**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-K**

 

| **ý** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                        |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                             |
|       | **For the Fiscal Year Ended December 31, 2002**                                                                                                                                                                  |
|       |                                                                                                                                                                                                             |
| **o**      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                    |
|       |                                                                                                                                                                                                             |
|       | **For the transition period from                 to               ** |

 

**CommissionFile 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 markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.Yes  ý    No  o

 

Indicate by check markif disclosure of delinquent filers in response to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Park III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct). Yes o  No ý

 

The aggregate marketvalue of voting stock held by non-affiliates of the registrant, i.e., personsother than directors and executive officers of the registrant was $69,200,000as of March 7, 2003 based upon the average bid and asked price of such commonequity as of the last business day of registrant’s most recently completedsecond fiscal quarter.

 

The number of shares ofCommon Stock outstanding as of March 7, 2003 is 4,593,560.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

** **

**Portions of the Proxy Statement for the 2003Annual Meeting of Stockholders are incorporated by reference into Part III ofthis Form 10-K.**

 

5

 

 

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**INDEX**

 
| **PART I**         |                                  |                                                                                             |
|--------------------|---------------------------------------|--------------------------------------------------------------------------------------------------|
|               |                                  |                                                                                             |
|               | Item 1.                               | Business                                                                                         | 7 |
|               |                                  |                                                                                             |   |
| Additional  Item.  | Executive  Officers of the Registrant | 33                                                                                               |
|               |                                  |                                                                                             |   |
|               | Item 2.                               | Properties                                                                                       | 34 |
|               |                                  |                                                                                             |   |
|               | Item 3.                               | Legal Proceedings                                                                                | 35 |
|               |                                  |                                                                                             |   |
|               | Item  4.                              | Submission  of Matters to a Vote of Security Holders                                             | 35 |
|               |                                  |                                                                                             |   |
| **PART II**        |                                  |                                                                                             |
|               |                                  |                                                                                             |   |
|               | Item  5.                              | Market  for the Company’s Common Equity and Related Stockholder Matters                     | 35 |
|               |                                  |                                                                                             |   |
|               | Item 6.                               | Selected Financial  Data                                                                         | 35 |
|               |                                  |                                                                                             |   |
|               | Item  7.                              | Management’s  Discussion and Analysis of Financial Condition and Results of Operations      | 35 |
|               |                                  |                                                                                             |   |
|               | Item  7A.                             | Quantitative  and Qualitative Disclosures About Market Risk                                      | 45 |
|               |                                  |                                                                                             |   |
|               | Item  8.                              | Financial  Statements and Supplementary Data                                                     | 45 |
|               |                                  |                                                                                             |   |
|               | Item  9.                              | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure            | 46 |
|               |                                  |                                                                                             |   |
| **PART III**       |                                  |                                                                                             |
|               |                                  |                                                                                             |   |
|               | Item  10.                             | Directors  and Executive Officers of the Registrant                                              | 46 |
|               |                                  |                                                                                             |   |
|               | Item 11.                              | Executive Compensation                                                                           | 46 |
|               |                                  |                                                                                             |   |
|               | Item  12.                             | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters | 46 |
|               |                                  |                                                                                             |   |
|               | Item  13.                             | Certain  Relationships and Related Transactions                                                  | 46 |
|               |                                  |                                                                                             |   |
|               | Item 14.                              | Controls and  Procedures                                                                         | 46 |
|               |                                  |                                                                                             |   |
| **PART IV**        |                                  |                                                                                             |
|               |                                  |                                                                                             |   |
|               | Item 15.                              | Exhibits, Financial Statement Schedules, and  Reports on Form 8-K                                | 47 |
|               |                                  |                                                                                             |   |
| **SIGNATURES**     |                                  | 49                                                                                               |
|               |                                  |                                                                                             |
| **CERTIFICATIONS** |                                  | **50**                                                                                           |

 

 

6

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**PART I**

 

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

 

**General**

 

EFC Bancorp, Inc. (alsoreferred to as the “Company” or “Registrant”), was incorporated under Delawarelaw in October 1997.  The Registrant wasformed to acquire Elgin Financial Savings Bank and subsidiaries, Elgin,Illinois, (the “Bank”) as part of the Bank’s conversion from a mutual to astock form of organization (the “Conversion”). In connection with the Conversion, the Company issued an aggregate of7,491,434 shares of its common stock, par value $0.01 per share (“CommonStock”) at a purchase price of $10 per share, of which 6,936,513 shares wereissued in a subscription offering and 554,921 shares were issued to the ElginFinancial Foundation (the “Foundation”), a charitable foundation established bythe Bank.  The Company received approvalto become a savings and loan holding company and is subject to regulation bythe Office of Thrift Supervision (“OTS”) and the Securities and ExchangeCommission (“SEC”).   The Company’sacquisition of the Bank occurred on April 3, 1998.

 

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

 

**Market Area**

 

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

 

Elgin is located on U.S.Interstate 90 (the Northwest tollway) in the Fox River Valley approximately 38miles northwest of downtown Chicago and 25 miles west of O’Hare InternationalAirport.  Interstate 90 provides easyaccess to the City of Chicago and is a major corridor of suburban growth forChicago.  The economy in the Bank’sprimary market area has historically benefited from the growth of the Chicagosuburbs into Kane, Western Cook and McHenry Counties with an influx of newresidents and employers.  Otheremployment and economic activity is provided by a variety of wholesale andretail trade, hospitals and a riverboat gambling facility located on the Fox Riverin Elgin.

 

**Competition**

 

The Bank faces significantcompetition both in making loans and in attracting deposits.  The State of Illinois has a high density offinancial institutions, many of which are branches of significantly largerinstitutions, which have greater financial resources than the Bank, all ofwhich are competitors of the Bank to varying degrees.  The Bank’s competition for loans comes principally from savingsbanks, savings and loan associations, commercial banks, mortgage bankingcompanies, credit unions, insurance companies and other financial servicecompanies.  Its most direct competitionfor deposits has historically come from savings and loan associations, savingsbanks, commercial banks and credit unions. The Bank faces additional competition for deposits from non-depositorycompetitors such as the mutual fund industry, securities and brokerage firmsand insurance companies.  Competitionmay also increase as a result of the lifting of restrictions on the interstateoperations of financial

 

7

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institutions.  There are approximately 15 financial institutions with operationsin Elgin and approximately 30 financial institutions with operations in theBank’s primary market area.

 

**LendingActivities**

 

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

 

The Bank’s loan portfolioprimarily consists of first mortgage loans secured by one- to four-familyresidences most of which are located in its primary market area.  At December 31, 2002, the Bank’s gross loanportfolio totaled $600.4 million, of which $406.0 million were one- tofour-family residential mortgage loans, or 67.6% of total loans.  At such date, the remainder of the loanportfolio consisted of $42.5 million of multi-family loans, or 7.1% of total loans;$52.2 million of commercial real estate loans, or 8.7% of total loans; $41.3million of construction and land loans, or 6.9% of total loans; $33.3 millionof commercial loans, or 5.6% of total loans; and $25.2 million of consumerloans, or 4.2% of total loans, consisting of $21.2 million of home equity linesof credit, $2.9 million of secured and unsecured personal loans and $1.1million of automobile loans.  The Banksold loans totaling $13.2 million and $10.3 million during the years endedDecember 31, 2002 and December 31, 2001, respectively.  At December 31, 2002, 39.1% of the Bank’smortgage loans had adjustable interest rates, most of which were indexed to theone year Constant Maturity Treasury (“CMT”) Index.

 

8

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The following table setsforth the composition of the Bank’s loan portfolio in dollar amounts and inpercentages of the respective portfolios at the dates indicated.

 
|                       |   | **At  December 31,**   |    |
|----------------------------|--------|-----------------------------|---------|
|                       |   | **2002**                    |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                       |   | **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       |   | $                           | 405,953 |   | 67.6 | % | $ | 375,452 |   | 69.6 | % | $ | 326,739 |   | 70.7 | % | $ | 283,300 |   | 71.2 | % | $ | 233,689 |   | 75.2 | % |
| Multi-family               |   | 42,498                      |    | 7.1 |   | 58,093 |   | 10.8 |   | 50,965 |   | 11.0 |   | 44,843 |   | 11.3 |   | 27,184 |   | 8.7 |   |
| Commercial real  estate    |   | 52,155                      |    | 8.7 |   | 42,813 |   | 7.9 |   | 29,729 |   | 6.5 |   | 30,870 |   | 7.8 |   | 20,407 |   | 6.6 |   |
| Construction and  land     |   | 41,323                      |    | 6.9 |   | 16,285 |   | 3.0 |   | 16,025 |   | 3.5 |   | 13,981 |   | 3.5 |   | 13,716 |   | 4.4 |   |
| Total mortgage  loans      |   | 541,929                     |    | 90.3 |   | 492,643 |   | 91.3 |   | 423,458 |   | 91.7 |   | 372,994 |   | 93.8 |   | 294,996 |   | 94.9 |   |
| Other loans:               |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Home equity loans          |   | 21,160                      |    | 3.5 |   | 14,689 |   | 2.7 |   | 11,972 |   | 2.6 |   | 10,002 |   | 2.5 |   | 9,014 |   | 2.9 |   |
| Commercial                 |   | 33,315                      |    | 5.6 |   | 30,046 |   | 5.6 |   | 25,240 |   | 5.5 |   | 13,320 |   | 3.4 |   | 5,606 |   | 1.8 |   |
| Auto loans                 |   | 1,116                       |    | .2 |   | 764 |   | .1 |   | 615 |   | .1 |   | 484 |   | .1 |   | 510 |   | .2 |   |
| Loans on savings  accounts |   | 1,017                       |    | .1 |   | 335 |   | .1 |   | 216 |   | — |   | 421 |   | .1 |   | 477 |   | .2 |   |
| Other                      |   | 1,889                       |    | .3 |   | 1,160 |   | .2 |   | 455 |   | .1 |   | 556 |   | .1 |   | 86 |   | — |   |
| Total other loans          |   | 58,497                      |    | 9.7 |   | 46,994 |   | 8.7 |   | 38,498 |   | 8.3 |   | 24,783 |   | 6.2 |   | 15,693 |   | 5.1 |   |
| Total loans  receivable    |   | 600,426                     |    | 100.0 | % | 539,637 |   | 100.0 | % | 461,956 |   | 100.0 | % | 397,777 |   | 100.0 | % | 310,689 |   | 100.0 | % |
| Less:                      |   |                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred loan  fees, net   |   | 247                         |    |   |   | 311 |   |   |   | 280 |   |   |   | 225 |   |   |   | 326 |   |   |   |
| Allowance for  loan losses |   | 3,141                       |    |   |   | 2,255 |   |   |   | 1,881 |   |   |   | 1,545 |   |   |   | 1,373 |   |   |   |
| Loans receivable,  net     |   | $                           | 597,038 |   |   |   |   | $ | 537,071 |   |   |   |   | $ | 459,795 |   |   |   | $ | 396,007 |   |   |   | $ | 308,990 |   |   |   |
|                            |        |                             |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

9

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***Loan Originations.****  *The Bank’smortgage lending activities are conducted by its loan personnel operatingat  its eight branch offices as well asthrough participation and loan acquisition programs.  All loans originated by the Bank are underwritten by the Bankpursuant to the Bank’s policies and procedures.  The Bank originates both adjustable-rate and fixed-rate mortgageloans, commercial loans, and consumer loans. The Bank’s ability to originate fixed- or adjustable-rate loans isdependent upon the relative customer demand for such loans, which is affectedby the current and expected future level of interest rates.  It is the general policy of the Bank toretain loans originated in its portfolio.

 

During the years endedDecember 31, 2002 and 2001, the Bank originated $87.2 million and $90.8 millionof fixed-rate one- to four-family residential mortgage loans, respectively, andfor the years ended December 31, 2002 and 2001, the Bank originated $15.9million and $16.6 million of adjustable-rate one- to four-family residentialmortgage loans, respectively, all of which were retained by the Bank.  Based upon the Bank’s investment needs andmarket opportunities, the Bank participates and purchases loans, consisting ofone-to-four family, multi-family and commercial real estate mortgage loans, andconstruction loans secured by property located in Illinois, southern Wisconsinand, to a lesser extent, in Minnesota, and had $114.2 million of purchased loanparticipation interests at December 31, 2002.

 

The following tables setforth the Bank’s loan originations, purchases and principal repayments for theperiods indicated.  All loans originatedby the Bank are generally held for investment.

 
|                                       |   | **For the  Year Ended December 31,** |    |
|--------------------------------------------|--------|-------------------------------------------|---------|
|                                       |   | **2002**                                  |    | **2001** |   | **2000** |   |
|                                       |   | **(In thousands)**                        |    |
| Gross loans(1):                            |   |                                      |    |   |   |   |   |
| Balance outstanding at beginning of period |   | $                                         | 539,637 |   | $ | 461,956 |   | $ | 397,777 |   |
| Loans originated(2):                       |   |                                      |    |   |   |   |   |
| One-to four-family residential             |   | 103,136                                   |    | 107,360 |   | 45,721 |   |
| Multi-family                               |   | 7,015                                     |    | 6,792 |   | 2,330 |   |
| Commercial real estate                     |   | 4,111                                     |    | 14,932 |   | 740 |   |
| Construction and land                      |   | 31,023                                    |    | 30,821 |   | 16,486 |   |
| Home equity                                |   | 18,240                                    |    | 13,231 |   | 8,379 |   |
| Commercial business                        |   | 9,102                                     |    | 28,932 |   | 19,502 |   |
| Auto loans                                 |   | 881                                       |    | 549 |   | 484 |   |
| Loans on savings accounts                  |   | 1,141                                     |    | 423 |   | 396 |   |
| Other                                      |   | 4,535                                     |    | 3,545 |   | 728 |   |
| Total loans originated                     |   | 179,184                                   |    | 206,585 |   | 94,766 |   |
| Loans purchased                            |   | 79,620                                    |    | 65,161 |   | 46,690 |   |
| Total loans originated and purchased       |   | 258,804                                   |    | 271,746 |   | 141,456 |   |
| Less:                                      |   |                                      |    |   |   |   |   |
| Principal repayments                       |   | (178,008                                  | )       | (189,972 | ) | (73,882 | ) |
| Loans sold                                 |   | (13,217                                   | )       | (10,349 | ) | — |   |
| Transfers to real estate owned             |   | (1,986                                    | )       | — |   | (540 | ) |
| Change in loans in process                 |   | (4,804                                    | )       | 6,256 |   | (2,855 | ) |
| Total loans receivable at end of period    |   | $                                         | 600,426 |   | $ | 539,637 |   | $ | 461,956 |   |

 

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| (1) | Gross loans exclude  unearned discounts, deferred loan fees and the allowance for loan losses. |
|-----|------------------------------------------------------------------------------------------------|
| (2) | Amounts for each period  include loans in process at period end.                               |

 

10

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***Loan Maturity and Repricing.***  Thefollowing table shows the contractual maturity of the Bank’s loan portfolio atDecember 31, 2002.  The table does notinclude prepayments, scheduled principal amortization or repricing ofadjustable rate loans.  Prepayments andscheduled principal amortization on mortgage loans totaled $178.0 million,$190.0 million and $73.9 million for the years ended December 31, 2002,2001 and 2000, respectively.

 
|                                |   | **At December 31, 2002**         |    |
|-------------------------------------|--------|----------------------------------|---------|
|                                |   | **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                     |   | $                                | 972     |   | $ | — |   | $ | 6,495 |   | $ | 3,125 |   | $ | 298 |   | $ | 12,798 |   | $ | 46 |   | $ | 307 |   | $ | 1,171 |   | $ | 25,212 |   |
| After one year:                     |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| More than one  year tothree years   |   | 425                              |    | 4,514 |   | 2,595 |   | 11,146 |   | 947 |   | 4,670 |   | 477 |   | 516 |   | 226 |   | 25,516 |   |
| More than three  years tofive years |   | 2,148                            |    | 11,801 |   | 18,141 |   | 14,586 |   | 2,704 |   | 12,077 |   | 491 |   | 161 |   | 29 |   | 62,138 |   |
| More than five  years to 10Years    |   | 14,601                           |    | 6,162 |   | 10,691 |   | 11,691 |   | 2,098 |   | 2,842 |   | 102 |   | 33 |   | — |   | 48,220 |   |
| More than 10  years to 20Years      |   | 122,665                          |    | 5,688 |   | 9,620 |   | 775 |   | 15,113 |   | 928 |   | — |   | — |   | 463 |   | 155,252 |   |
| More than 20  years                 |   | 265,142                          |    | 14,333 |   | 4,613 |   | — |   | — |   | — |   | — |   | — |   | — |   | 284,088 |   |
| Total due afterDecember 31, 2003    |   | 404,981                          |    | 42,498 |   | 45,660 |   | 38,198 |   | 20,862 |   | 20,517 |   | 1,070 |   | 710 |   | 718 |   | 575,214 |   |
| Total amount due  (gross)           |   | $                                | 405,953 |   | $ | 42,498 |   | $ | 52,155 |   | $ | 41,323 |   | $ | 21,160 |   | $ | 33,315 |   | $ | 1,116 |   | $ | 1,017 |   | $ | 1,889 |   | 600,426 |   |
| Less:                               |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deferred loan  fees, net            |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 247 |   |
| Allowance for  loan losses          |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 3,141 |   |
| Total loans, net                    |   |                             |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | $ | 597,038 |   |

 

The following table setsforth at December 31, 2002, the dollar amount of gross loans receivablecontractually due after December 31, 2003, and whether such loans have fixedinterest rates or adjustable interest rates.

 
|                      |   | **Due After December 31, 2003** |    |
|---------------------------|--------|---------------------------------|---------|
|                      |   | **Fixed**                       |    | **Adjustable** |   | **Total** |   |
|                      |   | **(In thousands)**              |    |
| Mortgage loans:           |   |                            |    |   |   |   |   |
| One- to four-family       |   | $                               | 270,747 |   | $ | 134,234 |   | $ | 404,981 |   |
| Multi-family              |   | 16,121                          |    | 26,377 |   | 42,498 |   |
| Commercial real estate    |   | 15,543                          |    | 30,117 |   | 45,660 |   |
| Construction and land     |   | 21,188                          |    | 17,010 |   | 38,198 |   |
| Total mortgage loans      |   | 323,599                         |    | 207,738 |   | 531,337 |   |
| Home equity               |   | —                          |    | 20,862 |   | 20,862 |   |
| Commercial                |   | 16,996                          |    | 3,521 |   | 20,517 |   |
| Auto loans                |   | 1,066                           |    | 4 |   | 1,070 |   |
| Loans on savings accounts |   | 287                             |    | 423 |   | 710 |   |
| Other                     |   | 718                             |    | — |   | 718 |   |
| Total loans               |   | $                               | 342,666 |   | $ | 232,548 |   | $ | 575,214 |   |

 

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

 

11

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mortgage brokers, from existing or pastcustomers, through advertising, and through referrals from local builders, realestate brokers and attorneys.  AtDecember 31, 2002, the Bank’s one- to four-family mortgage loans totaled $406.0million, or 67.6%, of total loans.  Ofthe one- to four-family mortgage loans outstanding at that date, 66.9% werefixed-rate mortgage loans and 33.1% were ARM loans.

 

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

 

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

 

The Bank has also purchasedone-to-four family first mortgage loans generally out of our primary marketarea.  As of December 31, 2002, the Bankhad $49.7 million of these loans.  Inaddition, the Bank sold loans totaling $13.2 million and $10.5 million for theyears ended December 31, 2002 and 2001, respectively.

 

***Multi-Family and Commercial Real EstateLending.***** **The Bank originates multi-family and commercialreal estate loans that are generally secured by five or more unit apartmentbuildings and properties used for business purposes such as small officebuildings or retail facilities located in the Bank’s primary market area.  The Bank’s multi-family and commercial realestate underwriting policies provide that such real estate loans may be made inamounts up to 80% of the appraised value of the property, subject to the Bank’scurrent loans-to-one-borrower limit, which at December 31, 2002 was $17.9 million.  The Bank’s multi-family and commercial realestate loans may be made with terms up to 25 years and are offered withinterest rates that adjust periodically. In reaching its decision on whether to make a multi-family or commercialreal estate loan, the Bank considers the net operating income of the property,the borrower’s expertise, credit history and profitability and the value of theunderlying property. The Bank has generally required that the propertiessecuring these real estate loans have debt service coverage ratios (the ratioof earnings before debt service to debt service) of at least 1.20x.  Environmental impact surveys are generallyrequired for all commercial real estate loans. Generally, all multi-family and commercial real estate loans made tocorporations, partnerships and other business entities require personalguarantees by the principals.  On anexception basis, the Bank may not require a personal guarantee on such loansdepending on the creditworthiness of the borrower and the amount of the downpayment and other mitigating circumstances. The Bank’s multi-family real estate loan portfolio at December 31, 2002was $42.5 million, or 7.1% of total loans, and the Bank’s commercial realestate loan portfolio at such date was $52.2 million, or 8.7% of totalloans.  The largest multi-family orcommercial real estate loan in the Bank’s portfolio (excluding loanparticipation interests) at December 31, 2002 was a $4.5 millioncommercial real estate loan secured by a multi-tenant industrial/officebuilding located in East Dundee, Illinois.

 

The Bank also purchases upto 90% participation interests in multi-family, commercial real estate andconstruction loans secured by real estate, most of which is located outside ofthe Bank’s primary market area in southern Wisconsin and Minnesota.  When determining whether to participate insuch loans, the Bank will underwrite its participation interest according toits own underwriting standards. The Bank will generally hedge againstparticipating in problematic loans by participating in those loans that havebeen in existence for at least one to two years and, accordingly, possess anestablished payment history.  AtDecember 31, 2002, the Bank had $20.0 million in multi-family real estateloan participation interests, or 47.2% of multi-family loans and 3.3% of totalloans.  In addition, the Bank had $38.0million in commercial real estate loan participation interests as of the samedate.

 

Loans secured bymulti-family and commercial real estate properties generally involve largerprincipal amounts and a greater degree of risk than one- to four-familyresidential mortgage loans. Because payments on loans secured by multi-familyand commercial real estate properties are often dependent on successfuloperation or management of the properties, repayment of such loans may besubject to adverse conditions in the real estate market or the economy.  The Bank seeks to minimize these risks

 

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through its underwriting standards.

 

***Construction and Land Lending. ***The Bank originates fixed-rate constructionloans for the development of residential property primarily located in theBank’s market area.  Construction loansare offered primarily to experienced local developers operating in the Bank’sprimary market area and, to a lesser extent, to individuals for theconstruction of their residence.  Themajority of the Bank’s construction loans are originated or participationinterests purchased primarily to finance the construction of one- tofour-family, owner-occupied residential real estate and multi-family realestate properties located in the Bank’s primary market area as well as southernWisconsin and Minnesota.  Constructionloans are generally offered with terms up to 12 months and may be made inamounts up to 80% of the appraised value of the property, as improved.  Construction loan proceeds are disbursedperiodically in increments as construction progresses and as inspections by theBank’s lending personnel warrant.

 

The Bank also originatesfixed-rate land loans to local developers for the purpose of developing theland for sale.  Such loans are securedby a lien on the property, are limited to 75% of the appraised value of the securedproperty and have terms of up to three years. The principal of the loan is reduced as lots are sold and released.  The Bank’s land loans are generally securedby properties located in its primary market area.  Generally, if the borrower is a corporation, partnership or otherbusiness entity, personal guarantees by the principals are required.

 

The Bank originated $31.0million, $30.8 million and $16.5 million of construction and land loans for theyears ended December 31, 2002, 2001 and 2000, respectively.  At December 31, 2002, the Bank’s largestconstruction or land loan was a performing loan with a $3.1 millioncarrying balance secured by land for the development of a healthcare facilityin East Dundee, Illinois.  At December31, 2002, the Bank had $41.3 million of construction and land loans, whichamounted to 6.9% of the Bank’s total loans.

 

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

 

***Commercial Busines*****s*Lending. ***The Bank also originates commercial businessloans in the forms of term loans and lines of credit to small- and medium-sizedbusinesses operating in the Bank’s primary market area.  Equipment, leases, inventory, accountsreceivable, and marketable securities generally secure such loans; however, theBank also makes unsecured commercial business loans.  The maximum amount of a commercial business loan is limited bythe Bank’s loans-to-one-borrower limit which, at December 31, 2002, was $17.9million.  Depending on the collateralused to secure the loans, commercial loans are made in amounts up to 80% of thevalue of the property securing the loan. Term loans are generally offered with fixed rates of interest and termsof up to 10 years.  All term loans fullyamortize during the term of such loan. Business lines of credit have adjustable rates of interest and terms ofup to one year.  Business lines ofcredit adjust on a daily basis and are indexed to the prime rate as publishedin *The Wall Street Journal*.  The Bank also issues both secured andunsecured letters of credit to business customers of the Bank.  Acceptable collateral includes an assigneddeposit account with the Bank, real estate or marketable securities.  Letters of credit have a maximum term of 36months.

 

In making commercialbusiness loans, the Bank considers primarily the financial resources of theborrower, the borrower’s ability to repay the loan out of net operating income,the Bank’s lending history with the borrower and the value of the collateral.  Generally, if the borrower is a corporation,partnership or other business entity, personal guarantees by the principals arerequired.  However, personal guaranteesmay not be required on such loans depending on the creditworthiness of theborrower and other mitigating circumstances. The Bank’s largest commercial loan at December 31, 2002 was $4.5million.  At such date, the Bank had$9.7 million of unadvanced commercial lines of credit.  At December 31, 2002, the Bank had $33.3million of commercial business loans, which amounted to 5.6% of the Bank’stotal loans.  The Bank originated $9.1million, $28.9 million and $19.5 million in commercial business loans for theyears ended December 31, 2002, 2001 and 2000, respectively.

 

Unlike mortgage loans, whichgenerally are made on the basis of the borrower’s ability to make repaymentfrom his or her employment or other income, and are secured by real propertywhich value tends to be more easily ascertainable, commercial loans are ofhigher risk and typically are made on the basis of the borrower’s ability tomake repayment from the cash flow of the borrower’s business.  As a result, the availability of funds forthe repayment of commercial loans may be substantially dependent

 

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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, 2002 amountedto $25.2 million, or 4.2% 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 theBank’s home equity lines of credit are secured by second mortgages onowner-occupied single-family residences located in the Bank’s primary marketarea.  At December 31, 2002, these loanstotaled $21.2 million, or 3.5% of the Bank’s total loans and 84.0% of consumerloans.  Home equity lines of creditgenerally have adjustable-rates of interest, which adjust on a monthly basis.  The unused home equity lines of credittotaled $23.0 million at December 31, 2002. The adjustable-rate of interest charged on such loans is indexed to theprime rate as reported in *The Wall StreetJournal*.  Home equity linesof credit generally have an 18% lifetime limit on interest rates.  Generally, the maximum combined LTV ratio onhome equity lines of credit is 89.9%. The underwriting standards employed by the Bank for home equity lines ofcredit include a determination of the applicant’s credit history and anassessment of the applicant’s ability to meet existing obligations and paymentson the proposed loan and the value of the collateral securing the loan.  The stability of the applicant’s monthlyincome may be determined by verification of gross monthly income from primaryemployment and, additionally, from any verifiable secondary income.  Creditworthiness of the applicant is ofprimary consideration.

 

The Bank also originatesother types of consumer loans consisting of secured and unsecured personalloans and new and used automobile loans. Secured personal loans are generally secured by deposit accounts.  Unsecured personal loans generally have amaximum borrowing limitation of $25,000 and generally require a debt ratio of38%.  Automobile loans have a maximumborrowing limitation of 80% of the sale price of the automobile, except thatexisting customers of the Bank who meet certain underwriting criteria mayborrow up to 100% of the sale price of the automobile.  At December 31, 2002, personal loans (bothsecured and unsecured) totaled $2.9 million or 0.5% of the Bank’s total loansand 11.5% of consumer loans; and automobile loans totaled $1.1 million, or 0.2%of total loans and 4.4% of consumer loans.

 

With respect to automobileloans, full-time employees of the Bank, other than executive officers anddirectors, who satisfy certain lending criteria and the general underwritingstandards of the Bank receive an interest rate 1% less than that which isoffered to the general public; provided, however, that the discounted interestrate is at no time less than 75 basis points above the Bank’s overall cost offunds, rounded to the highest quarter percentage point.

