarily represent amountscurrently payable to federal and state tax authorities.  Deferred income taxes, which principallyarise from the temporary difference related to the recognition of certainincome and expense items for financial reporting purposes and the period inwhich they affect federal and state taxable income, are included in the amountsprovided for income taxes.

 

***Bad Debt Reserves.**** *The SmallBusiness Job Protection Act of 1996 (the “1996 Act”), which was enacted onAugust 20, 1996, made significant changes to provisions of the Code relating toa savings institution’s use of bad debt reserves for federal income taxpurposes and requires such institutions to recapture (i.e. take into income)certain portions of their accumulated bad debt reserves.  Prior to the enactment of the 1996 Act, theBank was permitted to establish tax reserves for bad debts and to make annualadditions thereto, which additions, within specified formula limits, werededucted in arriving at the Bank’s taxable income.  The Bank’s deduction with respect to “qualifying loans,” whichare generally loans secured by certain interests in real property, could becomputed using an amount based on a six-year moving average of the Bank’sactual loss experience (the “Experience Method”), or a percentage equal to 8%of the Bank’s taxable income (the “PTI Method”), computed without regard to thisdeduction and with additional modifications and reduced by the amount of anypermitted addition to the non-qualifying reserve.  The Bank’s deduction with respect to non-qualifying loans wasrequired to be computed under the Experience Method.

 

***The 1996 Act.**** *The Bank isrequired to recapture (i.e. take into income) over a six-year period the excessof the balance of its tax bad debt reserves as of December 31, 1996 overthe balance of such reserves as of December 31, 1987.  As of December 31, 1995, the Bank’s taxbad debt reserve exceeded the balance of such reserve as of December 31,1987 by $2.2 million.  However, the Bankwill not incur an additional tax liability related to its tax bad debt reservessince the Bank has previously provided deferred taxes on the recapture amount.

 

***Distributions.**** *Under the 1996Act, if the Bank makes “non-dividend distributions” to the Company, suchdistributions will be considered to have been made from the Bank’s unrecapturedtax bad debt reserves (including the balance of its reserves as ofDecember 31, 1987) to the extent thereof, and an amount based on theamount distributed (but not in excess of the amount of such reserves) will beincluded in the Bank’s income.  The term“non-dividend distributions” is defined as distributions in excess of theBank’s current and accumulated earnings and profits, as calculated for federalincome tax purposes, distributions in redemption of stock, and distributions inpartial or complete liquidation. Dividends paid out of the Bank’s current or accumulated earnings andprofits will not cause this pre-1988 reserve to be included in the Bank’sincome.

 

The amount of additional taxable income created from a non-dividenddistribution is an amount that, when reduced by the tax attributable to theincome, is equal to the amount of the distribution.  Thus, if the Bank makes a non-dividend distribution to theCompany, approximately one and one-half times the amount of such distribution(but not in excess of the amount of such reserves) would be includable inincome for federal income tax purposes, assuming a 35% federal corporate incometax rate.  The Bank does not intend topay dividends that would result in a recapture of any portion of its tax baddebt reserves.

 

***Dividends Received Deduction andOther Matters.**** *The Company may exclude from its income 100%of dividends received from the Bank as a member of the same affiliated group ofcorporations.  The corporate dividendsreceived deduction is generally 70% in the case of dividends received fromunaffiliated corporations with which the Company and the Bank will not file aconsolidated tax return, except that if the Company and the Bank own more than20% of the stock of a corporation distributing a dividend, then 80% of anydividends received may be excluded.

 

**State Taxation**

 

***Illinois State Taxation.***  TheBank and its subsidiaries are required to file Illinois income tax returns andpay tax at an effective tax rate of 7.18% of Illinois taxable income.  For these purposes, Illinois taxable incomegenerally means federal taxable income subject to certain modifications theprimary one of which is the exclusion of interest income on United Statesobligations.

 

***Delaware State Taxation.**** *As a Delawareholding company not earning income in Delaware, the Company is exempt fromDelaware Corporate income tax but is required to file an annual report with andpay an annual franchise tax to the State of Delaware. 

 

**Available Information**

 

Our annual report on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form8-K and amendments to those reports are available without chargeon our website, www.efcbancorp.com, as soon as reasonably practicable afterthey are filed electronically with the SEC. We are providing the address to our internet site solely for theinformation of investors; we do not

 

28

----

 

intend the address to be an active link or to otherwise incorporate thecontents of the website into this report.

 

**Item 2****. Properties****.**

 

The Bank conducts its business through an executive and full-servicebranch office located in Elgin and seven other full-service branchoffices.  The downtown Elgin, Illinoisbranch was relocated to a larger downtown facility in 2002 and the originaldowntown location was sold in February 2004. The Company believes that the Bank’s facilities are adequate to meet thepresent and immediately foreseeable needs of the Bank and the Company.

 
| **Location**                                                                              |   | **Leased  or  Owned** |   | **Original  Year  Leased  or  Acquired** |   | **Date of  Lease  Expiration** |   | **Net Book  Value  of Property or  Leasehold  Improvements  at  December 31,  2003** |   |
|-------------------------------------------------------------------------------------------|--------|-----------------------|--------|------------------------------------------|--------|--------------------------------|--------|--------------------------------------------------------------------------------------|--------|
|                                                                                      |   |                  |   |                                     |   |                           |   | **(In  thousands)**                                                                  |   |
| **Executive/Main/Branch  Office:**                                                        |   |                  |   |                                     |   |                           |   |                                                                                 |   |
| 1695 Larkin Avenue  Elgin, Illinois 60123                                                 |   | Owned                 |   | 1973                                     |   | —                         |   | $                                                                                    | 1,022  |   |
| **Branch  Offices:**                                                                      |   |                  |   |                                     |   |                           |   |                                                                                 |   |
| 850 Summit Street  Elgin, Illinois 60120                                                  |   | Owned                 |   | 1983                                     |   | —                         |   | 462                                                                                  |   |
| 1000 S. McLean Boulevard  Elgin, Illinois 60123                                           |   | Leased                |   | 1996                                     |   | 2011                           |   | 116                                                                                  |   |
| 390 South Eighth Street  Route 31 & Village Quarter Road  West Dundee, Illinois 60118 |   | Owned                 |   | 1980                                     |   | —                         |   | 999                                                                                  |   |
| 13300 Route 47  Huntley, Illinois 60142                                                   |   | Owned                 |   | 1998                                     |   | —                         |   | 2,733                                                                                |   |
| 543 East Main Street  East Dundee, Illinois 60118                                         |   | Leased                |   | 2000                                     |   | 2015                           |   | 215                                                                                  |   |
| 28 North Grove Street  Elgin, Illinois 60123                                              |   | Owned                 |   | 2002                                     |   | —                         |   | 1,387                                                                                |   |
| 2429 Randall Road  Carpentersville, Illinois 60110                                        |   | Owned                 |   | 2002                                     |   | —                         |   | 3,353                                                                                |   |
| **Other  Properties:**                                                                    |   |                  |   |                                     |   | —                         |   |                                                                                 |   |
| 44 South Lyle Street  Elgin, Illinois 60123 (1)                                           |   | Owned                 |   | 1986                                     |   | —                         |   | 62                                                                                   |   |
| 1665 Larkin Avenue  Elgin, Illinois 60123 (2)                                             |   | Owned                 |   | 1996                                     |   | —                         |   | 1,142                                                                                |   |
| 176 East Chicago Avenue  Elgin, Illinois 60120 (3)                                        |   | Owned                 |   | 1953                                     |   | —                         |   | 146                                                                                  |   |
| Randall Road and Dean  Street  St. Charles, Illinois 60174 (4)                            |   | Owned                 |   | 2002                                     |   | —                         |   | 1,168                                                                                |   |
| Randall Road  Crystal Lake, Illinois (4)                                                  |   | Owned                 |   | 2002                                     |   | —                         |   | 2,356                                                                                |   |
|                                                                                           |        |                       |        |                                          |        |                                |        |                                                                                      |        |  |

 

----

(1)          The property consists of one commercial retailunit and a parking lot.  The property islocated across the street from the Bank’s main office and the parking lot isutilized by Bank customers and employees.

(2)          The property is located immediately adjacentto the Bank’s main office.  TheLifestyle Advantage, Information Technology, Human Resources and MarketingDepartments are located in this property.

(3)          This is the prior downtown Elgin branch, whichwas sold in February 2004.  The branchwas relocated to the 28 North Grove building in 2002.

(4)          These properties consist primarily of land forfuture branch locations.

 

29

----

 

**Item 3.Legal Proceedings****.**

 

TheCompany is not involved in any pending legal proceedings other than routinelegal proceedings occurring in the ordinary course of business.  Such routine legal proceedings, in theaggregate, are believed by management to be immaterial to the financialcondition and results of operations of the Company.

 

**Item 4****. Submission of Matters to aVote of Security Holders****.**

 

None.

 

 

# **PARTII**

 

**Item 5****.  Market for the Company’s Common Equity and Related StockholderMatters****.**

 

TheCommon Stock of the Company is traded on the American Stock Exchange under thesymbol “EFC.”  The stock began tradingon April 3, 1998.  During 2003 and 2002,the Company declared dividends to its shareholders amounting to $0.575 and$0.535 per share, respectively.  As ofMarch 8, 2004, there were approximately 2,384 shareholders of the Common Stockof the Company, which includes shares held in street name.  The following table sets forth for thequarters indicated the range of high and low sale price information for theCommon Stock of the Company as reported on the American Stock Exchange anddividends declared.

 
|      |   | **Year Ended  December 31, 2003** |   |
|-----------|--------|-----------------------------------|--------|
|      |   | **4th  Quarter**                  |   | **3rd  Quarter** |   | **2nd  Quarter** |   | **1st  Quarter** |   |
|      |   |                              |   |   |   |   |   |   |   |
| High      |   | $                                 | 23.90  |   | $ | 21.32 |   | $ | 20.60 |   | $ | 19.98 |   |
| Low       |   | 20.65                             |   | 18.11 |   | 18.01 |   | 18.00 |   |
| Dividends |   | 0.1475                            |   | 0.1450 |   | 0.1425 |   | 0.1400 |   |
|           |        |                                   |        |  |  |  |  |  |  |  |  |  |  |

 
|      |   | **Year Ended  December 31, 2002** |   |
|-----------|--------|-----------------------------------|--------|
|      |   | **4th  Quarter**                  |   | **3rd  Quarter** | ** ** | **2nd  Quarter** | ** ** | **1st  Quarter** | ** ** |
|      |   |                              |   |   |   |   |   |   |   |
| High      |   | $                                 | 18.50  |   | $ | 17.90 |   | $ | 18.50 |   | $ | 14.30 |   |
| Low       |   | 16.50                             |   | 15.90 |   | 13.96 |   | 13.40 |   |
| Dividends |   | 0.1375                            |   | 0.1350 |   | 0.1325 |   | 0.1300 |   |
|           |        |                                   |        |  |  |  |  |  |  |  |  |  |  |

 

**Item 6****. Selected Financial Data****.**

 

Theinformation relating to selected financial data is incorporated herein byreference to the Registrant’s 2003 Annual Report.

 

**Item 7****.  Management’s Discussion and Analysis of Financial Condition andResults of Operations****.**

 

**Forward-Looking Statements**

 

This report contains certain forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended.  The Company intends such forward-lookingstatements to be covered by the safe harbor provisions for forward-lookingstatements contained in the Private Securities Litigation Reform Act of 1995,and is including this statement for purposes of these safe harborprovisions.  Forward-looking statements,which are based on certain assumptions and describe future plans, strategiesand expectations of the Company, are generally identifiable by use of the words“believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” or similarexpressions.  The

 

30

----

 

Company’s ability to predict results or the actual effect of futureplans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations andfuture prospects of the Company and the subsidiaries include, but are notlimited to, changes in: interest rates, general economic conditions,legislative/regulatory changes, monetary and fiscal policies of the U.S.Government, including policies of the U.S. Treasury and the Federal ReserveBoard, the quality or composition of the loan or investment portfolios, demandfor loan products, deposit flows, competition, demand for financial services inthe Company’s market area and accounting principles, policies andguidelines.  These risks anduncertainties should be considered in evaluating forward-looking statements andundue reliance should not be placed on such statements.  Further information concerning the Companyand its business, including additional factors that could materially affect theCompany’s financial results, is included in the Company’s filings with the SEC.

 

The Company does not undertake - and specifically disclaims anyobligation - to publicly release the result of any revisions that may be madeto any forward-looking statements to reflect events or circumstances after thedate of such statements or to reflect the occurrence of anticipated orunanticipated events.

 

**Management of Interest Rate Risk and Market Risk Analysis**

 

Theprincipal objective of the Company’s interest rate risk management is toevaluate the interest rate risk inherent in certain balance sheet accounts,determine the level of risk appropriate given the Bank’s business strategy,operating environment, capital and liquidity requirements and performanceobjectives, and manage the risk consistent with the Board of Directors’ approvedguidelines.  Through such management,the Company seeks to reduce the vulnerability of its operations to changes ininterest rates.  The Bank’s Board ofDirectors reviews the Bank’s interest rate risk position on a quarterlybasis.  The Bank’s Asset/LiabilityCommittee is comprised of the Bank’s entire Board of Directors and members ofsenior management.  The Committee isresponsible for reviewing the Bank’s activities and strategies, the effect ofthose strategies on the Bank’s net interest margin, the market value of theportfolio and the effect that changes in the interest rates will have on theBank’s portfolio and the Bank’s exposure limits.

 

Inrecent years, the Bank has emphasized the origination, purchase and retentionof adjustable-rate mortgage loans and shorter-term fixed-rate mortgage loans,consumer loans consisting primarily of home equity lines of credit andshort-term commercial business loans to strategically manage interest raterisk.  The Bank currently does notparticipate in hedging programs, interest rate swaps or other activitiesinvolving the use of derivative financial instruments.

 

Inthe event of sharply rising interest rates, the Bank has, with retention inmind, competitively priced deposits. During 2003, the Bank focused on attracting money market accounts aswell as time deposits.  As necessary,the Bank has offered competitive special products to increase retention.  Historically, the Bank has retainedsignificant levels of maturing time deposits based on the above practice, aswell as effective customer service and long-standing relationships withcustomers.  For the year ended December31, 2003, the Bank retained 87.7% of funds maturing from time deposits.

 

 

**Analysis of Net Interest Income**

 

Net interest income represents the difference between income oninterest-earning assets and expense on interest-bearing liabilities. Netinterest income depends on the relative amounts of interest-earning assets andinterest-bearing liabilities and the interest rate earned or paid on them.

 

***Average Balance Sheet.**** *The followingtable sets forth certain information relating to the Bank for the years endedDecember 31, 2003, 2002 and 2001.  Theaverage yields and costs are derived by dividing income or expense by theaverage balance of interest-earning assets or interest-bearing liabilities,respectively, for the periods shown and reflect annualized yields andcosts.  Average balances are derivedfrom average monthly balances. The yields and costs include fees that areconsidered adjustments to yields. Tax-exempt income has been calculated on a tax equivalent basis using a34% tax rate.  Interest incomeattributed to the tax adjustment totaled $803,000, $725,000, and 248,000 forthe years ended December 31, 2003, 2002, and 2001, respectively.  Net interest margin without the taxadjustment totaled 3.01%, 3.21% and 3.01% for the years ended December 31,2003, 2002, and 2001, respectively.  Inaddition, interest rate spread without the tax adjustment totaled 2.71%, 2.80%,and 2.38% for the same time periods, respectively.

 

31

----

 
|                                                             |   | **For the  Year Ended December 31,** |    |
|------------------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                             |   | **2003**                                  |    | **2002** |   | **2001** |   |
|                                                             |   | **Average  Balance**                      |    | **Interest** |   | **Average  Yield/  Cost** |   | **Average  Balance** |   | **Interest** |   | **Average  Yield/  Cost** |   | **Average  Balance** |   | **Interest** |   | **Average  Yield/  Cost** |   |
|                                                             |   | **(Dollars  in thousands)**               |    |
| **Assets:**                                                      |   |                                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                         |   |                                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Short-term deposits                                              |   | $                                         | 25,436  |   | $ | 122 |   | 0.48 | % | $ | 27,611 |   | $ | 269 |   | 0.97 | % | $ | 28,416 |   | $ | 751 |   | 2.64 | % |
| Investment securities                                            |   | 88,312                                    |    | 5,076 |   | 5.75 |   | 75,853 |   | 4,641 |   | 6.12 |   | 61,201 |   | 4,021 |   | 6.57 |   |
| Mortgage-backed and mortgage- related securities                 |   | 13,685                                    |    | 517 |   | 3.78 |   | 12,811 |   | 641 |   | 5.00 |   | 12,874 |   | 827 |   | 6.42 |   |
| Mortgage loans, net                                              |   | 548,632                                   |    | 33,562 |   | 6.12 |   | 486,881 |   | 34,530 |   | 7.09 |   | 445,761 |   | 33,632 |   | 7.54 |   |
| Other loans                                                      |   | 116,678                                   |    | 6,662 |   | 5.71 |   | 80,103 |   | 5,179 |   | 6.46 |   | 55,127 |   | 4,319 |   | 7.84 |   |
| FHLB stock                                                       |   | 10,253                                    |    | 614 |   | 5.99 |   | 9,190 |   | 483 |   | 5.26 |   | 8,541 |   | 539 |   | 6.31 |   |
| Total interest-earning assets                                    |   | 802,996                                   |    | 46,553 |   | 5.80 |   | 692,449 |   | 45,743 |   | 6.61 |   | 611,920 |   | 44,089 |   | 7.20 |   |
| Noninterest-earning assets                                       |   | 48,371                                    |    |   |   |   |   | 40,089 |   |   |   |   |   | 21,466 |   |   |   |   |   |
| Total assets                                                     |   | $                                         | 851,367 |   |   |   |   |   | $ | 732,538 |   |   |   |   |   | $ | 633,386 |   |   |   |   |   |
| **Liabilities and Equity:**                                      |   |                                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                    |   |                                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                        |   |                                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market accounts                                            |   | $                                         | 146,397 |   | $ | 2,694 |   | 1.84 | % | $ | 121,957 |   | $ | 3,335 |   | 2.73 | % | $ | 76,406 |   | $ | 3,057 |   | 4.00 | % |
| Passbook savings accounts                                        |   | 119,766                                   |    | 1,867 |   | 1.56 |   | 101,257 |   | 2,308 |   | 2.28 |   | 74,726 |   | 2,325 |   | 3.11 |   |
| NOW accounts                                                     |   | 35,963                                    |    | 259 |   | 0.72 |   | 31,833 |   | 321 |   | 1.01 |   | 28,848 |   | 309 |   | 1.07 |   |
| Certificates of deposit                                          |   | 226,771                                   |    | 7,341 |   | 3.24 |   | 189,140 |   | 7,603 |   | 4.02 |   | 186,883 |   | 10,764 |   | 5.76 |   |
| Total deposits                                                   |   | 528,897                                   |    | 12,161 |   | 2.30 |   | 444,187 |   | 13,567 |   | 3.05 |   | 366,863 |   | 16,455 |   | 4.49 |   |
| Borrowings                                                       |   | 190,450                                   |    | 9,382 |   | 4.93 |   | 172,991 |   | 9,254 |   | 5.35 |   | 164,783 |   | 8,978 |   | 5.45 |   |
| Total interest-bearing liabilities                               |   | 719,347                                   |    | 21,543 |   | 2.99 |   | 617,178 |   | 22,821 |   | 3.70 |   | 531,646 |   | 25,433 |   | 4.78 |   |
| Noninterest-bearing liabilities                                  |   | 55,595                                    |    |   |   |   |   | 43,213 |   |   |   |   |   | 33,778 |   |   |   |   |   |
| Total liabilities                                                |   | 774,942                                   |    |   |   |   |   | 660,391 |   |   |   |   |   | 565,424 |   |   |   |   |   |
| Total equity                                                     |   | 76,425                                    |    |   |   |   |   | 72,147 |   |   |   |   |   | 67,962 |   |   |   |   |   |
| Total liabilities and equity                                     |   | $                                         | 851,367 |   |   |   |   |   | $ | 732,538 |   |   |   |   |   | $ | 633,386 |   |   |   |   |   |
| Net interest income                                              |   |                                      |    | $ | 25,010 |   |   |   |   |   | $ | 22,922 |   |   |   |   |   | $ | 18,656 |   |   |   |
| Interest rate spread                                             |   |                                      |    |   |   | 2.81 | % |   |   |   |   | 2.91 | % |   |   |   |   | 2.42 | % |
| Net interest margin as a percent of interest-earning assets      |   |                                      |    |   |   | 3.11 | % |   |   |   |   | 3.31 | % |   |   |   |   | 3.05 | % |
| Ratio of interest-earning assets to interest-bearing liabilities |   |                                      |    |   |   | 111.63 | % |   |   |   |   | 112.20 | % |   |   |   |   | 115.10 | % |

 

***Rate/Volume Analysis.**** *The followingtable presents the extent to which changes in interest rates and changes in thevolume of interest-earning assets and interest-bearing liabilities haveaffected the Bank’s interest income and interest expense during the periodsindicated.  Information is provided ineach category with respect to: (i) changes attributable to changes in volume (changes in volumemultiplied by prior rate); (ii) changes attributable to changes in rate(changes in rate multiplied by prior volume); (iii) changes due to acombination of volume and rate; and (iv) the net change.  The change in interest, not solely due tochanges in volume or rates, has been consistently allocated in proportion tothe absolute dollar amount of the change in each.

