**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**
| **ý**                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                           |       |                                                                                                    |
| **For the quarterly period ended  March 31, 2005**                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                                                           |       |                                                                                                    |
| **or**                                                                                                                                                                                                                                                                                                                                                                         |
|                                                                                                                                                                                                                                                                                                                                                                           |       |                                                                                                    |
| **o**                                                                                                                                                                                                                                                                                                                                                                          | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                                                           |       |                                                                                                    |
| **For the  transition period from                               to                            ** |

 

**Commission File Number 1-13605**

 

**EFC BANCORP, INC.**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                    |   | **36-4193304**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction  of incorporation or organization) |   | (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, including area code)

 

**Not Applicable**

(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý  No  o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12(b)-2 of the Exchange Act).Yes  oNo  ý

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date: 4,789,263 shares of common stock, par value$0.01 per share, were outstanding as of May 10, 2005.

 

 

----

 

EFC Bancorp, Inc.

 

Form 10-Q

 

For the Quarter Ended March 31, 2005

 

INDEX

 
| PART I.  | FINANCIAL INFORMATION                                                                        |                                                                                              |
|---------------|----------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------|
|          |                                                                                         |                                                                                              |
| Item 1.       | Financial Statements (unaudited)                                                             |                                                                                              |
|          |                                                                                         |                                                                                              |
|          |                                                                                         | Consolidated Balance Sheets at  March 31, 2005 and December 31, 2004                    |   |
|          |                                                                                         |                                                                                              |   |
|          |                                                                                         | Consolidated Statements of Income - For the  Three  Months Ended March 31, 2005 and 2004     |   |
|          |                                                                                         |                                                                                              |   |
|          |                                                                                         | Consolidated Statements of Cash Flows - For  the Three  Months Ended March 31, 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    |                                                                                         |

 

2

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**PART I.FINANCIAL INFORMATION**

**EFC BANCORP, INC.**

 

Item 1. FinancialStatements.

**EFC BANCORP, INC.**

**AND SUBSIDIARIES**

ConsolidatedBalance Sheets (unaudited)

March 31, 2005 and December 31, 2004

 
| ** **                                                                                                                                  | ** ** | **March 31,  2005** | ** **    | **December 31,  2004** | ** **    |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|---------------|-----------------------------|---------------|
| Assets                                                                                                                                      | ** ** | ** **               | ** **    | ** **                  | ** **    |
| Cash and cash equivalents:                                                                                                                  |       |                     |          |                        |          |
| On hand and in banks                                                                                                                        |       | $                        | 4,055,005     |                        | 5,327,541     |   |
| Interest bearing deposits with financial  institutions                                                                                      |       | 13,630,924               |          | 25,582,585                  |          |
| Total cash and cash equivalents                                                                                                             |       | 17,685,929               |          | 30,910,126                  |          |
|                                                                                                                                        |       |                     |          |                        |          |
| Loans receivable, net                                                                                                                       |       | 819,126,158              |          | 807,833,561                 |          |
| Mortgage-backed securities  available-for-sale, at fair value                                                                               |       | 11,137,427               |          | 9,976,804                   |          |
| Investment securities available-for-sale,  at fair value                                                                                    |       | 99,483,088               |          | 92,846,891                  |          |
| Stock in Federal Home Loan Bank of Chicago,  at cost                                                                                        |       | 12,188,300               |          | 12,023,700                  |          |
| Accrued interest receivable                                                                                                                 |       | 4,267,585                |          | 3,996,974                   |          |
| Office properties and equipment, net                                                                                                        |       | 24,346,694               |          | 24,302,624                  |          |
| Real estate held for development                                                                                                            |       | 1,117,176                |          | 1,544,818                   |          |
| Bank owned life insurance                                                                                                                   |       | 19,328,386               |          | 19,149,802                  |          |
| Other assets                                                                                                                                |       | 2,864,841                |          | 1,329,898                   |          |
|                                                                                                                                        |       |                     |          |                        |          |
| Total assets                                                                                                                                |       | $                        | 1,011,545,584 |                        | 1,003,915,198 |   |
|                                                                                                                                        |       |                     |          |                        |          |
| Liabilities  and Stockholders’ Equity                                                                                                  |       |                     |          |                        |          |
| Liabilities:                                                                                                                                |       |                     |          |                        |          |
| Deposits                                                                                                                                    |       | $                        | 689,586,996   |                        | 671,035,878   |   |
| Borrowed money                                                                                                                              |       | 220,000,000              |          | 237,000,000                 |          |
| Accrued expenses, income taxes payable and  other liabilities                                                                               |       | 15,846,875               |          | 10,344,521                  |          |
|                                                                                                                                        |       |                     |          |                        |          |
| Total liabilities                                                                                                                           |       | 925,433,871              |          | 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                                                                                                                  |       | 73,521,026               |          | 73,237,074                  |          |
| Retained earnings, substantially restricted                                                                                                 |       | 51,509,202               |          | 50,823,162                  |          |
| Treasury stock, at cost, 2,702,921 and  2,746,921 shares at March 31, 2005 and December 31, 2004,  respectively                   |       | (33,610,801              | )             | (34,131,491                 | )             |
| Unearned employee stock ownership plan  (ESOP), 309,647 and 319,636 shares at March 31, 2005 and  December 31, 2004, respectively |       | (4,630,004               | )             | (4,779,359                  | )             |
| Unearned stock award plan, 3,953 and 4,202  shares at March 31, 2005 and December 31, 2004, respectively                          |       | (43,974                  | )             | (46,747                     | )             |
| Accumulated other comprehensive income                                                                                                      |       | (708,650                 | )             | 357,246                     |          |
|                                                                                                                                        |       |                     |          |                        |          |
| Total stockholders’ equity                                                                                                             |       | 86,111,713               |          | 85,534,799                  |          |
|                                                                                                                                        |       |                     |          |                        |          |
| Commitments and contingencies                                                                                                               |       | —                   |          | —                      |          |
|                                                                                                                                        |       |                     |          |                        |          |
| Total liabilities and stockholders’ equity                                                                                             |       | $                        | 1,011,545,584 |                        | 1,003,915,198 |   |

 

See accompanying notes to unaudited consolidated financial statements.

