**UNITEDSTATES**

**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, 2004**                                                                                                                                                                                                                                                                                         |
|       |                                                                                                                                                                                                                                                                                                                                    |
| **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) |

 

Indicate by check mark whether theregistrant: (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

 

Indicate by check mark if disclosure ofdelinquent filers in response to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in ParkIII of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o  No ý

 

The aggregate market value of votingstock held by non-affiliates of the registrant, i.e., persons other thandirectors and executive officers of the registrant was $73,300,000 based uponthe average bid and asked price of such common equity as of the last businessday of registrant’s most recently completed second fiscal quarter.

 

The number of shares of Common Stock outstanding as of March 7, 2005 is4,759,513.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

**Portionsof the Annual Report and Proxy Statement for the 2005 Annual Meeting ofStockholders are incorporated by reference into Part II and III of this Form10-K.**

 

 

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**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  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |   |
|           |     |
|           | 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 |   |
|           |     |
|           | Item 9B. | Other  Information |   |
|           |     |
| **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 |   |
|           |     |
|           | Item 14. | Principal  Accountant Fees and Services |   |
|           |     |
| **PART IV**    |     |
|           |     |
|           | Item 15. | Exhibits and  Financial Statement Schedules |   |
|           |     |
| **SIGNATURES** |     |

 

2

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**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 ElginFinancial Savings Bank and subsidiaries, Elgin, Illinois, (the “Bank”) as partof the Bank’s conversion from a mutual to a stock form of organization (the “Conversion”).  In connection with the Conversion, theCompany issued an aggregate of 7,491,434 shares of its common stock, par value$0.01 per share (“Common Stock”) at a purchase price of $10 per share, of which6,936,513 shares were issued in a subscription offering and 554,921 shares wereissued to the Elgin Financial Foundation (the “Foundation”), now known as EFSFoundation, 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 savings association,and again in 1996 to become Elgin Financial Center, S.B., an Illinoisstate-chartered mutual savings bank.  In1998, the Bank changed its name to Elgin Financial Savings Bank.  Most recently, in October 2002 the Bankchanged its name to EFS Bank.  The Bank’sprincipal business consists of the acceptance of retail deposits from thegeneral public in the areas surrounding its full-service branch offices and theinvestment of those deposits, together with funds generated from operations andborrowings, primarily in one- to four-family residential mortgage loans and, toa lesser extent, multi-family and commercial real estate loans, constructionand land loans, commercial business loans, home equity loans, and automobileand passbook savings loans.  The Bankgenerally originates all of its loans for investment.  The Bank also invests primarily in governmentinsured or guaranteed mortgage-backed securities, U.S. Government obligationsand municipal securities.  The Bank’srevenues are derived principally from the interest on its mortgage, consumerand commercial business loans and securities and from servicing fees.  The Bank’s primary sources of funds areretail savings deposits and, to a lesser extent, advances from the Federal HomeLoan Bank of Chicago (the “FHLB-Chicago”).

 

**Market Area**

 

Headquartered in largely suburban Kane County, Illinois, the Bank hasbeen, and intends to continue to be, a community-oriented financial institutionoffering a variety of financial services to meet the needs of the communitiesit serves.  The Bank currently operatesfour full-service banking facilities in Elgin and five full service facilitieslocated in West Dundee, East Dundee, Huntley, Carpentersville and St. Charles,Illinois.  The Bank’s primary lending anddeposit gathering area is concentrated around the areas where its full-servicebanking facilities are located which the Bank generally considers to be itsprimary market area.

 

Elgin is located on U.S. Interstate 90 (the Northwest tollway) in theFox River Valley approximately 38 miles northwest of downtown Chicago and 25miles west of 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**

 

The Bank faces significant competition both in making loans and inattracting deposits.  The State ofIllinois has a high density of financial institutions, many of which arebranches of significantly larger institutions, which have greater financialresources than the Bank, all of which are competitors of the Bank to varyingdegrees.  The Bank’s competition forloans comes principally from savings banks, savings and loan associations,commercial banks, mortgage banking companies, credit unions, insurancecompanies and other financial service companies.  Its most direct competition for deposits hashistorically come from

 

3

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savings and loan associations, savings banks, commercial banks andcredit unions.  The Bank faces additionalcompetition for deposits from non-depository competitors such as the mutualfund 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 approximately 21financial institutions with operations in Elgin and approximately 51 financialinstitutions with operations in the Bank’s primary market area.

 

**Lending Activities**

 

***Loan Portfolio Composition.**** *The types of loans that the Bank may originate are subject to federaland state laws and regulations.  Interestrates charged by the Bank on loans are affected principally by the demand forsuch loans, the supply of money available for lending purposes and the ratesoffered by its competitors.  Thesefactors are, in turn, affected by general and economic conditions, monetarypolicies of the federal government, including the Federal Reserve Board (“FRB”),legislative tax policies and governmental budgetary matters.

 

The Bank’s loan portfolio primarily consists of first mortgage loanssecured by one- to four-family residences most of which are located in itsprimary market area.  At December 31,2004, the Bank’s gross loan portfolio totaled $812.5 million, of which $503.8million were one- to four-family residential mortgage loans, or 62.0% of totalloans.  At such date, the remainder ofthe loan portfolio consisted of $55.3 million of multi-family loans, or 6.8% oftotal loans; $131.0 million of commercial real estate loans, or 16.1% of totalloans; $44.1 million of construction and land loans, or 5.4% of total loans;$39.4 million of commercial loans, or 4.9% of total loans; and $39.0 million ofconsumer loans, or 4.8% of total loans, consisting of $31.7 million of homeequity lines of credit, $5.6 million of secured and unsecured personal loansand $1.7 million of automobile loans. The Bank sold loans totaling $42.7 million and $20.8 million during theyears ended December 31, 2004 and December 31, 2003, respectively.  At December 31, 2004, 53.0% of the Bank’smortgage loans had adjustable interest rates, most of which were indexed to theone year Constant Maturity Treasury (“CMT”) Index.

 

4

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The following table sets forth the composition of the Bank’s loanportfolio in dollar amounts and in percentages of the respective portfolios atthe dates indicated.

 
| ** **                 | ** ** | **At  December 31,**   | ** ** |
|----------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                 | ** ** | **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       |       | $                           | 503,755    |   | 62.0 | % | $ | 466,931 |   | 64.8 | % | $ | 405,953 |   | 67.6 | % | $ | 375,452 |   | 69.6 | % | $ | 326,739 |   | 70.7 | % |
| Multi-family               |       | 55,269                      |       | 6.8 |   | 52,249 |   | 7.3 |   | 42,498 |   | 7.1 |   | 58,093 |   | 10.8 |   | 50,965 |   | 11.0 |   |
| Commercial real  estate    |       | 131,043                     |       | 16.1 |   | 109,426 |   | 15.2 |   | 52,155 |   | 8.7 |   | 42,813 |   | 7.9 |   | 29,729 |   | 6.5 |   |
| Construction and  land     |       | 44,121                      |       | 5.4 |   | 36,356 |   | 5.0 |   | 41,323 |   | 6.9 |   | 16,285 |   | 3.0 |   | 16,025 |   | 3.5 |   |
| Total mortgage  loans      |       | 734,188                     |       | 90.3 |   | 664,962 |   | 92.3 |   | 541,929 |   | 90.3 |   | 492,643 |   | 91.3 |   | 423,458 |   | 91.7 |   |
| Other loans:               |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Home equity loans          |       | 31,654                      |       | 3.9 |   | 27,497 |   | 3.8 |   | 21,160 |   | 3.5 |   | 14,689 |   | 2.7 |   | 11,972 |   | 2.6 |   |
| Commercial                 |       | 39,416                      |       | 4.9 |   | 22,603 |   | 3.1 |   | 33,315 |   | 5.6 |   | 30,046 |   | 5.6 |   | 25,240 |   | 5.5 |   |
| Auto loans                 |       | 1,693                       |       | .2 |   | 1,471 |   | .2 |   | 1,116 |   | .2 |   | 764 |   | .1 |   | 615 |   | .1 |   |
| Loans on savings  accounts |       | 284                         |       | — |   | 229 |   | — |   | 1,017 |   | .1 |   | 335 |   | .1 |   | 216 |   | — |   |
| Other                      |       | 5,291                       |       | .7 |   | 4,066 |   | .6 |   | 1,889 |   | .3 |   | 1,160 |   | .2 |   | 455 |   | .1 |   |
| Total other loans          |       | 78,338                      |       | 9.7 |   | 55,866 |   | 7.7 |   | 58,497 |   | 9.7 |   | 46,994 |   | 8.7 |   | 38,498 |   | 8.3 |   |
| Total loans  receivable    |       | 812,526                     |       | 100.0 | % | 720,828 |   | 100.0 | % | 600,426 |   | 100.0 | % | 539,637 |   | 100.0 | % | 461,956 |   | 100.0 | % |
| Less:                      |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred loan  fees, net   |       | 196                         |       |   |   | 190 |   |   |   | 247 |   |   |   | 311 |   |   |   | 280 |   |   |   |
| Allowance for  loan losses |       | 4,496                       |       |   |   | 3,754 |   |   |   | 3,141 |   |   |   | 2,255 |   |   |   | 1,881 |   |   |   |
| Loans receivable,  net     |       | $                           | 807,834    |   |   |   | $ | 716,884 |   |   |   | $ | 597,038 |   |   |   | $ | 537,071 |   |   |   | $ | 459,795 |   |   |   |

 

5

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***Loan Originations.**** *The Bank’s mortgage lending activities are conducted by its loanpersonnel operating at its nine branch offices as well as through participationand loan acquisition programs.  All loansoriginated by the Bank are underwritten by the Bank pursuant to the Bank’spolicies and procedures.  The Bankoriginates both adjustable-rate and fixed-rate mortgage loans, commercialloans, and consumer loans.  The Bank’sability to originate fixed- or adjustable-rate loans is dependent upon therelative customer demand for such loans, which is affected by the current andexpected future level of interest rates. It is the general policy of the Bank to retain loans originated in itsportfolio.

 

Duringthe years ended December 31, 2004 and 2003, the Bank originated $12.0 millionand $93.6 million of fixed-rate one- to four-family residential mortgage loans,respectively, and for the years ended December 31, 2004 and 2003, the Bankoriginated $84.2 million and $62.5 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$192.2 million of purchased loan participation interests at December 31, 2004.

 

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 for investment.

 
| ** **                                 | ** ** | **For the  Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                 | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                 | ** ** | **(In thousands)**                        | ** ** |
| Gross loans (1):                           |       |                                      |       |   |   |   |   |
| Balance outstanding at beginning of period |       | $                                         | 720,828    |   | $ | 600,426 |   | $ | 539,637 |   |
| Loans originated (2):                      |       |                                      |       |   |   |   |   |
| One-to four-family residential             |       | 96,202                                    |       | 156,087 |   | 103,136 |   |
| Multi-family                               |       | 13,957                                    |       | 3,537 |   | 7,015 |   |
| Commercial real estate                     |       | 46,681                                    |       | 76,666 |   | 4,111 |   |
| Construction and land                      |       | 59,526                                    |       | 19,383 |   | 31,023 |   |
| Home equity                                |       | 24,756                                    |       | 27,402 |   | 18,240 |   |
| Commercial business                        |       | 49,985                                    |       | 8,915 |   | 9,102 |   |
| Auto loans                                 |       | 807                                       |       | 1,016 |   | 881 |   |
| Loans on savings accounts                  |       | 247                                       |       | 221 |   | 1,141 |   |
| Other                                      |       | 9,991                                     |       | 6,333 |   | 4,535 |   |
| Total loans originated                     |       | 302,152                                   |       | 299,560 |   | 179,184 |   |
| Loans purchased                            |       | 75,815                                    |       | 110,231 |   | 79,620 |   |
| Total loans originated and purchased       |       | 377,967                                   |       | 409,791 |   | 258,804 |   |
| Less:                                      |       |                                      |       |   |   |   |   |
| Principal repayments                       |       | (240,682                                  | )          | (268,417 | ) | (178,008 | ) |
| Loans sold                                 |       | (42,693                                   | )          | (20,838 | ) | (13,217 | ) |
| Transfers to real estate owned             |       | —                                    |       | — |   | (1,986 | ) |
| Change in loans in process                 |       | (2,894                                    | )          | (134 | ) | (4,804 | ) |
| Total loans receivable at end of period    |       | $                                         | 812,526    |   | $ | 720,828 |   | $ | 600,426 |   |

 

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

(2)   Amounts for each periodinclude loans in process at period end.

 

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***Loan Maturity and Repricing.***  Thefollowing table shows the contractual maturity of the Bank’s loan portfolio atDecember 31, 2004.  The table does notinclude prepayments, scheduled principal amortization or repricing ofadjustable rate loans.  Prepayments andscheduled principal amortization on mortgage loans totaled $240.7 million,$268.4 million and $178.0 million for the years ended December 31, 2004,2003 and 2002, respectively.

** **
| ** **                           | ** ** | **At  December 31, 2004**  | ** ** |
|--------------------------------------|------------|----------------------------|------------|
| ** **                           | ** ** | **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                      |       | $                          | 6,531      |   | $ | 5,450 |   | $ | 8,758 |   | $ | 13,111 |   | $ | 1,333 |   | $ | 25,500 |   | $ | 39 |   | $ | 232 |   | $ | 3,827 |   | $ | 64,781 |   |
| After one year:                      |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| More than one  year to three years   |       | 11,916                     |       | 10,602 |   | 27,361 |   | 25,430 |   | 2,562 |   | 1,533 |   | 1,249 |   | 52 |   | 313 |   | 81,018 |   |
| More than three  years to five years |       | 20,488                     |       | 14,805 |   | 69,039 |   | 2,632 |   | 1,097 |   | 11,424 |   | 393 |   | — |   | 320 |   | 120,198 |   |
| More than five  years to 10 Years    |       | 14,038                     |       | 12,267 |   | 17,568 |   | 2,840 |   | 7,980 |   | 959 |   | 12 |   | — |   | 99 |   | 55,763 |   |
| More than 10  years to 20 Years      |       | 120,254                    |       | 2,885 |   | 6,721 |   | 108 |   | 18,682 |   | — |   | — |   | — |   | 732 |   | 149,382 |   |
| More than 20  years                  |       | 330,528                    |       | 9,260 |   | 1,596 |   | — |   | — |   | — |   | — |   | — |   | — |   | 341,384 |   |
| Total due after  December 31, 2005   |       | 497,224                    |       | 49,819 |   | 122,285 |   | 31,010 |   | 30,321 |   | 13,916 |   | 1,654 |   | 52 |   | 1,464 |   | 747,745 |   |
| Total amount due  (gross)            |       | $                          | 503,755    |   | $ | 55,269 |   | $ | 131,043 |   | $ | 44,121 |   | $ | 31,654 |   | $ | 39,416 |   | $ | 1,693 |   | $ | 284 |   | $ | 5,291 |   | 812,526 |   |
| Less:                                |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred loan  fees, net             |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 196 |   |
| Allowance for  loan losses           |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 4,496 |   |
| Total loans, net                     |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 807,834 |   |

 

 The following table sets forth at December 31,2004, the dollar amount of gross loans receivable contractually due afterDecember 31, 2005, and whether such loans have fixed interest rates oradjustable interest rates.

 
| ** **                | ** ** | **Due After December 31, 2005** | ** ** |
|---------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **Fixed**                       | ** ** | **Adjustable** | ** ** | **Total** | ** ** |
| ** **                | ** ** | **(In  thousands)**             | ** ** |
| Mortgage loans:           |       |                            |       |   |   |   |   |
| One- to four-family       |       | $                               | 217,212    |   | $ | 280,012 |   | $ | 497,224 |   |
| Multi-family              |       | 30,920                          |       | 18,899 |   | 49,819 |   |
| Commercial real estate    |       | 77,345                          |       | 44,940 |   | 122,285 |   |
| Construction and land     |       | 4,443                           |       | 26,567 |   | 31,010 |   |
| Total mortgage loans      |       | 329,920                         |       | 370,418 |   | 700,338 |   |
| Home equity               |       | —                          |       | 30,321 |   | 30,321 |   |
| Commercial                |       | 8,465                           |       | 5,451 |   | 13,916 |   |
| Auto loans                |       | 1,654                           |       | — |   | 1,654 |   |
| Loans on savings accounts |       | 52                              |       | — |   | 52 |   |
| Other                     |       | 929                             |       | 535 |   | 1,464 |   |
| Total loans               |       | $                               | 341,020    |   | $ | 406,725 |   | $ | 747,745 |   |

 

***One- to Four-Family Lending. ***The Bank currently offers both fixed-rate and adjustable-rate mortgage(“ARM”) loans with maturities up to 30 years secured by one- to four-familyresidences which are generally located in the Bank’s primary market area. One-to four-family mortgage loan originations are generally obtained from the Bank’sin-house loan representatives,

 

7

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mortgagebrokers, from existing or past customers, through advertising, and throughreferrals from local builders, real estate brokers and attorneys.  At December 31, 2004, the Bank’s one- tofour-family mortgage loans totaled $503.8 million, or 62.0%, of totalloans.  Of the one- to four-familymortgage loans outstanding at that date, 47.1% were fixed-rate mortgage loansand 52.9% were ARM loans.

 

The Bank currently offers fixed-rate mortgage loans with terms from 10to 30 years.  These loans have generallybeen priced at current market rates for such loans.  The Bank currently offers a number of ARMloans with terms of up to 30 years and interest rates which adjust every one,two or three years from the outset of the loan or which adjust annually after atwo, three or five year initial fixed period. The interest rates for the Bank’s ARM loans are indexed to the one-yearCMT Index.  The Bank originates ARM loanswith initially discounted rates, often known as “teaser rates.”  The Bank’s ARM loans generally provide forperiodic (not more than 2%) and overall (not more than 6%) caps on the increaseor decrease in the interest rate at any adjustment date and over the life ofthe loan.  However, interest rates on theBank’s residential ARM loans may never adjust to be less than the initial rateof interest charged on any such loan.

 

The origination of adjustable-rate residential mortgage loans, asopposed to fixed-rate residential mortgage loans, helps reduce the Bank’sexposure to increases in interest rates. However, adjustable-rate loans generally pose credit risks not inherentin fixed-rate loans, primarily because as interest rates rise, the underlyingpayments of the borrower rise, thereby increasing the potential fordefault.  Periodic and lifetime caps oninterest rate increases help to reduce the risks associated withadjustable-rate loans but also limit the interest rate sensitivity of suchloans.

 

The Bank has also purchased one-to-four family first mortgage loansgenerally out of our primary market area. As of December 31, 2004, the Bank had $123.1 million of theseloans.  In addition, the Bank sold loanstotaling $42.7 million and $20.8 million for the years ended December 31, 2004and 2003, 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, 2004 was $20.9 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 make amulti-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, 2004was $55.3 million, or 6.8% of total loans, and the Bank’s commercial realestate loan portfolio at such date was $131.0 million, or 16.1% of totalloans.  This compares to $52.2 millionand $109.4 million at December 31, 2003, respectively.  The largest multi-family or commercial realestate loan in the Bank’s portfolio (excluding loan participation interests) atDecember 31, 2004 was a $6.4 million performing commercial real estateloan secured by commercial type property located in Elgin, Illinois.

 

The Bank also purchases up to 90% participation interests inmulti-family, commercial real estate and construction loans secured by realestate, most of which is located outside of the Bank’s primary market area insouthern Wisconsin 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, 2004, the Bank had$25.0 million in multi-family real estate loan participation interests, or45.2% of multi-family loans and 3.1% of total loans.  In addition, the Bank had $43.9 million incommercial real estate loan participation interests as of the same date.

 

Loans secured by multi-family and commercial real estate propertiesgenerally involve larger principal amounts and a greater degree of risk thanone- to four-family residential mortgage loans. Because payments on loanssecured by multi-family and 

 

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commercialreal estate properties are often dependent on successful operation ormanagement of the properties, repayment of such loans may be subject to adverseconditions in the real estate market or the economy.  The Bank seeks to minimize these risks throughits underwriting standards.

 

***Construction and Land Lending. ***The Bank originates fixed-rate construction loans for the developmentof residential property primarily located in the Bank’s market area.  Construction loans are offered primarily toexperienced local developers operating in the Bank’s primary market area and,to a lesser extent, to individuals for the construction of theirresidence.  The majority of the Bank’sconstruction 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 offered withterms up to 12 months and may be made in amounts up to 80% of the appraisedvalue of the property, as improved. Construction loan proceeds are disbursed periodically in increments asconstruction progresses and as inspections by the Bank’s lending personnelwarrant.

 

The Bank also originates fixed-rate land loans to local developers forthe purpose of developing the land for sale. Such loans are secured by a lien on the property, are limited to 75% ofthe appraised 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.

 

The Bank originated $59.5 million, $19.4 million and $31.0 million ofconstruction and land loans for the years ended December 31, 2004, 2003 and2002, respectively.  At December 31,2004, the Bank’s largest construction or land loan was a performing loan with a$8.8 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, 2004, the Bank had $44.1million of construction and land loans, which amounted to 5.4% of the Bank’stotal loans.

 

Construction and land financing is generally considered to involve ahigher degree of credit risk than long-term financing on improved,owner-occupied real estate.  Risk of losson a construction loan is dependent largely upon the accuracy of the initialestimate of the property’s value at completion of construction or developmentcompared to the estimated cost (including interest) of construction and otherassumptions, including the estimated time to sell residential properties.  If the estimate of value proves to beinaccurate, the Bank may be confronted with a project, when completed, having avalue that is insufficient to 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 businessloan is limited by the Bank’s loans-to-one-borrower limit which, at December31, 2004, was $20.9 million.  Dependingon the collateral used to secure the loans, commercial loans are made inamounts up to 80% of the value of the property securing the loan.  Term loans are generally offered with fixedrates of interest and terms of up to 10 years. All term loans fully amortize during the term of such loan.  Business lines of credit have adjustablerates of interest and terms of up to one year. Business lines of credit adjust on a daily basis and are indexed to theprime rate as published in *The Wall StreetJournal*.  The Bank also issuesboth secured and unsecured letters of credit to business customers of theBank.  Acceptable collateral includes anassigned deposit account with the Bank, real estate or marketablesecurities.  Letters of credit have amaximum term of 36 months.

 

In making commercial business loans, the Bank considers primarily thefinancial resources of the borrower, the borrower’s ability to repay the loanout of net operating income, the Bank’s lending history with the borrower andthe value of the collateral.  Generally,if the borrower is a corporation, partnership or other business entity,personal guarantees by the principals are required.  However, personal guarantees may not berequired on such loans depending on the creditworthiness of the borrower andother mitigating circumstances.  The Bankcontinues to emphasize commercial business loans.  The Bank’s largest commercial loan atDecember 31, 2004 was $5.2 million.  Atsuch date, the Bank had $61.4 million of unadvanced commercial lines ofcredit.  At December 31, 2004, the Bankhad $39.4 million of commercial business loans, which amounted to 4.9% of theBank’s total loans.  The Bank originated$50.0 million, $8.9 million and $9.1 million in commercial business loans forthe years ended December 31, 2004, 2003 and 2002, respectively.

 

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Unlike mortgage loans, which generally are made on the basis of theborrower’s ability to make repayment from his or her employment or otherincome, and are secured by real property which value tends to be more easilyascertainable, commercial loans are of higher risk and typically are made onthe basis of the borrower’s ability to make repayment from the cash flow of theborrower’s business.  As a result, theavailability of funds for the repayment of commercial loans may be substantiallydependent on the success of the business itself.  Further, any collateral securing such loansmay depreciate over time, may be difficult to appraise and may fluctuate invalue.

 

***Consumer Lending.***Consumer loans at December 31, 2004 amountedto $39.0 million, or 4.8% 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.

 

Substantially all of the Bank’s home equity lines of credit are securedby second mortgages on owner-occupied single-family residences located in theBank’s primary market area.  At December31, 2004, these loans totaled $31.7 million, or 3.9% of the Bank’s total loansand 80.1% of consumer loans.  Home equitylines of credit generally have adjustable-rates of interest, which adjust on amonthly basis.  The unused home equitylines of credit totaled $34.5 million at December 31, 2004.  The adjustable-rate of interest charged onsuch loans is indexed to the prime rate as reported in *The Wall Street Journal*.  Home equity lines of credit generally have an18% lifetime limit on interest rates. Generally, the maximum combined LTV ratio on home equity lines of creditis 89.9%.  The underwriting standardsemployed by the Bank for home equity lines of credit include a determination ofthe applicant’s credit history and an assessment of the applicant’s ability tomeet existing obligations and payments on the proposed loan and the value ofthe collateral securing the loan.  Thestability of the applicant’s monthly income may be determined by verificationof gross monthly income from primary employment and, additionally, from anyverifiable secondary income. Creditworthiness of the applicant is of primary consideration.

 

The Bank also originates other types of consumer loans consisting ofsecured and unsecured 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, 2004, personalloans (both secured and unsecured) totaled $5.6 million or 0.7% of the Bank’stotal loans and 14.3% of consumer loans; and automobile loans totaled $1.7million, or 0.2% of total loans and 4.4% of consumer loans.

 

With respect to automobile loans, full-time employees of the Bank,other than executive officers and directors, who satisfy certain lendingcriteria and the general underwriting standards of the Bank receive an interestrate 1% less than that which is offered to the general public; provided,however, that the discounted interest rate is at no time less than 75 basispoints above the Bank’s overall cost of funds, rounded to the highest quarterpercentage point.