 

32

----

 
|                                                  |   | **Year Ended  December 31, 2003  Compared to  Year Ended  December 31, 2002** |   | **Year Ended  December 31, 2002  Compared to  Year Ended  December 31, 2001** |   |
|-------------------------------------------------------|--------|-------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|
|                                                  |   | **Increase  (Decrease)  Due to**                                              |   |                                                                                    |   | **Increase  (Decrease)  Due to** |   |   |   |
|                                                  |   | **Volume**                                                                    |   | **Rate**                                                                                |   | **Vol./Rate** |   | **Net** |   | **Volume** |   | **Rate** |   | **Vol./Rate** |   | **Net** |   |
|                                                  |   | **(In  thousands)**                                                           |   |
| **Interest-earning assets:**                          |   |                                                                          |   |                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Short-term deposits                                   |   | $                                                                             | (21    | )                                                                                       | $      | (135 | ) | $ | 9 |   | $ | (147 | ) | $ | (21 | ) | $ | (475 | ) | $ | 14 |   | $ | (482 | ) |
| Investment securities                                 |   | 762                                                                           |   | (281                                                                                    | )      | (46 | ) | 435 |   | 962 |   | (275 | ) | (67 | ) | 620 |   |
| Mortgage-backed and mortgage-related  securities, net |   | 44                                                                            |   | (156                                                                                    | )      | (12 | ) | (124 | ) | (4 | ) | (183 | ) | 1 |   | (186 | ) |
| Mortgage loans, net                                   |   | 4,378                                                                         |   | (4,723                                                                                  | )      | (623 | ) | (968 | ) | 3,100 |   | (2,006 | ) | (196 | ) | 898 |   |
| Other loans                                           |   | 2,363                                                                         |   | (601                                                                                    | )      | (279 | ) | 1,483 |   | 1,959 |   | (761 | ) | (338 | ) | 860 |   |
| FHLB stock                                            |   | 56                                                                            |   | 67                                                                                      |   | 8 |   | 131 |   | 40 |   | (90 | ) | (6 | ) | (56 | ) |
| Total interest-earning assets                         |   | 7,582                                                                         |   | (5,829                                                                                  | )      | (943 | ) | 810 |   | 6,036 |   | (3,790 | ) | (592 | ) | 1,654 |   |
| **Interest-bearing liabilities:**                     |   |                                                                          |   |                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market accounts                                 |   | 667                                                                           |   | (1,085                                                                                  | )      | (223 | ) | (641 | ) | 1,822 |   | (970 | ) | (574 | ) | 278 |   |
| Passbook savings accounts                             |   | 422                                                                           |   | (729                                                                                    | )      | (134 | ) | (441 | ) | 824 |   | (620 | ) | (221 | ) | (17 | ) |
| NOW accounts                                          |   | 42                                                                            |   | (92                                                                                     | )      | (12 | ) | (62 | ) | 32 |   | (17 | ) | (3 | ) | 12 |   |
| Certificates of deposit                               |   | 1,513                                                                         |   | (1,475                                                                                  | )      | (300 | ) | (262 | ) | 131 |   | (3,252 | ) | (40 | ) | (3,161 | ) |
| FHLB advances                                         |   | 934                                                                           |   | (727                                                                                    | )      | (79 | ) | 128 |   | 447 |   | (165 | ) | (6 | ) | 276 |   |
| Total interest-bearing liabilities                    |   | 3,578                                                                         |   | (4,108                                                                                  | )      | (748 | ) | (1,278 | ) | 3,256 |   | (5,024 | ) | (844 | ) | (2,612 | ) |
| Net change in net interest income                     |   | $                                                                             | 4,004  |                                                                                    | $      | (1,738 | ) | $ | (178 | ) | $ | 2,088 |   | $ | 2,780 |   | $ | 1,234 |   | $ | 252 |   | $ | 4,266 |   |

 

**Comparison of Financial Condition For the Years EndedDecember 31, 2003 and December 31, 2002**

 

Total assets at December 31, 2003 were $897.1 million, whichrepresented an increase of $114.7 million, or 14.7%, compared to $782.4 millionat December 31, 2002.  The change intotal assets was primarily due to increases in loans receivable, bank ownedlife insurance, and investment securities. Loans receivable, net, increased by $119.9 million, or 20.1%, to $716.9million at December 31, 2003 as compared to $597.0 million at December 31,2002.  The increase in loans receivablewas attributable to a $61.0 million increase in the Bank’s one- to four-familymortgage loan portfolio; a $57.3 million increase in the commercial real estateloan portfolio; and a $9.8 million increase in the multi-family loan portfolio,which was partially offset by a $5.0 million decrease in the construction andland loan portfolio during the year ended December 31, 2003.  The overall increase in loans is primarilyattributed to the Bank’s growing market area and lower interest rateenvironment.  In addition, the Bankpurchased $110.2 million in loans for the year ended December 31, 2003.  Bank owned life insurance increased $5.8million, or 46.9%, to $18.0 million at December 31, 2003 as compared to $12.2million at December 31, 2002.  Thisincrease was due to an investment of $5.0 million made in May 2003.  Investment securities increased by $2.7million to $90.7 million at December 31, 2003, as compared to $88.0 million atDecember 31, 2002.  This increase wasdue to a $5.0 million increase in FNMA preferred stock, and a $3.2 millionincrease in U.S. Government obligations, which was partially offset by a $3.6million decrease in corporate bonds and a $2.0 million decrease in municipalsecurities.  Cash and cash equivalentsdecreased $10.9 million to $21.9 million at December 31, 2003 as compared to$32.8 million at December 31, 2002.  Thegrowth in total assets was funded by increases in deposits and borrowed money.  Deposits increased $72.6 million, or 13.8%,to $596.8 million at December 31, 2003 from $524.2 million at December 31,2002.  The increase in deposits islargely due to increased advertising and two new branch offices.  Borrowed money, primarily representing FHLBadvances, increased $40.0 million to $211.8 million at December 31, 2003 from$171.8 million at December 31, 2002. Stockholders’ equity increased by $3.6 million to $78.4 million atDecember 31, 2003 as compared to $74.8 million at December 31, 2002.  This increase is primarily the result of theCompany’s net income during the year, which was partially offset by a $819,000decrease in the Company’s accumulated other comprehensive income relating toits available-for-sale investment portfolio, stock repurchases totaling $2.6million and dividends paid of $2.4 million.

 

33

----

 

**Comparison of Operating Results for the Years EndedDecember 31, 2003 and December 31, 2002**

 

***General.*** The Company’s net income increased $1.1million, to $7.2 million for the year ended December 31, 2003, from $6.1million for the year ended December 31, 2002.

 

***Interest Income.***Interest income increased $731,000, or 1.6%,to $45.7 million for the year ended December 31, 2003, compared with the yearended December 31, 2002.  This increaseresulted from an increase in average interest-earning assets offset by adecrease in average yield.  The largestcomponent was an increase of $1.5 million in other loan interest income for theyear ended December 31, 2003.  Thisresulted from an increase in average balance of $36.6 million, offset by adecrease in average yield of 75 basis points. Another component was an increase of $332,000 in investment securitiesand interest bearing deposits interest income for the year ended December 31,2003.  This resulted from an increase inaverage balance of $12.5 million offset by a decrease in average yield of 37basis points.  This was partially offsetby a decrease of $968,000 in mortgage loan interest income.  This resulted from an increase in averagebalance of $61.8 million offset by a decrease in average yield of 97 basispoints.  Overall, the average yield onthe Bank’s interest-earning assets decreased by 81 basis points to 5.80% forthe year ended December 31, 2003 from 6.61% for the year ended December 31,2002.  The decrease in average yield isdue to a general decline in interest rates. The average balance of interest-earning assets increased $110.6 million,or 16.0%, to $803.0 million for the year ended December 31, 2003 from $692.4million for the comparable period in 2002.

 

***Interest Expense.***Interest expense decreased by $1.3 million,or 5.6%, to $21.5 million for the year ended December 31, 2003, from $22.8million for the year ended December 31, 2002. This decrease resulted from the increase in the average balance ofinterest-bearing liabilities, the effect of which was offset by an overalldecrease in the average rate paid on those interest-bearing liabilities.  The average rate paid on total deposits decreased75 basis points to 2.30% for the year ended December 31, 2003 from 3.05% forthe year ended December 31, 2002.  Theaverage balance of deposits increased $84.7 million, or 19.1%, to $528.9million for the year ended December 31, 2003 from $444.2 million for the yearended December 31, 2002.  The resultingdecrease in interest expense totaled $1.4 million for the year ended December31, 2002.  Interest expense resultingfrom borrowed money increased by $128,000. The average rate paid on borrowed money decreased 42 basis points to4.93% for the year ended December 31, 2003 from 5.35% for the year endedDecember 31, 2002.  This decrease inaverage rate was offset by an increase of $17.5 million in the average balanceof borrowed money to $190.5 million for the year ended December 31, 2003 from $173.0million for the year ended December 31, 2002.

 

***Net Interest Income Before Provisionfor Loan Losses.***Netinterest income before provision for loan losses increased $2.0 million, or9.1%, to $24.2 million for the year ended December 31, 2003 from $22.2 millionfor the year ended December 31, 2002. This increase was primarily attributed to a $110.6 million increase inaverage interest-earning assets, at an average yield of 5.80%, offset by anincrease in the average balance of interest-bearing liabilities of $102.2million, at an average cost of 2.99%. The interest rate spread decreased 10 basis points to 2.81% for the yearended December 31, 2003 from 2.91% for the year ended December 31, 2002.  The net interest margin as a percent ofinterest-earning assets decreased 20 basis points to 3.11% for the year endedDecember 31, 2003 as compared to 3.31% for the comparable period in 2002.

 

***Provision for Loan Losses.***The Bank’s provision for loan lossesdecreased $287,000 to $613,000 for the year ended December 31, 2003 from$900,000 in 2002.  At December 31, 2003and 2002, non-performing loans totaled $2.8 million and $2.4 million,respectively.  At December 31, 2003 and2002 the balance of the allowance for loan losses totaled $3.8 million and $3.1million, respectively.  At December 31,2003, the ratio of the allowance for loan losses to non-performing loans was135.7% compared to 131.1% at December 31, 2002.  The ratio of the allowance to total loans was 0.52% and 0.53% atDecember 31, 2003 and 2002, respectively. Net charge-offs totaled $14,000 in 2002 and there were no charge-offsfor the year ended December 31, 2003. Management periodically calculates anallowance sufficiency analysis based upon the portfolio composition, assetclassifications, loan-to-value ratios, impairments in the current loanportfolio, and other factors.  Thisanalysis is designed to reflect credit losses for specifically identifiedloans, as well as credit losses in the remainder of the loan portfolio.  The reserve methodology employed bymanagement reflects the difference in degree of risk between the variouscategories of loans in the Bank’s portfolio. The reserve methodology also critically assesses those loans adverselyclassified in the portfolio by management as doubtful, substandard or specialmention.  These allowance components areset at a higher factor than the non-classified one- to four-family loans in theportfolio to reflect the greater level of risk to which management believes theBank is exposed.  Management believesthat the allowance for loan losses is currently adequate to cover probablelosses in the existing loan portfolio. While management estimates loan losses using the best availableinformation, no assurance can be given that future additions to the allowancewill not

 

34

----

 

be necessary based on changes in economic and real estate marketconditions, further information obtained regarding problem loans,identification of additional problem loans and other factors, both within andoutside of management’s control.  Inaddition, the FDIC and the Commissioner, as an integral part of theirexamination processes, periodically review the Bank’s allowance for loanlosses.  Such agencies may require theBank to make additional provisions for estimated loan losses based uponjudgments different from those of management

 

***Noninterest Income.***Noninterest income totaled $5.7 million and$4.3 million for the years ended December 31, 2003 and 2002, respectively.  Service fees increased $566,000 to $2.2million for the year ended December 31, 2003 from $1.6 million for thecomparable period in 2002.  Service feesincreased primarily due to the offering of an overdraft privilege account toour customers.  Gains on sale of securitiestotaled $816,000 for the year ended December 31, 2003.  There were no securities sales for the yearended December 31, 2002.  The gain onsale of securities was the result of repositioning the balance sheet andfavorable market conditions.  Gains onsale of foreclosed real estate totaled $192,000 for the year ended December 31,2003.  There were no gains on sale offoreclosed real estate for the year ended December 31, 2002.  Income related to bank owned life insuranceincreased $151,000 to $844,000 for the year ended December 31, 2003 from$693,000 for the comparable period in 2002. This increase is primarily due to the additional investment of $5.0million made in May 2003.  In addition,insurance and brokerage commissions increased $37,000 to $442,000 for the yearended December 31, 2003 from $405,000 for the year ended December 31,2002.  These increases were partiallyoffset by a $496,000 decrease to $786,000 in income generated by ComputerDynamics Group, Inc. (“CDGI”) for the year ended December 31, 2003.  The decrease in income generated by CDGI islargely due to a decrease in sales related to a weaker demand for technologyservices.

 

***Noninterest Expense.***Noninterest expense increased by $2.0million, to $18.6 million for the year ended December 31, 2003 from $16.6million for the comparable period in 2002. Compensation and benefits increased by $747,000, or 7.3%, to $11.0million for the year ended December 31, 2003 compared to $10.2 million for theyear ended December 31, 2002.  Thisincrease was primarily due to a combination of annual salary increases and theaddition of staff.  The additional staffexpenses are partially attributed to the Bank’s two new branch offices.  Office buildings operations increased by$328,000 to $2.7 million for the year ended December 31, 2003 compared to $2.4million for the comparable period in 2002. Other operating expenses, including advertising, marketing, postage,communications, data processing and other office expense increased by acombined $243,000, or 11.1% to $2.4 million for the year ended December 31,2003 compared to $2.2 million for the comparable period in 2003.  Of this increase, $92,000 is related to dataprocessing expense; $85,000 of NOW account operating expenses, and $53,000 ofadvertising expenses.  In addition, theCompany incurred a goodwill impairment of $264,000, relating to its majorityowned subsidiary CDGI, for the year ended December 31, 2003.  The goodwill impairment is primarily due toa weaker demand for technology services. The efficiency ratio improved to 62.2% for the year ended December 31,2003 from 62.8% for the comparable prior year period.  In addition, the noninterest expense to average total asset ratiodecreased 8 basis points to 2.19% at December 31, 2003 from 2.27% for the prioryear period.  Management continues toemphasize the importance of expense management and control in order to continueto provide expanded banking services to a growing market base.

 

***Income Tax Expense.***Income tax expense totaled $3.6 million for theyear ended December 31, 2003 compared to $2.9 million for the comparable periodin 2002.  The increase in the provisionfor income taxes was the result of an increase in pretax income of $1.7 millionto $10.7 million for the year ended December 31, 2003 from $9.0 million for thesame period in 2002.  The effective taxrate increased slightly to 33.8% for the year ended December 31, 2003 from32.1% for the preceding year.  Theincrease in the effective tax rate is partially due to a reduction in the municipalbond investment portfolio and the goodwill impairment related to CDGI, offsetin part by the additional purchase of bank owned life insurance.

 

**Comparison of Operating Results for the Years EndedDecember 31, 2002 and December 31, 2001**

 

***General.*** The Company’s net income increased $1.5million, to $6.1 million for the year ended December 31, 2002, from $4.6million for the year ended December 31, 2001.

 

***Interest Income.***  Interest income increased $1.2 million, or 2.7%, to $45.0 million forthe year ended December 31, 2002, compared with 2001.  This increase resulted from an increase in averageinterest-earning assets, partially offset by a decrease in average yield.  The largest component was an increase of$898,000 in mortgage loan interest income for the year ended December 31,2002.  This resulted from an increase inaverage balance of $41.1 million offset by a decrease in average yield of 45basis points.  Another component was anincrease of $881,000 in other loan interest income for the year ended December31, 2002.  This resulted from anincrease in average balance of $25.0 million offset by a decrease in averageyield of 138 basis points.  This

 

35

----

 

was partially offset by a decrease of $332,000 in interest income oninvestment securities, FHLB stock and short-term deposits.  This resulted from an increase in averagebalance of $14.5 million offset by a decrease in average yield of 62 basispoints.  Overall, the average yield onthe Bank’s interest-earning assets decreased by 59 basis points to 6.61% forthe year ended December 31, 2002 from 7.20% for the year ended December 31,2001.  The decrease in average yield isdue to a general decrease in interest rates. The average balance of interest-earning assets increased by $80.5million, or 13.2%, to $692.4 million for the year ended December 31, 2002 from$611.9 million in 2001.

 

***Interest Expense.***  Interest expense decreased by $2.6 million, or 10.3%, to $22.8 millionfor the year ended December 31, 2002, from $25.4 million for the year endedDecember 31, 2001.  This decreaseresulted from the decrease in the average rate paid on interest-bearingliabilities offset by the increase in the average balance of interest-bearingliabilities.  The average rate paid ontotal deposits decreased 108 basis points to 3.70% for the year ended December31, 2002 from 4.78% for the year ended December 31, 2001.  The related average balance of depositsincreased $77.3 million, or 21.1%, to $444.2 million for the year endedDecember 31, 2002 from $366.9 million for the comparable period in 2001.  This increase was partially offset by adecrease in the average rate paid on those deposits of 144 basis points to3.05% for the year ended December 31, 2002 compared to 4.49% for the year endedDecember 31, 2001.  Interest expenseresulting from borrowed money increased by $276,000.  The average rate paid on borrowed money decreased by 10 basispoints to 5.35% for the year ended December 31, 2002 from 5.45% for the yearended December 31, 2001.  This decreasein average rate paid was partially offset by an increase of $8.2 million in theaverage balance of borrowed money to $173.0 million for the year ended December31, 2002 from $164.8 million for the year ended December 31, 2001.

 

***Net Interest Income Before Provisionfor Loan Losses.***  Net interest income before provision forloan losses increased $3.8 million, or 20.6%, to $22.2 million for the yearended December 31, 2002 from $18.4 million for 2001.  This increase was primarily attributable to an $80.5 millionincrease in average interest-earning assets, at an average yield of 6.61%,offset by an increase in the average balance of interest-bearing liabilities of$85.5 million, at an average cost of 3.70%. This combination resulted in an increase in interest rate spread of 46basis points to 2.91% for the year ended December 31, 2002, as compared to2.42% for the year ended December 31, 2001. The increase in interest rate spread is due to a general decrease inrates in the Bank’s local market area as well as deposits repricing faster thanloans.  The net interest margin as apercent of interest-earning assets increased by 26 basis points to 3.31% forthe year ended December 31, 2002 as compared to 3.05% for the comparable periodin 2001.

 

***Provision for Loan Losses.***   TheBank’s provision for loan losses increased by $400,000 to $900,000 for the yearended December 31, 2002 from $500,000 in 2001. This increase is primarily due to the increased risk in the loanportfolio based on uncertain economic conditions and a greater emphasis placedon commercial lending. At December 31, 2002 and 2001, non-performing loanstotaled $2.4 million and $2.6 million, respectively.  At December 31, 2002 and 2001 the balance of the allowance forloan losses totaled $3.1 and $2.3 million, respectively.  At December 31, 2002, the ratio of theallowance for loan losses to non-performing loans was 131.1% compared to 87.4%at December 31, 2001.  The ratio of theallowance to total loans was 0.53% and 0.42% at December 31, 2002 and 2001,respectively.  Net charge-offs totaled$14,000 and $126,000 in 2002 and 2001, respectively.