 

3

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**EFC BANCORP, INC.**

**AND SUBSIDIARIES**

 

ConsolidatedStatements of Income (unaudited)

For the three months ended March 31, 2005 and 2004

 
| ** **                                                                                          | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                          | ** ** | **2005**                               | ** ** | **2004** | ** ** |
|                                                                                                |       |                                   |       |   |   |
| Interest income:                                                                                    |       |                                   |       |   |   |
| Loans secured by real estate                                                                        |       | $                                      | 7,491,183  |   | 8,031,179 |   |
| Other loans                                                                                         |       | 3,619,704                              |       | 2,081,614 |   |
| Mortgage-backed securities  available-for-sale                                                      |       | 105,060                                |       | 89,814 |   |
| Investment securities available-for-sale  and interest bearing deposits with financial institutions |       | 1,328,758                              |       | 1,243,937 |   |
| Total interest income                                                                               |       | 12,544,705                             |       | 11,446,544 |   |
|                                                                                                |       |                                   |       |   |   |
| Interest expense:                                                                                   |       |                                   |       |   |   |
| Deposits                                                                                            |       | 3,641,813                              |       | 2,982,458 |   |
| Borrowed money                                                                                      |       | 2,596,620                              |       | 2,405,721 |   |
| Total interest expense                                                                              |       | 6,238,433                              |       | 5,388,179 |   |
|                                                                                                |       |                                   |       |   |   |
| Net interest income before provision for  loan losses                                               |       | 6,306,272                              |       | 6,058,365 |   |
| Provision for loan losses                                                                           |       | 220,000                                |       | 150,000 |   |
| Net interest income after provision for  loan losses                                                |       | 6,086,272                              |       | 5,908,365 |   |
|                                                                                                |       |                                   |       |   |   |
| Noninterest income:                                                                                 |       |                                   |       |   |   |
| Service fees                                                                                        |       | 742,870                                |       | 582,259 |   |
| Insurance and brokerage commissions                                                                 |       | 127,988                                |       | 196,871 |   |
| Information technology sales and service  income, net                                               |       | 93,205                                 |       | 126,463 |   |
| Gain on sale of property                                                                            |       | 35,975                                 |       | 149,396 |   |
| Gain on sale of securities                                                                          |       | —                                 |       | 47,527 |   |
| Gain on sale of loans                                                                               |       | 55,050                                 |       | 235,381 |   |
| Bank owned life insurance                                                                           |       | 214,387                                |       | 228,200 |   |
| Other                                                                                               |       | 20,286                                 |       | 50,192 |   |
| Total noninterest income                                                                            |       | 1,289,761                              |       | 1,616,289 |   |
|                                                                                                |       |                                   |       |   |   |
| Noninterest expense:                                                                                |       |                                   |       |   |   |
| Compensation and benefits                                                                           |       | 3,252,277                              |       | 2,783,505 |   |
| Office building, net                                                                                |       | 760,368                                |       | 687,318 |   |
| Federal insurance premiums                                                                          |       | 24,105                                 |       | 22,620 |   |
| Advertising                                                                                         |       | 216,929                                |       | 208,171 |   |
| Data processing                                                                                     |       | 281,797                                |       | 276,081 |   |
| NOW/checking account expenses                                                                       |       | 157,880                                |       | 124,190 |   |
| Intangible amortization                                                                             |       | 28,506                                 |       | 16,701 |   |
| Other                                                                                               |       | 725,241                                |       | 617,957 |   |
| Total noninterest expense                                                                           |       | 5,447,103                              |       | 4,736,543 |   |
|                                                                                                |       |                                   |       |   |   |
| Income before income taxes and minority  interest                                                   |       | 1,928,930                              |       | 2,788,111 |   |
|                                                                                                |       |                                   |       |   |   |
| Income tax expense                                                                                  |       | 517,209                                |       | 824,351 |   |
|                                                                                                |       |                                   |       |   |   |
| Income before minority interest                                                                     |       | 1,411,721                              |       | 1,963,760 |   |
|                                                                                                |       |                                   |       |   |   |
| Minority interest                                                                                   |       | —                                 |       | 6,451 |   |
|                                                                                                |       |                                   |       |   |   |
| Net income                                                                                          |       | $                                      | 1,411,721  |   | 1,970,211 |   |
|                                                                                                |       |                                   |       |   |   |
| Earnings per share:                                                                                 |       |                                   |       |   |   |
| Basic                                                                                               |       | $                                      | 0.32       |   | 0.46 |   |
| Diluted                                                                                             |       | 0.30                                   |       | 0.43 |   |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

4

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**EFC BANCORP, INC.**

**AND SUBSIDIARIES**

 

ConsolidatedStatements of Cash Flows (unaudited)

