## **UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

**ý****                                ****QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30,2005**

 

**or**

 

**o****                                ****TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                                         to                                         **

 

**Commission File Number 1-13605**

 

**EFC BANCORP, INC.**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                                                    | ** ** | **36-4193304**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **1695 Larkin Avenue, Elgin, Illinois**                         | ** ** | **60123**                             |
| (Address of principal  executive offices)                       |       | (Zip Code)                            |

 

**(847) 741-3900**

(Registrant’s telephone number, includingarea code)

 

**Not Applicable**(Former name, former address and former fiscal year, if changed since lastreport)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.                                                  Yesý  No o

 

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).                                                                                                 Yeso  No  ý

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date: 4,838,372 shares ofcommon stock, par value $0.01 per share, were outstanding as of November 1,2005.

 

 

----

 

EFC Bancorp, Inc.

 

Form 10-Q

 

For the Quarter Ended September 30, 2005

 

INDEX

 
| PART I.  | FINANCIAL INFORMATION                                                                       |                                                                                                      |
|---------------|---------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|
|          |                                                                                        |                                                                                                      |
| Item 1.       | Financial Statements (unaudited)                                                            |                                                                                                      |
|          |                                                                                        |                                                                                                      |
|          |                                                                                        | Consolidated Balance Sheets at September 30, 2005 and December 31,  2004                        |   |
|          |                                                                                        |                                                                                                      |   |
|          |                                                                                        | Consolidated Statements of Income - For the Three and Nine Months  Ended September 30, 2005 and 2004 |   |
|          |                                                                                        |                                                                                                      |   |
|          |                                                                                        | Consolidated Statements of Cash Flows - For the Nine Months Ended September 30,  2005 and 2004       |   |
|          |                                                                                        |                                                                                                      |   |
|          |                                                                                        | Notes to Consolidated Financial Statements                                                                |   |
|          |                                                                                        |                                                                                                      |
| Item 2.       | Management’s Discussion and Analysis of Financial Condition and  Results of Operations |                                                                                                      |
|          |                                                                                        |                                                                                                      |
| Item 3.       | Quantitative and Qualitative Disclosures  About Market Risk                                 |                                                                                                      |
|          |                                                                                        |                                                                                                      |
| Item 4.       | Controls and Procedures                                                                     |                                                                                                      |
|          |                                                                                        |                                                                                                      |
| PART II: | OTHER INFORMATION                                                                           |                                                                                                      |
|          |                                                                                        |                                                                                                      |
| Item  1.      | Legal  Proceedings                                                                          |                                                                                                      |
| Item  2.      | Unregistered  Sales of Equity Securities and Use of Proceeds                                |                                                                                                      |
| Item  3.      | Defaults  Upon Senior Securities                                                            |                                                                                                      |
| Item  4.      | Submission  of Matters to a Vote of Security Holders                                        |                                                                                                      |
| Item  5.      | Other  Information                                                                          |                                                                                                      |
| Item  6.      | Exhibits                                                                                    |                                                                                                      |
|          |                                                                                        |                                                                                                      |
| SIGNATURES    |                                                                                        |

 

----

 

**PART I. FINANCIAL INFORMATION**

**EFC BANCORP, INC.**

 

Item 1.Financial Statements.

**EFC BANCORP, INC.**

**AND SUBSIDIARIES**

Consolidated Balance Sheets (unaudited)

September 30, 2005 and December 31, 2004

 
| ** **                                                                                                                                      | ** ** | **September 30,  2005** | ** **    | **December 31,  2004** | ** **    |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|---------------|-----------------------------|---------------|
| Assets                                                                                                                                          |       |                         |          |                        |          |
| Cash and cash equivalents:                                                                                                                      |       |                         |          |                        |          |
| On hand and in banks                                                                                                                            |       | $                            | 6,358,577     |                        | 5,327,541     |   |
| Interest bearing deposits with financial  institutions                                                                                          |       | 37,335,443                   |          | 25,582,585                  |          |
| Total cash and cash equivalents                                                                                                                 |       | 43,694,020                   |          | 30,910,126                  |          |
|                                                                                                                                            |       |                         |          |                        |          |
| Loans receivable, net                                                                                                                           |       | 835,718,587                  |          | 807,833,561                 |          |
| Mortgage-backed securities available-for-sale, at fair value                                                                                    |       | 9,333,391                    |          | 9,976,804                   |          |
| Investment securities available-for-sale, at fair value                                                                                         |       | 95,811,275                   |          | 92,846,891                  |          |
| Stock in Federal Home Loan Bank of Chicago, at cost                                                                                             |       | 12,505,400                   |          | 12,023,700                  |          |
| Accrued interest receivable                                                                                                                     |       | 4,501,863                    |          | 3,996,974                   |          |
| Office properties and equipment, net                                                                                                            |       | 24,143,783                   |          | 24,302,624                  |          |
| Real estate held for development                                                                                                                |       | —                       |          | 1,544,818                   |          |
| Bank owned life insurance                                                                                                                       |       | 19,695,250                   |          | 19,149,802                  |          |
| Other assets                                                                                                                                    |       | 2,055,515                    |          | 1,329,898                   |          |
|                                                                                                                                            |       |                         |          |                        |          |
| Total assets                                                                                                                                    |       | $                            | 1,047,459,084 |                        | 1,003,915,198 |   |
|                                                                                                                                            |       |                         |          |                        |          |
| Liabilities and Stockholders’ Equity                                                                                                       |       |                         |          |                        |          |
| Liabilities:                                                                                                                                    |       |                         |          |                        |          |
| Deposits                                                                                                                                        |       | $                            | 724,826,270   |                        | 671,035,878   |   |
| Borrowed money                                                                                                                                  |       | 219,000,000                  |          | 237,000,000                 |          |
| Accrued expenses, income taxes payable and  other liabilities                                                                                   |       | 16,161,240                   |          | 10,344,521                  |          |
|                                                                                                                                            |       |                         |          |                        |          |
| Total liabilities                                                                                                                               |       | 959,987,510                  |          | 918,380,399                 |          |
|                                                                                                                                            |       |                         |          |                        |          |
| Stockholders’ Equity:                                                                                                                      |       |                         |          |                        |          |
| Preferred stock, par value $.01 per share,  authorized 2,000,000 shares; no shares issued                                                       |       | —                       |          | —                      |          |
| Common stock, par value $.01 per share,  authorized 25,000,000 shares; issued 7,491,434 shares                                                  |       | 74,914                       |          | 74,914                      |          |
| Additional paid-in capital                                                                                                                      |       | 73,988,968                   |          | 73,237,074                  |          |
| Retained earnings, substantially restricted                                                                                                     |       | 50,790,600                   |          | 50,823,162                  |          |
| Treasury stock, at cost, 2,653,062 and  2,746,921 shares at September 30, 2005 and December 31, 2004,  respectively                   |       | (33,090,445                  | )             | (34,131,491                 | )             |
| Unearned employee stock ownership plan  (ESOP), 289,670 and 319,636 shares at September 30, 2005 and December 31,  2004, respectively |       | (4,331,294                   | )             | (4,779,359                  | )             |
| Unearned stock award plan, 3,454 and 4,202  shares at September 30, 2005 and December 31, 2004, respectively                          |       | (38,429                      | )             | (46,747                     | )             |
| Accumulated other comprehensive income                                                                                                          |       | 77,260                       |          | 357,246                     |          |
|                                                                                                                                            |       |                         |          |                        |          |
| Total stockholders’ equity                                                                                                                 |       | 87,471,574                   |          | 85,534,799                  |          |
|                                                                                                                                            |       |                         |          |                        |          |
| Commitments and contingencies                                                                                                                   |       | —                       |          | —                      |          |
|                                                                                                                                            |       |                         |          |                        |          |
| Total liabilities and stockholders’ equity                                                                                                 |       | $                            | 1,047,459,084 |                        | 1,003,915,198 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

1

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**EFC BANCORP, INC.**

**AND SUBSIDIARIES**

 

Consolidated Statements of Income (unaudited)