 

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

 

***Loans-to-One Borrower Limitations.***** **The IllinoisSavings Bank Act imposes limitations on the aggregate amount of loans that anIllinois chartered savings bank can make to any one borrower.  Under the Illinois Savings Bank Act thepermissible amount of loans-to-one borrower is the greater of $500,000 (for asavings bank meeting its minimum capital requirements) or 25% of a savingsbank’s total capital plus general loan loss reserves.  In addition, a savings bank may make loans in an amount equal toan additional 10% of the savings bank’s capital plus general loan loss reservesif the loans are 100% secured by readily marketable collateral.  Under Illinois law, a savings bank’s capitalconsists of capital stock and noncumulative perpetual preferred stock, relatedpaid-in capital, retained earnings and other forms of capital deemed to bequalifying capital by the Federal Deposit Insurance Corporation (the“FDIC”).  Illinois law also permits aninstitution with capital in excess of 6% of assets to request permission of theIllinois Commissioner of Banks and Real Estate (the “Commissioner”) to lend upto 30% of the institution’s total capital and general loan loss reserves to oneborrower for the development of residential housing properties within Illinois.  At December 31, 2002, the Bank’s ordinarylimit on loans-to-one borrower under the Illinois Savings Bank Act was $17.9million.  The 30% limitation equaled$21.5 million at that date.  At December31, 2002, the Bank’s five largest groups of loans-to-one borrower ranged from$3.6 million to $6.8 million, with the largest single loan in such groups beinga $4.5 million loan secured by a multi-tenant industrial/office buildinglocated in East Dundee, Illinois.  AtDecember 31, 2002, there were no loans exceeding the

 

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25% limitation.  A substantial portion of each large group of loans is secured byreal estate.

 

***Loan Approval Procedures and Authority.***** **The Board ofDirectors establishes the lending policies and loan approval limits of theBank.  The Board of Directors hasestablished the Loan Committee (the “Committee”) of the Board, which considersand approves all loans within its designated authority as established by theBoard.  In addition, the Board ofDirectors has authorized certain officers of the Bank (the “designatedofficers”) to consider and approve all loans within their designated authorityas established by the Board.

 

***Underwriting. ***Withrespect to loans originated by the Bank, it is the general policy of the Bankto retain such loans in its portfolio. The Bank does not have a policy of underwriting its loans in conformancewith the Federal National Mortgage Association (“FNMA”) 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 to securea 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, 2002, theBank’s ratio of nonperforming loans to total loans was 0.40%, and its ratio ofnonperforming assets to total assets was 0.56%.  The Bank had real estate owned totaling $2.0 million at December31, 2002.  This property consisted of acommercial restaurant building and equipment and was sold in January 2003.  Net charge-offs amounted to $14,000 and$126,000 in 2002 and 2001, respectively. See “Delinquent Loans, Classified Assets and Real Estate Owned.”

 

The Bank’s one- tofour-family lending policy permits the investment in mortgage loans where theborrower’s monthly mortgage and prorated real estate tax payments were lessthan 32% of the borrower’s gross income, and where the borrower’s total monthlyobligations did not exceed 43% of the borrower’s gross income.  It is also the general practice of the Banknot to require private mortgage insurance, though the Bank retains the right torequire such insurance on any loan with a loan to value ratio in excess of80.0%.  All loans with loan to valueratios 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 has eliminated theprice differential on adjustable-rate loans with loan to value ratios of lessthan 80.0% and between 80.0% and 89.90% as a means of attracting moreborrowers.  The Bank believes that itsunderwriting standards are sufficient to allow it to adequately assess the creditworthinessof prospective borrowers.  There can beno assurances, however, that increasing the permissible debt coverage ratiosand loan-to-value ratios permitted for borrowers will not result in the Bankexperiencing increased delinquencies and defaults on loans.

 

**DelinquentLoans, Classified Assets and Real Estate Owned**

 

***Delinquencies, Classified Assets and RealEstate 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 the borroweris habitually delinquent.  When a borrowerfails to make a required payment on a loan, the Bank takes a number of steps tohave the borrower cure the delinquency and restore the loan to currentstatus.  The Bank generally sends theborrower a written notice of non-payment after the loan is first past due.  The Bank’s guidelines provide thattelephone, written correspondence and/or face-to-face contact will be attemptedto ascertain the reasons for delinquency and the prospects of repayment.  When contact is made with the borrower atany time prior to foreclosure, the Bank will attempt to obtain full payment,offer to work out a repayment schedule with the borrower to avoid foreclosureor, in some instances, accept a deed in lieu of foreclosure.  In the event payment is not then received orthe loan not otherwise satisfied, additional letters and telephone callsgenerally are made.  If the loan isstill not brought current or satisfied and it becomes necessary for the Bank totake legal action, which typically occurs after a loan is 90 days or moredelinquent, the Bank will commence foreclosure proceedings against any realproperty that secured the loan.  If aforeclosure action is instituted and the loan is not brought current, paid infull, or refinanced before the foreclosure sale, the property securing the loangenerally is sold at foreclosure and, if purchased by the Bank, becomes realestate owned.

 

Federal regulations and theBank’s internal policies require that the Bank utilize an internal assetclassification system as a

 

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means of reporting problem and potentialproblem assets.  The Bank currentlyclassifies 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.”

 

When the Bank classifies oneor more assets, or portions thereof, as Substandard or Doubtful, it establishesa specific allowance for probable loan losses in an amount deemed appropriateby management.  When the Bank classifiesone or more assets, or portions thereof, as Loss, it either establishes a specificallowance for losses equal to 100% of the amount of the assets so classified orcharges off such amount.

 

The Bank’s determination asto the classification of its assets and the amount of its allowances for loanlosses is subject to review by the FDIC and Commissioner, which can order theestablishment of additional general or specific loss allowances.  The FDIC, in conjunction with the otherfederal banking agencies, adopted an interagency policy statement on theallowance for loan and lease losses. The policy statement provides guidance for financial institutions onboth the responsibilities of management for the assessment and establishment ofadequate allowances and guidance for banking agency examiners to use indetermining the adequacy of general valuation guidelines.  Generally, the policy statement recommendsthat institutions have effective systems and controls to identify, monitor andaddress asset quality problems; that management has analyzed all significantfactors that affect the collectibility of the portfolio in a reasonable manner;and that management has established acceptable allowance evaluation processesthat meet the objectives set forth in the policy statement.   While the Bank believes that it hasestablished an adequate allowance for loan losses, there can be no assurancethat regulators, in reviewing the Bank’s loan portfolio, will not request theBank to increase at that time its allowance for loan losses, thereby negativelyaffecting the Bank’s financial condition and earnings at that time.  Although management believes that adequatespecific and general loan loss allowances have been established, futureprovisions are dependent upon future events such as loan growth and portfoliodiversification and, as such, further additions to the level of the allowancefor loan losses may become necessary.

 

The Bank reviews andclassifies its assets on a quarterly basis and the Board of Directors reviewsthe results of the reports on a quarterly basis.  The Bank classifies its assets in accordance with the managementguidelines described above.  At December31, 2002, the Bank had $3.1 million of assets, representing 0.51% of loansreceivable, or 0.39%, of assets, designated as Substandard.  No loans were classified as Doubtful orLoss.  In addition,  $1.3 million in commercial loans wereclassified Special Mention.  Loansclassified Special Mention may have been delinquent in the past or had otherweaknesses, however, in management’s judgment risk of loss is notprobable.  This classificationrepresents a watch list of loans for management to closely monitor.

 

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The following tables setforth delinquencies in the Bank’s loan portfolio past due 60 days or more:

 
|                               |   | **At  December 31, 2002**   |   | **At December 31,  2001**   |   |
|------------------------------------|--------|-----------------------------|--------|----------------------------------|--------|
|                               |   | **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                |   | 5                           |   | $                                | 354    |   | 7 |   | $ | 865 |   | 11 |   | $ | 1,206 |   | 7 |   | $ | 620 |   |
| Commercial real estate             |   | —                      |   | —                           |   | — |   | — |   | — |   | — |   | 1 |   | 1,623 |   |
| Consumer                           |   | —                      |   | —                           |   | 3 |   | 47 |   | 3 |   | 12 |   | — |   | — |   |
| Home equity                        |   | 1                           |   | 11                               |   | 2 |   | 126 |   | 3 |   | 118 |   | 1 |   | 35 |   |
| Commercial business                |   | —                      |   | —                           |   | 1 |   | 39 |   | 2 |   | 39 |   | 1 |   | 363 |   |
| Total                              |   | 6                           |   | $                                | 365    |   | 13 |   | $ | 1,077 |   | 19 |   | $ | 1,195 |   | 10 |   | $ | 2,641 |   |
|                               |   |                        |   |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Delinquent loans to total loans(1) |   |                        |   | 0.06                             | %      |   |   | 0.18 | % |   |   | 0.22 | % |   |   | 0.49 | % |

 
|                               |   | **At  December 31, 2000** | ** ** |
|------------------------------------|--------|--------------------------------|------------|
|                               |   | **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                              |       | $ | 251 |   | 9 |   | $ | 864 |   |
| Commercial real estate             |   | —                         |       | — |   | 1 |   | 3,505 |   |
| Consumer                           |   | —                         |       | — |   | 1 |   | 15 |   |
| Home equity                        |   | 2                              |       | 44 |   | — |   | — |   |
| Commercial business                |   | —                         |       | — |   | 4 |   | 148 |   |
|                               |   |                           |       |   |   |   |   |   |   |
| Total                              |   | 7                              |       | $ | 295 |   | 15 |   | $ | 4,532 |   |
|                               |   |                           |       |   |   |   |   |   |   |
| Delinquent loans to total loans(1) |   |                           |       | 0.06 | % |   |   | 0.98 | % |

 

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

 

***Nonperforming Assets.***** Thefollowing table sets forth information regarding nonperforming loans andREO.  At December 31, 2002, the Bank hadREO totaling $2.0 million.  Thisproperty consisted of a commercial restaurant building and equipment and wassold in January 2003.  It is the generalpolicy of the Bank to cease accruing interest on loans 90 days or more past dueand to fully reserve for all previously accrued interest.  For each of the five years ended December31, 2002, the amount of additional interest income that would have beenrecognized on non-accrual loans if such loans had continued to perform inaccordance with their contractual terms was $198,000, $187,000, $89,000,$46,000, and $71,000, respectively.

 

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|                                                 |   | **At December 31,**   |   |
|------------------------------------------------------|--------|----------------------------|--------|
|                                                 |   | **2002**                   |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                 |   | **(Dollars in thousands)** |   |
| Nonperforming loans:                                 |   |                       |   |   |   |   |   |   |   |   |   |
| Mortgage loans:                                      |   |                       |   |   |   |   |   |   |   |   |   |
| One- to four-family                                  |   | $                          | 865    |   | $ | 547 |   | $ | 864 |   | $ | 1,042 |   | $ | 724 |   |
| Multi-family                                         |   | —                     |   | — |   | — |   | — |   | — |   |
| Commercial real estate                               |   | —                     |   | 1,623 |   | 3,505 |   | 226 |   | 203 |   |
|                                                 |   |                       |   |   |   |   |   |   |   |   |   |
| Total mortgage loans                                 |   | 865                        |   | 2,170 |   | 4,369 |   | 1,268 |   | 927 |   |
|                                                 |   |                       |   |   |   |   |   |   |   |   |   |
| Other loans:                                         |   |                       |   |   |   |   |   |   |   |   |   |
| Home equity                                          |   | 126                        |   | — |   | — |   | — |   | — |   |
| Commercial business loans                            |   | 1,358                      |   | 402 |   | 148 |   | — |   | 79 |   |
| Auto loans                                           |   | 8                          |   | 8 |   | 15 |   | — |   | — |   |
| Other                                                |   | 39                         |   | — |   | — |   | 2 |   | — |   |
| Total other loans                                    |   | 1,531                      |   | 410 |   | 163 |   | 2 |   | 79 |   |
| Total nonperforming loans                            |   | 2,396                      |   | 2,580 |   | 4,532 |   | 1,270 |   | 1,006 |   |
| Real estate owned, net(1)                            |   | 1,986                      |   | — |   | 540 |   | 168 |   | 193 |   |
| Total nonperforming assets                           |   | $                          | 4,382  |   | $ | 2,580 |   | $ | 5,072 |   | $ | 1,438 |   | $ | 1,199 |   |
| Nonperforming loans as a percent of loans(2)         |   | 0.40                       | %      | 0.48 | % | 0.99 | % | 0.32 | % | 0.32 | % |
| Nonperforming assets as a percent of total assets(3) |   | 0.56                       | %      | 0.38 | % | 0.87 | % | 0.28 | % | 0.28 | % |

 

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(1)               REO balances are shown net of related lossallowances.

(2)               Loans receivable, net, excluding the allowancefor loan losses.

(3)               Nonperforming assets consist of nonperformingloans and REO.

 

Nonperforming loans totaled$2.4 million as of December 31, 2002, and included seven one- to four-familyloans, with an aggregate balance of $865,000, seven commercial business loanstotaling $1.4 million, two automobile loans totaling $8,000, one consumer loantotaling $39,000 and two home equity lines of credit totaling $126,000.  Six commercial loans totaling $1.3 millionare current, however, under the Bank’s internal classification system theseloans are considered nonperforming.

 

**Allowancefor Loan Losses**

 

The allowance for loanlosses is considered by management to be a critical accounting policy.  The allowance for loan losses is maintainedthrough provisions for loan losses based on management’s on-going evaluation ofthe risks inherent in its loan portfolio in consideration of the trends in itsloan portfolio, the national and regional economies and the real estate marketin the Bank’s primary lending area. The allowance for loan losses is maintainedat an amount management considers adequate to cover estimated losses in itsloan portfolio, which are deemed probable and estimable, 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 thereof, the periods of time involvedwith the acquisition and sale of such property, and costs and expensesassociated with maintaining and holding the property until sale and the costsassociated with the Bank’s inability to utilize funds for other incomeproducing activities during the estimated holding period of the property.  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 and outsideof management’s control.

 

Management calculates a loanloss allowance sufficiency analysis quarterly based upon the loan portfoliocomposition, asset classifications, loan-to-value ratios, impairments in theloan portfolio and other factors.  Theanalysis is compared to actual losses, peer group comparisons and economicconditions.  As of December 31, 2002,the Bank’s allowance for loan losses was $3.1 million, or 0.53%, of total loansand 131.1% of nonperforming loans as compared to $2.3 million, or 0.42%, oftotal loans and 87.4% of nonperforming loans as of December 31, 2001.  The Bank had total nonperforming loans of$2.4 million at December 31, 2002 as compared to $2.6 million at December 31,2001 and nonperforming loans to total loans of 0.40% and 0.48% at December 31,2002 and 2001, respectively.  The Bankwill continue to monitor and modify its allowance for loan losses as conditionsdictate.  Management believes that,based on information available at December 31, 2002, the Bank’s allowance for

 

18

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loan losses was adequate to cover probablelosses inherent in its loan portfolio at that time.  Based upon the Bank’s plan to increase its emphasis on non-one-to four-family mortgage lending which consist of secured commercial loans whichare generally considered to involve a higher degree of risk than one- tofour-family mortgage lending, the Bank has and may continue to further increaseits allowance for loan losses over future periods depending upon the thencurrent conditions.  The percentage ofone- to four-family loans to total loans decreased to 67.6% at December 31,2002 from 69.6% at December 31, 2001. At the same time, the percentage of commercial real estate andconstruction and land loans to total loans increased to 8.7% and 6.9%,respectively at December 31, 2002 from 7.9% and 3.0%, respectively from theprior year period.  However, noassurances can be given that the Bank’s level of allowance for loan losses willbe sufficient to cover loan losses incurred by the Bank or that futureadjustments to the allowance for loan losses will not be necessary if economicand other conditions differ substantially from the economic and otherconditions used by management to determine the current level of the allowancefor loan losses.  In addition, the FDICand 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.

 

The following table setsforth activity in the Bank’s allowance for loan losses for the periods setforth in the table.

 
|                                                          |   | **At or For the Year Ended December 31,** |   |
|---------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                          |   | **2002**                                       |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                          |   | **(Dollars in thousands)**                     |   |
|                                                          |   |                                           |   |   |   |   |   |   |   |   |   |
| Balance at beginning of year                                  |   | $                                              | 2,255  |   | $ | 1,881 |   | $ | 1,545 |   | $ | 1,373 |   | $ | 1,126 |   |
| Provision for loan losses                                     |   | 900                                            |   | 500 |   | 363 |   | 211 |   | 293 |   |
| Charge-offs                                                   |   | (16                                            | )      | (126 | ) | (28 | ) | (41 | ) | (46 | ) |
| Recoveries                                                    |   | 2                                              |   | — |   | 1 |   | 2 |   | — |   |
| Balance at end of year                                        |   | $                                              | 3,141  |   | $ | 2,255 |   | $ | 1,881 |   | $ | 1,545 |   | $ | 1,373 |   |
| Allowance for loan losses as a percent of loans(1)            |   | 0.53                                           | %      | 0.42 | % | 0.41 | % | 0.39 | % | 0.44 | % |
| Allowance for loan losses as a percent of nonperforming loans |   | 131.1                                          | %      | 87.4 | % | 41.5 | % | 112.7 | % | 136.5 | % |

 

(1)                    Loans receivable, net, excluding the allowancefor loan losses.

 

19

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

 
|                            |   | **At  December 31,** |        |
|---------------------------------|--------|---------------------------|-------------|
|                            |   | **2002**                  |        | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                            |   | **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** |   |
|                            |   |                      |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| One- to four-family             |   | $                         |  838   |   | 26.7 | % | 67.6 | % | $ |  765 |   | 33.9 | % | 69.6 | % | $ |  676 |   | 35.9 | % | 70.7 | % | $ |  592 |   | 38.4 | % | 71.2 | % | $ |  493 |   | 35.9 | % | 75.2 | % |
| Multi-family                    |   | 118                       |        | 3.7 |   | 7.1 |   | 158 |   | 7.0 |   | 10.8 |   | 154 |   | 8.2 |   | 11.0 |   | 147 |   | 9.5 |   | 11.3 |   | 82 |   | 6.0 |   | 8.7 |   |
| Commercial real estate          |   | 678                       |        | 16.8 |   | 8.7 |   | 352 |   | 15.6 |   | 7.9 |   | 437 |   | 23.2 |   | 6.5 |   | 318 |   | 20.6 |   | 7.8 |   | 204 |   | 14.9 |   | 6.6 |   |
| Construction and land           |   | 422                       |        | 3.6 |   | 6.9 |   | 131 |   | 5.8 |   | 3.0 |   | 158 |   | 8.4 |   | 3.5 |   | 127 |   | 8.3 |   | 3.5 |   | 135 |   | 9.8 |   | 4.4 |   |
| Home equity                     |   | 223                       |        | 7.1 |   | 3.5 |   | 147 |   | 6.5 |   | 2.7 |   | 120 |   | 6.4 |   | 2.6 |   | 100 |   | 6.5 |   | 2.5 |   | 90 |   | 6.5 |   | 2.9 |   |
| Commercial business loans       |   | 666                       |        | 23.2 |   | 5.6 |   | 575 |   | 25.5 |   | 5.6 |   | 276 |   | 14.7 |   | 5.5 |   | 147 |   | 9.6 |   | 3.4 |   | 74 |   | 5.4 |   | 1.8 |   |
| Auto loans                      |   | 24                        |        | 0.8 |   | 0.2 |   | 17 |   | 0.8 |   | 0.1 |   | 15 |   | 0.8 |   | 0.1 |   | 10 |   | 0.2 |   | 0.1 |   | 10 |   | 0.7 |   | 0.2 |   |
| Loans on savings accounts       |   | —                    |        | — |   | 0.1 |   | — |   | — |   | 0.1 |   | — |   | — |   | — |   | — |   | — |   | 0.1 |   | — |   | — |   | 0.2 |   |
| Other                           |   | 26                        |        | 13.5 |   | 0.3 |   | 24 |   | 1.1 |   | 0.2 |   | 9 |   | 0.5 |   | 0.1 |   | 47 |   | 3.1 |   | 0.1 |   | 44 |   | 3.2 |   | — |   |
| Unallocated                     |   | 146                       |        | 4.6 |   | — |   | 86 |   | 3.8 |   | — |   | 36 |   | 1.9 |   | — |   | 57 |   | 3.8 |   | — |   | 241 |   | 17.6 |   | — |   |
| Total allowance for loan losses |   | $                         |  3,141 |   | 100.0 | % | 100.0 | % | $ |  2,255 |   | 100.0 | % | 100.0 | % | $ |  1,881 |   | 100.0 | % | 100.0 | % | $ |  1,545 |   | 100.0 | % | 100.0 | % | $ |  1,373 |   | 100.0 | % | 100.0 | % |

 

20

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***Real Estate Owned.***** **At December31, 2002, the Bank had real estate owned (“REO”) totaling $2.0 million. Thisproperty consisted of a commercial restaurant building and equipment and wassold in January 2003.  When the Bankacquires property through foreclosure or deed in lieu of foreclosure, it isinitially recorded at the lower of the recorded investment in the correspondingloan or the fair value of the related assets at the date of foreclosure, lesscosts to sell.  Thereafter, if there isa further deterioration in value, the Bank provides for a specific valuationallowance and charges operations for the diminution in value.

 

***Real Estate Held For Development.***  OnJune 19, 2002, EFS Service Corporation, a wholly-owned subsidiary of the Bank,acquired approximately 16 acres of vacant land for the development of 29single-family home-sites located in West Dundee, Illinois.  The investment in this project totaled $2.9million as of December 31, 2002.

 

### **Investment Activities**

 

The Board of Directors setsthe investment policy and procedures of the Bank.  This policy generally provides that investment decisions will bemade based on the safety of the investment, liquidity requirements of the Bankand, to a lesser extent, potential return on the investments.  In pursuing these objectives, the Bankconsiders the ability of an investment to provide earnings consistent withfactors of quality, maturity, marketability and risk diversification.  While the Board of Directors has finalauthority and responsibility for the securities investment portfolio, the Bankhas established an Investment Committee comprised of five Directors tosupervise the Bank’s investment activities. The Bank’s Investment Committee meets at least quarterly and evaluatesall investment activities for safety and soundness, adherence to the Bank’sinvestment policy, and assurance that authority levels are maintained.

 

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

 

***Mortgage-Backed Securities. ***The Bank currently purchases mortgage-backedsecurities in order to:  (i) generatepositive interest rate spreads with minimal administrative expense; and (ii)lower its credit risk as a result of the guarantees provided by FHLMC, FNMA,and the Government National Mortgage Association (“GNMA”).  The Bank invests in mortgage-backedsecurities insured or guaranteed by FNMA, FHLMC and GNMA.  At December 31, 2002, mortgage-backedsecurities totaled $15.3 million, or 2.0%, of total assets and 2.2% of totalinterest earning assets, all of which was classified as available-for-sale.  At December 31, 2002, 16.8% of themortgage-backed securities were backed by adjustable-rate loans and 83.2% werebacked by fixed-rate loans.  Themortgage-backed securities portfolio had coupon rates ranging from 4.0% to10.0% and had a weighted average yield of 4.20% at December 31, 2002.

 

Mortgage-backed securities are created by the poolingof mortgages and issuance of a security with an interest rate that is less thanthe interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interestin a pool of single-family or multi-family mortgages, although the Bank focusesits investments on mortgage-backed securities backed by single-familymortgages.  The issuers of suchsecurities (generally U.S. Government agencies and government sponsoredenterprises, including FNMA, FHLMC and GNMA) pool and resell the participationinterests in the form of securities to investors such as the Bank and guaranteethe payment of principal and interest to investors.  Mortgage-backed securities generally yield less than the loansthat underlie such securities because of the cost of payment guarantees andcredit enhancements.  In addition,mortgage-backed securities are usually more liquid than individual mortgageloans and may be used to collateralize certain liabilities and obligations ofthe Bank.  Investments inmortgage-backed securities involve a risk that actual prepayments will begreater than estimated prepayments over the life of the security, which mayrequire adjustments to the amortization of any premium or accretion of anydiscount relating to such instruments thereby reducing the net yield on suchsecurities.  There is also reinvestmentrisk associated with the cash flows from such securities or in the event theissuer redeems such securities.  Inaddition, the market value of such securities may be adversely affected bychanges in interest rates.  The Bankestimates prepayments for its mortgage-backed securities at purchase to ensurethat prepayment assumptions are reasonable considering the underlyingcollateral for the mortgage-backed securities at issue and current mortgageinterest rates and to determine the yield and estimated maturity of itsmortgage-backed security portfolio.  Ofthe Bank’s $15.3 million mortgage-backed securities portfolio at December 31,2002, $276,000 with a weighted average yield of 6.46% had contractualmaturities within five years and $15.0 million with a weighted average yield of4.16% had contractual maturities over five years.  However, the actual maturity of a mortgage-backed security may beless than its stated maturity due to prepayments of the underlyingmortgages.  Prepayments that are fasterthan anticipated may shorten the life of the security and may result in a lossof any premiums paid and thereby reduce the net yield on such securities.  Although prepayments of underlying mortgagesdepend on many factors, the difference between the interest rates on theunderlying mortgages and the prevailing mortgage interest rates generally isthe most significant determinant of the rate of prepayments.  During periods of declining mortgageinterest rates, refinancing generally increases and accelerates the prepaymentof the underlying mortgages and the related security.  Under such circumstances, the Bank may be subject to reinvestmentrisk because, to the

 

21

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extent that the Bank’s mortgage-backed securitiesprepay faster than anticipated, the Bank may not be able to reinvest the proceedsof such repayments and prepayments at a comparable rate.

 

***U.S. Government Obligations. ***At December 31, 2002, the Bank’s U.S.Government securities portfolio totaled $32.8 million, all of which wereclassified as available-for-sale.  Suchportfolio primarily consists of medium-term (maturities of three to fifteenyears) securities.

 

***Municipal Securities.***  AtDecember 31, 2002, the Bank’s municipal security portfolio totaled $35.6million and was classified available-for-sale. This portfolio consists of general obligations issued by municipalities.

 

***Equity Investments. ***At December 31, 2002, the Bank’s equityinvestment portfolio totaled $10.5 million, all of which were classifiedavailable-for-sale.  The portfolioconsists of $100,000 of common stock and $200,000 of preferred stock in a smallprivately held company specializing in interest rate risk management and website design consulting and $4.9 million and $5.3 million of FNMA and FHLMCpreferred stock, respectively.

 

***Corporate Bonds. ***AtDecember 31, 2002, the Bank’s corporate bond portfolio totaled $9.0 million,all of which were classified available-for-sale.  This portfolio consists of highly rated corporate debt issuances.