For the three months ended March 31, 2005 and 2004

 
| ** **                                                                        | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
|                                                                              |       |        |       |        |       |
| Cash flows from operating activities:                                             |       |        |       |        |       |
| Net income                                                                        |       | $           | 1,411,721  |        | 1,970,211  |   |
| Adjustment to reconcile net income to net  cash provided by operating activities: |       |        |       |        |       |
| Amortization of premiums and discounts, net                                       |       | 17,807      |       | 20,488      |       |
| Provision for loan losses                                                         |       | 220,000     |       | 150,000     |       |
| FHLB of Chicago stock dividends                                                   |       | (164,600    | )          | (176,700    | )          |
| Stock award plan shares allocated                                                 |       | 2,773       |       | 8,344       |       |
| ESOP shares committed to be released                                              |       | 149,355     |       | 149,355     |       |
| Change in fair value of ESOP shares                                               |       | 283,952     |       | 114,248     |       |
| Depreciation of office properties and  equipment                                  |       | 377,973     |       | 302,221     |       |
| Gain on sale of securities                                                        |       | —      |       | (47,527     | )          |
| Gain on sale of loans receivable                                                  |       | (55,050     | )          | (235,381    | )          |
| Change in minority interest in subsidiary                                         |       | —      |       | (6,451      | )          |
| Increase in bank owned life insurance                                             |       | (178,584    | )          | (192,215    | )          |
| Intangible amortization                                                           |       | 28,506      |       | 16,701      |       |
| (Increase) decrease in accrued interest  receivable and other assets, net         |       | (1,158,566  | )          | 610,935     |       |
| Increase in income taxes payable, accrued  expenses and other liabilities, net    |       | 5,495,208   |       | 2,624,237   |       |
|                                                                              |       |        |       |        |       |
| Net cash provided by operating activities                                         |       | 6,430,495   |       | 5,308,466   |       |
|                                                                              |       |        |       |        |       |
| Cash flows from investing activities:                                             |       |        |       |        |       |
| Net increase in loans receivable                                                  |       | (13,949,093 | )          | (1,517,361  | )          |
| Purchases of loans receivable                                                     |       | (2,659,407  | )          | (20,759,880 | )          |
| Proceeds from the sale of loans receivable                                        |       | 5,150,951   |       | 25,672,200  |       |
| (Increase) decrease in real estate held for  development                          |       | 427,642     |       | (114,134    | )          |
| Purchases of mortgage-backed securities  available-for-sale                       |       | (1,991,712  | )          | —      |       |
| Principal payments on mortgage-backed  securities available-for-sale              |       | 760,626     |       | 1,012,145   |       |
| Maturities of investment securities  available-for-sale                           |       | 363,210     |       | 23,125,837  |       |
| Purchases of investment securities  available-for-sale                            |       | (8,694,120  | )          | (12,543,717 | )          |
| Proceeds from the sale of investment  securities                                  |       | —      |       | 904,207     |       |
| Purchases of office properties and  equipment                                     |       | (422,043    | )          | (465,092    | )          |
|                                                                              |       |        |       |        |       |
| Net cash (used in) provided by investing  activities                              |       | (21,013,946 | )          | 15,314,205  |       |
|                                                                              |       |        |       |        |       |
| Cash flows from financing activities:                                             |       |        |       |        |       |
| Net increase in deposits                                                          |       | 18,551,118  |       | 30,923,094  |       |
| Proceeds from borrowed money                                                      |       | 64,000,000  |       | 46,000,000  |       |
| Repayments on borrowed money                                                      |       | (81,000,000 | )          | (61,577,880 | )          |
| Purchase of treasury stock                                                        |       | —      |       | (268,963    | )          |
| Stock options exercised                                                           |       | 520,690     |       | 221,767     |       |
| Cash dividends paid                                                               |       | (712,554    | )          | (618,485    | )          |
| Net cash provided by financing activities                                         |       | 1,359,254   |       | 14,679,533  |       |
|                                                                              |       |        |       |        |       |
| Net increase (decrease) in cash and cash  equivalents                             |       | (13,224,197 | )          | 35,302,204  |       |
| Cash and cash equivalents at beginning of  period                                 |       | 30,910,126  |       | 21,875,988  |       |
|                                                                              |       |        |       |        |       |
| Cash and cash equivalents at end of period                                        |       | $           | 17,685,929 |        | 57,178,192 |   |
|                                                                              |       |        |       |        |       |
| Supplemental disclosures of cash flow  information:                               |       |        |       |        |       |
| Cash paid during the period for:                                                  |       |        |       |        |       |
| Interest                                                                          |       | $           | 6,380,313  |        | 5,442,012  |   |
| Income taxes                                                                      |       | 500,000     |       | —      |       |

 

Seeaccompanying notes to unaudited consolidated financial statements.

 

5

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**EFC BANCORP, INC.**

**Notes to Unaudited Consolidated Financial Statements**

 

Note 1: BASIS OF PRESENTATION

 

Theaccompanying unaudited consolidated financial statements include the accountsof EFC Bancorp, Inc. (the Company), its wholly-owned subsidiaries,Computer Dynamics Group, Inc. (CDGI), EFS Bank (the Bank) and itswholly-owned subsidiary, EFS Service Corporation of Elgin.  Certain amounts for the prior period havebeen reclassified to conform to the current period presentation.  The Company operates as a single segment.

 

In the opinionof the management of the Company, the accompanying consolidated financialstatements include all normal recurring adjustments necessary for a fairpresentation of the financial position and results of operations for theperiods presented.  All significantintercompany transactions have been eliminated in consolidation.  These interim financial statements have beenprepared according to the rules and regulations of the Securities andExchange Commission and therefore certain information and footnote disclosuresnormally included in annual financial statements presented in accordance withU.S. generally accepted accounting principles have been condensed or omitted.  The results of operations for the interimperiods are not necessarily indicative of the results to be expected for thefull year.  It is suggested that theaccompanying unaudited consolidated financial statements be read in conjunctionwith 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.

 

6

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Note 2: COMPREHENSIVE INCOME

 

The Company’scomprehensive income for the three month periods ended March 31, 2005 and2004 are as follows:

 
| ** **                                                                                                                             | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                             | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Net income                                                                                                                             |       | $                                      | 1,411,721  |   | 1,970,211 |   |
| Other comprehensive income, net of tax: Unrealized  holding gains/(losses) on securities arising during the period, net of tax  effect |       | (1,065,896                             | )          | 926,496 |   |
| Reclassification adjustment for net gain on  sales of securities realized in net income, net of tax                                    |       | —                                 |       | (29,942 | ) |
|                                                                                                                                   |       |                                   |       |   |   |
| Comprehensive income                                                                                                                   |       | $                                      | 345,825    |   | 2,866,765 |   |

 

There were nosales of securities for the three months ended March 31, 2005.  For the three month period ended March 31,2004 the sale of securities resulted in gains of $47,527 ($29,942 net of taxeffect).

 

Note 3: COMPUTATION OF PERSHARE EARNINGS

 

Basic earningsper share is calculated by dividing net income by the weighted average numberof common shares outstanding.  Dilutedearnings per share is calculated by dividing net income by the weighted averagenumber of common shares outstanding adjusted for the dilutive effect ofoutstanding stock options.  ESOP sharesare only considered outstanding for earnings per share calculations when theyare released or committed to be released.