 

***Noninterest Income.*** Noninterest income totaled $4.3 million and $1.8 million for the yearsended December 31, 2002 and 2001, respectively.  Insurance and brokerage commissions increased $86,000 to $405,000for the year ended December 31, 2002 from $319,000 for the comparable period in2001.  Income related to bank owned lifeinsurance increased from zero in 2001 to $693,000 for the year ended December31, 2002.  Service fees increased$371,000 to $1.6 million for the year ended December 31, 2002 from $1.2 millionfor the comparable prior year period. Revenues of $1.3 million were generated by Computer Dynamics Group, Inc.(“CDGI”).  As previously reported, theCompany purchased a controlling interest in CDGI for $420,000 in January2002.  CDGI is an information technologyconsulting/services company with main offices in West Chicago, Illinois andgenerally services clients located in the Chicago metropolitan area.

 

***Noninterest Expense.***  Noninterest expense increased by $4.0 million, to $16.6 million for theyear ended December 31, 2002 from $12.6 million for the comparable period in2001.  Compensation and benefitsincreased by $2.5 million, or 33.3%, to $10.2 million for the year endedDecember 31, 2002 compared to $7.7 million for the year ended December 31,2001.  This increase is primarily due toa combination of annual salary increases, the addition of staff and the relatedcompensation and benefits of CDGI. The additional staff expenses are primarilyattributed to the opening of a new branch office.  All other operating expenses, including advertising, depreciationand repairs, marketing, insurance, postage, communications, data processing andother office

 

36

----

 

expense increased by a combined $1.5 million, or 30.6%, to $6.4 millionfor the year ended December 31, 2002 compared to $4.9 million for thecomparable period in 2001.  Of thisincrease, $203,000 is related to marketing and advertising expenses relating toa new branch office and increased advertising for EFS Financial Services, Inc.,the Bank’s wholly owned subsidiary, which offers a full range of investmentproducts.

 

***Income Tax Expense.*** Income tax expense totaled $2.9 million for the year ended December 31,2002 compared to $2.5 million for the comparable period in 2001.  The increase in the provision for incometaxes was the result of an increase in pretax income of $1.9 million, to $9.0million for the year ended December 31, 2002 from $7.1 million for the sameperiod in 2001.  The effective incometax rate decreased to 32.1% for the year ended December 31, 2002 from 35.1% forthe preceding year.  The decrease in theeffective tax rate is primarily due to the increase in municipal securitiesavailable-for-sale and investment in bank owned insurance for which income isnon-taxable.

 

**Off-Balance Sheet Arrangements**

 

For a discussion of the Bank’s off-balance sheet arrangements, see note14 (“Concentrations of Credit Risk and Financial Instruments with Off-BalanceSheet Risk”) of the Notes to Consolidated Statements found on page F-23.

 

**Contractual Obligations and Commercial Commitments**

 

The Bank has certain obligations and commitments to make futurepayments under contracts.  At December31, 2003, the aggregate contractual obligations and commercial commitments are:

** **

|                            |   | **At  December 31, 2003** |    |
|---------------------------------|--------|---------------------------|---------|
|                            |   | **Less  than  One  Year** |    | **One to  Two  Years** |   | **Two to  Three  Years** |   | **Three  to Four  Years** |   | **Four  to Five  Years** |   | **More  than  Five  Years** |   | **Total  December  31, 2003** |   |
|                            |   | **(In  thousands)**       |    |
| Contractual obligations:        |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Certificates of deposit         |   | $                         | 126,067 |   | $ | 35,238 |   | $ | 60,600 |   | $ | 16,732 |   | $ | 6,509 |   | $ | — |   | $ | 245,146 |   |
| Federal home loan bank advances |   | 47,700                    |    | 23,000 |   | 15,000 |   | — |   | 19,000 |   | 100,000 |   | 204,700 |   |
| Operating leases                |   | 106                       |    | 108 |   | 109 |   | 110 |   | 112 |   | 293 |   | 838 |   |
| Total at December 31, 2003      |   | $                         | 173,873 |   | $ | 58,346 |   | $ | 75,709 |   | $ | 16,842 |   | $ | 25,621 |   | $ | 100,293 |   | $ | 450,684 |   |

 

|                          |   | **At  December 31, 2003** |   |
|-------------------------------|--------|---------------------------|--------|
|                          |   | **Less  than  One  Year** |   | **One to  Two  Years** |   | **Two to  Three  Years** |   | **Three  to Four  Years** |   | **Four  to Five  Years** |   | **More  than  Five  Years** |   | **Total  December  31, 2003** |   |
|                          |   | **(In  thousands)**       |   |
| Other commercial commitments: |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lines of credit               |   | $                         | 10,420 |   | $ | 952 |   | $ | 1,057 |   | $ | 612 |   | $ | 3,880 |   | $ | 25,421 |   | $ | 42,342 |   |
| Loan commitments              |   | 11,516                    |   | — |   | — |   | — |   | — |   | — |   | 11,516 |   |
| Letters of credit             |   | 2,422                     |   | 1,002 |   | 10 |   | 2,000 |   | — |   | — |   | 5,434 |   |
| Total at December 31, 2003    |   | $                         | 24,358 |   | $ | 1,954 |   | $ | 1,067 |   | $ | 2,612 |   | $ | 3,880 |   | $ | 25,421 |   | $ | 59,292 |   |

 

37

----

 

**Liquidity and Capital Resources**

 

TheBank’s primary sources of funds are savings deposits, proceeds from theprincipal and interest payments on loans and proceeds from the maturation ofsecurities and, to a lesser extent, borrowings from FHLB-Chicago.  While maturities and scheduled amortizationof loans and securities are predictable sources of funds, deposit outflows andmortgage prepayments are greatly influenced by general interest rates, economicconditions and competition.

 

Theprimary investing activities of the Bank are the origination of primarilyresidential one-to four-family loans and, to a lesser extent, multi-family andcommercial real estate, construction and land, commercial and consumer loansand the purchase of mortgage-backed and mortgage-related securities.  During the years ended December 31,2003, 2002, and 2001, the Bank’s loan originations totaled $299.6 million, $179.2million and $206.6 million, respectively. In addition, the Bank purchased loans totaling $110.2 million, $79.6million and $65.2 million for the same time periods.  Primarily deposit growth, borrowings and principal repayments onloans, and mortgage-backed securities funded these activities.  The Bank experienced a net increase in totaldeposits of $72.6 million, $104.1 million and $50.6 million for the years endedDecember 31, 2003, 2002, and 2001, respectively.  This increase can be attributed to an aggressive marketingcampaign as well as the addition of a branch office.  In addition, borrowings increased $40.0 million, decreased $3.5million and increased $35.0 million, respectively for the same timeperiods.  The level of interest ratesaffects deposit flows, the interest rates and products offered by the localcompetitors and the Bank, and other factors.

 

TheBank’s most liquid assets are cash and interest-bearing demand accounts.  The levels of these assets are dependent onthe Bank’s operating, financing, lending and investing activities during anygiven period.  At December 31, 2003,cash and interest-bearing demand accounts totaled $21.9 million, or 2.4% oftotal assets.  The Bank closely monitorsits liquidity position on a daily basis. On a longer-term basis, the Bank maintains a strategy of investing invarious lending products as described in greater detail under Item 1 to thisAnnual Report.  In the event the Bankshould require funds beyond its ability to generate them internally, additionalsources of funds are available through FHLB advances.  At December 31, 2003, the Bank had $204.7 million of outstandingFHLB borrowings.

 

Outstanding commitments to originate firstmortgage loans totaled $11.5 million at December 31, 2003.  Management of the Bank anticipates that itwill have sufficient funds available to meet its current loan commitments.  Certificates of deposit, which are scheduledto mature in one year or less from December 31, 2003, totaled $126.1 million.  For the year ended December 31, 2003, theBank experienced an 87.7% retention rate of funds maturing from certificates ofdeposit. It has been and will continue to be a priority of management to retaintime deposits.  The Bank reliesprimarily on competitive rates, customer service, and long-standingrelationships with customers to retain deposits.  From time to time, the Bank will also offer competitive specialproducts to its customers to increase retention.  Based upon the Bank’s experience with deposit retention andcurrent retention strategies, management believes that, although it is notpossible to predict future terms and conditions upon renewal, a significantportion of such deposits will remain with the Bank.

 

AtDecember 31, 2003, the Bank exceeded all of its regulatory capital requirementswith a leverage capital level of $73.7 million, or 8.27% of adjusted assets,which is above the required level of $35.7 million, or 4.00%, and risk-basedcapital of $77.5 million, or 12.19% of adjusted assets, which is above therequired level of $50.9 million, or 8.00%.

 

Thecapital injection resulting from the Conversion in 1998 of $72.8 millionsignificantly increased liquidity and capital resources.  A portion of the net proceeds was investedin marketable securities.  The initiallevel of liquidity has been reduced as net proceeds are utilized for generalcorporate purposes, including the funding of lending activities and expansionof facilities and to a greater degree the repurchase of the Company’s commonstock.  During 2003, the Companyrepurchased 134,500 shares of the Company’s common stock at an average priceper share of $19.04.  The Companybelieves that stock repurchases are a good way to manage its excess capital anda sound investment decision.  Theprimary source of funding for the Company is dividend payments from the Bank,sales and maturities of investment securities and, to a lesser extent, earningson investments and deposits held by the Company.  Dividend payments by the Bank have primarily been used to fundstock repurchase programs and pay dividends on Company stock.  These repurchases totaled $37.1 million asof December 31, 2003.  The Bank’sability to pay dividends and other capital distributions to the Company isgenerally limited by the provisions of the Illinois state banking regulationsand the Federal Deposit Insurance Corporation. Additionally, the Illinois State Banking Commissioner and FederalDeposit Insurance Corporation may prohibit the payment of dividends that areotherwise permissible by regulation for safety and soundness reasons.  Under Illinois banking law, an Illinoisstate chartered stock savings bank may declare and pay dividends out of its netprofits, unless there is an impairment of capital, but approval of theCommissioner is required if the total of all dividends declared in a calendaryear would exceed 50% of the

 

38

----

 

Bank’s net profits for that year if the Bank has total capital of lessthan 6% of total assets.  A savings bankmay not declare dividends in excess of its net profits in any year without theapproval of the Commissioner.  To theextent the Bank were to apply to pay a dividend or capital distribution to theCompany in excess of the regulatory permitted dividend amounts, no assurancescan be made such application would be approved by the regulatoryauthorities.  See also “Regulation andSupervision” on page 27.

 

**Impact of Inflation and Changing Prices**

 

TheConsolidated Financial Statements and Notes thereto presented in this AnnualReport have been prepared in accordance with accounting principles generallyaccepted in the United States of America, which generally require themeasurement of financial position and operating results in terms of historicaldollar amounts without considering the changes in the relative purchasing powerof money over time due to inflation. The impact of inflation is reflected in the increased cost of the Bank’soperations.  Unlike industrialcompanies, nearly all of the assets and liabilities of the Bank are monetary innature.  As a result, interest rateshave a greater impact on the Bank’s performance than do the effects of generallevels of inflation.  Interest rates donot necessarily move in the same direction or to the same extent as the priceof goods and services.

 

**Impact of Accounting Standards**

 

In January 2003, the FASB issuedInterpretation No. 46, “Consolidation of Variable Interest Entities” whichprovides new accounting guidance on when to consolidate a variable interestentity.  A variable interest entityexists when either the total equity investment at risk is not sufficient topermit the entity to finance its activities by itself, or the equity investorslack one of three characteristics associated with owning a controllingfinancial interest.  Thosecharacteristics include the direct or indirect ability to make decisions aboutan entity’s activities through voting rights or similar rights, the obligationto absorb the expected loss of an entity if they occur, and the right toreceive the expected residual return of the entity if they occur.  On October 9, 2003, the FASB issued adeferral to December 31, 2003 of the implementation of FIN 46 for variableinterest entities in existence prior to February 1, 2003.  We do not expect that the adoption of thisInterpretation will have a material impact on our consolidated financialstatements.  On December 24, 2003, theFinancial Accounting Standards Board issued FASB Interpretation No. 46 (revisedDecember 2003), “Consolidation of Variable Interest Entities,” (FIN 46R), whichaddresses how a business enterprise should evaluate whether it has acontrolling financial interest in an entity through means other than votingrights and accordingly should consolidate the entity.  FIN 46R replaces FASB Interpretation No. 46, “Consolidation ofVariable Interest Entities,” which was issued on January 17, 2003.  We do not believe the implementation of FIN46R will have a material effect on our financial statements.

 

In April 2003, the FASB issued SFAS No.149,“Amendment of Statement 133 on Derivative Instruments and HedgingActivities.”  This Statement amends andclarifies accounting for derivative instruments, including certain derivativeinstruments embedded in other contracts, and for hedging activities.  This Statement is effective for contractsentered into or modified after June 30, 2003 and for hedging relationshipsdesignated after June 30, 2003. Adoption of this Statement did not have a material impact on ourconsolidated financial statements.

 

In May 2003, the FASB issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity.”  This Statementwould require that certain financial instruments with characteristics of bothliabilities and equity be classified on the consolidated balance sheets asliabilities.  The Statement is effectivefor financial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003.  On October 29,2003, the FASB deferred the application of certain requirements of SFAS No.150.  Adoption of this Statement did nothave a material impact on our consolidated financial statements.

 

In November 2003, the FASB ratified aconsensus reached by the Emerging Issues Task Force (“EITF”) in EITF 03-1, “TheMeaning of Other-Than-Temporary Impairment and its Application to CertainInvestments,” which is effective for fiscal years ending after December 15,2003.  The consensus requires certainquantitative and qualitative disclosures for debt and marketable equitysecurities classified as available-for-sale or held-to-maturity under SFAS No.115, “Accounting for Certain Investments in Debt and Equity Securities” thatare impaired at the balance sheet date but for which an other-than-temporaryimpairment has not been recognized. These disclosures are contained in Note 4 of the Notes to ConsolidatedFinancial Statements.

 

39

----

 

##### **Item 7A**. Quantitative and QualitativeDisclosure About Market Risk

 

The Bank’s interest rate sensitivity is monitored by management throughthe use of a Net Portfolio Value Model which generates estimates of the changein the Bank’s net portfolio value (“NPV”) over a range of interest ratescenarios.  NPV is the present value ofexpected cash flows from assets, liabilities, and off-balance sheetcontracts.  The NPV ratio, under anyinterest rate scenario, is defined as the NPV in that scenario divided by themarket value of assets in the same scenario. The model assumes estimated loanprepayment rates, reinvestment rates and deposit decay rates similar to theassumptions utilized for the Gap Table. The Sensitivity Measure is the decline in the NPV ratio, in basispoints, caused by a 2% increase or decrease in rates; whichever produces alarger decline.  The higher theinstitution’s Sensitivity Ratio, the greater its exposure to interest rate riskis considered to be.  The following NPVTable sets forth the Bank’s NPV as of December 31, 2003.

 
| **Change in  Interest  Rates  In Basis  Points  (Rate  Shock)** |   |                                       |   |         |   |
|-----------------------------------------------------------------|--------|--------------------------------------------|--------|--------------|--------|
| **Net  Portfolio Value**                                        |   | **NPV as% of  Portfolio  Value of Assets** |
| **Amount**                                                      |   | **$  Change**                              |   | **% Change** |   | **NPV  Ratio** |   | **% Change** |
|                                                            |   | **(Dollars  in thousands)**                |   |         |   |   |   |   |   |
|                                                            |   |                                       |   |         |   |   |   |   |   |   |   |
| 300                                                             |   | $                                          | 48,762 |         | $      | (38,604 | ) | (44.19 | )% | 5.60 | % | (41.24 | )% |
| 200                                                             |   | 62,633                                     |   | (24,733      | )      | (28.31 | ) | 7.07 |   | (25.81 | ) |
| 100                                                             |   | 75,730                                     |   | (11,636      | )      | (13.32 | ) | 8.42 |   | (11.65 | ) |
| Static                                                          |   | 87,366                                     |   | —       |   | — |   | 9.53 |   | — |   |
| (100)                                                           |   | 83,338                                     |   | (4,028       | )      | (4.61 | ) | 9.07 |   | (4.83 | ) |
|                                                                 |        |                                            |        |              |        |  |  |  |  |  |  |  |  |

 

Certain shortcomings are inherent in the methodology used in the aboveinterest rate risk measurements. Modeling changes in NPV require certain assumptions which may or may notreflect the manner in which actual yields and costs respond to changes inmarket interest rates.  In this regard,the NPV Table presented assumes that the composition of the Bank’s interestsensitive assets and liabilities existing at the beginning of a period remainsconstant over the period being measured and also assumes that a particularchange in interest rates is reflected uniformly across the yield curveregardless of the duration to maturity or repricing of specific assets andliabilities.  Accordingly, although theNPV Table provides an indication of the Bank’s interest rate risk exposure at aparticular point in time, such measurements are not intended to and do notprovide a precise forecast of the effect of changes in market interest rates onthe Bank’s net interest income and will differ from actual results.  Due to the level of the current interest rateenvironment only a 100 basis point decline is shown.

 

For a further discussion regardingQuantitative and Qualitative Disclosure about Market Risk, see Item 7 of thisForm 10-K, “Management’s Discussion and Analysis of Financial Condition andResults of Operations - Management of Interest Rate Risk and Market RiskAnalysis.”

 

40

----

 

**Item 8. Financial Statements andSupplementary Data****.**

 

**EFC BANCORP, INC. AND SUBSIDIARIES**

 

Consolidated FinancialStatements

 

December 31, 2003,2002, and 2001

 

(With IndependentAuditors’ Report Thereon)

 

----

 

**IndependentAuditors’ Report**

 

TheBoard of DirectorsEFC Bancorp, Inc.:

 

We have audited the accompanying consolidated balance sheets of EFCBancorp, Inc. and subsidiaries (the Company) as of December 2003 and2002, and the related consolidated statements of income, changes instockholders’ equity, and cash flows for each of the years in the three-yearperiod ended December 31, 2003. These consolidated financial statementsare the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of EFC Bancorp, Inc. and subsidiariesas of December 31, 2003 and 2002, and the results of their operations andtheir cash flows for each of the years in the three-year period endedDecember 31, 2003 in conformity with accounting principles generallyaccepted in the United States of America.

