**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-Q**

**(Mark One)**

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

 

**For the quarterly period endedSeptember 30, 2004**

**or**

 

**o****                                 TRANSITIONREPORT 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**

 

**EFCBANCORP, 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 since last report) |

 

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

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12(b)-2 of the Exchange
| Act). | Yes o  No ý |
|-------|--------------------------------------|

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the latest practicable date:4,697,703 shares of common stock, par value $0.01 per share, were outstandingas of November 10, 2004.

 

 

----

 

EFC Bancorp, Inc.

 

Form 10-Q

 

For the Quarter EndedSeptember 30, 2004

 

INDEX

 
| PART I.    | FINANCIAL INFORMATION                                                                       |                                                                                                  |
|------------|---------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|
|       |                                                                                        |                                                                                                  |   |
| Item 1.    | Financial Statements  (unaudited)                                                           |                                                                                                  |
|       |                                                                                        |                                                                                                  |   |
|       |                                                                                        | Consolidated  Balance Sheets at September 30, 2004 and December 31, 2003                              |   |
|       |                                                                                        |                                                                                                  |   |
|       |                                                                                        | Consolidated  Statements of Income - For the Three and Nine Months Ended September 30, 2004  and 2003 |   |
|       |                                                                                        |                                                                                                  |   |
|       |                                                                                        | Consolidated  Statements of Cash Flows - For the Nine Months Ended September 30, 2004 and  2003       |   |
|       |                                                                                        |                                                                                                  |   |
|       |                                                                                        | Notes  to Consolidated Financial Statements                                                           |   |
|       |                                                                                        |                                                                                                  |   |
| Item  2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                  |
|       |                                                                                        |                                                                                                  |   |
| Item  3.   | Quantitative  and Qualitative Disclosures About Market Risk                                 |                                                                                                  |
|       |                                                                                        |                                                                                                  |   |
| Item 4.    | Controls and Procedures                                                                     |                                                                                                  |
|       |                                                                                        |                                                                                                  |   |
| PART II:   | OTHER INFORMATION                                                                           |                                                                                                  |
|       |                                                                                        |                                                                                                  |   |
| Item 1.    | Legal Proceedings                                                                           |                                                                                                  |
| Item  2.   | Unregistered  Sales of Equity Securities and Use of Proceeds                                |                                                                                                  |
| Item 3.    | Defaults Upon  Senior Securities                                                            |                                                                                                  |
| Item  4.   | Submission  of Matters to a Vote of Security Holders                                        |                                                                                                  |
| Item 5.    | Other Information                                                                           |                                                                                                  |
| Item 6.    | Exhibits                                                                                    |                                                                                                  |
|       |                                                                                        |                                                                                                  |   |
| SIGNATURES |                                                                                        |

 

----

 

**PART I. FINANCIAL INFORMATION**

**EFCBANCORP, INC.**

 

Item 1.    FinancialStatements.

**EFC BANCORP, INC.**

**AND SUBSIDIARIES**

 

Consolidated Balance Sheets (unaudited)

September 30, 2004 and December 31, 2003

 
| Assets                                                                                                                               | ** ** | **September  30,**