 

Loans secured by rapidly depreciable assets such as automobiles or thatare unsecured entail greater risks than one- to four-family residentialmortgage loans.  In such cases,repossessed collateral for a defaulted loan may not provide an adequate sourceof repayment of the outstanding loan balance, since there is a greaterlikelihood of damage, loss or depreciation of the underlying collateral.  Further, consumer loan collections on theseloans are dependent on the borrower’s continuing financial stability and,therefore, are more likely to be adversely affected by job loss, divorce, illnessor personal bankruptcy.  Finally, theapplication of various federal and state laws, including federal and statebankruptcy and insolvency laws, may limit the amount which can be recovered onsuch loans in the event of a default.

 

***Loans-to-One Borrower Limitations.***** **The Illinois Savings Bank Act imposes limitations on the aggregateamount of loans that an Illinois chartered savings bank can make to any oneborrower.  Under the Illinois SavingsBank Act the permissible amount of loans-to-one borrower is the greater of$500,000 (for a savings bank meeting its minimum capital requirements) or 25%of a savings bank’s total capital plus general loan loss reserves.  In addition, a savings bank may make loans inan amount equal to an additional 10% of the savings bank’s capital plus generalloan loss reserves if the loans are 100% secured by readily marketablecollateral.  Under Illinois law, asavings bank’s capital consists of capital stock and noncumulative perpetualpreferred stock, related paid-in capital, retained earnings and other forms ofcapital deemed to be qualifying capital by the Federal Deposit InsuranceCorporation (the “FDIC”).  Illinois lawalso permits an institution with capital in excess of 6% of assets to requestpermission of the Illinois Commissioner of Banks and Real Estate (the “Commissioner”)to lend up to 30% of the institution’s total capital and general loan lossreserves to one borrower for the development of residential housing propertieswithin Illinois.  At

 

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December31, 2004, the Bank’s ordinary limit on loans-to-one borrower under the IllinoisSavings Bank Act was $20.9 million.  The30% limitation equaled $25.1 million at that date.  At December 31, 2004, the Bank’s five largestgroups of loans-to-one borrower ranged from $9.6 million to $14.9 million, withthe largest single loan in such groups being a $6.2 million loan for theconstruction of town homes located in Elgin, Illinois.  At December 31, 2004, there were no loansexceeding the 25% limitation.  Asubstantial portion of each 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 policyof the Bank to retain such loans in its portfolio.  The Bank does not have a policy ofunderwriting its loans in conformance with the Fannie Mae or Federal Home LoanMortgage Corporation (“FHLMC”) guidelines. Upon receipt of a completed loan application from a prospectiveborrower, a credit report is ordered and certain other information is verifiedby an independent credit agency.  Ifnecessary, additional financial information may be required.  An appraisal of real estate intended tosecure a proposed loan generally is required to be performed by the Bank’s “in-house”appraisers or outside appraisers approved by the Bank.  For proposed mortgage loans, the Boardannually approves independent appraisers used by the Bank and approves the Bank’sappraisal policy.  The Bank’s policy isto obtain title and hazard insurance on all mortgage loans and flood insurancewhen necessary and the Bank may require borrowers to make payments to amortgage escrow account for the payment of property taxes.

 

At December 31, 2004, the Bank’s ratio of nonperforming loans to totalloans was 0.36%, and its ratio of nonperforming assets to total assets was0.29%.  The Bank did not have any realestate owned at December 31, 2004.  Netcharge-offs amounted to $18,000 in 2004. There were no net charge-offs in 2003 and net charge-offs in 2002totaled $14,000.  See “Delinquent Loans,Classified Assets and Real Estate Owned.”

 

The Bank’s one- to four-family lending policy permits the investment inmortgage loans where the borrower’s monthly mortgage and prorated real estate taxpayments were less than 32% of the borrower’s gross income, and where theborrower’s total monthly obligations did not exceed 43% of the borrower’s grossincome.  It is also the general practiceof the Bank not to require private mortgage insurance, though the Bank retainsthe right to require such insurance on any loan with a loan to value ratio inexcess of 80.0%.  All loans with loan tovalue ratios in excess of 89.9% must have private mortgage insurance, with theexception of its “First-Time Home Buyer” and “American Dream Loan”programs.  In addition, the Bank hadhistorically priced its one- to four- family loans with loan to value ratios ofbetween 80.0% and 89.9% at 25 basis points higher than loans with loan to valueratios of less than 80.0%, again in an effort to control the origination ofsuch loans.  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 EstateOwned**

 

***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 generally sendsthe borrower a written notice of non-payment after the loan is first past due.  The Bank’s guidelines provide that telephone,written correspondence and/or face-to-face contact will be attempted toascertain the reasons for delinquency and the prospects of repayment.  When contact is made with the borrower at anytime prior to foreclosure, the Bank will attempt to obtain full payment, offerto work out a repayment schedule with the borrower to avoid foreclosure or, insome 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 is stillnot brought current or satisfied and it becomes necessary for the Bank to takelegal 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

 

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foreclosureand, if purchased by the Bank, becomes real estate owned.

 

Federal regulations and the Bank’s internal policies require that theBank utilize an internal asset classification system as a means of reporting problemand potential problem assets.  The Bankcurrently classifies problem and potential problem assets as “Substandard,” “Doubtful”or “Loss” assets.  An asset is consideredSubstandard if it is inadequately protected by the current net worth and payingcapacity of the obligor or of the collateral pledged, if any.  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.”  Loans classified Special Mention may havebeen delinquent in the past or had other weaknesses, however, in management’sjudgment risk of loss is not probable. This classification represents a watch list of loans for management toclosely monitor.

 

When the Bank classifies one or more assets, or portions thereof, asSubstandard or Doubtful, it establishes a specific allowance for probable loanlosses in an amount deemed appropriate by management.  When the Bank classifies one or more assets,or portions thereof, as Loss, it either establishes a specific allowance for lossesequal to 100% of the amount of the assets so classified or charges off suchamount.

 

The Bank’s determination as to the classification of its assets and theamount of its 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 hasanalyzed all significant factors that affect the collectibility of theportfolio in a reasonable manner; and that management has establishedacceptable allowance evaluation processes that meet the objectives set forth inthe policy statement.  While the Bankbelieves that it has established an adequate allowance for loan losses, therecan be no assurance that regulators, in reviewing the Bank’s loan portfolio,will not request the Bank to increase at that time its allowance for loanlosses, thereby negatively affecting the Bank’s financial condition andearnings at that time.  Althoughmanagement believes that adequate specific and general loan loss allowanceshave been established, future provisions are dependent upon future events suchas loan growth and portfolio diversification and, as such, further additions tothe level of the allowance for loan losses may become necessary.

 

The Bank reviews and classifies its assets on a quarterly basis and theBoard of Directors reviews the results of the reports on a quarterlybasis.  The Bank classifies its assets inaccordance with the management guidelines described above.  At December 31, 2004, the Bank had $2.9million of assets, representing 0.36% of loans receivable, or 0.29%, of assets,designated as Substandard.  No loans wereclassified as Doubtful, Loss, or Special Mention.

 

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The following tables set forth delinquencies in the Bank’s loanportfolio past due 60 days or more:

 
| ** **                          | ** ** | **At December 31, 2004**       | ** ** | **At December 31, 2003**    | ** ** |
|-------------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **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                              |       | $                                | 979        |   | 7 |   | $ | 957 |   | 8 |   | $ | 1,014 |   | 9 |   | $ | 853 |   |
| Commercial real estate              |       | —                         |       | —                           |       | 1 |   | 500 |   | — |   | — |   | 1 |   | 505 |   |
| Consumer                            |       | 2                              |       | 5                                |       | 3 |   | 23 |   | 5 |   | 18 |   | 3 |   | 14 |   |
| Home equity                         |       | 1                              |       | 20                               |       | — |   | — |   | 5 |   | 166 |   | 2 |   | 77 |   |
| Commercial business                 |       | 1                              |       | 615                              |       | 7 |   | 1,298 |   | 1 |   | 24 |   | 6 |   | 1,273 |   |
| Total                               |       | 12                             |       | $                                | 1,619      |   | 18 |   | $ | 2,778 |   | 19 |   | $ | 1,222 |   | 21 |   | $ | 2,722 |   |
|                                |       |                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Delinquent loans to total loans (1) |       |                           |       | 0.20                             | %          |   |   | 0.34 | % |   |   | 0.17 | % |   |   | 0.38 | % |
| ** **                          | ** ** | ** **                     | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **At  December 31, 2002** | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                          | ** ** | **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                 |       | 5                              |       | $                                | 354        |   | 7 |   | $ | 865 |   |   |   |   |   |   |   |   |   |
| Commercial real estate              |       | —                         |       | —                           |       | — |   | — |   |   |   |   |   |   |   |   |   |
| Consumer                            |       | —                         |       | —                           |       | 3 |   | 47 |   |   |   |   |   |   |   |   |   |
| Home equity                         |       | 1                              |       | 11                               |       | 2 |   | 126 |   |   |   |   |   |   |   |   |   |
| Commercial business                 |       | —                         |       | —                           |       | 1 |   | 39 |   |   |   |   |   |   |   |   |   |
|                                |       |                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                               |       | 6                              |       | $                                | 365        |   | 13 |   | $ | 1,077 |   |   |   |   |   |   |   |   |   |
|                                |       |                           |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Delinquent loans to total loans (1) |       |                           |       | 0.06                             | %          |   |   | 0.18 | % |   |   |   |   |   |   |   |   |

 

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(1)   Total loans represent grossloans receivable less 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, 2004, 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 $99,000 $82,000, $198,000, $187,000, and $89,000, respectively.

 

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| ** **                                             | ** ** | **At December 31,**   | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|
| ** **                                             | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                             | ** ** | **(Dollars in thousands)** | ** ** |
| Nonperforming loans:                                   |       |                       |       |   |   |   |   |   |   |   |   |
| Mortgage loans:                                        |       |                       |       |   |   |   |   |   |   |   |   |
| One- to four-family                                    |       | $                          | 1,091      |   | $ | 853 |   | $ | 865 |   | $ | 547 |   | $ | 864 |   |
| Multi-family                                           |       | —                     |       | — |   | — |   | — |   | — |   |
| Commercial real estate                                 |       | 500                        |       | 505 |   | — |   | 1,623 |   | 3,505 |   |
| Total mortgage loans                                   |       | 1,591                      |       | 1,358 |   | 865 |   | 2,170 |   | 4,369 |   |
| Other loans:                                           |       |                       |       |   |   |   |   |   |   |   |   |
| Home equity                                            |       | 20                         |       | 89 |   | 126 |   | — |   | — |   |
| Commercial business loans                              |       | 1,298                      |       | 1,297 |   | 1,358 |   | 402 |   | 148 |   |
| Auto loans                                             |       | 7                          |       | 22 |   | 8 |   | 8 |   | 15 |   |
| Other                                                  |       | 16                         |       | 1 |   | 39 |   | — |   | — |   |
| Total other loans                                      |       | 1,341                      |       | 1,409 |   | 1,531 |   | 410 |   | 163 |   |
| Total nonperforming loans                              |       | 2,932                      |       | 2,767 |   | 2,396 |   | 2,580 |   | 4,532 |   |
| Real estate owned                                      |       | —                     |       | — |   | 1,986 |   | — |   | 540 |   |
| Total nonperforming assets                             |       | $                          | 2,932      |   | $ | 2,767 |   | $ | 4,382 |   | $ | 2,580 |   | $ | 5,072 |   |
| Nonperforming loans as a percent of loans  (1)         |       | 0.36                       | %          | 0.38 | % | 0.40 | % | 0.48 | % | 0.98 | % |
| Nonperforming assets as a percent of total  assets (2) |       | 0.29                       | %          | 0.31 | % | 0.56 | % | 0.38 | % | 0.87 | % |

 

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(1)   Loans receivable, gross.

(2)   Nonperforming assets consistof nonperforming loans and REO.

 

Nonperformingloans totaled $2.9 million as of December 31, 2004, and included eight one- tofour-family loans, with an aggregate balance of $1.1 million, one commercialreal estate loan totaling $500,000, seven commercial business loans totaling$1.3 million, two automobile loans totaling $7,000, one consumer loan totaling$16,000 and one home equity line of credit totaling $20,000.

 

**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 determinationsalso incorporate factors and analyses which consider the probable principalloss associated with the loan, costs of acquiring the property securing theloan through foreclosure or deed in lieu of foreclosure.  While management estimates loan losses usingthe best available information, no assurance can be given that future additionsto the allowance will not be necessary based on changes in economic and realestate market conditions, 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,impairments in the loan portfolio and other factors.  The analysis is compared to actual losses,peer group comparisons and economic conditions. As of December 31, 2004, the Bank’s allowance for loan losses was $4.5million, or 0.56%, of total loans and 153.4% of nonperforming loans as comparedto $3.8 million, or 0.52%, of total loans and 135.7% of nonperforming loans asof December 31, 2003.  The Bank had totalnonperforming loans of $2.9 million at December 31, 2004 as compared to $2.8million at December 31, 2003 and nonperforming loans to total loans of 0.36%and 0.39% at December 31, 2004 and 2003, respectively.  The Bank will continue to monitor and modifyits allowance for loan losses as conditions dictate.  Management believes that, based oninformation available at December 31, 2004, the Bank’s allowance for loanlosses was adequate to cover probable losses inherent in its loan portfolio atthat time.  Based upon the Bank’s plan toincrease its emphasis on non-one- to four-family mortgage lending which consistof secured commercial loans which are generally considered to involve a higherdegree of risk than one- to four-family mortgage lending, the Bank has and maycontinue to further

 

14

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increase its allowance forloan losses over future periods depending upon the then currentconditions.  The percentage of one- tofour-family loans to total loans decreased to 62.0% at December 31, 2004 from64.8% at December 31, 2003.  At the sametime, the percentage of commercial real estate loans to total loans increasedto 16.1% at December 31, 2004 from 15.2% at December 31, 2003.  However, no assurances can be given that theBank’s level of allowance for loan losses will be sufficient to cover loanlosses incurred by the Bank or that future adjustments to the allowance forloan losses will not be necessary if economic and other conditions differsubstantially from the economic and other conditions used by management todetermine the current level of the allowance for loan losses.  In addition, the FDIC and the Commissioner,as an integral part of their examination processes, periodically review theBank’s allowance for loan losses.  Suchagencies may require the Bank to make additional provisions for estimated loanlosses based upon judgments 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,** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                     | ** ** | **2004**                                       | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                     | ** ** | **(Dollars in thousands)**                     | ** ** |
|                                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Balance at beginning of year                                   |       | $                                              | 3,754      |   | $ | 3,141 |   | $ | 2,255 |   | $ | 1,881 |   | $ | 1,545 |   |
| Provision for loan losses                                      |       | 760                                            |       | 613 |   | 900 |   | 500 |   | 363 |   |
| Charge-offs                                                    |       | (19                                            | )          | — |   | (16 | ) | (126 | ) | (28 | ) |
| Recoveries                                                     |       | 1                                              |       | — |   | 2 |   | — |   | 1 |   |
| Balance at end of year                                         |       | $                                              | 4,496      |   | $ | 3,754 |   | $ | 3,141 |   | $ | 2,255 |   | $ | 1,881 |   |
| Allowance for loan losses as a percent of  loans (1)           |       | 0.56                                           | %          | 0.52 | % | 0.52 | % | 0.42 | % | 0.41 | % |
| Allowance for loan losses as a percent of  nonperforming loans |       | 153.4                                          | %          | 135.7 | % | 131.1 | % | 87.4 | % | 41.5 | % |

 

----

(1)   Loans receivable, gross.

 

15

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The following tables set forth the Bank’s percent of allowance for loanlosses to total allowance and the percent of loans to total loans in each ofthe categories listed at the dates indicated.

 
| ** **                       | ** ** | **At December 31,**                   | ** ** |
|----------------------------------|------------|--------------------------------------------|------------|
| ** **                       | ** ** | **2004**                                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** |   | **2000** |   |
| ** **                       | ** ** | **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             |       | $      1,041 |       | 23.2 | % | 62.0 | % | $       987 |   | 26.3 | % | 64.8 | % | $       838 |   | 26.7 | % | 67.6 | % | $        765 |   | 33.9 | % | 69.6 | % | $       676 |   | 35.9 | % | 70.7 | % |
| Multi-family                     |       | 166                                        |       | 3.7 |   | 6.8 |   | 157 |   | 4.2 |   | 7.3 |   | 118 |   | 3.7 |   | 7.1 |   | 158 |   | 7.0 |   | 10.8 |   | 154 |   | 8.2 |   | 11.0 |   |
| Commercial real  estate          |       | 1,244                                      |       | 27.7 |   | 16.1 |   | 1,094 |   | 29.1 |   | 15.2 |   | 678 |   | 21.6 |   | 8.7 |   | 352 |   | 15.6 |   | 7.9 |   | 437 |   | 23.2 |   | 6.5 |   |
| Construction and  land           |       | 424                                        |       | 9.4 |   | 5.4 |   | 363 |   | 9.7 |   | 5.0 |   | 422 |   | 13.4 |   | 6.9 |   | 131 |   | 5.8 |   | 3.0 |   | 158 |   | 8.4 |   | 3.5 |   |
| Home equity                      |       | 96                                         |       | 2.1 |   | 3.9 |   | 283 |   | 7.5 |   | 3.8 |   | 223 |   | 7.1 |   | 3.5 |   | 147 |   | 6.5 |   | 2.7 |   | 120 |   | 6.4 |   | 2.6 |   |
| Commercial  business loans       |       | 1,288                                      |       | 28.6 |   | 4.9 |   | 698 |   | 18.6 |   | 3.1 |   | 666 |   | 21.2 |   | 5.6 |   | 575 |   | 25.5 |   | 5.6 |   | 276 |   | 14.7 |   | 5.5 |   |
| Auto loans                       |       | 35                                         |       | 0.8 |   | 0.2 |   | 33 |   | 0.9 |   | 0.2 |   | 24 |   | 0.8 |   | 0.2 |   | 17 |   | 0.8 |   | 0.1 |   | 15 |   | 0.8 |   | 0.1 |   |
| Loans on savings  accounts       |       | —                                     |       | — |   | — |   | — |   | — |   | — |   | — |   | — |   | 0.1 |   | — |   | — |   | 0.1 |   | — |   | — |   | — |   |
| Other                            |       | 59                                         |       | 1.3 |   | 0.7 |   | 44 |   | 1.2 |   | 0.6 |   | 26 |   | 0.8 |   | 0.3 |   | 24 |   | 1.1 |   | 0.2 |   | 9 |   | 0.5 |   | 0.1 |   |
| Unallocated                      |       | 143                                        |       | 3.2 |   | — |   | 95 |   | 2.5 |   | — |   | 146 |   | 4.7 |   | — |   | 86 |   | 3.8 |   | — |   | 36 |   | 1.9 |   | — |   |
| Total allowance  for loan losses |       | $      4,496 |       | 100.0 | % | 100.0 | % | $    3,754 |   | 100.0 | % | 100.0 | % | $    3,141 |   | 100.0 | % | 100.0 | % | $     2,255 |   | 100.0 | % | 100.0 | % | $    1,881 |   | 100.0 | % | 100.0 | % |

 

16

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***Real Estate Owned.***** **At December 31, 2004, 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 located in West Dundee,Illinois.  This land was developed into29 home-sites for single-family residences. On October 15, 2004, one of the model homes previously built wassold.  On November 15, 2004, 25 developedlots were sold to a local homebuilder. As of December 31, 2004, this investment totaled $1.5 million and therewere three homes in various stages of completion, one of which was undercontract for sale.

 

### **Investment Activities**

 

TheBoard of Directors sets the investment policy and procedures of the Bank.  This policy generally provides that investmentdecisions will be made based on the safety of the investment, liquidityrequirements of the Bank and, to a lesser extent, potential return on theinvestments.  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 that authoritylevels 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-backed securities in orderto:  (i) generate positive interest ratespreads with minimal administrative expense; and (ii) lower its credit risk asa result of the guarantees provided by FHLMC, FNMA, and the Government NationalMortgage Association (“GNMA”).  The Bankinvests in mortgage-backed securities insured or guaranteed by FNMA, FHLMC andGNMA.  At December 31, 2004,mortgage-backed securities totaled $10.0 million, or 1.0%, of both total andinterest earning assets, all of which were classified asavailable-for-sale.  At December 31,2004, 7.9% of the mortgage-backed securities were backed by adjustable-rateloans and 92.1% were backed by fixed-rate loans.  The mortgage-backed securities portfolio hadcoupon rates ranging from 3.0% to 10.0% and had a weighted average yield of4.06% at December 31, 2004.

 

Mortgage-backedsecurities are created by the pooling of mortgages and issuance of a securitywith an interest rate that is less than the interest rate on the underlyingmortgages.  Mortgage-backed securitiestypically represent a participation interest in a pool of single-family ormulti-family mortgages, although the Bank focuses its investments onmortgage-backed securities backed by single-family mortgages.  The issuers of such securities (generallyU.S. Government agencies and government sponsored enterprises, including FNMA,FHLMC and GNMA) pool and resell the participation interests in the form ofsecurities to investors such as the Bank and guarantee the payment of principaland interest to investors. Mortgage-backed securities generally yield less than the loans thatunderlie such securities because of the cost of payment guarantees and creditenhancements.  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 in mortgage-backedsecurities involve a risk that actual prepayments will be greater thanestimated prepayments over the life of the security, which may requireadjustments to the amortization of any premium or accretion of any discountrelating 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 underlying collateralfor the mortgage-backed securities at issue and current mortgage interest ratesand to determine the yield and estimated maturity of its mortgage-backedsecurity portfolio.  Of the Bank’s $10.0million mortgage-backed securities portfolio at December 31, 2004, $25,000 witha weighted average yield of 9.53% had contractual maturities within five yearsand $10.0 million with a weighted average yield of 4.05% had contractualmaturities over five years.  However, theactual maturity of a mortgage-backed security may be less than its statedmaturity 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 mortgage interestrates, refinancing generally increases and accelerates the prepayment of theunderlying mortgages and the related security. Under such circumstances, the Bank may be subject to reinvestment riskbecause, to the

 

17

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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, 2004, the Bank’s U.S. Government securities portfoliototaled $39.0 million, all of which were classified as available-for-sale.  Such portfolio primarily consists ofmedium-term (maturities of three to fifteen years) securities.

 

***Municipal Securities.***  AtDecember 31, 2004, the Bank’s municipal security portfolio totaled $37.5million and was classified as available-for-sale.  This portfolio consists of generalobligations issued by municipalities.

 

***Equity Investments. ***At December 31, 2004, the Bank’s equity investment portfolio totaled$15.0 million, all of which were classified as available-for-sale.  The portfolio consists of $100,000 of commonstock and $200,000 of preferred stock in a small privately held companyspecializing in interest rate risk management and web site design consultingand $9.8 million and $5.0 million of FNMA and FHLMC preferred stock,respectively.