 

The following table setsforth the composition of the carrying value of the Bank’s available-for-saleinvestment and mortgage-backed securities portfolios in dollar amounts and inpercentages at the dates indicated:

 
|                             |   | **At  December 31,**   |    |
|----------------------------------|--------|-----------------------------|---------|
|                             |   | **2002**                    |    | **2001** |   | **2000** |   |
|                             |   | **Amount**                  |    | **Percent********of********Total** |   | **Amount** |   | **Percent********of********Total** |   | **Amount** |   | **Percent********of********Total** |   |
|                             |   | **(Dollars  in thousands)** |    |
| Investment securities:           |   |                        |    |   |   |   |   |   |   |   |   |   |   |
|                             |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| U.S. Government obligations      |   | $                           | 32,842  |   | 31.8 | % | $ | 38,288 |   | 46.4 | % | $ | 62,893 | % | 85.5 | % |
| Equity investments               |   | 10,521                      |    | 10.2 |   | 7,277 |   | 8.8 |   | 300 |   | 0.4 |   |
| Municipal securities             |   | 35,608                      |    | 34.5 |   | 23,050 |   | 28.0 |   | 878 |   | 1.2 |   |
| Corporate bonds                  |   | 9,011                       |    | 8.7 |   | — |   | — |   | — |   | — |   |
| Total investment  securities     |   | 87,982                      |    | 85.2 |   | 68,615 |   | 83.2 |   | 64,071 |   | 87.1 |   |
|                             |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:      |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| FHLMC                            |   | 6,734                       |    | 6.5 |   | 5,730 |   | 7.0 |   | 1,795 |   | 2.5 |   |
| GNMA                             |   | 4,687                       |    | 4.6 |   | 4,641 |   | 5.6 |   | 4,865 |   | 6.6 |   |
| FNMA                             |   | 3,835                       |    | 3.7 |   | 3,485 |   | 4.2 |   | 2,794 |   | 3.8 |   |
| Total mortgage-backed securities |   | 15,256                      |    | 14.8 |   | 13,856 |   | 16.8 |   | 9,454 |   | 12.9 |   |
| Total securities                 |   | $                           | 103,238 |   | 100.0 | % | $ | 82,471 |   | 100.0 | % | $ | 73,525 |   | 100.0 | % |

 

22

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The following table setsforth the Bank’s securities activities for the periods indicated.  All investment securities in the Bank’sportfolio are classified as available-for-sale.

 
|                                                                      |   | **For the Year********Ended December 31,** |    |
|---------------------------------------------------------------------------|--------|-------------------------------------------------|---------|
|                                                                      |   | **2002**                                        |    | **2001** |   | **2000** |   |
|                                                                      |   | **(In thousands)**                              |    |
|                                                                      |   |                                            |    |   |   |   |   |
| **Beginning balance**                                                     |   | $                                               | 82,471  |   | $ | 73,525 |   | $ | 72,962 |   |
| Investment securities purchased                                           |   | 45,058                                          |    | 40,602 |   | 13,139 |   |
| Mortgage-backed securities purchased                                      |   | 7,170                                           |    | 10,436 |   | — |   |
| **Less:**                                                                 |   |                                            |    |   |   |   |   |
| Sale of investment securities                                             |   | —                                          |    | 4,033 |   | 7,063 |   |
| Principal repayments on mortgage-backed securities                        |   | 5,593                                           |    | 5,979 |   | 2,542 |   |
| Maturities of investment securities                                       |   | 27,548                                          |    | 32,414 |   | 5,064 |   |
| Gain on sale of investment securities                                     |   | —                                          |    | (33 | ) | (150 | ) |
| Net amortization of premium                                               |   | (9                                              | )       | 151 |   | 36 |   |
| Change in net unrealized gains (losses) on available-for-sale  securities |   | (1,689                                          | )       | (452 | ) | (1,979 | ) |
| **Ending balance**                                                        |   | $                                               | 103,238 |   | $ | 82,471 |   | $ | 73,525 |   |

 

The following table setsforth at the dates indicated certain information regarding the amortized costand market values of the Bank’s investment and mortgage-backed securities, allof which were classified as available-for-sale.

 
|                             |   | **At December 31,**  |    |
|----------------------------------|--------|---------------------------|---------|
|                             |   | **2002**                  |    | **2001** |   | **2000** |   |
|                             |   | **Amortized********Cost** |    | **Fair  Value** |   | **Amortized********Cost** |   | **Fair  Value** |   | **Amortized********Cost** |   | **Fair  Value** |   |
|                             |   | **(In thousands)**        |    |
| Investment securities:           |   |                      |    |   |   |   |   |   |   |   |   |   |   |
| U.S. Government obligations      |   | $                         | 32,111  |   | $ | 32,842 |   | $ | 37,519 |   | $ | 38,288 |   | $ | 62,930 |   | $ | 62,893 |   |
| Equity investments               |   | 10,247                    |    | 10,521 |   | 7,313 |   | 7,277 |   | 300 |   | 300 |   |
| Municipal securities             |   | 34,765                    |    | 35,608 |   | 23,488 |   | 23,050 |   |  878 |   |  878 |   |
| Corporate bonds                  |   | 8,871                     |    | 9,011 |   | — |   | — |   | — |   | — |   |
| Total investment securities      |   | 85,994                    |    | 87,982 |   | 68,320 |   | 68,615 |   | 64,108 |   | 64,071 |   |
| Mortgage-backed securities:      |   |                      |    |   |   |   |   |   |   |   |   |   |   |
| GNMA                             |   | 4,661                     |    | 4,687 |   | 4,611 |   | 4,641 |   | 4,892 |   | 4,865 |   |
| FNMA                             |   | 3,796                     |    | 3,835 |   | 3,453 |   | 3,485 |   | 2,808 |   | 2,794 |   |
| FHLMC                            |   | 6,718                     |    | 6,734 |   | 5,708 |   | 5,730 |   | 1,789 |   | 1,795 |   |
| Total mortgage-backed securities |   | 15,175                    |    | 15,256 |   | 13,772 |   | 13,856 |   | 9,489 |   | 9,454 |   |
| Total securities                 |   | $                         | 101,169 |   | $ | 103,238 |   | $ | 82,092 |   | $ | 82,471 |   | $ | 73,597 |   | $ | 73,525 |   |

 

23

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The table below sets forth certain informationregarding the carrying value, weighted average yields and contractualmaturities of the Bank’s securities portfolio, excluding equity securities, allof which were classified as available-for-sale, as of December 31, 2002.

 
|                            |   | **At December 31, 2002**   |   |
|---------------------------------|--------|----------------------------|--------|
|                            |   | **One Year or Less**       |   | **More than One********Year to Five Years** |   | **More than Five  Years to Ten Years** |   | **More than Ten  Years** |   | **Total** |   |
|                            |   | **Carrying********Value**  |   | **Weighted********Average********Yield** |   | **Carrying********Value** |   | **Weighted********Average********Yield** |   | **Carrying********Value** |   | **Weighted********Average********Yield** |   | **Carrying********Value** |   | **Weighted********Average********Yield** |   | **Carrying********Value** |   | **Weighted********Average********Yield** |   |
|                            |   | **(Dollars in thousands)** |   |
|                            |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:     |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                            |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FHLMC                           |   | $                          | 86     |   | 5.97 | % | $ | — |   | — | % | $ | 391 |   | 7.11 | % | $ | 6,257 |   | 3.40 | % | $ | 6,734 |   | 3.65 | % |
| GNMA                            |   | —                     |   | — |   | — |   | — |   | 66 |   | 10.09 |   | 4,621 |   | 4.27 |   | 4,687 |   | 4.35 |   |
| FNMA                            |   | —                     |   | — |   | 190 |   | 6.68 |   | — |   | — |   | 3,645 |   | 4.90 |   | 3,835 |   | 4.99 |   |
| Total mortgage-backedsecurities |   | 86                         |   | 5.97 |   | 190 |   | 6.68 |   | 457 |   | 7.54 |   | 14,523 |   | 4.05 |   | 15,256 |   | 4.20 |   |
|                            |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Municipal securities            |   | 530                        |   | 2.50 |   | 1,346 |   | 3.47 |   | 293 |   | 4.25 |   | 33,439 |   | 4.77 |   | 35,608 |   | 4.68 |   |
| Corporate bonds                 |   | 1,979                      |   | 5.27 |   | 7,032 |   | 6.89 |   | — |   | — |   | — |   | — |   | 9,011 |   | 6.53 |   |
| U.S. Government Obligations     |   | 4,809                      |   | 6.02 |   | 997 |   | 4.52 |   | 22,135 |   | 6.19 |   | 4,901 |   | 6.20 |   | 32,842 |   | 6.12 |   |
| Total securities                |   | $                          | 7,318  |   | 5.56 |   | $ | 9,375 |   | 6.15 |   | $ | 22,428 |   | 6.16 |   | $ | 38,340 |   | 4.95 |   | $ | 77,461 |   | 5.50 |   |
|                                 |        |                            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Sources ofFunds**

 

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

 

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

 

At December 31, 2002, theBank’s deposits totaled $524.2 million, or 75.3%, of interest-bearingliabilities.  For the year endedDecember 31, 2002, the average balance of core deposits (savings, NOW, moneymarket and non-interest-bearing checking accounts) totaled $285.1 million, or60.1% of total average deposits.  AtDecember 31, 2002, the Bank had a total of $209.9 million in certificates ofdeposit, of which $116.3 million had maturities of one year or less reflectingthe shift in deposit accounts from savings accounts to shorter-term certificateaccounts that has occurred in recent years. For the year ended December 31, 2002, the average balance of coredeposits represented approximately 54.4% of total deposits and averagecertificate accounts represented 36.1%, as compared to the average balance ofcore deposits representing 48.3% of total deposits and average certificateaccounts representing 44.5% of deposits for the year ended December 31,2001.  Although the Bank has asignificant portion of its deposits in core deposits, management monitorsactivity on the Bank’s core deposits and, based on historical experience andthe Bank’s current pricing strategy, believes it will continue to retain alarge portion of such accounts.  TheBank is not limited with respect to the rates it may offer on deposit products.

 

At December 31, 2002, theBank had brokered deposits totaling $6.1 million.  These deposits were acquired in February 2002.

 

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

 

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difficult to retain than core deposits.

 

At December 31, 2002, theBank had outstanding $74.7 million in certificate of deposit accounts inamounts of $100,000 or more, maturing as follows:

 
| **Maturity  Period**          |   | **Amount**                 |   | **Weighted********Average********Rate** |   |
|-------------------------------|--------|----------------------------|--------|-----------------------------------------|--------|
|                          |   | **(Dollars in thousands)** |   |
|                          |   |                       |   |                                    |   |
| Three months or less          |   | $                          | 7,136  |                                    | 3.48   | % |
| Over three through six months |   | 6,833                      |   | 3.56                                    |   |
| Over six through 12 months    |   | 22,525                     |   | 2.95                                    |   |
| Over 12 months                |   | 38,233                     |   | 4.03                                    |   |
| Total                         |   | $                          | 74,727 |                                    | 3.61   |   |

 

The following table setsforth the distribution of the Bank’s deposit accounts for the periods indicatedand the weighted average interest rates on each category of deposits presented.

 
|                          |   | **At********December 31, 2002** |    | **At********December 31, 2001**        |   |
|-------------------------------|--------|---------------------------------|---------|---------------------------------------------|--------|
|                          |   | **Balance**                     |    | **Percent********of Total********Deposits** |   | **Weighted********Average********Rate** |   | **Balance** |   | **Percent********of Total********Deposits** |   | **Weighted********Average********Rate** |   |
|                          |   | **(Dollars in thousands)**      |    |
|                          |   |                            |    |                                        |   |   |   |   |   |   |   |   |   |
| Money market accounts         |   | $                               | 140,857 |                                        | 26.87  | % | 2.73 | % | $ | 106,850 |   | 25.44 | % | 4.00 | % |
| Passbook savings accounts     |   | 106,599                         |    | 20.34                                       |   | 2.28 |   | 84,889 |   | 20.21 |   | 3.11 |   |
| NOW accounts                  |   | 34,201                          |    | 6.52                                        |   | 1.01 |   | 30,646 |   | 7.29 |   | 1.07 |   |
| Non interest-bearing accounts |   | 32,655                          |    | 6.23                                        |   | — |   | 23,286 |   | 5.54 |   | — |   |
| Total                         |   | 314,312                         |    | 59.96                                       |   | 2.09 |   | 245,671 |   | 58.48 |   | 2.81 |   |
| Certificates of deposit       |   | 209,878                         |    | 40.04                                       |   | 4.02 |   | 174,413 |   | 41.52 |   | 5.76 |   |
| Total deposits                |   | $                               | 524,190 |                                        | 100.00 | % | 2.86 |   | $ | 420,084 |   | 100.00 | % | 4.22 |   |

 
|                          |   | **At********December 31, 2000** |       |
|-------------------------------|--------|--------------------------------------|------------|
|                          |   | **Balance**                          |       | **Percent********of Total********Deposits** |   | **Weighted********Average********Rate** |   |
|                          |   | **(Dollars  in thousands)**          | ** ** |
|                          |   |                                 |       |   |   |   |   |
| Money market accounts         |   | $                                    | 40,098     |   | 10.85 | % | 3.83 | % |
| Passbook savings accounts     |   | 75,802                               |       | 20.51 |   | 3.76 |   |
| NOW accounts                  |   | 31,019                               |       | 8.40 |   | 1.59 |   |
| Non interest-bearing accounts |   | 19,728                               |       | 5.34 |   | — |   |
| Total                         |   | 166,647                              |       | 45.10 |   | 2.94 |   |
| Certificates of deposit       |   | 202,886                              |       | 54.90 |   | 5.79 |   |
| Total deposits                |   | $                                    | 369,533    |   | 100.00 | % | 4.54 |   |

 

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The following tablepresents, by various rate categories, the amount of certificate of depositaccounts outstanding at the dates indicated.

 
|                       |   | **Period to  Maturity  from December 31, 2002** |          |                   |   |
|----------------------------|--------|-------------------------------------------------|---------------|------------------------|--------|
|                       |   | **Less  than  One  Year**                       |          | **One to  Two  Years** |   | **Two to  Three  Years** |   | **Three  to Four  Years** |   | **Four  to Five  Years** |   | **Total  December 31,  2002** |   |   |   |
| **At  December 31,**       |
| **2001**                   |   | **2000**                                        |
|                       |   | **(In  thousands)**                             |          |
| Certificate accounts:      |   |                                            |          |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 4.00% or less              |   | $                                               |  96,085  |                   | $      |  28,123 |   | $ |  9,528 |   | $ |  6,865 |   | $ |  830 |   | $ |  141,431 |   | $ |  54,005 |   | $ |  931 |   |
| 4.01 to 5.00%              |   | 10,478                                          |          | 15,323                 |   | 7,286 |   | 16,752 |   | 2,357 |   | 52,196 |   | 47,689 |   | 16,226 |   |
| 5.01 to 6.00%              |   | 5,820                                           |          | 2,130                  |   | 1,001 |   | 415 |   | 292 |   | 9,658 |   | 48,724 |   | 38,591 |   |
| 6.01 to 7.00%              |   | 3,523                                           |          | 168                    |   | 2,450 |   | — |   | — |   | 6,141 |   | 23,455 |   | 140,525 |   |
| 7.01 to 8.00%              |   | 352                                             |          | —                 |   | 100 |   | — |   | — |   | 452 |   | 540 |   | 6,613 |   |
|                       |   |                                            |          |                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total at December 31, 2002 |   | $                                               |  116,258 |                   | $      |  45,744 |   | $ |  20,365 |   | $ |  24,032 |   | $ |  3,479 |   | $ |  209,878 |   | $ |  174,413 |   | $ |  202,886 |   |

 

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

 
|                                                       |   | **At or  For the Year Ended********December 31,** |    |
|------------------------------------------------------------|--------|--------------------------------------------------------|---------|
|                                                       |   | **2002**                                               |    | **2001** |   | **2000** |   |
|                                                       |   | **(Dollars  in thousands)**                            |    |
| FHLB advances:                                             |   |                                                   |    |   |   |   |   |
| Average balance outstanding                                |   | $                                                      | 172,575 |   | $ | 164,783 |   | $ | 129,783 |   |
| Maximum amount outstanding at any month-endduring the year |   | $                                                      | 175,200 |   | $ | 175,200 |   | $ | 155,200 |   |
| Balance outstanding at end of year                         |   | $                                                      | 171,700 |   | $ | 175,200 |   | $ | 140,200 |   |
| Weighted average interest rate during the year             |   | 5.35                                                   | %       | 5.45 | % | 5.78 | % |
| Weighted average interest rate at end of year              |   | 5.27                                                   | %       | 5.28 | % | 5.83 | % |

 

**SubsidiaryActivities**

 

***EFS Service Corporation. ***Fox Valley Service Corporation of Elgin wasrenamed EFS Service Corporation (“EFSSC”) in October 2002 and is the Bank’swholly-owned subsidiary which was incorporated in 1974 for the purpose ofentering into joint venture real estate development projects.  On June 19, 2002, EFSSC purchasedapproximately 16 acres of land to be developed into 29 home-sites forsingle-family residences.  Theconstruction will begin in 2003.  Inaddition, EFSSC currently owns a single parcel of real estate valued at$92,000.

 

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

 

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

 

**Personnel**

 

As of December 31, 2002, theBank had 135 full-time employees and 41 part-time employees.  A collective bargaining unit does notrepresent the employees and the Bank considers its relationship with itsemployees to be good.

 

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**REGULATION AND SUPERVISION**

 

**General**

 

The Bank is an IllinoisState chartered savings bank and its deposit accounts are insured up toapplicable limits by the FDIC under the Savings Association Insurance Fund(“SAIF”).  The Bank is subject toextensive regulation by the Commissioner, as its chartering authority, and bythe FDIC, as the deposit insurer.  TheBank must file reports with the Commissioner and the FDIC concerning itsactivities and financial condition, in addition to obtaining regulatoryapprovals prior to entering into certain transactions such as establishingbranches and mergers with, or acquisitions of, other depository institutions.  There are periodic examinations by theCommissioner and the FDIC to assess the Bank’s compliance with variousregulatory requirements and financial condition.  This regulation and supervision establishes a framework ofactivities in which a savings bank can engage and is intended primarily for theprotection of the insurance fund and depositors.  The regulatory structure also gives the regulatory authoritiesextensive discretion in connection with their supervisory and enforcementactivities and examination policies, including policies with respect to theclassification of assets and the establishment of adequate loan loss reservesfor regulatory purposes.  Any change insuch regulation, whether by the Commissioner, the FDIC or through legislation,could have a material adverse impact on the Company and the Bank and theiroperations and stockholders.  TheHolding Company is also required to file certain reports with, and otherwisecomply with the rules and regulations, of the OTS, the Commissioner and of the Securitiesand Exchange Commission (“SEC”) under the federal securities laws.  Certain of the regulatory requirementsapplicable to the Bank and to the Holding Company are referred to below orelsewhere herein.

 

The Commissioner hasestablished a schedule for the assessment of “supervisory fees” upon allIllinois savings banks to fund the operations of the Commissioner.  These supervisory fees are computed on thebasis of each savings bank’s total assets (including consolidated subsidiaries)and are payable at the end of each calendar quarter.  A schedule of fees has also been established for certain filingsmade by Illinois savings banks with the Commissioner.  The Commissioner also assesses fees for examinations conducted bythe Commissioner’s staff, based upon the number of hours spent by theCommissioner’s staff performing the examination.  During the year ended December 31, 2002, the Bank paidapproximately $68,000 in supervisory fees and expenses.

 

**Regulations**

 

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

 

The FDIC has also adoptedrisk-based capital guidelines to which the Bank is subject.  The Bank is required to maintain certainlevels of regulatory capital in relation to regulatory risk-weightedassets.  Risk-based capital ratios aredetermined by allocating assets and specified off-balance sheet items to fourrisk-weighted categories ranging from 0% to 100%, with higher levels of capitalbeing required for the categories perceived as representing greater risk.  The guidelines divide a savings bank’scapital into two tiers.  The first tier(“Tier I”) includes common equity, retained earnings, certain non-cumulativeperpetual preferred stock (excluding auction rate issues) and minorityinterests in equity accounts of consolidated subsidiaries, less goodwill andother intangible assets (except mortgage servicing rights and purchased creditcard relationships subject to certain limitations).  Recent regulatory amendments require the deduction from Tier 1capital of a percentage of the carrying value of investments in equitysecurities of non-financial companies acquired after March 13, 2000.  Supplementary (“Tier II”) capital includes,among other items, cumulative perpetual and long-term limited-life preferredstock, mandatory convertible securities, certain hybrid capital instruments,term subordinated debt, a portion of pretax net unrealized holding gains onavailable-for-sale equity securities with readily determinable fair values andthe allowance for loan losses, subject to certain limitations, less requireddeductions.  Savings banks are requiredto maintain a total risk-based capital ratio of 8%, of which at least 4% mustbe Tier I capital.

 

In addition, the FDIC hasestablished regulations prescribing a minimum Tier I leverage ratio.  These regulations provide for a minimum TierI leverage ratio of 3% for banks that meet certain specified criteria,including that they have the highest examination rating and are notexperiencing or anticipating significant growth.  All other banks are required to maintain a Tier I leverage ratio of3% plus an additional cushion of at least 1%. The FDIC may, however, set higher leverage and risk-based capitalrequirements on individual institutions when particular circumstances warrant.

 

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

 
|                                  |   | **2002** |   | **2001** |   |
|---------------------------------------|--------|----------|--------|----------|--------|
| Total Capital to Total Assets         |   | 8.96     | %      | 9.58     | %      |
| Total Capital to Risk-Weighted Assets |   | 13.41    | %      | 14.58    | %      |
| Tier I Leverage Ratio                 |   | 8.92     | %      | 9.53     | %      |
| Tier I to Risk-Weighted Assets        |   | 12.82    | %      | 14.09    | %      |

 

The FDIC and the otherfederal banking agencies, have adopted a regulation providing that the agencieswill take account of the exposure of a bank’s capital and economic value tochanges in interest rate risk in assessing a bank’s capital adequacy.

 

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

 

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

 

The Bank is also subject toa loans-to-one borrower limitation. Under the Illinois law, the total loans and extensions of credit by theBank to any person outstanding at one time must not exceed the greater of$500,000 or 25% of the Bank’s total capital plus general loan lossreserves.  In addition, the Bank maymake loans in an amount equal to an additional 10% of the Bank’s capital plusgeneral loan loss reserves if secured by readily marketable collateral.

 

***Dividend Limitations.***** **Under theISBA, dividends may only be declared when the total capital of the Bank isgreater than that required by Illinois law. Dividends may be paid by the Bank out of its net profits.  The written approval of the Commissionermust be obtained, however, before a savings bank having total capital of lessthan 6% of total assets may declare dividends in any year in an amount inexcess of 50% of its net profits for that year.  A savings bank may not declare dividends in excess of its netprofits in any year without the approval of the Commissioner.  Finally, the Bank will be unable to paydividends in an amount which would reduce its capital below the greater of (i)the amount required by the FDIC capital regulations or otherwise specified bythe FDIC, (ii) the amount required by the Commissioner or (iii) the amountrequired for the liquidation account to be established by the Bank inconnection 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.

 

**PromptCorrective Regulatory Action**

 

Federal law requires, amongother things, that federal bank regulatory authorities take “prompt correctiveaction” with respect to banks that do not meet minimum capitalrequirements.  For these purposes, thelaw establishes various capital categories. The FDIC has adopted regulations to implement the prompt correctiveaction legislation.  Under theregulations, an institution is deemed to be “undercapitalized” if it has atotal risk-based capital ratio of less than 8%, a Tier I risk-based capitalratio of less than 4%, or generally a leverage ratio of less than 4%.  An institution is deemed to be“significantly undercapitalized” if it has a total risk-based capital ratio ofless than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverageratio of less than 3%.  An institutionis deemed to be “critically undercapitalized” if it has a ratio of tangibleequity (as defined in the regulations) to total assets that is equal to or lessthan 2%.

 

“Undercapitalized” banks aresubject to growth, capital distribution (including dividend) and otherlimitations and are required to submit a capital restoration plan.  A bank’s compliance with such plan must beguaranteed by any company that controls the undercapitalized institution in anamount equal to the lesser of 5.0% of the Bank’s total assets when deemedundercapitalized or the amount necessary to achieve the status of adequatelycapitalized.  If an “undercapitalized”bank fails to submit an acceptable plan, it is treated as if it is“significantly undercapitalized.” “Significantly undercapitalized” banks are subject to one or more of anumber of additional restrictions, including but not limited to an order by theFDIC to sell sufficient

 

28

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voting stock to become adequatelycapitalized, requirements to reduce total assets and cease receipt of depositsfrom correspondent banks or dismiss directors or officers.  “Critically undercapitalized” institutionsalso may not make any payment of principal or interest on certain subordinateddebt or extend credit for a highly leveraged transaction or enter into anymaterial transaction outside the ordinary course of business.  In addition, subject to a narrow exception,the appointment of a receiver or conservator is required for a “criticallyundercapitalized” institution within 270 days after it obtains such status.

 

**Transactionswith Affiliates**

 

Federal law governstransactions between depository institutions and their affiliates.  An affiliate of a savings bank is anycompany or entity that controls, is controlled by, or is under common controlwith the savings bank, other than certain subsidiaries. In a holding companycontext, at a minimum, the parent holding company of a savings bank and anycompanies that are controlled by such parent holding company are affiliates ofthe savings bank.  Generally, the extentto which the savings bank or its subsidiaries may engage in “coveredtransactions,” including loans, with any one affiliate is limited to 10% ofsuch savings bank’s capital stock and surplus, and there is an aggregate limiton all such transactions with all affiliates of 20% of such capital stock andsurplus.  Federal law also establishesspecific collateral requirements for loans or extensions of credit to, orguarantees, acceptances on letters of credit issued on behalf of an affiliate.  Covered transactions and a broad list of otherspecified transactions also must be on terms substantially the same, or no lessfavorable, to the savings bank or its subsidiary as similar transactions withnonaffiliates.

 

Federal law also restricts asavings bank with respect to loans to directors, executive officers, andprincipal stockholders.  Loans todirectors, executive officers and stockholders who control, directly orindirectly, 10% or more of voting securities of a savings bank, and certainrelated interests of any of the foregoing, may not exceed the savings bank’stotal capital and surplus.  Loans todirectors, executive officers and principal shareholders must be made on termssubstantially the same as offered in comparable transactions to other persons,except that such insiders may receive preferential loans made pursuant to abenefit or compensation program that is widely available to the Bank’semployees and does not give preference to the insider over the employees.  Federal law also establishes board ofdirector approval requirements for loans exceeding a certain amount.  There are additional limitations on loans toexecutive officers.

 

**Enforcement**

 

The Commissioner and FDIChave extensive enforcement authority over Illinois-chartered savings banks,including the Bank.  This enforcementauthority includes, among other things, the ability to assess civil moneypenalties, to issue cease and desist orders and to remove directors andofficers.  In general, these enforcementactions may be initiated in response to violations of laws and regulations andto unsafe or unsound practices.

 

The Commissioner is givenauthority by Illinois law to appoint a conservator or receiver for an Illinoissavings bank under certain circumstances including, but not limited to,insolvency, a substantial dissipation of assets due to violation of law,regulation, order of the Commissioner or an unsafe or unsound practice.  The FDIC also has authority under federallaw to appoint a conservator or receiver for an insured savings bank undercertain circumstances.

 

**Insuranceof Deposit Accounts**

 

Deposits of the Bank arepresently insured by the SAIF.  The FDICmaintains a risk-based assessment system by which institutions are assigned toone of three categories based on their capitalization and one of threesubcategories based on examination ratings and other supervisoryinformation.  An institution’sassessment rate depends upon the categories to which it is assigned.  Assessment rates for SAIF memberinstitutions are determined semiannually by the FDIC and currently range fromzero basis points for the healthiest institutions to 27 basis points ofassessable deposits for the riskiest.

 

In addition to theassessment for deposit insurance, institutions are required to make payments onbonds issued in the late 1980s by the Financing Corporation (“FICO”) torecapitalize the predecessor to the SAIF. During 2002, FICO payments for SAIF members approximated 1.75 basispoints of assessable deposits.

 

The Bank’s assessment ratefor 2002 was zero.  Payments toward theFICO bonds amounted to $76,000.  TheFDIC has authority to increase insurance assessments.  A significant increase in SAIF insurance premiums would likelyhave an adverse effect on the operating expenses and results of operations ofthe Bank.  Management cannot predictwhat insurance assessment

 

29

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rates will be in the future.

 

Insurance of deposits may beterminated by the FDIC upon a finding that the institution has engaged inunsafe or unsound practices, is in an unsafe or unsound condition to continueoperations or has violated any applicable law, regulation, rule, order orcondition imposed by the FDIC or the OTS. The management of the Bank does not know of any practice, condition orviolation that might lead to termination of deposit insurance.

 

**FederalReserve System**

 

The Federal Reserve Boardregulations require depository institutions to maintain non-interest-earningreserves against their transaction accounts (primarily NOW and regular checkingaccounts).  The Federal Reserve Boardregulations generally require that reserves be maintained against aggregatetransaction accounts as follows:  forthat portion of transaction accounts aggregating $42.1 million or less (subjectto adjustment by the Federal Reserve Board) the reserve requirement is 3%; andfor accounts greater than $42.1 million, the reserve requirement is $1.083million plus 10% (subject to adjustment by the Federal Reserve Board between 8%and 14%) against that portion of total transaction accounts in excess of $42.1million.  The first $6.0 million ofotherwise reservable balances (subject to adjustments by the Federal ReserveBoard) are exempted from the reserve requirements.  The Bank is in compliance with the foregoing requirements atDecember 31, 2002.

 

**FederalHome Loan Bank System**

 

The Bank is a member of theFHLB System, which consists of 12 regional FHLBs.  The FHLB provides a central credit facility primarily for memberinstitutions.  The Bank, as a member ofthe FHLB, is required to acquire and hold shares of capital stock in the FHLBin an amount at least equal to 1% of the aggregate principal amount of itsunpaid residential mortgage loans and similar obligations at the beginning ofeach year, or 1/20 of its advances (borrowings) from the FHLB, whichever isgreater.  The Bank was in compliancewith this requirement with an investment in FHLB stock at December 31, 2002 of$9.4 million.

 

The FHLBs are required toprovide funds for the resolution of insolvent thrifts and to contribute fundsfor affordable housing programs.  Theserequirements could reduce the amount of dividends that the FHLBs pay to theirmembers and could also result in the FHLBs imposing a higher rate of intereston advances to their members.  For theyears ended December 31, 2002, 2001 and 2000, dividends from the FHLB to theBank amounted to approximately $483,000, $539,000 and $508,000, respectively.