**2004** | ** **  | **December  31,**

**2003** | ** **  |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|-----------------------------|-------------|
| Cash and cash equivalents:                                                                                                           |       |                         |        |                        |        |
| On hand and in banks                                                                                                                 |       | $                            | 5,783,274   |                        | 5,449,261   |   |
| Interest bearing deposits with financial institutions                                                                                |       | 27,841,452                   |        | 16,426,727                  |        |
| Total cash and cash equivalents                                                                                                      |       | 33,624,726                   |        | 21,875,988                  |        |
|                                                                                                                                 |       |                         |        |                        |        |
| Loans receivable, net                                                                                                                |       | 794,014,980                  |        | 716,883,910                 |        |
| Mortgage-backed securities available-for-sale, at fair value                                                                         |       | 10,877,623                   |        | 10,164,501                  |        |
| Investment securities available-for-sale, at fair value                                                                              |       | 96,176,496                   |        | 90,656,208                  |        |
| Stock in Federal Home Loan Bank of Chicago, at cost                                                                                  |       | 11,766,100                   |        | 10,877,600                  |        |
| Accrued interest receivable                                                                                                          |       | 4,312,539                    |        | 4,009,280                   |        |
| Office properties and equipment, net                                                                                                 |       | 23,732,431                   |        | 17,672,562                  |        |
| Real estate held for development                                                                                                     |       | 4,920,696                    |        | 4,189,637                   |        |
| Bank owned life insurance                                                                                                            |       | 18,967,239                   |        | 17,986,416                  |        |
| Other assets                                                                                                                         |       | 609,464                      |        | 2,776,482                   |        |
|                                                                                                                                 |       |                         |        |                        |        |
| Total assets                                                                                                                         |       | $                            | 999,002,294 |                        | 897,092,584 |   |
|                                                                                                                                 |       |                         |        |                        |        |
| Liabilities and  Stockholders’ Equity                                                                                           |       |                         |        |                        |        |
| Liabilities:                                                                                                                         |       |                         |        |                        |        |
| Deposits                                                                                                                             |       | $                            | 672,660,124 |                        | 596,763,807 |   |
| Borrowed money                                                                                                                       |       | 232,000,000                  |        | 211,788,751                 |        |
| Accrued expenses, income taxes payable and other liabilities                                                                         |       | 11,161,190                   |        | 10,294,740                  |        |
|                                                                                                                                 |       |                         |        |                        |        |
| Total liabilities                                                                                                                    |       | 915,821,314                  |        | 818,847,298                 |        |
|                                                                                                                                 |       |                         |        |                        |        |
| Minority interest                                                                                                                    |       | —                       |        | (158,666                    | )           |
|                                                                                                                                 |       |                         |        |                        |        |
| 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                                                                                                           |       | 72,886,537                   |        | 72,247,346                  |        |
| Retained earnings, substantially restricted                                                                                          |       | 49,451,163                   |        | 46,681,729                  |        |
| Treasury stock, at cost, 2,801,731 and 2,898,763 shares at September  30, 2004 and December 31, 2003, respectively                   |       | (34,741,252                  | )           | (35,598,664                 | )           |
| Unearned employee stock ownership plan (ESOP), 329,624 and 359,590 shares  at September 30, 2004 and December 31, 2003, respectively |       | (4,928,715                   | )           | (5,376,779                  | )           |
| Unearned stock award plan, 3,776 and 6,026 shares at September 30,  2004 and December 31, 2003, respectively                         |       | (42,008                      | )           | (67,039                     | )           |
| Accumulated other comprehensive income                                                                                               |       | 480,341                      |        | 442,445                     |        |
|                                                                                                                                 |       |                         |        |                        |        |
| Total stockholders’ equity                                                                                                      |       | 83,180,980                   |        | 78,403,952                  |        |
|                                                                                                                                 |       |                         |        |                        |        |
| Commitments and contingencies                                                                                                        |       | —                       |        | —                      |        |
|                                                                                                                                 |       |                         |        |                        |        |
| Total liabilities and stockholders’ equity                                                                                      |       | $                            | 999,002,294 |                        | 897,092,584 |   |
|                                                                                                                                      |            |                              |             |                             |             |  |  |

 

See accompanying notes to consolidated financial statements.

 

1

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**EFC BANCORP, INC.**

**AND SUBSIDIARIES**

 

Consolidated Statements of Income (unaudited)

For the three and nine months ended September 30, 2004 and 2003

 
| ** **                                                                                          | ** ** | **Three  months ended**