 

***Corporate Bonds. ***At December 31, 2004, the Bank’s corporate bond portfolio totaled $1.3million, all of which were classified as available-for-sale.  This portfolio consists of highly ratedcorporate 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,**    | ** ** |
|----------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **2004**                    | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                       | ** ** | ** **                  | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** | ** ** | ** ** | **Percent** | ** ** |
| ** **                       | ** ** | ** **                  | ** ** | **of** | ** ** | ** ** | ** ** | **of** | ** ** | ** ** | ** ** | **of** | ** ** |
| ** **                       | ** ** | **Amount**                  | ** ** | **Total** | ** ** | **Amount** | ** ** | **Total** | ** ** | **Amount** | ** ** | **Total** | ** ** |
| ** **                       | ** ** | **(Dollars  in thousands)** | ** ** |
| Investment securities:           |       |                        |       |   |   |   |   |   |   |   |   |   |   |
|                             |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government obligations      |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Equity investments               |       | $                           | 39,018     |   | 37.9 | % | $ | 36,064 |   | 35.8 | % | $ | 32,842 |   | 31.8 | % |
| Municipal securities             |       | 15,047                      |       | 14.6 |   | 15,512 |   | 15.4 |   | 10,521 |   | 10.2 |   |
| Corporate bonds                  |       | 37,483                      |       | 36.5 |   | 33,650 |   | 33.4 |   | 35,608 |   | 34.5 |   |
| Total investment securities      |       | 1,299                       |       | 1.3 |   | 5,430 |   | 5.4 |   | 9,011 |   | 8.7 |   |
|                             |       | 92,847                      |       | 90.3 |   | 90,656 |   | 89.9 |   | 87,982 |   | 85.2 |   |
|                             |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:      |       |                        |       |   |   |   |   |   |   |   |   |   |   |
| FHLMC                            |       | 1,473                       |       | 1.4 |   | 3,044 |   | 3.0 |   | 6,734 |   | 6.5 |   |
| GNMA                             |       | 7,288                       |       | 7.1 |   | 5,013 |   | 5.0 |   | 4,687 |   | 4.6 |   |
| FNMA                             |       | 1,216                       |       | 1.2 |   | 2,108 |   | 2.1 |   | 3,835 |   | 3.7 |   |
| Total mortgage-backed securities |       | 9,977                       |       | 9.7 |   | 10,165 |   | 10.1 |   | 15,256 |   | 14.8 |   |
| Total securities                 |       | $                           | 102,824    |   | 100.0 | % | $ | 100,821 |   | 100.0 | % | $ | 103,238 |   | 100.0 | % |

 

18

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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.  In the fourth quarter 2004, a $1.1 millionother-than temporary impairment charge was recorded by the Company relating toit’s investment in FNMA preferred stock.

 
| ** **                                                                | ** ** | **For the Year  Ended December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                | ** ** | **2004**                                  | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                | ** ** | **(In thousands)**                        | ** ** |
|                                                                      |       |                                      |       |   |   |   |   |
| **Beginning balance**                                                     |       | $                                         | 100,821    |   | $ | 103,238 |   | $ | 82,471 |   |
| Investment securities purchased                                           |       | 39,378                                    |       | 48,075 |   | 45,058 |   |
| Mortgage-backed securities purchased                                      |       | 4,036                                     |       | 2,549 |   | 7,170 |   |
| **Less:**                                                                 |       |                                      |       |   |   |   |   |
| Sale of investment securities                                             |       | 9,961                                     |       | 15,350 |   | — |   |
| Principal repayments on mortgage-backed  securities                       |       | 4,095                                     |       | 7,363 |   | 5,593 |   |
| Maturities of investment securities                                       |       | 26,502                                    |       | 29,700 |   | 27,548 |   |
| Impairment on securities                                                  |       | 1,140                                     |       | — |   | — |   |
| Gain on sale of investment securities                                     |       | (511                                      | )          | (816 | ) | — |   |
| Net amortization of premium                                               |       | (84                                       | )          | (101 | ) | (9 | ) |
| Change in net unrealized gains (losses) on  available-for-sale securities |       | 140                                       |       | 1,343 |   | (1,689 | ) |
| **Ending balance**                                                        |       | $                                         | 102,824    |   | $ | 100,821 |   | $ | 103,238 |   |

 

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

 
| ** **                       | ** ** | **At December 31,** | ** ** |
|----------------------------------|------------|--------------------------|------------|
| ** **                       | ** ** | **2004**                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                       | ** ** | **Amortized  Cost**      | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
| ** **                       | ** ** | **(In thousands)**       | ** ** |
| Investment securities:           |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Government obligations      |       | $                        | 39,546     |   | $ | 39,018 |   | $ | 36,081 |   | $ | 36,064 |   | $ | 32,111 |   | $ | 32,842 |   |
| Equity investments               |       | 15,095                   |       | 15,047 |   | 16,238 |   | 15,512 |   | 10,247 |   | 10,521 |   |
| Municipal securities             |       | 36,359                   |       | 37,483 |   | 32,558 |   | 33,650 |   | 34,765 |   | 35,608 |   |
| Corporate bonds                  |       | 1,214                    |       | 1,299 |   | 5,039 |   | 5,430 |   | 8,871 |   | 9,011 |   |
| Total investment securities      |       | 92,214                   |       | 92,847 |   | 89,916 |   | 90,656 |   | 85,994 |   | 87,982 |   |
| Mortgage-backed securities:      |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| GNMA                             |       | 7,345                    |       | 7,288 |   | 5,058 |   | 5,013 |   | 4,661 |   | 4,687 |   |
| FNMA                             |       | 1,201                    |       | 1,216 |   | 2,081 |   | 2,108 |   | 3,796 |   | 3,835 |   |
| FHLMC                            |       | 1,478                    |       | 1,473 |   | 3,040 |   | 3,044 |   | 6,718 |   | 6,734 |   |
| Total mortgage-backed securities |       | 10,024                   |       | 9,977 |   | 10,179 |   | 10,165 |   | 15,175 |   | 15,256 |   |
| Total securities                 |       | $                        | 102,238    |   | $ | 102,824 |   | $ | 100,095 |   | $ | 100,821 |   | $ | 101,169 |   | $ | 103,238 |   |

 

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, 2004. The yields on tax-exempt securities have not been calculated on a taxequivalent basis.

 

19

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| ** **                       | ** ** | **At  December 31, 2004**  | ** ** |
|----------------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | **One Year  or Less**      | ** ** | **More  than One  Year to Five Years** | ** ** | **More  than Five  Years to Ten Years** | ** ** | **More  than Ten  Years** | ** ** | **Total** | ** ** |
| ** **                       | ** ** | ** **                 | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                       | ** ** | **Carrying**               | ** ** | **Average** | ** ** | **Carrying** | ** ** | **Average** | ** ** | **Carrying** | ** ** | **Average** | ** ** | **Carrying** | ** ** | **Average** | ** ** | **Carrying** | ** ** | **Average** | ** ** |
| ** **                       | ** ** | **Value**                  | ** ** | **Yield** | ** ** | **Value** | ** ** | **Yield** | ** ** | **Value** | ** ** | **Yield** | ** ** | **Value** | ** ** | **Yield** | ** ** | **Value** | ** ** | **Yield** | ** ** |
| ** **                       | ** ** | **(Dollars in thousands)** | ** ** |
| ** **                       | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Mortgage-backed securities:      |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                             |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FHLMC                            |       | $                          | —     |   | — | % | $ | — |   | — | % | $ | 127 |   | 7.65 | % | $ | 1,347 |   | 4.40 | % | $ | 1,474 |   | 4.68 | % |
| GNMA                             |       | —                     |       | — |   | 25 |   | 9.53 |   | 137 |   | 9.02 |   | 7,125 |   | 3.47 |   | 7,287 |   | 3.60 |   |
| FNMA                             |       | —                     |       | — |   | — |   | — |   | — |   | — |   | 1,216 |   | 6.10 |   | 1,216 |   | 6.10 |   |
| Total mortgage-backed securities |       | —                     |       | — |   | 25 |   | 9.53 |   | 264 |   | 8.36 |   | 9,688 |   | 3.93 |   | 9,977 |   | 4.06 |   |
| Municipal securities             |       | 265                        |       | 3.40 |   | 832 |   | 4.04 |   | 10,078 |   | 4.19 |   | 26,308 |   | 5.47 |   | 37,483 |   | 5.08 |   |
| Corporate bonds                  |       | —                     |       | — |   | 1,299 |   | 8.20 |   | — |   | — |   | — |   | — |   | 1,299 |   | 8.20 |   |
| U.S. Government Obligations      |       | —                     |       | — |   | 2,997 |   | 3.55 |   | 26,184 |   | 4.63 |   | 9,837 |   | 4.11 |   | 39,018 |   | 4.42 |   |
| Total securities                 |       | $                          | 265        |   | 3.40 |   | $ | 5,128 |   | 4.81 |   | $ | 36,262 |   | 4.51 |   | $ | 36,145 |   | 5.10 |   | $ | 77,800 |   | 4.80 |   |

 

**Sources of Funds**

 

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

 

***Deposits.**** *The Bank offers a variety of deposit accounts with a range of interestrates and terms.  The Bank’s depositaccounts consist of savings, retail checking/NOW accounts, commercial checkingaccounts, money market accounts, club accounts and certificate of depositaccounts.  The Bank offers certificate ofdeposit accounts with balances in excess of $100,000 at preferential rates(jumbo certificates) and also offers Individual Retirement Accounts (“IRAs”)and other qualified plan accounts.

 

AtDecember 31, 2004, the Bank’s deposits totaled $671.0 million, or 73.9%, ofinterest-bearing liabilities.  For theyear ended December 31, 2004, the average balance of core deposits (savings,NOW, money market and non-interest-bearing checking accounts) totaled $322.1million, or 52.1% of total average deposits. At December 31, 2004, the Bank had a total of $322.8 million incertificates of deposit, of which $112.6 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, 2004, theaverage balance of core deposits represented approximately 48.0% of totaldeposits and average certificate accounts represented 44.2%, as compared to theaverage balance of core deposits representing 57.0% of total deposits andaverage certificate accounts representing 38.0% of deposits for the year endedDecember 31, 2003.  Although the Bank hasa 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.  The Bankis not limited with respect to the rates it may offer on deposit products.

 

AtDecember 31, 2004 and 2003, the Bank had brokered deposits totaling $16.0million.

 

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 customer serviceand long-standing relationships with customers to attract and retain thesedeposits; 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 andgenerally does not solicit deposits from outside its market area.  While certificate accounts in excess of$100,000 are accepted by the Bank, and may be subject to preferential rates,the Bank does not actively solicit such deposits as such deposits are moredifficult to retain than core deposits.

 

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AtDecember 31, 2004, the Bank had outstanding $156.9 million in certificate ofdeposit accounts in amounts of $100,000 or more, maturing as follows:

 
| **Maturity  Period**          | ** ** | **Amount**                 | ** ** | **Weighted  Average  Rate** | ** ** |
|-------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **(Dollars in thousands)** | ** ** |
|                          |       |                       |       |                        |       |
| Three months or less          |       | $                          | 33,664     |                        | 2.42       | % |
| Over three through six months |       | 6,405                      |       | 2.49                        |       |
| Over six through 12 months    |       | 18,533                     |       | 2.92                        |       |
| Over 12 months                |       | 98,330                     |       | 3.17                        |       |
| Total                         |       | $                          | 156,932    |                        | 2.95       |   |

 

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, 2004**      | ** ** | **At  December 31, 2003**  | ** ** |
|-------------------------------|------------|--------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **Balance**                    | ** ** | **Percent  of Total  Deposits** | ** ** | **Weighted  Average  Rate** | ** ** | **Balance** | ** ** | **Percent  of Total  Deposits** | ** ** | **Weighted  Average  Rate** | ** ** |
| ** **                    | ** ** | **(Dollars in thousands)**     | ** ** |
|                          |       |                           |       |                            |       |   |   |   |   |   |   |   |   |
| Money market accounts         |       | $                              | 118,040    |                            | 17.59      | % | 1.62 | % | $ | 145,530 |   | 24.39 | % | 1.84 | % |
| Passbook savings accounts     |       | 141,207                        |       | 21.04                           |       | 1.42 |   | 127,929 |   | 21.44 |   | 1.56 |   |
| NOW accounts                  |       | 42,448                         |       | 6.33                            |       | 0.50 |   | 39,122 |   | 6.55 |   | 0.72 |   |
| Non interest-bearing accounts |       | 46,589                         |       | 6.94                            |       | — |   | 39,037 |   | 6.54 |   | — |   |
| Total                         |       | 348,284                        |       | 51.90                           |       | 1.19 |   | 351,618 |   | 58.92 |   | 1.41 |   |
| Certificates of deposit       |       | 322,752                        |       | 48.10                           |       | 2.94 |   | 245,146 |   | 41.08 |   | 3.10 |   |
| Total deposits                |       | $                              | 671,036    |                            | 100.00     | % | 2.07 |   | $ | 596,764 |   | 100.00 | % | 2.16 |   |
| ** **                    | ** ** | ** **                     | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **At  December 31, 2002** | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **Balance**                    | ** ** | **Percent  of Total  Deposits** | ** ** | **Weighted  Average  Rate** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                    | ** ** | **(Dollars  in thousands)**    | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
|                          |       |                           |       |                            |       |   |   |   |   |   |   |   |   |
| Money market accounts         |       | $                              | 140,857    |                            | 26.87      | % | 2.73 | % |   |   |   |   |   |   |
| Passbook savings accounts     |       | 106,599                        |       | 20.34                           |       | 2.28 |   |   |   |   |   |   |   |
| NOW accounts                  |       | 34,201                         |       | 6.52                            |       | 1.01 |   |   |   |   |   |   |   |
| Non interest-bearing accounts |       | 32,655                         |       | 6.23                            |       | — |   |   |   |   |   |   |   |
| Total                         |       | 314,312                        |       | 59.96                           |       | 2.11 |   |   |   |   |   |   |   |
| Certificates of deposit       |       | 209,878                        |       | 40.04                           |       | 3.63 |   |   |   |   |   |   |   |
| Total deposits                |       | $                              | 524,190    |                            | 100.00     | % | 2.72 |   |   |   |   |   |   |   |

 

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

 

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| ** **                 | ** ** | **Period to Maturity  from December 31, 2004** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                 | ** ** | **Less**                                       | ** ** |       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **than**                                       | ** ** | **One to** | ** ** | **Two to** | ** ** | **Three** | ** ** | **Four** | ** ** | **Total** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **One**                                        | ** ** | **Two**    | ** ** | **Three**  | ** ** | **to Four** | ** ** | **to Five** | ** ** | **December 31,** | ** ** | **At December 31,** | ** ** |
| ** **                 | ** ** | **Year**                                       | ** ** | **Years**  | ** ** | **Years**  | ** ** | **Years** | ** ** | **Years** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                 | ** ** | **(In thousands)**                             | ** ** |
| Certificate accounts:      |       |                                           |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| 4.00% or less              |       | $                                              | 100,990    |       | $          | 142,044    |       | $ | 37,031 |   | $ | 8,352 |   | $ | 664 |   | $ | 289,081 |   | $ | 194,967 |   | $ | 141,431 |   |
| 4.01 to 5.00%              |       | 7,441                                          |       | 18,446     |       | 2,603      |       | 464 |   | 201 |   | 29,155 |   | 43,515 |   | 52,196 |   |
| 5.01 to 6.00%              |       | 1,145                                          |       | 431        |       | 302        |       | — |   | — |   | 1,878 |   | 3,967 |   | 9,658 |   |
| 6.01 to 7.00%              |       | 2,538                                          |       | —     |       | —     |       | — |   | — |   | 2,538 |   | 2,597 |   | 6,141 |   |
| 7.01 to 8.00%              |       | 100                                            |       | —     |       | —     |       | — |   | — |   | 100 |   | 100 |   | 452 |   |
|                       |       |                                           |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Total at December 31, 2004 |       | $                                              | 112,214    |       | $          | 160,921    |       | $ | 39,936 |   | $ | 8,816 |   | $ | 865 |   | $ | 322,752 |   | $ | 245,146 |   | $ | 209,878 |   |

 

***Borrowed Funds.**** *The following table sets forth certain information regarding the Bank’sborrowed funds at or for the years ended on the dates indicated:

 
| ** **                                                   | ** ** | **At or For the Year Ended  December 31,** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                                   | ** ** | **2004**                                        | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                   | ** ** | **(Dollars in thousands)**                      | ** ** |
|                                                         |       |                                            |       |   |   |   |   |
| FHLB advances:                                               |       |                                            |       |   |   |   |   |
| Average balance outstanding                                  |       | $                                               | 215,842    |   | $ | 188,617 |   | $ | 172,575 |   |
| Maximum amount outstanding at any month-end  during the year |       | $                                               | 237,000    |   | $ | 210,700 |   | $ | 175,200 |   |
| Balance outstanding at end of year                           |       | $                                               | 237,000    |   | $ | 204,700 |   | $ | 171,700 |   |
| Weighted average interest rate during the year               |       | 4.65                                            | %          | 4.96 | % | 5.35 | % |
| Weighted average interest rate at end of  year               |       | 4.40                                            | %          | 4.66 | % | 5.27 | % |

 

**Subsidiary Activities**

 

***EFS Service Corporation. ***Fox Valley Service Corporation of Elgin was renamed EFS ServiceCorporation (“EFSSC”) in October 2002 and is the Bank’s wholly-owned subsidiarywhich was incorporated in 1974 for the purpose of entering into joint venturereal estate development projects.  OnJune 19, 2002, EFSSC purchased approximately 16 acres of land to be developedinto 29 home-sites for single-family residences.  All land improvements have been made.  On October 15, 2004, one of the model homespreviously built was sold.  In addition,on November 15, 2004, 25 of the developed lots were sold to a localhomebuilder.  As of December 31, 2004, thisinvestment totaled $1.5 million and there were three homes in various stages ofcompletion, one of which was under contract for sale.  EFSSC currently owns a single parcel of realestate valued at $92,000.  In addition,EFSSC entered into two 50/50 joint venture agreements in 2003, known asAlgonquin 80 LLC and Algonquin 36 LLC. Algonquin 80 LLC consisted of 80 acres of vacant land in Algonquin,Illinois to be sold and subsequently developed into residential properties.  This parcel was sold on December 29, 2004 andthe outstanding loan paid in full. Algonquin 36 LLC consists of 36 acres of vacant land in Algonquin,Illinois.  The strategy is for the jointventure to develop the parcel into commercial properties.  The Bank has made a loan to the joint venture,which totaled $8.8 million at December 31, 2004 primarily for the acquisitionof 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 insurance products.  EFSFS has four salespeople who are employedon a commission basis.

 

***Computer Dynamics Group, Inc. ***Computer Services Dynamics, Inc. was renamed Computer Dynamics Group,Inc. (“CDGI”) in 2002.  The Company wasinformed in October 2004 of the bankruptcy filing of its minority partner in CDGI.  Accordingly, a receivable from the minorityowner was written-off.  Additionally,upon notification of the bankruptcy, the Company recorded its investment inCDGI as a wholly-owned subsidiary.  CDGIis an information technology consulting/services company with main offices inWest Chicago, Illinois, and generally services clients located in the Chicagometropolitan area.

 

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**Personnel**

 

Asof December 31, 2004, the Bank had 156 full-time employees and 46 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 theCommissioner and the FDIC concerning its activities and financial condition, inaddition to obtaining regulatory approvals prior to entering into certaintransactions such as establishing branches and mergers with, or acquisitionsof, other depository institutions.  Thereare periodic examinations by the Commissioner and the FDIC to assess the Bank’scompliance with various regulatory requirements and financial condition.  This regulation and supervision establishes aframework 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 theCommissioner, the FDIC or through legislation, could have a material adverseimpact on the Company 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 “supervisory fees”upon all Illinois savings banks to fund the operations of theCommissioner.  These supervisory fees arecomputed 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, 2004, the Bank paid approximately $111,000 in supervisory fees andexpenses.

 

**Regulations**

 

***Capital Requirements. ***Under the Illinois law and the regulations of the Commissioner, anIllinois savings bank must maintain a minimum level of capital equal to thehighest of 3% of total assets or the amount required to maintain insurance ofdeposits by the FDIC.  The Commissionerhas the authority to require an Illinois savings bank to maintain a higherlevel of capital if deemed necessary based on the savings bank’s financialcondition, 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-based capitalratios are determined by allocating assets and specified off-balance sheetitems to four risk-weighted categories ranging from 0% to 100%, with higherlevels of capital being required for the categories perceived as representinggreater risk.  The guidelines divide asavings bank’s capital into two tiers. The first tier (“Tier I”) includes common equity, retained earnings,certain non-cumulative perpetual preferred stock (excluding auction rateissues) and minority interests in equity accounts of consolidated subsidiaries,less goodwill and other intangible assets (except mortgage servicing rights andpurchased credit card relationships subject to certain limitations).  Recent regulatory amendments require thededuction from Tier 1 capital of a percentage of the carrying value ofinvestments in equity securities of non-financial companies acquired afterMarch 13, 2000.  Supplementary (“Tier II”)capital includes, among other items, cumulative perpetual and long-termlimited-life preferred stock, mandatory convertible securities, certain hybridcapital instruments, term subordinated debt, a portion of pretax net unrealizedholding gains on available-for-sale equity securities with readily determinablefair values and the allowance for loan losses, subject to certain limitations,less required deductions.  Savings banksare required to maintain a total risk-based capital ratio of 8%, of which atleast 4% must be Tier I capital.

 

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 examination rating andare not experiencing or anticipating significant growth.  All other banks are required to maintain aTier I

 

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leverage ratio of not lessthan 4%.  The FDIC may, however, sethigher leverage and risk-based capital requirements on individual institutionswhen particular circumstances warrant.

 

The following is a summary of the Bank’s regulatory capital at December31:

 
| ** **                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Total Capital to Total Assets         |       | 7.96     | %          | 8.35     | %          |
| Total Capital to Risk-Weighted Assets |       | 10.96    | %          | 11.74    | %          |
| Tier I Leverage Ratio                 |       | 7.88     | %          | 8.27     | %          |
| Tier I to Risk-Weighted Assets        |       | 10.91    | %          | 11.60    | %          |

 

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 from making secured or unsecuredloans for business, corporate, commercial or agricultural purposes representingin the aggregate an amount in excess of 15% of its total assets, unless theCommissioner authorizes in writing a higher percentage limit for such loansupon 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 the ISBA, dividends may only be declared when the total capitalof the Bank is greater than that required by Illinois law.  Dividends may be paid by the Bank out of itsnet profits.  The written approval of theCommissioner must be obtained, however, before a savings bank having totalcapital of less than 6% of total assets may declare dividends in any year in anamount in excess of 50% of its net profits for that year.  A savings bank may not declare dividends inexcess of its net profits in any year without the approval of theCommissioner.  Finally, the Bank will beunable to pay dividends in an amount which would reduce its capital below thegreater of (i) the amount required by the FDIC capital regulations or otherwisespecified by the FDIC, (ii) the amount required by the Commissioner or (iii)the amount required for the liquidation account to be established by the Bankin connection with the Bank’s conversion. The Commissioner and the FDIC also have the authority to prohibit thepayment of any dividends by the Bank if the Commissioner or the FDIC determinesthat the distribution would constitute 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 to implementthe 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-basedcapital ratio of less than 4%, or generally a leverage ratio of less than4%.  An institution is deemed to be “significantlyundercapitalized” if it has a total risk-based capital ratio of less than 6%, aTier I risk-based capital ratio of less than 3%, or a leverage ratio of lessthan 3%.  An institution is deemed to be “criticallyundercapitalized” if it has a ratio of tangible equity (as defined in theregulations) to total assets that is 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 the Bank’stotal assets when deemed undercapitalized or the amount necessary to achievethe status of adequately capitalized.  Ifan “undercapitalized” bank fails to

 

24

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submit an acceptable plan, it is treated as if it is “significantlyundercapitalized.”  “Significantlyundercapitalized” banks are subject to one or more of a number of additionalrestrictions, including but not limited to an order by the FDIC to sellsufficient voting stock to become adequately capitalized, requirements toreduce total assets and cease receipt of deposits from correspondent banks ordismiss directors or officers.  “Criticallyundercapitalized” institutions also may not make any payment of principal orinterest on certain subordinated debt or extend credit for a highly leveragedtransaction or enter into any material transaction outside the ordinary courseof business.  In addition, subject to anarrow exception, the appointment of a receiver or conservator is required fora “critically undercapitalized” institution within 270 days after it obtainssuch 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 and abroad list of other specified transactions also must be on terms substantiallythe same, or no less favorable, to the savings bank or its subsidiary assimilar 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, amongother things, the ability to assess civil money penalties, to issue cease anddesist orders and to remove directors and officers.  In general, these enforcement actions may beinitiated in response to violations of laws and regulations and to unsafe orunsound 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 assessmentsystem by which institutions are assigned to one of three categories based ontheir capitalization and one of three subcategories based on examinationratings and other supervisory information. An institution’s assessment rate depends upon the categories to which itis assigned.  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 2004, FICO payments for SAIF membersapproximated 1.51 basis points of assessable deposits.

 

 

The Bank’s assessment rate for 2004 was zero.  Payments toward the FICO bonds amounted to$92,000.  The FDIC has

 

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authority to increase insurance assessments.  A significant increase in SAIF insurancepremiums would likely have an adverse effect on the operating expenses andresults of operations of the Bank. Management cannot predict what insurance assessment rates will be in thefuture.

 

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 tomaintain non-interest earning reserves against their transaction accounts(primarily negotiable 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 $47.6 million; a 10% reserve ratio isapplied above $47.6 million.  The first$7.0 million of otherwise reservable balances (subject to adjustments by the FederalReserve 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, isrequired to acquire and hold shares of capital stock in the FHLB.  The Bank was in compliance with thisrequirement with an investment in FHLB stock at December 31, 2004 of $12.0million.

 

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 amount ofdividends 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, 2004, 2003and 2002, dividends from the FHLB to the Bank amounted to approximately$680,100, $614,000 and $483,000, 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 hasreceived approval from the OTS to become a savings and loan holdingcompany.  The Company has registered withthe OTS and is subject to OTS regulations, examinations, supervision andreporting requirements.  In addition, theOTS has enforcement authority over the Company and its non-savings institutionsubsidiaries.  Among other things, thisauthority permits the OTS to restrict or prohibit activities that aredetermined to be a serious risk to the subsidiary savings institution.  Additionally, the Bank is required to notifythe OTS at least 30 days before declaring any dividend to the Company.  Because the Bank is chartered under Illinoislaw, the Company is also subject to registration with and regulation by theCommissioner.

 

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 Act specifiesthat existing savings and loan holding companies may only engage in such activities.  The Gramm-Leach-Bliley Act, however,grandfathered the unrestricted authority for activities with respect to unitarysavings and loan holding companies existing prior to May 4, 1999, such as theCompany, so long as the Bank continues to comply with the qualified thriftlender test.  Upon any non-supervisoryacquisition by the Company of another savings association as a separatesubsidiary, the Company would become a multiple savings and loan holdingcompany and would be subject to limitations on the types of business activitiesin which it could engage.  Federal lawlimits the activities of a multiple savings and loan holding company and itsnon-insured institution subsidiaries primarily to activities permissible forbank holding companies under Section 4(c)(8) of the Bank Holding Company Act,subject to the prior approval of the OTS, to those permissible for financialholding companies and to other activities authorized by OTS regulation.  Multiple savings and loan holding companiesare prohibited from acquiring or

 

26

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retaining, with certain exceptions, more than 5% of a non-subsidiarycompany engaged in activities other than those permitted by 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) interstatesupervisory acquisitions by savings and loan holding companies; and(ii) the acquisition of a savings institution in another state if the lawsof the state of the target savings institution specifically permit suchacquisitions.  The states vary in theextent to which they permit interstate savings and loan holding companyacquisitions.

 

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 Bank tomaintain 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 December 31,2004, the Bank maintained in excess of 65% of its portfolio assets in qualifiedthrift investments.  The Bank also metthe test in each of the prior 12 months and, therefore, is a qualified thriftlender.  Recent legislative amendments havebroadened the scope of “qualified thrift investments” that go toward meetingthe test to fully include credit card loans, student loans and small businessloans.