For the three and nine months ended September 30, 2005 and 2004

 
| ** **                                                                                          | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Interest income:                                                                                    |       |                                       |       |                                      |       |   |   |   |   |
| Loans secured by real estate                                                                        |       | $                                          | 7,670,446  |                                      | 7,608,786  |   | 22,790,979 |   | 23,220,232 |   |
| Other loans                                                                                         |       | 4,386,140                                  |       | 2,865,066                                 |       | 12,088,856 |   | 7,311,046 |   |
| Mortgage-backed securities  available-for-sale                                                      |       | 95,644                                     |       | 98,318                                    |       | 301,290 |   | 301,435 |   |
| Investment securities available-for-sale  and interest bearing deposits with financial institutions |       | 1,418,980                                  |       | 1,266,227                                 |       | 4,073,950 |   | 3,685,013 |   |
| Total interest income                                                                               |       | 13,571,210                                 |       | 11,838,397                                |       | 39,255,075 |   | 34,517,726 |   |
|                                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Interest expense:                                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Deposits                                                                                            |       | 4,595,320                                  |       | 3,391,593                                 |       | 12,355,434 |   | 9,433,012 |   |
| Borrowed money                                                                                      |       | 2,450,752                                  |       | 2,612,469                                 |       | 7,534,212 |   | 7,370,052 |   |
| Total interest expense                                                                              |       | 7,046,072                                  |       | 6,004,062                                 |       | 19,889,646 |   | 16,803,064 |   |
|                                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Net interest income before provision for loan losses                                                |       | 6,525,138                                  |       | 5,834,335                                 |       | 19,365,429 |   | 17,714,662 |   |
| Provision for loan losses                                                                           |       | 225,000                                    |       | 210,000                                   |       | 670,000 |   | 550,000 |   |
| Net interest income after provision for loan losses                                                 |       | 6,300,138                                  |       | 5,624,335                                 |       | 18,695,429 |   | 17,164,662 |   |
|                                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Noninterest income:                                                                                 |       |                                       |       |                                      |       |   |   |   |   |
| Service fees                                                                                        |       | 970,631                                    |       | 795,295                                   |       | 2,548,724 |   | 2,080,527 |   |
| Insurance and brokerage commissions                                                                 |       | 88,737                                     |       | 151,396                                   |       | 472,217 |   | 493,325 |   |
| Information technology sales and service  income, net                                               |       | 15,062                                     |       | 75,519                                    |       | 198,822 |   | 311,048 |   |
| Gain (loss) on sale of property                                                                     |       | (2,130                                     | )          | —                                    |       | 49,086 |   | 149,396 |   |
| Gain on sale of securities                                                                          |       | —                                     |       | —                                    |       | 208,969 |   | 249,418 |   |
| Gain on sale of loans                                                                               |       | 76,865                                     |       | 16,348                                    |       | 171,583 |   | 277,972 |   |
| Bank owned life insurance                                                                           |       | 222,571                                    |       | 207,735                                   |       | 653,980 |   | 654,061 |   |
| Other                                                                                               |       | 36,623                                     |       | 43,944                                    |       | 91,174 |   | 151,449 |   |
| Total noninterest income                                                                            |       | 1,408,359                                  |       | 1,290,237                                 |       | 4,394,555 |   | 4,367,196 |   |
|                                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Noninterest expense:                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Compensation and benefits                                                                           |       | 6,522,957                                  |       | 2,713,958                                 |       | 12,985,238 |   | 8,336,106 |   |
| Merger related expenses                                                                             |       | 455,991                                    |       | —                                    |       | 455,991 |   | — |   |
| Office building, net                                                                                |       | 762,239                                    |       | 747,492                                   |       | 2,277,770 |   | 2,140,727 |   |
| Federal insurance premiums                                                                          |       | 23,137                                     |       | 23,125                                    |       | 70,973 |   | 68,528 |   |
| Advertising                                                                                         |       | 176,838                                    |       | 250,712                                   |       | 643,427 |   | 761,724 |   |
| Data processing                                                                                     |       | 319,098                                    |       | 285,555                                   |       | 896,263 |   | 860,877 |   |
| NOW/checking account expenses                                                                       |       | 245,307                                    |       | 189,290                                   |       | 541,217 |   | 460,247 |   |
| Other                                                                                               |       | 820,842                                    |       | 1,125,105                                 |       | 2,369,232 |   | 2,444,359 |   |
| Total noninterest expense                                                                           |       | 9,326,409                                  |       | 5,335,237                                 |       | 20,240,111 |   | 15,072,568 |   |
|                                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Income (loss) before income taxes and minority interest                                             |       | (1,617,912                                 | )          | 1,579,335                                 |       | 2,849,873 |   | 6,459,290 |   |
|                                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Income tax expense (benefit)                                                                        |       | (584,178                                   | )          | 350,856                                   |       | 699,912 |   | 1,728,192 |   |
|                                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Income (loss) before minority interest                                                              |       | (1,033,734                                 | )          | 1,228,479                                 |       | 2,149,961 |   | 4,731,098 |   |
|                                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Minority interest                                                                                   |       | —                                     |       | (10,103                                   | )          | — |   | — |   |
|                                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Net income (loss)                                                                                   |       | $                                          | (1,033,734 | )                                         | 1,218,376  |   | 2,149,961 |   | 4,731,098 |   |
|                                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Earnings (loss) per share:                                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                                                                               |       | $                                          | (0.23      | )                                         | 0.28       |   | 0.48 |   | 1.10 |   |
| Diluted                                                                                             |       | (0.22                                      | )          | 0.27                                      |       | 0.46 |   | 1.04 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

2

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**EFC BANCORP, INC.**

**AND SUBSIDIARIES**

 

Consolidated Statements of Cash Flows (unaudited)

For the nine months ended September 30, 2005 and 2004

 
| ** **                                                                        | ** ** | **2005**     | ** ** | **2004**    | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------|------------|-------------|------------|
|                                                                              |       |         |       |        |       |
| Cash flows from operating activities:                                             |       |         |       |        |       |
| Net income                                                                        |       | $            | 2,149,961  |        | 4,731,098  |   |
| Adjustment to reconcile net income to net  cash provided by operating activities: |       |         |       |        |       |
| Amortization of premiums and discounts, net                                       |       | 54,645       |       | 79,945      |       |
| Provision for loan losses                                                         |       | 670,000      |       | 550,000     |       |
| FHLB of Chicago stock dividends                                                   |       | (481,700     | )          | (888,500    | )          |
| Stock award plan shares allocated                                                 |       | 8,318        |       | 25,031      |       |
| ESOP shares committed to be released                                              |       | 448,064      |       | 448,064     |       |
| Change in fair value of ESOP shares                                               |       | 751,894      |       | 639,191     |       |
| Depreciation of office properties and  equipment                                  |       | 1,151,706    |       | 933,366     |       |
| Gain on sale of securities                                                        |       | (208,969     | )          | (249,418    | )          |
| Gain on sale of loans receivable                                                  |       | (171,583     | )          | (277,972    | )          |
| Change in minority interest in subsidiary                                         |       | —       |       | 158,666     |       |
| Increase in bank owned life insurance                                             |       | (545,448     | )          | (555,823    | )          |
| Intangible amortization                                                           |       | 147,716      |       | —      |       |
| (Increase) decrease in accrued interest  receivable and other assets, net         |       | (1,196,647   | )          | 1,837,399   |       |
| Increase in income taxes payable, accrued  expenses and other liabilities, net    |       | 5,801,472    |       | 816,962     |       |
|                                                                              |       |         |       |        |       |
| Net cash provided by operating activities                                         |       | 8,579,429    |       | 8,248,009   |       |
|                                                                              |       |         |       |        |       |
| Cash flows from investing activities:                                             |       |         |       |        |       |
| Net increase in loans receivable                                                  |       | (34,653,302  | )          | (47,907,447 | )          |
| Purchases of loans receivable                                                     |       | (14,307,807  | )          | (70,023,873 | )          |
| Proceeds from the sale of loans receivable                                        |       | 20,577,664   |       | 40,528,222  |       |
| Decrease (increase) in real estate held for  development                          |       | 1,544,818    |       | (731,059    | )          |
| Purchases of mortgage-backed securities  available-for-sale                       |       | (1,991,712   | )          | (4,035,625  | )          |
| Principal payments on mortgage-backed  securities available-for-sale              |       | 2,516,224    |       | 3,231,485   |       |
| Maturities of investment securities  available-for-sale                           |       | 2,579,219    |       | 23,331,922  |       |
| Purchases of investment securities  available-for-sale                            |       | (8,714,246   | )          | (32,276,933 | )          |
| Proceeds from the sale of investment  securities                                  |       | 2,984,877    |       | 3,747,338   |       |
| Purchases of office properties and  equipment                                     |       | (992,866     | )          | (6,993,235  | )          |
| Investment in bank owned life insurance                                           |       | —       |       | (425,000    | )          |
|                                                                              |       |         |       |        |       |
| Net cash used in investing activities                                             |       | (30,457,131  | )          | (91,554,205 | )          |
|                                                                              |       |         |       |        |       |
| Cash flows from financing activities:                                             |       |         |       |        |       |
| Net increase in deposits                                                          |       | 53,790,392   |       | 75,896,317  |       |
| Proceeds from borrowed money                                                      |       | 111,000,000  |       | 119,000,785 |       |
| Repayments on borrowed money                                                      |       | (129,000,000 | )          | (98,789,536 | )          |
| Purchase of treasury stock                                                        |       | —       |       | (268,963    | )          |
| Stock options exercised                                                           |       | 1,041,046    |       | 1,126,375   |       |
| Cash dividends paid                                                               |       | (2,169,842   | )          | (1,910,044  | )          |
| Net cash provided by financing activities                                         |       | 34,661,596   |       | 95,054,934  |       |
|                                                                              |       |         |       |        |       |
| Net increase in cash and cash equivalents                                         |       | 12,783,894   |       | 11,748,738  |       |
| Cash and cash equivalents at beginning of period                                  |       | 30,910,126   |       | 21,875,988  |       |
|                                                                              |       |         |       |        |       |
| Cash and cash equivalents at end of period                                        |       | $            | 43,694,020 |        | 33,624,726 |   |
|                                                                              |       |         |       |        |       |
| Supplemental disclosures of cash flow information:                                |       |         |       |        |       |
| Cash paid during the period for:                                                  |       |         |       |        |       |
| Interest                                                                          |       | $            | 19,832,099 |        | 16,680,058 |   |
| Income taxes                                                                      |       | 2,750,000    |       | 2,005,000   |       |

 

See accompanying notes to unaudited consolidated financial statements.

 

3

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**EFCBANCORP, INC.**

**Notes to Unaudited Consolidated FinancialStatements**

 

Note 1: BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financial statements includethe accounts of EFC Bancorp, Inc. (the Company), its wholly-ownedsubsidiaries, Computer Dynamics Group, Inc. (CDGI), EFS Bank (the Bank)and its wholly-owned subsidiary, EFS Service Corporation of Elgin.  The Company operates as a single segment.

 

In the opinion of the management of the Company, the accompanyingconsolidated financial statements include all normal recurring adjustmentsnecessary for a fair presentation of the financial position and results ofoperations for the periods presented. All significant intercompany transactions have been eliminated inconsolidation.  These interim financialstatements have been prepared according to the rules and regulations ofthe Securities and Exchange Commission and therefore certain information andfootnote disclosures normally included in annual financial statements presentedin accordance with U.S. generally accepted accounting principles have beencondensed or omitted.  The preparation offinancial statements in conformity with U.S. GAAP requires the use of estimatesand assumptions that affect amounts and disclosures.  Actual results could differ from thoseestimates.  The results of operations forthe interim periods are not necessarily indicative of the results to beexpected for the full year.  It issuggested that the accompanying unaudited consolidated financial statements beread in conjunction with the Company’s 2004 Annual Report on Form 10-K.  Currently, other than investing in varioussecurities, the Company does not directly transact any material business otherthan through the Bank.  Accordingly, thediscussion herein addresses the operations of the Company as they are conductedthrough the Bank.