 

7

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Presented below are thecalculations for the basic and diluted earnings per share:

 
| ** **                                    | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                    | ** ** | **2005**                               | ** ** | **2004** | ** ** |
|                                          |       |                                   |       |   |   |
| Basic:                                        |       |                                   |       |   |   |
| Net income                                    |       | $                                      | 1,411,721  |   | 1,970,211 |   |
|                                          |       |                                   |       |   |   |
| Weighted average shares outstanding           |       | 4,446,769                              |       | 4,239,568 |   |
|                                          |       |                                   |       |   |   |
| Basic earnings per share                      |       | $                                      | 0.32       |   | 0.46 |   |
| Diluted:                                      |       |                                   |       |   |   |
|                                          |       |                                   |       |   |   |
| Net income                                    |       | $                                      | 1,411,721  |   | 1,970,211 |   |
|                                          |       |                                   |       |   |   |
| Weighted average shares outstanding           |       | 4,446,769                              |       | 4,239,568 |   |
| Effect of dilutive stock options  outstanding |       | 199,815                                |       | 309,071 |   |
| Diluted weighted average shares outstanding   |       | 4,646,584                              |       | 4,548,639 |   |
|                                          |       |                                   |       |   |   |
| Diluted earnings per share                    |       | $                                      | 0.30       |   | 0.43 |   |

 

Note 4:  STOCK OPTION PLANS

 

The Companyaccounts 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 March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **2005**                                       | ** ** | **2004** | ** ** |
|                                                                                                                                        |       |                                           |       |   |   |
| Net income as reported                                                                                                                      |       | $                                              | 1,411,721  |   | 1,970,211 |   |
| Add: Stock-based compensation, net of tax,  included in the determination of net income, as reported                                        |       | 2,773                                          |       | 8,344 |   |
| 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                                        | )          | (26,584 | ) |
| Pro forma net income                                                                                                                        |       | $                                              | 1,377,619  |   | 1,951,971 |   |
|                                                                                                                                        |       |                                           |       |   |   |
| Basic earnings per share                                                                                                                    |       |                                           |       |   |   |
| As reported                                                                                                                                 |       | $                                              | 0.32       |   | 0.46 |   |
| Pro forma                                                                                                                                   |       | 0.31                                           |       | 0.46 |   |
|                                                                                                                                        |       |                                           |       |   |   |
| Diluted earnings per share                                                                                                                  |       |                                           |       |   |   |
| As reported                                                                                                                                 |       | $                                              | 0.30       |   | 0.43 |   |
| Pro forma                                                                                                                                   |       | 0.30                                           |       | 0.43 |   |

 

8

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

 

Set forthbelow are highlights and significant items for the first quarter of 2005:

 

•                  The Bankcontinues to experience margin compression as a result of short-term interestrates increasing at a faster rate than long-term rates over the last severalmonths;

•                  Diluted earningsper share were $0.30 for the quarter and $0.43 for the comparable prior yearperiod;

•                  Net income was$1.4 million for the quarter and $2.0 million for the comparable prior yearperiod;

•                  Return onaverage equity was 6.55% for the quarter and 9.86% for the comparable prioryear period.

 

The followinganalysis discusses changes in the financial condition at March 31, 2005and results of operations for the three months ended March 31, 2005, andshould be read in conjunction with the Company’s Unaudited ConsolidatedFinancial Statements and the notes thereto, appearing in Part I, Item 1 ofthis document.

 

**Critical Accounting Policy**

 

The allowance for loan and lease losses isconsidered by management to be a critical accounting policy.  The allowance for loan losses is maintainedthrough provisions for loan losses based on management’s on-going evaluation ofthe risks in its loan portfolio in consideration of the trends in its loanportfolio, the national and regional economies and the real estate market inthe Bank’s primary lending area.  Theallowance for loan losses is maintained at an amount management considersadequate to cover probable losses in its portfolio, based on informationcurrently known to management.  The Bank’sloan loss allowance determination also incorporates factors and analyses whichconsider the probable principal loss associated with the loans, costs ofacquiring the property and securing the loan through foreclosure or deed inlieu of foreclosure.  While managementestimates loan losses using the best available information, no assurance can begiven that future additions to the allowance will not be necessary based onchanges in economic and real estate market conditions, further informationobtained regarding problem loans, identification of additional problem loansand other factors, both within and outside of management’s control.

 

**Forward-LookingStatements**

 

This reportcontains certain forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. The Company intends suchforward-looking statements to be covered by the safe harbor provisions for forward-lookingstatements contained in the Private Securities Litigation Reform Act of 1995,and is including this statement for purposes of these safe harbor provisions.Forward-looking statements, which are based on certain assumptions and describefuture plans, strategies and expectations of the Company, are generallyidentified by use of the

 

9

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words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,”or similar expressions. The Company’s ability to predict results or the actualeffect of future plans or strategies is inherently uncertain. Factors whichcould have a material adverse effect on the operations of the Company and itssubsidiaries include, but are not limited to, changes in: interest rates,general economic conditions, legislative/regulatory changes, monetary andfiscal policies of the U.S. Government, including policies of the U.S. Treasuryand the Federal Reserve Board, the quality or composition of the loan orinvestment portfolios, demand for loan products, deposit flows, competition,demand for financial services in the Company’s market area and accountingprinciples and guidelines. These risks and uncertainties should be consideredin evaluating forward-looking statements and undue reliance should not beplaced on such statements. Further information concerning the Company and itsbusiness, including additional factors that could materially affect the Company’sfinancial results, is included in the Company’s filings with the SEC, includingits 2004 Annual Report on Form 10-K.

 

The Companydoes not undertake - and specifically disclaims any obligation - to publiclyrelease the result of any revisions which may be made to any forward-lookingstatements to reflect events or circumstances after the date of such statementsor to reflect the occurrence of anticipated or unanticipated events.

 

**Comparisonof Financial Condition at March 31, 2005 and December 31, 2004**

 

Total assetsat March 31, 2005 were $1.012 billion, which represented an increase of$8.0 million, or 0.80%, compared to $1.004 billion at December 31, 2004.The increase in total assets was primarily a result of an increase in net loansreceivable of $11.3 million, or 1.4%, to $819.1 million at March 31, 2005from $807.8 million at December 31, 2004. The increase was the result of increases of $8.2 million in multi-familyloans, $7.8 million in construction and land loans and $2.2 million in homeequity loans, the effect of which was offset by a $3.8 million decrease in commercialbusiness loans.  This growth isconsistent with management’s long-term strategy for the Bank, which includesbranch expansion and competitive pricing of deposit accounts in its localmarket area.  In addition, investmentsecurities increased $6.7 million, or 7.2%, to $99.5 million at March 31,2005 from $92.8 million at December 31, 2004 and mortgage-backedsecurities increased $1.1 million, or 11.6%, to $11.1 million at March 31,2005 from $10.0 million at December 31, 2004.  These increases were partially offset bydecreases in cash and cash equivalents of $13.2 million, or 42.8%, to $17.7million at March 31, 2005 from $30.9 million at December 31, 2004 andreal estate owned for development of $428,000, or 27.7%, to $1.1 million at March 31,2005 from $1.5 million at December 31, 2004.  The loan growth was funded by increases indeposits and the reduction in cash and cash equivalents for the three monthsended March 31, 2005.  Depositsincreased $18.6 million, or 2.8%, to $689.6 million at March 31, 2005 from$671.0 million at December 31, 2004. Borrowed money, representing FHLB advances, decreased $17.0 million to$220.0 million at March 31, 2005 from $237.0 million at December 31,2004.  Stockholders’ equity increased$577,000 to $86.1 million at March 31, 2005 from $85.5 million at December 31,2004.  The increase in stockholders’equity was primarily the result of the Company’s net income for the threemonths ended March 31, 2005, which was partially offset by dividends paidand a decrease of $1.1 million in the Company’s accumulated other comprehensiveincome relating to the change in fair value of its available-for-saleinvestment portfolio.