 

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 into considerationcertain factors, including the financial and managerial resources of theacquirer 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, withoutregistration, a number of shares not to exceed, in any three-month period, thegreater of (i) 1% of the outstanding shares of the Company or (ii) the averageweekly volume of trading in such shares during the preceding four calendarweeks.  Provision may be made in thefuture by the Company to permit affiliates to have their shares registered forsale under the Securities 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.

 

Amounts provided for income tax expense are based upon income reportedfor financial statement purposes and do not

 

27

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necessarily represent amounts currently payable to federal and statetax authorities.  Deferred income taxes,which principally arise from the temporary difference related to therecognition of certain income and expense items for financial reportingpurposes and the period in which they affect federal and state taxable income,are included in the amounts provided for income taxes.

 

***Bad Debt Reserves.**** *The Small Business Job Protection Act of 1996 (the “1996 Act”), whichwas enacted on August 20, 1996, made significant changes to provisions of theCode relating to a savings institution’s use of bad debt reserves for federalincome tax purposes and requires such institutions to recapture (i.e. take intoincome) 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 “qualifyingloans,” which are generally loans secured by certain interests in real property,could be computed using an amount based on a six-year moving average of theBank’s actual loss experience (the “Experience Method”), or a percentage equalto 8% of the Bank’s taxable income (the “PTI Method”), computed without regardto this deduction and with additional modifications and reduced by the amountof any permitted addition to the non-qualifying reserve.  The Bank’s deduction with respect tonon-qualifying loans was required to be computed under the Experience Method.

 

***The 1996 Act.**** *The Bank is required to recapture (i.e. take into income) over asix-year period the excess of the balance of its tax bad debt reserves as ofDecember 31, 1996 over the balance of such reserves as ofDecember 31, 1987.  As ofDecember 31, 1995, the Bank’s tax bad debt reserve exceeded the balance ofsuch reserve as of December 31, 1987 by $2.2 million.  However, the Bank will not incur anadditional tax liability related to its tax bad debt reserves since the Bank haspreviously provided deferred taxes on the recapture amount.

 

***Distributions.**** *Under the 1996 Act, if the Bank makes “non-dividend distributions” tothe Company, such distributions will be considered to have been made from theBank’s unrecaptured tax bad debt reserves (including the balance of its reservesas of December 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-dividenddistributions” is defined as distributions in excess of the Bank’s current andaccumulated earnings and profits, as calculated for federal income taxpurposes, distributions in redemption of stock, and distributions in partial orcomplete liquidation.  Dividends paid outof the Bank’s current or accumulated earnings and profits will not cause thispre-1988 reserve to be included in the Bank’s income.

 

The amount of additional taxable income created from a non-dividenddistribution is an amount that, when reduced by the tax attributable to the income,is equal to the amount of the distribution. Thus, if the Bank makes a non-dividend distribution to the Company,approximately one and one-half times the amount of such distribution (but notin excess of the amount of such reserves) would be includable in income forfederal income tax purposes, assuming a 35% federal corporate income taxrate.  The Bank does not intend to paydividends that would result in a recapture of any portion of its tax bad debtreserves.

 

***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 7.30% 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 Delaware holding company not earning income in Delaware, theCompany is exempt from Delaware Corporate income tax but is required to file anannual report with and pay an annual franchise tax to the State of Delaware. 

 

28

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**Available Information**

 

Ourannual report on Form 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K and amendments to those reports are available without charge on ourwebsite, www.efcbancorp.com, as soon as reasonably practicable after they arefiled electronically with the SEC.  Weare providing the address to our internet site solely for the information ofinvestors; we do not intend the address to be an active link or to otherwiseincorporate the contents of the website into this report.

 

**Executive Officers**

 

                The following table sets forth certaininformation regarding the executive officers of the Company and the Bank whoare not also directors or Named Executive Officers.  Each of the following executive officers hasbeen employed at the Bank for at least five years except where noted.  The executive officers are elected annuallyand hold office until their successors have been elected and qualified or untilthey are removed or are replaced.

 
| **Name**          | ** ** | **Age at  12/31/04** | ** ** | **Position**                                                                                                                                                                   |
|-------------------|------------|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Stephen P. DuBois |       | 55                   |       | 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    |       | 69                   |       | Vice President/Compliance  Officer - Employed by Bank since 1993.                                                                                                              |
| Glenn J. Kozeluh  |       | 52                   |       | 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     |       | 64                   |       | 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 |       | 62                   |       | Senior Vice  President/Savings - Employed by Bank since 1960.                                                                                                                  |
| Eric J. Wedeen    |       | 41                   |       | Senior Vice  President/Chief Financial Officer - Employed by Bank since 1994.                                                                                                  |

 

29

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

 

The Bank conducts its business through an executive and full-servicebranch office located in Elgin and eight 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,  2004** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------|------------|--------------------------------------------------|------------|------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | ** **                | ** ** | ** **                                       | ** ** | ** **                         | ** ** | **(In  thousands)**                                                                           | ** ** |
| **Executive/Main/Branch  Office:**                                                        | ** ** | ** **                | ** ** | ** **                                       | ** ** | ** **                         | ** ** | ** **                                                                                    | ** ** |
| 1695 Larkin Avenue  Elgin, Illinois 60123                                                 |       | Owned                     |       | 1973                                             |       | —                             |       | $                                                                                             | 1,019      |   |
| **Branch  Offices:**                                                                      |       |                      |       |                                             |       |                               |       |                                                                                          |       |
| 850 Summit Street  Elgin, Illinois 60120                                                  |       | Owned                     |       | 1983                                             |       | —                             |       | 430                                                                                           |       |
| 1000 S. McLean Boulevard  Elgin, Illinois 60123                                           |       | Leased                    |       | 1996                                             |       | 2011                               |       | 101                                                                                           |       |
| 390 South Eighth Street  Route 31 & Village Quarter Road  West Dundee, Illinois 60118 |       | Owned                     |       | 1980                                             |       | —                             |       | 978                                                                                           |       |
| 13300 Route 47  Huntley, Illinois 60142                                                   |       | Owned                     |       | 1998                                             |       | —                             |       | 2,670                                                                                         |       |
| 543 East Main Street  East Dundee, Illinois 60118                                         |       | Leased                    |       | 2000                                             |       | 2015                               |       | 193                                                                                           |       |
| 28 North Grove Street  Elgin, Illinois 60123                                              |       | Owned                     |       | 2002                                             |       | —                             |       | 2,291                                                                                         |       |
| 2429 Randall Road  Carpentersville, Illinois 60110                                        |       | Owned                     |       | 2002                                             |       | —                             |       | 3,312                                                                                         |       |
| 2019 Dean Street  St. Charles, Illinois 60174                                             |       | Owned                     |       | 2002                                             |       | —                             |       | 2,812                                                                                         |       |
| **Other  Properties:**                                                                    |       |                      |       |                                             |       |                               |       |                                                                                          |       |
| 44 South Lyle Street  Elgin, Illinois 60123 (1)                                           |       | Owned                     |       | 1986                                             |       | —                             |       | 52                                                                                            |       |
| 1665 Larkin Avenue  Elgin, Illinois 60123 (2)                                             |       | Owned                     |       | 1996                                             |       | —                             |       | 1,200                                                                                         |       |
| Randall Road  Crystal Lake, Illinois (3)                                                  |       | Owned                     |       | 2002                                             |       | —                             |       | 2,393                                                                                         |       |
| Nessler Road  Elgin, Illinois (3)                                                         |       | Owned                     |       | 2004                                             |       | —                             |       | 2,314                                                                                         |       |
| Peace Road  Sycamore, Illinois (3)                                                        |       | Owned                     |       | 2004                                             |       | —                             |       | 967                                                                                           |       |
| Hampshire  Hampshire, Illinois (3)                                                        |       | Owned                     |       | 2004                                             |       | —                             |       | 416                                                                                           |       |
|                                                                                           |            |                           |            |                                                  |            |                                    |            |                                                                                               |            |  |

 

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(1)   The property consists of one commercial retail unit and a parkinglot.  The property is located across thestreet from the Bank’s main office and the parking lot is utilized by Bankcustomers and employees.

 

30

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(2)   The property is located immediately adjacent to the Bank’s mainoffice.  The Lifestyle Advantage,Information Technology, Human Resources and Marketing Departments are locatedin this property.

(3)   These properties consist primarily of land for future branch locations.

 

**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.

 

# **PART II**

 

**Item 5****.  Market for the Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities****.**

 

TheCommon Stock of the Company is traded on the American Stock Exchange under thesymbol “EFC.”  The stock began trading onApril 3, 1998.  During 2004 and 2003, theCompany declared dividends to its shareholders amounting to $0.620 and $0.575per share, respectively.  As of March 7,2005, there were approximately 2,228 shareholders of the Common Stock of theCompany, 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, 2004**  | ** ** |
|------------|------------|-----------------------------------|------------|
| ** ** | ** ** | **4th Quarter**                   | ** ** | **3rd Quarter** | ** ** | **2nd Quarter** | ** ** | **1st Quarter** | ** ** |
|       |       |                              |       |   |   |   |   |   |   |
| High       |       | $                                 | 26.30      |   | $ | 26.70 |   | $ | 28.49 |   | $ | 28.05 |   |
| Low        |       | 24.60                             |       | 23.25 |   | 23.00 |   | 23.65 |   |
| Dividends  |       | 0.1625                            |       | 0.1550 |   | 0.1525 |   | 0.1500 |   |
|       |       |                              |       |   |   |   |   |   |   |
| ** ** | ** ** | **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 |   |

 

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

 

Theinformation relating to selected financial data is incorporated herein byreference to the Registrant’s 2004 Annual Report.

 

**Item 7****.  Management’s Discussion and Analysis ofFinancial Condition and Results 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-looking statementsto be covered by the safe harbor provisions for forward-looking statementscontained in the Private Securities Litigation Reform Act of 1995, and isincluding this statement for purposes of these safe harbor provisions.  Forward-looking statements,

 

31

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which are based on certain assumptions and describe future plans,strategies and expectations of the Company, are generally identifiable by useof the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,”or similar expressions.  The Company’sability to predict results or the actual effect of future plans or strategiesis inherently uncertain.  Factors whichcould have a material adverse effect on the operations and future prospects ofthe Company and the subsidiaries include, but are not limited to, changes in:interest rates, general economic conditions, legislative/regulatory changes,monetary and fiscal policies of the U.S. Government, including policies of theU.S. Treasury and the Federal Reserve Board, the quality or composition of theloan or investment portfolios, demand for loan products, deposit flows,competition, demand for financial services in the Company’s market area andaccounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluatingforward-looking statements and undue reliance should not be placed on suchstatements.  Further informationconcerning the Company and its business, including additional factors thatcould materially affect the Company’s financial results, is included in theCompany’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’approved guidelines.  Through suchmanagement, the Company seeks to reduce the vulnerability of its operations tochanges in interest rates.  The Bank’sBoard of Directors 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 2004, the Bank focused on attracting money market accounts aswell as time deposits.  As necessary, theBank 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, 2004, the Bank retained 79.1% 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 following table sets forth certain information relating to the Bankfor the years ended December 31, 2004, 2003 and 2002.  The average yields and costs are derived bydividing income or expense by the average balance of interest-earning assets orinterest-bearing liabilities, respectively, for the periods shown and reflectannualized yields and costs.  Averagebalances are derived from average monthly balances. The yields and costsinclude fees that are considered adjustments to yields.  Tax-exempt income has been calculated on atax equivalent basis using a 34% tax rate. Interest income attributed to the tax adjustment totaled $819,000,$803,000 and $725,000 for the years ended December 31, 2004, 2003, and 2002,respectively.  Net interest marginwithout the tax adjustment totaled 2.64%, 3.01% and 3.21% for the years endedDecember 31, 2004, 2003, and 2002, respectively.  In addition, interest rate spread without thetax adjustment totaled 2.37%, 2.71% and 2.80% for the same time periods,respectively.

 

32

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| ** **                                                        | ** ** | **For the Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                        | ** ** | **2004**                                 | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                        | ** ** | **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                                              |       | $                                        | 26,199     |   | $ | 181 |   | 0.69 | % | $ | 25,436 |   | $ | 122 |   | 0.48 | % | $ | 27,611 |   | $ | 269 |   | 0.97 | % |
| Investment  securities                                            |       | 89,050                                   |       | 4,970 |   | 5.58 |   | 88,312 |   | 5,076 |   | 5.75 |   | 75,853 |   | 4,641 |   | 6.12 |   |
| Mortgage-backed  and mortgage- related securities                 |       | 10,802                                   |       | 393 |   | 3.63 |   | 13,685 |   | 517 |   | 3.78 |   | 12,811 |   | 641 |   | 5.00 |   |
| Mortgage loans, net                                               |       | 571,338                                  |       | 30,813 |   | 5.39 |   | 548,632 |   | 33,562 |   | 6.12 |   | 486,881 |   | 34,530 |   | 7.09 |   |
| Other loans                                                       |       | 197,407                                  |       | 10,736 |   | 5.44 |   | 116,678 |   | 6,662 |   | 5.71 |   | 80,103 |   | 5,179 |   | 6.46 |   |
| FHLB stock                                                        |       | 11,420                                   |       | 680 |   | 5.96 |   | 10,253 |   | 614 |   | 5.99 |   | 9,190 |   | 483 |   | 5.26 |   |
| Total interest-earning  assets                                    |       | 906,216                                  |       | 47,773 |   | 5.27 |   | 802,996 |   | 46,553 |   | 5.80 |   | 692,449 |   | 45,743 |   | 6.61 |   |
| Noninterest-earning  assets                                       |       | 55,735                                   |       |   |   |   |   | 48,371 |   |   |   |   |   | 40,089 |   |   |   |   |   |
| Total assets                                                      |       | $                                        | 961,951    |   |   |   |   |   | $ | 851,367 |   |   |   |   |   | $ | 732,538 |   |   |   |   |   |
| **Liabilities  and Equity:**                                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                    |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                         |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market  accounts                                            |       | $                                        | 134,850    |   | $ | 2,186 |   | 1.62 | % | $ | 146,397 |   | $ | 2,694 |   | 1.84 | % | $ | 121,957 |   | $ | 3,335 |   | 2.73 | % |
| Passbook savings  accounts                                        |       | 132,934                                  |       | 1,881 |   | 1.42 |   | 119,766 |   | 1,867 |   | 1.56 |   | 101,257 |   | 2,308 |   | 2.28 |   |
| NOW accounts                                                      |       | 39,754                                   |       | 197 |   | 0.50 |   | 35,963 |   | 259 |   | 0.72 |   | 31,833 |   | 321 |   | 1.01 |   |
| Certificates of  deposit                                          |       | 296,382                                  |       | 8,706 |   | 2.94 |   | 226,771 |   | 7,341 |   | 3.24 |   | 189,140 |   | 7,603 |   | 4.02 |   |
| Total deposits                                                    |       | 603,920                                  |       | 12,970 |   | 2.15 |   | 528,897 |   | 12,161 |   | 2.30 |   | 444,187 |   | 13,567 |   | 3.05 |   |
| Borrowings                                                        |       | 215,842                                  |       | 10,033 |   | 4.65 |   | 190,450 |   | 9,382 |   | 4.93 |   | 172,991 |   | 9,254 |   | 5.35 |   |
| Total  interest-bearing liabilities                               |       | 819,762                                  |       | 23,003 |   | 2.81 |   | 719,347 |   | 21,543 |   | 2.99 |   | 617,178 |   | 22,821 |   | 3.70 |   |
| Noninterest-bearing  liabilities                                  |       | 60,562                                   |       |   |   |   |   | 55,595 |   |   |   |   |   | 43,213 |   |   |   |   |   |
| Total liabilities                                                 |       | 880,324                                  |       |   |   |   |   | 774,942 |   |   |   |   |   | 660,391 |   |   |   |   |   |
| Total equity                                                      |       | 81,627                                   |       |   |   |   |   | 76,425 |   |   |   |   |   | 72,147 |   |   |   |   |   |
| Total liabilities  and equity                                     |       | $                                        | 961,951    |   |   |   |   |   | $ | 851,367 |   |   |   |   |   | $ | 732,538 |   |   |   |   |   |
| Net interest  income                                              |       |                                     |       | $ | 24,770 |   |   |   |   |   | $ | 25,010 |   |   |   |   |   | $ | 22,922 |   |   |   |
| Interest rate  spread                                             |       |                                     |       |   |   | 2.46 | % |   |   |   |   | 2.81 | % |   |   |   |   | 2.91 | % |
| Net interest  margin as a percent of interest-earning assets      |       |                                     |       |   |   | 2.73 | % |   |   |   |   | 3.11 | % |   |   |   |   | 3.31 | % |
| Ratio of  interest-earning assets to interest-bearing liabilities |       |                                     |       |   |   | 110.55 | % |   |   |   |   | 111.63 | % |   |   |   |   | 112.20 | % |

 

***Rate/Volume Analysis.**** *The following table presents the extent to which changes in interestrates and changes in the volume of interest-earning assets and interest-bearingliabilities have affected the Bank’s interest income and interest expenseduring the periods indicated. Information is provided in each category with respect to:  (i) changes attributable to changes involume (changes in volume multiplied by prior rate); (ii) changesattributable to changes in rate (changes in rate multiplied by prior volume);(iii) changes due to a combination of volume and rate; and (iv) the net change.

 

33

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| ** **                                            | ** ** | **Year Ended  December 31, 2004  Compared to  Year Ended  December 31, 2003** | ** ** | **Year Ended  December 31, 2003  Compared to  Year Ended  December 31, 2002** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **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                                   |       | $                                                                             | 4          |                                                                                    | $          | 53 |   | $ | 2 |   | $ | 59 |   | $ | (21 | ) | $ | (135 | ) | $ | 9 |   | $ | (147 | ) |
| Investment securities                                 |       | 42                                                                            |       | (150                                                                                    | )          | 2 |   | (106 | ) | 762 |   | (281 | ) | (46 | ) | 435 |   |
| Mortgage-backed and mortgage-related  securities, net |       | (109                                                                          | )          | (21                                                                                     | )          | 5 |   | (125 | ) | 44 |   | (156 | ) | (12 | ) | (124 | ) |
| Mortgage loans, net                                   |       | 1,390                                                                         |       | (4,005                                                                                  | )          | (133 | ) | (2,748 | ) | 4,378 |   | (4,723 | ) | (623 | ) | (968 | ) |
| Other loans                                           |       | 4,610                                                                         |       | (315                                                                                    | )          | (221 | ) | 4,074 |   | 2,363 |   | (601 | ) | (279 | ) | 1,483 |   |
| FHLB stock                                            |       | 70                                                                            |       | (3                                                                                      | )          | (1 | ) | 66 |   | 56 |   | 67 |   | 8 |   | 131 |   |
| Total interest-earning assets                         |       | 6,007                                                                         |       | (4,441                                                                                  | )          | (346 | ) | 1,220 |   | 7,582 |   | (5,829 | ) | (943 | ) | 810 |   |
| **Interest-bearing liabilities:**                     |       |                                                                          |       |                                                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market accounts                                 |       | (212                                                                          | )          | (322                                                                                    | )          | 25 |   | (509 | ) | 667 |   | (1,085 | ) | (223 | ) | (641 | ) |
| Passbook savings accounts                             |       | 205                                                                           |       | (168                                                                                    | )          | (23 | ) | 14 |   | 422 |   | (729 | ) | (134 | ) | (441 | ) |
| NOW accounts                                          |       | 27                                                                            |       | (79                                                                                     | )          | (9 | ) | (61 | ) | 42 |   | (92 | ) | (12 | ) | (62 | ) |
| Certificates of deposit                               |       | 2,255                                                                         |       | (680                                                                                    | )          | (210 | ) | 1,365 |   | 1,513 |   | (1,475 | ) | (300 | ) | (262 | ) |
| FHLB advances                                         |       | 1,252                                                                         |       | (533                                                                                    | )          | (68 | ) | 651 |   | 934 |   | (727 | ) | (79 | ) | 128 |   |
| Total interest-bearing liabilities                    |       | 3,527                                                                         |       | (1,782                                                                                  | )          | (285 | ) | 1,460 |   | 3,578 |   | (4,108 | ) | (748 | ) | (1,278 | ) |
| Net change in net interest income                     |       | $                                                                             | 2,480      |                                                                                    | $          | (2,659 | ) | $ | (61 | ) | $ | (240 | ) | $ | 4,004 |   | $ | (1,738 | ) | $ | (178 | ) | $ | 2,088 |   |

 

**Comparison of Financial Condition For the Years EndedDecember 31, 2004 and December 31, 2003**

 

Total assets at December 31, 2004 were $1.0 billion, which representedan increase of $106.8 million, or 11.9%, compared to $897.1 million at December31, 2003.  The change in total assets wasprimarily due to increases in loans receivable, cash and cash equivalents,office properties and equipment, bank owned life insurance, and investment securities.  Loans receivable, net, increased by $90.9million, or 12.7%, to $807.8 million at December 31, 2004 as compared to $716.9million at December 31, 2003.  Theincrease in loans receivable was attributable to a $38.0 million increase inthe Bank’s one- to four-family mortgage loan portfolio; a $21.6 millionincrease in the commercial real estate loan portfolio, a $3.0 million increasein the multi-family loan portfolio, and a $16.8 million increase in thecommercial loan portfolio during the year ended December 31, 2004.  The overall increase in loans is primarilyattributed to the Bank’s growing market area, the lower interest rateenvironment and loans purchased, which totaled $75.8 million for the year endedDecember 31, 2004.  Office properties andequipment increased $6.6 million, or 37.5% to $24.3 million at December 31,2004 as compared to $17.7 million at December 31, 2003, which is primarily dueto the company’s continued branch expansion efforts.  Bank owned life insurance increased $1.1 million,or 6.5%, to $19.1 million at December 31, 2004 as compared to $18.0 million atDecember 31, 2003.  This increase waspartially due to an investment of $425,000 made in May 2004.  Investment securities increased by $2.1million to $92.8 million at December 31, 2004, as compared to $90.7 million atDecember 31, 2003.  This increase was dueto a $3.8 million increase in municipal securities and a $3.0 million increasein U.S. Government obligations, which was partially offset by a $4.1 milliondecrease in corporate bonds.  Cash andcash equivalents increased $9.0 million to $30.9 million at December 31, 2004as compared to $21.9 million at December 31, 2003.  The growth in total assets was funded byincreases in deposits and borrowed money. Deposits increased $74.2 million, or 12.4%, to $671.0 million atDecember 31, 2004 from $596.8 million at December 31, 2003.  The increase in deposits is largely due toincreased advertising and a new branch office. Borrowed money, primarily representing

 

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FHLB advances, increased $25.2 million to $237.0 million at December31, 2004 from $211.8 million at December 31, 2003.  Stockholders’ equity increased by $7.1million to $85.5 million at December 31, 2004 as compared to $78.4 million atDecember 31, 2003.  This increase isprimarily the result of the Company’s net income during the year, which waspartially offset by stock repurchases totaling $268,000 and dividends paid of$2.9 million.

 

**Comparison of Operating Results for the Years EndedDecember 31, 2004 and December 31, 2003**

 

***General.*** The Company’s net income increased $362,000,to $6.8 million for the year ended December 31, 2004, from $7.2 million for theyear ended December 31, 2003.

 

***Interest Income.***  Interestincome increased $1.2 million, or 2.6%, to $47.0 million for the year endedDecember 31, 2004, compared with 2003. This increase resulted from an increase in average interest-earningassets, partially offset by a decrease in average yield.  The largest component was an increase of $4.1million in other loan interest income for the year ended December 31,2004.  This resulted from an increase inaverage balance of $80.7 million offset by a decrease in average yield of 27basis points to 5.44% for the year ended December 31, 2004 from 5.71% for thecomparable prior year period.  This waspartially offset by a decrease of $2.7 million in mortgage loan interest incomefor the year ended December 31, 2004. This resulted from an increase in average balance of $22.7 millionoffset by a decrease in average yield of 73 basis points to 5.39% for the yearended December 31, 2004 from 6.12% for the comparable prior year period.  Overall, the average yield on the Bank’sinterest-earning assets decreased by 53 basis points to 5.27% for the yearended December 31, 2004 from 5.80% for the year ended December 31, 2003.  The decrease in average yield is due toassets re-pricing at lower yields compared to periods prior to the increase inmarket rates during the last half of the year. The average balance of interest-earning assets increased by $103.2million, or 12.8%, to $906.2 million for the year ended December 31, 2004 from$803.0 million in 2003.

 

***Interest Expense.***  Interestexpense increased by $1.5 million, or 6.8%, to $23.0 million for the year endedDecember 31, 2004, from $21.5 million for the year ended December 31,2003.  This increase resulted from theincrease in the average balance of interest-bearing liabilities offset by thedecrease in the average rate paid on interest-bearing liabilities.  The average balance of deposits increased$75.0 million, or 14.2%, to $603.9 million for the year ended December 31, 2004from $528.9 million for the comparable period in 2003.  The average rate paid on total depositsdecreased 15 basis points to 2.15% for the year ended December 31, 2004 from2.30% for the year ended December 31, 2003. Interest expense resulting from borrowed money increased by $651,000.  The average rate paid on borrowed moneydecreased by 28 basis points to 4.65% for the year ended December 31, 2004 from4.93% for the year ended December 31, 2003. This decrease in average rate paid was partially offset by an increaseof $25.4 million in the average balance of borrowed money to $215.8 million forthe year ended December 31, 2004 from $190.4 million for the year endedDecember 31, 2003.