 

4

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Note 2: COMPREHENSIVE INCOME

 

The Company’s comprehensive income for the three and nine month periodsended September 30, 2005 and 2004 are as follows:

 
| ** **                                                                                          | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income (loss)                                                                                   |       | $                                          | (1,033,734 | )                                         | 1,218,376  |   | 2,149,961 |   | 4,731,098 |   |
| Other comprehensive income, net of tax:                                                             |       |                                       |       |                                      |       |   |   |   |   |
| Unrealized holding gains/(losses) on  securities arising during the period, net of tax effect       |       | (483,537                                   | )          | 2,123,059                                 |       | (279,985 | ) | 37,896 |   |
| Reclassification adjustment for net gain on  sales of securities realized in net income, net of tax |       | —                                     |       | —                                    |       | (131,650 | ) | (157,133 | ) |
|                                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Comprehensive income (loss)                                                                         |       | $                                          | (1,517,271 | )                                         | 3,341,435  |   | 1,738,326 |   | 4,611,861 |   |

 

For the three months ended September 30, 2005 therewere no sales of securities.  For thenine months ended September 30, 2005 the sale of securities resulted ingains of $208,969 ($131,650 net of tax effect). For the three months ended September 30, 2004 there were no salesof securities.  For the nine months endedSeptember 30, 2004 the sale of securities resulted in gains of $249,418($157,133 net of tax effect).

 

Note 3: COMPUTATION OF PER SHARE EARNINGS

 

Basic earnings per share is calculated by dividing net income by theweighted average number of common shares outstanding.  Diluted earnings per share is calculated bydividing net income by the weighted average number of common shares outstandingadjusted for the dilutive effect of outstanding stock options.  ESOP shares are only considered outstandingfor earnings per share calculations when they are released or committed to bereleased.

 

5

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Presented below are the calculations for the basic and diluted earningsper share:

 
| ** **                                   | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Basic:                                       | ** ** | ** **                                 | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                            |       | $                                          | (1,033,734 | )                                         | 1,218,376  |   | 2,149,961 |   | 4,731,098 |   |
|                                         |       |                                       |       |                                      |       |   |   |   |   |
| Weighted average shares outstanding          |       | 4,535,906                                  |       | 4,340,546                                 |       | 4,492,602 |   | 4,287,395 |   |
|                                         |       |                                       |       |                                      |       |   |   |   |   |
| Basic earnings (loss) per share              |       | $                                          | (0.23      | )                                         | 0.28       |   | 0.48 |   | 1.10 |   |
|                                         |       |                                       |       |                                      |       |   |   |   |   |
| Diluted:                                     |       |                                       |       |                                      |       |   |   |   |   |
|                                         |       |                                       |       |                                      |       |   |   |   |   |
| Net income (loss)                            |       | $                                          | (1,033,734 | )                                         | 1,218,376  |   | 2,149,961 |   | 4,731,098 |   |
|                                         |       |                                       |       |                                      |       |   |   |   |   |
| Weighted average shares outstanding          |       | 4,535,906                                  |       | 4,340,546                                 |       | 4,492,602 |   | 4,287,395 |   |
| Effect of dilutive stock options outstanding |       | 240,045                                    |       | 247,455                                   |       | 197,804 |   | 252,164 |   |
| Diluted weighted average shares outstanding  |       | 4,775,591                                  |       | 4,588,001                                 |       | 4,690,406 |   | 4,539,559 |   |
|                                         |       |                                       |       |                                      |       |   |   |   |   |
| Diluted earnings (loss) per share            |       | $                                          | (0.22      | )                                         | 0.27       |   | 0.46 |   | 1.04 |   |

 

Note4:  STOCK OPTION PLANS

 

TheCompany accounts for stock-based compensation plans under APB Opinion No. 25.  For the stock option program, no compensationcost is recognized in connection with the granting of stock options with anexercise price equal to the fair market value of the stock on the date of thegrant.  For the stock award plan, theCompany uses the fixed method of accounting and records compensation expense,over the vesting period of the grant, based upon the fair market value of thestock at the date of grant.  Inaccordance with the disclosure requirements of SFAS No. 123, as amended bySFAS No. 148, the following table provides the pro forma effect on netincome and earnings per share if the fair value method of accounting forstock-based compensation had been used for all awards:

 
| ** **                                                                                                                                  | ** ** | **For the Three Months  Ended September 30,** | ** ** | **For the Nine Months  Ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **2005**                                           | ** ** | **2004**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                                        |       |                                               |       |                                              |       |   |   |   |   |
| Net income (loss) as reported                                                                                                               |       | $                                                  | (1,033,734 | )                                                 | 1,218,376  |   | 2,149,961 |   | 4,731,098 |   |
| Add: Stock-based compensation, net of tax,  included in the determination of net income, as reported                                        |       | 2,773                                              |       | 8,344                                             |       | 8,319 |   | 25,032 |   |
| Deduct: Stock-based compensation, net of  tax, that would have been reported if the fair value based method had been  applied to all awards |       | (36,875                                            | )          | (27,831                                           | )          | (110,626 | ) | (80,394 | ) |
| Pro forma net income (loss)                                                                                                                 |       | $                                                  | (1,067,836 | )                                                 | 1,198,889  |   | 2,047,654 |   | 4,675,736 |   |
|                                                                                                                                        |       |                                               |       |                                              |       |   |   |   |   |
| Basic earnings (loss) per share                                                                                                             |       |                                               |       |                                              |       |   |   |   |   |
| As reported                                                                                                                                 |       | $                                                  | (0.23      | )                                                 | 0.28       |   | 0.48 |   | 1.10 |   |
| Pro forma                                                                                                                                   |       | (0.24                                              | )          | 0.28                                              |       | 0.46 |   | 1.09 |   |
|                                                                                                                                        |       |                                               |       |                                              |       |   |   |   |   |
| Diluted earnings (loss) per share                                                                                                           |       |                                               |       |                                              |       |   |   |   |   |
| As reported                                                                                                                                 |       | $                                                  | (0.22      | )                                                 | 0.27       |   | 0.46 |   | 1.04 |   |
| Pro forma                                                                                                                                   |       | (0.22                                              | )          | 0.26                                              |       | 0.44 |   | 1.03 |   |

 

6

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Note 5:  MERGER AGREEMENT WITHMAF BANCORP, INC.

 

On June 29, 2005, the Company entered into an Agreement and Planof Reorganization (“Merger Agreement”) with MAF Bancorp, Inc. (“MAF”)pursuant to which the Company and the Bank will be merged with and into MAF anda subsidiary of MAF (the “Merger”). Subject to the terms and conditions of the Merger Agreement, eachoutstanding share of the Company’s common stock will be converted into theright to receive either .8082 shares of MAF common stock for each share ofCompany common stock they hold, or cash in the amount of $34.69 withoutinterest, for each such share, or a combination thereof, subject to theelection and allocation procedures detailed in the Merger Agreement.  Approximately 60% of the total considerationwill be paid in MAF common stock and approximately 40% will be paid in cash.  The transaction is currently expected to becompleted in January 2006, subject to customary closing conditions,regulatory approvals and approval by the holders of a majority of the Company’scommon stock.  In the event the merger isnot consummated under certain circumstances, the Company has agreed to pay MAFa termination fee of $9.0 million.

 

The Merger Agreement includes terms and conditions which affect theconduct of the Company’s business until the Merger is completed or the MergerAgreement is terminated.  Among otheritems, the Merger Agreement generally requires the Company to carry on businessin its ordinary course consistent with past practice and in accordance withsound banking practices, and to observe in all material respects its legal andcontractual obligations.  The MergerAgreement generally restricts the ability of the Company to make materialchanges in any aspect of the conduct of its business without the consent of MAFincluding significant capital expenditures, new material lines of business orthe disposition of assets or incurring of obligations outside of the ordinarycourse of business.  The Company believesthat it is in compliance with the obligations under the Merger Agreement in allmaterial respects.

 

Item 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

 

On June 30, 2005, MAF and the Company announced that they hadagreed to a transaction whereby MAF will acquire the Company in a stock andcash transaction valued at approximately $177.5 million.  The respective boards of directors of MAF andthe Company approved the Merger Agreement to effectuate the Merger of the twoinstitutions, with MAF to be the surviving corporation.  Under the terms of the agreement,shareholders of the Company will be entitled to elect to receive either .8082shares of MAF stock for each share of Company common stock they hold, or cashin the amount of $34.69, without interest, for each such share, or acombination thereof, subject to the election and allocation procedures detailedin the Merger Agreement.  Approximately 60%of the total consideration will be paid in MAF stock and approximately 40% willbe paid in cash.  Based on this structureand the current outstanding shares of Company common stock, the aggregatemerger consideration will include approximately $70.0 million in cash andapproximately 2.3 million shares of MAF stock (excluding stock options).  The transaction is currently expected to becompleted in January 2006, subject to customary closing conditions,regulatory approvals and approval by the holders of a majority of the Company’scommon stock.  In the event the merger isnot consummated under certain circumstances, the Company has agreed to pay MAFa termination fee of $9.0

 

7

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million.

 

Set forth below are highlights and significant items for the thirdquarter of 2005:

 

•                  TheCompany recognized $3.7 million in merger related expenses for the quarter;

•                  Dilutedearnings (loss) per share were $(0.22) for the quarter and $0.27 for thecomparable prior year period;

•                  Netincome (loss) was $(1.0 million) for the quarter and $1.2 million for thecomparable prior year period; and

•                  Return(loss) on average equity was (4.64%) for the quarter and 5.99% for thecomparable prior year period.

 

The following analysis discusses changes in the financial condition at September 30,2005 and results of operations for the three and nine months ended September 30,2005, and should be read in conjunction with the Company’s UnauditedConsolidated Financial Statements and the notes thereto, appearing in Part I,Item 1 of this document.