 

 
|               |  |   |
|--------------------|--|--------|
| Chicago,  Illinois |
| March 5,  2004     |

 

F-1

----

 

**EFCBANCORP, INC. AND SUBSIDIARIES**

 

Consolidated Balance Sheets

 

December 31, 2003 and 2002

 
|                                                                                                                           |   | **2003**    |        | **2002**    |        |
|--------------------------------------------------------------------------------------------------------------------------------|--------|-------------|-------------|-------------|-------------|
| **Assets**                                                                                                                     |   |        |        |        |        |
| Cash and cash equivalents:                                                                                                     |   |        |        |        |        |
| On hand and in banks                                                                                                           |   | $           | 5,449,261   |        | 4,277,209   |   |
| Interest bearing deposits with financial  institutions                                                                         |   | 16,426,727  |        | 28,567,081  |        |
|                                                                                                                           |   |        |        |        |        |
| Total cash and cash equivalents                                                                                                |   | 21,875,988  |        | 32,844,290  |        |
|                                                                                                                           |   |        |        |        |        |
| Loans receivable, net                                                                                                          |   | 716,883,910 |        | 597,038,305 |        |
| Mortgage-backed securities available-for-sale, at  fair value                                                                  |   | 10,164,501  |        | 15,255,684  |        |
| Investment securities available-for-sale, at fair  value                                                                       |   | 90,656,208  |        | 87,981,884  |        |
| Foreclosed real estate                                                                                                         |   | —      |        | 1,985,741   |        |
| Stock in Federal Home Loan Bank of Chicago, at  cost                                                                           |   | 10,877,600  |        | 9,362,200   |        |
| Accrued interest receivable                                                                                                    |   | 4,009,280   |        | 3,887,410   |        |
| Office properties and equipment, net                                                                                           |   | 17,672,562  |        | 16,796,685  |        |
| Real estate held for development                                                                                               |   | 4,189,637   |        | 2,934,072   |        |
| Bank owned life insurance                                                                                                      |   | 17,986,416  |        | 12,246,803  |        |
| Other assets                                                                                                                   |   | 2,776,482   |        | 2,042,852   |        |
|                                                                                                                           |   |        |        |        |        |
| Total assets                                                                                                                   |   | $           | 897,092,584 |        | 782,375,926 |   |
|                                                                                                                           |   |        |        |        |        |   |
| **Liabilities and Stockholders’ Equity**                                                                                  |   |        |        |        |        |
|                                                                                                                           |   |        |        |        |        |
| Liabilities:                                                                                                                   |   |        |        |        |        |
| Deposits                                                                                                                       |   | $           | 596,763,807 |        | 524,189,844 |   |
| Borrowed money                                                                                                                 |   | 211,788,751 |        | 171,778,743 |        |
| Income taxes payable                                                                                                           |   | 535,795     |        | (40,717     | )           |
| Accrued expenses and other liabilities                                                                                         |   | 9,758,945   |        | 11,746,488  |        |
|                                                                                                                           |   |        |        |        |        |
| Total liabilities                                                                                                              |   | 818,847,298 |        | 707,674,358 |        |
|                                                                                                                           |   |        |        |        |        |
| Minority interest                                                                                                              |   | (158,666    | )           | (75,127     | )           |
|                                                                                                                           |   |        |        |        |        |
| Stockholders’ equity:                                                                                                     |   |        |        |        |        |
| Preferred stock, par value $0.01 per share.  Authorized 2,000,000 shares; no shares issued                                     |   | —      |        | —      |        |
| Common stock, par value $0.01 per share.  Authorized 25,000,000 shares; issued 7,491,434 shares at December 31, 2003  and 2002 |   | 74,914      |        | 74,914      |        |
| Additional paid-in capital                                                                                                     |   | 72,247,346  |        | 71,834,834  |        |
| Treasury stock, at cost, 2,898,763 and 2,854,293  shares at December 31, 2003 and 2002, respectively                           |   | (35,598,664 | )           | (33,755,940 | )           |
| Unearned employee stock ownership plan (ESOP),  359,590 and 399,544 shares at December 31, 2003 and 2002, respectively         |   | (5,376,779  | )           | (5,974,199  | )           |
| Unearned stock award plan, 6,026 and 51,790 shares  at December 31, 2003 and 2002, respectively                                |   | (67,039     | )           | (576,164    | )           |
| Retained earnings, substantially restricted                                                                                    |   | 46,681,729  |        | 41,911,421  |        |
| Accumulated other comprehensive income, net                                                                                    |   | 442,445     |        | 1,261,829   |        |
|                                                                                                                           |   |        |        |        |        |
| Total stockholders’ equity                                                                                                |   | 78,403,952  |        | 74,776,695  |        |
|                                                                                                                           |   |        |        |        |        |
| Commitments and contingencies                                                                                                  |   |        |        |        |        |
|                                                                                                                           |   |        |        |        |        |
| Total liabilities and stockholders’ equity                                                                                |   | $           | 897,092,584 |        | 782,375,926 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-2

----

 

**EFCBANCORP, INC. AND SUBSIDIARIES**

 

Consolidated Statements ofIncome

 

Years ended December 31,2003, 2002, and 2001

 
|                                                                                                |   | **2003**   |       | **2002**   |       | **2001**   |       |
|-----------------------------------------------------------------------------------------------------|--------|------------|------------|------------|------------|------------|------------|
| Interest income:                                                                                    |   |       |       |       |       |       |       |
| Loans secured by real estate                                                                        |   | $          | 33,561,702 |       | 34,529,608 |       | 33,631,702 |   |
| Other loans                                                                                         |   | 6,658,237  |       | 5,166,670  |       | 4,285,273  |       |
| Mortgage-backed securities available-for-sale                                                       |   | 517,104    |       | 641,146    |       | 826,999    |       |
| Investment securities available-for-sale and  interest bearing deposits with financial institutions |   | 5,012,524  |       | 4,680,757  |       | 5,096,809  |       |
|                                                                                                |   |       |       |       |       |       |       |
| Total interest income                                                                               |   | 45,749,567 |       | 45,018,181 |       | 43,840,783 |       |
|                                                                                                |   |       |       |       |       |       |       |
| Interest expense:                                                                                   |   |       |       |       |       |       |       |
| Deposits                                                                                            |   | 12,160,594 |       | 13,567,100 |       | 16,454,916 |       |
| Borrowed money                                                                                      |   | 9,382,424  |       | 9,254,173  |       | 8,978,165  |       |
|                                                                                                |   |       |       |       |       |       |       |
| Total interest expense                                                                              |   | 21,543,018 |       | 22,821,273 |       | 25,433,081 |       |
|                                                                                                |   |       |       |       |       |       |       |
| Net interest income before provision for loan  losses                                               |   | 24,206,549 |       | 22,196,908 |       | 18,407,702 |       |
|                                                                                                |   |       |       |       |       |       |       |
| Provision for loan losses                                                                           |   | 613,250    |       | 900,000    |       | 500,000    |       |
|                                                                                                |   |       |       |       |       |       |       |
| Net interest income after provision for loan  losses                                                |   | 23,593,299 |       | 21,296,908 |       | 17,907,702 |       |
|                                                                                                |   |       |       |       |       |       |       |
| Noninterest income:                                                                                 |   |       |       |       |       |       |       |
| Service fees                                                                                        |   | 2,157,189  |       | 1,591,294  |       | 1,220,059  |       |
| Insurance and brokerage commissions                                                                 |   | 441,725    |       | 404,929    |       | 318,698    |       |
| Information technology sales and service income,  net                                               |   | 786,130    |       | 1,282,615  |       | —     |       |
| Gain on sale of foreclosed real estate                                                              |   | 192,113    |       | —     |       | 8,014      |       |
| Gain on sale of securities                                                                          |   | 816,454    |       | —     |       | 32,812     |       |
| Gain on sale of loans                                                                               |   | 156,223    |       | 200,409    |       | 170,723    |       |
| Bank owned life insurance                                                                           |   | 844,385    |       | 692,863    |       | —     |       |
| Other                                                                                               |   | 342,007    |       | 148,757    |       | 70,392     |       |
|                                                                                                |   |       |       |       |       |       |       |
| Total noninterest income                                                                            |   | 5,736,226  |       | 4,320,867  |       | 1,820,698  |       |
|                                                                                                |   |       |       |       |       |       |       |
| Noninterest expense:                                                                                |   |       |       |       |       |       |       |
| Compensation and benefits                                                                           |   | 10,981,846 |       | 10,234,785 |       | 7,676,007  |       |
| Office building, net                                                                                |   | 2,714,859  |       | 2,387,286  |       | 1,695,108  |       |
| Federal insurance premiums                                                                          |   | 89,573     |       | 76,311     |       | 74,853     |       |
| Advertising                                                                                         |   | 779,331    |       | 726,320    |       | 523,023    |       |
| Data processing                                                                                     |   | 980,204    |       | 888,634    |       | 829,076    |       |
| NOW account operating expenses                                                                      |   | 582,915    |       | 498,104    |       | 357,121    |       |
| Impairment of goodwill                                                                              |   | 264,382    |       | —     |       | —     |       |
| Other                                                                                               |   | 2,216,839  |       | 1,834,366  |       | 1,430,201  |       |
|                                                                                                |   |       |       |       |       |       |       |
| Total noninterest expense                                                                           |   | 18,609,949 |       | 16,645,806 |       | 12,585,389 |       |
|                                                                                                |   |       |       |       |       |       |       |
| Income before income taxes and minority interest                                                    |   | 10,719,576 |       | 8,971,969  |       | 7,143,011  |       |
|                                                                                                |   |       |       |       |       |       |       |
| Income tax expense                                                                                  |   | 3,618,674  |       | 2,882,339  |       | 2,507,811  |       |
|                                                                                                |   |       |       |       |       |       |       |
| Income before minority interest                                                                     |   | 7,100,902  |       | 6,089,630  |       | 4,635,200  |       |
|                                                                                                |   |       |       |       |       |       |       |
| Minority interest                                                                                   |   | 83,539     |       | 57,682     |       | —     |       |
|                                                                                                |   |       |       |       |       |       |       |
| Net income                                                                                          |   | $          | 7,184,441  |       | 6,147,312  |       | 4,635,200  |   |
|                                                                                                |   |       |       |       |       |       |       |
| Earnings per share:                                                                                 |   |       |       |       |       |       |       |
| Basic                                                                                               |   | $          | 1.70       |       | 1.46       |       | 1.09       |   |
| Diluted                                                                                             |   | 1.61       |       | 1.39       |       | 1.08       |       |

 

See accompanying notes to consolidatedfinancial statements.

 

F-3

----

 

**EFCBANCORP, INC. AND SUBSIDIARIES**

 

Consolidated Statements ofChanges in Stockholders’ Equity

 

Years ended December 31,2003, 2002, and 2001

 
|                                                                                                                                                            |   | **Number of  common  stock  shares** |   | **Common  stock** |   | **Additional  paid-in  capital** |       | **Treasury  stock** |         | **Unearned  ESOP  plan  shares** |        | **Unearned  stock award  plan  shares** |        | **Retained  earnings** |       | **Accumulated  other  comprehensive  income (loss)** |     | **Total**  |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|-------------------|--------|----------------------------------|------------|---------------------|--------------|----------------------------------|-------------|-----------------------------------------|-------------|------------------------|------------|------------------------------------------------------|----------|------------|------------|
| Balance  at December 31, 2000                                                                                                                                   |   |                                 |   | $                 | 74,914 |                             | 71,761,626 |                | (30,987,317) |                             | (7,169,039) |                                    | (1,834,468) |                   | 35,483,689 |                                                 | (44,303) |       | 67,285,102 |   |
|                                                                                                                                                            |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     |       |       |
| Treasury stock purchased                                                                                                                                        |   | (227,708                             | )      | —            |   | —                           |       | (2,597,237          | )            | —                           |        | —                                  |        | —                 |       | —                                               |     | (2,597,237 | )          |
| ESOP shares committed to be released                                                                                                                            |   | 39,954                               |   | —            |   | (128,832                         | )          | —              |         | 597,420                          |        | —                                  |        | —                 |       | —                                               |     | 468,588    |       |
| Stock award plan – shares allocated                                                                                                                        |   | 56,953                               |   | —            |   | 30,901                           |       | —              |         | —                           |        | 633,602                                 |        | —                 |       | —                                               |     | 664,503    |       |
| Dividends declared ($0.50 per share)                                                                                                                            |   |                                 |   | —            |   | —                           |       | —              |         | —                           |        | —                                  |        | (2,103,147             | )          | —                                               |     | (2,103,147 | )          |
|                                                                                                                                                            |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     |       |       |
| Comprehensive income:                                                                                                                                           |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     |       |       |
| Net income                                                                                                                                                      |   |                                 |   | —            |   | —                           |       | —              |         | —                           |        | —                                  |        | 4,635,200              |       | —                                               |     | 4,635,200  |       |
| Change in net unrealized gain (loss) on securities  available-for-sale, less reclassification adjustment for realized gains  included in net income of $32,812  |   |                                 |   | —            |   | —                           |       | —              |         | —                           |        | —                                  |        | —                 |       | 451,728                                              |     | 451,728    |       |
| Income tax effect                                                                                                                                               |   |                                 |   | —            |   | —                           |       | —              |         | —                           |        | —                                  |        | —                 |       | (176,174                                             | )        | (176,174   | )          |
|                                                                                                                                                            |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     |       |       |
| Total comprehensive income                                                                                                                                      |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     | 4,910,754  |       |
|                                                                                                                                                            |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     |       |       |
| Balance at December 31, 2001                                                                                                                                    |   |                                 |   | 74,914            |   | 71,663,695                       |       | (33,584,554         | )            | (6,571,619                       | )           | (1,200,866                              | )           | 38,015,742             |       | 231,251                                              |     | 68,628,563 |       |
|                                                                                                                                                            |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     |       |       |
| Treasury stock purchased                                                                                                                                        |   | (56,800                              | )      | —            |   | —                           |       | (956,564            | )            | —                           |        | —                                  |        | —                 |       | —                                               |     | (956,564   | )          |
| ESOP shares committed to be released                                                                                                                            |   | 39,954                               |   | —            |   | 43,671                           |       | —              |         | 597,420                          |        | —                                  |        | —                 |       | —                                               |     | 641,091    |       |
| Stock options exercised                                                                                                                                         |   | 87,380                               |   | —            |   | —                           |       | 785,178             |         | —                           |        | —                                  |        | —                 |       | —                                               |     | 785,178    |       |
| Stock award plan – shares allocated                                                                                                                        |   | 56,153                               |   | —            |   | 127,468                          |       | —              |         | —                           |        | 624,702                                 |        | —                 |       | —                                               |     | 752,170    |       |
| Dividends  declared ($0.535 per share)                                                                                                                          |   |                                 |   | —            |   | —                           |       | —              |         | —                           |        | —                                  |        | (2,251,633             | )          | —                                               |     | (2,251,633 | )          |
|                                                                                                                                                            |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     |       |       |
| Comprehensive income:                                                                                                                                           |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     |       |       |
| Net income                                                                                                                                                      |   |                                 |   | —            |   | —                           |       | —              |         | —                           |        | —                                  |        | 6,147,312              |       | —                                               |     | 6,147,312  |       |
| Change in net unrealized gain (loss) on securities  available-for-sale                                                                                          |   |                                 |   | —            |   | —                           |       | —              |         | —                           |        | —                                  |        | —                 |       | 1,689,471                                            |     | 1,689,471  |       |
| Income tax effect                                                                                                                                               |   |                                 |   | —            |   | —                           |       | —              |         | —                           |        | —                                  |        | —                 |       | (658,893                                             | )        | (658,893   | )          |
|                                                                                                                                                            |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     |       |       |
| Total comprehensive income                                                                                                                                      |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     | 7,177,890  |       |
|                                                                                                                                                            |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     |       |       |
| Balance  at December 31, 2002                                                                                                                                   |   |                                 |   | 74,914            |   | 71,834,834                       |       | (33,755,940         | )            | (5,974,199                       | )           | (576,164                                | )           | 41,911,421             |       | 1,261,829                                            |     | 74,776,695 |       |
|                                                                                                                                                            |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     |       |       |
| Treasury stock purchased                                                                                                                                        |   | (134,500                             | )      | —            |   | —                           |       | (2,560,340          | )            | —                           |        | —                                  |        | —                 |       | —                                               |     | (2,560,340 | )          |
| ESOP shares committed to be released                                                                                                                            |   | 39,954                               |   | —            |   | 202,986                          |       | —              |         | 597,420                          |        | —                                  |        | —                 |       | —                                               |     | 800,406    |       |
| Stock options exercised                                                                                                                                         |   | 90,030                               |   | —            |   | —                           |       | 717,616             |         | —                           |        | —                                  |        | —                 |       | —                                               |     | 717,616    |       |
| Stock award plan – shares allocated                                                                                                                        |   | 45,764                               |   | —            |   | 209,526                          |       | —              |         | —                           |        | 509,125                                 |        | —                 |       | —                                               |     | 718,651    |       |
| Dividends declared ($0.575 per share)                                                                                                                           |   |                                 |   | —            |   | —                           |       | —              |         | —                           |        | —                                  |        | (2,414,133             | )          | —                                               |     | (2,414,133 | )          |
|                                                                                                                                                            |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     |       |       |
| Comprehensive income:                                                                                                                                           |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     |       |       |
| Net income                                                                                                                                                      |   |                                 |   | —            |   | —                           |       | —              |         | —                           |        | —                                  |        | 7,184,441              |       | —                                               |     | 7,184,441  |       |
| Change in net unrealized gain (loss) on securities  available-for-sale, less reclassification adjustment for realized gains  included in net income of $816,454 |   |                                 |   | —            |   | —                           |       | —              |         | —                           |        | —                                  |        | —                 |       | (1,343,252                                           | )        | (1,343,252 | )          |
| Income tax effect                                                                                                                                               |   |                                 |   | —            |   | —                           |       | —              |         | —                           |        | —                                  |        | —                 |       | 523,868                                              |     | 523,868    |       |
|                                                                                                                                                            |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     |       |       |
| Total comprehensive income                                                                                                                                      |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     | 6,365,057  |       |
|                                                                                                                                                            |   |                                 |   |              |   |                             |       |                |         |                             |        |                                    |        |                   |       |                                                 |     |       |       |
| Balance at December 31, 2003                                                                                                                                    |   |                                 |   | $                 | 74,914 |                             | 72,247,346 |                | (35,598,664  | )                                | (5,376,779  | )                                       | (67,039     | )                      | 46,681,729 |                                                 | 442,445  |       | 78,403,952 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-4

----

 

**EFC BANCORP, INC. AND SUBSIDIARIES**

 

Consolidated Statements ofCash Flows

 