 

***Net Interest Income Before Provisionfor Loan Losses.***  Net interest income before provision for loanlosses decreased $256,000, or 1.1%, to $24.0 million for the year ended December31, 2004 from $24.2 million for 2003. The average balance of interest-earning assets increased $103.2 millionfor the year ended December 31, 2004 compared to the prior year period.  The increase in interest-earning assets wasprimarily the result of increases in the average balance of other loans of$80.7 million and a $22.7 million increase in mortgage loans.  These increases were partially offset by a$2.9 million decrease in mortgage-backed securities.  In addition, the average balance of interest-bearingliabilities increased $100.5 million for the year ended December 31, 2004compared to the prior year period.  Theincrease in interest-bearing liabilities was primarily the result of increasesin the average balance of certificates of deposit of $69.6 million, $13.2million in passbook savings accounts, $3.8 million increase in NOW accounts and$25.4 million in borrowed money, which primarily consisted of Federal Home LoanBank advances.  These increases werepartially offset by an $11.5 million decrease in money market accounts.  The tax equivalent net interest margin as apercent of interest-earning assets decreased by 38 basis points to 2.73% forthe year ended December 31, 2004 from 3.11% for the comparable period in2003.  Increasing the net interest marginis dependent on the Bank’s ability to generate higher yielding assets andlower-cost deposits.  Managementcontinues to closely monitor the net interest margin.

 

***Provision for Loan Losses.***  TheBank’s provision for loan losses increased by $147,000 to $760,000 for the yearended December 31, 2004 from $613,000 in 2003. This increase is primarily due to the increased risk in the loanportfolio based on uncertain economic conditions and a greater emphasis placedon commercial lending, which is generally considered to involve a higher degreeof risk.  At December 31, 2004 and 2003,non-performing loans totaled $2.9 million and $2.8 million, respectively.  At December 31, 2004 and 2003 the balance ofthe allowance for loan losses totaled $4.5 and $3.8 million, respectively.  At December 31, 2004, the ratio of theallowance for loan losses to non-performing loans was 153.4% compared to 135.7%at

 

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December 31, 2003.  The ratio ofthe allowance to total loans was 0.56% and 0.52% at December 31, 2004 and 2003,respectively. Net charge-offs totaled $18,000 in 2004 and there were nocharge-offs for 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 available information,no assurance can be given that future additions to the allowance will not benecessary based on changes in economic and real estate market conditions,further information obtained regarding problem loans, identification ofadditional problem loans and other factors, both within and outside ofmanagement’s control.  In addition, theFDIC and the Commissioner, as an integral part of their examination processes,periodically review the Bank’s allowance for loan losses.  Such agencies may require the Bank to makeadditional provisions for estimated loan losses based upon judgments differentfrom those of management.

 

***Noninterest Income.*** Noninterest income totaled $6.0 million and $5.7 million for the yearsended December 31, 2004 and 2003, respectively. The increase is primarily due to increases of $1.5 million in gain onsale of property.  The gain on sale ofproperty primarily consists of $149,000 gain on sale of an office buildingpreviously occupied by the Bank, $93,000 related to the gain on sale of asingle-family home located in a subdivision developed by the Bank’swholly-owned subsidiary EFS Service Corporation and $1.4 million on the sale ofproperty owned by a joint venture known as Algonquin 80 LLC, in which theCompany has a 50% interest. Service fees increased $802,000 to $3.0 million forthe year ended December 31, 2004 from $2.2 million for the comparable prioryear period.  These fees increasedprimarily due to the growth in the number of deposit accounts.  Gain on sale of loans increased $133,000 to$289,000 for the year ended December 31, 2004 from $156,000 for the comparableprior year period.  Insurance andbrokerage commissions increased $121,000 to $563,000 for the year endedDecember 31, 2004 from $442,000 for the prior year period.  These increases were partially offset by afourth quarter $1.1 million other-than-temporary, non-cash, nonoperatingpre-tax impairment charge relating to the Company’s write-down of itsinvestment in Fannie Mae preferred stock. The Company recorded the write-down, in accordance with GAAP, becausethe fair value has been below cost for an extended period and a recovery infair value is not assured within a reasonably short period of time.  In addition, revenues generated by ComputerDynamics Group, Inc. (CDGI) decreased $582,000 to $204,000 for the year endedDecember 31, 2004 from $786,000 for the prior year period.  The decrease in these revenues is largely dueto a decrease in sales related to a weaker demand for CDGI’s services.  Finally, gains on the sale of securitiesdecreased $305,000 to $511,000 for the year ended December 31, 2004 from$816,000 for the prior year period.

 

***Noninterest Expense.***  Noninterestexpense increased by $1.5 million, to $20.1 million for the year ended December31, 2004 from $18.6 million for the comparable period in 2003.  Compensation and benefits increased by$184,000, or 1.7%, to $11.2 million for the year ended December 31, 2004compared to $11.0 million for the year ended December 31, 2003.  This increase is primarily due to acombination of annual salary increases, and the addition of staff.  The additional staff expenses are partiallyattributed to the Bank’s new branch office and expansion of the commercial loandepartment.  Other operating expenses,including advertising, marketing, data processing, communications and otheroffice expense increased by a combined $606,000, or 11.8% to $5.7 million forthe year ended December 31, 2004 compared to $5.1 million for the prior yearperiod.  Of this increase $242,000 is relatedto advertising, $175,000 is related to office building operations and $157,000to data processing expenses.  Inaddition, $424,000 was due to a nonrecurring charge related to the Company’smajority-owned subsidiary CDGI.  TheCompany was informed in October 2004 of the bankruptcy filing of its minoritypartner in CDGI.  Accordingly, areceivable from the minority owner totaling $265,000 was written-off.  Additionally, upon notification of thebankruptcy, the Company recorded its investment in CDGI as a wholly-ownedsubsidiary, which resulted in a $159,000 charge to expense to eliminate theminority interest. Management continues to emphasize the importance of expensemanagement and control in order to continue to provide expanded bankingservices to a growing market base.

 

***Income Tax Expense.*** Income tax expense totaled $2.3 million for the year ended December 31,2004 compared to $3.6 million for the comparable period in 2003.  The decrease in the provision for incometaxes was partially the result of a decrease in pretax income of $1.6 million,to $9.1 million for the year ended December 31, 2004 from $10.7 million for thesame period in 2003.  The effectiveincome tax rate decreased to 25.0% for the year ended December 31, 2004 from33.8% for the preceding year.  The 

 

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decrease in the effective tax rate is partially due to a reduction inthe accrued income tax liability, which resulted from a detailed analysiscompleted by the Company in the fourth quarter of 2004 of the tax amounts dueand the related tax uncertainties.

 

**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 average balanceof $61.8 million offset by a decrease in average yield of 97 basis points.  Overall, the average yield on the Bank’sinterest-earning assets decreased by 81 basis points to 5.80% for the yearended December 31, 2003 from 6.61% for the year ended December 31, 2002.  The decrease in average yield is due to ageneral decline in interest rates.  Theaverage balance of interest-earning assets increased $110.6 million, or 16.0%,to $803.0 million for the year ended December 31, 2003 from $692.4 million forthe 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$173.0 million 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.

 

***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 ofsecurities totaled $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

 

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gains on sale of foreclosed real estate for the year ended December 31,2002.  Income related to bank owned lifeinsurance increased $151,000 to $844,000 for the year ended December 31, 2003from $693,000 for the comparable period in 2002.  This increase is primarily due to theadditional investment of $5.0 million made in May 2003.  In addition, insurance and brokeragecommissions increased $37,000 to $442,000 for the year ended December 31, 2003from $405,000 for the year ended December 31, 2002.  These increases were partially offset by a$496,000 decrease to $786,000 in income generated by Computer Dynamics 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 to aweaker 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 toaverage total asset ratio decreased 8 basis points to 2.19% at December 31,2003 from 2.27% for the prior year period.

 

***Income Tax Expense.***Income tax expense totaled $3.6 million forthe year ended December 31, 2003 compared to $2.9 million for the comparableperiod in 2002.  The increase in theprovision for income taxes was the result of an increase in pretax income of$1.7 million to $10.7 million for the year ended December 31, 2003 from $9.0million for the same period in 2002.  Theeffective tax rate increased slightly to 33.8% for the year ended December 31,2003 from 32.1% for the preceding year. The increase in the effective tax rate is partially due to a reductionin the municipal bond investment portfolio and the goodwill impairment relatedto CDGI, offset in part by the additional purchase of bank owned lifeinsurance.

 

 

**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.

 

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**Contractual Obligations and Commercial Commitments**

 

The Bank has certain obligations and commitments to make futurepayments under contracts.  At December31, 2004, the aggregate contractual obligations and commercial commitments are(amounts do not include interest):

 
| ** **                      | ** ** | **At December 31, 2004**  | ** ** |
|---------------------------------|------------|---------------------------|------------|
| ** **                      | ** ** | **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, 2004** | ** ** |
| ** **                      | ** ** | **(In thousands)**        | ** ** |
| Contractual obligations:        |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Certificates of deposit         |       | $                         | 112,214    |   | $ | 160,921 |   | $ | 39,936 |   | $ | 8,816 |   | $ | 865 |   | $ | — |   | $ | 322,752 |   |
| Federal home loan bank advances |       | 33,000                    |       | 31,000 |   | 38,000 |   | 25,000 |   | 10,000 |   | 100,000 |   | 237,000 |   |
| Operating leases                |       | 108                       |       | 109 |   | 110 |   | 112 |   | 114 |   | 244 |   | 797 |   |
| Total at December 31, 2004      |       | $                         | 145,322    |   | $ | 192,030 |   | $ | 78,046 |   | $ | 33,928 |   | $ | 10,979 |   | $ | 100,244 |   | $ | 560,549 |   |
|                            |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                      | ** ** | **At December 31, 2004**  | ** ** |
| ** **                      | ** ** | **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, 2004** | ** ** |
| ** **                      | ** ** | **(In thousands)**        | ** ** |
| Other commercial commitments:   |       |                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Lines of credit                 |       | $                         | 26,181     |   | $ | 10,418 |   | $ | 11,467 |   | $ | 4,143 |   | $ | 5,824 |   | $ | 3,348 |   | $ | 61,381 |   |
| Loan commitments                |       | 9,107                     |       | — |   | — |   | — |   | — |   | — |   | 9,107 |   |
| Letters of credit               |       | 3,597                     |       | 5,019 |   | 2,793 |   | — |   | 67 |   | — |   | 11,476 |   |
| Total at December 31, 2004      |       | $                         | 38,885     |   | $ | 15,437 |   | $ | 14,260 |   | $ | 4,143 |   | $ | 5,891 |   | $ | 3,348 |   | $ | 81,964 |   |

 

**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 31,2004, 2003, and 2002, the Bank’s loan originations totaled $302.2 million,$299.6 million and $179.2 million, respectively.  In addition, the Bank purchased loanstotaling $75.8 million, $110.2 million and $79.6 million for the same timeperiods.  Primarily deposit growth,borrowings and principal repayments on loans, and mortgage-backed securitiesfunded these activities.  The Bankexperienced a net increase in total deposits of $74.3 million, $72.6 millionand $104.1 million for the years ended December 31, 2004, 2003, and 2002,respectively.  This increase can beattributed to an aggressive marketing campaign as well as the addition ofbranch offices.  In addition, borrowingsincreased

 

39

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$25.2 million, $40.0 millionand decreased $3.5 million, respectively for the same time periods.  The level of interest rates affects depositflows, the interest rates and products offered by the local competitors and theBank, 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, 2004, cashand interest-bearing demand accounts totaled $30.9 million, or 3.1% of totalassets.  The Bank closely monitors itsliquidity position on a daily basis.  Ona longer-term basis, the Bank maintains a strategy of investing in variouslending products as described in greater detail under Item 1 to this AnnualReport.  In the event the Bank shouldrequire funds beyond its ability to generate them internally, additionalsources of funds are available through FHLB advances.  At December 31, 2004, the Bank had $237.0million of outstanding FHLB borrowings.

 

Outstandingcommitments to originate first mortgage loans totaled $9.1 million at December31, 2004.  Management of the Bankanticipates that it will have sufficient funds available to meet its currentloan commitments.  Certificates ofdeposit, which are scheduled to mature in one year or less from December 31,2004, totaled $112.2 million.  For theyear ended December 31, 2004, the Bank experienced a 79.1% retention rate offunds maturing from certificates of deposit. It has been and will continue tobe a priority of management to retain time deposits.  The Bank relies primarily on competitiverates, customer service, and long-standing relationships with customers toretain deposits.  From time to time, theBank will also offer competitive special products to its customers to increaseretention.  Based upon the Bank’sexperience with deposit retention and current retention strategies, managementbelieves that, although it is not possible to predict future terms andconditions upon renewal, a significant portion of such deposits will remainwith the Bank.

 

AtDecember 31, 2004, the Bank exceeded all of its regulatory capital requirementswith a leverage capital level of $79.3 million, or 7.88% of adjusted assets,which is above the required level of $40.3 million, or 4.00%, and risk-basedcapital of $83.8 million, or 11.52% of adjusted assets, which is above therequired level of $58.1 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 invested inmarketable securities.  The initial levelof 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 2004, the Companyrepurchased 10,900 shares of the Company’s common stock at an average price pershare of $24.66.  The Company believesthat stock repurchases are a good way to manage its excess capital and a soundinvestment decision.  The primary sourceof funding for the Company is dividend payments from the Bank, sales andmaturities of investment securities and, to a lesser extent, earnings oninvestments and deposits held by the Company. Dividend payments by the Bank have primarily been used to fund stockrepurchase programs and pay dividends on Company stock.  These repurchases totaled $37.4 million as ofDecember 31, 2004.  The Bank’s ability topay dividends and other capital distributions to the Company is generallylimited by the provisions of the Illinois state banking regulations and theFederal 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 Illinois statechartered 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 Bank’s net profits for that year if the Bank hastotal capital of less than 6% of total assets. A savings bank may not declare dividends in excess of its net profits inany year without the approval of the Commissioner.  To the extent the Bank were to apply to pay adividend or capital distribution to the Company in excess of the regulatorypermitted dividend amounts, no assurances can be made such application would beapproved by the regulatory authorities. See also “Regulation and Supervision” 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.  Theimpact of inflation is reflected in the increased cost of the Bank’soperations.  Unlike industrial companies,nearly all of the assets and liabilities of the Bank are monetary innature.  As a result, interest rates havea 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.

 

40

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**Impact of Accounting Standards**

 

In December 2003, the American Institute of Certified PublicAccountants (“AICPA”) released Statement of Position 03-3, “Accounting forCertain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”).  SOP 03-3 addresses the accounting for differencesbetween contractual cash flows and cash flows expected to be collected from aninvestors initial investment in loans or debt securities acquired in a transferif those differences are attributable to credit quality.  SOP 03-3 is effective for loans acquired infiscal years beginning after December 31, 2004. Adoption of this Statement is not expected to have a material impact onthe Company’s consolidated financial statements.

 

InMarch 2004, the FASB reached a consensus on EITF 03-1, “The Meaning of Other-Than-TemporaryImpairment and Its Application to Certain Investments” (“EITF 03-1”).  EITF 03-1 provides guidance for determiningwhen an investment is impaired and whether the impairment is other thantemporary.  EITF 03-1 also incorporatesinto its consensus the required disclosures about unrealized losses oninvestments announced by the EITF in late 2003 and adds new disclosurerequirements relating to cost-method investments.  The impairment accounting guidance was tobecome effective for reporting periods beginning after June 15, 2004.  The new disclosure requirements are effectivefor annual reporting periods after June 15, 2004.  In September 2004, the FASB delayed the effectivedate of EITF 03-1 for measurement and recognition of impairment losses untilimplementation guidance is issued.

 

InDecember 2004, the FASB issued SFAS No. 123 (Revised 2004) (123R), “Share-BasedPayment”, an amendment of FASB Statements No. 123 and 95.  SFAS No. 123R will require compensation costrelating to share-based payment transactions be recognized in consolidatedfinancial statements, effective for the Company’s third quarter in 2005.  The Company has not yet completed itsevaluation of the Standard, but anticipates that it will result in a reductionin earnings and earnings per share beginning with the third quarter of 2005.

 

41

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**Item 7A****. Quantitative and Qualitative Disclosure AboutMarket 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, 2004.

 
| **Change in  Interest  Rates  In Basis  Points** | ** ** | ** **                 | ** ** | **NPV as % of Portfolio  Value of Assets** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|--------------------------------------------|------------|
| **(Rate   Shock)**                               | ** ** | **Net Portfolio Value**    | ** ** | **NPV  Ratio**                             | ** ** | **% Change** | ** ** |
| **Amount**                                       | ** ** | **$ Change**          | ** ** | **% Change**                               |
| ** **                                       | ** ** | **(Dollars in thousands)** | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                             |       |                       |       |                                       |       |   |   |   |   |   |   |
| 300                                              |       | $                          | 58,695     |                                       | $          | (27,652 | ) | (32.02 | )% | 6.29 | % | (27.20 | )% |
| 200                                              |       | 68,243                     |       | (18,104                                    | )          | (20.97 | ) | 7.15 |   | (17.25 | ) |
| 100                                              |       | 77,867                     |       | (8,480                                     | )          | (9.82 | ) | 7.97 |   | (7.75 | ) |
| Static                                           |       | 86,347                     |       | —                                     |       | — |   | 8.64 |   | — |   |
| (100)                                            |       | 96,951                     |       | 10,604                                     |       | 12.28 |   | 9.36 |   | 8.33 |   |
| (200)                                            |       | 94,261                     |       | 7,914                                      |       | 9.17 |   | 9.25 |   | 7.06 |   |
|                                                  |            |                            |            |                                            |            |  |  |  |  |  |  |  |  |

 

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.

 

Fora further discussion regarding Quantitative and Qualitative Disclosure aboutMarket Risk, see Item 7 of this Form 10-K, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations - Management ofInterest Rate Risk and Market Risk Analysis.”

 

42

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

 

**EFC BANCORP, INC. AND SUBSIDIARIES**

 

Consolidated Financial Statements

 

December 31, 2004, 2003, and 2002

 

(With Report of Independent Registered Public Accounting Firm Thereon)

 

----

 

**Report of Independent Registered Public Accounting Firm**

 

 

The Board of DirectorsEFC Bancorp, Inc.:

 

We have audited theaccompanying consolidated balance sheets of EFC Bancorp, Inc. and subsidiaries(the Company) as of December 2004 and 2003, and the relatedconsolidated statements of income, changes in stockholders’ equity, and cashflows for each of the years in the three-year period ended December 31,2004. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of EFC Bancorp, Inc. and subsidiariesas of December 31, 2004 and 2003, and the results of their operations andtheir cash flows for each of the years in the three-year period ended December 31,2004 in conformity with U.S. generally accepted accounting principles.

 

 

/s/ 

 

 

Chicago, IllinoisMarch 14, 2005

 

F-1

----

 

**EFC BANCORP, INC. AND SUBSIDIARIES**

ConsolidatedBalance Sheets

December31, 2004 and 2003

 
| ** **                                                                                                                     | ** ** | **2004**    | ** **    | **2003**    | ** **  |
|--------------------------------------------------------------------------------------------------------------------------------|------------|-------------|---------------|-------------|-------------|
| **Assets**                                                                                                                     | ** ** | ** **  | ** **    | ** **  | ** **  |
| Cash and cash equivalents:                                                                                                     |       |        |          |        |        |
| On hand and in banks                                                                                                           |       | $           | 5,327,541     |        | 5,449,261   |   |
| Interest bearing deposits with financial  institutions                                                                         |       | 25,582,585  |          | 16,426,727  |        |
| Total cash and cash equivalents                                                                                                |       | 30,910,126  |          | 21,875,988  |        |
| Loans receivable, net                                                                                                          |       | 807,833,561 |          | 716,883,910 |        |
| Mortgage-backed securities  available-for-sale, at fair value                                                                  |       | 9,976,804   |          | 10,164,501  |        |
| Investment securities available-for-sale,  at fair value                                                                       |       | 92,846,891  |          | 90,656,208  |        |
| Stock in Federal Home Loan Bank of Chicago,  at cost                                                                           |       | 12,023,700  |          | 10,877,600  |        |
| Accrued interest receivable                                                                                                    |       | 3,996,974   |          | 4,009,280   |        |
| Office properties and equipment, net                                                                                           |       | 24,302,624  |          | 17,672,562  |        |
| Real estate held for development                                                                                               |       | 1,544,818   |          | 4,189,637   |        |
| Bank owned life insurance                                                                                                      |       | 19,149,802  |          | 17,986,416  |        |
| Other assets                                                                                                                   |       | 1,329,898   |          | 2,776,482   |        |
| Total assets                                                                                                                   |       | $           | 1,003,915,198 |        | 897,092,584 |   |
| **Liabilities  and Stockholders’ Equity**                                                                                 |       |        |          |        |        |
| Liabilities:                                                                                                                   |       |        |          |        |        |
| Deposits                                                                                                                       |       | $           | 671,035,878   |        | 596,763,807 |   |
| Borrowed money                                                                                                                 |       | 237,000,000 |          | 211,788,751 |        |
| Income taxes payable                                                                                                           |       | 508,888     |          | 535,795     |        |
| Accrued expenses and other liabilities                                                                                         |       | 9,835,633   |          | 9,758,945   |        |
| Total liabilities                                                                                                              |       | 918,380,399 |          | 818,847,298 |        |
| Minority interest                                                                                                              |       | —      |          | (158,666    | )           |
| 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, 2004  and 2003 |       | 74,914      |          | 74,914      |        |
| Additional paid-in capital                                                                                                     |       | 73,237,074  |          | 72,247,346  |        |
| Treasury stock, at cost, 2,746,921 and  2,898,763 shares at December 31, 2004 and 2003, respectively                           |       | (34,131,491 | )             | (35,598,664 | )           |
| Unearned employee stock ownership plan  (ESOP), 319,636 and 359,590 shares at December 31, 2004 and 2003,  respectively        |       | (4,779,359  | )             | (5,376,779  | )           |
| Unearned stock award plan, 4,202 and 6,026  shares at December 31, 2004 and 2003, respectively                                 |       | (46,747     | )             | (67,039     | )           |
| Retained earnings, substantially restricted                                                                                    |       | 50,823,162  |          | 46,681,729  |        |
| Accumulated other comprehensive income, net                                                                                    |       | 357,246     |          | 442,445     |        |
| Total stockholders’ equity                                                                                                |       | 85,534,799  |          | 78,403,952  |        |
| Commitments and contingencies                                                                                                  |       |        |          |        |        |
| Total liabilities and stockholders’ equity                                                                                |       | $           | 1,003,915,198 |        | 897,092,584 |   |

 

See accompanying notes to consolidated financialstatements.

 

F-2

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**EFC BANCORP, INC. AND SUBSIDIARIES**

ConsolidatedStatements of Income

Yearsended December 31, 2004, 2003, and 2002

 
| ** **                                                                                          | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Interest income:                                                                                    |       |       |       |       |       |       |       |
| Loans secured by real estate                                                                        |       | $          | 30,813,132 |       | 33,561,702 |       | 34,529,608 |   |
| Other loans                                                                                         |       | 10,733,416 |       | 6,658,237  |       | 5,166,670  |       |
| Mortgage-backed securities  available-for-sale                                                      |       | 392,424    |       | 517,104    |       | 641,146    |       |
| Investment securities available-for-sale  and interest bearing deposits with financial institutions |       | 5,015,328  |       | 5,012,524  |       | 4,680,757  |       |
| Total interest income                                                                               |       | 46,954,300 |       | 45,749,567 |       | 45,018,181 |       |
| Interest expense:                                                                                   |       |       |       |       |       |       |       |
| Deposits                                                                                            |       | 12,969,939 |       | 12,160,594 |       | 13,567,100 |       |
| Borrowed money                                                                                      |       | 10,033,364 |       | 9,382,424  |       | 9,254,173  |       |
| Total interest expense                                                                              |       | 23,003,303 |       | 21,543,018 |       | 22,821,273 |       |
| Net interest income before provision for  loan losses                                               |       | 23,950,997 |       | 24,206,549 |       | 22,196,908 |       |
| Provision for loan losses                                                                           |       | 760,000    |       | 613,250    |       | 900,000    |       |
| Net interest income after provision for  loan losses                                                |       | 23,190,997 |       | 23,593,299 |       | 21,296,908 |       |
| Noninterest income:                                                                                 |       |       |       |       |       |       |       |
| Service fees                                                                                        |       | 2,959,257  |       | 2,157,189  |       | 1,591,294  |       |
| Insurance and brokerage commissions                                                                 |       | 563,309    |       | 441,725    |       | 404,929    |       |
| Information technology sales and service income,  net                                               |       | 203,725    |       | 786,130    |       | 1,282,615  |       |
| Gain on sale of foreclosed real estate                                                              |       | —     |       | 192,113    |       | —     |       |
| Gain on sale of property                                                                            |       | 1,515,016  |       | —     |       | —     |       |
| Impairment of securities                                                                            |       | (1,139,704 | )          | —     |       | —     |       |
| Gain on sale of securities                                                                          |       | 511,478    |       | 816,454    |       | —     |       |
| Gain on sale of loans                                                                               |       | 288,730    |       | 156,223    |       | 200,409    |       |
| Increase in cash surrender value of bank  owned life insurance                                      |       | 871,461    |       | 844,385    |       | 692,863    |       |
| Other                                                                                               |       | 205,938    |       | 342,007    |       | 148,757    |       |
| Total noninterest income                                                                            |       | 5,979,210  |       | 5,736,226  |       | 4,320,867  |       |
| Noninterest expense:                                                                                |       |       |       |       |       |       |       |
| Compensation and benefits                                                                           |       | 11,165,766 |       | 10,981,846 |       | 10,234,785 |       |
| Office building, net                                                                                |       | 2,889,922  |       | 2,714,859  |       | 2,387,286  |       |
| Federal insurance premiums                                                                          |       | 91,747     |       | 89,573     |       | 76,311     |       |
| Advertising                                                                                         |       | 1,021,534  |       | 779,331    |       | 726,320    |       |
| Data processing                                                                                     |       | 1,137,638  |       | 980,204    |       | 888,634    |       |
| NOW account operating expenses                                                                      |       | 612,383    |       | 582,915    |       | 498,104    |       |
| Intangible amortization                                                                             |       | 77,680     |       | 264,382    |       | —     |       |
| Other                                                                                               |       | 3,073,190  |       | 2,216,839  |       | 1,834,366  |       |
| Total noninterest expense                                                                           |       | 20,069,860 |       | 18,609,949 |       | 16,645,806 |       |
| Income before income taxes and minority  interest                                                   |       | 9,100,347  |       | 10,719,576 |       | 8,971,969  |       |
| Income tax expense                                                                                  |       | 2,278,001  |       | 3,618,674  |       | 2,882,339  |       |
| Income before minority interest                                                                     |       | 6,822,346  |       | 7,100,902  |       | 6,089,630  |       |
| Minority interest                                                                                   |       | —     |       | 83,539     |       | 57,682     |       |
| Net income                                                                                          |       | $          | 6,822,346  |       | 7,184,441  |       | 6,147,312  |   |
| Earnings per share:                                                                                 |       |       |       |       |       |       |       |
| Basic                                                                                               |       | $          | 1.58       |       | 1.70       |       | 1.46       |   |
| Diluted                                                                                             |       | 1.51       |       | 1.61       |       | 1.39       |       |

 

See accompanying notes to consolidatedfinancial statements.