 

##### **Critical Accounting Policy**

 

The allowance for loan and lease losses is considered bymanagement to be a critical accounting policy. The allowance for loan losses is maintained through provisions for loanlosses based on management’s on-going evaluation of the risks in its loanportfolio in consideration of the trends in its loan portfolio, the nationaland regional economies and the real estate market in the Bank’s primary lendingarea.  The allowance for loan losses ismaintained at an amount management considers adequate to cover probable lossesin its portfolio, based on information currently known to management.  The Bank’s loan loss allowance determinationalso incorporates factors and analyses which consider the probable principalloss associated with the loans, costs of acquiring the property and securingthe loan through foreclosure or deed in lieu of foreclosure.  While management estimates loan losses usingthe best available information, no assurance can be given that future additionsto the allowance will not be necessary based on changes in economic and realestate market conditions, further information obtained regarding problem loans,identification of additional problem loans and other factors, both within andoutside of management’s control.

 

**Forward-Looking Statements**

 

This report contains certain forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, and Section 21Eof the Securities Exchange Act of 1934, as amended. The Company intends suchforward-looking statements to be covered by the safe harbor provisions forforward-looking statements contained in the Private Securities LitigationReform Act of 1995, and is including this statement for purposes of these safeharbor provisions. Forward-looking statements, which are based on certainassumptions and describe future plans, strategies and expectations of theCompany, are generally identified by use of the words “believe,” “expect,” “intend,”“anticipate,” “estimate,” “project,” or similar expressions. The Company’sability to predict results or the actual effect of future plans or strategiesis inherently uncertain. Factors which could have a material adverse effect onthe operations of the

 

8

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Company and its subsidiaries include, but are not limited to, changesin: interest rates, general economic conditions, legislative/regulatorychanges, monetary and fiscal policies of the U.S. Government, includingpolicies of the U.S. Treasury and the Federal Reserve Board, the quality orcomposition of the loan or investment portfolios, demand for loan products,deposit flows, competition, demand for financial services in the Company’smarket area and accounting principles and guidelines. These risks anduncertainties should be considered in evaluating forward-looking statements andundue reliance should not be placed on such statements. Further informationconcerning the Company and its business, including additional factors thatcould materially affect the Company’s financial results, is included in theCompany’s filings with the SEC, including its 2004 Annual Report on Form 10-K.

 

Forward-looking statements also include, with limitation, those statementsrelating the anticipated effects of the Company’s proposed merger with MAFBancorp, Inc.  The followingfactors, among others, could cause the actual results of the merger to differmaterially from expectations:  theability of the companies to obtain the required shareholder or regulatoryapprovals of the merger; the imposition of any regulatory conditions orrequirements on the merger; the ability of the companies to consummate themerger; the ability to successfully integrate the companies following themerger, including integration of data processing systems and retention of keypersonnel; a materially adverse change in the financial condition, operations,or projected or actual earnings of either company; the ability to fully realizethe expected cost savings and revenues; the ability to realize the expectedcost savings and revenues on a timely basis; and any material change in thelocal markets in which each company operates.

 

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

 

**Comparison of Financial Condition at September 30, 2005 and December 31,2004**

 

Total assets at September 30, 2005 were $1.047 billion, whichrepresented an increase of $43.5 million, or 4.3%, compared to $1.004 billionat December 31, 2004.  The increasein total assets was primarily a result of an increase in net loans receivableof $27.9 million, or 3.5%, to $835.7 million at September 30, 2005 from$807.8 million at December 31, 2004. The increase in loans was the result of increases of $23.1 million inone-to-four family loans, $16.4 million in construction and land loans and $3.7million in home equity loans, the effect of which was partially offset by a$7.1 million decrease in commercial business loans and a $9.5 million decreasein commercial real estate loans.  Thisgrowth is consistent with management’s overall strategy for the Bank, whichincludes branch expansion and competitive pricing of deposit accounts in itslocal market area.  In addition,investment securities increased $3.0 million, or 3.2%, to $95.8 million at September 30,2005 from $92.8 million at December 31, 2004 and cash and cash equivalentsincreased $12.8 million, or 41.4%, to $43.7 million at September 30, 2005from $30.9 million at December 31, 2004. These increases were partially offset by a decrease in real estate ownedfor development of $1.5 million at December 31, 2004 to zero at September 30,2005.  This decrease is primarily due tothe sale of the remaining single-family residences in a subdivision developedby the Bank’s wholly-owned subsidiary EFS Service Corporation.  The

 

9

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loan growth was funded by increases in deposits.  Deposits increased $53.8 million, or 8.0%, to$724.8 million at September 30, 2005 from $671.0 million at December 31,2004.  Borrowed money, representing FHLBadvances, decreased $18.0 million to $219.0 million at September 30, 2005from $237.0 million at December 31, 2004. Stockholders’ equity increased $2.0 million to $87.5 million at September 30,2005 from $85.5 million at December 31, 2004.  The increase in stockholders’ equity wasprimarily the result of a decrease in treasury stock held by the Company, whichwas the result of employees exercising approximately 96,000 stock options andthe Company’s net income for the nine months ended September 30, 2005,which was partially offset by dividends paid of $2.2 million and a decrease of$280,000 in the Company’s accumulated other comprehensive income relating tothe change in fair value of its available-for-sale investment portfolio.

 

**Comparison of Operating Results For the Three Months Ended September 30,2005 and 2004**

 

***General.***  The Company’s net income decreased $2.3million, or 184.9%, to ($1.0 million) for the three months ended September 30,2005 as compared to the prior year period.

 

***Interest Income.***  Interest income increased $1.7 million, or14.6%, to $13.6 million for the three months ended September 30, 2005,compared to the same period in 2004. This increase resulted from an increase in the average balance ofinterest-earning assets and an increase in the average rate earned oninterest-earning assets.  The averageyield on interest-earning assets increased by 40 basis points to 5.57% for thethree months ended September 30, 2005 from 5.17% for the three monthsended September 30, 2004.  Theaverage balance of interest-earning assets increased by $57.7 million, or 6.2%,to $989.1 million for the three months ended September 30, 2005 from$931.4 million for the comparable period in 2004.  This increase resulted primarily from anincrease in the average balance of loans receivable of $40.7 million from$791.2 million for the three months ended September 30, 2004 to $831.9million for the three months ended September 30, 2005.  In addition, the average balance onshort-term deposits increased $13.7 million from $25.8 million for the threemonths ended September 30, 2004 to $39.5 million for the three monthsended September 30, 2005 and the average balance on investment securitiesincreased $4.0 million from $91.7 million for the three months ended September 30,2004 to $95.7 million for the three months ended September 30, 2005.

 

Mortgage loan interest income increased by $62,000 for the three monthsended September 30, 2005 compared with the same period in 2004.  The average balance of mortgage loansdecreased $19.7 million to $559.8 million and the mortgage loan yield increasedby 23 basis points from 5.25% to 5.48%. Interest income from other loans increased $1.5 million for the threemonths ended September 30, 2005. This increase resulted from a combination of an increase in averagebalance of $60.4 million to $272.1 million, and a 104 basis point increase inyield from 5.42% for the three months ended September 30, 2004 to 6.46%for the three months ended September 30, 2005.  Interest income from investment securitiesincluding stock in the Federal Home Loan Bank of Chicago (“FHLBC”),mortgage-backed securities and short-term deposits increased $150,000 to $1.5million for the three months ended September 30, 2005, compared with thesame period in 2004.  The average balanceincreased $17.0 million and the yield decreased 14 basis points from 4.49% forthe three months ended September 30, 2004 to

 

10

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4.35% for the three months ended September 30, 2005.  The decrease in yield is primarily due to alower dividend yield on the stock in the FHLBC. The average yields are reported on a tax equivalent basis.

 

***Interest Expense. ***Interest expenseincreased by $1.0 million, or 17.4%, to $7.0 million for the three months endedSeptember 30, 2005, compared to the same period in 2004.  This increase resulted from a combination ofan increase in the average balance of interest-bearing liabilities, and anincrease in the average rate paid on those interest-bearing liabilities.  The average balance of interest-bearingliabilities increased by $50.3 million, or 6.0%, to $895.2 million for thethree months ended September 30, 2005 from $844.9 million for the threemonths ended September 30, 2004. This increase is partially due to deposit growth resulting from theopening of the Company’s ninth full service branch in September 2004.  The increase in interest-bearing liabilitiesreflects a $56.7 million increase in deposit accounts, which is attributable toa $5.9 million increase in passbook savings accounts, a $73.2 million increasein certificates of deposit and a $10.9 million increase in NOW accounts.  These increases were partially offset by adecrease of $33.3 million in money market accounts.  In addition, borrowings decreased $6.3million to $219.0 million for the three months ended September 30, 2005from $225.3 million for the comparable period in 2004.  The average rate paid on deposits increasedby 53 basis points to 2.72% for the three months ended September 30, 2005from 2.19% for the comparable prior year period.  The average rate paid on borrowed moneydecreased by 16 basis points to 4.48% for the three months ended September 30,2005 from 4.64% for the three months ended September 30, 2004.  This decrease is primarily due to therepayment of higher rate FHLB advances.

 

***Net Interest Income Before Provision for LoanLosses.***  Netinterest income before provision for loan losses increased $691,000, or 11.8%,to $6.5 million for the three months ended September 30, 2005 from $5.8million for the comparable period in 2004. The average balance of interest-earning assets increased $57.7 millionfor the three months ended September 30, 2005 compared to the comparableprior year period.  The increase ininterest-earning assets was primarily the result of increases in the averagebalance of other loans of $60.4 million, cash and cash equivalents of $13.7million and a $4.0 million increase in investment securities.  These increases were partially offset by a$19.7 million decrease in mortgage loans. The tax equivalent net interest margin as a percent of interest-earningassets increased by 12 basis points to 2.72% for the three months ended September 30,2005 from 2.60% for the comparable period in 2004.  Increasing the net interest margin isdependent on the Bank’s ability to generate higher-yielding assets andlower-cost deposits.  While the netinterest margin has expanded in the three and nine month periods ended September 30,2005 as compared to the prior year periods, management continues to closelymonitor the net interest margin.