 

**HoldingCompany Regulation**

 

Federal law allows a statesavings bank that qualifies as a “qualified thrift lender” to elect to betreated as a savings association for purposes of the savings and loan holdingcompany provisions of federal law.  Suchelection results in its holding company being regulated as a savings and loanholding company by the OTS rather than as a bank holding company by the FederalReserve Board.  The Bank has made suchelection and has received approval from the OTS to become a savings and loanholding company.  The Company has registeredwith the OTS and is subject to OTS regulations, examinations, supervision andreporting requirements.  In addition,the OTS has enforcement authority over the Company and its non-savingsinstitution subsidiaries.  Among otherthings, this authority permits the OTS to restrict or prohibit activities thatare determined 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 andloan holding company, the Company is generally not restricted under existinglaws as to the types of business activities in which it may engage.  The Gramm-Leach-Bliley Act of 1999 providedthat no company may acquire control of a savings association after May 4, 1999unless it engages only in the financial activities permitted for financialholding companies under the law or for multiple savings and loan holdingcompanies as described below.  Further,the Gramm-Leach-Bliley Act specifies that existing savings and loan holdingcompanies may only engage in such activities. The Gramm-Leach-Bliley Act, however, grandfathered the unrestrictedauthority for activities with respect to unitary savings and loan holdingcompanies existing prior to May 4, 1999, such as the Company, so long as theBank continues to comply with the qualified thrift lender test.  Upon any non-supervisory acquisition by theCompany of another savings association as a separate subsidiary, the Companywould become a multiple savings and loan holding company and would be subjectto limitations on the types of business activities in which it couldengage.  Federal law limits theactivities of a multiple savings and loan holding company and its non-insuredinstitution subsidiaries primarily to activities permissible for bank holdingcompanies under Section 4(c)(8) of the Bank Holding Company Act, subject to theprior approval of the OTS, to those permissible for financial holding companiesand to

 

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other activities authorized by OTSregulation.  Multiple savings and loanholding companies are prohibited from acquiring or retaining, with certainexceptions, more than 5% of a non-subsidiary company engaged inactivities other than those permitted by federal law.

 

Federal law prohibits asavings and loan holding company, directly or indirectly, or through one ormore subsidiaries, from merging with or acquiring more than 5% of the votingstock of another savings institution or holding company thereof without priorwritten approval of the OTS.  Inevaluating applications by holding companies to acquire savings institutions,the OTS must consider the financial and managerial resources and futureprospects of the company and institution involved, the effect of theacquisition on the risk to the insurance funds, the convenience and needs ofthe community and competitive factors.

 

The OTS is prohibited fromapproving any acquisition that would result in a multiple savings and loanholding company controlling savings institutions in more than one state,except:  (i) interstate supervisoryacquisitions by savings and loan holding companies; and (ii) theacquisition of a savings institution in another state if the laws of the stateof the target savings institution specifically permit such acquisitions.  The states vary in the extent to which theypermit interstate savings and loan holding company acquisitions.

 

In order to elect and continueto be regulated as a savings and loan holding company by the OTS, the Bank mustcontinue to qualify as a qualified thrift lender.  This requires the Bank to maintain compliance with the test for a“domestic building and loan association,” as defined in the Internal RevenueCode, or with a Qualified Thrift Lender Test. Under the Test, a savings institution is required to maintain at least65% of its “portfolio assets” (total assets less: (i) specified liquid assetsup to 20% of total assets; (ii) intangibles, including goodwill; and (iii) thevalue of property used to conduct business) in certain “qualified thriftinvestments” (primarily residential mortgages and related investments,including certain mortgage-backed and related securities) in at least 9 monthsout of each 12 month period.  A holdingcompany of a savings institution that fails to qualify as a qualified thriftlender must either convert to a bank holding company and thereby become subjectto the regulation and supervision of the Federal Reserve Board or operate undercertain restrictions.  As of December31, 2002, the Bank maintained in excess of 65% of its portfolio assets inqualified thrift investments.  The Bankalso met the test in each of the prior 12 months and, therefore, is a qualifiedthrift lender.  Recent legislativeamendments have broadened the scope of “qualified thrift investments” that gotoward meeting the test to fully include credit card loans, student loans andsmall business loans.

 

**FederalSecurities Laws**

 

Shares purchased by anaffiliate of the Company will be subject to the resale restrictions of Rule 144under the Securities Act.  If theCompany meets the current public information requirements of Rule 144 under theSecurities Act, each affiliate of the Company who complies with the otherconditions of Rule 144 (including those that require the affiliate’s sale to beaggregated with those of certain other persons) would be able to sell in thepublic market, without registration, a number of shares not to exceed, in anythree-month period, the greater of (i) 1% of the outstanding shares of theCompany or (ii) the average weekly volume of trading in such shares during thepreceding four calendar weeks. Provision may be made in the future by the Company to permit affiliatesto have their shares registered for sale under the Securities Act under certaincircumstances.

 

**FEDERAL AND STATE INCOME TAXATION**

 

**FederalTaxation**

 

***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 incometax expense are based upon income reported for financial statement purposes anddo not necessarily represent amounts currently payable to federal and state taxauthorities.  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 SmallBusiness Job Protection Act of 1996 (the “1996 Act”), which was enacted onAugust 20, 1996, made significant changes to provisions of the Code relating toa savings institution’s use of bad debt reserves for federal income taxpurposes and requires such institutions to recapture (i.e. take into income)certain portions of their accumulated bad debt reserves.  Prior to the enactment of the 1996 Act, theBank was permitted to establish tax reserves for bad debts and to make

 

31

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annual additions thereto, which additions,within specified formula limits, were deducted in arriving at the Bank’staxable income.  The Bank’s deductionwith respect to “qualifying loans,” which are generally loans secured bycertain interests in real property, could be computed using an amount based ona six-year moving average of the Bank’s actual loss experience (the “ExperienceMethod”), or a percentage equal to 8% of the Bank’s taxable income (the “PTIMethod”), computed without regard to this deduction and with additional modificationsand reduced by the amount of any permitted addition to the non-qualifyingreserve.  The Bank’s deduction withrespect to non-qualifying loans was required to be computed under theExperience Method.

 

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

 

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

 

The amount of additionaltaxable income created from a non-dividend distribution is an amount that, whenreduced by the tax attributable to the income, is equal to the amount of thedistribution.  Thus, if the Bank makes anon-dividend distribution to the Company, approximately one and one-half timesthe amount of such distribution (but not in excess of the amount of suchreserves) would be includable in income for federal income tax purposes,assuming a 35% federal corporate income tax rate.  The Bank does not intend to pay dividends that would result in arecapture of any portion of its tax bad debt reserves.

 

***Dividends Received Deduction and OtherMatters.**** *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.

 

**StateTaxation**

 

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

 

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

 

32

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**Additional Item. Executive Officers of the Registrant****.**

 

The following table setsforth certain information regarding the executive officers of the Company andthe Bank who are 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 12/31/02** |   | **Position**                                                                                                                                                                                                  |   |
|--------------------|--------|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Randy C. Blackburn |   | 43                  |   | Senior Vice  President/Information Technology - Employed by Bank since 1997.  Prior to joining the Bank Mr. Blackburn  was Director of Operations at Computer Dynamics Group in West Chicago,  Illinois. |   |
|               |   |                |   |                                                                                                                                                                                                          |   |
| Stephen P. DuBois  |   | 53                  |   | 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     |   | 67                  |   | Vice President/Compliance  Officer - Employed by Bank since 1993.                                                                                                                                             |   |
|               |   |                |   |                                                                                                                                                                                                          |   |
| Sandra L. Sommers  |   | 60                  |   | Senior Vice President/Savings  - Employed by Bank since 1960.                                                                                                                                                 |   |
|               |   |                |   |                                                                                                                                                                                                          |   |
| Joseph E. Stanczak |   | 50                  |   | Senior Vice President -  Employed by Bank since 1974.                                                                                                                                                         |   |

 

33

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

 

The Bank conducts itsbusiness through an executive and full-service branch office located in Elginand seven other full-service branch offices. The downtown Elgin, Illinois branch was relocated to a larger downtownfacility in 2002.  The Company believesthat the Bank’s facilities are adequate to meet the present and immediatelyforeseeable 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,  2002** |       |
|--------------------------------------|--------|-----------------------|------------|------------------------------------------|------------|--------------------------------|------------|--------------------------------------------------------------------------------------|------------|
|                                 |   |                  | ** ** |                                     | ** ** |                           | ** ** | **(In  thousands)**                                                                  | ** ** |
| **Executive/Main/Branch  Office:**   |   |                  | ** ** |                                     | ** ** |                           | ** ** |                                                                                 | ** ** |
| 1695 Larkin Avenue                   |   | Owned                 |       | 1973                                     |       | —                         |       | $                                                                                    | 1,065      |   |
| Elgin, Illinois 60123                |   |                  |       |                                     |       |                           |       |                                                                                 |       |
| **Branch  Offices:**                 |   |                  |       |                                     |       |                           |       |                                                                                 |       |
| 850 Summit Street                    |   | Owned                 |       | 1983                                     |       | —                         |       | 393                                                                                  |       |
| Elgin, Illinois 60120                |   |                  |       |                                     |       |                           |       |                                                                                 |       |
| 1000 S. McLean Boulevard             |   | Leased                |       | 1996                                     |       | 2011                           |       | 131                                                                                  |       |
| Elgin, Illinois 60123                |   |                  |       |                                     |       |                           |       |                                                                                 |       |
| 390 South Eighth Street              |   | Owned                 |       | 1980                                     |       | —                         |       | 1,025                                                                           |       |
| Route 31 & Village  Quarter Road |   |                  |       |                                     |       |                           |       |                                                                                 |       |
| West Dundee, Illinois  60118         |   |                  |       |                                     |       |                           |       |                                                                                 |       |
| 13300 Route 47                       |   | Owned                 |       | 1998                                     |       | —                         |       | 2,794                                                                                |       |
| Huntley, Illinois 60142              |   |                  |       |                                     |       |                           |       |                                                                                 |       |
| 543 East Main Street                 |   | Leased                |       | 2000                                     |       | 2015                           |       | 224                                                                                  |       |
| East Dundee, Illinois  60118         |   |                  |       |                                     |       |                           |       |                                                                                 |       |
| 28 North Grove Street                |   | Owned                 |       | 2002                                     |       | —                         |       | 1,160                                                                                |       |
| Elgin, Illinois 60123                |   |                  |       |                                     |       |                           |       |                                                                                 |       |
| 2429 Randall Road                    |   | Owned                 |       | 2002                                     |       | —                         |       | 3,322                                                                                |       |
| Carpentersville, Illinois  60110     |   |                  |       |                                     |       |                           |       |                                                                                 |       |
| **Other  Properties:**               |   |                  |       |                                     |       |                           |       |                                                                                 |       |
| 44 South Lyle Street                 |   | Owned                 |       | 1986                                     |       | —                         |       | 67                                                                                   |       |
| Elgin, Illinois 60123(1)             |   |                  |       |                                     |       |                           |       |                                                                                 |       |
| 1665 Larkin Avenue                   |   | Owned                 |       | 1996                                     |       | —                         |       | 1,180                                                                                |       |
| Elgin, Illinois 60123(2)             |   |                  |       |                                     |       |                           |       |                                                                                 |       |
| 176 East Chicago Avenue              |   | Owned                 |       | 1953                                     |       | —                         |       | 149                                                                                  |       |
| Elgin, Illinois 60120(3)             |   |                  |       |                                     |       |                           |       |                                                                                 |       |
| Randall Road and Dean  Street        |   | Owned                 |       | 2002                                     |       | —                         |       |  600                                                                       |       |
| St. Charles, Illinois  60174(4)      |   |                  |       |                                     |       |                           |       |                                                                                 |       |
| Randall Road                         |   | Owned                 |       | 2002                                     |       | —                         |       | 2,315                                                                                |       |
| Crystal Lake, Illinois (4)           |   |                  |       |                                     |       |                           |       |                                                                                 |       |
|                                      |        |                       |            |                                          |            |                                |            |                                                                                      |            |  |

 

----

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

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

(3)                       This is the prior downtown Elgin branch.  The branch was relocated to the 28 NorthGrove building in 2002.

(4)                       These properties consist of land for futurebranch locations.

 

34

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

 

The Company is not involvedin any pending legal proceedings other than routine legal proceedings occurringin the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed bymanagement to be immaterial to the financial condition and results ofoperations of the Company.

 

**Item 4. Submission of Matters to a Vote of Security Holders****.**

 

None.

# **PART II**

 

**Item 5.  Market forthe Company’s Common Equity and Related Stockholder Matters****.**

 

The Common Stock of theCompany is traded on the American Stock Exchange under the symbol “EFC.”  The stock began trading on April 3,1998.  During 2002 and 2001, the Companydeclared dividends to its shareholders amounting to $0.535 and $0.50 per share,respectively.  As of March 7, 2003,there were approximately 2,352 shareholders of the Common Stock of the Company,which includes shares held in street name. The following table sets forth for the quarters indicated the range ofhigh and low sale price information for the Common Stock of the Company asreported on the American Stock Exchange and dividends declared.

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

 
|      |   | **Year Ended December 31, 2001** |   |
|-----------|--------|----------------------------------|--------|
|      |   | **4th Quarter**                  |   | **3rd Quarter** |   | **2nd Quarter** |   | **1st Quarter** |   |
|      |   |                             |   |   |   |   |   |   |   |
| High      |   | $                                | 14.50  |   | $ | 12.39 |   | $ | 11.70 |   | $ | 11.25 |   |
| Low       |   | 12.10                            |   | 11.50 |   | 10.35 |   | 10.25 |   |
| Dividends |   | 0.1275                           |   | 0.1250 |   | 0.1250 |   | 0.1225 |   |
|           |        |                                  |        |  |  |  |  |  |  |  |  |  |  |

 

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

 

See “Selected ConsolidatedFinancial and Other Data of the Company” on the fourth page hereof.  In the electronic version of the Form 10-Kthe above-captioned information appears in Exhibit 13.

 

**Item 7.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations****.**

 

**Forward-LookingStatements**

 

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

 

35

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Company’s ability to predict results or theactual effect of future plans or strategies is inherently uncertain.  Factors which could have a material adverseeffect on the operations and future prospects of the Company and thesubsidiaries include, but are not limited to, changes in: interest rates,general economic conditions, legislative/regulatory changes, monetary andfiscal policies of the U.S. Government, including policies of the U.S. Treasuryand the Federal Reserve Board, the quality or composition of the loan orinvestment portfolios, demand for loan products, deposit flows, competition,demand for financial services in the Company’s market area and accountingprinciples, policies and guidelines.  Theserisks and uncertainties should be considered in evaluating forward-lookingstatements and undue reliance should not be placed on such statements.  Further information concerning the Companyand its business, including additional factors that could materially affect theCompany’s financial results, is included in the Company’s filings with the SEC.

 

TheCompany does not undertake - and specifically disclaims any obligation - topublicly release the result of any revisions that may be made to any forward-lookingstatements to reflect events or circumstances after the date of such statementsor to reflect the occurrence of anticipated or unanticipated events.

 

**Managementof Interest Rate Risk and Market Risk Analysis**

 

The principal objective ofthe Company’s interest rate risk management is to evaluate the interest raterisk inherent in certain balance sheet accounts, determine the level of riskappropriate given the Bank’s business strategy, operating environment, capitaland liquidity requirements and performance objectives, and manage the riskconsistent with the Board of Directors’ approved guidelines.  Through such management, the Company seeksto reduce the vulnerability of its operations to changes in interestrates.  The Bank’s Board of Directors reviewsthe Bank’s interest rate risk position on a quarterly basis.  The Bank’s Asset/Liability Committee iscomprised of the Bank’s entire Board of Directors and members of seniormanagement.  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.

 

In recent years, the Bankhas emphasized the origination, purchase and retention of adjustable-ratemortgage loans and shorter-term fixed-rate mortgage loans, consumer loansconsisting primarily of home equity lines of credit and short-term commercialbusiness loans to strategically manage interest rate risk.  The Bank currently does not participate inhedging programs, interest rate swaps or other activities involving the use ofderivative financial instruments.

 

In the event of sharplyrising interest rates, the Bank has, with retention in mind, competitivelypriced deposits.  During 2002, the Bankfocused on attracting money market accounts as well as time deposits.  As necessary, the Bank has offeredcompetitive special products to increase retention.  Historically, the Bank has retained significant levels ofmaturing time deposits based on the above practice, as well as effectivecustomer service and long-standing relationships with customers.  For the year ended December 31, 2002, theBank retained 89.1% of funds maturing from time deposits.

 

 

**Analysis ofNet Interest Income**

 

Net interest income represents the differencebetween income on interest-earning assets and expense on interest-bearingliabilities. Net interest income depends on the relative amounts ofinterest-earning assets and interest-bearing liabilities and the interest rateearned or paid on them.

 

***Average Balance Sheet.**** *The followingtable sets forth certain information relating to the Bank for the years endedDecember 31, 2002, 2001 and 2000.  Theaverage yields and costs are derived by dividing income or expense by theaverage balance of interest-earning assets or interest-bearing liabilities,respectively, for the periods shown and reflect annualized yields andcosts.  Average balances are derivedfrom average monthly balances. The yields and costs include fees that areconsidered adjustments to yields. Tax-exempt income has been calculated on a tax equivalent basis using a34% tax rate.

 

36

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|                                                             |   | **For the  Year Ended December 31,** |    |
|------------------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                             |   | **2002**                                  |    | **2001** |   | **2000** |   |
|                                                             |   | **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                                              |   | $                                         | 27,611  |   | $ | 269 |   | 0.97 | % | $ | 28,416 |   | $ | 751 |   | 2.64 | % | $ | 17,511 |   | $ | 693 |   | 3.96 | % |
| Investment securities                                            |   | 75,853                                    |    | 4,385 |   | 5.78 |   | 61,201 |   | 3,947 |   | 6.45 |   | 65,744 |   | 4,550 |   | 6.92 |   |
| Mortgage-backed and mortgage-related securities                  |   | 12,811                                    |    | 641 |   | 5.00 |   | 12,874 |   | 827 |   | 6.42 |   | 10,519 |   | 835 |   | 7.94 |   |
| Mortgage loans, net                                              |   | 486,881                                   |    | 34,530 |   | 7.09 |   | 445,761 |   | 33,632 |   | 7.54 |   | 402,871 |   | 30,362 |   | 7.54 |   |
| Other loans                                                      |   | 80,103                                    |    | 5,174 |   | 6.46 |   | 55,127 |   | 4,308 |   | 7.81 |   | 31,693 |   | 2,868 |   | 9.05 |   |
| FHLB stock                                                       |   | 9,190                                     |    | 483 |   | 5.26 |   | 8,541 |   | 539 |   | 6.31 |   | 6,835 |   | 508 |   | 7.43 |   |
| Total interest-earning assets                                    |   | 692,449                                   |    | 45,482 |   | 6.57 |   | 611,920 |   | 44,004 |   | 7.19 |   | 535,173 |   | 39,816 |   | 7.44 |   |
| Noninterest-earning assets                                       |   | 40,089                                    |    |   |   |   |   | 21,466 |   |   |   |   |   | 20,579 |   |   |   |   |   |
| Total assets                                                     |   | $                                         | 732,538 |   |   |   |   |   | $ | 633,386 |   |   |   |   |   | $ | 555,752 |   |   |   |   |   |
| **Liabilities and Equity:**                                      |   |                                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                    |   |                                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                        |   |                                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market accounts                                            |   | $                                         | 121,957 |   | $ | 3,335 |   | 2.73 | % | $ | 76,406 |   | $ | 3,057 |   | 4.00 | % | $ | 32,921 |   | $ | 1,261 |   | 3.83 | % |
| Passbook savings accounts                                        |   | 101,257                                   |    | 2,308 |   | 2.28 |   | 74,726 |   | 2,325 |   | 3.11 |   | 74,560 |   | 2,807 |   | 3.76 |   |
| NOW accounts                                                     |   | 31,833                                    |    | 321 |   | 1.01 |   | 28,848 |   | 309 |   | 1.07 |   | 28,724 |   | 457 |   | 1.59 |   |
| Certificates of deposit                                          |   | 189,140                                   |    | 7,603 |   | 4.02 |   | 186,883 |   | 10,764 |   | 5.76 |   | 196,301 |   | 11,374 |   | 5.79 |   |
| Total deposits                                                   |   | 444,187                                   |    | 13,567 |   | 3.05 |   | 366,863 |   | 16,455 |   | 4.49 |   | 332,506 |   | 15,899 |   | 4.78 |   |
| FHLB advances                                                    |   | 172,991                                   |    | 9,254 |   | 5.35 |   | 164,783 |   | 8,978 |   | 5.45 |   | 129,783 |   | 7,502 |   | 5.78 |   |
| Total interest-bearing liabilities                               |   | 617,178                                   |    | 22,821 |   | 3.70 |   | 531,646 |   | 25,433 |   | 4.78 |   | 462,289 |   | 23,401 |   | 5.06 |   |
| Noninterest-bearing liabilities                                  |   | 43,213                                    |    |   |   |   |   | 33,778 |   |   |   |   |   | 27,927 |   |   |   |   |   |
| Total liabilities                                                |   | 660,391                                   |    |   |   |   |   | 565,424 |   |   |   |   |   | 490,216 |   |   |   |   |   |
| Total equity                                                     |   | 72,147                                    |    |   |   |   |   | 67,962 |   |   |   |   |   | 65,536 |   |   |   |   |   |
| Total liabilities and equity                                     |   | $                                         | 732,538 |   |   |   |   |   | $ | 633,386 |   |   |   |   |   | $ | 555,752 |   |   |   |   |   |
| Net interest income                                              |   |                                      |    | $ | 22,661 |   |   |   |   |   | $ | 18,571 |   |   |   |   |   | $ | 16,415 |   |   |   |
| Interest rate spread                                             |   |                                      |    |   |   | 2.87 | % |   |   |   |   | 2.41 | % |   |   |   |   | 2.38 | % |
| Net interest margin as a percent of interest-earning assets      |   |                                      |    |   |   | 3.27 | % |   |   |   |   | 3.03 | % |   |   |   |   | 3.07 | % |
| Ratio of interest-earning assets to interest-bearing liabilities |   |                                      |    |   |   | 112.20 | % |   |   |   |   | 115.10 | % |   |   |   |   | 115.77 | % |

 

37

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

 
|                                                 |   | **Year Ended  December 31, 2002********Compared to********Year Ended********December 31, 2001** |       | **Year Ended  December 31, 2001********Compared to********Year Ended********December 31, 2000** |   |
|------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|--------|
|                                                 |   | **Increase (Decrease)  Due to**                                                                 |       | **Increase (Decrease)  Due to**                                                                 |   |
|                                                 |   | **Volume**                                                                                      |       | **Rate**                                                                                        |   | **Vol./Rate** |   | **Net** |   | **Volume** |   | **Rate** |   | **Vol./Rate** |   | **Net** |   |
|                                                 |   | **(In  thousands)**                                                                             | ** ** |
| **Interest-earning assets:**                         |   |                                                                                            |       |                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Short-term deposits                                  |   | $                                                                                               | (21        | )                                                                                               | $      | (475 | ) | $ | 14 |   | $ | (482 | ) | $ | 432 |   | $ | (231 | ) | $ | (143 | ) | $ | 58 |   |
| Investment securities                                |   | 945                                                                                             |       | (410                                                                                            | )      | (98 | ) | 437 |   | (314 | ) | (309 | ) | 20 |   | (603 | ) |
| Mortgage-backed and mortgage-related securities, net |   | (4                                                                                              | )          | (183                                                                                            | )      | 1 |   | (186 | ) | 187 |   | (160 | ) | (35 | ) | (8 | ) |
| Mortgage loans, net                                  |   | 3,100                                                                                           |       | (2,006                                                                                          | )      | (196 | ) | 898 |   | 3,270 |   | - |   | - |   | 3,270 |   |
| Other loans                                          |   | 1,950                                                                                           |       | (744                                                                                            | )      | (340 | ) | 866 |   | 2,121 |   | (393 | ) | (288 | ) | 1,440 |   |
| FHLB stock                                           |   | 41                                                                                              |       | (90                                                                                             | )      | (6 | ) | (55 | ) | 127 |   | (77 | ) | (19 | ) | 31 |   |
| Total interest-earning assets                        |   | 6,011                                                                                           |       | (3,908                                                                                          | )      | (625 | ) | 1,478 |   | 5,823 |   | (1,170 | ) | (465 | ) | 4,188 |   |
| **Interest-bearing liabilities:**                    |   |                                                                                            |       |                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market accounts                                |   | 1,822                                                                                           |       | (970                                                                                            | )      | (574 | ) | 278 |   | 1,666 |   | 56 |   | 74 |   | 1,796 |   |
| Passbook savings accounts                            |   | 825                                                                                             |       | (620                                                                                            | )      | (222 | ) | (17 | ) | 6 |   | (487 | ) | (1 | ) | (482 | ) |
| NOW accounts                                         |   | 32                                                                                              |       | (17                                                                                             | )      | (3 | ) | 12 |   | 2 |   | (149 | ) | (1 | ) | (148 | ) |
| Certificates of deposit                              |   | 130                                                                                             |       | (3,252                                                                                          | )      | (39 | ) | (3,161 | ) | (548 | ) | (59 | ) | (3 | ) | (610 | ) |
| FHLB advances                                        |   | 447                                                                                             |       | (165                                                                                            | )      | (6 | ) | 276 |   | 2,019 |   | (427 | ) | (116 | ) | 1,476 |   |
| Total interest-bearing liabilities                   |   | 3,256                                                                                           |       | (5,024                                                                                          | )      | (844 | ) | (2,612 | ) | 3,145 |   | (1,066 | ) | (47 | ) | 2,032 |   |
| Net change in net interest income                    |   | $                                                                                               | 2,755      |                                                                                            | $      | 1,116 |   | $ | 219 |   | $ | 4,090 |   | $ | 2,678 |   | $ | (104 | ) | $ | (418 | ) | $ | 2,156 |   |

 

**Comparison of Financial Condition For the Years EndedDecember 31, 2002 and December 31, 2001**

 

Total assets at December 31,2002 were $782.4 million, which represented an increase of $109.0 million, or16.2%, compared to $673.4 million at December 31, 2001.  The change in total assets was primarily dueto increases in loans receivable, investment securities, and cash and cashequivalents.  Loans receivable, net,increased by $59.9 million, or 11.2%, to $597.0 million at December 31, 2002 ascompared to $537.1 million at December 31, 2001.  The increase in loans receivable was attributable to a $30.5million increase in the Bank’s one- to four-family mortgage loan portfolio; a$9.3 million increase in the commercial real estate loan portfolio; and a $3.3million increase in the commercial business loan portfolio, which was partiallyoffset by a $15.6 million decrease in the multi-family mortgage loan portfolioduring the year ended December 31, 2002. The overall increase in loans is primarily attributed to the Bank’smarket area and current interest rate environment.  Investment securities increased by $19.4 million to $88.0 millionat December 31, 2002, as compared to $68.6 million at December 31, 2001.  This increase was due to a $12.6 millionincrease in municipal securities, a $3.2 million increase in FNMA preferredstock, and a $9.0 million increase in corporate bonds, which was partiallyoffset by a $5.4 million decrease in U.S. Government obligations.  Cash and cash equivalents increased $14.6million to $32.8 million at December 31, 2002 as compared to $18.2 million atDecember 31, 2001.  The growth in totalassets was funded by increases in deposits. Deposits increased $104.1 million, or 24.8%,

 

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to $524.2 million at December 31, 2002 from$420.1 million at December 31, 2001. The increase in deposits is largely due to increased advertising and anew branch office.  Stockholders’ equityincreased by $6.2 million to $74.8 million at December 31, 2002 as compared to$68.6 million at December 31, 2001. This increase is primarily the result of the Company’s net income duringthe year and a $1.0 million increase in the Company’s accumulated othercomprehensive income relating to its available-for-sale investment portfolio,offset by dividends paid.

 

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

 

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

 

***Interest Income.***  Interest income increased $1.2 million, or 2.7%, to $45.0 million forthe year ended December 31, 2002, compared with 2001.  This increase resulted from an increase in averageinterest-earning assets, partially offset by a decrease in average yield.  The largest component was an increase of$898,000 in mortgage loan interest income for the year ended December 31,2002.  This resulted from an increase inaverage balance of $41.1 million offset by a decrease in average yield of 62basis points.  Another component was anincrease of $881,000 in other loan interest income for the year ended December31, 2002.  This resulted from anincrease in average balance of $25.0 million offset by a decrease in averageyield of 135 basis points.  This waspartially offset by a decrease of $416,000 in interest income on investmentsecurities, FHLB stock and short-term deposits.  This resulted from an increase in average balance of $14.5million offset by a decrease in average yield of 78 basis points.  Overall, the average yield on the Bank’sinterest-earning assets decreased by 62 basis points to 6.57% for the yearended December 31, 2002 from 7.19% for the year ended December 31, 2001.  The decrease in average yield is due to ageneral decrease in interest rates.  Theaverage balance of interest-earning assets increased by $80.5 million, or13.2%, to $692.4 million for the year ended December 31, 2002 from $611.9million in 2001.

 

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

 

***Net Interest Income Before Provision forLoan Losses.***  Net interest income before provision forloan losses increased $3.8 million, or 20.6%, to $22.2 million for the yearended December 31, 2002 from $18.4 million for 2001.  This increase was primarily attributable to an $80.5 millionincrease in average interest-earning assets, at an average yield of 6.57%,offset by an increase in the average balance of interest-bearing liabilities of$85.5 million, at an average cost of 3.70%. This combination resulted in an increase in interest rate spread of 46basis points to 2.87% for the year ended December 31, 2002, as compared to2.41% for the year ended December 31, 2001. The increase in interest rate spread is due to a general decrease inrates in the Bank’s local market area as well as deposits repricing faster thanloans.  The net interest margin as apercent of interest-earning assets increased by 24 basis points to 3.27% forthe year ended December 31, 2002 as compared to 3.03% for the comparable periodin 2001.