**September  30,** | ** ** | **Nine  months ended**

**September  30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2004**                                    | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                |       |                                        |       |                                       |       |   |   |   |   |
| Interest income:                                                                                    |       |                                        |       |                                       |       |   |   |   |   |
| Loans secured by real estate                                                                        |       | $                                           | 7,608,786  |                                       | 8,258,392  |   | 23,220,232 |   | 25,448,767 |   |
| Other loans                                                                                         |       | 2,865,066                                   |       | 1,744,170                                  |       | 7,311,046 |   | 4,729,418 |   |
| Mortgage-backed securities available-for-sale                                                       |       | 98,318                                      |       | 107,310                                    |       | 301,435 |   | 415,612 |   |
| Investment securities available-for-sale and interest bearing  deposits with financial institutions |       | 1,266,227                                   |       | 1,202,610                                  |       | 3,685,013 |   | 3,717,910 |   |
| Total interest income                                                                               |       | 11,838,397                                  |       | 11,312,482                                 |       | 34,517,726 |   | 34,311,707 |   |
|                                                                                                |       |                                        |       |                                       |       |   |   |   |   |
| Interest expense:                                                                                   |       |                                        |       |                                       |       |   |   |   |   |
| Deposits                                                                                            |       | 3,391,593                                   |       | 3,017,886                                  |       | 9,433,012 |   | 9,238,516 |   |
| Borrowed money                                                                                      |       | 2,612,469                                   |       | 2,372,350                                  |       | 7,370,052 |   | 6,950,759 |   |
| Total interest expense                                                                              |       | 6,004,062                                   |       | 5,390,236                                  |       | 16,803,064 |   | 16,189,275 |   |
|                                                                                                |       |                                        |       |                                       |       |   |   |   |   |
| Net interest income before provision for loan losses                                                |       | 5,834,335                                   |       | 5,922,246                                  |       | 17,714,662 |   | 18,122,432 |   |
| Provision for loan losses                                                                           |       | 210,000                                     |       | 140,000                                    |       | 550,000 |   | 463,250 |   |
| Net interest income after provision for loan losses                                                 |       | 5,624,335                                   |       | 5,782,246                                  |       | 17,164,662 |   | 17,659,182 |   |
|                                                                                                |       |                                        |       |                                       |       |   |   |   |   |
| Noninterest income:                                                                                 |       |                                        |       |                                       |       |   |   |   |   |
| Service fees                                                                                        |       | 795,295                                     |       | 572,810                                    |       | 2,080,527 |   | 1,555,618 |   |
| Insurance and brokerage commissions                                                                 |       | 151,396                                     |       | 136,292                                    |       | 493,325 |   | 250,322 |   |
| Information technology sales and service income, net                                                |       | 75,519                                      |       | 146,628                                    |       | 311,048 |   | 642,882 |   |
| Gain on sale of foreclosed real estate                                                              |       | —                                      |       | —                                     |       | — |   | 41,315 |   |
| Gain on sale of office properties and equipment                                                     |       | —                                      |       | —                                     |       | 149,396 |   | — |   |
| Gain on sale of securities                                                                          |       | —                                      |       | 290,385                                    |       | 249,418 |   | 816,454 |   |
| Gain on sale of loans                                                                               |       | 16,348                                      |       | —                                     |       | 277,972 |   | 156,223 |   |
| Bank owned life insurance                                                                           |       | 207,735                                     |       | 234,543                                    |       | 654,061 |   | 600,675 |   |
| Other                                                                                               |       | 43,944                                      |       | 102,626                                    |       | 151,449 |   | 175,855 |   |
| Total noninterest income                                                                            |       | 1,290,237                                   |       | 1,483,284                                  |       | 4,367,196 |   | 4,239,344 |   |
|                                                                                                |       |                                        |       |                                       |       |   |   |   |   |
| Noninterest expense:                                                                                |       |                                        |       |                                       |       |   |   |   |   |
| Compensation and benefits                                                                           |       | 2,713,958                                   |       | 2,740,615                                  |       | 8,336,106 |   | 8,062,139 |   |
| Office building, net                                                                                |       | 747,492                                     |       | 683,434                                    |       | 2,140,727 |   | 2,058,996 |   |
| Federal insurance premiums                                                                          |       | 23,125                                      |       | 21,669                                     |       | 68,528 |   | 66,055 |   |
| Advertising                                                                                         |       | 250,712                                     |       | 160,877                                    |       | 761,724 |   | 594,003 |   |
| Data processing                                                                                     |       | 285,555                                     |       | 220,938                                    |       | 860,877 |   | 704,934 |   |
| NOW/checking account expenses                                                                       |       | 189,290                                     |       | 177,093                                    |       | 460,247 |   | 432,866 |   |
| Other                                                                                               |       | 1,125,105                                   |       | 561,355                                    |       | 2,444,359 |   | 1,852,196 |   |
| Total noninterest expense                                                                           |       | 5,335,237                                   |       | 4,565,981                                  |       | 15,072,568 |   | 13,771,189 |   |
|                                                                                                |       |                                        |       |                                       |       |   |   |   |   |
| Income before income taxes and minority interest                                                    |       | 1,579,335                                   |       | 2,699,549                                  |       | 6,459,290 |   | 8,127,337 |   |
|                                                                                                |       |                                        |       |                                       |       |   |   |   |   |
| Income tax expense                                                                                  |       | 350,856                                     |       | 889,286                                    |       | 1,728,192 |   | 2,766,221 |   |
|                                                                                                |       |                                        |       |                                       |       |   |   |   |   |
| Income before minority interest                                                                     |       | 1,228,479                                   |       | 1,810,263                                  |       | 4,731,098 |   | 5,361,116 |   |
|                                                                                                |       |                                        |       |                                       |       |   |   |   |   |
| Minority interest                                                                                   |       | (10,103                                     | )          | 10,615                                     |       | — |   | 81,265 |   |
|                                                                                                |       |                                        |       |                                       |       |   |   |   |   |
| Net income                                                                                          |       | $                                           | 1,218,376  |                                       | 1,820,878  |   | 4,731,098 |   | 5,442,381 |   |
|                                                                                                |       |                                        |       |                                       |       |   |   |   |   |
| Earnings per share:                                                                                 |       |                                        |       |                                       |       |   |   |   |   |
| Basic                                                                                               |       | $                                           | 0.28       |                                       | 0.43       |   | 1.10 |   | 1.29 |   |
| Diluted                                                                                             |       | 0.27                                        |       | 0.41                                       |       | 1.04 |   | 1.22 |   |