 

***Provision for Loan Losses.***  The provision for loan losses increased by$15,000, to $225,000 for the three months ended September 30, 2005 from $210,000in the comparable prior year period.  Theincrease in the provision for loan losses is primarily due to the growth andincreased risk in the loan portfolio based on a greater emphasis placed oncommercial real estate and construction and land loans, which involves a higherdegree of risk.  Commercial real estateloans increased $1.6 million, or 1.3%, to $121.5 million at September 30,2005 from $119.9 million at September 30, 2004.  In addition, construction and land loansincreased $16.5 million,

 

11

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or 37.4%, to $60.5 million at September 30, 2005 from $44.1million at September 30, 2004.  At September 30,2005, December 31, 2004 and September 30, 2004, non-performing loanstotaled $3.3 million, $2.9 million and $2.5 million, respectively.  At September 30, 2005, the ratio of theallowance for loan losses to non-performing loans was 151.2% compared to 153.5%at December 31, 2004 and 168.2% at September 30, 2004.  The ratio of the allowance to total loans was0.60%, 0.56% and 0.54%, at September 30, 2005, December 31, 2004 and September 30,2004, respectively.  Net charge-offs forthe three months ended September 30, 2005 totaled $51,000.  Net charge-offs for the three months ended September 30,2004 totaled $3,000.  Managementperiodically performs an allowance sufficiency analysis based upon theportfolio composition, asset classifications, loan-to-value ratios, probableimpairments in the loan portfolio, and other factors.

 

***Noninterest Income. ***Noninterestincome totaled $1.4 million and $1.3 million for the three months ended September 30,2005 and 2004, respectively.  Theincrease in noninterest income is primarily attributable to increases of$175,000 in service fees, $61,000 in gain on sale of loans, and $6,000 in gainon sale of property.  These increaseswere partially offset by decreases of $60,000 in revenues generated by CDGI and$63,000 in insurance and brokerage commissions. The decrease in income generated by CDGI is largely due to a decrease insales related to a weaker demand for CDGI’s services.  It is management’s intention to phase out ofCDGI by the end of the year.  Theincrease in service fees is primarily due to the growth in the number ofdeposit accounts.

 

***Noninterest Expense. ***Noninterestexpense increased $4.0 million, to $9.3 million for the three months ended September 30,2005 from $5.3 million for the comparable period in 2004.  This increase is primarily due to $3.7million of merger related expenses incurred in connection with the Company’spreviously announced intention to merge with MAF Bancorp, Inc.  These expenses consist of legal, investmentbanking and other payments.  These otherpayments, recorded as compensation expense, are required to be made undercertain agreements with directors and officers of the Company.  These agreements require payments totaling$8.1 million to be made to the directors and officers provided they remain withthe Company through the expected effective time of the merger (on or around January 6,2006) and are not contingent upon the consummation of the merger.  At the time the agreements were signed theCompany had an existing liability of $1.3 million.  Consequently, the total expense to berecognized for these payments is $6.8 million. Expense recognized in the third quarter was $3.3 million representingthe portion of these payments earned during the quarter.  The remaining expense of $3.4 million will berecognized in the fourth quarter.  Inaddition, there were increases of $520,000 in compensation and benefits,$34,000 in data processing, $56,000 in checking account expenses and $62,000impairment charge related to an intangible asset recorded by CDGI.  These increases were partially offset bydecreases of $74,000 in advertising expenses and $366,000 in otherexpenses.  The decrease in other expensesconsists of a non-recurring charge of $424,000 related to the Company’smajority-owned subsidiary CDGI for the three months ended September 30,2004 offset partially by an increase of $46,000 relating to professional auditand outsourced internal audit fees for the three months ended September 30,2005.  The increase in these audit feesis directly related to the Company’s compliance with Section 404 of theSarbanes-Oxley Act of 2002 for the fiscal year ending December 31,2005.  The increase in compensation andbenefits is primarily due to a combination of annual salary increases and theaddition of staff.

 

12

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The additional staff is related to the new branch office opened in September 2004and the expansion of the commercial loan department.  Management continues to emphasize theimportance of expense management and control while continuing to provideexpanded banking services to a growing market base.

 

***Income Tax Expense. ***Income taxexpense (benefit) totaled ($584,000) and $351,000 for the three months ended September 30,2005 and 2004, respectively.  Theeffective tax rate was 36.1% and 22.2% for the three months ended September 30,2005 and 2004, respectively.  Thedecrease in income tax expense was primarily the result of a decrease in incomebefore income taxes of $3.2 million to a loss of $1.6 million for three monthsended September 30, 2005 from $1.6 million for the comparable prior yearperiod.

 

**Comparison of Operating Results For the Nine Months Ended September 30,2005 and 2004**

 

***General.***  The Company’s net income decreased $2.6million, or 54.6%, to $2.1 million for the nine months ended September 30,2005 as compared to the prior year period.

 

***Interest Income.***  Interest income increased $4.7 million, or13.7%, to $39.3 million for the nine months ended September 30, 2005,compared to the same period in 2004. This increase resulted from an increase in the average balance ofinterest-earning assets and an increase in the average yield earned oninterest-earning assets.  The averageyield on interest-earning assets increased by 25 basis points to 5.47% for thenine months ended September 30, 2005 from 5.22% for the nine months ended September 30,2004.  The average balance ofinterest-earning assets increased by $78.8 million, or 8.8%, to $971.4 millionfor the nine months ended September 30, 2005 from $892.6 million for thecomparable period in 2004.  This increaseresulted primarily from an increase in the average balance of loans receivableof $70.0 million from $755.7 million for the nine months ended September 30,2004 to $825.7 million for the nine months ended September 30, 2005.  In addition, the average balance oninvestment securities increased $10.7 million from $87.1 million for the ninemonths ended September 30, 2004 to $97.8 million for the nine months endedSeptember 30, 2005.

 

Mortgage loan interest income decreased by $429,000 for the nine monthsended September 30, 2005 compared with the same period in 2004.  The average balance of mortgage loansdecreased $6.7 million to $564.4 million and the mortgage loan yield decreasedby 4 basis points from 5.42% to 5.38%. Interest income from other loans increased $4.8 million for the ninemonths ended September 30, 2005. This increase resulted from a combination of an increase in averagebalance of $76.7 million to $261.3 million, and an 89 basis point increase inyield from 5.28% for the nine months ended September 30, 2004 to 6.17% forthe nine months ended September 30, 2005. Interest income from investment securities including stock in theFederal Home Loan Bank of Chicago, mortgage-backed securities and short-termdeposits increased $389,000 to $4.4 million for the nine months ended September 30,2005, compared with the same period in 2004. The average balance increased $8.8 million and the yield increased 29basis points from 4.28% for the nine months ended September 30, 2004 to4.57% for the nine months ended September 30, 2005.  The average yields are reported on a taxequivalent basis.

 

13

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***Interest Expense. ***Interest expenseincreased by $3.1 million, or 18.4%, to $19.9 million for the nine months endedSeptember 30, 2005, compared to the same period in 2004.  This increase resulted from a combination ofan increase in the average balance of interest-bearing liabilities, and anincrease in the average rate paid on those interest-bearing liabilities.  The average balance of interest-bearingliabilities increased by $73.5 million, or 9.1%, to $879.8 million for the ninemonths ended September 30, 2005 from $806.3 million for the nine monthsended September 30, 2004.  Theincrease in interest-bearing liabilities reflects a $58.0 million increase indeposit accounts, which is attributable to a $12.1 million increase in passbooksavings accounts, a $73.1 million increase in certificates of deposit and a$6.9 million increase in NOW accounts. This increase is partially due to the opening of the Company’s ninthfull service branch in September 2004. These increases were offset by a decrease of $34.1 million in moneymarket accounts.  In addition, borrowingsincreased $15.5 million to $225.4 million for the nine months ended September 30,2005 from $209.9 million for the comparable period in 2004.  The average rate paid on deposits increasedby 41 basis points to 2.52% for the nine months ended September 30, 2005from 2.11% for the comparable prior year period.  The average rate paid on borrowed moneydecreased by 22 basis points to 4.46% for the nine months ended September 30,2005 from 4.68% for the nine months ended September 30, 2004.  The lower rate paid on borrowed money waspartially due to a greater use of overnight borrowings during the nine monthsended September 30, 2005, which bear a lower rate of interest than FHLBadvances.

 

***Net Interest Income Before Provision for LoanLosses.***  Netinterest income before provision for loan losses increased $1.7 million, or9.3%, to $19.4 million for the nine months ended September 30, 2005 from$17.7 million for the comparable period in 2004.  The average balance of interest-earningassets increased $78.8 million for the nine months ended September 30,2005 compared to the comparable prior year period.  The increase in interest-earning assets wasprimarily the result of increases in the average balance of other loans of$76.7 million and investment securities of $10.7 million.  These increases were partially offset by a$2.4 million decrease in cash and cash equivalents.  The tax equivalent net interest margin as apercent of interest-earning assets increased by 3 basis points to 2.74% for thenine months ended September 30, 2005 from 2.71% for the comparable periodin 2004.

 

***Provision for Loan Losses.***  The provision for loan losses increased by$120,000, to $670,000 for the nine months ended September 30, 2005 from$550,000 in the comparable prior year period. The increase in the provision for loan losses is primarily due to thegrowth and increased risk in the loan portfolio based on a greater emphasisplaced on commercial real estate and construction and land loans, whichinvolves a higher degree of risk. Commercial real estate loans increased $1.6 million, or 1.3%, to $121.5million at September 30, 2005 from $119.9 million at September 30,2004.  In addition, construction and landloans increased $16.5 million, or 37.4%, to $60.5 million at September 30,2005 from $44.1 million at September 30, 2004.  At September 30, 2005, December 31,2004 and September 30, 2004, non-performing loans totaled $3.3 million,$2.9 million and $2.5 million, respectively. At September 30, 2005, the ratio of the allowance for loan lossesto non-performing loans was 151.2% compared to 153.5% at December 31, 2004and 168.2% at September 30, 2004. The ratio of the allowance to total loans was 0.60%, 0.56% and 0.54%, atSeptember 30, 2005, December 31, 2004 and September 30, 2004,respectively.  Net charge-offs for thenine months ended September 30, 2005 totaled $111,000.  Net charge-offs for the nine months ended September 30,2004 totaled $18,000.  Management

 

14

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periodically performs an allowance sufficiency analysis based upon theportfolio composition, asset classifications, loan-to-value ratios, probableimpairments in the loan portfolio, and other factors.