 

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

 

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2001, respectively.   Management periodically calculates an allowance sufficiencyanalysis based upon the portfolio composition, asset classifications,loan-to-value ratios, impairments in the current loan portfolio, and otherfactors.  This analysis is designed toreflect credit losses for specifically identified loans, as well as creditlosses in the remainder of the loan portfolio. The reserve methodology employed by management reflects the differencein degree of risk between the various categories of loans in the Bank’sportfolio.  The reserve methodology alsocritically assesses those loans adversely classified in the portfolio bymanagement as doubtful, substandard or special mention.  These allowance components are set at ahigher factor than the non-classified one- to four-family loans in theportfolio to reflect the greater level of risk to which management believes theBank is exposed.  Management believesthat the allowance for loan losses is currently adequate to cover probablelosses in the existing loan portfolio. While management estimates loan losses using the best availableinformation, no assurance can be given that future additions to the allowancewill not be necessary based on changes in economic and real estate marketconditions, further information obtained regarding problem loans,identification of additional problem loans and other factors, both within andoutside of management’s control.  Inaddition, the FDIC and the Commissioner, as an integral part of theirexamination processes, periodically review the Bank’s allowance for 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 $4.3 million and $1.8 million for the yearsended December 31, 2002 and 2001, respectively.  Insurance and brokerage commissions increased $86,000 to $405,000for the year ended December 31, 2002 from $319,000 for the comparable period in2001.  Other income increased by$771,000 to $842,000 for the year ended December 31, 2002 from $70,000 for the yearended December 31, 2001.  This increaseis primarily related to the increase in cash surrender value of Bank Owned LifeInsurance.  Service fees increased$371,000 to $1.6 million for the year ended December 31, 2002 from $1.2 millionfor the comparable prior year period. Revenues of $1.3 million were generated by Computer Dynamics Group, Inc.(“CDGI”).  As previously reported, theCompany purchased a controlling interest in CDGI for $420,000 in January2002.  CDGI is an information technologyconsulting/services company with main offices in West Chicago, Illinois andgenerally services clients located in the Chicago metropolitan area.

 

***Noninterest Expense.***  Noninterest expense increased by $4.0 million, to $16.6 million for theyear ended December 31, 2002 from $12.6 million for the comparable period in2001.  Compensation and benefitsincreased by $2.5 million, or 33.3%, to $10.2 million for the year endedDecember 31, 2002 compared to $7.7 million for the year ended December 31,2001.  This increase is primarily due toa combination of annual salary increases, the addition of staff and the relatedcompensation and benefits of CDGI. The additional staff expenses are primarilyattributed to the opening of a new branch office.  All other operating expenses, including advertising, depreciationand repairs, marketing, insurance, postage, communications, data processing andother office expense increased by a combined $1.5 million, or 30.6%, to $6.4million for the year ended December 31, 2002 compared to $4.9 million for thecomparable period in 2001.  Of thisincrease, $203,000 is related to marketing and advertising expenses relating toa new branch office and increased advertising for EFS Financial Services, Inc.,the Bank’s wholly owned subsidiary, which offers a full range of investmentproducts.

 

***Income Tax Expense.*** Income tax expense totaled $2.9 million for the year ended December 31,2002 compared to $2.5 million for the comparable period in 2001.  The increase in the provision for incometaxes was the result of an increase in pretax income of $1.8 million, to $9.0million for the year ended December 31, 2002 from $7.2 million for the sameperiod in 2001.  The effective incometax rate decreased to 32.1% for the year ended December 31, 2002 from 35.1% forthe preceding year.  The decrease in theeffective tax rate is primarily due to the increase in municipal securitiesavailable-for-sale and investment in bank owned insurance for which income isnon-taxable.

 

**Comparison of Operating Results for the Years Ended December31, 2001 and December 31, 2000**

 

***General.*** The Company’s net income increased $774,000,to $4.6 million for the year ended December 31, 2001, from $3.9 million for theyear ended December 31, 2000.

 

***Interest Income.***Interest income increased $4.0 million, or10.1%, to $43.8 million for the year ended December 31, 2001, compared with theyear ended December 31, 2000.  Thisincrease resulted from an increase in average interest-earning assets offset bya decrease in average yield.  The largestcomponent was an increase of $3.3 million in mortgage loan interest income forthe year ended December 31, 2001.  Thisresulted from an increase in average balance of $42.9 million, while theaverage yield remained unchanged at 7.54% for both year-end periods.  This was partially offset by a decrease of$693,000 in interest income on investment and mortgage-backed securitiesavailable-for-sale and short-term deposits. This resulted from an increase in average

 

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balance of $8.7 million offset by a decreasein average yield of 123 basis points. Overall, the average yield on the Bank’s interest-earning assetsdecreased by 25 basis points to 7.19% for the year ended December 31, 2001 from7.44% for the year ended December 31, 2000. The decrease in average yield is due to a general decline in interestrates.  The average balance ofinterest-earning assets increased $76.7 million, or 14.3%, to $611.9 millionfor the year ended December 31, 2001 from $535.2 million for the comparableperiod in 2000.

 

***Interest Expense.***Interest expense increased by $2.0 million,or 8.7%, to $25.4 million for the year ended December 31, 2001, from $23.4million for the year ended December 31, 2000. This increase resulted from the increase in the average balance ofinterest-bearing liabilities, the effect of which was partially offset by anoverall decrease in the average rate paid on those interest-bearingliabilities.  The average rate paid ontotal deposits decreased 29 basis points to 4.49% for the year ended December31, 2001 from 4.78% for the year ended December 31, 2000.  The average balance of deposits increased$34.4 million, or 10.3%, to $366.9 million for the year ended December 31, 2001from $332.5 million for the year ended December 31, 2000.  The resulting increase in interest expensetotaled $556,000 for the year ended December 31, 2001.  Interest expense resulting from borrowedmoney increased by $1.5 million.  Theaverage rate paid on borrowed money decreased 33 basis points to 5.45% for theyear ended December 31, 2001 from 5.78% for the year ended December 31,2000.  This decrease in average rate wasoffset by an increase of $35.0 million in the average balance of borrowed moneyto $164.8 million for the year ended December 31, 2001 from $129.8 million forthe year ended December 31, 2000.

 

***Net Interest Income Before Provision forLoan Losses.***Netinterest income before provision for loan losses increased $2.0 million, or12.2%, to $18.4 million for the year ended December 31, 2001 from $16.4 millionfor the year ended December 31, 2000. This increase was primarily attributed to a $76.7 million increase inaverage interest-earning assets, at an average yield of 7.19%, offset by anincrease in the average balance of interest-bearing liabilities of $69.4million, at an average cost of 4.78%. The interest rate spread increased 3 basis points to 2.41% for the yearended December 31, 2001 from 2.38% for the year ended December 31, 2000.  The net interest margin as a percent ofinterest-earning assets decreased 4 basis points to 3.03% for the year endedDecember 31, 2001 as compared to 3.07% for the comparable period in 2000.

 

***Provision for Loan Losses.***The Bank’s provision for loan lossesincreased $137,000 to $500,000 for the year ended December 31, 2001 from$363,000 in 2000.  At December 31, 2001and 2000, non-performing loans totaled $2.6 million and $4.5 million,respectively.  At December 31, 2001,$1.6 million of the $2.6 million in non-performing loans was secured by a firstmortgage on a commercial building located in Elgin, Illinois.  At December 31, 2001 and 2000 the balance ofthe allowance for loan losses totaled $2.3 million and $1.9 million,respectively.  At December 31, 2001, theratio of the allowance for loan losses to non-performing loans was 87.4%compared to 41.5% at December 31, 2000. The ratio of the allowance to total loans was 0.42% and 0.41% atDecember 31, 2001 and 2000, respectively. Net charge-offs totaled $126,000 and $27,000 in 2001 and 2000,respectively.

 

***Noninterest Income.***Noninterest income totaled $1.8 million and$1.3 million for the years ended December 31, 2001 and 2000, respectively.  Service fees increased $268,000 to $1.2million for the year ended December 31, 2001 from $953,000 for the comparableperiod in 2000.  In addition, realestate and insurance commissions increased $152,000 to $319,000 for the yearended December 31, 2001 from $167,000 for the year ended December 31, 2000.  Gains on sale of loans totaled $171,000 forthe year ended December 31, 2001.  Therewere no loan sales for the year ended December 31, 2000.  These increases were partially offset by a$117,000 decrease to $33,000 in gains on the sales of securities for the yearended December 31, 2001 from $150,000 for the comparable period in 2000.

 

***Noninterest Expense.***Noninterest expense increased by $1.2million, to $12.6 million for the year ended December 31, 2001 from $11.4million for the comparable period in 2000. Compensation and benefits increased by $836,000, or 12.2%, to $7.7million for the year ended December 31, 2001 compared to $6.8 million for theyear ended December 31, 2000.  Thisincrease was primarily due to a combination of annual salary increases and theaddition of staff.  The additional staffexpenses are partially attributed to the opening of the Bank’s newest branch inJune 2000.  All other operatingexpenses, including advertising, depreciation and repairs, marketing, postage,communications, data processing and other office expense increased by acombined $368,000, or 8.1% to $4.9 million for the year ended December 31, 2001compared to $4.5 million for the comparable period in 2000.  Of this increase, $194,000 is related tooffice building expenses; $102,000 of data processing expense; and $144,000 ofNOW account operating expenses.  Theefficiency ratio improved to 62.2% for the year ended December 31, 2001 from64.2% for the comparable prior year period. In addition, the noninterest expense to average total asset ratiodecreased 6 basis points to 1.99% at December 31, 2001 from 2.05% for the prioryear period.  Management continues toemphasize the importance of

 

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expense management and control in order tocontinue to provide expanded banking services to a growing market base.

 

***Income Tax Expense.***Income tax expense totaled $2.5 million forthe year ended December 31, 2001 compared to $2.1 million for the comparableperiod in 2000.  The increase in theprovision for income taxes was the result of an increase in pretax income of$1.1 million to $7.1 million for the year ended December 31, 2001 from $6.0million for the same period in 2000. The effective tax rate decreased to 35.1% for the year ended December31, 2001 from 35.6% for the preceding year.

 

**ContractualObligations and Commercial Commitments**

 

The Bank has certainobligations and commitments to make future payments under contracts.  At December 31, 2002, the aggregatecontractual obligations and commercial commitments are:

** **
|                            |   | **Period to Maturity********from December 31, 2002** |    |
|---------------------------------|--------|------------------------------------------------------|---------|
|                            |   | **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, 2002** |   |
|                            |   | **(In thousands)**                                   |    |
| Contractual obligations:        |   |                                                 |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Certificates of deposit         |   | $                                                    | 116,258 |   | $ | 45,744 |   | $ | 20,365 |   | $ | 24,032 |   | $ | 3,479 |   | $ | — |   | $ | 209,878 |   |
| Federal home loan bank advances |   | 5,000                                                |    | 32,700 |   | 15,000 |   | 5,000 |   | — |   | 114,000 |   | 171,700 |   |
| Operating leases                |   | 109                                                  |    | 106 |   | 86 |   | 65 |   | 65 |   | 260 |   | 691 |   |
| Total at December 31, 2002      |   | $                                                    | 121,367 |   | $ | 78,550 |   | $ | 35,451 |   | $ | 29,097 |   | $ | 3,544 |   | $ | 114,260 |   | $ | 382,269 |   |

 
|                          |   | **Period to Maturity  from December 31, 2002** |   |
|-------------------------------|--------|------------------------------------------------|--------|
|                          |   | **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, 2002** |   |
|                          |   | **(In thousands)**                             |   |
| Other commercial commitments: |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Lines of credit               |   | $                                              | 6,906  |   | $ | 2,404 |   | $ | 287 |   | $ | 1,162 |   | $ | 384 |   | $ | 14,924 |   | $ | 26,067 |   |
| Loan commitments              |   | 12,773                                         |   | — |   | — |   | — |   | — |   | — |   | 12,773 |   |
| Letters of credit             |   | 1,873                                          |   | 788 |   | 256 |   | 10 |   | 2,000 |   | — |   | 4,927 |   |
| Total at December 31, 2002    |   | $                                              | 21,552 |   | $ | 3,192 |   | $ | 543 |   | $ | 1,172 |   | $ | 2,384 |   | $ | 14,924 |   | $ | 43,767 |   |

 

**Liquidity and Capital Resources**

 

The Bank’s primary sourcesof funds are savings deposits, proceeds from the principal and interestpayments on loans and proceeds from the maturation of securities and, to alesser extent, borrowings from FHLB-Chicago. While maturities and scheduled amortization of loans and securities arepredictable sources of funds, deposit outflows and mortgage prepayments aregreatly influenced by general interest rates, economic conditions andcompetition.

 

The primary investingactivities of the Bank are the origination of primarily residential one-tofour-family loans and, to a lesser extent, multi-family and commercial realestate, construction and land, commercial and consumer loans and the purchaseof mortgage-backed and mortgage-related securities.  During the years ended December 31, 2002, 2001, and 2000,the Bank’s loan originations totaled $179.2 million, $206.6 million and $94.8million, respectively.  In addition, theBank purchased loans totaling

 

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$79.6 million, $65.2 million and $46.7million for the same time periods. Primarily deposit growth, FHLB advances and principal repayments onloans, and mortgage-backed securities funded these activities.  The Bank experienced a net increase in totaldeposits of $104.1 million, $50.6 million and $45.7 million for the years endedDecember 31, 2002, 2001, and 2000, respectively.  This increase can be attributed to an aggressive marketingcampaign as well as the addition of a branch office.  In addition, FHLB advances decreased $3.5 million, and increased$35.0 million and $25.0 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.

 

The Bank’s most liquidassets are cash and interest-bearing demand accounts.  The levels of these assets are dependent on the Bank’s operating,financing, lending and investing activities during any given period.  At December 31, 2002, cash andinterest-bearing demand accounts totaled $32.8 million, or 4.2% 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, 2002, the Bank had $171.1 million of outstandingFHLB borrowings.

 

Outstanding commitments tooriginate first mortgage loans totaled $12.8 million at December 31, 2002.  Management of the Bank anticipates that itwill have sufficient funds available to meet its current loan commitments.  Certificates of deposit, which are scheduledto mature in one year or less from December 31, 2002, totaled $116.3million.  For the year ended December31, 2002, the Bank experienced an 89.1% retention rate of funds maturing fromcertificates of deposit. It has been and will continue to be a priority of managementto retain time deposits.  The Bankrelies primarily on competitive rates, customer service, and long-standingrelationships with customers to retain deposits.  From time to time, the Bank will also offer competitive specialproducts to its customers to increase retention.  Based upon the Bank’s experience with deposit retention andcurrent retention strategies, management believes that, although it is notpossible to predict future terms and conditions upon renewal, a significantportion of such deposits will remain with the Bank.

 

At December 31, 2002, theBank exceeded all of its regulatory capital requirements with a leveragecapital level of $68.5 million, or 8.92% of adjusted assets, which is above therequired level of $30.7 million, or 4.00%, and risk-based capital of $71.7million, or 13.41% of adjusted assets, which is above the required level of$42.8 million, or 8.00%.

 

The capital injectionresulting from the Conversion in 1998 of $72.8 million significantly increasedliquidity and capital resources.  Aportion of the net proceeds was invested in marketable securities.  The initial level of liquidity has beenreduced as net proceeds are utilized for general corporate purposes, includingthe funding of lending activities and expansion of facilities and to a greaterdegree the repurchase of the Company’s common stock.  During 2002, the Company repurchased 56,800 shares of theCompany’s common stock at an average price per share of $16.84.  The Company believes that stock repurchasesare a good way to manage its excess capital and a sound investmentdecision.  The primary source of fundingfor the Company is dividend payments from the Bank, sales and maturities ofinvestment securities and, to a lesser extent, earnings on investments anddeposits held by the Company.  Dividendpayments by the Bank have primarily been used to fund stock repurchase programsand pay dividends on Company stock. These repurchases totaled $34.5 million as of December 31, 2002.  The Bank’s ability to pay dividends andother capital distributions to the Company is generally limited by theprovisions of the Illinois state banking regulations and the Federal DepositInsurance Corporation.  Additionally,the Illinois State Banking Commissioner and Federal Deposit InsuranceCorporation may prohibit the payment of dividends that are otherwisepermissible by regulation for safety and soundness reasons.  Under Illinois banking law, an Illinoisstate chartered stock savings bank may declare and pay dividends out of its netprofits, unless there is an impairment of capital, but approval of theCommissioner is required if the total of all dividends declared in a calendaryear would exceed 50% of the 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 a dividend or capitaldistribution to the Company in excess of the regulatory permitted dividendamounts, no assurances can be made such application would be approved by theregulatory authorities.  See also“Regulation and Supervision” on page 27.

 

**Impact of Inflation and Changing Prices**

 

The Consolidated FinancialStatements and Notes thereto presented in this Annual Report have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America, which generally require the measurement of financialposition and operating results in terms of historical dollar amounts withoutconsidering the changes in the relative purchasing power of money over time dueto inflation.  The impact of inflationis reflected in the increased cost of the Bank’s operations.  Unlike industrial companies, nearly all ofthe assets and liabilities of the Bank are monetary in nature.  As a result, interest rates have a greater

 

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impact on the Bank’s performance than do theeffects of general levels of inflation. Interest rates do not necessarily move in the same direction or to thesame extent as the price of goods and services.

 

**Impact of Accounting Standards**

 

In July 2001,the FASB issued SFAS No. 141, “*BusinessCombinations*” (SFAS No. 141) and SFAS No. 142, “*Goodwill and Other Intangible Assets*”(SFAS No. 142).  SFAS No. 141 requiresthat all business combinations initiated after June 30, 2001 be accounted forunder the purchase method and addresses the initial recognition and measurementof goodwill and other intangible assets acquired in a businesscombination.  SFAS No. 142 addresses theinitial recognition and measurement of intangible assets acquired outside of abusiness combination and the accounting for goodwill and other intangibleassets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives beamortized and that goodwill and intangible assets with indefinite lives willnot be amortized, but will rather be tested at least annually forimpairment.  SFAS No. 142 was effectiveJanuary 1, 2002 for calendar year companies. The adoption of SFAS No. 141 and No. 142 did not have a material impacton the Company’s results of operations or financial condition.

 

In June 2002,the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit orDisposal Activities.”  This statementaddresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies Emerging Task Force (EITF) Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring).”  This Statement iseffective for exit or disposal activities that are initiated after December 31,2002.  Adoption of this statement is notexpected to have a material effect on the Company’s consolidated financialstatements.

 

In October2002, the FASB issued SFAS No. 147 “Acquisitions of Certain FinancialInstitutions.”  This statement, whichprovides guidance on the accounting for the acquisition of a financialinstitution, applies to all acquisitions except transactions between two ormore mutual enterprises.  The provisionsof this Statement that relate to the application of SFAS No. 144 apply tocertain long-term customer-relationship intangible assets recognized in anacquisition of a financial institution, including those acquired intransactions between mutual enterprises. The excess of the fair value of liabilities assumed over the fair valueof tangible and identifiable intangible assets acquired in a businesscombination represents goodwill that should be accounted for under SFAS No.142.  If certain criteria in this SFASNo. 147 are met, the amount of the unidentifiable intangible asset will bereclassified to goodwill upon the adoption of SFAS No. 142, and financialinstitutions meeting these conditions will be required to restate previouslyissued financials.  Provisions of thisstatement that relate to the application of the purchase method of accountingare effective for acquisitions on or after October 1, 2002.  The provision of this Statement relating toaccounting for impairment or disposal of certain long-termcustomer-relationship intangible assets are effective on October 1, 2002, withearlier application permitted. The adoption of this Statement did not have amaterial effect on the Company’s consolidated financial statements.

 

In December2002, the FASB issued Statement 148, “Accounting for Stock-Based Compensation -Transition and Disclosure” (FAS 148). FAS 148 amends FAS 123, “Accounting for Stock-Based Compensation, toprovide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  In addition, this Statement amends thedisclosure requirements of FAS 123 to require prominent disclosures in bothannual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.  The Company has included thenew disclosures in Note 12 of the Notes to Consolidated Financial Statements.

 

In November2002, the FASB issued Interpretation No. 45 (“FIN 45”), an interpretation ofFASB Statement Nos. 5, 57 and 107, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers.”  This interpretation expandsthe disclosures to be made by a guarantor in its interim and annual financialstatements about its obligations under certain guarantees and requires theguarantor to recognize a liability for the fair value of an obligation assumedunder a guarantee.  FIN 45 clarifies therequirements of SFAS No. 5, “Accounting for Contingencies,” relating toguarantees.  In general, FIN 45 appliesto contracts or indemnification agreements that contingently require theguarantor to make payments to the guaranteed party based on changes in anunderlying instrument that is related to an asset, liability, or equitysecurity of the guaranteed party. Certain guarantee contracts are excluded from both the disclosure andrecognition requirements of this interpretation, including, among others,guarantees relating to employee compensation, residual value guarantees undercapital lease arrangements, commercial letters of credit, loan commitments,subordinated interests in a special purpose entity, and guarantees of acompany’s own future performance.  Otherguarantees are subject to the disclosure requirements of FIN 45 but not to the recognitionprovisions and include, among others, a guarantee accounted for as a derivativeinstrument under SFAS No. 133, “Accounting for Derivative Instruments andHedging

 

44

----

 

Activities,” a parent’sguarantee of debt owed to a third party by its subsidiary or vice versa, and aguarantee which is based on performance not price.  The disclosure requirements of FIN 45 are effective for theCompany as of December 31, 2002, and require disclosure of the nature of theguarantee, the maximum potential amount of the future payments that theguarantor could be required to make under the guarantee, and the current amountof the liability, if any, for the guarantor’s obligation under theguarantee.  The recognition requirementsof FIN 45 are to be applied prospectively to guarantees issued or modifiedafter December 31, 2002.  The Companydoes not expect the requirements of FIN 45 to have a material effect on itsconsolidated financial statements.

 

##### **Item 7A.Quantitative and Qualitative Disclosure About Market Risk**

 

The Bank’s interest ratesensitivity is monitored by management through the use of a Net Portfolio ValueModel which generates estimates of the change in the Bank’s net portfolio value(“NPV”) over a range of interest rate scenarios.  NPV is the present value of expected cash flows from assets,liabilities, and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPVin that scenario divided by the market value of assets in the same scenario.The model assumes estimated loan prepayment rates, reinvestment rates anddeposit decay rates similar to the assumptions utilized for the Gap Table.  The Sensitivity Measure is the decline inthe NPV ratio, in basis points, caused by a 2% increase or decrease in rates;whichever produces a larger decline. The higher the institution’s Sensitivity Ratio, the greater its exposureto interest rate risk is considered to be. The following NPV Table sets forth the Bank’s NPV as of December 31,2002.

 
| **Change in  Interest Rates In Basis Points (Rate Shock)** |                    |                        |                                       |         |           |
|------------------------------------------------------------|-------------------------|-----------------------------|--------------------------------------------|--------------|----------------|
|                                                       | **Net Portfolio Value** |                        | **NPV as % of Portfolio  Value of Assets** |         |
| **Amount**                                                 |                    | **$  Change**               |                                       | **% Change** | **NPV  Ratio** |   | **% Change** |
|                                                       |                    | **(Dollars  in thousands)** | ** **                                 |         | ** **     |   | ** ** |   | ** ** |
|                                                       |                    |                        |                                       |         |           |   |   |   |   |   |   |
| 300                                                        |                    | $                           | 58,951                                     |         | $              | (33,430 | ) | (36.19 | )% | 7.68 | % | (32.81 | )% |
| 200                                                        |                    | 71,601                      |                                       | (20,780      | )              | (22.49 | ) | 9.17 |   | (19.77 | ) |
| 100                                                        |                    | 83,502                      |                                       | (8,879       | )              | (9.61 | ) | 10.51 |   | (8.05 | ) |
| Static                                                     |                    | 92,381                      |                                       | —       |           | — |   | 11.43 |   | — |   |
| (100)                                                      |                    | 94,601                      |                                       | 2,220        |           | 2.40 |   | 11.55 |   | 1.05 |   |
| (200)                                                      |                    | 90,959                      |                                       | (1,422       | )              | (1.54 | ) | 11.03 |   | (3.50 | ) |
| (300)                                                      |                    | 88,481                      |                                       | (3,900       | )              | (4.22 | ) | 10.64 |   | (6.91 | ) |
|                                                            |                         |                             |                                            |              |                |  |  |  |  |  |  |  |  |

 

Certain shortcomings areinherent in the methodology used in the above interest rate riskmeasurements.  Modeling changes in NPVrequire certain assumptions which may or may not reflect the manner in whichactual yields and costs respond to changes in market interest rates.  In this regard, the NPV Table presentedassumes that the composition of the Bank’s interest sensitive assets andliabilities existing at the beginning of a period remains constant over theperiod being measured and also assumes that a particular change in interestrates is reflected uniformly across the yield curve regardless of the durationto maturity or repricing of specific assets and liabilities.  Accordingly, although the NPV Table providesan indication of the Bank’s interest rate risk exposure at a particular pointin time, such measurements are not intended to and do not provide a preciseforecast of the effect of changes in market interest rates on the Bank’s netinterest income and will differ from actual results.

 

For a further discussion regarding Quantitative and QualitativeDisclosure about Market Risk, see Item 7 of this Form 10-K, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Management of Interest Rate Risk and Market Risk Analysis.”

 

**Item 8. Financial Statements and Supplementary Data****.**

 

45

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** **

**EFC BANCORP, INC. AND SUBSIDIARIES**

 

Consolidated Financial Statements

 

December 31, 2002, 2001, and 2000

 

(With Independent Auditors’ Report Thereon)

 

----

 

**Independent Auditors’ Report**

 

The Board of DirectorsEFC Bancorp, Inc.:

 

We have audited theaccompanying consolidated balance sheets of EFC Bancorp, Inc. and subsidiaries(the Company) as of December 2002 and 2001, and the related consolidatedstatements of income, changes in stockholders’ equity, and cash flows for eachof the years in the three-year period ended December 31, 2002. Theseconsolidated financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

 

We conducted our audits inaccordance with auditing standards generally accepted in the United States ofAmerica. Those standards require that we plan and perform the audit to obtainreasonable 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, 2002 and 2001, and the results of their operations andtheir cash flows for each of the years in the three-year period endedDecember 31, 2002 in conformity with accounting principles generallyaccepted in the United States of America.