 

10

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**Comparisonof Operating Results For the Three Months Ended March 31, 2005 and 2004**

 

***General.***  The Company’s net income decreased $558,000,or 28.4%, to $1.4 million for the three months ended March 31, 2005 ascompared to the prior year period.

 

***Interest Income.***  Interest income increased $1.1 million, or9.6%, to $12.5 million for the three months ended March 31, 2005, comparedto the same period in 2004.  Thisincrease resulted from an increase in the average balance of interest-earningassets, partially offset by a decrease in the average rate earned oninterest-earning assets.  The averageyield on interest-earning assets decreased by 3 basis points to 5.36% for thethree months ended March 31, 2005 from 5.39% for the three months ended March 31,2004.  The average balance ofinterest-earning assets increased by $89.7 million, or 10.4%, to $953.0 millionfor the three months ended March 31, 2005 from $863.3 million for thecomparable period in 2004.  This increaseresulted primarily from an increase in the average balance of loans receivableof $89.5 million from $724.6 million for the three months ended March 31,2004 to $814.1 million for the three months ended March 31, 2005.

 

Mortgage loaninterest income decreased by $540,000 for the three months ended March 31,2005 compared with the same period in 2004. The average balance of mortgage loans decreased $6.2 million to $563.7million and the mortgage loan yield decreased by 32 basis points from 5.64% to5.32%.  The decrease in yield ispartially due to the sale of $32.7 million of fixed rate loans in March 2004.  These loans had an average rate of5.62%.  Interest income from other loansincreased $1.5 million for the three months ended March 31, 2005.  This increase resulted from a combination ofan increase in average balance of $95.7 million to $250.3 million, and a 40basis point increase in yield from 5.38% for the three months ended March 31,2004 to 5.78% for the three months ended March 31, 2005.  Of the increase in other loans, $39.8 millionis attributed to commercial real estate and business loans, which increased31.6%, to $166.0 million for the three months ended March 31, 2005 from$126.2 million for the comparable period in 2004.  Interest income from investment securitiesincluding stock in the Federal Home Loan Bank of Chicago, mortgage-backedsecurities and short-term deposits increased $100,000 to $1.4 million for thethree months ended March 31, 2005, compared with the same period in2004.  The average balance increased$214,000 and the yield increased 29 basis points from 3.84% for the threemonths ended March 31, 2004 to 4.13% for the three months ended March 31,2005.  The average yields are reported ona tax equivalent basis.

 

***Interest Expense. ***Interest expenseincreased by $850,000, or 15.8%, to $6.2 million for the three months ended March 31,2005, compared to the same period in 2004. This increase resulted from a combination of an increase in the averagebalance of interest-bearing liabilities, and an increase in the average ratepaid on those interest-bearing liabilities. The average balance of interest-bearing liabilities increased by $84.4million, or 10.8%, to $863.1 million for the three months ended March 31,2005 from $778.7 million for the three months ended March 31, 2004.  This increase is partially due the opening ofthe Company’s ninth full service branch in September 2004.  This change reflects a $53.1 million increasein deposit accounts, which is attributable to a $19.1 million increase inpassbook savings accounts, a $63.2 million increase in certificates of depositand a $3.5 million increase in NOW accounts. These increases were partially offset by a decrease of $32.7 million inmoney market accounts.  In addition,borrowings

 

11

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increased $31.3 million to $232.0 million for the three months ended March 31,2005 from $200.7 million for the comparable period in 2004.  The average rate paid on deposits increasedby 25 basis points to 2.31% for the three months ended March 31, 2005 from2.06% for the comparable prior year period. The average rate paid on borrowed money decreased by 31 basis points to4.48% for the three months ended March 31, 2005 from 4.79% for the threemonths ended March 31, 2004.

 

***Net Interest Income Before Provision for LoanLosses.***  Netinterest income before provision for loan losses increased $248,000, or 4.1%,to $6.3 million for the three months ended March 31, 2005 from $6.1million for the comparable period in 2004. The average balance of interest-earning assets increased $89.7 million forthe three months ended March 31, 2005 compared to the comparable prioryear period.  The increase ininterest-earning assets was primarily the result of increases in the averagebalance of investment securities of $14.4 million and a $95.7 million increasein other loans.  These increases werepartially offset by a $17.3 million decrease in cash and cash equivalents and a$6.2 million decrease in mortgage loans. The tax equivalent net interest margin as a percent of interest-earningassets decreased by 15 basis points to 2.74% for the three months ended March 31,2005 from 2.89% for the comparable period in 2004.  The Bank continues to experience margincompression as a result of the recent interest rate environment and efforts toreduce interest rate risk.  These effortsincluded the sale of approximately $32.7 million of fixed rate mortgage loansin March 2004.  Increasing the netinterest margin is dependent on the Bank’s ability to generate higher-yieldingassets and lower-cost deposits. Management continues to closely monitor the net interest margin.

 

***Provision for Loan Losses.***  The provision for loan losses increased by$70,000, to $220,000 for the three months ended March 31, 2005 from$150,000 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 lending, which involves a higher degree of risk.  At March 31, 2005, December 31,2004 and March 31, 2004, non-performing loans totaled $2.9 million, $2.9million and $2.6 million, respectively. At March 31, 2005, the ratio of the allowance for loan losses tonon-performing loans was 160.5% compared to 153.5% at December 31, 2004and 148.9% at March 31, 2004.  Theratio of the allowance to total loans was 0.58%, 0.56% and 0.55%, at March 31,2005, December 31, 2004 and March 31, 2004, respectively.  There were no net charge-offs for the threemonths ended March 31, 2005. Net charge-offs for the three months ended March 31,2004 totaled $12,000.  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 $1.3 million and $1.6 million for the three months ended March 31,2005 and 2004, respectively.  Thedecrease in noninterest income is primarily attributable to decreases of$180,000 in gain on sale of loans, $113,000 in gain on sale of property,$48,000 in gain on sale of securities, $68,000 in insurance and brokeragecommissions and $33,000 in revenues generated by Computer Dynamics Group, Inc.(“CDGI”).  The decrease in incomegenerated by CDGI is largely due to a decrease in sales related to a weakerdemand for CDGI’s services.  The impactof these decreases was partially offset by increases of $161,000 in servicefees, which increased primarily due to the growth in the number

 

12

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of deposit accounts.