 

F-3

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**EFC BANCORP, INC. AND SUBSIDIARIES**

ConsolidatedStatements of Changes in Stockholders’ Equity

Yearsended December 31, 2004, 2003, and 2002

 
| ** **                                                                                                                                                       | ** ** | **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, 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 |       |
|                                                                                                                                                             |       |                                  |       |              |       |                             |       |                |        |                             |       |                                    |       |                   |       |                                                 |       |       |       |
| Treasury stock  purchased                                                                                                                                        |       | (10,908                               | )          | —            |       | —                           |       | (268,963            | )           | —                           |       | —                                  |       | —                 |       | —                                               |       | (268,963   | )          |
| ESOP shares  committed to be released                                                                                                                            |       | 39,954                                |       | —            |       | 422,933                          |       | —              |        | 597,420                          |       | —                                  |       | —                 |       | —                                               |       | 1,020,353  |       |
| Stock options  exercised                                                                                                                                         |       | 162,750                               |       | —            |       | —                           |       | 1,736,136           |        | —                           |       | —                                  |       | —                 |       | —                                               |       | 1,736,136  |       |
| Tax benefit of  options exercised                                                                                                                                |       |                                  |       | —            |       | 549,274                          |       | —              |        | —                           |       | —                                  |       | —                 |       | —                                               |       | 549,274    |       |
| Stock award plan –  shares allocated                                                                                                                        |       | 3,000                                 |       | —            |       | 17,521                           |       | —              |        | —                           |       | 20,292                                  |       | —                 |       | —                                               |       | 37,813     |       |
| Dividends  declared ($0.62 per share)                                                                                                                            |       |                                  |       | —            |       | —                           |       | —              |        | —                           |       | —                                  |       | (2,680,913             | )          | —                                               |       | (2,680,913 | )          |
| Comprehensive  income:                                                                                                                                           |       |                                  |       |              |       |                             |       |                |        |                             |       |                                    |       |                   |       |                                                 |       |       |       |
| Net income                                                                                                                                                       |       |                                  |       | —            |       | —                           |       | —              |        | —                           |       | —                                  |       | 6,822,346              |       | —                                               |       | 6,822,346  |       |
| Change in net  unrealized gain (loss) on securities available-for-sale, less reclassification  adjustment for realized gains included in net income of $511,478  |       |                                  |       | —            |       | —                           |       | —              |        | —                           |       | —                                  |       | —                 |       | (139,671                                             | )          | (139,671   | )          |
| Income tax effect                                                                                                                                                |       |                                  |       | —            |       | —                           |       | —              |        | —                           |       | —                                  |       | —                 |       | 54,472                                               |       | 54,472     |       |
| Total  comprehensive income                                                                                                                                      |       |                                  |       |              |       |                             |       |                |        |                             |       |                                    |       |                   |       |                                                 |       | 6,737,147  |       |
| Balance at  December 31, 2004                                                                                                                                    |       |                                  |       | $                 | 74,914     |                             | 73,237,074 |                | (34,131,491 | )                                | (4,779,359 | )                                       | (46,747    | )                      | 50,823,162 |                                                 | 357,246    |       | 85,534,799 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

F-4

----

 

**EFC BANCORP, INC. AND SUBSIDIARIES**

ConsolidatedStatements of Cash Flows

Yearsended December 31, 2004, 2003, and 2002

 
| ** **                                                                                   | ** ** | **2004**     | ** ** | **2003**     | ** ** | **2002**    | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------|------------|--------------|------------|-------------|------------|
| Cash flows from operating activities:                                                        |       |         |       |         |       |        |       |
| Net income                                                                                   |       | $            | 6,822,346  |         | 7,184,441  |        | 6,147,312  |   |
| Adjustments to reconcile net income to net  cash provided by (used in) operating activities: |       |         |       |         |       |        |       |
| Amortization of premiums and discounts, net                                                  |       | 83,849       |       | 101,179      |       | 9,392       |       |
| Provision for loan losses                                                                    |       | 760,000      |       | 613,250      |       | 900,000     |       |
| Impairment of securities                                                                     |       | 1,139,704    |       | —       |       | —      |       |
| FHLB of Chicago stock dividends                                                              |       | (1,146,100   | )          | (755,200     | )          | (470,300    | )          |
| Deferred income tax expense (benefit)                                                        |       | (840,824     | )          | 407,906      |       | (276,407    | )          |
| Stock award plan shares allocated, net of  tax effect                                        |       | 37,813       |       | 718,651      |       | 752,170     |       |
| ESOP shares committed to be released, at  cost                                               |       | 597,420      |       | 597,420      |       | 597,420     |       |
| Change in fair value of ESOP shares  committed to be released                                |       | 422,933      |       | 202,986      |       | 43,671      |       |
| Depreciation and amortization of office  properties and equipment                            |       | 1,300,180    |       | 1,153,959    |       | 834,635     |       |
| Gain on sale of foreclosed real estate                                                       |       | —       |       | (192,113     | )          | —      |       |
| Gain on sale of investment securities                                                        |       | (511,478     | )          | (816,454     | )          | —      |       |
| Gain on sale of loans                                                                        |       | (288,730     | )          | (156,223     | )          | (200,409    | )          |
| Change in minority interest in subsidiary                                                    |       | 158,666      |       | (83,539      | )          | (75,127     | )          |
| Increase in cash surrender value bank owned  life insurance                                  |       | (738,386     | )          | (739,613     | )          | (612,803    | )          |
| Intangible amortization                                                                      |       | 77,680       |       | 264,382      |       | —      |       |
| (Increase) decrease in accrued interest  receivable and other assets, net                    |       | 1,429,554    |       | (612,900     | )          | (1,183,514  | )          |
| Increase (decrease) in income taxes  payable, accrued expenses and other liabilities, net    |       | 797,036      |       | (1,858,749   | )          | 2,401,319   |       |
| Net cash provided by operating activities                                                    |       | 10,101,663   |       | 6,029,383    |       | 8,867,359   |       |
| Cash flows from investing activities:                                                        |       |         |       |         |       |        |       |
| Net (increase) decrease in loans receivable                                                  |       | (58,298,861  | )          | (30,899,719  | )          | 3,749,783   |       |
| Purchases of loans receivable                                                                |       | (75,815,260  | )          | (110,230,678 | )          | (79,620,252 | )          |
| Proceeds from the sale of loans                                                              |       | 42,693,200   |       | 20,838,243   |       | 13,217,497  |       |
| Increase (decrease) in real estate held for  development                                     |       | 2,644,819    |       | (1,255,565   | )          | (2,934,072  | )          |
| Purchases of mortgage-backed securities  available-for-sale                                  |       | (4,035,625   | )          | (2,549,222   | )          | (7,170,009  | )          |
| Principal payments on mortgage-backed  securities available-for-sale                         |       | 4,094,848    |       | 7,363,479    |       | 5,593,387   |       |
| Maturities of investment securities  available-for-sale                                      |       | 26,502,721   |       | 29,699,965   |       | 27,547,993  |       |
| Proceeds from sale of investment securities  available-for-sale                              |       | 9,960,826    |       | 15,349,744   |       | —      |       |
| Purchases of investment securities  available-for-sale                                       |       | (39,377,503  | )          | (48,075,084  | )          | (45,057,683 | )          |
| Purchases of office properties and  equipment                                                |       | (7,930,242   | )          | (2,029,835   | )          | (6,641,114  | )          |
| Investment in bank owned life insurance                                                      |       | (425,000     | )          | (5,000,000   | )          | (780,000    | )          |
| Purchases of stock in the Federal Home Loan  Bank of Chicago                                 |       | —       |       | (760,200     | )          | —      |       |
| Cash used in acquisition of majority-owned  subsidiary                                       |       | —       |       | —       |       | (420,000    | )          |
| Proceeds from sale of foreclosed real  estate                                                |       | —       |       | 2,177,854    |       | —      |       |
| Net cash used in investing activities                                                        |       | (99,986,077  | )          | (125,371,018 | )          | (92,514,470 | )          |
| Cash flows from financing activities:                                                        |       |         |       |         |       |        |       |
| Net increase in deposits                                                                     |       | 74,272,071   |       | 72,573,963   |       | 104,105,555 |       |
| Proceeds from borrowed money                                                                 |       | 129,000,784  |       | 136,071,102  |       | 622,636     |       |
| Repayments on borrowed money                                                                 |       | (103,789,535 | )          | (96,061,094  | )          | (4,043,893  | )          |
| Purchase of treasury stock                                                                   |       | (268,963     | )          | (2,560,340   | )          | (956,564    | )          |
| Stock options exercised                                                                      |       | 2,285,410    |       | 717,616      |       | 785,178     |       |
| Cash dividends paid                                                                          |       | (2,581,215   | )          | (2,367,914   | )          | (2,196,801  | )          |
| Net cash provided by financing activities                                                    |       | 98,918,552   |       | 108,373,333  |       | 98,316,111  |       |
| Net increase (decrease) in cash and cash  equivalents                                        |       | 9,034,138    |       | (10,968,302  | )          | 14,669,000  |       |
| Cash and cash equivalents at beginning of  year                                              |       | 21,875,988   |       | 32,844,290   |       | 18,175,290  |       |
| Cash and cash equivalents at end of year                                                     |       | $            | 30,910,126 |         | 21,875,988 |        | 32,844,290 |   |
| Supplemental disclosures of cash flow  information:                                          |       |         |       |         |       |        |       |
| Cash paid during the year for:                                                               |       |         |       |         |       |        |       |
| Interest                                                                                     |       | $            | 22,788,480 |         | 21,381,233 |        | 22,759,969 |   |
| Income taxes                                                                                 |       | 2,005,000    |       | 3,340,000    |       | 3,121,000   |       |
| Noncash investing activities:                                                                |       |         |       |         |       |        |       |
| Transfer of loans to foreclosed real estate                                                  |       | —       |       | —       |       | 1,985,741   |       |

 

See accompanying notes to consolidatedfinancial statements.

 

F-5

----

 

**EFC BANCORP, INC. AND SUBSIDIARIES**

Notes to Consolidated Financial Statements

December 31, 2004, 2003, and 2002

 

 

**(1)****       Summaryof Significant Accounting Policies**

 

The following describes the more significant policies which EFCBancorp, Inc. (the Company) follows in preparing and presenting itsconsolidated financial statements.

 

***(a)******       Principlesof Consolidation***

 

The consolidated financial statements include the accounts of EFCBancorp, Inc. and its wholly owned subsidiaries. All significant intercompanyaccounts and transactions have been eliminated in consolidation.

 

The accounting and reporting policies of the Company conform toaccounting principles generally accepted in the United States of America and togeneral practice within the banking industry. In preparing the consolidatedfinancial statements, management is required to make estimates and assumptionsthat affect the reported amounts of assets and liabilities as of the date ofthe consolidated balance sheet and revenues and expenses for the period. Actualresults could differ from these estimates.

 

***(b)******       FinancialReporting of Segments***

 

Statement of Financial Accounting Standards No. 131(SFAS 131), *Disclosures About Segmentsof an Enterprise and Related Information*, establishes standards forthe way public business enterprises report information about operating segmentsin annual financial statements. Operating segments are components of anenterprise for which separate financial information is available, and areevaluated regularly by management in deciding how to allocate resources and inassessing performance. SFAS 131 establishes standards for relateddisclosures about products, services, geographic areas, and major customers.The Company operates as a single segment.

 

EFS Bank (the Savings Bank) is principally engaged in the business ofattracting deposits and investing these funds, together with borrowings, tooriginate and purchase primarily one-to-four family residential mortgages andconstruction loans and to purchase securities.

 

***(c)******       LoansReceivable***

 

Loans receivable are stated at unpaid principal balances less netdeferred loan fees and costs and the allowance for loan losses. Premiums anddiscounts 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 costs associated with loanoriginations are deferred. Net deferred fees and costs are amortized as yieldadjustments over the contractual life of the related loans using the level-yieldmethod.

 

The allowance for loan losses is provided by charges to operations. Thebalance of the allowance is based on management’s estimate of probable lossesin the loan portfolio and current economic conditions. Regulatory examiners mayrequire the Company to recognize additions to the allowance based upon theirjudgments about information available to them at the time of their examination.

 

A provision for losses on specific loans is charged to operations whenany permanent decline reduces the market value to less than the loan principalbalance or carrying value.

 

F-6

----

 

Management, considering current information and events regarding theborrower’s ability to repay their obligations, considers a loan to be impairedwhen it is probable that the Company will be unable to collect all amounts dueaccording to the contractual terms of the note agreement, including principaland interest. The amount of impairment for individual loans is measured basedon the fair value of the collateral, if the loan is collateral dependent, oralternatively, on the present value of expected future cash flows discounted atthe loan’s effective interest rate. Certain groups of small balance homogenousloans represented by installment and consumer credit and residential realestate loans are excluded from the impairment provisions.

 

A loan is generally classified as nonaccrual when collectibility is indoubt and the loan is contractually past due three months or more. When a loanis placed on nonaccrual status, previously accrued, but unpaid interest isreversed against interest income. Income on such loans is subsequently recordedto the extent that cash is received and where future collection of principal isprobable.

 

***(d)******       InvestmentSecurities and Mortgage-backed Securities***

 

The Company classifies its investment and mortgage-backed securities inone of three categories: trading, available-for-sale, or held-to-maturity.Securities which the Company has the positive intent and ability to hold tomaturity are classified as held-to-maturity and measured at amortized cost.Securities purchased for the purpose of being sold in the near term areclassified as trading securities and measured at fair value with any change infair value included in earnings. All other securities that are not classifiedas held-to-maturity or trading are classified as available-for-sale. Securitiesclassified as available-for-sale are measured at fair value with any changes infair value reflected as a separate component of stockholders’ equity, net ofrelated tax effects. Gains and losses on the sale of such securities aredetermined using the specific identification method. Securities that havelosses deemed other than temporary are recognized as losses in the consolidatedstatement of income and a new cost basis is established. The Company hasclassified all investment securities as available-for-sale at December 31,2004 and 2003.

 

Discounts and premiums on mortgage-backed securities purchased areaccreted and amortized to maturity, using a method which approximates theeffective interest method. For investment securities, the straight-line methodbased upon the contractual life of the security is principally used, whichapproximates the effective interest method.

 

***(e)******       OfficeProperties and Equipment***

 

Office properties and equipment are stated at cost less accumulateddepreciation and amortization. Depreciation and amortization is computed forfinancial reporting purposes principally on the straight-line basis over theestimated useful lives (5 to 40 years) of the respective assets.

 

F-7

----

 

***(f)******        IncomeTaxes***

 

Deferred income taxes arise from the recognition of certain items ofincome and expense for tax purposes in years different from those in which theyare recognized in the consolidated financial statements. Deferred tax assetsand liabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases (temporary differences).

 

Deferred tax assets and liabilities are measured using enacted taxrates. The effects of future changes in the laws or rates are not anticipated.The effect on deferred tax assets and liabilities of a change in tax rates isrecognized as income in the period that includes the enactment date. To theextent a deferred tax asset is established which is not likely to be realized,a valuation allowance is established against such asset.

 

***(g)******       ForeclosedReal Estate***

 

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

 

***(h)******       EmployeeStock Ownership Plan (ESOP)***

 

Compensation expense under the ESOP is equal to the fair value ofcommon shares released or committed to be released annually to participants inthe ESOP. The difference between the fair value of the shares committed to bereleased and the cost of those shares to the ESOP is charged or credited toadditional paid-in capital. Common stock purchased by the ESOP and notcommitted 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.

 

***(i)******        Earningsper Share***

 

Basic earnings per share is calculated by dividing net income by theweighted average number of common shares outstanding. Diluted earnings pershare is calculated by dividing net income by the weighted average number ofcommon shares adjusted for the dilutive effect of outstanding stock options.ESOP shares are only considered outstanding for earnings per share calculationswhen they are committed to be released.

 

***(j)******        Cashand Cash Equivalents***

 

For purposes of the consolidated statements of cash flows, cash andcash equivalents are considered to include cash on hand and in banks and interestbearing deposits with financial institutions.

 

F-8

----

 

***(k)******       ComprehensiveIncome***

 

Comprehensive income consists of net income and net unrealized gains(losses) on available-for-sale securities and is presented in the consolidatedstatements of changes in stockholders’ equity.

 

***(l)******        StockOption Plan***

 

The Company has stock option plans that authorize the granting of stockoptions to eligible employees. In December 2002, the Company adopted SFASNo. 148, *Accounting for Stock BasedCompensation – Transition and Disclosure*.

 

Under Statement 123, the Company is required to disclose pro formanet income and earnings per share as if compensation expense relative to thefair value of options granted had been included in earnings. Had the Companydetermined compensation cost based on the fair value at the grant date of itsstock options under Statement 123, the Company’s net income would havebeen reduced to the pro forma amounts indicated below:

 
| ** **                                                                                                                          | ** ** | **Year ended December 31** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                          | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income as reported                                                                                                              |       | $                          | 6,822,346  |   | 7,184,441 |   | 6,147,312 |   |
|                                                                                                                                |       |                       |       |   |   |   |   |
| Add:                                                                                                                                |       |                       |       |   |   |   |   |
| Stock based compensation, net of tax  included in the determination of net income as reported                                       |       | 20,292                     |       | 509,125 |   | 624,702 |   |
|                                                                                                                                |       |                       |       |   |   |   |   |
| Deduct:                                                                                                                             |       |                       |       |   |   |   |   |
| Stock based compensation, net of tax, that  would have been reported if the fair value based method had been applied to all  awards |       | (95,141                    | )          | (977,388 | ) | (1,073,080 | ) |
| Pro forma net income                                                                                                                |       | $                          | 6,747,497  |   | 6,716,178 |   | 5,698,934 |   |
|                                                                                                                                |       |                       |       |   |   |   |   |
| Basic earnings per share                                                                                                            |       |                       |       |   |   |   |   |
| As reported                                                                                                                         |       | $                          | 1.58       |   | 1.70 |   | 1.46 |   |
| Pro forma                                                                                                                           |       | 1.57                       |       | 1.59 |   | 1.35 |   |
|                                                                                                                                |       |                       |       |   |   |   |   |
| Diluted earnings per share:                                                                                                         |       |                       |       |   |   |   |   |
| As reported                                                                                                                         |       | $                          | 1.51       |   | 1.61 |   | 1.39 |   |
| Pro forma                                                                                                                           |       | 1.49                       |       | 1.51 |   | 1.29 |   |

 

F-9

----

 

The Company follows the disclosure provisions of FASB StatementNo. 123, *Accounting for Stock-Based C*o*mpensation*. The fair value of each optiongranted is estimated on the grant date using the Black-Scholes option-pricingmodel with the following weighted average assumptions:

 
| ** **                     | ** ** | **2004**           | ** ** | **2003**           | ** ** |
|--------------------------------|------------|--------------------|------------|--------------------|------------|
| Dividend yield                 |       | 2.21% – 2.49% |       | 2.83% – 3.16% |       |
| Risk-free interest rate        |       | 4.05% – 4.76% |       | 3.54% – 3.83% |       |
| Weighted average expected life |       | 10 Years           |       | 10 Years           |       |
| Expected volatility            |       | 21.2% – 28.7% |       | 14.7% – 17.0% |       |

 

There were no options granted during 2002.

 

The weighted average per share fair value of options granted in 2004was $7.12.

 

***(m)******      Basisof Presentation***

 

Certain amounts for prior years have been reclassified to conform tothe current year presentation.

 

**(2)****       EarningsPer Share**

 

The following table sets forth the computation of basic and dilutedearnings per share for the periods indicated. ESOP shares are only consideredoutstanding for earnings per share calculations when they are committed to bereleased.

 
| ** **                                         | ** ** | **Year ended December 31** | ** ** |
|----------------------------------------------------|------------|----------------------------|------------|
| ** **                                         | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Basic:                                             |       |                       |       |   |   |   |   |
| Net income                                         |       | $                          | 6,822,346  |   | 7,184,441 |   | 6,147,312 |   |
| Weighted average common shares outstanding         |       | 4,310,933                  |       | 4,214,480 |   | 4,215,039 |   |
|                                               |       |                       |       |   |   |   |   |
| Basic earnings per share                           |       | 1.58                       |       | 1.70 |   | 1.46 |   |
|                                               |       |                       |       |   |   |   |   |
| Diluted:                                           |       |                       |       |   |   |   |   |
| Net income                                         |       | 6,822,346                  |       | 7,184,441 |   | 6,147,312 |   |
| Weighted average common shares outstanding         |       | 4,310,933                  |       | 4,214,480 |   | 4,215,039 |   |
| Effect of dilutive stock options outstanding       |       | 222,734                    |       | 238,633 |   | 204,985 |   |
| Diluted weighted average common shares outstanding |       | $                          | 4,533,667  |   | 4,453,113 |   | 4,420,024 |   |
| Diluted earnings per share                         |       | $                          | 1.51       |   | 1.61 |   | 1.39 |   |

 

F-10

----

 

**(3)****       LoansReceivable, Net**

 

Loans receivable, net are summarized as follows:

 
| ** **                     | ** ** | **December 31** | ** **  |
|--------------------------------|------------|-----------------|-------------|
| ** **                     | ** ** | **2004**        | ** **  | **2003** | ** ** |
| Mortgage loans:                |       |            |        |   |   |
| One-to-four family residential |       | $               | 503,755,447 |   | 466,930,401 |   |
| Multifamily                    |       | 55,268,558      |        | 52,248,499 |   |
| Commercial                     |       | 131,043,282     |        | 109,426,205 |   |
| Construction and land          |       | 44,121,308      |        | 36,356,150 |   |
| Total mortgage loans           |       | 734,188,595     |        | 664,961,255 |   |
| Other loans:                   |       |            |        |   |   |
| Home equity loans              |       | 31,653,771      |        | 27,497,027 |   |
| Commercial                     |       | 39,415,346      |        | 22,603,322 |   |
| Auto loans                     |       | 1,692,859       |        | 1,471,200 |   |
| Loans on savings accounts      |       | 283,881         |        | 228,563 |   |
| Other                          |       | 5,291,102       |        | 4,066,233 |   |
| Total other loans              |       | 78,336,959      |        | 55,866,345 |   |
| Total loans receivable         |       | 812,525,554     |        | 720,827,600 |   |
| Less:                          |       |            |        |   |   |
| Deferred loan fees             |       | 195,794         |        | 189,174 |   |
| Allowance for loan losses      |       | 4,496,199       |        | 3,754,516 |   |
| Loans receivable, net          |       | $               | 807,833,561 |   | 716,883,910 |   |

 

Activity in the allowance for loan losses is summarized as follows:

 
| ** **                   | ** ** | **Year ended December 31** | ** ** |
|------------------------------|------------|----------------------------|------------|
| ** **                   | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Balance at beginning of year |       | $                          | 3,754,516  |   | 3,141,146 |   | 2,255,146 |   |
| Provision for loans losses   |       | 760,000                    |       | 613,250 |   | 900,000 |   |
| Charge-offs                  |       | (19,217                    | )          | — |   | (16,192 | ) |
| Recoveries                   |       | 900                        |       | 120 |   | 2,192 |   |
| Balance at end of year       |       | $                          | 4,496,199  |   | 3,754,516 |   | 3,141,146 |   |

 

F-11

----

 

Loans receivable in arrears three months or more and on nonaccrualstatus or in the process of foreclosure are as follows:

 
| ** **        | ** ** | **Number  of loans** | ** ** | **Amount** | ** ** | **Percent of  gross loans  receivable** | ** ** |
|-------------------|------------|----------------------|------------|------------|------------|-----------------------------------------|------------|
| December 31, 2004 |       | 18                   |       | $          | 2,778,692  |                                    | 0.34       | % |
| December 31, 2003 |       | 18                   |       | 1,884,550  |       | 0.26                                    |       |
| December 31, 2002 |       | 13                   |       | 1,076,762  |       | 0.18                                    |       |
|                   |            |                      |            |            |            |                                         |            |  |

 

Interest income foregone that would have been recognized on nonaccrualloans if such loans had performed in accordance with their contractual termswas $99,000, $82,000, and $198,000 for the years ended December 31, 2004,2003, and 2002, respectively.