 

 

Chicago, IllinoisMarch 3, 2003

 

 

----

 

**EFC BANCORP, INC. AND SUBSIDIARIES**

 

ConsolidatedBalance Sheets

 

December31, 2002 and 2001

 
|                                                                                                                          |   | **2002**    |        | **2001**    |        |
|-------------------------------------------------------------------------------------------------------------------------------|--------|-------------|-------------|-------------|-------------|
|                                                                                                                          |   |        |        |        |        |
| **Assets**                                                                                                                    |   |        |        |        |        |
| Cash and cash equivalents:                                                                                                    |   |        |        |        |        |
| On hand and in banks                                                                                                          |   | $           | 4,277,209   |        | 3,186,966   |   |
| Interest bearing deposits with financial institutions                                                                         |   | 28,567,081  |        | 14,988,324  |        |
| Total cash and cash equivalents                                                                                               |   | 32,844,290  |        | 18,175,290  |        |
|                                                                                                                          |   |        |        |        |        |
| Loans receivable, net                                                                                                         |   | 597,038,305 |        | 537,070,664 |        |
| Mortgage-backed securities available-for-sale, at fair value                                                                  |   | 15,255,684  |        | 13,855,715  |        |
| Investment securities available-for-sale, at fair value                                                                       |   | 87,981,884  |        | 68,615,462  |        |
| Foreclosed real estate                                                                                                        |   | 1,985,741   |        | —      |        |
| Stock in Federal Home Loan Bank of Chicago, at cost                                                                           |   | 9,362,200   |        | 8,891,900   |        |
| Accrued interest receivable                                                                                                   |   | 3,887,410   |        | 3,682,120   |        |
| Office properties and equipment, net                                                                                          |   | 16,796,685  |        | 10,990,206  |        |
| Real estate held for development                                                                                              |   | 2,934,072   |        | —      |        |
| Bank owned life insurance                                                                                                     |   | 12,246,803  |        | 10,854,000  |        |
| Other assets                                                                                                                  |   | 2,042,852   |        | 1,308,083   |        |
| Total assets                                                                                                                  |   | $           | 782,375,926 |        | 673,443,440 |   |
|                                                                                                                          |   |        |        |        |        |
| **Liabilities  and Stockholders’ Equity**                                                                                |   |        |        |        |        |
| Liabilities:                                                                                                                  |   |        |        |        |        |
| Deposits                                                                                                                      |   | $           | 524,189,844 |        | 420,084,289 |   |
| Borrowed money                                                                                                                |   | 171,778,743 |        | 175,200,000 |        |
| Income taxes payable                                                                                                          |   | (40,717     | )           | 419,125     |        |
| Accrued expenses and other liabilities                                                                                        |   | 11,746,488  |        | 9,111,463   |        |
| Total liabilities                                                                                                             |   | 707,674,358 |        | 604,814,877 |        |
|                                                                                                                          |   |        |        |        |        |
| Minority interest                                                                                                             |   | (75,127     | )           | —      |        |
|                                                                                                                          |   |        |        |        |        |
| Stockholders’ equity:                                                                                                    |   |        |        |        |        |
| Preferred stock, par value $0.01 per share. Authorized 2,000,000  shares; no shares issued                                    |   | —      |        | —      |        |
| Common stock, par value $0.01 per share. Authorized 25,000,000  shares; issued 7,491,434 shares at December 31, 2002 and 2001 |   | 74,914      |        | 74,914      |        |
| Additional paid-in capital                                                                                                    |   | 71,834,834  |        | 71,663,695  |        |
| Treasury stock, at cost, 2,854,293 and 2,884,873 shares at December  31, 2002 and 2001, respectively                          |   | (33,755,940 | )           | (33,584,554 | )           |
| Unearned employee stock ownership plan (ESOP), 399,544 and 439,498  shares at December 31, 2002 and 2001, respectively        |   | (5,974,199  | )           | (6,571,619  | )           |
| Unearned stock award plan, 51,790 and 107,943 shares at December 31,  2002 and 2001, respectively                             |   | (576,164    | )           | (1,200,866  | )           |
| Retained earnings, substantially restricted                                                                                   |   | 41,911,421  |        | 38,015,742  |        |
| Accumulated other comprehensive income                                                                                        |   | 1,261,829   |        | 231,251     |        |
| Total stockholders’ equity                                                                                               |   | 74,776,695  |        | 68,628,563  |        |
| Commitments and contingencies                                                                                                 |   |        |        |        |        |
| Total liabilities and stockholders’ equity                                                                               |   | $           | 782,375,926 |        | 673,443,440 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

 

F-2

----

 

**EFC BANCORP, INC. AND SUBSIDIARIES**

 

ConsolidatedStatements of Income

 

Yearsended December 31, 2002, 2001, and 2000

 
|                                                                                                |   | **2002**   |       | **2001**   |       | **2000**   |       |
|-----------------------------------------------------------------------------------------------------|--------|------------|------------|------------|------------|------------|------------|
| Interest income:                                                                                    |   |       |       |       |       |       |       |
| Loans secured by real estate                                                                        |   | $          | 34,529,608 |       | 33,631,702 |       | 30,354,576 |   |
| Other loans                                                                                         |   | 5,166,670  |       | 4,285,273  |       | 2,866,475  |       |
| Mortgage-backed securities available-for-sale                                                       |   | 641,146    |       | 826,999    |       | 835,232    |       |
| Investment securities available-for-sale and interest  bearing deposits with financial institutions |   | 4,680,757  |       | 5,096,809  |       | 5,750,686  |       |
| Total interest income                                                                               |   | 45,018,181 |       | 43,840,783 |       | 39,806,969 |       |
| Interest expense:                                                                                   |   |       |       |       |       |       |       |
| Deposits                                                                                            |   | 13,567,100 |       | 16,454,916 |       | 15,898,933 |       |
| Borrowed money                                                                                      |   | 9,254,173  |       | 8,978,165  |       | 7,502,220  |       |
| Total interest expense                                                                              |   | 22,821,273 |       | 25,433,081 |       | 23,401,153 |       |
| Net interest income before provision for loan losses                                                |   | 22,196,908 |       | 18,407,702 |       | 16,405,816 |       |
| Provision for loan losses                                                                           |   | 900,000    |       | 500,000    |       | 363,000    |       |
| Net interest income after provision for loan losses                                                 |   | 21,296,908 |       | 17,907,702 |       | 16,042,816 |       |
| Noninterest income:                                                                                 |   |       |       |       |       |       |       |
| Service fees                                                                                        |   | 1,591,294  |       | 1,220,059  |       | 952,551    |       |
| Real estate and insurance commissions                                                               |   | 404,929    |       | 318,698    |       | 166,862    |       |
| Information technology sales and service income, net                                                |   | 1,282,615  |       | —     |       | —     |       |
| Gain (loss) on sale of foreclosed real estate                                                       |   | —     |       | 8,014      |       | (7,413     | )          |
| Gain on sale of securities                                                                          |   | —     |       | 32,812     |       | 150,057    |       |
| Gain on sale of loans                                                                               |   | 200,409    |       | 170,723    |       | —     |       |
| Bank owned life insurance                                                                           |   | 692,863    |       | —     |       | —     |       |
| Other                                                                                               |   | 148,757    |       | 70,392     |       | 67,718     |       |
| Total noninterest income                                                                            |   | 4,320,867  |       | 1,820,698  |       | 1,329,775  |       |
| Noninterest expense:                                                                                |   |       |       |       |       |       |       |
| Compensation and benefits                                                                           |   | 10,234,785 |       | 7,676,007  |       | 6,839,922  |       |
| Office building, net                                                                                |   | 2,387,286  |       | 1,695,108  |       | 1,500,822  |       |
| Federal insurance premiums                                                                          |   | 76,311     |       | 74,853     |       | 68,084     |       |
| Advertising                                                                                         |   | 726,320    |       | 523,023    |       | 633,240    |       |
| Data processing                                                                                     |   | 888,634    |       | 829,076    |       | 727,170    |       |
| NOW account operating expenses                                                                      |   | 498,104    |       | 357,121    |       | 213,144    |       |
| Other                                                                                               |   | 1,834,366  |       | 1,430,201  |       | 1,398,497  |       |
| Total noninterest expense                                                                           |   | 16,645,806 |       | 12,585,389 |       | 11,380,879 |       |
| Income before income taxes and minority interest                                                    |   | 8,971,969  |       | 7,143,011  |       | 5,991,712  |       |
|                                                                                                |   |       |       |       |       |       |       |
| Income tax expense                                                                                  |   | 2,882,339  |       | 2,507,811  |       | 2,130,043  |       |
| Income before minority interest                                                                     |   | 6,089,630  |       | 4,635,200  |       | 3,861,669  |       |
| Minority interest                                                                                   |   | 57,682     |       | —     |       | —     |       |
| Net income                                                                                          |   | $          | 6,147,312  |       | 4,635,200  |       | 3,861,669  |   |
| Earnings per share:                                                                                 |   |       |       |       |       |       |       |
| Basic                                                                                               |   | $          | 1.46       |       | 1.09       |       | 0.87       |   |
| Diluted                                                                                             |   | 1.39       |       | 1.08       |       | 0.87       |       |

 

See accompanying notes to consolidatedfinancial statements.

 

 

F-3

----

 

**EFC BANCORP, INC. AND SUBSIDIARIES**

 

ConsolidatedStatements of Changes in Stockholders’ Equity

 

Yearsended December 31, 2002, 2001, and 2000

 
|                                                                                                                                                            |   | **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, 1999                                                                                                                                    |   |                                 |   | $                 | 74,914 |                             | 72,039,597 |                | (27,671,724 | )                                | (7,766,459 | )                                        | (2,472,242 | )                      | 33,469,424 |                                                 | (1,251,421 | )          | 66,422,089 |   |
|                                                                                                                                                            |   |                                 |   |              |   |                             |       |                |        |                             |       |                                     |       |                   |       |                                                 |       |       |       |
| Treasury stock purchased                                                                                                                                        |   | (325,981                             | )      | —            |   | —                           |       | (3,315,593          | )           | —                           |       | —                                   |       | —                 |       | —                                               |       | (3,315,593 | )          |
| ESOP shares committed to be  released                                                                                                                           |   | 39,954                               |   | —            |   | (216,931                         | )          | —              |        | 597,420                          |       | —                                   |       | —                 |       | —                                               |       | 380,489    |       |
| Stock award plan – shares allocated                                                                                                                        |   | 57,328                               |   | —            |   | (61,040                          | )          | —              |        | —                           |       | 637,774                                  |       | —                 |       | —                                               |       | 576,734    |       |
| Dividends declared ($0.48 per share)                                                                                                                            |   |                                 |   | —            |   | —                           |       | —              |        | —                           |       | —                                   |       | (1,847,404             | )          | —                                               |       | (1,847,404 | )          |
| Comprehensive income:                                                                                                                                           |   |                                 |   |              |   |                             |       |                |        |                             |       |                                     |       |                   |       |                                                 |       |       |       |
| Net income                                                                                                                                                      |   |                                 |   | —            |   | —                           |       | —              |        | —                           |       | —                                   |       | 3,861,669              |       | —                                               |       | 3,861,669  |       |
| Change in net unrealized gain (loss) on securities  available-for-sale, less reclassification adjustment for realized gains  included in net income of $150,057 |   |                                 |   | —            |   | —                           |       | —              |        | —                           |       | —                                   |       | —                 |       | 1,978,884                                            |       | 1,978,884  |       |
| Income tax effect                                                                                                                                               |   |                                 |   | —            |   | —                           |       | —              |        | —                           |       | —                                   |       | —                 |       | (771,766                                             | )          | (771,766   | )          |
| Total comprehensive income                                                                                                                                      |   |                                 |   |              |   |                             |       |                |        |                             |       |                                     |       |                   |       |                                                 |       | 5,068,787  |       |
| Balance at December 31, 2000                                                                                                                                    |   |                                 |   | 74,914            |   | 71,761,626                       |       | (30,987,317         | )           | (7,169,039                       | )          | (1,834,468                               | )          | 35,483,689             |       | (44,303                                              | )          | 67,285,102 |       |
|                                                                                                                                                            |   |                                 |   |              |   |                             |       |                |        |                             |       |                                     |       |                   |       |                                                 |       |       |       |
| Treasury stock purchased                                                                                                                                        |   | (227,708                             | )      | —            |   | —                           |       | (2,597,237          | )           | —                           |       | —                                   |       | —                 |       | —                                               |       | (2,597,237 | )          |
| ESOP shares committed to be released                                                                                                                            |   | 39,954                               |   | —            |   | (128,832                         | )          | —              |        | 597,420                          |       | —                                   |       | —                 |       | —                                               |       | 468,588    |       |
| Stock award plan – shares allocated                                                                                                                        |   | 56,953                               |   | —            |   | 30,901                           |       | —              |        | —                           |       | 633,602                                  |       | —                 |       | —                                               |       | 664,503    |       |
| Dividends declared ($0.50 per share)                                                                                                                            |   |                                 |   | —            |   | —                           |       | —              |        | —                           |       | —                                   |       | (2,103,147             | )          | —                                               |       | (2,103,147 | )          |
|                                                                                                                                                            |   |                                 |   |              |   |                             |       |                |        |                             |       |                                     |       |                   |       |                                                 |       |       |       |
| Comprehensive income:                                                                                                                                           |   |                                 |   |              |   |                             |       |                |        |                             |       |                                     |       |                   |       |                                                 |       |       |       |
| Net income                                                                                                                                                      |   |                                 |   | —            |   | —                           |       | —              |        | —                           |       | —                                   |       | 4,635,200              |       | —                                               |       | 4,635,200  |       |
| Change in net unrealized gain (loss) on securities  available-for-sale, less reclassification adjustment for realized gains  included in net income of $32,812  |   |                                 |   | —            |   | —                           |       | —              |        | —                           |       | —                                   |       | —                 |       | 451,728                                              |       | 451,728    |       |
| Income tax effect                                                                                                                                               |   |                                 |   | —            |   | —                           |       | —              |        | —                           |       | —                                   |       | —                 |       | (176,174                                             | )          | (176,174   | )          |
| Total comprehensive income                                                                                                                                      |   |                                 |   |              |   |                             |       |                |        |                             |       |                                     |       |                   |       |                                                 |       | 4,910,754  |       |
| Balance at December 31, 2001                                                                                                                                    |   |                                 |   | 74,914            |   | 71,663,695                       |       | (33,584,554         | )           | (6,571,619                       | )          | (1,200,866                               | )          | 38,015,742             |       | 231,251                                              |       | 68,628,563 |       |
|                                                                                                                                                            |   |                                 |   |              |   |                             |       |                |        |                             |       |                                     |       |                   |       |                                                 |       |       |       |
| Treasury stock purchased                                                                                                                                        |   | (56,800                              | )      | —            |   | —                           |       | (956,564            | )           | —                           |       | —                                   |       | —                 |       | —                                               |       | (956,564   | )          |
| ESOP shares committed to be  released                                                                                                                           |   | 39,954                               |   | —            |   | 43,671                           |       | —              |        | 597,420                          |       | —                                   |       | —                 |       | —                                               |       | 641,091    |       |
| Stock options exercised                                                                                                                                         |   | 87,380                               |   | —            |   | —                           |       | 785,178             |        | —                           |       | —                                   |       | —                 |       | —                                               |       | 785,178    |       |
| Stock award plan – shares allocated                                                                                                                        |   | 56,153                               |   | —            |   | 127,468                          |       | —              |        | —                           |       | 624,702                                  |       | —                 |       | —                                               |       | 752,170    |       |
| Dividends declared ($0.535 per share)                                                                                                                           |   |                                 |   | —            |   | —                           |       | —              |        | —                           |       | —                                   |       | (2,251,633             | )          | —                                               |       | (2,251,633 | )          |
| Comprehensive income:                                                                                                                                           |   |                                 |   |              |   |                             |       |                |        |                             |       |                                     |       |                   |       |                                                 |       |       |       |
| Net income                                                                                                                                                      |   |                                 |   | —            |   | —                           |       | —              |        | —                           |       | —                                   |       | 6,147,312              |       | —                                               |       | 6,147,312  |       |
| Change in net unrealized gain (loss) on securities available-for-sale                                                                                           |   |                                 |   | —            |   | —                           |       | —              |        | —                           |       | —                                   |       | —                 |       | 1,689,471                                            |       | 1,689,471  |       |
| Income tax effect                                                                                                                                               |   |                                 |   | —            |   | —                           |       | —              |        | —                           |       | —                                   |       | —                 |       | (658,893                                             | )          | (658,893   | )          |
| Total comprehensive income                                                                                                                                      |   |                                 |   |              |   |                             |       |                |        |                             |       |                                     |       |                   |       |                                                 |       | 7,177,890  |       |
| Balance at December 31, 2002                                                                                                                                    |   |                                 |   | $                 | 74,914 |                             | 71,834,834 |                | (33,755,940 | )                                | (5,974,199 | )                                        | (576,164   | )                      | 41,911,421 |                                                 | 1,261,829  |       | 74,776,695 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

 

F-4

----

 

**EFC BANCORP, INC. AND SUBSIDIARIES**

 

ConsolidatedStatements of Cash Flows

 

Yearsended December 31, 2002, 2001, and 2000

 
|                                                                                         |   | **2002**    |       | **2001**    |       | **2000**    |       |
|----------------------------------------------------------------------------------------------|--------|-------------|------------|-------------|------------|-------------|------------|
| Cash flows from operating activities:                                                        |   |        |       |        |       |        |       |
| Net income                                                                                   |   | $           | 6,147,312  |        | 4,635,200  |        | 3,861,669  |   |
| Adjustments to reconcile net income to net cash provided by  (used in) operating activities: |   |        |       |        |       |        |       |
| Amortization of premiums and discounts, net                                                  |   | 9,392       |       | 151,481     |       | 36,244      |       |
| Provision for loan losses                                                                    |   | 900,000     |       | 500,000     |       | 363,000     |       |
| FHLB of Chicago stock dividends                                                              |   | (470,300    | )          | (538,300    | )          | (507,800    | )          |
| Deferred income tax expense (benefit)                                                        |   | (276,407    | )          | 192,517     |       | 108,909     |       |
| Stock award plan shares allocated, net of tax effect                                         |   | 752,170     |       | 664,503     |       | 576,734     |       |
| ESOP shares committed to be released                                                         |   | 597,420     |       | 597,420     |       | 597,420     |       |
| Change in fair value of ESOP shares                                                          |   | 43,671      |       | (128,832    | )          | (216,931    | )          |
| Depreciation and amortization of office properties and equipment                             |   | 834,635     |       | 738,071     |       | 687,620     |       |
| (Gain)/loss on sale of foreclosed real estate                                                |   | —      |       | (8,014      | )          | 7,413       |       |
| Gain on sale of investment securities                                                        |   | —      |       | (32,812     | )          | (150,057    | )          |
| Gain on sale of loans                                                                        |   | (200,409    | )          | (170,723    | )          | —      |       |
| Minority interest in subsidiary                                                              |   | (75,127     | )          | —      |       | —      |       |
| Increase in bank owned life insurance                                                        |   | (692,863    | )          | —      |       | —      |       |
| (Increase)/decrease in accrued interest receivable and  other assets, net                    |   | (1,883,454  | )          | (10,649,566 | )          | (1,174,503  | )          |
| Increase in income taxes payable, accrued  expenses and other liabilities, net               |   | 2,401,319   |       | 3,327,567   |       | 648,074     |       |
| Net cash provided by (used in) operating activities                                          |   | 8,087,359   |       | (721,488    | )          | 4,837,792   |       |
|                                                                                         |   |        |       |        |       |        |       |
| Cash flows from investing activities:                                                        |   |        |       |        |       |        |       |
| Net (increase)/decrease in loans receivable                                                  |   | 3,749,783   |       | (26,520,097 | )          | (22,051,226 | )          |
| Purchases of loans receivable                                                                |   | (79,620,252 | )          | (65,161,386 | )          | (42,639,630 | )          |
| Proceeds from the sale of loans                                                              |   | 13,217,497  |       | 10,519,267  |       | —      |       |
| Purchase of real estate held for development                                                 |   | (2,934,072  | )          | —      |       | —      |       |
| Purchases of mortgage-backed securities available-for-sale                                   |   | (7,170,009  | )          | (10,435,957 | )          | —      |       |
| Principal payments on mortgage-backed securities available-for-sale                          |   | 5,593,387   |       | 5,978,113   |       | 2,542,344   |       |
| Maturities of investment securities available-for-sale                                       |   | 27,547,993  |       | 32,413,522  |       | 5,063,818   |       |
| Proceeds from sale of investment securities available-for-sale                               |   | —      |       | 4,032,812   |       | 7,063,076   |       |
| Purchases of investment securities available-for-sale                                        |   | (45,057,683 | )          | (40,602,120 | )          | (13,139,252 | )          |
| Purchases of office properties and equipment                                                 |   | (6,641,114  | )          | (2,723,957  | )          | (1,051,530  | )          |
| Purchases of stock in the Federal Home Loan Bank of Chicago                                  |   | —      |       | (593,600    | )          | (1,492,200  | )          |
| Cash used in acquisition of majority-owned subsidiary                                        |   | (420,000    | )          | —      |       | —      |       |
| Proceeds from sale of foreclosed real estate                                                 |   | —      |       | 4,104,916   |       | 160,732     |       |
| Net cash used in investing activities                                                        |   | (91,734,470 | )          | (88,988,487 | )          | (65,543,868 | )          |
|                                                                                         |   |        |       |        |       |        |       |
| Cash flows from financing activities:                                                        |   |        |       |        |       |        |       |
| Net increase in deposits                                                                     |   | 104,105,555 |       | 50,550,934  |       | 45,654,062  |       |
| Proceeds from borrowed money                                                                 |   | 622,636     |       | 60,000,000  |       | 119,000,000 |       |
| Repayments on borrowed money                                                                 |   | (4,043,893  | )          | (25,000,000 | )          | (94,000,000 | )          |
| Purchase of treasury stock                                                                   |   | (956,564    | )          | (2,597,237  | )          | (3,315,593  | )          |
| Stock options exercised                                                                      |   | 785,178     |       | —      |       | —      |       |
| Cash dividends paid                                                                          |   | (2,196,801  | )          | (2,091,103  | )          | (1,783,317  | )          |
| Net cash provided by financing activities                                                    |   | 98,316,111  |       | 80,862,594  |       | 65,555,152  |       |
| Net increase (decrease) in cash and cash equivalents                                         |   | 14,669,000  |       | (8,847,381  | )          | 4,849,076   |       |
|                                                                                         |   |        |       |        |       |        |       |
| Cash and cash equivalents at beginning of year                                               |   | 18,175,290  |       | 27,022,671  |       | 22,173,595  |       |
| Cash and cash equivalents at end of year                                                     |   | $           | 32,844,290 |        | 18,175,290 |        | 27,022,671 |   |
|                                                                                         |   |        |       |        |       |        |       |
| Supplemental disclosures of cash flow information:                                           |   |        |       |        |       |        |       |
| Cash paid during the year for:                                                               |   |        |       |        |       |        |       |
| Interest                                                                                     |   | $           | 22,759,969 |        | 25,366,680 |        | 23,153,805 |   |
| Income taxes                                                                                 |   | 3,121,000   |       | 2,207,500   |       | 2,030,000   |       |
| Noncash investing activities – transfer of loans to foreclosed real  estate             |   | 1,985,741   |       | 3,557,110   |       | 539,792     |       |

 

See accompanying notes to consolidatedfinancial statements.

 

 

F-5

----

 

**EFC BANCORP, INC. AND SUBSIDIARIES**

 

Notesto Consolidated Financial Statements

 

December31, 2002, 2001, and 2000

 

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

 

The followingdescribes the more significant policies which EFC Bancorp, Inc. (the Company)follows in preparing and presenting its consolidated financial statements.

 

***Principles ofConsolidation***

 

Theconsolidated financial statements include the accounts of EFC Bancorp, Inc. andits wholly owned subsidiaries. All significant intercompany accounts andtransactions have been eliminated in consolidation.  The Company purchased an 80% interest in Computer Dynamics Group,Inc. (“CDGI”) for $420,000 in January 2002. CDGI is consolidated and a minority interest is recorded for theproportionate interest not owned by the Company.

 

The accountingand reporting policies of the Company conform to accounting principlesgenerally accepted in the United States of America and to general practicewithin the banking industry. In preparing the consolidated financialstatements, management is required to make estimates and assumptions thataffect the reported amounts of assets and liabilities as of the date of the consolidatedbalance sheet and revenues and expenses for the period. Actual results coulddiffer from these estimates.

 

***Financial Reportingof Segments***

 

Statement ofFinancial Accounting Standards No. 131 (SFAS 131), *Disclosures about Segments of an Enterprise andRelated Information,* establishes standards for the way publicbusiness enterprises report information about operating segments in annualfinancial statements. Operating segments are components of an enterprise forwhich separate financial information is available, and is evaluated regularlyby management in deciding how to allocate resources and in assessingperformance. SFAS 131 establishes standards for related disclosures aboutproducts, services, geographic areas, and major customers. The Company operatesas a single segment.

 

EFS Bank (theSavings Bank) is principally engaged in the business of attracting deposits andinvesting these funds, together with borrowings, to originate and purchaseprimarily one-to-four family residential mortgages and construction loans andto purchase securities. 

 

***Loans Receivable***

 

Loansreceivable are stated at unpaid principal balances less deferred loan fees andthe allowance for loan losses. Premiums and discounts on purchased loans areamortized and accreted to interest income using the level-yield method over theremaining period to contractual maturity.

 

Loanorigination fees and certain direct costs associated with loan originations aredeferred. Net deferred fees are amortized as yield adjustments over the contractuallife of the related loans using the level-yield method.

 

The allowancefor loan losses is provided by charges to operations. The balance of theallowance is based on management’s estimate of probable losses in the loanportfolio and current economic conditions. Regulatory examiners may require theCompany to recognize additions to the allowance based upon their judgmentsabout information available to them at the time of their examination.

 

 

F-6

----

 

A provisionfor losses on specific loans is charged to operations when any permanentdecline reduces the market value to less than the loan principal balance orcarrying value less estimated costs to sell foreclosed real estate.

 

Management,considering current information and events regarding the borrower’s ability torepay their obligations, considers a loan to be impaired when it is probablethat the Company will be unable to collect all amounts due according to thecontractual terms of the note agreement, including principal and interest.Loans past due three months or more are considered impaired. The amount ofimpairment for individual loans is measured based on the fair value of thecollateral, if the loan is collateral dependent, or alternatively, on the presentvalue of expected future cash flows discounted at the loan’s effective interestrate. Certain groups of small balance homogenous loans represented byinstallment and consumer credit and residential real estate loans are excludedfrom the impairment provisions.

 

A loan isgenerally classified as non-accrual when collectibility is in doubt and theloan is contractually past due three months or more. When a loan is placed onnon-accrual status, previously accrued, but unpaid interest is reversed againstinterest income. Income on such loans is subsequently recorded to the extentthat cash is received and where future collection of principal is probable. 

 

***InvestmentSecurities and Mortgage-backed Securities***

 

The Companyclassifies its investment and mortgage-backed securities in one of threecategories: trading, available-for-sale, or held-to-maturity. Securities whichthe Company has the positive intent and ability to hold to maturity areclassified as held-to-maturity and measured at amortized cost. Securitiespurchased for the purpose of being sold in the near term are classified astrading securities and measured at fair value with any change in fair valueincluded in earnings. All other securities that are not classified asheld-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 has classified all investmentsecurities as available-for-sale at December 31, 2002 and 2001.

 

Discounts andpremiums on mortgage-backed securities purchased are accreted and amortized tomaturity, using a method which approximates the effective interest method. Forinvestment securities, the straight-line method based upon the contractual lifeof the security is principally used, which approximates the effective interestmethod.

 

***Office Propertiesand Equipment***

 

Officeproperties and equipment are stated at cost less accumulated depreciation andamortization. Depreciation and amortization is computed for financial reportingpurposes principally on the straight-line basis over the estimated useful lives(5 to 40 years) of the respective assets.

 

 

F-7

----

 

***Income Taxes***

 

Deferredincome taxes arise from the recognition of certain items of income and expensefor tax purposes in years different from those in which they are recognized inthe consolidated financial statements. Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases (temporary differences).

 

Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which the temporary differences are expectedto be recovered or settled. The effect on deferred tax assets and liabilitiesof a change in tax rates is recognized as income in the period that includesthe enactment date. 

 

***Foreclosed RealEstate***

 

Foreclosedreal estate represents real estate acquired through foreclosure, and isrecorded at the lower of cost (principal balance of the former first mortgageloan plus costs of obtaining title and possession) or net realizable value, atthe date of foreclosure. After foreclosure, additional charges are recorded tooperations as necessary to reflect further impairment of the estimated netrealizable value.

 

***Employee StockOwnership Plan (ESOP)***

 

Compensationexpense under the ESOP is equal to the fair value of common shares released orcommitted to be released annually to participants in the ESOP. The differencebetween the fair value of the shares committed to be released and the cost ofthose shares to the ESOP is charged or credited to additional paid-in capital.Common stock purchased by the ESOP and not committed to be released toparticipants is included in the consolidated balance sheet at cost as areduction of stockholders’ equity. Dividends on allocated ESOP shares arerecorded as a reduction of stockholders’ equity; dividends on unallocated ESOPshares are used to pay debt service, and recorded as a reduction of debt andaccrued interest.

 

***Earnings per Share***

 

Basic earningsper share is calculated by dividing net income available to common stockholdersby the weighted average number of common shares outstanding. Diluted earningsper share is calculated by dividing net income by the weighted average numberof common 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. 

 

***Cash and CashEquivalents***

 

For purposesof the consolidated statements of cash flows, cash and cash equivalents areconsidered to include cash on hand and in banks and interest bearing depositswith financial institutions.

 

***Comprehensive Income***

 

Comprehensiveincome consists of net income and net unrealized gains (losses) onavailable-for-sale securities and is presented in the consolidated statementsof changes in stockholders’ equity.

 

 

F-8

----

 

***Basis ofPresentation***

 

Certainamounts for prior years have been reclassified to conform to the current yearpresentation.