 

***Noninterest Expense. ***Noninterestexpense increased $711,000, to $5.4 million for the three months ended March 31,2005 from $4.7 million for the comparable period in 2004.  Of this increase, $469,000 is directly relatedto compensation and benefits.  Inaddition, expenses relating to office building operations increased $73,000resulting from the costs related to a new branch office placed in service in September 2004and $37,000 relating to professional audit and outsourced internal auditfees.  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 $517,000 and $824,000 for the three months ended March 31,2005 and 2004, respectively.  Theeffective tax rate was 26.8% and 29.6% for the three months ended March 31,2005 and 2004, respectively.  Thedecrease in income tax expense and the effective tax rate was primarily theresult of a decrease in income before income taxes and minority interest of$859,000 to $1.9 million for three months ended March 31, 2005 from $2.8million for the comparable prior year period. In addition, the permanent items utilized in the tax calculationremained consistent for the three months ended March 31, 2004 to the threemonths ended March 31, 2005.

 

**Liquidityand Capital Resources**

 

The Company’s primary source of funding for dividends and periodicstock repurchases have been dividends from the Bank.  The Bank’s ability to pay dividends and othercapital distributions to the Company is generally limited by the Office ofThrift Supervision’s regulations.

 

The Bank’sprimary sources of funds are savings deposits, proceeds from the principal andinterest payments on loans, proceeds from the maturity of securities andborrowings from the FHLB-Chicago. While maturities and scheduled amortizationof loans and securities are predictable sources of funds, deposit outflows andmortgage prepayments are greatly influenced by general interest rates, economicconditions and competition.

 

The primaryinvesting activities of the Bank are the origination and purchase of primarilyresidential one-to-four-family loans, the purchase of mortgage-backedsecurities and, to a lesser extent, multi-family and commercial real 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 tothe primary investing activities of the Bank, the Company has repurchasedshares of its common stock from time to time in the open market.  As of March 31, 2005, the

 

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Company repurchased a total of 3,087,081 shares of the Company’s commonstock at an average price per share of $12.11 since becoming a public companyin 1998.  There currently is no formalrepurchase plan in place and there were no shares repurchased during the threemonths ended March 31, 2005.

 

The Bank’smost liquid assets are cash and interest-bearing deposits with financialinstitutions. The levels of these assets are dependent on the Bank’s operating,financing, lending and investing activities during any given period.  At March 31, 2005, cash andinterest-bearing deposits with financial institutions totaled $17.7 million, or1.8% of total assets.

 

See the “ConsolidatedStatements of Cash Flows” in the Unaudited Consolidated Financial Statementsincluded in this Form 10-Q for the sources and uses of cash flows foroperating, investing and financing activities for the three months ended March 31,2005 and 2004.

 

At March 31,2005, the Bank exceeded all of its regulatory capital requirements. Thefollowing is a summary of the Bank’s regulatory capital ratios at March 31,2005:

 
| ** **                               | ** ** | **Actual** | ** ** | **For capital adequacy  purposes** | ** ** | **To be well capitalized under  prompt corrective action** | ** ** |
|------------------------------------------|------------|------------|------------|------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                               | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                                                 | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| March 31, 2005:                     |       |       |       |                               |       |                                                       |       |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |       | $          | 79,389,000 |                               | 10.78      | %                                                          | $          | 58,931,000 |   | 8.0 | % | $ | 73,663,000 |   | 10.0 | % |
| Tier I capital (to risk weighted assets) |       | 79,969,000 |       | 10.86                              |       | 29,465,000                                                 |       | 4.0 |   | 44,198,000 |   | 6.0 |   |
| Tier I capital (to average assets)       |       | 79,969,000 |       | 7.91                               |       | 40,422,000                                                 |       | 4.0 |   | 50,528,000 |   | 5.0 |   |
|                                          |            |            |            |                                    |            |                                                            |            |  |  |  |  |  |  |  |  |  |

 

At March 31, 2005, the Company had aTotal Capital to Total Assets ratio of 8.51%.

 

On March 16,2005, the Company announced its first quarter dividend of $0.1625 per share.  The dividend was paid on April 12, 2005to stockholders of record on March 31, 2005.

 

**FinancialInstruments with Off-Balance Sheet Risk**

 

The Bank is aparty to financial instruments with off-balance sheet risk in the normal courseof business to meet the financing needs of its customers.  Those financial instruments primarily includecommitments 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.

 

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The Bank’sapproved, but unused lines of credit are based on underwriting standards thatallow total borrowings, including the equity line of credit to exceed 80% ofthe current appraised value of the customer’s residence.  The Bank charges a 1% higher interest rate onhome equity lines of credit up to 90% of the home’s current appraised value.

 

The Bank’sstandby letters of credit are conditional commitments issued by the Bank toguarantee 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 totalcommitment outstanding, totaled $11.5 million at March 31, 2005.

 

At March 31,2005 and December 31, 2004, the bank had the following commitments toextend credit:

 
| ** **                | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------|------------|--------------------------|------------|-----------------------------|------------|
| First mortgage loans      |       | $                        | 7,825,000  |                        | $          | 8,303,000 |   |
| Construction loans        |       | 1,732,000                |       | 804,000                     |       |
| Unused lines of credit    |       | 53,695,000               |       | 61,381,000                  |       |
| Standby letters of credit |       | 11,472,000               |       | 11,476,000                  |       |
|                           |            |                          |            |                             |            |  |  |

 

**ContractualObligations**

 

The Bank has certain obligations and commitments to make futurepayments under contract.  There has beenno material change in contractual obligations from December 31, 2004.