 

As of December 31, 2004, management identified $1.8 million in impairedloans for which an adequate allowance for loan loss was established. There wereno impaired loans at December 31, 2003.

 

The Savings Bank offers to its employees, officers, and directorsadjustable-rate mortgage loans for the purchase or refinance of theindividual’s owner-occupied primary residence with interest rates which may beup 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, 2004 and 2003, the outstanding balance on such loanswas approximately $4,292,000 and $4,544,000, respectively. Loan originations,repayments, and other changes for the year ended December 31, 2004 were $769,000,$322,000, and $699,000, respectively.

 

F-12

----

 

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

 

The amortized cost and estimated fair value of mortgage-backedsecurities and investment securities available-for-sale are summarized asfollows:

 
| ** **                               | ** ** | **December 31, 2004** | ** **  |
|------------------------------------------|------------|-----------------------|-------------|
| ** **                               | ** ** | **Amortized  cost**   | ** **  | **Gross  unrealized  gains** | ** ** | **Gross  unrealized  losses** | ** ** | **Estimated  fair value** | ** ** |
| Mortgage-backed securities:              |       |                  |        |   |   |   |   |   |   |
| Federal Home Loan Mortgage Corporation   |       | $                     | 1,478,156   |   | 7,480 |   | (12,286 | ) | 1,473,350 |   |
| Federal National Mortgage Association    |       | 1,200,468             |        | 20,292 |   | (4,920 | ) | 1,215,840 |   |
| Government National Mortgage Association |       | 7,345,395             |        | 9,495 |   | (67,276 | ) | 7,287,614 |   |
|                                     |       | 10,024,019            |        | 37,267 |   | (84,482 | ) | 9,976,804 |   |
| Investment securities:                   |       |                  |        |   |   |   |   |   |   |
| United States Government obligations     |       | 39,545,725            |        | 70,382 |   | (597,731 | ) | 39,018,376 |   |
| Municipal securities                     |       | 36,359,092            |        | 1,210,226 |   | (86,460 | ) | 37,482,858 |   |
| Corporate bonds                          |       | 1,213,737             |        | 85,112 |   | — |   | 1,298,849 |   |
| Equity securities                        |       | 15,095,473            |        | 50,466 |   | (99,131 | ) | 15,046,808 |   |
|                                     |       | 92,214,027            |        | 1,416,186 |   | (783,322 | ) | 92,846,891 |   |
|                                     |       | $                     | 102,238,046 |   | 1,453,453 |   | (867,804 | ) | 102,823,695 |   |

 

F-13

----

 
| ** **                               | ** ** | **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 |   |

 

During the year ended December 31, 2004, sales of investmentsecurities available-for-sale totaled $9,960,826. These sales resulted in grossgains of $511,478 for 2004. During the year ended December 31, 2003, salesof investment securities available-for-sale totaled $15,349,744. These salesresulted in gross gains of $816,454 for 2003. There were no sales of investmentsecurities available-for-sale for the year ended December 31, 2002.

 

The amortized cost and estimated fair value of investment securitiesavailable-for-sale at December 31, 2004 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                |       | $                   | 265,000    |                      | 265,131    |   |
| Due after one year through five years  |       | 5,021,393           |       | 5,128,113                 |       |
| Due after five years through ten years |       | 35,867,113          |       | 36,262,252                |       |
| Due after ten years                    |       | 35,965,048          |       | 36,144,587                |       |
| Equity securities                      |       | 15,095,473          |       | 15,046,808                |       |
|                                   |       | $                   | 92,214,027 |                      | 92,846,891 |   |

 

F-14

----

 

The following table provides the gross unrealized losses and fairvalue, aggregated by investment category and length of time the individualizedsecurities have been in a continuous unrealized loss position atDecember 31, 2004:

 
| ** **                            | ** ** | **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          |       | $                        | 30,959,851 |                   | (597,731   | )               | —     |   | — |   | 30,959,851 |   | (597,731 | ) |
| Municipal  securities                 |       | 2,482,301                |       | (23,945                | )          | 1,625,952       |       | (62,515 | ) | 4,108,253 |   | (86,460 | ) |
| Mortgage-backed  securities           |       | 5,102,483                |       | (28,484                | )          | 3,645,255       |       | (54,674 | ) | 8,747,738 |   | (83,158 | ) |
| Subtotal, debt  securities            |       | 38,544,635               |       | (650,160               | )          | 5,271,207       |       | (117,189 | ) | 43,815,842 |   | (767,349 | ) |
| Equity securities                     |       | 4,904,816                |       | (99,131                | )          | —          |       | — |   | 4,904,816 |   | (99,131 | ) |
| Total temporarly  impaired securities |       | $                        | 43,449,451 |                   | (749,291   | )               | 5,271,207  |   | (117,189 | ) | 48,720,658 |   | (866,480 | ) |

 

 Because the securitiesidentified in the table above are classified as available for sale, and carriedat fair value with unrealized losses net of related tax effect recorded instockholders’ equity, any charge to earnings in the future if the securitieswould be deemed by management to be other than temporarily impaired would notbe expected to have a significant impact. None of the unrealized losses arerelated to credit deterioration. The Bank has the ability and intent to holdthese securities until market values recover or until maturity date, ifapplicable.

 

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

 

Accrued interest receivable is summarized as follows:

 
| ** **                 | ** ** | **December 31** | ** ** |
|----------------------------|------------|-----------------|------------|
| ** **                 | ** ** | **2004**        | ** ** | **2003** | ** ** |
| Loans receivable           |       | $               | 3,339,313  |   | 3,184,334 |   |
| Mortgage-backed securities |       | 38,272          |       | 52,437 |   |
| Investment securities      |       | 619,389         |       | 772,509 |   |
|                       |       | $               | 3,996,974  |   | 4,009,280 |   |

 

F-15

----

 

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

 

Office properties and equipment at cost are summarized as follows:

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| ** **                                      | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Land                                            |       | $                | 9,129,373  |   | 5,609,577 |   |
| Land improvements                               |       | 721,593          |       | 584,511 |   |
| Office buildings                                |       | 13,844,476       |       | 10,982,472 |   |
| Leasehold improvements                          |       | 499,296          |       | 499,296 |   |
| Furniture, fixtures, and equipment              |       | 7,264,269        |       | 5,927,633 |   |
| Construction in progress                        |       | 157,403          |       | 607,837 |   |
|                                            |       | 31,616,410       |       | 24,211,326 |   |
| Less accumulated depreciation and  amortization |       | (7,313,786       | )          | (6,538,764 | ) |
|                                            |       | $                | 24,302,624 |   | 17,672,562 |   |

 

Depreciation and amortization expense totaled $1,300,180, $1,153,959,and $834,635 for the years ended December 31, 2004, 2003, and 2002,respectively.

 

The bank is obligated under noncancelable leases primarily for officespace. Rent expense under these leases for the years ended December 31,2004, 2003, and 2002, was $106,000, $103,000, and $133,000, respectively. Theprojected minimum rentals under existing leases as of December 31, 2004 isas follows (in thousands):

 

| ** ** | ** ** | **Year ended  December 31** | ** ** |
|------------|------------|-----------------------------|------------|
| 2005       |       | $                           | 108        |   |
| 2006       |       | 109                         |       |
| 2007       |       | 110                         |       |
| 2008       |       | 112                         |       |
| 2009       |       | 114                         |       |
|            |            |                             |            |  |

 

**(7)****       RealEstate Activity**

 

***(a)******       RealEstate Held for Development***

 

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 was developed into 29 home-sites forsingle-family residences. On October 15, 2004, one of the model homespreviously built was sold. In addition, on November 15, 2004, the 25 remainingdeveloped lots were sold to a local homebuilder. As of December 31, 2004,this investment totaled $1.5 million and there were three homes in variousstages of completion, one of which was under contract for sale.

 

F-16

----

 

***(b)******       JointVentures***

 

EFS Service Corporation entered into two 50/50 joint venture agreementsin 2003, known as Algonquin 80 LLC and Algonquin 36 LLC. Algonquin 80 LLCconsisted of 80 acres of vacant land in Algonquin, Illinois to be developedinto residential properties. This parcel was sold on December 29, 2004 andthe outstanding loan paid in full. A gain of $2.6 million was recognized by thejoint venture at the time of the sale. An additional $2.0 million of proceedsis yet to be recognized and is contingent on the occurrence of certain events.Algonquin 36 LLC consists of 36 acres of vacant land in Algonquin,Illinois. The strategy is for the joint venture to develop the parcel intocommercial properties. The Bank made a loan to the joint venture, which totaled$8.8 million at December 31, 2004 and was used primarily for theacquisition of the land.

 

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

 

Deposit balances are summarized as follows:

 
| ** **                                                                 | ** **             | ** **  | ** **  | **Stated  or  weighted  average rate** | ** **  | ** ** | ** ** | **Stated  or  weighted  average rate** | ** ** |
|----------------------------------------------------------------------------|------------------------|-------------|-------------|----------------------------------------|-------------|------------|------------|----------------------------------------|------------|
| **December  31, 2004**                                                     | **December  31, 2003** |
| **Amount**                                                                 | ** **             | **Percent** | **Amount**  | ** **                             | **Percent** |
| Commercial  checking accounts                                              |                   | $           | 31,553,835  |                                   | 4.7         | %          | —     |                                   | $          | 26,069,361 |   | 4.4 | % | — |   |
| NOW accounts –  noninterest bearing                                   |                   | 15,035,059  |        | 2.3                                    |        | —     |       | 12,967,947                             |       | 2.2 |   | — |   |
| NOW accounts –  interest bearing                                      |                   | 42,447,439  |        | 6.3                                    |        | 0.50       | %          | 39,121,533                             |       | 6.5 |   | 0.72 | % |
| Passbook                                                                   |                   | 141,206,849 |        | 21.0                                   |        | 1.42       |       | 127,929,602                            |       | 21.4 |   | 1.56 |   |
| Money market  accounts                                                     |                   | 118,040,320 |        | 17.6                                   |        | 1.62       |       | 145,529,681                            |       | 24.4 |   | 1.84 |   |
|                                                                       |                   |        |        |                                   |        |       |       |                                   |       |   |   |   |   |
| Certificate  accounts:                                                     |                   |        |        |                                   |        |       |       |                                   |       |   |   |   |   |
| Fixed rates                                                                |                   | 268,412,822 |        | 40.0                                   |        | 2.87       |       | 190,376,683                            |       | 31.9 |   | 3.07 |   |
| Individual  retirement accounts – 18-48 month fixed and variable rate |                   | 54,339,554  |        | 8.1                                    |        | 3.77       |       | 54,769,000                             |       | 9.2 |   | 3.80 |   |
|                                                                       |                   | $           | 671,035,878 |                                   | 100.0       | %          | 2.07       |                                   | $          | 596,763,807 |   | 100.0 | % | 2.16 |   |
| Contractual  maturity of certificate accounts ($100,000 or greater):       |                   |        |        |                                   |        |       |       |                                   |       |   |   |   |   |
| Under 3 months                                                             |                   | $           | 33,664,317  |                                   | 21.4        | %          |       |                                   | $          | 17,374,274 |   | 16.3 | % |   |   |
| Over 3 months  through  6 months                                           |                   | 6,404,577   |        | 4.1                                    |        |       |       | 17,468,267                             |       | 16.4 |   |   |   |
| Over 6 months  through  12 months                                          |                   | 18,533,015  |        | 11.8                                   |        |       |       | 24,645,733                             |       | 23.1 |   |   |   |
| Over 12 months                                                             |                   | 98,330,291  |        | 62.7                                   |        |       |       | 47,026,013                             |       | 44.2 |   |   |   |
|                                                                       |                   | $           | 156,932,200 |                                   | 100.0       | %          |       |                                   | $          | 106,514,287 |   | 100.0 | % |   |   |

 

F-17

----

 

The aggregate maturities of certificate accounts at December 31,2004 are as follows (in thousands):

 

| 2005   |   | $       | 112,214 |   |
|--------|--------|---------|---------|--------|
| 2006   |   | 160,921 |    |
| 2007   |   | 39,936  |    |
| 2008   |   | 8,816   |    |
| 2009   |   | 865     |    |
|   |   | $       | 322,752 |   |
|        |        |         |         |        |  |

 

Interest expense on deposits is summarized as follows for the yearsended December 31:

 
| ** **            | ** ** | **2004**  | ** ** | **2003**  | ** ** | **2002**  | ** ** |
|-----------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Passbook accounts     |       | $         | 1,881,150  |      | 1,867,243  |      | 2,308,336  |   |
| NOW accounts          |       | 197,406   |       | 258,451   |       | 320,846   |       |
| Money market accounts |       | 2,185,691 |       | 2,694,360 |       | 3,335,403 |       |
| Certificate accounts  |       | 8,705,692 |       | 7,340,540 |       | 7,602,515 |       |
|                  |       | $         | 12,969,939 |      | 12,160,594 |      | 13,567,100 |   |
|                       |            |           |            |           |            |           |            |  |  |

 

**(9)****       BorrowedMoney**

 

Borrowed money is summarized as follows:

 
| ** **                                            | ** ** | ** **         | ** ** | **December 31, 2004**       | ** ** | **December 31, 2003**    | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                            | ** ** | **Maturity**       | ** ** | **Weighted  interest rate** | ** ** | **Outstanding  balance** | ** ** | **Weighted  interest rate** | ** ** | **Outstanding  balance** | ** ** |
| ** **                                            | ** ** | **(In thousands)** | ** ** |
| Advances from the Federal Home Loan Bank of  Chicago: |       |               |       |                        |       |                     |       |   |   |   |   |
|                                                  |       | 2004               |       | —                      |       | $                        | —     |   | 3.68 | % | $ | 47,700 |   |
|                                                  |       | 2005               |       | 4.06                        | %          | 33,000                   |       | 4.72 |   | 23,000 |   |
|                                                  |       | 2006               |       | 3.09                        |       | 31,000                   |       | 3.02 |   | 15,000 |   |
|                                                  |       | 2007               |       | 3.38                        |       | 38,000                   |       | — |   | — |   |
|                                                  |       | 2008               |       | 4.18                        |       | 25,000                   |       | 4.24 |   | 19,000 |   |
|                                                  |       | 2009               |       | 3.64                        |       | 10,000                   |       | — |   | — |   |
|                                                  |       | 2010               |       | 5.85                        |       | 65,000                   |       | 5.85 |   | 65,000 |   |
|                                                  |       | 2011               |       | 4.66                        |       | 35,000                   |       | 4.66 |   | 35,000 |   |
|                                                  |       |               |       | 4.40                        | %          | $                        | 237,000    |   | 4.66 | % | $ | 204,700 |   |

 

At December 31, 2004, the Savings Bank had $5,000,000 in overnightborrowings at a floating interest rate of 2.47%. These borrowings are includedin the above table maturing in 2005. In addition, $5,000,000 of the advancesdue in 2008 have adjustable interest rates. All other advances have fixedinterest rates. At December 31, 2004, $129,000,000 in advances are callableby the Federal Home Loan Bank of Chicago (FHLB) beginning in 2005.

 

F-18

----

 

The Savings Bank adopted a collateral pledge agreement whereby it hasagreed to at all times keep on hand, free of all other pledges, liens, andencumbrances, performing first mortgage loans with unpaid principal balancesaggregating no less than 167% of the outstanding secured advances from theFHLB. The carrying value of the collateral was approximately $506,211,000 atDecember 31, 2004. All stock in the FHLB is also pledged as additionalcollateral for these advances.

 

**(10)****     IncomeTaxes**

 

Income tax expense (benefit) for the years ended December 31,2004, 2003, and 2002 is as follows:

 
| ** **               | ** ** | **Year ended December 31** | ** ** |
|--------------------------|------------|----------------------------|------------|
| ** **               | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Current:                 |       |                       |       |   |   |   |   |
| Federal                  |       | $                          | 2,578,400  |   | 2,520,966 |   | 2,727,959 |   |
| State                    |       | 540,425                    |       | 689,802 |   | 430,787 |   |
|                     |       | 3,118,825                  |       | 3,210,768 |   | 3,158,746 |   |
| Deferred:                |       |                       |       |   |   |   |   |
| Federal                  |       | (752,318                   | )          | 410,688 |   | (184,908 | ) |
| State                    |       | (88,506                    | )          | (2,782 | ) | (91,499 | ) |
|                     |       | (840,824                   | )          | 407,906 |   | (276,407 | ) |
| Total income tax expense |       | $                          | 2,278,001  |   | 3,618,674 |   | 2,882,339 |   |

 

The actual Federal income tax expense for 2004 and 2003 differs fromthe “expected” income tax expense for those periods (computed by applying thestatutory U.S. Federal corporate tax rate of 34% to earnings before incometaxes) as follows:

 
| ** **                                                          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tax expense based on the statutory U.S.  Federal corporate tax rate |       | $        | 3,094,118  |     | 3,644,656  |     | 3,070,081  |   |
| State income taxes, net of federal impact                           |       | 298,267  |       | 453,433  |       | 269,747  |       |
| Tax exempt interest income                                          |       | (484,541 | )          | (474,343 | )          | (415,202 | )          |
| Bank owned life insurance                                           |       | (251,051 | )          | (251,468 | )          | (208,353 | )          |
| Reduction of tax exposure reserve                                   |       | (371,818 | )          | —   |       | —   |       |
| Intangible amortization/impairment                                  |       | 26,411   |       | 71,912   |       | —   |       |
| Other, net                                                          |       | (33,385  | )          | 174,484  |       | 166,066  |       |
|                                                                |       | $        | 2,278,001  |     | 3,618,674  |     | 2,882,339  |   |

 

F-19

----

 

The tax effects of existing temporary differences that give rise tosignificant portions of the deferred tax assets and deferred tax liabilities atDecember 31, 2004 and 2003 are as follows:

 
| ** **                                        | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax assets:                              |       |       |       |       |       |
| Allowance for loan losses                         |       | $          | 1,745,334  |       | 1,457,428  |   |
| Loan fees                                         |       | 455,822    |       | 353,107    |       |
| Capital loss carryforward                         |       | 442,410    |       | —     |       |
| Deferred gain joint venture                       |       | 388,180    |       | —     |       |
| Compensation expense                              |       | 421,262    |       | 279,207    |       |
| Deferred sales income                             |       | 55,453     |       | 68,761     |       |
| State net operating loss carryforward             |       | 133,391    |       | 151,493    |       |
| Gross deferred tax assets                         |       | 3,641,852  |       | 2,309,996  |       |
| Deferred tax liabilities:                         |       |       |       |       |       |
| FHLB stock dividends                              |       | (1,222,843 | )          | (953,523   | )          |
| Depreciation                                      |       | (1,049,746 | )          | (828,033   | )          |
| Unrealized gain or securities  available-for-sale |       | (228,403   | )          | (282,875   | )          |
| Other, net                                        |       | (2,306     | )          | (2,306     | )          |
| Gross deferred tax liabilities                    |       | (2,503,298 | )          | (2,066,737 | )          |
| Net deferred tax asset                            |       | $          | 1,138,554  |       | 243,259    |   |
|                                                   |            |            |            |            |            |  |  |

 

A tax benefit has been recorded for the other-than-temporary impairmentcharge on certain available for sale securities recorded in 2004 due to certaintax planning strategies that are available to the Company which enable theCompany to recognize capital gains in the future to offset the capital losscarryforward. Retained earnings at December 31, 2004 include approximately$2,328,000 of tax bad debt reserves for which no provision for Federal or stateincome tax has been made. If, in the future this amount, or a portion thereof,is used for certain purposes, then a Federal and state tax liability, at thethen-current corporate income tax rates, will be imposed on the amounts soused. The state net operating loss carryforwards total approximately $2,769,000and will expire starting in 2015. No valuation allowance was required atDecember 31, 2004 due to the expiration and utilization of the charitablecontribution carryforward in 2004.

 

**(11)****     EmployeeBenefit Plans**

 

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

 

The Savings Bank adopted the Elgin Federal Financial Center 401(k)Employee Benefit Plan and Trust (Plan), effective November 1, 1986, forthe exclusive benefit of eligible employees and their beneficiaries. The Planis a qualified plan covering all employees of the Savings Bank who havecompleted at least six months of service for the Savings Bank and are age 20 orolder. The Plan also provides benefits in the event of death, disability, orother termination of employment. Participants may make contributions to thePlan from 2% to 10% of their earnings, subject to Internal Revenue Servicelimitations. Matching contributions can be made at the Savings Bank’sdiscretion each plan year. There were no contributions by the Savings Bankduring 2004, 2003, and 2002.

 

F-20

----

 

***(b)******       EmployeeStock Ownership Plan (ESOP)***

 

In conjunction with the Savings Bank’s conversion, the Company formedan ESOP. The ESOP covers substantially all employees that are age 21 or overand with at least 1,000 hours of service. The ESOP borrowed $8,961,298from the Company and purchased 599,314 common shares issued in the Conversion.The loan has a 15 year term, with an interest rate of 8.50%. The Savings Bankintends to make discretionary contributions to the ESOP sufficient to servicethe requirements of the loan over a period of 15 years. During the yearsended December 31, 2004, 2003, and 2002, 39,954 shares were allocatedannually. ESOP expense for the years ended December 31, 2004, 2003, and2002 totaled $1,020,361, $800,414, and $641,091, respectively. The fair valueof unallocated shares totaled $8,327,000 and $8,593,000 at December 31,2004 and 2003, respectively.

 

***(c)******       StockAward Plan (SAP)***

 

The Company has a SAP which may grant up to 4%, or 299,657 shares,of the common stock issued in the Company’s initial public offering to eligibledirectors, officers, and certain key employees of the Company. All sharesavailable under the SAP have been granted. Shares vest as follows: 20% per yearfor five (5) years of continuous service. Deferred compensationrelating to the shares granted under the SAP totaled $3,333,684, the fair valueof the shares on the date of grant, and is being recognized as compensationexpense as the participants vest in those shares. For the years endedDecember 31, 2004, 2003, and 2002, the Company recorded compensationexpense of $37,813, $718,651, and $752,170, respectively.

 

Shares of the Company’s common stock were purchased by the SAP in theopen market at a weighted average price of $12.37 per share. The aggregatepurchase price of all nonvested shares acquired by the SAP is reflected as areduction of stockholders’ equity as deferred compensation and additional paid-incapital.

 

***(d)******       SupplementalExecutive Retirement Plan (SERP)***

 

In 2002, the board of directors of the Bank adopted a SERP. This plancovers certain executives and directors of the Bank. For the years endedDecember 31, 2004 and 2003, the Company recorded compensation expenserelated to the SERP in the amount of $365,952 and $312,700, respectively.

 

**(12)****     StockOption Plans**

 

In 1998, the Company adopted a stock option plan (the Stock OptionPlan) pursuant to which the Company’s board of directors may grant stock optionsto directors, officers, and employees of the Company and the Savings Bank. Thenumber of common shares authorized under the Stock Option Plan is 749,143,equal to 10% of the total number of shares issued in the initial stockoffering. A similar second plan, consisting of 254,256 shares, wasapproved 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

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A summary of the status of the Company’s stock option transactionsunder the plans for the years ended December 31, 2004, 2003, and 2002 ispresented below:

 
| ** **                       | ** ** | **2004**   | ** ** | **2003**                              | ** ** | **2002**   | ** ** |
|----------------------------------|------------|------------|------------|---------------------------------------|------------|------------|------------|
| ** **                       | ** ** | **Shares** | ** ** | **Weighted  average  exercise price** | ** ** | **Shares** | ** ** | **Weighted  average  exercise price** | ** ** | **Shares** | ** ** | **Weighted  average  exercise price** | ** ** |
| Outstanding at beginning of year |       | 591,171    |       | $                                     | 11.93      |       | 648,318    |   | $ | 10.99 |   | 771,500 |   | $ | 11.01 |   |
| Forfeitures                      |       | —     |       |                                  |       | —     |       |   |   | (6,000 | ) | 11.125 |   |
| Granted                          |       | 120,500    |       | 25.48                                 |       | 67,500     |       | 19.33 |   | — |   | — |   |
| Exercised                        |       | (166,492   | )          | 11.03                                 |       | (124,647   | )          | 11.09 |   | (117,182 | ) | 11.10 |   |
| Outstanding at end of year       |       | 545,179    |       | 15.20                                 |       | 591,171    |       | 11.93 |   | 648,318 |   | 10.99 |   |
| Exercisable at end of year       |       | 361,779    |       | 11.29                                 |       | 499,271    |       | 11.02 |   | 482,018 |   | 11.05 |   |
|                                  |            |            |            |                                       |            |            |            |  |  |  |  |  |  |  |  |  |

 

**(13)****     RegulatoryCapital Requirements**

 

The Savings Bank is subject to regulatory capital requirementsadministered by state and federal regulatory agencies. Failure to meet minimumcapital requirements can initiate certain mandatory and possibly additionaldiscretionary actions by regulators that, if undertaken, could have a directmaterial effect on the Savings Bank’s financial statements. Under capitaladequacy guidelines and the regulatory framework for prompt corrective action,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 to ensure adequacyrequire the Savings Bank to maintain minimum amounts and ratios as set forthbelow. Management believes, as of December 31, 2004, that the Savings Bankmeets all capital adequacy requirements to which it is subject.