Years ended December 31, 2003, 2002, and 2001

 
|                                                                                         |   | **2003**     |       | **2002**    |       | **2001**    |       |
|----------------------------------------------------------------------------------------------|--------|--------------|------------|-------------|------------|-------------|------------|
| Cash flows from operating activities:                                                        |   |         |       |        |       |        |       |
| Net income                                                                                   |   | $            | 7,184,441  |        | 6,147,312  |        | 4,635,200  |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |   |         |       |        |       |        |       |
| Amortization of premiums and discounts, net                                                  |   | 101,179      |       | 9,392       |       | 151,481     |       |
| Provision for loan losses                                                                    |   | 613,250      |       | 900,000     |       | 500,000     |       |
| FHLB of Chicago stock dividends                                                              |   | (755,200     | )          | (470,300    | )          | (538,300    | )          |
| Deferred income tax expense (benefit)                                                        |   | 407,906      |       | (276,407    | )          | 192,517     |       |
| Stock award plan shares allocated, net of tax effect                                         |   | 718,651      |       | 752,170     |       | 664,503     |       |
| ESOP shares committed to be released                                                         |   | 597,420      |       | 597,420     |       | 597,420     |       |
| Change in fair value of ESOP shares                                                          |   | 202,986      |       | 43,671      |       | (128,832    | )          |
| Depreciation and amortization of office properties  and equipment                            |   | 1,153,959    |       | 834,635     |       | 738,071     |       |
| Gain on sale of foreclosed real estate                                                       |   | (192,113     | )          | —      |       | (8,014      | )          |
| Gain on sale of investment securities                                                        |   | (816,454     | )          | —      |       | (32,812     | )          |
| Gain on sale of loans                                                                        |   | (156,223     | )          | (200,409    | )          | (170,723    | )          |
| Change in minority interest in subsidiary                                                    |   | (83,539      | )          | (75,127     | )          | —      |       |
| Increase in bank owned life insurance                                                        |   | (739,613     | )          | (612,803    | )          | —      |       |
| Impairment of goodwill                                                                       |   | 264,382      |       | —      |       | —      |       |
| (Increase) decrease in accrued interest receivable  and other assets, net                    |   | (612,900     | )          | (1,183,514  | )          | 204,434     |       |
| Increase (decrease) in income taxes payable,  accrued expenses and other liabilities, net    |   | (1,858,749   | )          | 2,401,319   |       | 3,327,567   |       |
|                                                                                         |   |         |       |        |       |        |       |
| Net cash provided by operating activities                                                    |   | 6,029,383    |       | 8,867,359   |       | 10,132,512  |       |
|                                                                                         |   |         |       |        |       |        |       |
| Cash flows from investing activities:                                                        |   |         |       |        |       |        |       |
| Net (increase) decrease in loans receivable                                                  |   | (30,899,719  | )          | 3,749,783   |       | (26,520,097 | )          |
| Purchases of loans receivable                                                                |   | (110,230,678 | )          | (79,620,252 | )          | (65,161,386 | )          |
| Proceeds from the sale of loans                                                              |   | 20,838,243   |       | 13,217,497  |       | 10,519,267  |       |
| Increase in real estate held for development                                                 |   | (1,255,565   | )          | (2,934,072  | )          | —      |       |
| Purchases of mortgage-backed securities  available-for-sale                                  |   | (2,549,222   | )          | (7,170,009  | )          | (10,435,957 | )          |
| Principal payments on mortgage-backed securities  available-for-sale                         |   | 7,363,479    |       | 5,593,387   |       | 5,978,113   |       |
| Maturities of investment securities  available-for-sale                                      |   | 29,699,965   |       | 27,547,993  |       | 32,413,522  |       |
| Proceeds from sale of investment securities  available-for-sale                              |   | 15,349,744   |       | —      |       | 4,032,812   |       |
| Purchases of investment securities  available-for-sale                                       |   | (48,075,084  | )          | (45,057,683 | )          | (40,602,120 | )          |
| Purchases of office properties and equipment                                                 |   | (2,029,835   | )          | (6,641,114  | )          | (2,723,957  | )          |
| Investment in bank owned life insurance                                                      |   | (5,000,000   | )          | (780,000    | )          | (10,854,000 | )          |
| Purchases of stock in the Federal Home Loan Bank  of Chicago                                 |   | (760,200     | )          | —      |       | (593,600    | )          |
| Cash used in acquisition of majority-owned  subsidiary                                       |   | —       |       | (420,000    | )          | —      |       |
| Proceeds from sale of foreclosed real estate                                                 |   | 2,177,854    |       | —      |       | 4,104,916   |       |
|                                                                                         |   |         |       |        |       |        |       |
| Net cash used in investing activities                                                        |   | (125,371,018 | )          | (92,514,470 | )          | (99,842,487 | )          |
|                                                                                         |   |         |       |        |       |        |       |
| Cash flows from financing activities:                                                        |   |         |       |        |       |        |       |
| Net increase in deposits                                                                     |   | 72,573,963   |       | 104,105,555 |       | 50,550,934  |       |
| Proceeds from borrowed money                                                                 |   | 136,071,102  |       | 622,636     |       | 60,000,000  |       |
| Repayments on borrowed money                                                                 |   | (96,061,094  | )          | (4,043,893  | )          | (25,000,000 | )          |
| Purchase of treasury stock                                                                   |   | (2,560,340   | )          | (956,564    | )          | (2,597,237  | )          |
| Stock options exercised                                                                      |   | 717,616      |       | 785,178     |       | —      |       |
| Cash dividends paid                                                                          |   | (2,367,914   | )          | (2,196,801  | )          | (2,091,103  | )          |
|                                                                                         |   |         |       |        |       |        |       |
| Net cash provided by financing activities                                                    |   | 108,373,333  |       | 98,316,111  |       | 80,862,594  |       |
|                                                                                         |   |         |       |        |       |        |       |
| Net increase (decrease) in cash and cash  equivalents                                        |   | (10,968,302  | )          | 14,669,000  |       | (8,847,381  | )          |
|                                                                                         |   |         |       |        |       |        |       |
| Cash and cash equivalents at beginning of year                                               |   | 32,844,290   |       | 18,175,290  |       | 27,022,671  |       |
|                                                                                         |   |         |       |        |       |        |       |
| Cash and cash equivalents at end of year                                                     |   | $            | 21,875,988 |        | 32,844,290 |        | 18,175,290 |   |
|                                                                                         |   |         |       |        |       |        |       |
| Supplemental disclosures of cash flow information:                                           |   |         |       |        |       |        |       |
| Cash paid during the year for:                                                               |   |         |       |        |       |        |       |
| Interest                                                                                     |   | $            | 21,381,233 |        | 22,759,969 |        | 25,366,680 |   |
| Income taxes                                                                                 |   | 3,340,000    |       | 3,121,000   |       | 2,207,500   |       |
| Noncash investing activities:                                                                |   |         |       |        |       |        |       |
| Transfer of loans to foreclosed real estate                                                  |   | —       |       | 1,985,741   |       | 3,557,110   |       |

 

See accompanying notes to consolidatedfinancial statements.

 

F-5

----

 

**EFC BANCORP, INC. AND SUBSIDIARIES**

 

Notes to ConsolidatedFinancial Statements

 

December 31, 2003, 2002, and 2001

 

**(1)**                     Summary of Significant Accounting Policies

 

Thefollowing describes the more significant policies which EFC Bancorp, Inc.(the Company) follows in preparing and presenting its consolidatedfinancial statements.

 

***Principles of Consolidation***

 

The consolidated financial statements include theaccounts of EFC Bancorp, Inc. and its wholly owned subsidiaries. Allsignificant intercompany accounts and transactions have been eliminated inconsolidation. The Company purchased an 80% interest in Computer DynamicsGroup, Inc. (CDGI) for $420,000 in January 2002. CDGI is consolidated anda minority interest is recorded for the proportionate interest not owned by theCompany.

 

The accounting and reporting policies of the Companyconform to accounting principles generally accepted in the United States ofAmerica and to general practice within the banking industry. In preparing theconsolidated financial statements, management is required to make estimates andassumptions that affect the reported amounts of assets and liabilities as ofthe date of the consolidated balance sheet and revenues and expenses for theperiod. Actual results could differ from these estimates.

 

***Financial Reporting of Segments***

 

Statement of Financial Accounting StandardsNo. 131 (SFAS 131), *DisclosuresAbout Segments of an Enterprise and Related Information*, establishesstandards for the way public business enterprises report information aboutoperating segments in annual financial statements. Operating segments arecomponents of an enterprise for which separate financial information isavailable, and is evaluated regularly by management in deciding how to allocateresources and in assessing performance. SFAS 131 establishes standards forrelated disclosures about products, services, geographic areas, and majorcustomers. The Company operates as a single segment.

 

EFS Bank (the Savings Bank) is principally engaged in thebusiness of attracting deposits and investing these funds, together withborrowings, to originate and purchase primarily one-to-four family residentialmortgages and construction loans and to purchase securities.

 

***Loans Receivable***

 

Loans receivable are stated at unpaid principalbalances less deferred loan fees and the allowance for loan losses. Premiumsand discounts on purchased loans are amortized and accreted to interest incomeusing the level-yield method over the remaining period to contractual maturity.

 

Loan origination fees and certain direct costsassociated with loan originations are deferred. Net deferred fees are amortizedas yield adjustments over the contractual life of the related loans using thelevel-yield method.

 

The allowance for loan losses is provided by chargesto operations. The balance of the allowance is based on management’s estimateof probable losses in the loan portfolio and current economic conditions.Regulatory examiners may require the Company to recognize additions to theallowance based upon their judgments about information available to them at thetime of their examination.

 

F-6

----

 

A provision for losses on specific loans is charged tooperations when any permanent decline reduces the market value to less than theloan principal balance or carrying value less estimated costs to sellforeclosed real estate.

 

Management, considering current information and eventsregarding the borrower’s ability to repay their obligations, considers a loanto be impaired when it is probable that the Company will be unable to collectall amounts due according to the contractual terms of the note agreement,including principal and interest. The amount of impairment for individual loansis measured based on the fair value of the collateral, if the loan iscollateral dependent, or alternatively, on the present value of expected futurecash flows discounted at the loan’s effective interest rate. Certain groups ofsmall balance homogenous loans represented by installment and consumer creditand residential real estate loans are excluded from the impairment provisions.

 

A loan is generally classified as nonaccrual whencollectibility is in doubt and the loan is contractually past due three monthsor more. When a loan is placed on nonaccrual status, previously accrued, butunpaid interest is reversed against interest income. Income on such loans issubsequently recorded to the extent that cash is received and where futurecollection of principal is probable.

 

***Investment Securities and Mortgage-backed Securities***

 

The Company classifies its investment andmortgage-backed securities in one of three categories: trading,available-for-sale, or held-to-maturity. Securities which the Company has thepositive intent and ability to hold to maturity are classified asheld-to-maturity and measured at amortized cost. Securities purchased for thepurpose of being sold in the near term are classified as trading securities andmeasured at fair value with any change in fair value included in earnings. Allother securities that are not classified as held-to-maturity or trading areclassified as available-for-sale. Securities classified as available-for-saleare measured at fair value with any changes in fair value reflected as aseparate component of stockholders’ equity, net of related tax effects. Gainsand losses on the sale of such securities are determined using the specificidentification method. Securities that have losses deemed other than temporaryare recognized as losses in the consolidated statement of income and a new costbasis is established. The Company has classified all investment securities asavailable-for-sale at December 31, 2003 and 2002.

 

Discounts and premiums on mortgage-backed securitiespurchased are accreted and amortized to maturity, using a method whichapproximates the effective interest method. For investment securities, thestraight-line method based upon the contractual life of the security isprincipally used, which approximates the effective interest method.

 

***Office Properties and Equipment***

 

Office properties and equipment are stated at costless accumulated depreciation and amortization. Depreciation and amortizationis computed for financial reporting purposes principally on the straight-linebasis over the estimated useful lives (5 to 40 years) of the respective assets.

 

F-7

----

 

***Income Taxes***

 

Deferred income taxes arise from the recognition ofcertain items of income and expense for tax purposes in years different fromthose in which they are recognized in the consolidated financial statements.Deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases (temporary differences).

 

Deferred tax assets and liabilities are measured usingenacted tax rates expected to apply to taxable income in the years in which thetemporary differences are expected to be recovered or settled. The effect ondeferred tax assets and liabilities of a change in tax rates is recognized asincome in the period that includes the enactment date. To the extent a deferredtax asset is established which is not likely to be realized, a valuationallowance is established against such asset.

 

***Foreclosed Real Estate***

 

Foreclosed real estate represents real estate acquiredthrough foreclosure, and is recorded at the lower of cost (principal balance ofthe former first mortgage loan plus costs of obtaining title and possession) ornet realizable value, at the date of foreclosure. After foreclosure, additionalcharges are recorded to operations as necessary to reflect further impairmentof the estimated net realizable value.

 

***Employee Stock Ownership Plan (ESOP)***

 

Compensation expense under the ESOP is equal to thefair value of common shares released or committed to be released annually toparticipants in the ESOP. The difference between the fair value of the sharescommitted to be released and the cost of those shares to the ESOP is charged orcredited to additional paid-in capital. Common stock purchased by the ESOP andnot committed to be released to participants is included in the consolidatedbalance sheet at cost as a reduction of stockholders’ equity. Dividends onallocated ESOP shares are recorded as a reduction of stockholders’ equity;dividends on unallocated ESOP shares are used to pay debt service, and recordedas a reduction of debt and accrued interest.

 

***Earnings per Share***

 

Basic earnings per share is calculated by dividing netincome available to common stockholders by the weighted average number ofcommon shares outstanding. Diluted earnings per share is calculated by dividingnet income by the weighted average number of common shares adjusted for thedilutive effect of outstanding stock options. ESOP shares are only consideredoutstanding for earnings per share calculations when they are committed to bereleased.

 

***Cash and Cash Equivalents***

 

For purposes of the consolidated statements of cashflows, cash and cash equivalents are considered to include cash on hand and inbanks and interest bearing deposits with financial institutions.

 

F-8

----

 

***Comprehensive Income***

 

Comprehensive income consists of net income and netunrealized gains (losses) on available-for-sale securities and is presented inthe consolidated statements of changes in stockholders’ equity.

 

***Stock Option Plan***

 

The Company has stock option plans that authorize thegranting of stock options to eligible employees. In December 2002, the Companyadopted SFAS No. 148, *“Accounting forStock Based Compensation – Transition and Disclosure.”*

 

Under Statement 123, the Company is required todisclose pro forma net income and earnings per share as if compensation expenserelative to the fair value of options granted had been included in earnings.Had the Company determined compensation cost based on the fair value at thegrant date of its stock options under Statement 123, the Company’s netincome would have been reduced to the pro forma amounts indicated below:

 
|                                                                                                                                        |   | **Year ended December 31** |      |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|-----------|
|                                                                                                                                        |   | **2003**                   |      | **2002** |   | **2001** |   |
| Net  income as reported                                                                                                                     |   | $                          | 7,184,441 |   | 6,147,312 |   | 4,635,200 |   |
| Add:  Stock based compensation, net of tax included in the determination of net  income as reported                                         |   | 509,125                    |      | 624,702 |   | 633,602 |   |
| Deduct:  Stock based compensation, net of tax, that would have been reported if the  fair value based method had been applied to all awards |   | (977,388                   | )         | (1,073,080 | ) | (1,085,821 | ) |
|                                                                                                                                        |   |                       |      |   |   |   |   |
| Pro  forma net income                                                                                                                       |   | $                          | 6,716,178 |   | 5,698,934 |   | 4,182,981 |   |
|                                                                                                                                        |   |                       |      |   |   |   |   |
| Basic  earnings per share                                                                                                                   |   |                       |      |   |   |   |   |
| As  reported                                                                                                                                |   | $                          | 1.70      |   | 1.46 |   | 1.09 |   |
| Pro  forma                                                                                                                                  |   | 1.59                       |      | 1.35 |   | 0.98 |   |
|                                                                                                                                        |   |                       |      |   |   |   |   |
| Diluted  earnings per share                                                                                                                 |   |                       |      |   |   |   |   |
| As  reported                                                                                                                                |   | $                          | 1.61      |   | 1.39 |   | 1.08 |   |
| Pro  forma                                                                                                                                  |   | 1.51                       |      | 1.29 |   | 0.97 |   |

 

F-9

----

 

The Company follows the disclosure provisions of FASBStatement No. 123, *Accounting forStock-Based Compensation*. The fair value of each option granted isestimated on the grant date using the Black-Scholes option-pricing model withthe following weighted-average assumptions:

 

|                            |   | **2003**       |   |
|---------------------------------|--------|----------------|--------|
| Dividend  yield                 |   | 2.83%  - 3.16% |   |
| Risk-free  interest rate        |   | 3.54%  - 3.83% |   |
| Weighted  average expected life |   | 10  Years      |   |
| Expected  volatility            |   | 14.7%  - 17%   |   |

 

There were no options granted during 2002 and 2001.

 

The weighted average per share fair value of optionsgranted in 2003 was $2.61.

 

***Basis of Presentation***

*** ***

Certain amounts for prior years have been reclassifiedto conform to the current year presentation.

 

**(2)**                     Earnings Per Share

** **

The following table sets forth the computation ofbasic and diluted earnings per share for the periods indicated. ESOP shares areonly considered outstanding for earnings per share calculations when they arecommitted to be released.

 
|                                                |   | **Year ended December 31** |      |
|-----------------------------------------------------|--------|----------------------------|-----------|
|                                                |   | **2003**                   |      | **2002** |   | **2001** |   |
| Basic:                                              |   |                       |      |   |   |   |   |
| Net  income                                         |   | $                          | 7,184,441 |   | 6,147,312 |   | 4,635,200 |   |
| Weighted  average common shares outstanding         |   | 4,214,480                  |      | 4,215,039 |   | 4,249,640 |   |
|                                                |   |                       |      |   |   |   |   |
| Basic  earnings per share                           |   | $                          | 1.70      |   | 1.46 |   | 1.09 |   |
|                                                |   |                       |      |   |   |   |   |
| Diluted:                                            |   |                       |      |   |   |   |   |
| Net  income                                         |   | $                          | 7,184,441 |   | 6,147,312 |   | 4,635,200 |   |
| Weighted  average common shares outstanding         |   | 4,214,480                  |      | 4,215,039 |   | 4,249,640 |   |
| Effect  of dilutive stock options outstanding       |   | 238,633                    |      | 204,985 |   | 47,134 |   |
|                                                |   |                       |      |   |   |   |   |
| Diluted  weighted average common shares outstanding |   | 4,453,113                  |      | 4,420,024 |   | 4,296,774 |   |
|                                                |   |                       |      |   |   |   |   |
| Diluted  earnings per share                         |   | $                          | 1.61      |   | 1.39 |   | 1.08 |   |

 

F-10

----

 

**(3)**                     Loans Receivable, Net

 

Loansreceivable, net are summarized as follows:

 
|                            |   | **December 31,** |        |
|---------------------------------|--------|------------------|-------------|
|                            |   | **2003**         |        | **2002** |   |
| Mortgage  loans:                |   |             |        |   |   |
| One-to-four  family residential |   | $                | 466,930,401 |   | 405,952,832 |   |
| Multifamily                     |   | 52,248,499       |        | 42,497,672 |   |
| Commercial                      |   | 109,426,205      |        | 52,154,556 |   |
| Construction  and land          |   | 36,356,150       |        | 41,323,317 |   |
|                            |   |             |        |   |   |
| Total  mortgage loans           |   | 664,961,255      |        | 541,928,377 |   |
|                            |   |             |        |   |   |
| Other  loans:                   |   |             |        |   |   |
| Home  equity loans              |   | 27,497,027       |        | 21,160,238 |   |
| Commercial                      |   | 22,603,322       |        | 33,315,091 |   |
| Auto  loans                     |   | 1,471,200        |        | 1,115,795 |   |
| Loans  on savings accounts      |   | 228,563          |        | 1,017,541 |   |
| Other                           |   | 4,066,233        |        | 1,888,763 |   |
|                            |   |             |        |   |   |
| Total  other loans              |   | 55,866,345       |        | 58,497,428 |   |
|                            |   |             |        |   |   |
| Total  loans receivable         |   | 720,827,600      |        | 600,425,805 |   |
|                            |   |             |        |   |   |
| Less:                           |   |             |        |   |   |
| Deferred  loan fees             |   | 189,174          |        | 246,354 |   |
| Allowance  for loan losses      |   | 3,754,516        |        | 3,141,146 |   |
|                            |   |             |        |   |   |
| Loans  receivable, net          |   | $                | 716,883,910 |   | 597,038,305 |   |

 

Activityin the allowance for loan losses is summarized as follows:

 
|                          |   | **Year ended December 31** |      |
|-------------------------------|--------|----------------------------|-----------|
|                          |   | **2003**                   |      | **2002** |   | **2001** |   |
| Balance  at beginning of year |   | $                          | 3,141,146 |   | 2,255,146 |   | 1,881,084 |   |
| Provision  for loans losses   |   | 613,250                    |      | 900,000 |   | 500,000 |   |
| Charge-offs                   |   | —                     |      | (16,192 | ) | (125,959 | ) |
| Recoveries                    |   | 120                        |      | 2,192 |   | 21 |   |
|                          |   |                       |      |   |   |   |   |
| Balance  at end of year       |   | $                          | 3,754,516 |   | 3,141,146 |   | 2,255,146 |   |

 

F-11

----

 

Loans receivable in arrears three months or more andon nonaccrual status or in the process of foreclosure are as follows:

 
|              |   | **Number  of loans** |   | **Amount** |      | **Percent of  gross loans  receivable** |   |
|-------------------|--------|----------------------|--------|------------|-----------|-----------------------------------------|--------|
| December 31, 2003 |   | 18                   |   | $          | 1,884,550 |                                    | 0.26   | % |
| December 31, 2002 |   | 13                   |   | 1,076,762  |      | 0.18                                    |   |
| December 31, 2001 |   | 10                   |   | 2,641,085  |      | 0.49                                    |   |
|                   |        |                      |        |            |           |                                         |        |  |

 

 

Interest income foregone that would have beenrecognized on nonaccrual loans if such loans had performed in accordance withtheir contractual terms was $82,000, $198,000, and $187,000 for the years endedDecember 31, 2003, 2002, and 2001, respectively.

 

There were no impaired loans at December 31, 2003and 2002.

 

The Savings Bank offers to its employees, officers,and directors adjustable-rate mortgage loans for the purchase or refinance ofthe individual’s owner-occupied primary residence with interest rates which maybe up to 1% below the rates offered to the Savings Bank’s other customers. Allother loans to officers, directors, and to associates of such persons are madein the ordinary course of business, on substantially the same terms, includingcollateral, as those prevailing at the time for comparable transactions withother customers and do not involve more than a normal risk of collectibility.As of December 31, 2003 and 2002, the outstanding balance on such loanswas approximately $4,544,000 and $5,274,000, respectively. Loan originations,repayments, and other changes for the year ended December 31, 2003 were$2,923,000, $3,216,000, and $437,000, respectively.