 

***Noninterest Income. ***Noninterestincome totaled $4.4 million for both the nine month periods ended September 30,2005 and 2004, respectively.  Servicefees increased $468,000.  This increasewas partially offset by decreases of $112,000 in revenues generated by CDGI, $106,000in gain on sale of loans, $92,000 in gain on sale of property and $40,000 ingain on sale of securities.  The decreasein income generated by CDGI is largely due to a decrease in sales related to aweaker demand for CDGI’s services.  It ismanagement’s intention to phase out of CDGI by the end of the year.  The increase in service fees is primarily dueto the growth in the number of deposit accounts.

 

***Noninterest Expense. ***Noninterestexpense increased $5.1 million, to $20.2 million for the nine months ended September 30,2005 from $15.1 million for the comparable period in 2004.  Of this increase, $3.7 million is directlyrelated to merger costs associated with the purchase of the Company by MAFBancorp, Inc. as mentioned above. In addition, there were increases of $1.4 million in compensation andbenefits, $137,000 resulting from the costs related to a new branch officeplaced in service in September 2004, $81,000 in checking account expensesand a $62,000 impairment charge discussed above in addition to the regularamortization of $37,000 and $35,000 in data processing expenses.  These increases were partially offset bydecreases of $118,000 in advertising and $174,000 in other expenses.  The decrease in other expenses consists of anon-recurring charge of $424,000 related to the Company’s majority-ownedsubsidiary CDGI for the nine months ended September 30, 2004 offsetpartially by an increase of $122,000 relating to professional audit andoutsourced internal audit fees for the nine months ended September 30,2005.  The increase in these audit feesis directly related to the Company’s compliance with Section 404 of theSarbanes-Oxley Act of 2002 for the fiscal year ending December 31,2005.  The increase in compensation andbenefits is primarily due to a combination of annual salary increases and theaddition of staff.  The additional staffis related to the new branch office opened in September 2004 and theexpansion of the commercial loan department. Management continues to emphasize the importance of expense managementand control while continuing to provide expanded banking services to a growingmarket base.

 

***Income Tax Expense. ***Income taxexpense totaled $700,000 and $1.7 million for the nine months ended September 30,2005 and 2004, respectively.  Theeffective tax rate was 24.6% and 26.8% for the nine months ended September 30,2005 and 2004, respectively.  Thedecrease in the effective tax rate is primarily due to a reduction in theCompany’s income before income taxes without a corresponding decrease innon-taxable income.  The decrease inincome tax expense was primarily the result of a decrease in income beforeincome taxes of $3.7 million to $2.8 million for nine months ended September 30,2005 from $6.5 million for the comparable prior year period.

 

15

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**Liquidity and Capital Resources**

 

The Company’s primary source of funding fordividends and periodic stock repurchases have been dividends from theBank.  The Bank’s ability to paydividends and other capital distributions to the Company is generally limitedby the Office of Thrift Supervision’s regulations.  Additionally, the Merger Agreement includes acovenant that prohibits the Company from paying any cash dividends exceeding$0.1625 per share, and from paying a dividend for a quarter when Companyshareholders receiving MAF stock in the Merger would also receive a dividendpayment from MAF on the MAF shares received in the Merger.

 

The Bank’s primary sources of funds are savings deposits, proceeds fromthe principal and interest payments on loans, proceeds from the maturity ofsecurities and borrowings from the FHLB-Chicago. While maturities and scheduledamortization of loans and securities are predictable sources of funds, depositoutflows and mortgage prepayments are greatly influenced by general interestrates, economic conditions and competition.

 

The primary investing activities of the Bank are the origination andpurchase of primarily residential one-to-four-family loans, the purchase ofmortgage-backed securities and, to a lesser extent, multi-family and commercialreal estate, construction and land, commercial and consumer loans.  In addition, the Bank purchases loans,secured by single-family, multi-family and commercial real estate.  Deposit flows are affected by the level ofinterest rates, the interest rates and products offered by the localcompetitors and other factors.

 

In addition to the primary investing activities of the Bank, theCompany has repurchased shares of its common stock from time to time in theopen market.  As of September 30,2005, the Company repurchased a total of 3,087,081 shares of the Company’scommon stock at an average price per share of $12.11 since becoming a publiccompany in 1998.  There currently is no formalrepurchase plan in place and there were no shares repurchased during the ninemonths ended September 30, 2005.

 

The Bank’s most liquid assets are cash and interest-bearing depositswith financial institutions. The levels of these assets are dependent on theBank’s operating, financing, lending and investing activities during any givenperiod.  At September 30, 2005, cashand interest-bearing deposits with financial institutions totaled $43.7million, or 4.2% of total assets.

 

See the “Consolidated Statements of Cash Flows” in the UnauditedConsolidated Financial Statements included in this Form 10-Q for thesources and uses of cash flows for operating, investing and financingactivities for the nine months ended September 30, 2005 and 2004.

 

At September 30, 2005, the Bank exceeded all of its regulatorycapital requirements. The following is a summary of the Bank’s regulatorycapital ratios at September 30, 2005:

 

16

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| ** **                               | ** ** | ** ** | ** ** | ** **   | ** ** | **For capital adequacy**     | ** ** | **To be well capitalized under** | ** ** |
|------------------------------------------|------------|------------|------------|--------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **Actual** | ** ** | **purposes** | ** ** | **prompt corrective action** | ** ** |
| ** **                               | ** ** | **Amount** | ** ** | **Ratio**    | ** ** | **Amount**                   | ** ** | **Ratio**                        | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| September 30,  2005:                |       |       |       |         |       |                         |       |                             |       |   |   |   |   |
| Total capital (to risk weighted assets)  |       | $          | 80,370,000 |         | 10.61      | %                            | $          | 60,590,000                       |       | 8.0 | % | $ | 75,737,000 |   | 10.0 | % |
| Tier I capital (to risk weighted assets) |       | 78,957,000 |       | 10.41        | %          | 30,346,000                   |       | 4.0                              |       | 45,518,000 |   | 6.0 |   |
| Tier I capital (to average assets)       |       | 78,957,000 |       | 7.52         | %          | 42,024,000                   |       | 4.0                              |       | 52,530,000 |   | 5.0 |   |
|                                          |            |            |            |              |            |                              |            |                                  |            |  |  |  |  |  |  |  |

 

At September 30, 2005, the Company had aTotal Capital to Total Assets ratio of 8.35%.

 

On September 21, 2005, the Company announced its third quarterdividend of $0.1625 per share.  Thedividend was paid on October 11, 2005 to stockholders of record on September 30,2005.

 

##### **Financial Instruments with Off-Balance Sheet Risk**

 

The Bank is a party to financial instruments with off-balance sheetrisk in the normal course of business to meet the financing needs of itscustomers.  Those financial instrumentsprimarily include commitments to extend credit. Commitments to extend credit are agreements to lend to a customer solong as there is no violation of any condition established in the contract. TheBank evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained is based onmanagement’s credit evaluation of the customer. The Bank’s exposure to credit loss in the event of nonperformance by thecustomer is represented by the contractual amount of those financialinstruments.  The commitments tooriginate first mortgage loans represent amounts which the Bank plans to fundwithin a period of 30 to 90 days.

 

The Bank’s approved, but unused lines of credit are based onunderwriting standards that allow total borrowings, including the equity lineof credit to exceed 80% of the current appraised value of the customer’sresidence.  The Bank charges a 1% higherinterest rate on home equity lines of credit up to 90% of the home’s currentappraised value.

 

The Bank’s standby letters of credit are conditional commitments issuedby the 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 fair value of standby letters of credit approximates the amount ofrecorded related fees.  The maximum riskof accounting loss for these items, which is represented by the total commitmentoutstanding, totaled $14.5 million at September 30, 2005.

 

17

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At September 30, 2005 and December 31, 2004, the bank had thefollowing commitments to extend credit:

 
| ** **                 | ** ** | **September 30  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| First  mortgage loans      |       | $                           | 5,230,000  |                        | $          | 8,303,000 |   |
| Construction  loans        |       | 265,000                     |       | 804,000                     |       |
| Unused lines  of credit    |       | 57,831,000                  |       | 61,381,000                  |       |
| Standby  letters of credit |       | 14,527,000                  |       | 11,476,000                  |       |
|                            |            |                             |            |                             |            |  |  |

 

**Contractual Obligations**

 

The Bank has certain obligations andcommitments to make future payments under contract.  There has been no material change incontractual obligations from December 31, 2004.

 

**Recent Accounting Pronouncements**

 

In March 2004, theEmerging Issues Task Force (“EITF”) reached a consensus on issue 03-1, “TheMeaning of Other-Than-Temporary Impairment and its Application to CertainInvestments.”  The EITF reached aconsensus on an other-than-temporary impairment model for debt and equitysecurities accounted for under SFAS No. 115, “Accounting for CertainInvestments in Debt and Equity Securities,” and cost method investments.  The new guidance prescribes a three-stepprocess to identify impairment of investment securities, classify impairment aseither temporary or other-than-temporary, and recognize loss in the case ofother-than-temporary impairment of investment securities.  In September 2004, FASB issued aproposed FASB Staff Position, FSP EITF Issue 03-1-a, Implementation Guidancefor the Application of Paragraph 16 of EITF Issue No. 03-1, “The Meaningof Other-Than-Temporary Impairment and Its Application to Certain Investments.”  The proposed FSP would provide implementationguidance with respect to debt securities that are impaired solely due tointerest rates and/or sector spreads and analyzed for other-than-temporaryimpairment under paragraph 16 of Issue 03-1. FASB has delayed the effective date for the measurement and recognitionguidance contained in paragraphs 10 through 20 of Issue 03-1.  This delay does not suspend the requirementto recognize other-than-temporary impairments as required by existingauthoritative literature.  The delay ofthe effective date for paragraphs 10 through 20 of Issue 03-1 will besuperceded concurrent with the final issuance of FSP EITF Issue 03-1-a.  The disclosure guidance in paragraph 21 and22 of Issue 03-1 remains effective.  Theamount of any other-than-temporary impairment that may need to be recognized inthe future will be dependent on market conditions, the occurrence of certainevents or changes in circumstances relative to an investee, and the Corporation’sintent to hold the impaired investments at the time of valuation.