 

As of December 31, 2004 and 2003, the most recent notificationfrom the Federal Deposit Insurance Corporation categorized the Savings Bank aswell capitalized under the regulatory framework for prompt corrective action.At December 31, 2004, there are no conditions or events since the mostrecent notification that management believes have changed the institution’scategory.

 

F-22

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

 
| ** **                                | ** ** | **Actual** | ** ** | **For  capital adequacy  purposes** | ** ** | **To be  well capitalized under  prompt corrective action** | ** ** |
|-------------------------------------------|------------|------------|------------|-------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                | ** ** | **Amount** | ** ** | **Ratio**                           | ** ** | **Amount**                                                  | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| December 31,  2004:                       |       |       |       |                                |       |                                                        |       |   |   |   |   |   |   |
| Total capital (to  risk weighted assets)  |       | $          | 79,619,000 |                                | 10.96      | %                                                           | $          | 58,142,000 |   | 8.0 | % | $ | 72,677,000 |   | 10.0 | % |
| Tier I capital  (to risk weighted assets) |       | 79,261,000 |       | 10.91                               |       | 29,071,000                                                  |       | 4.0 |   | 43,606,000 |   | 6.0 |   |
| Tier I capital  (to average assets)       |       | 79,261,000 |       | 7.88                                |       | 40,250,000                                                  |       | 4.0 |   | 50,312,000 |   | 5.0 |   |
|                                      |       |       |       |                                |       |                                                        |       |   |   |   |   |   |   |
| 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 |   |

 

**(14)****     Concentrationsof Credit Risk and Financial Instruments with Off-balance Sheet Risk**

 

A majority of the Savings Bank’s mortgage loans are secured by single-familyhomes in Kane County. For loans originated, the Savings Bank evaluates eachcustomer’s creditworthiness on a case-by-case basis. Management believes theSavings Bank has a diversified loan portfolio and concentration of lendingactivities that does not result in an acute dependency upon the economicconditions of its lending area. Purchased participation loans are secured byproperties primarily in the southern Wisconsin area and to a lesser extent byproperties in the Chicagoland area.

 

The Savings Bank is party to financial instruments with off-balancesheet risk in the normal course of business to meet the financing needs of itscustomers. Those financial instruments primarily include commitments to extendcredit. Commitments to extend credit are agreements to lend to a customer solong as there is no violation of any condition established in the contract. TheSavings Bank evaluates each customer’s creditworthiness on a case-by-casebasis. The amount of collateral obtained is based on management’s creditevaluation of the customer. The Savings Bank’s exposure to credit loss in theevent of nonperformance by the customer is represented by the contractualamount of those financial instruments. The commitments to originate firstmortgage loans represent amounts which the Savings Bank plans to fund within aperiod of 30 to 90 days.

 

The Savings Bank’s approved, but unused lines of credit are based onunderwriting standards that generally do not allow total borrowings, includingthe equity line of credit to exceed 80% of the current appraised value of thecustomer’s residence. However, the Savings Bank offers home equity lines ofcredit up to 90% of the home’s current appraised value at a 1% higher interestrate.

 

The Savings Bank’s standby letters of credit are conditionalcommitments issued by the Savings Bank to guarantee performance of a customerto a third party. The credit risk involved in these transactions is essentiallythe same as that involved in extending a loan to a customer in the normalcourse of business. Standby letters of credit are collateralized by mortgages,savings accounts, or liens on business assets. The fair value of the standbyletters of credit approximates the amount of recorded related fees, which arenot

 

F-23

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considered material. The maximum risk of accounting loss for theseitems, which is represented by the total commitment outstanding, totaled$11.5 million at December 31, 2004.

 

At December 31, 2004 and 2003, the Savings Bank had the followingcommitments:

 
| ** **                | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------|------------|------------|------------|------------|------------|
| First mortgage loans      |       | $          | 8,303,000  |       | 7,306,000  |   |
| Construction loans        |       | 804,000    |       | 4,210,000  |       |
| Unused lines of credit    |       | 61,381,000 |       | 42,342,000 |       |
| Standby letters of credit |       | 11,476,000 |       | 5,434,000  |       |
|                           |            |            |            |            |            |  |

 

There are various matters of litigation pending against the Companythat have arisen during the normal course of business. Based upon discussionswith legal counsel, management believes that the liability, if any, resultingfrom these matters will not be material to the consolidated financial positionor results of operations of the Company.

 

**(15)****     FairValue of Financial Instruments**

 

FASB Statement No. 107, *DisclosuresAbout Fair Value of Financial Instruments* (Statement 107),requires the disclosure of estimated fair values of all asset, liability, andoff-balance sheet financial instruments. The estimated fair value amounts underStatement No. 107 have been determined as of a specific point in timeutilizing various available market information, assumptions, and appropriatevaluation methodologies. Accordingly, the estimated fair values presentedherein are not necessarily representative of the underlying value of theCompany. Rather, the disclosures are limited to reasonable estimates of thefair value of only the Company’s financial instruments. The use of assumptionsand various valuation techniques, as well as the absence of secondary marketsfor certain financial instruments, will likely reduce the comparability of fairvalue disclosures between financial institutions. The Company does not plan tosell most of its assets or settle most of its liabilities at these fair values.

 

F-24

----

 

The estimated fair values of the Company’s financial instruments areset forth in the following table.

 
| ** **                      | ** ** | **December 31**      | ** ** |
|---------------------------------|------------|----------------------|------------|
| ** **                      | ** ** | **2004**             | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **Carrying  amount** | ** ** | **Fair  value** | ** ** | **Carrying  amount** | ** ** | **Fair  value** | ** ** |
| ** **                      | ** ** | **(In thousands)**   | ** ** |
| Financial assets:               |       |                 |       |   |   |   |   |   |   |
| Cash and cash equivalents       |       | $                    | 30,910     |   | 30,910 |   | 21,876 |   | 21,876 |   |
| Investment securities           |       | 92,847               |       | 92,847 |   | 90,656 |   | 90,656 |   |
| Mortgage-backed securities      |       | 9,977                |       | 9,977 |   | 10,165 |   | 10,165 |   |
| Loans receivable, net           |       | 807,834              |       | 810,068 |   | 716,884 |   | 723,090 |   |
| Accrued interest receivable     |       | 3,997                |       | 3,997 |   | 4,009 |   | 4,009 |   |
| Bank owned life insurance       |       | 19,150               |       | 19,150 |   | 17,986 |   | 17,986 |   |
| Stock in FHLB of Chicago        |       | 12,024               |       | 12,024 |   | 10,878 |   | 10,878 |   |
|                            |       |                 |       |   |   |   |   |   |   |
| Financial liabilities:          |       |                 |       |   |   |   |   |   |   |
| Nonmaturing deposits            |       | $                    | 348,284    |   | 348,284 |   | 351,618 |   | 351,618 |   |
| Deposits with stated maturities |       | 322,752              |       | 325,231 |   | 245,146 |   | 249,094 |   |
| Borrowed money                  |       | 237,000              |       | 236,071 |   | 211,789 |   | 211,979 |   |
| Accrued interest payable        |       | 1,424                |       | 1,424 |   | 1,218 |   | 1,218 |   |

 

The following methods and assumptions are used by the Company inestimating the fair value amounts for its financial instruments.

 

***(a)******       Cashand Cash Equivalents***

 

The carrying value of cash and cash equivalents approximates fair valuedue to the short period of time between origination of the instrument and itsexpected realization.

 

***(b)******       InvestmentSecurities, Mortgage-backed Securities, and FHLB Stock***

 

The fair values of investment securities and mortgage-backed securitiesare estimated using quoted market prices. The fair value of FHLB stock is basedon its redemption value.

 

***(c)******       LoansReceivable***

 

The fair value of loans receivable is based on contractual cash flowsadjusted for prepayment assumptions, discounted using the current rate at whichsimilar loans would be made to borrowers with similar credit ratings andremaining terms to maturity.

 

***(d)******       AccruedInterest Receivable and Payable***

 

The carrying value of accrued interest receivable and payableapproximates fair value due to the relatively short period of time betweenaccrual and expected realization.

 

F-25

----

 

***(e)******       BankOwned Life Insurance***

 

The carrying value of bank owned life insurance approximates its fairvalue. Bank owned life insurance, for reporting purposes, is reflected at itscash value.

 

***(f)******        Deposits***

 

The fair value of deposits with no stated maturity, such as commercialchecking, passbook savings, NOW, and money market accounts are disclosed as theamount payable on demand.

 

The fair value of fixed-maturity deposits is the present value of thecontractual cash flows discounted using interest rates currently being offeredfor deposits with similar remaining terms to maturity. If the fair valueestimate is less than the amount payable on demand at December 31, thefair value disclosed is the amount payable on demand as per Statement 107.

 

***(g)******       BorrowedFunds***

 

The fair value of fixed rate FHLB advances is the present value of thecontractual cash flows discounted by the current rate offered for similarremaining maturities. For variable rate advances, the carrying valueapproximates fair value. The carrying value of the overnight borrowings atLaSalle approximates fair value due to the daily repricing.

 

**(16)****     CondensedParent Company Only Financial Information**

 

Presented below is the condensed balance sheets as of December 31,2004 and 2003 and statements of income and cash flows for each of the yearsended in the three-year period for EFC Bancorp, Inc. These statements should beread in conjunction with the consolidated financial statements and the notesthereto.

 

**Balance Sheets**

 
| ** **                                                    | ** ** | **December 31** | ** ** |
|---------------------------------------------------------------|------------|-----------------|------------|
| ** **                                                    | ** ** | **2004**        | ** ** | **2003** | ** ** |
| Assets:                                                       |       |            |       |   |   |
| Cash and cash equivalents                                     |       | $               | 4,218,630  |   | 1,353,134 |   |
| Mortgage-backed securities  available-for-sale, at fair value |       | 131,216         |       | 234,538 |   |
| Investment securities available-for-sale,  at fair value      |       | 300,000         |       | 300,000 |   |
| Equity investment in majority owned subsidiary                |       | (706,245        | )          | (144,888 | ) |
| Equity investment in the Savings Bank                         |       | 79,619,375      |       | 74,471,363 |   |
| Accrued interest receivable                                   |       | 1,532           |       | 2,095 |   |
| Other assets                                                  |       | 2,757,847       |       | 3,018,432 |   |
| Total assets                                                  |       | $               | 86,322,355 |   | 79,234,674 |   |
| Liabilities:                                                  |       |            |       |   |   |
| Other liabilities                                             |       | $               | 787,556    |   | 989,388 |   |
| Minority interest                                             |       | —          |       | (158,666 | ) |
| Stockholders’ equity                                     |       | 85,534,799      |       | 78,403,952 |   |
| Total liabilities and stockholders’ equity               |       | $               | 86,322,355 |   | 79,234,674 |   |

 

F-26

----

 

**Statements of Income**

 
| ** **                                            | ** ** | **Year ended December 31** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Dividends from Savings Bank                           |       | $                          | 2,581,215  |   | 2,367,914 |   | 2,196,801 |   |
| Equity in undistributed earnings of the Savings  Bank |       | 5,174,676                  |       | 5,700,084 |   | 4,571,914 |   |
| Interest income                                       |       | 637,397                    |       | 654,914 |   | 703,784 |   |
| Noninterest expense                                   |       | (1,639,414                 | )          | (1,697,983 | ) | (1,577,932 | ) |
| Income before income taxes and minority  interest     |       | 6,753,874                  |       | 7,024,929 |   | 5,894,567 |   |
| Income tax benefit                                    |       | 68,472                     |       | 75,973 |   | 195,063 |   |
| Income before minority interest                       |       | 6,822,346                  |       | 7,100,902 |   | 6,089,630 |   |
| Minority interest                                     |       | —                     |       | 83,539 |   | 57,682 |   |
| Net income                                            |       | $                          | 6,822,346  |   | 7,184,441 |   | 6,147,312 |   |

 

F-27

----

 

**Statements of Cash Flows**

 
| ** **                                                             | ** ** | **Year ended December 31** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                             | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| Operating activities:                                                  |       |                       |       |   |   |   |   |
| Net income                                                             |       | $                          | 6,822,346  |   | 7,184,441 |   | 6,147,312 |   |
| Equity in undistributed earnings of the Savings  Bank                  |       | (5,174,676                 | )          | (5,700,084 | ) | (4,571,914 | ) |
| Deficit in undistributed loss of majority  owned subsidiary            |       | 402,691                    |       | 417,698 |   | 305,856 |   |
| Amortization of premiums                                               |       | 1,527                      |       | 3,030 |   | 6,079 |   |
| ESOP plan shares committed to be released,  at cost                    |       | 597,420                    |       | 597,420 |   | 597,420 |   |
| Stock award plan shares allocated                                      |       | 37,813                     |       | 509,125 |   | 752,170 |   |
| Change in fair value of ESOP shares committed  to be released          |       | 422,933                    |       | 412,512 |   | 43,671 |   |
| Minority interest in subsidiary                                        |       | 158,666                    |       | (83,539 | ) | (75,127 | ) |
| (Increase) decrease in other assets                                    |       | 260,309                    |       | (23,089 | ) | (449,990 | ) |
| Decrease in accrued interest receivable                                |       | 563                        |       | 1,658 |   | 2,411 |   |
| Increase (decrease) in other liabilities                               |       | (201,832                   | )          | 138,834 |   | 101,396 |   |
| Net cash provided by operating activities                              |       | 3,327,760                  |       | 3,458,006 |   | 2,859,284 |   |
| Investing activities:                                                  |       |                       |       |   |   |   |   |
| Principal repayments on mortgage-backed securities  available-for-sale |       | 102,504                    |       | 274,417 |   | 371,630 |   |
| Cash used in acquisition of majority owned subsidiary                  |       | —                     |       | — |   | (420,000 | ) |
| Net cash provided by (used in) investing  activities                   |       | 102,504                    |       | 274,417 |   | (48,370 | ) |
| Financing activities:                                                  |       |                       |       |   |   |   |   |
| Cash dividends paid                                                    |       | (2,581,215                 | )          | (2,367,914 | ) | (2,196,801 | ) |
| Purchase of treasury stock                                             |       | (268,963                   | )          | (2,560,340 | ) | (956,564 | ) |
| Stock options exercised                                                |       | 2,285,410                  |       | 717,616 |   | 785,178 |   |
| Net cash used in financing activities                                  |       | (564,768                   | )          | (4,210,638 | ) | (2,368,187 | ) |
| Net increase (decrease) in cash and cash  equivalents                  |       | 2,865,496                  |       | (478,215 | ) | 442,727 |   |
| Cash and cash equivalents at beginning of  year                        |       | 1,353,134                  |       | 1,831,349 |   | 1,388,622 |   |
| Cash and cash equivalents at end of year                               |       | $                          | 4,218,630  |   | 1,353,134 |   | 1,831,349 |   |

 

F-28

----

 

**(17)****     SelectedQuarterly Financial Data (Unaudited)**

 

A summary of consolidated operating results on a quarterly basis is asfollows:

 
| ** **                                              | ** ** | **Three months ended**                    | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                              | ** ** | **March 31,  2004**                       | ** ** | **June 30,  2004** | ** ** | **September 30,  2004** | ** ** | **December 31,  2004** | ** ** |
| ** **                                              | ** ** | **(In thousands, except per share data)** | ** ** |
| Interest income                                         |       | $                                         | 11,447     |   | 11,233 |   | 11,838 |   | 12,436 |   |
| Interest expense                                        |       | 5,388                                     |       | 5,411 |   | 6,004 |   | 6,200 |   |
| Net interest income before provision for loan  losses   |       | 6,059                                     |       | 5,822 |   | 5,834 |   | 6,236 |   |
| Provision for loan losses                               |       | 150                                       |       | 190 |   | 210 |   | 210 |   |
| Net interest income after provision for  loan losses    |       | 5,909                                     |       | 5,632 |   | 5,624 |   | 6,026 |   |
| Noninterest income                                      |       | 1,616                                     |       | 1,461 |   | 1,290 |   | 1,612 |   |
| Noninterest expense                                     |       | 4,737                                     |       | 5,001 |   | 5,345 |   | 4,997 |   |
| Income before income tax expense and minority  interest |       | 2,788                                     |       | 2,092 |   | 1,569 |   | 2,641 |   |
| Income tax expense                                      |       | 824                                       |       | 553 |   | 351 |   | 550 |   |
| Income before minority interest                         |       | 1,964                                     |       | 1,539 |   | 1,218 |   | 2,091 |   |
| Minority interest                                       |       | 6                                         |       | 4 |   | — |   | — |   |
| Net income                                              |       | $                                         | 1,970      |   | 1,543 |   | 1,218 |   | 2,091 |   |
| Earnings per share:                                     |       |                                      |       |   |   |   |   |   |   |
| Basic                                                   |       | $                                         | 0.46       |   | 0.36 |   | 0.28 |   | 0.48 |   |
| Diluted                                                 |       | 0.43                                      |       | 0.34 |   | 0.27 |   | 0.45 |   |

 

In the fourth quarter of 2004, the Company recorded a $1.1 millionother-than-temporary pre-tax impairment charge relating to its investment inFannie Mae preferred stock and a $1.4 million gain on sale of property owned byone of its joint ventures, and reduced its accrued income tax liability byapproximately $200,000, which resulted from a detailed analysis completed bythe Company of tax amounts due and related tax uncertainties.

 

F-29

----

 
| ** **                                              | ** ** | **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-30

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**Item 9****. Changes in andDisagreements with Accountants on Accounting and Financial Disclosure****.**

 

None.

 

**Item 9A****. Controls and Procedures****.**

 

TheCompany’s management, including the Company’s principal executive officer andprincipal financial officer, have evaluated the effectiveness of the Company’s “disclosurecontrols and procedures, “ as such term is defined in Rule 13a-15(e)promulgated under the Securities Exchange Act of 1934, as amended, (the “ExchangeAct”).  Based upon their evaluation, theprincipal executive officer and principal financial officer concluded that, asof the end of the period covered by this report, the Company’s disclosurecontrols and procedures were effective for the purpose of ensuring that theinformation required to be disclosed in the reports that the Company files orsubmits under the Exchange Act with the Securities and Exchange (the “SEC”) (1)is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and (2) is communicated to the Company’smanagement, including its principal executive and principal financial officers,as appropriate to allow timely decisions regarding required disclosure.

 

**Item 9B****.  Other Information****.**

 

Thefollowing disclosures would otherwise have been filed on Form 8-K under theheading: “Item 1.01. Entry into a Material Definitive Agreement”:

 

OnDecember 21, 2004, the Board of Directors granted Randy C. Blackburn and R.Scott Reining options to purchase 5,000 shares of the Company’s common stock atan exercise price of $24.90 per share. The form of the Company’s stock option award agreement is attached asExhibit 10.10 to this report.  The Boardalso approved and ratified the following Board fees for outside directors forthe second half of 2004: $3,000 retainer fee for the Company; $3,000 permeeting attendance fee ($5,500 per meeting attended for Director Anderson asVice Chairman); and a $200 or $300 fee for each committee meeting attended forthe Bank (depending on the committee, except that no such fees are paid forattending a meeting of the Executive or CRA Committees).

 

Thefollowing disclosures would otherwise have been filed on Form 8-K under theheading: “Item 2.06. Material Impairments”:

 

Duringthe fourth quarter the Company recorded a $1.1 million other-than-temporary,non-cash, nonoperating pre-tax impairment charge relating to the Company’swrite-down of its investment in Fannie Mae preferred.  The Company recorded the write-down, inaccordance with GAAP, because the fair value has been below cost for anextended period and a recovery in fair value is not assured within a reasonablyshort period of time.

 

## **PARTIII**

 

**Item 10****. Directors and ExecutiveOfficers of the Registrant****.**

 

Theinformation relating to Directors and Executive Officers of the Registrant isincorporated herein by reference to the Registrants’ Proxy Statement for theAnnual Meeting of Stockholders to be held on April 19, 2005, at pages 7 through9 and 19.  Information regardingexecutive officers is included under the caption “Executive Officers” on page33 of this report.

 

TheRegistrant has adopted a Code of Ethics and Business Conduct.

 

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

 

Theinformation relating to director and executive compensation is incorporatedherein by reference to the Registrant’s Proxy Statement for the Annual Meetingof Stockholders to be held on April 19, 2005, at pages 13 through 15.

 

43

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**Item 12****.  Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters****.**

 

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 19,2005, at pages 6 and 7.

 

Equity CompensationPlan Information as of December 31, 2004:

 
| **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     |       | 545,179                                                                                                 |       | $                                                                                       | 15.20      |                                                                                                                                                      | 49,899     |   |
| Equity compensation plans not approved by  security holders |       | —                                                                                                  |       | —                                                                                  |       | —                                                                                                                                                    |       |
| Total                                                       |       | 545,179                                                                                                 |       | $                                                                                       | 15.20      |                                                                                                                                                      | 49,899     |   |

 

**Item 13****. Certain Relationships andRelated Transactions****.**

 

The information relating to certain relationships and relatedtransactions is incorporated herein by reference to the Registrant’s ProxyStatement for the Annual Meeting of Stockholders to be held on April 19, 2005,at page 21.

 

**Item 14****. 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 the2005 Annual Meeting of Stockholders.

 

## **PARTIV**

 

**Item 15****. Exhibits, FinancialStatement Schedules, and Reports on Form 8-K****.**

 

**1.****    ****Financial Statements**

 

ConsolidatedFinancial Statements of the Company are listed in the index and appear in thisreport under “Item 8.  FinancialStatements and Supplementary Data.”

 

**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.

 

44

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**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)                                |
| 10.10               |   | Form of Stock Option Award  Agreement (filed herewith)                                                                          |
| 10.11               |   | Amendment to the EFC  Bancorp, Inc. Employment Agreement with Barrett J. O’Connor filed on Form 8-K  February 17, 2005.    |
| 10.12               |   | Amendment to the EFC  Bancorp, Inc. Employment Agreement with James J. Kovac filed on Form 8-K  February 17, 2005.              |
| 10.13               |   | Amendment to the EFC  Bancorp, Inc. Employment Agreement with Leo M. Flanagan, Jr. filed on Form  8-K February 17, 2005.        |
| 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 Incorporated herein by reference to Form 10-K filed on March  19, 2004.                    |
| 21.0                |   | Subsidiary information  incorporated herein by reference to “Part 1 - Subsidiaries”                                   |
| 23.0                |   | Consent of Independent  Registered Public Accounting Firm (filed herewith)                                                      |
| 31.1                |   | Rule 13a-14(a)/15d-14(a)  Certification of Chief Executive Officer (filed herewith)                                             |
| 31.2                |   | Rule 13a-14(a)/15d-14(a)  Certification of Chief Financial Officer (filed herewith)                                             |
| 32.1                |   | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section  1350 (filed herewith)      |

 

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(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 by reference into this documentfrom the Proxy Statement for the Annual Meeting of Stockholders filed on March26, 1999.

(3)   Incorporated by reference into this documentfrom the Appendix to the Proxy Statement for the Annual Meeting of Stockholdersfiled on March 23, 2000.

 

45

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**Signatures**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|           | EFC  Bancorp, Inc.            |   |
|----------------|-------------------------------|--------|
|           | (Registrant)                  |   |
|           |                          |   |
| March 17, 2005 | /s/  Barrett J. O’Connor |   |
|           | Barrett  J. O’Connor,    |   |
|           | Chief  Executive Officer      |   |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant, in the capacities, and on the dates indicated:

 
| **NAME**                     | ** ** | **TITLE**                                   | ** **                          | **DATE** |
|------------------------------|------------|---------------------------------------------|-------------------------------------|----------|
|                         |       |                                        |                                |     |
| /s/ Barrett J. O’Connor |       |                                        | Chief Executive Officer             |     | March 17, 2005 |
| Barrett J. O’Connor     |       | and Director (principal  executive officer) |                                |     |
|                         |       |                                        |                                |     |
| /s/ James J. Kovac           |       |                                        | President, Chief Operating  Officer |     | March 17, 2005 |
| James J. Kovac               |       | and Director                                |                                |     |
|                         |       |                                        |                                |     |
| /s/ Leo M. Flanagan, Jr.     |       |                                        | Director and Chairman of  the Board |     | March 17, 2005 |
| Leo M. Flanagan, Jr.         |       |                                        |                                |     |
|                         |       |                                        |                                |     |
| /s/ Thomas I. Anderson       |       |                                        | Director                            |     | March 17, 2005 |
| Thomas I. Anderson           |       |                                        |                                |     |
|                         |       |                                        |                                |     |
| /s/ Eric J. Fernandez        |       |                                        | Director                            |     | March 17, 2005 |
| Eric J. Fernandez            |       |                                        |                                |     |
|                         |       |                                        |                                |     |
| /s/ Randolph W. Brittain     |       |                                        | Director                            |     | March 17, 2005 |
| Randolph W. Brittain         |       |                                        |                                |     |
|                         |       |                                        |                                |     |
| /s/ Peter A. Traeger         |       |                                        | Director                            |     | March 17, 2005 |
| Peter A. Traeger             |       |                                        |                                |     |
|                         |       |                                        |                                |     |
| /s/ James A. Alpeter         |       |                                        | Director                            |     | March 17, 2005 |
| James A. Alpeter             |       |                                        |                                |     |
|                         |       |                                        |                                |     |
| /s/ Larry M. Narum           |       |                                        | Director                            |     | March 17, 2005 |
| Larry M. Narum               |       |                                        |                                |     |
|                              |            |                                             |                                     |          |  |  |  |  |  |

 

46

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