 

F-12

----

 

**(4)****                     Mortgage-backedSecurities and Investment Securities Available-for-Sale**

 

Theamortized cost and estimated fair value of mortgage-backed securities andinvestment securities available-for-sale are summarized as follows:

 
|                                     |   | **December  31, 2003** |        |
|------------------------------------------|--------|------------------------|-------------|
|                                     |   | **Amortized  cost**    |        | **Gross  unrealized  gains** |   | **Gross  unrealized  losses** |   | **Estimated  fair value** |   |
| Mortgage-backed securities:              |   |                   |        |   |   |   |   |   |   |
| Federal Home Loan Mortgage Corporation   |   | $                      | 3,039,557   |   | 16,910 |   | (12,519 | ) | 3,043,948 |   |
| Federal National Mortgage Association    |   | 2,081,020              |        | 27,116 |   | (343 | ) | 2,107,793 |   |
| Government National Mortgage Association |   | 5,058,235              |        | 14,970 |   | (60,445 | ) | 5,012,760 |   |
|                                     |   |                   |        |   |   |   |   |   |   |
|                                     |   | 10,178,812             |        | 58,996 |   | (73,307 | ) | 10,164,501 |   |
| Investment securities:                   |   |                   |        |   |   |   |   |   |   |
| United States Government obligations     |   | 36,081,402             |        | 277,043 |   | (294,722 | ) | 36,063,723 |   |
| Municipal securities                     |   | 32,558,305             |        | 1,168,679 |   | (76,525 | ) | 33,650,459 |   |
| Corporate bonds                          |   | 5,038,570              |        | 391,641 |   | — |   | 5,430,211 |   |
| Equity securities                        |   | 16,238,300             |        | 57,000 |   | (783,485 | ) | 15,511,815 |   |
|                                     |   |                   |        |   |   |   |   |   |   |
|                                     |   | 89,916,577             |        | 1,894,363 |   | (1,154,732 | ) | 90,656,208 |   |
|                                     |   |                   |        |   |   |   |   |   |   |
|                                     |   | $                      | 100,095,389 |   | 1,953,359 |   | (1,228,039 | ) | 100,820,709 |   |

 

F-13

----

 
|                                     |   | **December  31, 2002** |        |
|------------------------------------------|--------|------------------------|-------------|
|                                     |   | **Amortized  cost**    |        | **Gross  unrealized  gains** |   | **Gross  unrealized  losses** |   | **Estimated  fair value** |   |
| Mortgage-backed securities:              |   |                   |        |   |   |   |   |   |   |
| Federal Home Loan Mortgage Corporation   |   | $                      | 6,717,546   |   | 38,837 |   | (22,359 | ) | 6,734,024 |   |
| Federal National Mortgage Association    |   | 3,795,954              |        | 39,454 |   | (109 | ) | 3,835,299 |   |
| Government National Mortgage Association |   | 4,661,310              |        | 39,401 |   | (14,350 | ) | 4,686,361 |   |
|                                     |   |                   |        |   |   |   |   |   |   |
|                                     |   | 15,174,810             |        | 117,692 |   | (36,818 | ) | 15,255,684 |   |
| Investment securities:                   |   |                   |        |   |   |   |   |   |   |
| United States Government obligations     |   | 32,110,804             |        | 826,668 |   | (95,895 | ) | 32,841,577 |   |
| Municipal securities                     |   | 34,764,789             |        | 905,781 |   | (62,565 | ) | 35,608,005 |   |
| Corporate bonds                          |   | 8,870,890              |        | 156,126 |   | (16,110 | ) | 9,010,906 |   |
| Equity securities                        |   | 10,247,703             |        | 302,910 |   | (29,217 | ) | 10,521,396 |   |
|                                     |   |                   |        |   |   |   |   |   |   |
|                                     |   | 85,994,186             |        | 2,191,485 |   | (203,787 | ) | 87,981,884 |   |
|                                     |   |                   |        |   |   |   |   |   |   |
|                                     |   | $                      | 101,168,996 |   | 2,309,177 |   | (240,605 | ) | 103,237,568 |   |

 

Duringthe year ended December 31, 2003, sales of investment securitiesavailable-for-sale totaled $15,349,744. These sales resulted in gross gains of$816,454 for 2003. There were no sales of investment securitiesavailable-for-sale for the year ended December 31, 2002. In addition,during the year ended December 31, 2001, sales of investment securities available-for-saletotaled $4,032,812. These sales resulted in gross gains of $32,812.

 

Theamortized cost and estimated fair value of investment securitiesavailable-for-sale at December 31, 2003 by contractual maturity are shownbelow. Expected maturities may differ from contractual maturities becauseborrowers may have the right to prepay obligations.

 
|                                   |   | **Amortized  cost** |       | **Estimated  fair value** |       |
|----------------------------------------|--------|---------------------|------------|---------------------------|------------|
| Due in one year or less                |   | $                   | 500,000    |                      | 500,328    |   |
| Due after one year through five years  |   | 6,113,570           |       | 6,555,247                 |       |
| Due after five years through ten years |   | 33,190,105          |       | 33,259,918                |       |
| Due after ten years                    |   | 33,874,602          |       | 34,828,900                |       |
| Equity securities                      |   | 16,238,300          |       | 15,511,815                |       |
|                                   |   |                |       |                      |       |
|                                   |   | $                   | 89,916,577 |                      | 90,656,208 |   |

 

F-14

----

 

Thefollowing table provides the gross unrealized losses and fair value, aggregatedby investment category and length of time the individualized securities havebeen in a continuous unrealized loss position at December 31, 2003:

 
|                                 |   | **Less than  12 months** |       | **12 months  or more** |     | **Total**       |      |
|--------------------------------------|--------|--------------------------|------------|------------------------|----------|-----------------|-----------|
| **Description**                      |   | **Fair  value**          |       | **Unrealized  loss**   |     | **Fair  value** |      | **Unrealized  loss** |   | **Fair  value** |   | **Unrealized  loss** |   |
| U.S. Government obligations          |   | $                        | 22,815,577 |                   | (294,722 | )               | —    |   | — |   | 22,815,577 |   | (294,722 | ) |
| Municipal securities                 |   | 1,994,331                |       | (76,525                | )        | —          |      | — |   | 1,994,331 |   | (76,525 | ) |
| Mortgage-backed securities           |   | 5,808,842                |       | (46,759                | )        | 1,549,108       |      | (26,548 | ) | 7,357,950 |   | (73,307 | ) |
|                                 |   |                     |       |                   |     |            |      |   |   |   |   |   |   |
| Subtotal, debt securities            |   | 30,618,750               |       | (418,006               | )        | 1,549,108       |      | (26,548 | ) | 32,167,858 |   | (444,554 | ) |
|                                 |   |                     |       |                   |     |            |      |   |   |   |   |   |   |
| Equity securities                    |   | 10,697,470               |       | (303,183               | )        | 2,457,345       |      | (480,302 | ) | 13,154,815 |   | (783,485 | ) |
|                                 |   |                     |       |                   |     |            |      |   |   |   |   |   |   |
| Total temporarly impaired securities |   | $                        | 41,316,220 |                   | (721,189 | )               | 4,006,453 |   | (506,850 | ) | 45,322,673 |   | (1,228,039 | ) |

 

Becausethe securities identified in the table above are classified as available forsale, and carried at fair value with unrealized losses net of related taxeffect recorded in stockholders’ equity, any charge to earnings in the futureif the securities would be deemed by management to be other than temporarilyimpaired would not be expected to have a significant impact on stockholders’equity. None of the unrealized losses are related to credit deterioration. TheBank has the ability and intent to hold these securities until market valuesrecover or until maturity date, if applicable. The $480,000 of unrealizedlosses on equity securities are primarily on Fannie Mae and Freddie Macfloating rate preferred stock. These unrealized losses are considered temporaryimpairments due to the interest rate environment in 2003. It is expected thatmarket values will recover in the future as the interest rate on the securitiesreprice higher as market interest rates increase.

 

**(5)****                     AccruedInterest Receivable**

 

Accruedinterest receivable is summarized as follows:

 
|                       |   | **December  31,** |      |
|----------------------------|--------|-------------------|-----------|
|                       |   | **2003**          |      | **2002** |   |
| Loans receivable           |   | $                 | 3,184,334 |   | 2,793,170 |   |
| Mortgage-backed securities |   | 52,437            |      | 93,871 |   |
| Investment securities      |   | 772,509           |      | 1,000,369 |   |
|                       |   | $                 | 4,009,280 |   | 3,887,410 |   |

 

F-15

----

 

**(6)****                     OfficeProperties and Equipment**

 

Officeproperties and equipment at cost is summarized as follows:

 
|                                            |   | **December  31,** |       |
|-------------------------------------------------|--------|-------------------|------------|
|                                            |   | **2003**          |       | **2002** |   |
| Land                                            |   | $                 | 5,609,577  |   | 5,609,577 |   |
| Land improvements                               |   | 584,511           |       | 549,891 |   |
| Office buildings                                |   | 10,982,472        |       | 10,404,662 |   |
| Leasehold improvements                          |   | 499,296           |       | 492,345 |   |
| Furniture, fixtures, and equipment              |   | 5,927,633         |       | 5,253,000 |   |
| Construction in progress                        |   | 607,837           |       | — |   |
|                                            |   |              |       |   |   |
|                                            |   | 24,211,326        |       | 22,309,475 |   |
|                                            |   |              |       |   |   |
| Less accumulated depreciation and  amortization |   | (6,538,764        | )          | (5,512,790 | ) |
|                                            |   |              |       |   |   |
|                                            |   | $                 | 17,672,562 |   | 16,796,685 |   |

 

Depreciationand amortization expense totaled $1,153,959, $834,635, and $738,071 for theyears ended December 31, 2003, 2002, and 2001, respectively.

 

Thebank is obligated under non-cancelable leases primarily for office space. Rentexpense under these leases for the years ended December 31, 2003, 2002,and 2001, was $103,000, $133,000 and $103,000, respectively. The projectedminimum rentals under existing leases as of December 31, 2003 is as follows (inthousands):

 

|                |   | **Year ended  December 31,** |   |
|---------------------|--------|------------------------------|--------|
| 2004                |   | $                            | 106    |   |
| 2005                |   | 108                          |   |
| 2006                |   | 109                          |   |
| 2007                |   | 110                          |   |
| 2008                |   | 112                          |   |
| 2009 and thereafter |   | 293                          |   |
|                     |        |                              |        |  |

 

**(7)****                     Real EstateActivity**

 

***Real Estate Held forDevelopment***

 

On June 19, 2002, EFS Service Corporation, a wholly ownedsubsidiary of the Bank, purchased approximately 16 acres of land located inWest Dundee, Illinois. This land is being developed into 29 home-sites forsingle-family residences. As of December 31, 2003, this investment totaled $4.2million and there were two model homes under construction.

 

F-16

----

 

***Joint Ventures***

 

EFS Service Corporation entered into two 50/50 joint venture agreementsin 2003, known as Algonquin 80 LLC and Algonquin 36 LLC. Algonquin 80 LLC is 80acres of vacant land in Algonquin, Illinois to be sold and subsequentlydeveloped into residential properties. The Bank has made a loan to the jointventure in the amount of $7.4 million at December 31, 2003 primarily for theacquisition of the land. Algonquin 36 LLC consists of 36 acres of vacant landin Algonquin, Illinois. The strategy is for the joint venture to develop theparcel into commercial properties. The Bank has made a loan to the jointventure in the amount of $8.2 million at December 31, 2003 primarily for theacquisition of the land.

 

**(8)****                     Deposits**

 

Depositbalances are summarized as follows:

 
|                                                                      |                   |        |        | **Stated or  weighted  average rate** |        |   |   | **Stated or  weighted  average rate** |   |
|---------------------------------------------------------------------------|------------------------|-------------|-------------|---------------------------------------|-------------|--------|--------|---------------------------------------|--------|
| **December  31, 2003**                                                    | **December  31, 2002** |
| **Amount**                                                                |                   | **Percent** | **Amount**  |                                  | **Percent** |
| Commercial checking accounts                                              |                   | $           | 26,069,361  |                                  | 4.4         | %      | — |                                  | $      | 21,741,940 |   | 4.1 | % | — |   |
| NOW accounts – noninterest bearing                                   |                   | 12,967,947  |        | 2.2                                   |        | — |   | 10,912,899                            |   | 2.1 |   | — |   |
| NOW accounts – interest bearing                                      |                   | 39,121,533  |        | 6.5                                   |        | 0.72   | %      | 34,201,191                            |   | 6.5 |   | 1.01 | % |
| Passbook                                                                  |                   | 127,929,602 |        | 21.4                                  |        | 1.56   |   | 106,598,938                           |   | 20.3 |   | 2.28 |   |
| Money market accounts                                                     |                   | 145,529,681 |        | 24.4                                  |        | 1.84   |   | 140,856,886                           |   | 26.9 |   | 2.73 |   |
|                                                                      |                   |        |        |                                  |        |   |   |                                  |   |   |   |   |   |
| Certificate accounts:                                                     |                   |        |        |                                  |        |   |   |                                  |   |   |   |   |   |
| Fixed rates                                                               |                   | 147,732,779 |        | 24.8                                  |        | 2.99   |   | 130,204,987                           |   | 24.9 |   | 3.50 |   |
| Individual retirement accounts – 18-48 month fixed and variable rate |                   | 54,769,000  |        | 9.2                                   |        | 3.80   |   | 50,882,510                            |   | 9.7 |   | 4.14 |   |
| Jumbo certificates (with a minimum denomination of $100,000)              |                   | 42,643,904  |        | 7.1                                   |        | 2.60   |   | 28,790,493                            |   | 5.5 |   | 3.33 |   |
|                                                                      |                   |        |        |                                  |        |   |   |                                  |   |   |   |   |   |
|                                                                      |                   | $           | 596,763,807 |                                  | 100.0       | %      | 2.30   | %                                     | $      | 524,189,844 |   | 100.0 | % | 3.05 | % |
|                                                                      |                   |        |        |                                  |        |   |   |                                  |   |   |   |   |   |
| Contractual maturity of certificate accounts ($100,000 or greater):       |                   |        |        |                                  |        |   |   |                                  |   |   |   |   |   |
| Under 3 months                                                            |                   | $           | 17,374,274  |                                  | 16.3        | %      |   |                                  | $      | 7,135,456 |   | 9.6 | % |   |   |
| Over 3 months through 6 months                                            |                   | 17,468,267  |        | 16.4                                  |        |   |   | 6,833,041                             |   | 9.1 |   |   |   |
| Over 6 months through 12 months                                           |                   | 24,645,733  |        | 23.1                                  |        |   |   | 22,525,183                            |   | 30.1 |   |   |   |
| Over 12 months                                                            |                   | 47,026,013  |        | 44.2                                  |        |   |   | 38,233,222                            |   | 51.2 |   |   |   |
|                                                                      |                   |        |        |                                  |        |   |   |                                  |   |   |   |   |   |
|                                                                      |                   | $           | 106,514,287 |                                  | 100.0       | %      |   |                                  | $      | 74,726,902 |   | 100.0 | % |   |   |

 

F-17

----

 

The aggregatematurities of certificate accounts at December 31, 2003 are as follows (inthousands):

 

| 2004   |   | $      | 126,066 |   |
|--------|--------|--------|---------|--------|
| 2005   |   | 35,239 |    |
| 2006   |   | 60,601 |    |
| 2007   |   | 16,731 |    |
| 2008   |   | 6,509  |    |
|   |   |   |    |
|   |   | $      | 245,146 |   |

 

Interest expense on deposits is summarized as followsfor the years ended December 31:

 
|                  |   | **2003**  |       | **2002**  |       | **2001**   |       |
|-----------------------|--------|-----------|------------|-----------|------------|------------|------------|
| Passbook accounts     |   | $         | 1,867,243  |      | 2,308,336  |       | 2,324,594  |   |
| NOW accounts          |   | 258,451   |       | 320,846   |       | 308,862    |       |
| Money market accounts |   | 2,694,360 |       | 3,335,403 |       | 3,057,400  |       |
| Certificate accounts  |   | 7,340,540 |       | 7,602,515 |       | 10,764,060 |       |
|                  |   |      |       |      |       |       |       |
|                  |   | $         | 12,160,594 |      | 13,567,100 |       | 16,454,916 |   |

 

**(9)**                     Borrowed Money

 

Borrowed money is summarized as follows:

 
|                                                  |   |                |   | **December 31, 2003**       |   | **December 31, 2002**    |    |
|-------------------------------------------------------|--------|---------------------|--------|-----------------------------|--------|--------------------------|---------|
|                                                  |   | **Maturity**        |   | **Weighted  interest rate** |   | **Outstanding  balance** |    | **Weighted  interest rate** |   | **Outstanding  balance** |   |
|                                                  |   | **(In  thousands)** |   |
| Advances from the Federal Home Loan Bank of  Chicago: |   |                |   |                        |   |                     |    |   |   |   |   |
|                                                  |   | 2003                |   | —                      |   | $                        | —  |   | 4.65 | % | $ | 5,000 |   |
|                                                  |   | 2004                |   | 3.68                        | %      | 47,700                   |    | 4.82 |   | 32,700 |   |
|                                                  |   | 2005                |   | 4.72                        |   | 23,000                   |    | 6.17 |   | 15,000 |   |
|                                                  |   | 2006                |   | 3.02                        |   | 15,000                   |    | 4.30 |   | 5,000 |   |
|                                                  |   | 2008                |   | 4.24                        |   | 19,000                   |    | 4.78 |   | 14,000 |   |
|                                                  |   | 2010                |   | 5.85                        |   | 65,000                   |    | 5.85 |   | 65,000 |   |
|                                                  |   | 2011                |   | 4.66                        |   | 35,000                   |    | 4.66 |   | 35,000 |   |
|                                                  |   |                |   |                        |   |                     |    |   |   |   |   |
|                                                  |   |                |   | 4.66                        | %      | $                        | 204,700 |   | 5.27 | % | $ | 171,700 |   |

 

At December 31, 2003, the Savings Bank had $15,000,000in overnight borrowings at a floating interest rate of 1.21%. These borrowingsare included in the above table maturing in 2004. In addition, $5,000,000 ofthe advances due in 2008 have adjustable interest rates. All other advanceshave fixed interest rates. At December 31, 2003, $134,000,000 in advancesare callable by the Federal Home Loan Bank of Chicago (FHLB) beginning in 2004.

 

F-18

----

 

In addition, at December 31, 2003, the Savings Bankhad $7,000,000 in overnight borrowings at a floating interest rate of 1.27% atLaSalle National Bank.

 

The Savings Bank adopted a collateral pledge agreementwhereby it has agreed to at all times keep on hand, free of all other pledges,liens, and encumbrances, performing first mortgage loans with unpaid principalbalances aggregating no less than 167% of the outstanding secured advances fromthe FHLB. The carrying value of the collateral was approximately $458,039,000at December 31, 2003. All stock in the FHLB is also pledged as additionalcollateral for these advances.