 

In December 2004, theFASB issued SFAS No. 123 (Revised 2004) (123R), “Share Based Payment, anamendment of FASB Statements No. 123 and 95.  SFAS No. 123R will require compensationcost relating to share-based payment transactions be recognized in consolidatedfinancial statements.  In April 2005,the SEC delayed the effective date of 123R to the Company’s fiscal year beginningJanuary 1, 2006.  The Company hasnot yet completed its evaluation of the standard, but anticipates that it willnot have a material impact on earnings and

 

18

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earnings per share beginning with the firstquarter of 2006.

 

In March 2005, the SECstaff issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding theinteraction between SFAS No. 123R and certain SEC rules andregulations and provides the staff’s views regarding the valuation of share-basedpayment arrangements for public companies. SAB 107 provides guidance related to valuation methods (includingassumptions such as expected volatility and expected term), accounting forcertain redeemable financial instruments issued under share-based paymentarrangements, the classification of compensation expense, non-GAAP financialmeasures, capitalization of compensation cost related to share-based paymentarrangements, the accounting for income tax effects of share-based paymentarrangements upon adoption of Statement 123R, the modification of employeeshare options prior to adoption of Statement 123R and disclosures in Management’sDiscussion and Analysis of Financial Condition and results of Operationssubsequent to adoption of Statement 123R.

 

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections.”  SFAS No. 154 changes the accounting for,and reporting of, a change in accounting principle and requires the prospectiveapplication to prior period’s financial statements of voluntary changes inaccounting principle and changes required by new accounting standards when thestandard does not include specific transition provisions unless it isimpracticable to do so.  SFAS No. 154is effective for accounting changes and corrections of errors in fiscal yearsbeginning after December 15, 2005. Adoption of this Statement is not expected to have a material impact onthe Company’s consolidated financial statements.

 

19

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**Average Balance Sheet**

 

The following tables set forth certaininformation relating to the Bank for the three and nine months ended September 30,2005 and 2004, respectively.  The averageyields and costs are derived by dividing income or expense by the average balanceof interest-earning assets or interest-bearing liabilities, respectively, forthe periods shown and reflect annualized yields and costs.  Average balances are derived from averagemonthly balances.  The yields and costsinclude fees, which are considered adjustments to yields.  Tax exempt income has been calculated on atax equivalent basis using a tax rate of 34% and amounted to $202,000 and$211,000 for the three months ended September 30, 2005 and 2004 and$631,000 and $413,000 for the nine months ended September 30, 2005 and2004, respectively.

 
| ** **                                                        | ** ** | **Three Months Ended  September 30, 2005** | ** ** | **Three Months Ended  September 30, 2004** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands)**                                                | ** ** | **Average  Balance**                            | ** ** | **Interest**                                    | ** ** | **Yield/Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/Cost** | ** ** |
| Assets:                                                           |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Interest earning assets:                                          |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Short-term deposits and FHLB stock                                |       | $                                               | 51,994     |                                            | 347        |   | 2.67 | % | 37,386 |   | 223 |   | 2.39 | % |
| Investment securities                                             |       | 95,672                                          |       | 1,267                                           |       | 5.30 | % | 91,653 |   | 1,253 |   | 5.47 | % |
| Mortgage-backed securities                                        |       | 9,555                                           |       | 96                                              |       | 4.00 | % | 11,209 |   | 98 |   | 3.50 | % |
| Mortgage loans                                                    |       | 559,824                                         |       | 7,670                                           |       | 5.48 | % | 579,520 |   | 7,609 |   | 5.25 | % |
| Other loans                                                       |       | 272,079                                         |       | 4,393                                           |       | 6.46 | % | 211,637 |   | 2,866 |   | 5.42 | % |
| Total interest earning assets                                     |       | 989,124                                         |       | 13,773                                          |       | 5.57 | % | 931,405 |   | 12,049 |   | 5.17 | % |
| Noninterest earning assets                                        |       | 66,338                                          |       |                                            |       |   |   | 58,224 |   |   |   |   |   |
| Total assets                                                      |       | $                                               | 1,055,462  |                                            |       |   |   |   | 989,629 |   |   |   |   |   |
| Liabilities and stockholders’ equity                         |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities                                      |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Deposits:                                                         |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Money market accounts                                             |       | $                                               | 98,540     |                                            | 510        |   | 2.07 | % | 131,786 |   | 547 |   | 1.66 | % |
| Passbook savings accounts                                         |       | 135,832                                         |       | 673                                             |       | 1.98 | % | 129,961 |   | 467 |   | 1.44 | % |
| NOW Accounts                                                      |       | 49,762                                          |       | 122                                             |       | 0.98 | % | 38,890 |   | 48 |   | 0.49 | % |
| Certificates of deposit                                           |       | 392,092                                         |       | 3,290                                           |       | 3.36 | % | 318,903 |   | 2,330 |   | 2.92 | % |
| Total deposits                                                    |       | 676,226                                         |       | 4,595                                           |       | 2.72 | % | 619,540 |   | 3,392 |   | 2.19 | % |
| FHLB Advances                                                     |       | 219,000                                         |       | 2,451                                           |       | 4.48 | % | 225,333 |   | 2,612 |   | 4.64 | % |
| Total interest-bearing liabilities                                |       | 895,226                                         |       | 7,046                                           |       | 3.15 | % | 844,873 |   | 6,004 |   | 2.84 | % |
| Noninterest-bearing liabilities                                   |       | 71,133                                          |       |                                            |       |   |   | 63,426 |   |   |   |   |   |
| Total liabilities                                                 |       | 966,359                                         |       |                                            |       |   |   | 908,299 |   |   |   |   |   |
| Total stockholders’ equity                                   |       | 89,103                                          |       |                                            |       |   |   | 81,330 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                   |       | $                                               | 1,055,462  |                                            |       |   |   |   | 989,629 |   |   |   |   |   |
| Net interest income before provision for  loan losses             |       |                                            |       | 6,727                                           |       |   |   |   |   | 6,045 |   |   |   |
| Interest rate spread                                              |       |                                            |       |                                            |       | 2.42 | % |   |   |   |   | 2.33 | % |
| Net interest margin as a percent of interest  earning assets      |       |                                            |       |                                            |       | 2.72 | % |   |   |   |   | 2.60 | % |
| Ratio of interest-earning assets to interest-bearing  liabilities |       |                                            |       |                                            |       | 110.49 | % |   |   |   |   | 110.24 | % |

 

20

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| ** **                                                        | ** ** | **Nine Months Ended  September 30, 2005** | ** ** | **Nine Months Ended  September 30, 2004** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| **(in thousands)**                                                | ** ** | **Average  Balance**                           | ** ** | **Interest**                                   | ** ** | **Yield/Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/Cost** | ** ** |
| Assets:                                                           |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Interest earning  assets:                                         |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Short-term deposits and FHLB stock                                |       | $                                              | 37,421     |                                           | 762        |   | 2.72 | % | 38,806 |   | 633 |   | 2.17 | % |
| Investment securities                                             |       | 97,781                                         |       | 3,933                                          |       | 5.36 | % | 87,121 |   | 3,463 |   | 5.30 | % |
| Mortgage-backed securities                                        |       | 10,493                                         |       | 301                                            |       | 3.83 | % | 11,001 |   | 302 |   | 3.66 | % |
| Mortgage loans                                                    |       | 564,422                                        |       | 22,791                                         |       | 5.38 | % | 571,123 |   | 23,220 |   | 5.42 | % |
| Other loans                                                       |       | 261,264                                        |       | 12,099                                         |       | 6.17 | % | 184,574 |   | 7,313 |   | 5.28 | % |
| Total interest earning assets                                     |       | 971,381                                        |       | 39,886                                         |       | 5.47 | % | 892,625 |   | 34,931 |   | 5.22 | % |
| Noninterest  earning assets                                       |       | 64,374                                         |       |                                           |       |   |   | 54,947 |   |   |   |   |   |
| Total assets                                                      |       | $                                              | 1,035,755  |                                           |       |   |   |   | 947,572 |   |   |   |   |   |
| Liabilities  and stockholders’ equity                        |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities                                     |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Deposits:                                                         |       |                                           |       |                                           |       |   |   |   |   |   |   |   |   |
| Money market accounts                                             |       | $                                              | 104,249    |                                           | 1,519      |   | 1.94 | % | 138,394 |   | 1,675 |   | 1.61 | % |
| Passbook savings accounts                                         |       | 143,163                                        |       | 1,976                                          |       | 1.84 | % | 131,075 |   | 1,370 |   | 1.39 | % |
| NOW Accounts                                                      |       | 46,271                                         |       | 273                                            |       | 0.79 | % | 39,393 |   | 145 |   | 0.49 | % |
| Certificates of deposit                                           |       | 360,700                                        |       | 8,587                                          |       | 3.17 | % | 287,563 |   | 6,243 |   | 2.89 | % |
| Total deposits                                                    |       | 654,383                                        |       | 12,355                                         |       | 2.52 | % | 596,425 |   | 9,433 |   | 2.11 | % |
| FHLB Advances                                                     |       | 225,445                                        |       | 7,534                                          |       | 4.46 | % | 209,900 |   | 7,370 |   | 4.68 | % |
| Total interest-bearing liabilities                                |       | 879,828                                        |       | 19,889                                         |       | 3.01 | % | 806,325 |   | 16,803 |   | 2.78 | % |
| Noninterest-bearing  liabilities                                  |       | 68,261                                         |       |                                           |       |   |   | 60,523 |   |   |   |   |   |
| Total liabilities                                                 |       | 948,089                                        |       |                                           |       |   |   | 866,848 |   |   |   |   |   |
| Total  stockholders’ equity                                  |       | 87,666                                         |       |                                           |       |   |   | 80,724 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                   |       | $                                              | 1,035,755  |                                           |       |   |   |   | 947,572 |   |   |   |   |   |
| Net interest income before provision  for loan losses             |       |                                           |       | 19,997                                         |       |   |   |   |   | 18,128 |   |   |   |
| Interest  rate spread                                             |       |                                           |       |                                           |       | 2.46 | % |   |   |   |   | 2.44 | % |
| Net interest margin as a percent of interest  earning assets      |       |                                           |       |                                           |       | 2.74 | % |   |   |   |   | 2.71 | % |
| Ratio of interest-earning assets to interest-bearing  liabilities |       |                                           |       |                                           |       | 110.41 | % |   |   |   |   | 110.70 | % |

 

21

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Item 3.    Quantitative andQualitative Disclosures About Market Risk.