 

**(2)****              Earnings Per Share**

 

The followingtable sets forth the computation of basic and diluted earnings per share forthe periods indicated. ESOP shares are only considered outstanding for earningsper share calculations when they are committed to be released.

 
|                                                |   | **Year ended  December 31** |      |
|-----------------------------------------------------|--------|----------------------------------|-----------|
|                                                |   | **2002**                         |      | **2001** |   | **2000** |   |
|                                                |   |                             |      |   |   |   |   |
| Basic:                                              |   |                             |      |   |   |   |   |
| Net income                                          |   | $                                | 6,147,312 |   | 4,635,200 |   | 3,861,669 |   |
|                                                |   |                             |      |   |   |   |   |
| Weighted average common shares outstanding          |   | 4,215,039                        |      | 4,249,640 |   | 4,422,427 |   |
|                                                |   |                             |      |   |   |   |   |
| Basic earnings per share                            |   | $                                | 1.46      |   | 1.09 |   | 0.87 |   |
|                                                |   |                             |      |   |   |   |   |
| Diluted:                                            |   |                             |      |   |   |   |   |
| Net income                                          |   | $                                | 6,147,312 |   | 4,635,200 |   | 3,861,669 |   |
|                                                |   |                             |      |   |   |   |   |
| Weighted average common shares outstanding          |   | 4,215,039                        |      | 4,249,640 |   | 4,422,427 |   |
| Effect of dilutive stock options  outstanding       |   | 204,985                          |      | 47,134 |   | 61 |   |
|                                                |   |                             |      |   |   |   |   |
| Diluted weighted average common shares  outstanding |   | 4,420,024                        |      | 4,296,774 |   | 4,422,488 |   |
|                                                |   |                             |      |   |   |   |   |
| Diluted earnings per share                          |   | $                                | 1.39      |   | 1.08 |   | 0.87 |   |

 

 

F-9

----

 

**(3)****              Loans Receivable,Net**

 

Loansreceivable, net are summarized as follows:

 
|                           |   | **December 31** |        |
|--------------------------------|--------|----------------------|-------------|
|                           |   | **2002**             |        | **2001** |   |
|                           |   |                 |        |   |   |
| Mortgage loans:                |   |                 |        |   |   |
| One-to-four family residential |   | $                    | 405,952,832 |   | 375,451,938 |   |
| Multifamily                    |   | 42,497,672           |        | 58,093,093 |   |
| Commercial                     |   | 52,154,556           |        | 42,813,519 |   |
| Construction and land          |   | 41,323,317           |        | 16,285,096 |   |
|                           |   |                 |        |   |   |
| Total mortgage loans           |   | 541,928,377          |        | 492,643,646 |   |
|                           |   |                 |        |   |   |
| Other loans:                   |   |                 |        |   |   |
| Home equity loans              |   | 21,160,238           |        | 14,689,288 |   |
| Commercial                     |   | 33,315,091           |        | 30,045,720 |   |
| Auto loans                     |   | 1,115,795            |        | 763,688 |   |
| Loans on savings accounts      |   | 1,017,541            |        | 334,800 |   |
| Other                          |   | 1,888,763            |        | 1,159,973 |   |
|                           |   |                 |        |   |   |
| Total other loans              |   | 58,497,428           |        | 46,993,469 |   |
|                           |   |                 |        |   |   |
| Total loans receivable         |   | 600,425,805          |        | 539,637,115 |   |
|                           |   |                 |        |   |   |
| Less:                          |   |                 |        |   |   |
| Deferred loan fees             |   | 246,354              |        | 311,305 |   |
| Allowance for loan losses      |   | 3,141,146            |        | 2,255,146 |   |
|                           |   |                 |        |   |   |
| Loans receivable, net          |   | $                    | 597,038,305 |   | 537,070,664 |   |

 

Activity inthe allowance for loan losses is summarized as follows:

 
|                         |   | **Year ended December 31** |      |
|------------------------------|--------|---------------------------------|-----------|
|                         |   | **2002**                        |      | **2001** |   | **2000** |   |
|                         |   |                            |      |   |   |   |   |
| Balance at beginning of year |   | $                               | 2,255,146 |   | 1,881,084 |   | 1,544,577 |   |
| Provision for loan losses    |   | 900,000                         |      | 500,000 |   | 363,000 |   |
| Charge-offs                  |   | (16,192                         | )         | (125,959 | ) | (27,951 | ) |
| Recoveries                   |   | 2,192                           |      | 21 |   | 1,458 |   |
|                         |   |                            |      |   |   |   |   |
| Balance at end of year       |   | $                               | 3,141,146 |   | 2,255,146 |   | 1,881,084 |   |

 

 

F-10

----

 

Loansreceivable in arrears three months or more and on nonaccrual status or in theprocess of foreclosure are as follows:

 
|              |   | **Number of  loans** |   | **Amount** |      | **Percent of  gross loans  receivable** |   |
|-------------------|--------|----------------------|--------|------------|-----------|-----------------------------------------|--------|
|              |   |                 |   |       |      |                                    |   |
| December 31, 2002 |   | 13                   |   | $          | 1,076,762 |                                    | 0.18   | % |
| December 31, 2001 |   | 10                   |   | 2,641,085  |      | 0.49                                    |   |
| December 31, 2000 |   | 15                   |   | 4,531,637  |      | 0.98                                    |   |
|                   |        |                      |        |            |           |                                         |        |  |

 

Interest incomeforegone that would have been recognized on non-accrual loans if such loans hadperformed in accordance with their contractual terms was $198,000, $187,000,and $89,000 for the years ended December 31, 2002, 2001, and 2000,respectively.

 

There were no impairedloans at December 31, 2002 and 2001.

 

The SavingsBank offers to its employees, officers, and directors adjustable-rate mortgageloans for the purchase or refinance of the individual’s owner-occupied primaryresidence with interest rates which may be up to 1% below the rates offered tothe 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 ofcollectibility.  As of December 31,2002 and 2001 the outstanding balance on such loans was approximately$5,274,000 and $4,404,000, respectively. Loan originations, repayments, andother changes for the year ended December 31, 2002 were $3,217,000,$2,248,000, and $99,000, respectively. 

 

 

F-11

----

 

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

 

The amortizedcost and estimated fair value of mortgage-backed securities and investmentsecurities available-for-sale are summarized as follows:

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

 

 

F-12

----

 
|                                     |   | **December 31, 2001** |       |
|------------------------------------------|--------|----------------------------|------------|
|                                     |   | **Amortized  cost**        |       | **Gross  unrealized  gains** |   | **Gross  unrealized  losses** |   | **Estimated  fair value** |   |
|                                     |   |                       |       |   |   |   |   |   |   |
| Mortgage-backed securities:              |   |                       |       |   |   |   |   |   |   |
| Federal Home Loan Mortgage Corporation   |   | $                          | 5,707,530  |   | 37,920 |   | (15,510 | ) | 5,729,940 |   |
| Federal National Mortgage Association    |   | 3,453,241                  |       | 33,582 |   | (1,546 | ) | 3,485,277 |   |
| Government National Mortgage Association |   | 4,611,404                  |       | 40,863 |   | (11,769 | ) | 4,640,498 |   |
|                                     |   | 13,772,175                 |       | 112,365 |   | (28,825 | ) | 13,855,715 |   |
|                                     |   |                       |       |   |   |   |   |   |   |
| Investment securities:                   |   |                       |       |   |   |   |   |   |   |
| United States Government obligations     |   | 37,518,864                 |       | 897,353 |   | (128,248 | ) | 38,287,969 |   |
| Municipal securities                     |   | 23,488,194                 |       | 33,439 |   | (470,929 | ) | 23,050,704 |   |
| Equity securities                        |   | 7,312,843                  |       | 28,000 |   | (64,054 | ) | 7,276,789 |   |
|                                     |   | 68,319,901                 |       | 958,792 |   | (663,231 | ) | 68,615,462 |   |
|                                     |   | $                          | 82,092,076 |   | 1,071,157 |   | (692,056 | ) | 82,471,177 |   |

 

There were nosales of investment securities available-for-sale for the year ended December31, 2002.  During the years endedDecember 31, 2001, and 2000, sales of investment securitiesavailable-for-sale totaled $4,032,812, and $7,063,076, respectively. These salesresulted in gross gains of $32,812, and $150,057 for the respective years.

 

The amortizedcost and estimated fair value of investment securities available-for-sale atDecember 31, 2002 by contractual maturity are shown below. Expectedmaturities may differ from contractual maturities because borrowers may havethe right to prepay obligations.

 
|                                   |   | **Amortized  cost** |       | **Estimated  fair  value** |       |
|----------------------------------------|--------|---------------------|------------|----------------------------|------------|
|                                   |   |                |       |                       |       |
| Due in one year or less                |   | $                   | 7,139,759  |                       | 7,318,463  |   |
| Due after one year through five years  |   | 9,236,131           |       | 9,374,531                  |       |
| Due after five years through ten years |   | 22,983,919          |       | 22,428,374                 |       |
| Due after ten years                    |   | 36,386,674          |       | 38,339,120                 |       |
| Equity securities                      |   | 10,247,703          |       | 10,521,396                 |       |
|                                   |   |                |       |                       |       |
|                                   |   | $                   | 85,994,186 |                       | 87,981,884 |   |

 

 

F-13

----

 

**(5)****              Accrued InterestReceivable**

 

Accrued interestreceivable is summarized as follows:

 
|                       |   | **December 31** |      |
|----------------------------|--------|----------------------|-----------|
|                       |   | **2002**             |      | **2001** |   |
| Loans receivable           |   | $                    | 2,793,170 |   | 2,621,878 |   |
| Mortgage-backed securities |   | 93,871               |      | 98,453 |   |
| Investment securities      |   | 1,000,369            |      | 961,789 |   |
|                       |   |                 |      |   |   |
|                       |   | $                    | 3,887,410 |   | 3,682,120 |   |

 

**(6)****              Office Propertiesand Equipment**

 

Officeproperties and equipment at cost is summarized as follows:

 
|                                            |   | **December 31** |       |
|-------------------------------------------------|--------|----------------------|------------|
|                                            |   | **2002**             |       | **2001** |   |
| Land                                            |   | $                    | 5,609,577  |   | 2,693,644 |   |
| Land improvements                               |   | 549,891              |       | 299,061 |   |
| Office buildings                                |   | 10,404,662           |       | 7,481,266 |   |
| Leasehold improvements                          |   | 492,345              |       | 454,860 |   |
| Furniture, fixtures, and equipment              |   | 5,021,919            |       | 3,955,443 |   |
| Construction in progress                        |   | —               |       | 658,234 |   |
|                                            |   | 22,078,394           |       | 15,542,508 |   |
|                                            |   |                 |       |   |   |
| Less accumulated depreciation and  amortization |   | (5,281,709           | )          | (4,552,302 | ) |
|                                            |   |                 |       |   |   |
|                                            |   | $                    | 16,796,685 |   | 10,990,206 |   |

 

Depreciationand amortization expense totaled $834,635, $738,071, and $687,620 for the yearsended December 31, 2002, 2001, and 2000, respectively.

 

**(7)****              Real Estate Held forDevelopment**

 

On June 19,2002, EFS Service Corporation, a wholly-owned subsidiary of the Bank, purchasedapproximately 16 acres of land located in West Dundee, Illinois.  This land will be developed into 29home-sites for single-family residences. The development of this property will begin in 2003.

 

 

F-14

----

 

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

 

Depositbalances are summarized as follows:

 
|                                                                       |   | **December 31, 2002** |        | **Stated or  weighted  average rate** |        | **December 31,  2001** |   | **Stated or  weighted  average rate** |   |
|----------------------------------------------------------------------------|--------|----------------------------|-------------|---------------------------------------|-------------|-----------------------------|--------|---------------------------------------|--------|
| **Amount**                                                                 |   | **Percent**                | **Amount**  |                                  | **Percent** |
|                                                                       |   |                       |        |                                  |        |                        |   |                                  |   |   |   |   |   |
| Commercial checking accounts                                               |   | $                          | 21,741,940  |                                  | 4.1         | %                           | — | %                                     | $      | 14,387,774 |   | 3.4 | % | — | % |
| NOW accounts - noninterest bearing                                         |   | 10,912,899                 |        | 2.1                                   |        | —                      |   | 8,898,504                             |   | 2.1 |   | — |   |
| NOW accounts - interest bearing                                            |   | 34,201,191                 |        | 6.5                                   |        | 1.01                        |   | 30,646,178                            |   | 7.3 |   | 1.07 |   |
| Passbook                                                                   |   | 106,598,938                |        | 20.3                                  |        | 2.28                        |   | 84,888,698                            |   | 20.2 |   | 3.11 |   |
| Money market accounts                                                      |   | 140,856,886                |        | 26.9                                  |        | 2.73                        |   | 106,850,171                           |   | 25.5 |   | 4.00 |   |
|                                                                       |   |                       |        |                                  |        |                        |   |                                  |   |   |   |   |   |
| Certificate accounts:                                                      |   |                       |        |                                  |        |                        |   |                                  |   |   |   |   |   |
| Fixed rates                                                                |   | 130,204,987                |        | 24.9                                  |        | 3.50                        |   | 112,431,729                           |   | 26.8 |   | 4.57 |   |
| Individual retirement accounts - 18-48  month fixed and variable rate |   | 50,882,510                 |        | 9.7                                   |        | 4.14                        |   | 45,532,141                            |   | 10.8 |   | 5.01 |   |
| Jumbo certificates (with a minimum  denomination of $100,000)              |   | 28,790,493                 |        | 5.5                                   |        | 3.33                        |   | 16,449,094                            |   | 3.9 |   | 4.68 |   |
|                                                                       |   |                       |        |                                  |        |                        |   |                                  |   |   |   |   |   |
|                                                                       |   | $                          | 524,189,844 |                                  | 100.0       | %                           | 3.05   | %                                     | $      | 420,084,289 |   | 100.0 | % | 4.78 | % |
| Contractual maturity of certificate  accounts ($100,000 or greater):       |   |                       |        |                                  |        |                        |   |                                  |   |   |   |   |   |
| Under 3 months                                                             |   | $                          | 7,135,456   |                                  | 9.6         | %                           |   |                                  | $      | 9,745,052 |   | 25.6 | % |   |   |
| Over 3 months through 6 months                                             |   | 6,833,041                  |        | 9.1                                   |        |                        |   | 6,123,529                             |   | 16.1 |   |   |   |
| Over 6 months through 12 months                                            |   | 22,525,183                 |        | 30.1                                  |        |                        |   | 12,112,330                            |   | 31.8 |   |   |   |
| Over 12 months                                                             |   | 38,233,222                 |        | 51.2                                  |        |                        |   | 10,086,727                            |   | 26.5 |   |   |   |
|                                                                       |   |                       |        |                                  |        |                        |   |                                  |   |   |   |   |   |
|                                                                       |   | $                          | 74,726,902  |                                  | 100.0       | %                           |   |                                  | $      | 38,067,638 |   | 100.0 | % |   |   |
|                                                                            |        |                            |             |                                       |             |                             |        |                                       |        |  |  |  |  |  |  |  |

 

The aggregatematurities of certificate accounts at December 31, 2002 are as follows (inthousands):

 
| 2003   |   | $      | 116,258 |   |
|--------|--------|--------|---------|--------|
| 2004   |   | 45,744 |    |
| 2005   |   | 20,365 |    |
| 2006   |   | 24,032 |    |
| 2007   |   | 3,479  |    |
|   |   |   |    |
|   |   | $      | 209,878 |   |

 

Interestexpense on deposits is summarized as follows for the years endedDecember 31:

 
|                  |   | **2002**  |       | **2001**   |       | **2000**   |       |
|-----------------------|--------|-----------|------------|------------|------------|------------|------------|
|                  |   |      |       |       |       |       |       |
| Passbook accounts     |   | $         | 2,308,336  |       | 2,324,594  |       | 2,806,378  |   |
| NOW accounts          |   | 320,846   |       | 308,862    |       | 457,244    |       |
| Money market accounts |   | 3,335,403 |       | 3,057,400  |       | 1,261,297  |       |
| Certificate accounts  |   | 7,602,515 |       | 10,764,060 |       | 11,374,014 |       |
|                  |   |      |       |       |       |       |       |
|                  |   | $         | 13,567,100 |       | 16,454,916 |       | 15,898,933 |   |

 

 

F-15

----

 

**(9)**              **Borrowed Money**

** **

Borrowed moneyis summarized as follows: 

 
|                                                  |   |               |   | **December 31,  2002** |   | **December 31,  2001** |    |
|-------------------------------------------------------|--------|--------------------|--------|-----------------------------|--------|-----------------------------|---------|
|                                                  |   | **Maturity**       |   | **Weighted  interest rate** |   | **Outstanding  balance**    |    | **Weighted  interest rate** |   | **Outstanding  balance** |   |
|                                                  |   | **(In thousands)** |   |
|                                                  |   |               |   |                        |   |                        |    |   |   |   |   |
| Advances from the Federal Home Loan Bank of  Chicago: |   | 2002               |   | —                      | %      | $                           | —  |   | 5.52 | % | $ | 3,500 |   |
|                                                  |   | 2003               |   | 4.65                        |   | 5,000                       |    | 4.65 |   | 5,000 |   |
|                                                  |   | 2004               |   | 4.82                        |   | 32,700                      |    | 4.82 |   | 32,700 |   |
|                                                  |   | 2005               |   | 6.17                        |   | 15,000                      |    | 6.17 |   | 15,000 |   |
|                                                  |   | 2006               |   | 4.30                        |   | 5,000                       |    | 4.30 |   | 5,000 |   |
|                                             |   | 2008               |   | 4.78                        |   | 14,000                      |    | 4.78 |   | 14,000 |   |
|                                                  |   | 2010               |   | 5.85                        |   | 65,000                      |    | 5.85 |   | 65,000 |   |
|                                                  |   | 2011               |   | 4.66                        |   | 35,000                      |    | 4.66 |   | 35,000 |   |
|                                                  |   |               |   |                        |   |                        |    |   |   |   |   |
|                                                  |   |               |   | 5.27                        |   | $                           | 171,700 |   | 5.28 | % | $ | 175,200 |   |

 

AtDecember 31, 2002, $5,000,000 of the advances due in 2008 have adjustableinterest rates. All other advances have fixed interest rates. At December 31,2002, $134,000,000 in advances are callable by the Federal Home Loan Bank ofChicago (FHLB) beginning in 2003.

 

The SavingsBank adopted a collateral pledge agreement whereby it has agreed to at alltimes keep on hand, free of all other pledges, liens, and encumbrances,performing first mortgage loans with unpaid principal balances aggregating noless than 167% of the outstanding secured advances from the FHLB. The carryingvalue of the collateral was approximately $396,815,000 at December 31,2002. All stock in the FHLB is also pledged as additional collateral for theseadvances.

 

 

F-16

----

 

**(10)**       **Income Taxes**

 

Income taxexpense (benefit) for the years ended December 31, 2002, 2001, and 2000,is as follows:

 
|                     |   | **Year ended  December 31** |      |
|--------------------------|--------|----------------------------------|-----------|
|                     |   | **2002**                         |      | **2001** |   | **2000** |   |
|                     |   |                             |      |   |   |   |   |
| Current:                 |   | $                                |      |   |   |   |   |
| Federal                  |   | 2,727,959                        |      | 2,071,628 |   | 1,914,316 |   |
| State                    |   | 430,787                          |      | 243,666 |   | 106,818 |   |
|                     |   |                             |      |   |   |   |   |
|                     |   | 3,158,746                        |      | 2,315,294 |   | 2,021,134 |   |
|                     |   |                             |      |   |   |   |   |
| Deferred:                |   |                             |      |   |   |   |   |
| Federal                  |   | (184,908                         | )         | 168,966 |   | 95,586 |   |
| State                    |   | (91,499                          | )         | 23,551 |   | 13,323 |   |
|                     |   |                             |      |   |   |   |   |
|                     |   | (276,407                         | )         | 192,517 |   | 108,909 |   |
|                     |   |                             |      |   |   |   |   |
| Total income tax expense |   | $                                | 2,882,339 |   | 2,507,811 |   | 2,130,043 |   |
|                          |        |                                  |           |  |  |  |  |  |

 

The actualFederal income tax expense for 2002 and 2001 differs from the “expected” incometax expense for those periods (computed by applying the statutory U.S. Federalcorporate tax rate of 34% to earnings before income taxes) as follows:

 
|                                                                |   | **2002** |      | **2001** |      | **2000** |      |
|---------------------------------------------------------------------|--------|----------|-----------|----------|-----------|----------|-----------|
|                                                                |   |     |      |     |      |     |      |
| Tax expense based on the statutory U.S. federal  corporate tax rate |   | $        | 3,070,081 |     | 2,428,624 |     | 2,037,182 |   |
| State income taxes, net of federal impact                           |   | 269,747  |      | 169,537  |      | 82,256   |      |
| Tax exempt interest income                                          |   | (415,202 | )         | (163,688 | )         | (1,743   | )         |
| Bank owned life insurance                                           |   | (208,353 | )         | —   |      | —   |      |
| Other, net                                                          |   | 166,066  |      | 73,338   |      | 12,348   |      |
|                                                                |   |     |      |     |      |     |      |
|                                                                |   | $        | 2,882,339 |     | 2,507,811 |     | 2,130,043 |   |

 

 

F-17

----

 

The taxeffects of existing temporary differences that give rise to significantportions of the deferred tax assets and deferred tax liabilities atDecember 31, 2002 and 2001, are as follows:

 
|                                                |   | **2002**   |      | **2001**   |    |
|-----------------------------------------------------|--------|------------|-----------|------------|---------|
|                                                |   |       |      |       |    |
| Deferred tax assets:                                |   |       |      |       |    |
| Allowance for loan losses                           |   | $          | 1,216,842 |       | 873,616 |   |
| Charitable contribution carryforward                |   | 899,614    |      | 1,193,930  |    |
| Compensation expense                                |   | 159,324    |      | —     |    |
| State net operating loss carryforward               |   | 65,728     |      | —     |    |
|                                                |   |       |      |       |    |
| Gross deferred tax assets                           |   | 2,341,508  |      | 2,067,546  |    |
|                                                |   |       |      |       |    |
| Less valuation allowance                            |   | (190,190   | )         | (122,500   | )       |
|                                                |   |       |      |       |    |
|                                                |   | 2,151,318  |      | 1,945,046  |    |
|                                                |   |       |      |       |    |
| Deferred tax liabilities:                           |   |       |      |       |    |
| FHLB stock dividends                                |   | (719,145   | )         | (532,037   | )       |
| Loan fees                                           |   | 195,948    |      | 39,510     |    |
| Depreciation                                        |   | (546,549   | )         | (479,792   | )       |
| Tax bad debt reserve in excess of base year  amount |   | (145,231   | )         | (288,868   | )       |
| Unrealized gain or securities available for  sale   |   | (806,743   | )         | (147,850   | )       |
| Other, net                                          |   | (2,301     | )         | (26,224    | )       |
|                                                |   |       |      |       |    |
| Gross deferred tax liabilities                      |   | (2,024,021 | )         | (1,435,261 | )       |
|                                                |   |       |      |       |    |
| Net deferred tax asset                              |   | $          | 127,297   |       | 509,785 |   |

 

Retainedearnings at December 31, 2002 include approximately $2,328,000 of tax baddebt reserves for which no provision for Federal or state income tax has beenmade. If, in the future this amount, or a portion thereof, is used for certainpurposes, then a Federal and state tax liability, at the then-current corporateincome tax rates, will be imposed on the amounts so used.

 

For financialreporting purposes, a valuation allowance has been established atDecember 31, 2002 to offset the portion of the deferred tax asset from acharitable contribution carryforward, that may not be recognized uponexpiration of the carryforward period in 2003.

 

**(11)**       **Employee Benefit Plans**

 

***401(k) Plan andTrust***

 

The Savings Bank adopted the Elgin FederalFinancial Center 401(k) Employee Benefit Plan and Trust (Plan), effectiveNovember 1, 1986, for the exclusive benefit of eligible employees andtheir beneficiaries. The Plan is a qualified plan covering all employees of theSavings Bank who have completed at least six months of service for the SavingsBank and are age 20 or older. The Plan also provides benefits in the event ofdeath, disability, or other termination of employment. Participants may makecontributions to the Plan from 2% to 10% of their earnings, subject to InternalRevenue Service limitations. Matching contributions can be made at the SavingsBank’s discretion each Plan year. There were no contributions by the SavingsBank during 2002, 2001, and 2000.

 

 

F-18

----

 

***Employee StockOwnership Plan (ESOP)***

 

In conjunctionwith the Savings Bank’s conversion, the Company formed an ESOP. The ESOP coverssubstantially all employees that are age 21 or over and with at least 1,000hours of service. The ESOP borrowed $8,961,298 from the Company and purchased599,314 common shares issued in the Conversion. The loan has a 15 year term,with an interest rate of 8.50%. The Savings Bank intends to make discretionarycontributions to the ESOP sufficient to service the requirements of the loanover a period of 15 years. During the years ended December 31, 2002, 2001,and 2000, 39,954 shares were allocated annually. ESOP expense for the yearsended December 31, 2002, 2001, and 2000 totaled $439,498, $468,596, and$380,489, respectively. The fair value of unallocated shares totaled $7,292,000and $6,087,000 at December 31, 2002 and 2001, respectively.

 

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

 

OnOctober 27, 1998, the Company adopted a SAP which may grant up to 4%, or299,657 shares of the common stock issued in the Company’s initial publicoffering to eligible directors, officers, and certain key employees of theCompany. All shares available under the SAP were granted on October 27,1998. Shares vest as follows: 20% per year for five (5) years of continuousservice. Deferred compensation relating to the shares granted under the SAP totaled$3,333,684, the fair value of the shares on the date of grant, and is beingrecognized as compensation expense as the participants vest in those shares.For the years ended December 31, 2002, 2001, and 2000, the Companyrecorded compensation expense of $624,702, $633,602, and $637,774,respectively.

 

During 1998,299,657 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 additionalpaid-in capital.

 

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

 

On March 19,2002, the Board of Directors of the Bank adopted a SERP.  This plan covers certain executives anddirectors of the Bank.  For the yearended December 31, 2002, the Company recorded compensation expense related tothe SERP in the amount of $411,277.

 

**(12)**       **Stock Option Plans**

 

OnOctober 27, 1998, the Company adopted a stock option plan (the StockOption Plan) pursuant to which the Company’s Board of Directors may grant stockoptions to directors, officers, and employees of the Company and the SavingsBank. The number 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, was approved bythe stockholders on April 25, 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 thecommencement date of the plans of October 27, 1998 and October 27,2000, respectively.

 

 

F-19

----

 

The Companyfollows the disclosure provisions of FASB Statement No. 123, *Accounting for Stock-Based Compensation.*The fair value of each option granted is estimated on the grant date using theBlack-Scholes option-pricing model. There were no options granted during 2002 and 2001.  

 
|                           |   | **2002** |   | **2001** |   | **2000** |   |
|--------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                           |   |     |   |     |   |     |   |
| Dividend yield                 |   | —   |   | —   |   | 4.63     | %      |
| Risk-free interest rate        |   | —   |   | —   |   | 5.28     | %      |
| Weighted average expected life |   | —   |   | —   |   | 10 yrs   |   |
| Expected volatility            |   | —   |   | —   |   | 3.75     | %      |

 

The weightedaverage per share fair values of options granted in 2000 totaled $0.77.

 

UnderStatement 123, the Company is required to disclose pro forma net income andearnings per share as if compensation expense relative to the fair value ofoptions granted had been included in earnings. Had the Company determinedcompensation cost based on the fair value at the grant date of its stockoptions under Statement 123, the Company’s net income would have been reducedto the pro forma amounts indicated below:

 
|                |   | **Year ended  December 31** |      |
|---------------------|--------|----------------------------------|-----------|
|                |   | **2002**                         |      | **2001** |   | **2000** |   |
|                |   |                             |      |   |   |   |   |
| Net income:         |   |                             |      |   |   |   |   |
| As reported         |   | $                                | 6,147,312 |   | 4,635,200 |   | 3,861,669 |   |
| Pro forma           |   | 5,698,934                        |      | 4,182,981 |   | 3,399,060 |   |
|                |   |                             |      |   |   |   |   |
| Earnings per share: |   |                             |      |   |   |   |   |
| Basic:              |   |                             |      |   |   |   |   |
| As reported         |   | $                                | 1.46      |   | 1.09 |   | 0.87 |   |
| Pro forma           |   | 1.35                             |      | 0.98 |   | 0.77 |   |
| Diluted:            |   |                             |      |   |   |   |   |
| As reported         |   | 1.39                             |      | 1.08 |   | 0.87 |   |
| Pro forma           |   | 1.29                             |      | 0.97 |   | 0.77 |   |

 

 

F-20

----

 

A summary ofthe status of the Company’s stock option transactions under the Plans for theyears ended December 31, 2002, 2001, 2000, is presented below:

 
|                             |   | **2002**   |   | **2001**                              |   | **2000**   |    |
|----------------------------------|--------|------------|--------|---------------------------------------|--------|------------|---------|
|                             |   | **Shares** |   | **Weight-  average  exercise  price** |   | **Shares** |    | **Weight-  average  exercise  price** |   | **Shares** |   | **Weight-  average  exercise  price** |   |
|                             |   |       |   |                                  |   |       |    |   |   |   |   |   |   |
| Outstanding at beginning of year |   | 771,500    |   | $                                     | 11.01  |       | 793,500 |   | $ | 11.01 |   | 749,000 |   | $ | 11.09 |   |
| Forfeitures                      |   | (6,000     | )      | 11.125                                |   | (22,000    | )       | 11.125 |   | — |   | — |   |
| Granted                          |   | —     |   | —                                |   | —     |    | — |   | 44,500 |   | 9.75 |   |
| Exercised                        |   | (117,182   | )      | 11.10                                 |   | —     |    | — |   | — |   | — |   |
|                             |   |       |   |                                  |   |       |    |   |   |   |   |   |   |
| Outstanding at end of year       |   | 648,318    |   | 10.99                                 |   | 771,500    |    | 11.01 |   | 793,500 |   | 11.01 |   |
|                             |   |       |   |                                  |   |       |    |   |   |   |   |   |   |
| Exercisable at end of year       |   | 482,018    |   | $                                     | 11.05  |       | 443,300 |   | $ | 11.07 |   | 293,000 |   | $ | 11.11 |   |

 

**(13)**       **Regulatory Capital Requirements**

 

The SavingsBank is subject to regulatory capital requirements administered by state andfederal regulatory agencies. Failure to meet minimum capital requirements caninitiate certain mandatory and possibly additional discretionary actions byregulators that, if undertaken, could have a direct material effect on theSavings Bank’s financial statements. Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Savings Bank must meetspecific capital guidelines that involve quantitative measures of the SavingsBank’s assets, liabilities, and certain off-balance sheet items as calculatedunder regulatory accounting practices. The Savings Bank’s capital amounts and classificationare also subject to qualitative judgments by the regulators about components,risk weightings, and other factors.