 

**(10)**              Income Taxes

 

Income tax expense (benefit) for the years endedDecember 31, 2003, 2002, and 2001 is as follows:

 
|                     |   | **Year ended December 31** |      |
|--------------------------|--------|----------------------------|-----------|
|                     |   | **2003**                   |      | **2002** |   | **2001** |   |
| Current:                 |   |                       |      |   |   |   |   |
| Federal                  |   | $                          | 2,520,966 |   | 2,727,959 |   | 2,071,628 |   |
| State                    |   | 689,802                    |      | 430,787 |   | 243,666 |   |
|                     |   |                       |      |   |   |   |   |
|                     |   | 3,210,768                  |      | 3,158,746 |   | 2,315,294 |   |
| Deferred:                |   |                       |      |   |   |   |   |
| Federal                  |   | 410,688                    |      | (184,908 | ) | 168,966 |   |
| State                    |   | (2,782                     | )         | (91,499 | ) | 23,551 |   |
|                     |   |                       |      |   |   |   |   |
|                     |   | 407,906                    |      | (276,407 | ) | 192,517 |   |
|                     |   |                       |      |   |   |   |   |
| Total income tax expense |   | $                          | 3,618,674 |   | 2,882,339 |   | 2,507,811 |   |

 

The actual Federal income tax expense for 2003 and2002 differs from the “expected” income tax expense for those periods (computedby applying the statutory U.S. Federal corporate tax rate of 34% to earningsbefore income taxes) as follows:

 
|                                                                |   | **2003** |      | **2002** |      | **2001** |      |
|---------------------------------------------------------------------|--------|----------|-----------|----------|-----------|----------|-----------|
| Tax expense based on the  statutory U.S. Federal corporate tax rate |   | $        | 3,644,656 |     | 3,070,081 |     | 2,428,624 |   |
| State income taxes, net of federal impact                           |   | 453,433  |      | 269,747  |      | 169,537  |      |
| Tax exempt interest income                                          |   | (474,343 | )         | (415,202 | )         | (163,688 | )         |
| Bank owned life insurance                                           |   | (251,468 | )         | (208,353 | )         | —   |      |
| Goodwill impairment                                                 |   | 71,912   |      | —   |      | —   |      |
| Other, net                                                          |   | 174,484  |      | 166,066  |      | 73,338   |      |
|                                                                |   |     |      |     |      |     |      |
|                                                                |   | $        | 3,618,674 |     | 2,882,339 |     | 2,507,811 |   |

 

F-19

----

 

The tax effects ofexisting temporary differences that give rise to significant portions of thedeferred tax assets and deferred tax liabilities at December 31, 2003 and2002 are as follows:

 
|                                               |   | **2003**   |      | **2002**   |      |
|----------------------------------------------------|--------|------------|-----------|------------|-----------|
| Deferred tax assets:                               |   |       |      |       |      |
| Allowance for loan losses                          |   | $          | 1,457,428 |       | 1,216,842 |   |
| Loan fees                                          |   | 353,107    |      | 195,948    |      |
| Charitable contribution carryforward               |   | —     |      | 899,614    |      |
| Compensation expense                               |   | 279,207    |      | 159,324    |      |
| Deferred sales income                              |   | 68,761     |      | —     |      |
| State net operating loss carryforward              |   | 151,493    |      | 65,728     |      |
|                                               |   |       |      |       |      |
| Gross deferred tax assets                          |   | 2,309,996  |      | 2,537,456  |      |
|                                               |   |       |      |       |      |
| Less valuation allowance                           |   | —     |      | (190,190   | )         |
|                                               |   |       |      |       |      |
|                                               |   | 2,309,996  |      | 2,347,266  |      |
| Deferred tax liabilities:                          |   |       |      |       |      |
| FHLB stock dividends                               |   | (953,523   | )         | (719,145   | )         |
| Depreciation                                       |   | (828,033   | )         | (546,549   | )         |
| Tax bad debt reserve in excess of base year amount |   | —     |      | (145,231   | )         |
| Unrealized gain or securities available-for-sale   |   | (282,875   | )         | (806,743   | )         |
| Other, net                                         |   | (2,306     | )         | (2,301     | )         |
|                                               |   |       |      |       |      |
| Gross deferred tax liabilities                     |   | (2,066,737 | )         | (2,219,969 | )         |
|                                               |   |       |      |       |      |
| Net deferred tax asset                             |   | $          | 243,259   |       | 127,297   |   |

 

Retained earnings at December 31, 2003 includeapproximately $2,328,000 of tax bad debt reserves for which no provision forFederal or state income tax has been made. If, in the future this amount, or aportion thereof, is used for certain purposes, then a Federal and state taxliability, at the then-current corporate income tax rates, will be imposed onthe amounts so used. The state net operating loss carryforwards totalapproximately $3,144,000 and will expire starting in 2015. No valuationallowance was required at December 31, 2003 due to the expiration andutilization of the charitable contribution carryforward in 2003.

 

**(11)**              Employee Benefit Plans

 

***401(k) Plan and Trust***

 

The Savings Bank adopted the Elgin Federal FinancialCenter 401(k) Employee Benefit Plan and Trust (Plan), effectiveNovember 1, 1986, for the exclusive benefit of eligible employees andtheir beneficiaries. The Plan is a qualified plan covering all employees of theSavings Bank who have completed at least six months of service for the SavingsBank and are age 20 or older. The Plan also provides benefits in the event ofdeath, disability, or other termination of employment. Participants may makecontributions to the Plan from 2% to 10% of their earnings, subject to InternalRevenue Service limitations. Matching contributions can be made at the SavingsBank’s discretion each plan year. There were no contributions by the SavingsBank during 2003, 2002, and 2001.

 

F-20

----

 

***Employee Stock Ownership Plan (ESOP)***

 

In conjunction with the Savings Bank’s conversion, theCompany formed an ESOP. The ESOP covers substantially all employees that areage 21 or over and with at least 1,000 hours of service. The ESOP borrowed$8,961,298 from the Company and purchased 599,314 common shares issued in theConversion. The loan has a 15 year term, with an interest rate of 8.50%. TheSavings Bank intends to make discretionary contributions to the ESOP sufficientto service the requirements of the loan over a period of 15 years. During theyears ended December 31, 2003, 2002, and 2001, 39,954 shares wereallocated annually. ESOP expense for the years ended December 31, 2003, 2002,and 2001 totaled $800,414, $641,091, and $468,596, respectively. The fair valueof unallocated shares totaled $8,593,000 and $7,292,000 at December 31,2003 and 2002, respectively.

 

***Stock Award Plan (SAP)***

 

The Company has an SAP which may grant up to 4%, or299,657 shares, of the common stock issued in the Company’s initial publicoffering to eligible directors, officers, and certain key employees of theCompany. All shares available under the SAP have been granted. Shares vest asfollows: 20% per year for five (5) years of continuous service. Deferredcompensation relating to the shares granted under the SAP totaled $3,333,684,the fair value of the shares on the date of grant, and is being recognized ascompensation expense as the participants vest in those shares. For the yearsended December 31, 2003, 2002, and 2001, the Company recorded compensationexpense of $718,651, $752,170, and $664,503, respectively.

 

Shares of the Company’s common stock were purchased bythe SAP in the open market at a weighted average price of $12.37 per share. Theaggregate purchase price of all nonvested shares acquired by the SAP isreflected as a reduction of stockholders’ equity as deferred compensation andadditional paid-in capital.

 

***Supplemental Executive Retirement Plan (SERP)***

 

In 2002, the board of directors of the Bank adopted aSERP. This plan covers certain executives and directors of the Bank. For theyears ended December 31, 2003 and 2002, the Company recorded compensationexpense related to the SERP in the amount of $312,700 and $411,277,respectively.

 

**(12)**              Stock Option Plans

 

In 1998, the Company adopted a stock option plan (theStock Option Plan) pursuant to which the Company’s board of directors may grantstock options to directors, officers, and employees of the Company and theSavings Bank. The number of common shares authorized under the Stock OptionPlan is 749,143, equal to 10% of the total number of shares issued in theinitial stock offering. A similar second plan, consisting of 254,256 shares,was approved by the stockholders in 2000. Stock options granted under the planswill vest at a rate of 20% per year beginning on the first anniversary date ofthe respective grant. Exercise prices are equal to the fair value of the commonstock at the date of grant. Option terms cannot exceed ten years from the datethe grant is awarded.

 

F-21

----

 

A summary of thestatus of the Company’s stock option transactions under the plans for the yearsended December 31, 2003, 2002, and 2001 is presented below:

 
|                             |   | **2003**   |   | **2002**                              |   | **2001**   |    |
|----------------------------------|--------|------------|--------|---------------------------------------|--------|------------|---------|
|                             |   | **Shares** |   | **Weighted  average  exercise price** |   | **Shares** |    | **Weighted  average  exercise price** |   | **Shares** |   | **Weighted  average  exercise price** |   |
| Outstanding at beginning of year |   | 648,318    |   | $                                     | 10.99  |       | 771,500 |   | $ | 11.01 |   | 793,500 |   | $ | 11.01 |   |
| Forfeitures                      |   | —     |   |                                  |   | (6,000     | )       | 11.125 |   | (22,000 | ) | 11.125 |   |
| Granted                          |   | 67,500     |   | 19.33                                 |   | —     |    | — |   | — |   | — |   |
| Exercised                        |   | (124,647   | )      | 11.09                                 |   | (117,182   | )       | 11.10 |   | — |   | — |   |
|                             |   |       |   |                                  |   |       |    |   |   |   |   |   |   |
| Outstanding at end of year       |   | 591,171    |   | 11.93                                 |   | 648,318    |    | 10.99 |   | 771,500 |   | 11.01 |   |
|                             |   |       |   |                                  |   |       |    |   |   |   |   |   |   |
| Exercisable at end of year       |   | 499,271    |   | $                                     | 11.02  |       | 482,018 |   | $ | 11.05 |   | 443,300 |   | $ | 11.07 |   |

 

**(13)**              Regulatory Capital Requirements

 

The Savings Bank is subject to regulatory capitalrequirements administered by state and federal regulatory agencies. Failure tomeet minimum capital requirements can initiate certain mandatory and possiblyadditional discretionary actions by regulators that, if undertaken, could havea direct material effect on the Savings Bank’s financial statements. Undercapital adequacy guidelines and the regulatory framework for prompt correctiveaction, the Savings Bank must meet specific capital guidelines that involvequantitative measures of the Savings Bank’s assets, liabilities, and certainoff-balance sheet items as calculated under regulatory accounting practices.The Savings Bank’s capital amounts and classification are also subject toqualitative judgments by the regulators about components, risk weightings, andother factors.

 

Quantitative measures established by regulation toensure adequacy require the Savings Bank to maintain minimum amounts and ratiosas set forth below. Management believes, as of December 31, 2003, that theSavings Bank meets all capital adequacy requirements to which it is subject.

 

As of December 31, 2003 and 2002, the most recentnotification from the Federal Deposit Insurance Corporation categorized theSavings Bank as well capitalized under the regulatory framework for promptcorrective action. At December 31, 2003, there are no conditions or eventssince the most recent notification that management believes have changed theinstitution’s category.

 

F-22

----

 

The Savings Bank’s actual capital amounts and ratiosare as follows:

 
|                                     |   | **Actual** |       | **For  capital adequacy  purposes** |   | **To  be well capitalized under  prompt corrective action** |   |
|------------------------------------------|--------|------------|------------|-------------------------------------|--------|-------------------------------------------------------------|--------|
|                                     |   | **Amount** |       | **Ratio**                           |   | **Amount**                                                  |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
| December 31, 2003:                       |   |       |       |                                |   |                                                        |   |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | $          | 74,630,000 |                                | 11.74  | %                                                           | $      | 50,865,000 |   | 8.0 | % | $ | 63,582,000 |   | 10.0 | % |
| Tier I capital (to risk weighted assets) |   | 73,743,000 |       | 11.60                               |   | 25,433,000                                                  |   | 4.0 |   | 38,149,000 |   | 6.0 |   |
| Tier I capital (to average assets)       |   | 73,743,000 |       | 8.27                                |   | 35,682,000                                                  |   | 4.0 |   | 44,602,000 |   | 5.0 |   |
| December 31, 2002:                       |   |       |       |                                |   |                                                        |   |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | 71,674,000 |       | 13.41                               |   | 42,754,000                                                  |   | 8.0 |   | 53,442,000 |   | 10.0 |   |
| Tier I capital (to risk weighted assets) |   | 68,532,000 |       | 12.82                               |   | 21,377,000                                                  |   | 4.0 |   | 32,065,000 |   | 6.0 |   |
| Tier I capital (to average assets)       |   | 68,532,000 |       | 8.92                                |   | 30,724,000                                                  |   | 4.0 |   | 38,405,000 |   | 5.0 |   |
|                                          |        |            |            |                                     |        |                                                             |        |  |  |  |  |  |  |  |  |  |

 

**(14)**              Concentrations of Credit Risk and FinancialInstruments with Off-Balance Sheet Risk

 

A majority of the Savings Bank’s mortgage loans aresecured by single-family homes in Kane County. For loans originated, theSavings Bank evaluates each customer’s creditworthiness on a case-by-casebasis. Management believes the Savings Bank has a diversified loan portfolioand concentration of lending activities that does not result in an acutedependency upon the economic conditions of its lending area. Purchasedparticipation loans are secured by properties primarily in the southernWisconsin area and to a lesser extent by properties in the Chicagoland area.

 

The Savings Bank is party to financial instrumentswith off-balance sheet risk in the normal course of business to meet thefinancing needs of its customers. Those financial instruments primarily includecommitments to extend credit. Commitments to extend credit are agreements tolend to a customer so long as there is no violation of any conditionestablished in the contract. The Savings Bank evaluates each customer’screditworthiness on a case-by-case basis. The amount of collateral obtained isbased on management’s credit evaluation of the customer. The Savings Bank’sexposure to credit loss in the event of nonperformance by the customer isrepresented by the contractual amount of those financial instruments. Thecommitments to originate first mortgage loans represent amounts which theSavings Bank plans to fund within a period of 30 to 90 days.

 

The Savings Bank’s approved, but unused lines ofcredit are based on underwriting standards that generally do not allow totalborrowings, including the equity line of credit to exceed 80% of the currentappraised value of the customer’s residence. However, the Savings Bank offershome equity lines of credit up to 90% of the home’s current appraised value ata 1% higher interest rate.

 

The Savings Bank’s standby letters of credit areconditional commitments issued by the Savings Bank to guarantee performance ofa customer to a third party. The credit risk involved in these transactions isessentially the same as that involved in extending a loan to a customer in thenormal course of business. Standby letters of credit are collateralized bymortgages, savings accounts, or liens on business assets. The fair value of thestandby letters of credit approximates the amount of recorded related fees,which are not

 

F-23

----

 

considered material. The maximum risk of accountingloss for these items, which is represented by the total commitment outstanding,totaled $5.4 million at December 31, 2003.

 

AtDecember 31, 2003 and 2002, the Savings Bank had the followingcommitments:

 
|                      |   | **2003**   |      | **2002**   |       |
|---------------------------|--------|------------|-----------|------------|------------|
| First mortgage loans      |   | $          | 7,306,000 |       | 11,965,000 |   |
| Construction loans        |   | 4,210,000  |      | 808,000    |       |
| Unused lines of credit    |   | 42,342,000 |      | 32,666,000 |       |
| Standby letters of credit |   | 5,434,000  |      | 4,927,000  |       |
|                           |        |            |           |            |            |  |

 

There are various matters of litigation pending againstthe Company that have arisen during the normal course of business. Based upondiscussions with legal counsel, management believes that the liability, if any,resulting from these matters will not be material to the consolidated financialposition or results of operations of the Company.

 

**(15)**              Fair Value of Financial Instruments

 

FASB Statement No. 107, *Disclosures About Fair Value of Financial Instruments*(Statement 107), requires the disclosure of estimated fair values of allasset, liability, and off-balance sheet financial instruments. The estimatedfair value amounts under Statement No. 107 have been determined as of aspecific point in time utilizing various available market information,assumptions, and appropriate valuation methodologies. Accordingly, theestimated fair values presented herein are not necessarily representative ofthe underlying value of the Company. Rather, the disclosures are limited toreasonable estimates of the fair value of only the Company’s financialinstruments. The use of assumptions and various valuation techniques, as wellas the absence of secondary markets for certain financial instruments, willlikely reduce the comparability of fair value disclosures between financialinstitutions. The Company does not plan to sell most of its assets or settlemost of its liabilities at these fair values.

 

F-24

----

 

The estimated fairvalues of the Company’s financial instruments are set forth in the followingtable.

 
|                            |   | **December 31,**     |    |
|---------------------------------|--------|----------------------|---------|
|                            |   | **2003**             |    | **2002** |   |
|                            |   | **Carrying  amount** |    | **Fair  value** |   | **Carrying  amount** |   | **Fair  value** |   |
|                            |   | **(In  thousands)**  |    |
|                            |   |                 |    |   |   |   |   |   |   |
| Financial assets:               |   |                 |    |   |   |   |   |   |   |
| Cash and cash equivalents       |   | $                    | 21,876  |   | 21,876 |   | 32,844 |   | 32,844 |   |
| Investment securities           |   | 90,656               |    | 90,656 |   | 87,982 |   | 87,982 |   |
| Mortgage-backed securities      |   | 10,165               |    | 10,165 |   | 15,256 |   | 15,256 |   |
| Loans receivable, net           |   | 716,884              |    | 723,090 |   | 597,038 |   | 614,929 |   |
| Accrued interest receivable     |   | 4,009                |    | 4,009 |   | 3,887 |   | 3,887 |   |
| Bank owned life insurance       |   | 17,986               |    | 17,986 |   | 12,247 |   | 12,247 |   |
| Stock in FHLB of Chicago        |   | 10,878               |    | 10,878 |   | 9,362 |   | 9,362 |   |
|                            |   |                 |    |   |   |   |   |   |   |
| Financial liabilities:          |   |                 |    |   |   |   |   |   |   |
| Nonmaturing deposits            |   | $                    | 351,618 |   | 351,618 |   | 314,312 |   | 314,312 |   |
| Deposits with stated maturities |   | 245,146              |    | 249,094 |   | 209,878 |   | 213,923 |   |
| Borrowed money                  |   | 211,789              |    | 211,979 |   | 171,779 |   | 173,677 |   |
| Accrued interest payable        |   | 1,218                |    | 1,218 |   | 1,056 |   | 1,056 |   |

 

The following methods and assumptions are used by theCompany in estimating the fair value amounts for its financial instruments.

 

***Cash and Cash Equivalents***

 

The carrying value of cash and cash equivalentsapproximates fair value due to the short period of time between origination ofthe instrument and its expected realization.

 

***Investment Securities, Mortgage-backed Securities, andFHLB Stock***

 

The fair value of investment securities andmortgage-backed securities are estimated using quoted market prices. The fairvalue of FHLB stock is based on its redemption value.

 

***Loans Receivable***

 

The fair value of loans receivable is based oncontractual cash flows adjusted for prepayment assumptions, discounted usingthe current rate at which similar loans would be made to borrowers with similarcredit ratings and remaining terms to maturity.

 

***Accrued Interest Receivable and Payable***

 

The carrying value of accrued interest receivable andpayable approximates fair value due to the relatively short period of timebetween accrual and expected realization.

 

F-25

----

 

***Bank Owned Life Insurance***

 

The carrying value of bank owned life insuranceapproximates its fair value. Bank owned life insurance, for reporting purposes,is reflected at its cash value.

 

***Deposits***

 

The fair value of deposits with no stated maturity,such as commercial checking, passbook savings, NOW, and money market accountsare disclosed as the amount payable on demand.

 

The fair value of fixed-maturity deposits is thepresent value of the contractual cash flows discounted using interest ratescurrently being offered for deposits with similar remaining terms to maturity.If the fair value estimate is less than the amount payable on demand atDecember 31, the fair value disclosed is the amount payable on demand asper Statement 107.

 

***Borrowed Funds***

 

The fair value of fixed rate FHLB advances is thepresent value of the contractual cash flows discounted by the current rateoffered for similar remaining maturities. For variable rate advances, thecarrying value approximates fair value. The carrying value of the overnightborrowings at LaSalle approximate fair value due to the daily repricing.

 

**(16)**              Condensed Parent Company Only Financial Information

 

Presented below is the condensed balance sheets as ofDecember 31, 2003 and 2002 and statements of income and cash flows foreach of the years ended in the three-year period for EFC Bancorp, Inc. Thesestatements should be read in conjunction with the consolidated financialstatements and the notes thereto.