 

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**RecentAccounting Pronouncements**

 

In December 2003, the American Institute ofCertified Public Accountants (“AICPA”) released Statement of Position 03-3, “Accountingfor Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”).  SOP 03-3 addresses the accounting fordifferences between contractual cash flows and cash flows expected to becollected from an investors initial investment in loans or debt securitiesacquired in a transfer if those differences are attributable to creditquality.  SOP 03-3 is effective for loansacquired in fiscal years beginning after December 31, 2004.  Adoption of this Statement had no impact onthe Company’s consolidated financial statements.

 

In March 2004, the FASB ratified a consensus onEITF 03-1,  “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF03-1”).  EITF 03-1 provides guidance fordetermining when an investment is impaired, whether the impairment is otherthan temporary and measuring an impairment loss.  EITF 03-1 also incorporates into itsconsensus the required disclosures about unrealized losses on investmentsannounced by the EITF in late 2003 and adds new disclosure requirementsrelating to cost-method investments.  Theimpairment accounting guidance was to become effective for reporting periodsbeginning after June 15, 2004.  Thenew disclosure requirements are effective for annual reporting periods after June 15,2004.  In September 2004, the FASBdelayed the effective date of EITF 03-1 for measurement and recognition ofimpairment losses until implementation guidance is issued.

 

In December 2004, the FASB issued SFAS No. 123(Revised 2004) (123R), “Share Based Payment, an amendment of FASB Statements No. 123and 95.  SFAS No. 123R will requirecompensation cost relating to share-based payment transactions be recognized inconsolidated financial 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 earnings per share beginning withthe first quarter of 2006.

 

In March 2005, the SEC staff issued StaffAccounting Bulletin No. 107 (“SAB 107”) regarding the interaction betweenSFAS No. 123R and certain SEC rules and regulations and provides thestaff’s views regarding the valuation of share-based payment arrangements forpublic companies.  SAB 107 providesguidance related to valuation methods (including assumptions such as expectedvolatility and expected term), accounting for certain redeemable financialinstruments issued under share-based payment arrangements, the classificationof compensation expense, non-GAAP financial measures, capitalization ofcompensation cost related to share-based payment arrangements, the accountingfor income tax effects of share-based payment arrangements upon adoption ofStatement 123R, the modification of employee share options prior to adoption ofStatement 123R and disclosures in Management’s Discussion and Analysis ofFinancial Condition and results of Operations subsequent to adoption ofStatement 123R.

 

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**AverageBalance Sheet**

 

The following tables set forth certain information relating to the Bankfor the three months ended March 31, 2005 and 2004, respectively.  The average yields and costs are derived bydividing income or expense by the average balance of interest-earning assets orinterest-bearing liabilities, respectively, for the periods shown and reflectannualized yields and costs.  Averagebalances are derived from average monthly balances.  The yields and costs include fees, which areconsidered adjustments to yields.  Taxexempt income has been calculated on a tax equivalent basis using a tax rate of34% and amounted to $219,000 and $190,000 for the three months ended March 31,2005 and 2004, respectively.

 

 
| ** **                                                                        | ** ** | **Three Months Ended  March 31, 2005** | ** ** | **Three Months Ended  March 31, 2004** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                        | ** ** | **Average**                                 | ** ** | ** **                                  | ** ** | ** ** | ** ** | **Average** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(in thousands)**                                                                | ** ** | **Balance**                                 | ** ** | **Interest**                                | ** ** | **Yield/Cost** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Yield/Cost** | ** ** |
| Assets:                                                                           |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Interest earning assets:                                                          |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Short-term deposits and FHLB stock                                                |       | $                                           | 27,921     |                                        | 206        |   | 2.95 | % | 44,052 |   | 210 |   | 1.91 | % |
| Investment securities                                                             |       | 99,621                                      |       | 1,342                                       |       | 5.39 | % | 85,253 |   | 1,223 |   | 5.74 | % |
| Mortgage-backed securities                                                        |       | 11,435                                      |       | 105                                         |       | 3.67 | % | 9,458 |   | 90 |   | 3.80 | % |
| Mortgage loans                                                                    |       | 563,707                                     |       | 7,491                                       |       | 5.32 | % | 569,937 |   | 8,031 |   | 5.64 | % |
| Other loans                                                                       |       | 250,345                                     |       | 3,620                                       |       | 5.78 | % | 154,678 |   | 2,082 |   | 5.38 | % |
| Total interest earning assets                                                     |       | 953,029                                     |       | 12,764                                      |       | 5.36 | % | 863,378 |   | 11,636 |   | 5.39 | % |
| Noninterest earning assets                                                        |       | 61,385                                      |       |                                        |       |   |   | 50,040 |   |   |   |   |   |
| Total assets                                                                      |       | $                                           | 1,014,414  |                                        |       |   |   |   | 913,418 |   |   |   |   |   |
| Liabilities and stockholders’ equity Interest-bearing  liabilities Deposits: |       |                                        |       |                                        |       |   |   |   |   |   |   |   |   |
| Money market accounts                                                             |       | $                                           | 110,674    |                                        | 488        |   | 1.76 | % | 143,364 |   | 570 |   | 1.59 | % |
| Passbook savings accounts                                                         |       | 148,632                                     |       | 630                                         |       | 1.69 | % | 129,510 |   | 442 |   | 1.37 | % |
| NOW Accounts                                                                      |       | 42,451                                      |       | 59                                          |       | 0.56 | % | 38,974 |   | 48 |   | 0.49 | % |
| Certificates of deposit                                                           |       | 329,299                                     |       | 2,465                                       |       | 2.99 | % | 266,137 |   | 1,922 |   | 2.89 | % |
| Total deposits                                                                    |       | 631,056                                     |       | 3,642                                       |       | 2.31 | % | 577,985 |   | 2,982 |   | 2.06 | % |
| FHLB Advances                                                                     |       | 232,000                                     |       | 2,596                                       |       | 4.48 | % | 200,700 |   | 2,406 |   | 4.79 | % |
| Total interest-bearing liabilities                                                |       | 863,056                                     |       | 6,238                                       |       | 2.89 | % | 778,685 |   | 5,388 |   | 2.77 | % |
| Noninterest-bearing liabilities                                                   |       | 65,084                                      |       |                                        |       |   |   | 54,821 |   |   |   |   |   |
| Total liabilities                                                                 |       | 928,140                                     |       |                                        |       |   |   | 833,506 |   |   |   |   |   |
| Total stockholders’ equity                                                   |       | 86,274                                      |       |                                        |       |   |   | 79,912 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                                   |       | $                                           | 1,014,414  |                                        |       |   |   |   | 913,418 |   |   |   |   |   |
| Net interest income before provision for  loan losses                             |       |                                        |       | 6,526                                       |       |   |   |   |   | 6,248 |   |   |   |
| Interest rate spread                                                              |       |                                        |       |                                        |       | 2.47 | % |   |   |   |   | 2.62 | % |
| Net interest margin as a percent of interest  earning assets                      |       |                                        |       |                                        |       | 2.74 | % |   |   |   |   | 2.89 | % |
| Ratio of interest-earning assets to interest-bearing  liabilities                 |       |                                        |       |                                        |       | 110.42 | % |   |   |   |   | 110.88 | % |

 

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Item 3.    Quantitative andQualitative Disclosures About Market Risk.