 

Quantitativemeasures established by regulation to ensure adequacy require the Savings Bankto maintain minimum amounts and ratios as set forth below. Management believes,as of December 31, 2002, that the Savings Bank meets all capital adequacyrequirements to which it is subject.

 

As ofDecember 31, 2002 and 2001, the most recent notification from the FederalDeposit Insurance Corporation categorized the Savings Bank as well capitalizedunder the regulatory framework for prompt corrective action. AtDecember 31, 2002, there are no conditions or events since the most recentnotification that management believes have changed the institution’s category.

 

 

F-21

----

 

The SavingsBank’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, 2002:                  |   |       |       |                                |   |                                                        |   |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | $          | 71,674,000 |                                | 13.41  | %                                                           | $      | 42,754,000 |   | 8.0 | % | $ | 53,442,000 |   | 10.0 | % |
|                                     |   |       |       |                                |   |                                                        |   |   |   |   |   |   |   |
| Tier I capital (to risk weighted assets) |   | 68,532,000 |       | 12.82                               |   | 21,377,000                                                  |   | 4.0 |   | 32,065,000 |   | 6.0 |   |
|                                     |   |       |       |                                |   |                                                        |   |   |   |   |   |   |   |
| Tier I capital (to average assets)       |   | 68,532,000 |       | 8.92                                |   | 30,724,000                                                  |   | 4.0 |   | 38,405,000 |   | 5.0 |   |
|                                     |   |       |       |                                |   |                                                        |   |   |   |   |   |   |   |
| December 31, 2001:                  |   |       |       |                                |   |                                                        |   |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |   | 66,271,000 |       | 14.58                               |   | 36,354,000                                                  |   | 8.0 |   | 45,443,000 |   | 10.0 |   |
|                                     |   |       |       |                                |   |                                                        |   |   |   |   |   |   |   |
| Tier I capital (to risk weighted assets) |   | 64,015,000 |       | 14.09                               |   | 18,177,000                                                  |   | 4.0 |   | 27,266,000 |   | 6.0 |   |
|                                     |   |       |       |                                |   |                                                        |   |   |   |   |   |   |   |
| Tier I capital (to average assets)       |   | 64,015,000 |       | 9.53                                |   | 26,878,000                                                  |   | 4.0 |   | 33,597,000 |   | 5.0 |   |
|                                          |        |            |            |                                     |        |                                                             |        |  |  |  |  |  |  |  |  |  |

 

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

 

A majority ofthe Savings Bank’s mortgage loans are secured by single-family homes in KaneCounty. For loans originated, the Savings Bank evaluates each customer’screditworthiness on a case-by-case basis. Management believes the Savings Bankhas a diversified loan portfolio and concentration of lending activities thatdoes not result in an acute dependency upon the economic conditions of itslending area. Purchased participation loans are secured by properties primarilyin the southern Wisconsin area and to a lesser extent by properties in theChicagoland area.

 

The SavingsBank is party to financial instruments with off-balance sheet risk in thenormal course of business to meet the financing needs of its customers. Thosefinancial instruments primarily include commitments to extend credit.Commitments to extend credit are agreements to lend to a customer so long asthere is no violation of any condition established in the contract. The SavingsBank evaluates each customer’s creditworthiness on a case-by-case basis. Theamount of collateral obtained is based on management’s credit evaluation of thecustomer. The Savings Bank’s exposure to credit loss in the event ofnonperformance by the customer is represented by the contractual amount ofthose financial instruments.  Thecommitments to originate first mortgage loans represent amounts, which theSavings Bank plans to fund within a period of 30 to 90 days.  

 

The SavingsBank’s approved, but unused lines of credit are based on underwriting standardsthat generally do not allow total borrowings, including the equity line ofcredit to exceed 80% of the current appraised value of the customer’sresidence.  However, the Savings Bankoffers home equity lines of credit up to 90% of the home’s current appraisedvalue at a 1% higher interest rate.

 

The SavingsBank’s standby letters of credit are conditional commitments issued by theSavings Bank to guarantee performance of a customer to a third party.  The credit risk involved in thesetransactions is essentially the same as that involved in extending a loan to acustomer in the normal course of business. Standby letters of credit are collateralized by mortgages, savingsaccounts or liens on business assets. The

 

 

F-22

----

 

fair value ofthe standby letters of credit approximates the amount of recorded related fees,which are not considered material.  Themaximum risk of accounting loss for these items, which is represented by thetotal commitment outstanding, totaled $4.9 million at December 31, 2002.

 

AtDecember 31, 2002 and 2001, the Savings Bank had the followingcommitments:

 
|                      |   | **2002**   |       | **2001**   |       |
|---------------------------|--------|------------|------------|------------|------------|
|                      |   |       |       |       |       |
| First mortgage loans      |   | $          | 11,965,000 |       | 14,331,000 |   |
| Construction loans        |   | 808,000    |       | 1,415,000  |       |
| Unused lines of credit    |   | 32,666,000 |       | 27,213,000 |       |
| Standby letters of credit |   | 4,927,000  |       | 2,963,000  |       |
|                           |        |            |            |            |            |  |

 

There are variousmatters of litigation pending against the Company that have arisen during thenormal course of business. Based upon discussions with legal counsel,management believes that the liability, if any, resulting from these matterswill not be material to the consolidated financial position or results ofoperations of the Company. 

 

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

 

FASB StatementNo. 107, *Disclosures about Fair Valueof Financial Instruments* (Statement 107), requires the disclosure ofestimated fair values of all asset, liability, and off-balance sheet financialinstruments. The estimated fair value amounts under Statement No. 107 havebeen determined as of a specific point in time utilizing various availablemarket information, assumptions, and appropriate valuation methodologies.Accordingly, the estimated fair values presented herein are not necessarilyrepresentative of the underlying value of the Company. Rather, the disclosuresare limited to reasonable estimates of the fair value of only the Company’sfinancial instruments. The use of assumptions and various valuation techniques,as well as the absence of secondary markets for certain financial instruments,will likely reduce the comparability of fair value disclosures betweenfinancial institutions. The Company does not plan to sell most of its assets orsettle most of its liabilities at these fair values. 

 

 

F-23

----

 

The estimatedfair values of the Company’s financial instruments are set forth in thefollowing table.

 
|                            |   | **December 31**      |    |
|---------------------------------|--------|----------------------|---------|
|                            |   | **2002**             |    | **2001** |   |
|                            |   | **Carrying  amount** |    | **Fair  value** |   | **Carrying  amount** |   | **Fair  value** |   |
|                            |   | **(In thousands)**   |    |
| Financial assets:               |   |                 |    |   |   |   |   |   |   |
| Cash and cash equivalents       |   | $                    | 32,844  |   | 32,844 |   | 18,175 |   | 18,175 |   |
| Investment securities           |   | 87,982               |    | 87,982 |   | 68,615 |   | 68,615 |   |
| Mortgage-backed securities      |   | 15,256               |    | 15,256 |   | 13,856 |   | 13,856 |   |
| Loans receivable, net           |   | 597,038              |    | 614,929 |   | 537,071 |   | 541,408 |   |
| Accrued interest receivable     |   | 3,887                |    | 3,887 |   | 3,682 |   | 3,682 |   |
| Bank owned life insurance       |   | 12,247               |    | 12,247 |   | 10,854 |   | 10,854 |   |
| Stock in FHLB of Chicago        |   | 9,362                |    | 9,362 |   | 8,892 |   | 8,892 |   |
|                            |   |                 |    |   |   |   |   |   |   |
| Financial liabilities:          |   |                 |    |   |   |   |   |   |   |
| Nonmaturing deposits            |   | $                    | 314,312 |   | 314,312 |   | 245,671 |   | 245,671 |   |
| Deposits with stated maturities |   | 209,878              |    | 213,923 |   | 174,413 |   | 176,993 |   |
| Borrowed money                  |   | 171,779              |    | 173,677 |   | 175,200 |   | 176,315 |   |
| Accrued interest payable        |   | 1,056                |    | 1,056 |   | 988 |   | 988 |   |

 

The followingmethods and assumptions are used by the Company in estimating the fair valueamounts for its financial instruments.

 

***Cash and CashEquivalents***

 

The carryingvalue of cash and cash equivalents approximates fair value due to the shortperiod of time between origination of the instrument and its expectedrealization.

 

***InvestmentSecurities, Mortgage-backed Securities, and FHLB Stock***

 

The fair valueof investment securities and mortgage-backed securities are estimated usingquoted market prices. The fair value of FHLB stock is based on its redemptionvalue.

 

***Loans Receivable***

 

The fair valueof loans receivable is based on contractual cash flows adjusted for prepaymentassumptions, discounted using the current rate at which similar loans would bemade to borrowers with similar credit ratings and remaining terms to maturity.

 

***Accrued InterestReceivable and Payable***

 

The carryingvalue of accrued interest receivable and payable approximates fair value due tothe relatively short period of time between accrual and expected realization.

 

 

F-24

----

 

***Bank Owned LifeInsurance***

 

The carryingvalue of bank owned life insurance approximates its fair value.  Bank owned life insurance, for reportingpurposes, is reflected at its cash value.

 

***Deposits***

 

The fair valueof deposits with no stated maturity, such as commercial checking, passbooksavings, NOW, and money market accounts are disclosed as the amount payable ondemand.

 

The fair valueof fixed-maturity deposits is the present value of the contractual cash flowsdiscounted using interest rates currently being offered for deposits withsimilar remaining terms to maturity. If the fair value estimate is less thanthe amount payable on demand at December 31, the fair value disclosed isthe amount payable on demand as per Statement 107.

 

***Borrowed Funds***

 

The fair valueof fixed rate FHLB advances is the present value of the contractual cash flowsdiscounted by the current rate offered for similar remaining maturities. Forvariable rate advances, the carrying value approximates fair value.

 

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

 

Presentedbelow is the condensed balance sheets as of December 31, 2002 and 2001 andstatements of income and cash flows for each of the years ended in thethree-year period for EFC Bancorp, Inc. These statements should be read inconjunction with the consolidated financial statements and the notes thereto.

 
|                                                          |   | **December 31** |       |
|---------------------------------------------------------------|--------|----------------------|------------|
|                                                          |   | **2002**             |       | **2001** |   |
| **Balance Sheets**                                            |   |                 |       |   |   |
| Assets:                                                       |   |                 |       |   |   |
| Cash and cash equivalents                                     |   | $                    | 1,831,349  |   | 1,388,622 |   |
| Mortgage-backed securities  available-for-sale, at fair value |   | 518,194              |       | 894,940 |   |
| Investment securities available-for-sale,  at fair value      |   | 300,000              |       | 300,000 |   |
| Equity investment in majority owned  subsidiary               |   | 189,271              |       | — |   |
| Equity investment in the Savings Bank                         |   | 69,716,634           |       | 64,244,687 |   |
| Accrued interest receivable                                   |   | 3,753                |       | 6,164 |   |
| Other assets                                                  |   | 2,994,549            |       | 2,544,559 |   |
| Total assets                                                  |   | $                    | 75,553,750 |   | 69,378,972 |   |
|                                                          |   |                 |       |   |   |
| Liabilities – other liabilities                          |   | $                    | 852,182    |   | 750,409 |   |
|                                                          |   |                 |       |   |   |
| Minority interest                                             |   | (75,127              | )          | — |   |
|                                                          |   |                 |       |   |   |
| Stockholders’ equity                                     |   | 74,776,695           |       | 68,628,563 |   |
| Total liabilities and stockholders’ equity               |   | $                    | 75,553,750 |   | 69,378,972 |   |

 

 

F-25

----

 
|                                                                  |   | **Year ended December 31** |      |
|-----------------------------------------------------------------------|--------|----------------------------|-----------|
|                                                                  |   | **2002**                   |      | **2001** |   | **2000** |   |
| **Statements  of Income**                                             |   |                       |      |   |   |   |   |
| Dividends from Savings Bank                                           |   | $                          | 2,196,801 |   | 2,091,103 |   | 1,783,317 |   |
| Equity in undistributed earnings of the Savings Bank                  |   | 4,571,914                  |      | 2,771,076 |   | 2,186,058 |   |
| Interest income                                                       |   | 703,784                    |      | 811,547 |   | 968,897 |   |
| Noninterest expense                                                   |   | (1,577,932                 | )         | (1,126,808 | ) | (1,153,245 | ) |
|                                                                  |   |                       |      |   |   |   |   |
| Income before income taxes and minority interest                      |   | 5,894,567                  |      | 4,546,918 |   | 3,785,027 |   |
|                                                                  |   |                       |      |   |   |   |   |
| Income tax benefit                                                    |   | 195,063                    |      | 88,282 |   | 76,642 |   |
|                                                                  |   |                       |      |   |   |   |   |
| Income before minority interest                                       |   | 6,089,630                  |      | 4,635,200 |   | 3,861,669 |   |
|                                                                  |   |                       |      |   |   |   |   |
| Minority interest                                                     |   | 57,682                     |      | — |   | — |   |
|                                                                  |   |                       |      |   |   |   |   |
| Net income                                                            |   | $                          | 6,147,312 |   | 4,635,200 |   | 3,861,669 |   |
| **Statements  of Cash Flows**                                         |   |                       |      |   |   |   |   |
| Operating activities:                                                 |   |                       |      |   |   |   |   |
| Net income                                                            |   | $                          | 6,147,312 |   | 4,635,200 |   | 3,861,669 |   |
| Equity in undistributed earnings of the Savings Bank                  |   | (4,571,914                 | )         | (2,771,076 | ) | (2,186,058 | ) |
| Deficit in undistributed loss of majority owned subsidiary            |   | 305,856                    |      | — |   | — |   |
| Amortization of premiums                                              |   | 6,079                      |      | 11,908 |   | 13,552 |   |
| ESOP plan shares allocated                                            |   | 597,420                    |      | 597,420 |   | 934,094 |   |
| Stock award plan shares allocated                                     |   | 752,170                    |      | 664,503 |   | 576,734 |   |
| Change in fair value of ESOP shares                                   |   | 43,671                     |      | (128,832 | ) | (216,931 | ) |
| Minority interest in subsidiary                                       |   | (75,127                    | )         | — |   | — |   |
| Decrease/(increase) in other assets                                   |   | (449,990                   | )         | (349,954 | ) | 383,907 |   |
| Decrease in accrued interest receivable                               |   | 2,411                      |      | 21,577 |   | 721,094 |   |
| Increase in other liabilities                                         |   | 101,396                    |      | 40,580 |   | 111,385 |   |
|                                                                  |   |                       |      |   |   |   |   |
| Net cash provided by operating activities                             |   | 2,859,284                  |      | 2,721,326 |   | 4,199,446 |   |
| Investing activities:                                                 |   |                       |      |   |   |   |   |
| Principal repayments on mortgage-backed securities available-for-sale |   | 371,630                    |      | 679,201 |   | 642,200 |   |
| Cash used in acquisition of majority owned subsidiary                 |   | (420,000                   | )         | — |   | — |   |
| Maturities of investment securities available-for-sale                |   | —                     |      | 2,000,000 |   | — |   |
| Net cash provided by investing activities                             |   | (48,370                    | )         | 2,679,201 |   | 642,200 |   |
| Financing activities:                                                 |   |                       |      |   |   |   |   |
| Cash dividends paid                                                   |   | (2,196,801                 | )         | (2,091,103 | ) | (1,783,317 | ) |
| Purchase of treasury stock                                            |   | (956,564                   | )         | (2,597,237 | ) | (3,315,593 | ) |
| Stock options exercised                                               |   | 785,178                    |      | — |   | — |   |
|                                                                  |   |                       |      |   |   |   |   |
| Net cash used in financing activities                                 |   | (2,368,187                 | )         | (4,688,340 | ) | (5,098,910 | ) |
| Net increase (decrease) in cash and cash equivalents                  |   | 442,727                    |      | 712,187 |   | (257,264 | ) |
| Cash and cash equivalents at beginning of year                        |   | 1,388,622                  |      | 676,435 |   | 933,699 |   |
|                                                                  |   |                       |      |   |   |   |   |
| Cash and cash equivalents at end of year                              |   | $                          | 1,831,349 |   | 1,388,622 |   | 676,435 |   |

 

 

F-26

----

 

**(17)**       **Selected Quarterly Financial Data (Unaudited)**

 

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

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

 

 

F-27

----

 
|                                                  |   | **Three  months ended**                    |   |
|-------------------------------------------------------|--------|--------------------------------------------|--------|
|                                                  |   | **March 31,  2001**                        |   | **June 30,  2001** |   | **September  30,  2001** |   | **December  31,  2001** |   |
|                                                  |   | **(In  thousands, except per share data)** |   |
|                                                  |   |                                       |   |   |   |   |   |   |   |
| Interest income                                       |   | $                                          | 10,677 |   | 10,755 |   | 11,138 |   | 11,271 |   |
| Interest expense                                      |   | 6,489                                      |   | 6,389 |   | 6,437 |   | 6,118 |   |
|                                                  |   |                                       |   |   |   |   |   |   |   |
| Net interest income before provision for  loan losses |   | 4,188                                      |   | 4,366 |   | 4,701 |   | 5,153 |   |
|                                                  |   |                                       |   |   |   |   |   |   |   |
| Provision for loan losses                             |   | 90                                         |   | 105 |   | 135 |   | 170 |   |
|                                                  |   |                                       |   |   |   |   |   |   |   |
| Net interest income after provision for  loan losses  |   | 4,098                                      |   | 4,261 |   | 4,566 |   | 4,983 |   |
|                                                  |   |                                       |   |   |   |   |   |   |   |
| Noninterest income                                    |   | 342                                        |   | 399 |   | 433 |   | 647 |   |
| Noninterest expense                                   |   | 3,034                                      |   | 3,202 |   | 3,193 |   | 3,157 |   |
|                                                  |   |                                       |   |   |   |   |   |   |   |
| Income before income tax expense                      |   | 1,406                                      |   | 1,458 |   | 1,806 |   | 2,473 |   |
|                                                  |   |                                       |   |   |   |   |   |   |   |
| Income tax expense                                    |   | 505                                        |   | 497 |   | 637 |   | 869 |   |
|                                                  |   |                                       |   |   |   |   |   |   |   |
| Net income                                            |   | $                                          | 901    |   | 961 |   | 1,169 |   | 1,604 |   |
|                                                  |   |                                       |   |   |   |   |   |   |   |
| Earnings per share:                                   |   |                                       |   |   |   |   |   |   |   |
| Basic                                                 |   | $                                          | 0.21   |   | 0.23 |   | 0.27 |   | 0.38 |   |
| Diluted                                               |   | 0.21                                       |   | 0.23 |   | 0.27 |   | 0.37 |   |

 

 

F-28

----

 

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

 

None.

 

 

## **PART III**

 

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

 

The information relating toDirectors and Executive Officers of the Registrant is incorporated herein byreference to the Registrants’ Proxy Statement for the Annual Meeting ofStockholders to be held on April 22, 2003, at pages 4 through 6 and 17.

 

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

 

The information relating todirector and executive compensation is incorporated herein by reference to theRegistrant’s Proxy Statement for the Annual Meeting of Stockholders to be heldon April 22, 2003, at pages 8 through 11.

 

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

 

Theinformation 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 22,2003, at pages 3 and 4.

 

EquityCompensation Plan Information as of December 31, 2002

 
| **Plan category**                                           |   | **Number of securities****to be issued upon exercise  of outstanding options,  warrants and rights(a)** |   | **Weighted-average****exercise price ofoutstanding options,warrants and rights  (b)** |   | **Number of securities****remaining available forfuture issuance underequity compensationplans (excluding securities  reflected in column (a))  (c)** |    |
|-------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
| Equity compensation plans  approved by security holders     |   | 648,318                                                                                                 |   | $                                                                                     | 10.99  |                                                                                                                                                  | 237,899 |   |
| Equity compensation plans not  approved by security holders |   | —                                                                                                  |   | —                                                                                |   | —                                                                                                                                                |    |
| Total                                                       |   | 648,318                                                                                                 |   | $                                                                                     | 10.99  |                                                                                                                                                  | 237,899 |   |

 

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

 

Theinformation relating to certain relationships and related transactions isincorporated herein by reference to the Registrant’s Proxy Statement for theAnnual Meeting of Stockholders to be held on April 22, 2003, at page 17.

 

**Item14. Controls and Procedures.**

 

Evaluation of disclosure controls and procedures.  The Company maintains controls andprocedures designed to ensure that information required to be disclosed in thereports that the Company files or submits under the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the Securities and ExchangeCommission.  Based upon their evaluationof those controls and procedures performed within 90 days of the filing date ofthis report, the chief executive officer and the chief financial officer of theCompany concluded that the Company’s disclosure

 

 

46

----

 

controls and procedures were adequate.

 

Changes in internal controls.  The Company made no significant changes inits internal controls or in other factors that could significantly affect thesecontrols subsequent to the date of the evaluation of those controls by thechief executive officer and chief financial officer.

 

## **PART IV**

 

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

 

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

 

Consolidated FinancialStatements of the Company are listed in the index and appear in this reportunder “Item 8.  Financial Statements andSupplementary Data.”

 

**(a) 2.**  **Financial StatementSchedules**

 

Financial StatementSchedules have been omitted because they are not applicable or the requiredinformation is shown in the Consolidated Financial Statements or notes thereto.

 

**(b)**               **Reports on Form 8-K filedduring the last quarter of 2002**

 

None.

 

**(c)**               **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               | The Elgin Financial  Savings Bank Supplemental Executive Retirement Agreement between Elgin  Financial Savings Bank and Barrett J. O’Connor (filed herewith) |
| 10.11               | The Elgin Financial  Savings Bank Supplemental Executive Retirement Agreement between Elgin  Financial Savings Bank and James J. Kovac (filed herewith)           |
| 10.12               | The Elgin Financial  Savings Bank Supplemental Executive Retirement Agreement between Elgin  Financial Savings Bank and Leo M. Flanagan, Jr. (filed herewith)     |
| 10.13               | The Elgin Financial Savings  Bank Supplemental Executive Retirement Agreement between Elgin Financial  Savings Bank and Thomas I. Anderson (filed herewith)       |

 

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| 10.14 | The Elgin Financial  Savings Bank Supplemental Executive Retirement Agreement between Elgin  Financial Savings Bank and Peter A. Traeger (filed herewith)    |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.15 | The Elgin Financial  Savings Bank Supplemental Executive Retirement Agreement between Elgin  Financial Savings Bank and James A. Alpeter (filed herewith)    |
| 10.16 | The Elgin Financial  Savings Bank Supplemental Executive Retirement Agreement between Elgin  Financial Savings Bank and Larry M. Narum (filed herewith)      |
| 10.17 | The Elgin Financial  Savings Bank Supplemental Executive Retirement Agreement between Elgin  Financial Savings Bank and R. Scott Reining (filed herewith)    |
| 10.18 | The Elgin Financial  Savings Bank Supplemental Executive Retirement Agreement between Elgin  Financial Savings Bank and Nancy L. Topalovich (filed herewith) |
| 11.0  | Statement Re:  Computation of Per Share Earnings  Incorporated herein by reference to Footnote 2 on page F-9 of this document                           |
| 13.0  | Selected Consolidated  Financial and Other Data (filed herewith)                                                                                             |
| 21.0  | Subsidiary information  incorporated herein by reference to “Part I - Subsidiaries”                                                                |
| 23.0  | Consent of the Company’s  Independent Auditors (filed herewith)                                                                                         |
| 99.1  | Certification of Chief  Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002          |
| 99.2  | Certification of Chief  Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002          |

 

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(1)           Incorporated by reference into this documentfrom the Exhibits filed with the Registration Statement on Form S-1, and anyamendments thereto, Registration No. 333-38637.

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

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

 

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**Signatures**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|            |                                                               |
|-----------------|--------------------------------------------------------------------|
|            | EFC Bancorp, Inc.                                                  |   |
|            | (Registrant)                                                       |   |
|            |                                                               |   |
| March 20,  2003 | /s/ Barrett J. O’Connor                                       |   |
|            | Barrett J. O’Connor, President &  Chief Executive Officer |   |

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant, in thecapacities, and on the dates indicated:

 
| **NAME**                      |   | **TITLE**                                     |   | **DATE**        |
|-------------------------------|--------|-----------------------------------------------|--------|-----------------|
|                          |   |                                          |   |            |
| /s/ Barrett  J. O’Connor |   | President,  Chief Executive Officer           |   | March 20,  2003 |
| Barrett J.  O’Connor     |   | and Director  (principal executive officer)   |   |            |
|                          |   |                                          |   |            |
| /s/ James J.  Kovac           |   | Executive  Vice President, Chief              |   | March 20,  2003 |
| James J.  Kovac               |   | Financial  Officer and Director               |   |            |
|                          |   | (principal  accounting and financial officer) |   |            |
|                          |   |                                          |   |            |
| /s/ Leo M.  Flanagan, Jr.     |   | Director and  Chairman of the Board           |   | March 20,  2003 |
| Leo M.  Flanagan, Jr.         |   |                                          |   |            |
|                          |   |                                          |   |            |
| /s/ Thomas  I. Anderson       |   | Director                                      |   | March 20,  2003 |
| Thomas I.  Anderson           |   |                                          |   |            |
|                          |   |                                          |   |            |
| /s/ Vincent  C. Norton        |   | Director                                      |   | March 20,  2003 |
| Vincent C.  Norton            |   |                                          |   |            |
|                          |   |                                          |   |            |
| /s/ Ralph W.  Helm            |   | Director                                      |   | March 20,  2003 |
| Ralph W.  Helm                |   |                                          |   |            |
|                          |   |                                          |   |            |
| /s/ Peter A.  Traeger         |   | Director                                      |   | March 20,  2003 |
| Peter A.  Traeger             |   |                                          |   |            |
|                          |   |                                          |   |            |
| /s/ James A.  Alpeter         |   | Director                                      |   | March 20,  2003 |
| James A.  Alpeter             |   |                                          |   |            |
|                          |   |                                          |   |            |
| /s/ Larry M.  Narum           |   | Director                                      |   | March 20,  2003 |
| Larry M.  Narum               |   |                                          |   |            |

 

49

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**Certification**

 

I, Barrett J, O’Connor, certifythat:

 

1.                         I have reviewed this annualreport on Form 10-K of EFC Bancorp, Inc.;

 

2.                        Based on my knowledge, thisannual report does not contain any untrue statement of a material fact or omitto state a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading with respectto the period covered by this annual report;

 

3.                        Based on my knowledge, thefinancial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report;

 

4.                        The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)                       designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared;

 

b)                      evaluated the effectiveness ofthe registrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

 

c)                       presented in this annual reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.                        The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)                       all significant deficiencies inthe design or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)                      any fraud, whether or notmaterial, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.                        The registrant’s othercertifying officers and I have indicated in this annual report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
|   | By:                       | /s/ Barrett  J. O’Connor |   |
|--------|---------------------------|-------------------------------|--------|
|   | Barrett J.  O’Connor |
|   | Chief  Executive Officer  |
|   | March 20,  2003           |

 

50

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**Certification**

 

I, James J. Kovac, certify that:

 

1.                        I have reviewed this annualreport on Form 10-K of EFC Bancorp, Inc.;

 

2.                        Based on my knowledge, thisannual report does not contain any untrue statement of a material fact or omitto state a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.                        Based on my knowledge, thefinancial statements, and other financial information included in this annualreport, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, theperiods presented in this annual report;

 

4.                        The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a.                        designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared;

 

b.                       evaluated the effectiveness ofthe registrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

 

c.                        presented in this annual reportour conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

 

5.                        The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a.                        all significant deficiencies inthe design or operation of internal controls which could adversely affect theregistrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b.                       any fraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.                        The registrant’s othercertifying officers and I have indicated in this annual report whether or notthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
|   | By:                      | /s/ James J.  Kovac |   |
|--------|--------------------------|---------------------|--------|
|   | James J.  Kovac          |
|   | Chief  Financial Officer |
|   | March 20,  2003          |

 

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