 

**Balance Sheets**

 
|                                                          |   | **December 31,** |       |
|---------------------------------------------------------------|--------|------------------|------------|
|                                                          |   | **2003**         |       | **2002** |   |
| Assets:                                                       |   |             |       |   |   |
| Cash and cash equivalents                                     |   | $                | 1,353,134  |   | 1,831,349 |   |
| Mortgage-backed securities available-for-sale, at  fair value |   | 234,538          |       | 518,194 |   |
| Investment securities available-for-sale, at fair  value      |   | 300,000          |       | 300,000 |   |
| Equity investment in majority owned subsidiary                |   | (144,888         | )          | 189,271 |   |
| Equity investment in the Savings Bank                         |   | 74,471,363       |       | 69,716,634 |   |
| Accrued interest receivable                                   |   | 2,095            |       | 3,753 |   |
| Other assets                                                  |   | 3,018,432        |       | 2,994,549 |   |
|                                                          |   |             |       |   |   |
| Total assets                                                  |   | $                | 79,234,674 |   | 75,553,750 |   |
|                                                          |   |             |       |   |   |   |
| Liabilities:                                                  |   |             |       |   |   |
| Other liabilities                                             |   | $                | 989,388    |   | 852,182 |   |
|                                                          |   |             |       |   |   |   |
| Minority interest                                             |   | (158,666         | )          | (75,127 | ) |
|                                                          |   |             |       |   |   |
| Stockholders’ equity                                     |   | 78,403,952       |       | 74,776,695 |   |
|                                                          |   |             |       |   |   |
| Total liabilities and stockholders’ equity               |   | $                | 79,234,674 |   | 75,553,750 |   |

 

F-26

----

 

**Statements of Income**

 
|                                             |   | **Year ended December 31** |      |
|--------------------------------------------------|--------|----------------------------|-----------|
|                                             |   | **2003**                   |      | **2002** |   | **2001** |   |
| Dividends from Savings Bank                      |   | $                          | 2,367,914 |   | 2,196,801 |   | 2,091,103 |   |
| Equity in undistributed earnings of the          |   |                       |      |   |   |   |   |
| Savings Bank                                     |   | 5,700,084                  |      | 4,571,914 |   | 2,771,076 |   |
| Interest income                                  |   | 654,914                    |      | 703,784 |   | 811,547 |   |
| Noninterest expense                              |   | (1,697,983                 | )         | (1,577,932 | ) | (1,126,808 | ) |
|                                             |   |                       |      |   |   |   |   |
| Income before income taxes and minority interest |   | 7,024,929                  |      | 5,894,567 |   | 4,546,918 |   |
|                                             |   |                       |      |   |   |   |   |
| Income tax benefit                               |   | 75,973                     |      | 195,063 |   | 88,282 |   |
|                                             |   |                       |      |   |   |   |   |
| Income before minority interest                  |   | 7,100,902                  |      | 6,089,630 |   | 4,635,200 |   |
|                                             |   |                       |      |   |   |   |   |
| Minority interest                                |   | 83,539                     |      | 57,682 |   | — |   |
|                                             |   |                       |      |   |   |   |   |
| Net income                                       |   | $                          | 7,184,441 |   | 6,147,312 |   | 4,635,200 |   |

 

F-27

----

 

 

**Statements of Cash Flows**

 
|                                                                   |   | **Year ended  December 31** |      |
|------------------------------------------------------------------------|--------|-----------------------------|-----------|
|                                                                   |   | **2003**                    |      | **2002** |   | **2001** |   |
| Operating activities:                                                  |   |                        |      |   |   |   |   |
| Net income                                                             |   | $                           | 7,184,441 |   | 6,147,312 |   | 4,635,200 |   |
| Equity in undistributed earnings of the                                |   |                        |      |   |   |   |   |
| Savings Bank                                                           |   | (5,700,084                  | )         | (4,571,914 | ) | (2,771,076 | ) |
| Deficit in undistributed loss of majority  owned                       |   |                        |      |   |   |   |   |
| subsidiary                                                             |   | 417,698                     |      | 305,856 |   | — |   |
| Amortization of premiums                                               |   | 3,030                       |      | 6,079 |   | 11,908 |   |
| ESOP plan shares allocated                                             |   | 597,420                     |      | 597,420 |   | 597,420 |   |
| Stock award plan shares allocated                                      |   | 509,125                     |      | 752,170 |   | 664,503 |   |
| Change in fair value of ESOP shares                                    |   | 412,512                     |      | 43,671 |   | (128,832 | ) |
| Minority interest in subsidiary                                        |   | (83,539                     | )         | (75,127 | ) | — |   |
| Increase in other assets                                               |   | (23,089                     | )         | (449,990 | ) | (349,954 | ) |
| Decrease in accrued interest receivable                                |   | 1,658                       |      | 2,411 |   | 21,577 |   |
| Increase in other liabilities                                          |   | 138,834                     |      | 101,396 |   | 40,580 |   |
|                                                                   |   |                        |      |   |   |   |   |
| Net cash provided by operating activities                              |   | 3,458,006                   |      | 2,859,284 |   | 2,721,326 |   |
|                                                                   |   |                        |      |   |   |   |   |
| Investing activities:                                                  |   |                        |      |   |   |   |   |
| Principal repayments on mortgage-backed  securities available-for-sale |   | 274,417                     |      | 371,630 |   | 679,201 |   |
| Cash used in acquisition of majority owned  subsidiary                 |   | —                      |      | (420,000 | ) | — |   |
| Maturities of investment securities  available-for-sale                |   | —                      |      | — |   | 2,000,000 |   |
|                                                                   |   |                        |      |   |   |   |   |
| Net cash provided by (used in) investing  activities                   |   | 274,417                     |      | (48,370 | ) | 2,679,201 |   |
|                                                                   |   |                        |      |   |   |   |   |
| Financing activities:                                                  |   |                        |      |   |   |   |   |
| Cash dividends paid                                                    |   | (2,367,914                  | )         | (2,196,801 | ) | (2,091,103 | ) |
| Purchase of treasury stock                                             |   | (2,560,340                  | )         | (956,564 | ) | (2,597,237 | ) |
| Stock options exercised                                                |   | 717,616                     |      | 785,178 |   | — |   |
|                                                                   |   |                        |      |   |   |   |   |
| Net cash used in financing activities                                  |   | (4,210,638                  | )         | (2,368,187 | ) | (4,688,340 | ) |
|                                                                   |   |                        |      |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                  |   | (478,215                    | )         | 442,727 |   | 712,187 |   |
|                                                                   |   |                        |      |   |   |   |   |
| Cash and cash equivalents at beginning of  year                        |   | 1,831,349                   |      | 1,388,622 |   | 676,435 |   |
|                                                                   |   |                        |      |   |   |   |   |
| Cash and cash equivalents at end of year                               |   | $                           | 1,353,134 |   | 1,831,349 |   | 1,388,622 |   |

 

F-28

----

 

**(17)****              Selected QuarterlyFinancial Data (Unaudited)**

 

A summary ofconsolidated operating results on a quarterly basis is as follows:

 
|                                                    |   | **Three  months ended**                    |       |
|---------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                    |   | **March 31,  2003**                        |       | **June 30,  2003** |   | **September  30,  2003** |   | **December  31,  2003** |   |
|                                                    |   | **(In  thousands, except per share data)** | ** ** |
|                                                    |   |                                       |       |
| Interest income                                         |   | $                                          | 11,425     |   | 11,574 |   | 11,312 |   | 11,438 |   |
| Interest expense                                        |   | 5,441                                      |       | 5,358 |   | 5,390 |   | 5,354 |   |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Net interest income before provision for  loan losses   |   | 5,984                                      |       | 6,216 |   | 5,922 |   | 6,084 |   |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Provision for loan losses                               |   | 181                                        |       | 142 |   | 140 |   | 150 |   |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Net interest income after provision for  loan losses    |   | 5,803                                      |       | 6,074 |   | 5,782 |   | 5,934 |   |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Noninterest income                                      |   | 1,010                                      |       | 1,746 |   | 1,483 |   | 1,497 |   |
| Noninterest expense                                     |   | 4,502                                      |       | 4,703 |   | 4,566 |   | 4,839 |   |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Income before income tax expense and  minority interest |   | 2,311                                      |       | 3,117 |   | 2,699 |   | 2,592 |   |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Income tax expense                                      |   | 744                                        |       | 1,133 |   | 889 |   | 852 |   |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Income before minority interest                         |   | 1,567                                      |       | 1,984 |   | 1,810 |   | 1,740 |   |
| Minority interest                                       |   | (21                                        | )          | (50 | ) | (11 | ) | (2 | ) |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Net income                                              |   | $                                          | 1,588      |   | 2,034 |   | 1,821 |   | 1,742 |   |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Earnings per share:                                     |   |                                       |       |   |   |   |   |   |   |
| Basic                                                   |   | $                                          | 0.38       |   | 0.48 |   | 0.43 |   | 0.41 |   |
| Diluted                                                 |   | 0.36                                       |       | 0.46 |   | 0.41 |   | 0.39 |   |

 

F-29

----

 
|                                                    |   | **Three  months ended**                    |       |
|---------------------------------------------------------|--------|--------------------------------------------|------------|
|                                                    |   | **March 31,  2002**                        |       | **June 30,  2002** |   | **September  30,  2002** |   | **December  31,  2002** |   |
|                                                    |   | **(In  thousands, except per share data)** | ** ** |
|                                                    |   |                                       |       |
| Interest income                                         |   | $                                          | 11,128     |   | 11,206 |   | 11,221 |   | 11,463 |   |
| Interest expense                                        |   | 5,687                                      |       | 5,720 |   | 5,763 |   | 5,651 |   |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Net interest income before provision for  loan losses   |   | 5,441                                      |       | 5,486 |   | 5,458 |   | 5,812 |   |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Provision for loan losses                               |   | 225                                        |       | 225 |   | 225 |   | 225 |   |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Net interest income after provision for  loan losses    |   | 5,216                                      |       | 5,261 |   | 5,233 |   | 5,587 |   |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Noninterest income                                      |   | 1,077                                      |       | 1,084 |   | 1,141 |   | 1,018 |   |
| Noninterest expense                                     |   | 4,031                                      |       | 4,001 |   | 4,232 |   | 4,382 |   |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Income before income tax expense and  minority interest |   | 2,262                                      |       | 2,344 |   | 2,142 |   | 2,223 |   |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Income tax expense                                      |   | 714                                        |       | 732 |   | 727 |   | 709 |   |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Income before minority interest                         |   | 1,548                                      |       | 1,612 |   | 1,415 |   | 1,514 |   |
| Minority interest                                       |   | (20                                        | )          | 17 |   | (34 | ) | (21 | ) |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Net income                                              |   | $                                          | 1,568      |   | 1,595 |   | 1,449 |   | 1,535 |   |
|                                                    |   |                                       |       |   |   |   |   |   |   |
| Earnings per share:                                     |   |                                       |       |   |   |   |   |   |   |
| Basic                                                   |   | $                                          | 0.38       |   | 0.38 |   | 0.34 |   | 0.36 |   |
| Diluted                                                 |   | 0.36                                       |       | 0.36 |   | 0.32 |   | 0.34 |   |

 

F-30

----

 

**Item 9. Changes in and Disagreements with Accountants onAccounting and Financial Disclosure****.**

 

None.

 

**Item 9A. Controls and Procedures**

 

The Company’s management, including the Company’sprincipal executive officer and principal financial officer, have evaluated theeffectiveness of the Company’s “disclosure controls and procedures, “ as suchterm is defined in Rule 13a-15(e) promulgated under the Securities Exchange Actof 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer andprincipal financial officer concluded that, as of the end of the period coveredby this report, the Company’s disclosure controls and procedures were effectivefor the purpose of ensuring that the information required to be disclosed inthe reports that the Company files or submits under the Exchange Act with theSecurities and Exchange (the “SEC”) (1) is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms, and(2) is communicated to the Company’s management, including its principalexecutive and principal financial officers, as appropriate to allow timelydecisions regarding required disclosure.

 

## **PARTIII**

 

**Item 10. Directors and Executive Officers of the Registrant****.**

 

The information relating to Directors and Executive Officers of theRegistrant is incorporated herein by reference to the Registrants’ ProxyStatement for the Annual Meeting of Stockholders to be held on April 20, 2004,at pages 7 through 9 and 19.

 

The Registrant has adopted a Code of Ethics and Business Conduct.  See the Exhibits to this Annual Report onForm 10-K.

 

The following table sets forth certain information regarding theexecutive officers of the Company and the Bank who are not also directors orNamed Executive Officers.  Each of thefollowing executive officers has been employed at the Bank for at least fiveyears except where noted.  The executiveofficers are elected annually and hold office until their successors have beenelected and qualified or until they are removed or are replaced.

 
| **Name**             |   | **Age at  12/31/03** |   | **Position**                                                                                                                                                                        |
|----------------------|--------|----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Stephen  P. DuBois   |   | 54                   |   | Senior  Vice President/Marketing - Employed by Bank since 2000.  Prior to joining the Bank Mr. DuBois was  Account Executive at WJZI FM Radio in Milwaukee, Wisconsin.         |
|                 |   |                 |   |                                                                                                                                                                                |
| Jerry  L. Gosse      |   | 68                   |   | Vice  President/Compliance Officer - Employed by Bank since 1993.                                                                                                                   |
|                 |   |                 |   |                                                                                                                                                                                |
| Glenn  J. Kozeluh    |   | 51                   |   | Executive  Vice President/Retail Operations - Employed by Bank since 2003.  Prior to joining the Bank Mr. Kozeluh was  Senior Vice President at Fidelity Federal Savings Bank. |
|                 |   |                 |   |                                                                                                                                                                                |
| Pat  A. Lenart       |   | 63                   |   | Senior  Vice President/Human Resource - Employed by Bank since 2000.  Prior to joining the Bank Ms. Lenart was  Vice President at State Financial.                             |
| Sandra  L. Sommers   |   | 61                   |   | Senior  Vice President/Savings - Employed by Bank since 1960.                                                                                                                       |
|                 |   |                 |   |                                                                                                                                                                                |
| Joseph  E. Stanczak  |   | 51                   |   | Senior  Vice President - Employed by Bank since 1974.                                                                                                                               |
|                 |   |                 |   |                                                                                                                                                                                |
| Nancy  L. Topalovich |   | 49                   |   | Senior  Vice President - Employed by Bank since 1999.                                                                                                                               |
|                 |   |                 |   |                                                                                                                                                                                |
| Eric  J. Wedeen      |   | 40                   |   | Senior  Vice President/Chief Financial Officer - Employed by Bank since 1994.                                                                                                       |

 

41

----

 

**Item 11. Executive Compensation****.**

 

The information relating to director and executive compensation isincorporated herein by reference to the Registrant’s Proxy Statement for theAnnual Meeting of Stockholders to be held on April 20, 2004, at pages 13through 15.

 

**Item 12.  SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters****.**

 

The information relating to security ownership of certain beneficialowners and management is incorporated herein by reference to the Registrant’sProxy Statement for the Annual Meeting of Stockholders to be held on April 20,2004, at pages 6 and 7.

 

Equity Compensation Plan Information as ofDecember 31, 2003

 
| **Plan category**                                           |   | **Number of  securities  to be issued upon exercise  of outstanding options,  warrants and rights  (a)** |   | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)** |   | **Number of  securities  remaining available for  future issuance under  equity compensation  plans (excluding securities  reflected in column (a))  (c)** |    |
|-------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
| Equity compensation plans approved by  security holders     |   | 591,171                                                                                                  |   | $                                                                                       | 11.93  |                                                                                                                                                       | 170,399 |   |
| Equity compensation plans not approved by  security holders |   | —                                                                                                   |   | —                                                                                  |   | —                                                                                                                                                     |    |
| Total                                                       |   | 591,171                                                                                                  |   | $                                                                                       | 11.93  |                                                                                                                                                       | 170,399 |   |

 

**Item 13. Certain Relationships and Related Transactions****.**

 

The information relating to certain relationships and relatedtransactions is incorporated herein by reference to the Registrant’s Proxy Statementfor the Annual Meeting of Stockholders to be held on April 20, 2004, at page19.

 

## **PARTIV**

 

**Item14. Principal Accountant Fees and Expenses**

 

The information relating to the principal accountant fees and expensesis incorporated herein by reference to the Company’s Proxy Statement for the2004 Annual Meeting of Stockholders.

 

**Item 15. Exhibits, Financial Statement Schedules, and Reportson Form 8-K****.**

 

**(a) 1.****        ****Financial Statements**

 

Consolidated Financial Statements of the Company arelisted in the index and appear in this report under “Item 8.  Financial Statements and SupplementaryData.”

 

42

----

 

**2.****                         ****Financial StatementSchedules**

 

FinancialStatement Schedules have been omitted because they are not applicable or therequired information is shown in the Consolidated Financial Statements or notesthereto.

 

**3.****                         ****Exhibits Required bySecurities and Exchange Commission Regulation S-K**

 
| **Exhibit  Number** |   |   |
|---------------------|--------|--------|
| 3.1                 |   |   | Certificate  of Incorporation of EFC Bancorp, Inc. (1) |
| 3.2                 |   |   | By-Laws  of EFC Bancorp, Inc. (1) |
| 4.0                 |   |   | Stock  Certificate of EFC Bancorp, Inc. (1) |
| 10.1                |   |   | EFC  Bancorp, Inc. 2000 Stock Option Plan (3) |
| 10.2                |   |   | Amended  and Restated EFC Bancorp, Inc. 1998 Stock Based Incentive Plan (2) |
| 10.3                |   |   | Form  of Employment Agreement between Elgin Financial Savings Bank and certain  executive officers (1) |
| 10.4                |   |   | Form  of Employment Agreement between EFC Bancorp, Inc. and certain executive  officers (1) |
| 10.5                |   |   | Form  of Change in Control Agreement between Elgin Financial Savings Bank and  certain executive officers (1) |
| 10.6                |   |   | Form  of Change in Control Agreement between EFC Bancorp, Inc. and certain  executive officers (1) |
| 10.8                |   |   | Form  of Elgin Financial Savings Bank Supplemental Executive Retirement  Plan (1) |
| 10.9                |   |   | Form  of Elgin Financial Savings Bank Management Supplemental Executive Retirement  Plan (1) |
| 11.0                |   |   | Statement  Re:  Computation of Per Share Earnings  Incorporated herein by reference to Footnote 2 on page F-10 of this document. |
| 13.0                |   |   | Selected  Consolidated Financial and Other Data (filed herewith) |
| 14.1                |   |   | Code  of Ethics and Business Conduct |
| 21.0                |   |   | Subsidiary  information incorporated herein by reference to “Part 1 - Subsidiaries” |
| 23.0                |   |   | Consent  of the Company’s Independent Auditors (filed herewith) |
| 31.1                |   |   | Rule  13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
| 31.2                |   |   | Rule  13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
| 32.1                |   |   | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350 |

 

----

(1)          Incorporated by reference into this document from the Exhibits filedwith the Registration Statement on Form S-1, and any amendments thereto,Registration No. 333-38637.

(2)          Incorporated byreference into this document from the Proxy Statement for the Annual Meeting ofStockholders filed on March 26, 1999.

(3)          Incorporated byreference into this document from the Appendix to the Proxy Statement for theAnnual Meeting of Stockholders filed on March 23, 2000.

 

**(b)****                     ****Reports on Form 8-K filedduring the last quarter of 2003**

 

The Company furnished aCurrent Report on Form 8-K on October 31, 2003 announcing its financial resultsfor the quarter ended September 30, 2003. The press release was included as an exhibit to Form 8-K.

 

43

----

 

**Signatures**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|           | EFC Bancorp, Inc.            |   |
|----------------|------------------------------|--------|
|           | (Registrant)                 |   |
|           |                         |   |
| March 19, 2004 | /s/ Barrett J. O’Connor |   |
|           | Barrett J. O’Connor,    |   |
|           | Chief Executive Officer      |   |
|                |                              |        |  |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant, in the capacities, and on thedates indicated:

 
| **NAME**                     |   | **TITLE**                                  |                               | **DATE** |
|------------------------------|--------|--------------------------------------------|------------------------------------|----------|
|                         |   |                                       |                               |     |
| /s/ Barrett J. O’Connor |   |                                       | Chief Executive Officer            |     | March 19, 2004 |
| Barrett J. O’Connor     |   | and Director (principal executive officer) |                               |     |
|                         |   |                                       |                               |     |
| /s/ James J. Kovac           |   |                                       | President, Chief Operating Officer |     | March 19, 2004 |
| James J. Kovac               |   | and Director                               |                               |     |
|                         |   |                                       |                               |     |
| /s/ Leo M. Flanagan, Jr.     |   |                                       | Director and Chairman of the Board |     | March 19, 2004 |
| Leo M. Flanagan, Jr.         |   |                                       |                               |     |
|                         |   |                                       |                               |     |
| /s/ Thomas I. Anderson       |   |                                       | Director                           |     | March 19, 2004 |
| Thomas I. Anderson           |   |                                       |                               |     |
|                         |   |                                       |                               |     |
| /s/ Vincent C. Norton        |   |                                       | Director                           |     | March 19, 2004 |
| Vincent C. Norton            |   |                                       |                               |     |
|                         |   |                                       |                               |     |
| /s/ Randolph W. Brittain     |   |                                       | Director                           |     | March 19, 2004 |
| Randolph W. Brittain         |   |                                       |                               |     |
|                         |   |                                       |                               |     |
| /s/ Peter A. Traeger         |   |                                       | Director                           |     | March 19, 2004 |
| Peter A. Traeger             |   |                                       |                               |     |
|                         |   |                                       |                               |     |
| /s/ James A. Alpeter         |   |                                       | Director                           |     | March 19, 2004 |
| James A. Alpeter             |   |                                       |                               |     |
|                         |   |                                       |                               |     |
| /s/ Larry M. Narum           |   |                                       | Director                           |     | March 19, 2004 |
| Larry M. Narum               |   |                                       |                               |     |
|                              |        |                                            |                                    |          |  |  |  |  |  |  |  |

 

44

----