 

The Bank’s interest rate sensitivity is monitored by management throughthe use of a Net Portfolio Value Model which generates estimates of the changein the Bank’s net portfolio value (“NPV”) over a range of interest ratescenarios.  NPV is the present value ofexpected cash flows from assets, liabilities, and off-balance sheetcontracts.  The NPV ratio, under any interestrate scenario, is defined as the NPV in that scenario divided by the marketvalue of assets in the same scenario. The model assumes estimated prepayment rates, reinvestment rates anddeposit decay rates.  The SensitivityMeasure is the decline in the NPV ratio, in basis points, caused by a 3%increase or 2% decrease in rates, whichever produces a larger decline.  The higher the institution’s SensitivityRatio, the greater its exposure to interest rate risk is considered to be.  The following NPV Table sets forth the Bank’sNPV as of September 30, 2005.  Theseresults are not materially different from the results as of December 31,2004.

 
| **Change in**       | ** ** | ** **              | ** ** | ** **          | ** ** | ** **   | ** ** | ** **                | ** ** | ** **   | ** ** |
|---------------------|------------|-------------------------|------------|---------------------|------------|--------------|------------|---------------------------|------------|--------------|------------|
| **Interest Rates**  | ** ** | ** **              | ** ** | ** **          | ** ** | ** **   | ** ** | **NPV as % of Portfolio** | ** ** |
| **in Basis Points** | ** ** | **Net Portfolio Value** | ** ** | **Value of Assets** | ** ** |
| **(Rate  Shock)**   | ** ** | **Amount**              | ** ** | **$ Change**   | ** ** | **% Change** | ** ** | **NPV Ratio**             | ** ** | **% Change** | ** ** |
| ** **          | ** ** | **(In thousands)**      | ** ** | ** **          | ** ** | ** **   | ** ** | ** **                | ** ** |
|                |       |                    |       |                |       |         |       |                      |       |         |       |
| +300                |       | $                       | 55,954     |                | $          | (42,491      | )          | (43.16                    | )%         | 5.78         | %          | (38.58 | )% |
| +200                |       | 67,366                  |       | (31,079             | )          | (31.57       | )          | 6.80                      |       | (27.74       | )          |
| +100                |       | 80,968                  |       | (17,477             | )          | (17.75       | )          | 7.97                      |       | (15.30       | )          |
| Static              |       | 98,445                  |       | —              |       | —       |       | 9.41                      |       | —       |       |
| -100                |       | 108,480                 |       | 10,035              |       | 10.19        |       | 10.16                     |       | 7.97         |       |
| -200                |       | 109,355                 |       | 10,910              |       | 11.08        |       | 10.11                     |       | 7.44         |       |
|                     |            |                         |            |                     |            |              |            |                           |            |              |            |  |  |

 

Certain shortcomings are inherent in the methodology used in the aboveinterest rate risk measurements. Modeling changes in NPV requires management to make certain assumptionswhich may or may not reflect the manner in which actual yields and costsrespond to changes in market interest rates. In this regard, the NPV Table presented assumes that the composition ofthe Bank’s interest sensitive assets and liabilities existing at the beginningof a period remains constant over the period being measured and also assumesthat a particular change in interest rates is reflected uniformly across theyield curve regardless of the duration to maturity or repricing of specificassets and liabilities.  Accordingly,although the NPV Table provides an indication of the Bank’s interest rate riskexposure at a particular point in time, such measurements are not intended toand do not provide a precise forecast of the effect of changes in marketinterest rates on the Bank’s net interest income and may differ from actualresults.

 

Item 4.  Controls andProcedures

 

The Company’s management, including the Company’s principal executiveofficer and principal financial officer, have evaluated the effectiveness ofthe Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended, (the “Exchange Act”).  Based upon their

 

22

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evaluation, the principal executive officer and principal financialofficer concluded that, as of the end of the period covered by this report, theCompany’s disclosure controls and procedures were effective for the purpose ofensuring that the information required to be disclosed in the reports that theCompany files or submits under the Exchange Act with the Securities andExchange Commission (the “SEC”) (1) is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms,and (2) is accumulated and communicated to the Company’s management,including its principal executive and principal financial officers, asappropriate to allow timely decisions regarding required disclosure.  In addition, based on that evaluation, nochange in the Company’s internal control over financial reporting occurredduring the quarter ended September 30, 2005 that has materially affected,or is reasonably likely to materially affect, the Company’s internal controlover financial reporting.

 

23

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**PART II. OTHER INFORMATION**

 
| Item 1. |   | Legal Proceedings.                                                                                                                                                                                                                                                                                                                 |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                               |
|    |   | The Company is not involved in any pending legal proceedings other  than routine legal proceedings occurring in the ordinary course of business.  Such routine legal proceedings, in the aggregate, are believed by management  to be immaterial to the Company’s financial condition, results of operations  and cash flows. |
|    |   |                                                                                                                                                                                                                                                                                                                               |   |   |   |   |
| Item 2. |   | Unregistered Sales of Equity Securities and Use of Proceeds.                                                                                                                                                                                                                                                                       |
|    |   | None.                                                                                                                                                                                                                                                                                                                              |   |   |   |   |
|    |   |                                                                                                                                                                                                                                                                                                                               |   |   |   |   |
| Item 3. |   | Defaults Upon Senior Securities.                                                                                                                                                                                                                                                                                                   |   |   |   |   |
|    |   | None.                                                                                                                                                                                                                                                                                                                              |   |   |   |   |
|    |   |                                                                                                                                                                                                                                                                                                                               |   |   |   |   |
| Item 4. |   | Submission of Matters to a Vote of Security Holders.                                                                                                                                                                                                                                                                               |
|    |   | None.                                                                                                                                                                                                                                                                                                                              |   |   |   |   |
|    |   |                                                                                                                                                                                                                                                                                                                               |   |   |   |   |
| Item 5. |   | Other Information.                                                                                                                                                                                                                                                                                                                 |   |   |   |   |
|    |   | None.                                                                                                                                                                                                                                                                                                                              |   |   |   |   |
|    |   |                                                                                                                                                                                                                                                                                                                               |   |   |   |   |
| Item 6. |   | Exhibits                                                                                                                                                                                                                                                                                                                           |   |   |   |   |
|    |   |                                                                                                                                                                                                                                                                                                                               |
|    |   | (a)                                                                                                                                                                                                                                                                                                                                |   | Exhibits |
|    |   |                                                                                                                                                                                                                                                                                                                               |   | 2.1 |   | Agreement and Plan of Reorganization, dated June 29, 2005, by and  between MAF Bancorp, Inc. and EFC Bancorp, Inc. (1) |
|    |   |                                                                                                                                                                                                                                                                                                                               |   | 3.1 |   | Certificate of Incorporation of EFC Bancorp, Inc. (2) |
|    |   |                                                                                                                                                                                                                                                                                                                               |   | 3.2 |   | Bylaws of EFC Bancorp, Inc. (2) |
|    |   |                                                                                                                                                                                                                                                                                                                               |   | 4.0 |   | Specimen Stock Certificate of EFC Bancorp, Inc. (2) |
|    |   |                                                                                                                                                                                                                                                                                                                               |   | 11.0 |   | Statement re: Computation of Per Share Earnings Incorporated herein  by reference to Note 3 to the unaudited consolidated financial statements. |
|    |   |                                                                                                                                                                                                                                                                                                                               |   | 31.1 |   | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive  Officer |
|    |   |                                                                                                                                                                                                                                                                                                                               |   | 31.2 |   | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial  Officer |
|    |   |                                                                                                                                                                                                                                                                                                                               |   | 32.1 |   | Certification of Chief Executive Officer and Chief Financial Officer  pursuant to 18 U.S.C. Section 1350 |
|    |   |                                                                                                                                                                                                                                                                                                                               |   |   |   |   |
|    |   | (1)                                                                                                                                                                                                                                                                                                                                |   | Incorporated by reference to the Exhibits filed with the Current  Report on Form 8-K, and any amendments thereto, filed with the SEC on  July 1, 2005. |
|    |   |                                                                                                                                                                                                                                                                                                                               |   |   |   |   |
|    |   | (2)                                                                                                                                                                                                                                                                                                                                |   | Incorporated herein by reference from the Exhibits filed with the Registration  Statement on Form S-1 and any amendments thereto. Initially filed with  the Securities and Exchange Commission (“SEC”) on October 24, 1997. |
|         |        |                                                                                                                                                                                                                                                                                                                                    |  |  |  |  |  |  |  |  |  |  |

 

24

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned hereunto duly authorized.

 

 
|   | EFC BANCORP, INC.                            |   |
|--------|----------------------------------------------|--------|
|   |                                         |   |
|   |                                         |   |
| Dated: | November 4, 2005                        |   | By: | /s/ Barrett J. O’Connor |   |   |
|   |                                         |   | Barrett J. O’Connor |   |
|   |                                         |   | Chief Executive Officer |   |
|   |                                         |   | (Principal executive officer) |   |
|   |                                         |   |   |   |
| Dated: | November 4, 2005                        |   | By: | /s/ Eric J. Wedeen |   |   |
|   | Eric J. Wedeen                               |   |
|   | Senior Vice President and Chief              |   |
|   | Financial Officer                            |   |
|   | (Principal financial and accounting officer) |   |
|        |                                              |        |  |  |  |  |  |

 

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