 

The Bank’sinterest rate sensitivity is monitored by management through the use of a NetPortfolio Value Model which generates estimates of the change in the Bank’s netportfolio value (“NPV”) over a range of interest rate scenarios.  NPV is the present value of expected cashflows from assets, liabilities, and off-balance sheet contracts.  The NPV ratio, under any interest ratescenario, is defined as the NPV in that scenario divided by the market value ofassets in the same scenario.  The modelassumes estimated prepayment rates, reinvestment rates and deposit decayrates.  The Sensitivity Measure is thedecline 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 March 31, 2005.  Theseresults are not materially different from the results as of December 31,2004.

 
| **Change in  Interest Rates  in Basis Points** | ** ** | **Net Portfolio Value** | ** ** | ** **        | ** ** | **NPV as % of Portfolio  Value of Assets** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-------------------|------------|--------------------------------------------|------------|
| **(Rate Shock)**                               | ** ** | **Amount**              | ** ** | **$ Change** | ** ** | **% Change**                               | ** ** | **NPV Ratio** | ** ** | **% Change** | ** ** |
|                                           |       | **(In  thousands)**     |       |              |       |                                       |       |   |   |
|                                           |       |                    |       |              |       |                                       |       |   |   |   |   |
| +300                                           |       | $                       | 49,040     |              | $          | (42,702                                    | )          | (46.55 | )% | 5.36 | % | (41.87 | )% |
| +200                                           |       | 62,274                  |       | (29,468           | )          | (32.12                                     | )          | 6.63 |   | (28.09 | ) |
| +100                                           |       | 76,891                  |       | (14,851           | )          | (16.19                                     | )          | 7.95 |   | (13.77 | ) |
| Static                                         |       | 91,742                  |       | —            |       | —                                     |       | 9.22 |   | — |   |
| -100                                           |       | 95,188                  |       | 3,446             |       | 3.76                                       |       | 9.27 |   | 0.54 |   |
| -200                                           |       | 96,463                  |       | 4,721             |       | 5.15                                       |       | 9.52 |   | 3.25 |   |
|                                                |            |                         |            |                   |            |                                            |            |  |  |  |  |  |  |

 

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

 

Item 4.    Controls and Procedures

 

The Company’smanagement, including the Company’s principal executive officer and principalfinancial officer, have evaluated the effectiveness of the Company’s “disclosurecontrols 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

 

18

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evaluation, the principalexecutive officer and principal financial officer concluded that, as of the endof the period covered by this report, the Company’s disclosure controls andprocedures were effective for the purpose of ensuring that the informationrequired to be disclosed in the reports that the Company files or submits underthe Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and (2) is accumulated and communicatedto the Company’s management, including its principal executive and principalfinancial officers, as appropriate to allow timely decisions regarding requireddisclosure.  In addition, based on thatevaluation, no change in the Company’s internal control over financialreporting occurred during the quarter ended March 31, 2005 that hasmaterially affected, or is reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

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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.                                                                                                                                                                                                                                                                              |

 

The annualmeeting of shareholders was held April 19, 2005.  Directors whose terms continued are asfollows:  Thomas I. Anderson (2006),Barrett J. O’Connor (2006), Larry M. Narum (2006), James J. Kovac (2007), RandolphW. Brittain (2007) and Eric J. Fernandez (2007).  The following proposals were voted on by thestockholders.

 
| **PROPOSAL**                                                                                                                                               | ** ** | **FOR**   | ** ** | **WITHHELD** | ** ** | **ABSTAIN** | ** ** | **BROKER  NON-VOTES** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------|------------|--------------|------------|-------------|------------|-----------------------|
|                                                                                                                                                       |       |      |       |         |       |        |       |                  |
| 1) Election  of Directors –  nominees for three year term                                                                                             |       |      |       |         |       |        |       |                  |
| Leo M. Flanagan, Jr.                                                                                                                                  |       | 3,606,648 |       | 62,607       |       | N/A         |       | N/A                   |
| Peter A. Traeger                                                                                                                                           |       | 3,607,877 |       | 61,378       |       | N/A         |       | N/A                   |
| James A. Alpeter                                                                                                                                           |       | 3,573,266 |       | 95,989       |       | N/A         |       | N/A                   |
|                                                                                                                                                       |       |      |       |         |       |        |       |                  |
| 2) Approval  of appointment of  KPMG LLP as the Company’s  Independent Registered Public  Accounting Firm for the  Year ending December 31, 2005 |       | 3,661,049 |       | 6,822        |       | 1,384       |       | N/A                   |

 

Item 5.                                                             Other Information.

None.

 

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| Item 6. | Exhibits |
|---------|----------|
|    |     |   |   |
|    | (a)      |   | Exhibits |
|    |     | 3.1 |   | Certificate  of Incorporation of EFC Bancorp, Inc. * |
|    |     | 3.2 |   | Bylaws of  EFC Bancorp, Inc. * |
|    |     | 4.0 |   | Specimen  Stock Certificate of EFC Bancorp, Inc. * |
|    |     | 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 |
|    |     |   |   |   |   |   |   |   |
|         |
|    | *        |   | 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. |
|         |          |  |  |  |  |  |  |  |  |  |

 

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned hereuntoduly authorized.

 

 
|   | EFC BANCORP, INC.                             |
|--------|-----------------------------------------------|
|   |                                          |
|   |                                          |
| Dated: | May 13,  2005                            | By: | /s/ Barrett  J. O’Connor |   |
|   |                                          | Barrett J.  O’Connor |
|   |                                          | Chief  Executive Officer |
|   |                                          | (Principal  executive officer) |
|   |                                          |   |
| Dated: | May 13,  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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