 

See accompanying notes to consolidated financial statements.

 

2

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**EFC BANCORP, INC.**

**AND SUBSIDIARIES**

 

Consolidated Statements of Cash Flows (unaudited)

For the nine months ended September 30, 2004 and 2003

 
| ** **                                                                        | ** ** | **2004**    | ** ** | **2003**     | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------|------------|--------------|------------|
|                                                                              |       |        |       |         |       |
| Cash flows from operating activities:                                             |       |        |       |         |       |
| Net income                                                                        |       | $           | 4,731,098  |         | 5,442,381  |   |
| Adjustment to reconcile net income to net cash provided by operating  activities: |       |        |       |         |       |
| Amortization of premiums and discounts, net                                       |       | 79,945      |       | 75,318       |       |
| Provision for loan losses                                                         |       | 550,000     |       | 463,250      |       |
| FHLB of Chicago stock dividends                                                   |       | (888,500    | )          | (568,000     | )          |
| Stock award plan shares allocated                                                 |       | 25,031      |       | 381,843      |       |
| ESOP shares committed to be released                                              |       | 448,064     |       | 448,064      |       |
| Change in fair value of ESOP shares                                               |       | 639,191     |       | 132,887      |       |
| Depreciation of office properties and equipment                                   |       | 933,366     |       | 855,482      |       |
| Gain on sale of foreclosed real estate                                            |       | —      |       | (41,315      | )          |
| Gain on sale of securities                                                        |       | (249,418    | )          | (816,454     | )          |
| Gain on sale of loans receivable                                                  |       | (277,972    | )          | (156,223     | )          |
| Change in minority interest in subsidiary                                         |       | 158,666     |       | (81,265      | )          |
| Increase in bank owned life insurance                                             |       | (555,823    | )          | (534,210     | )          |
| Decrease in accrued interest receivable and other assets, net                     |       | 1,837,399   |       | 40,294       |       |
| Increase in income taxes payable, accrued expenses and other  liabilities, net    |       | 816,962     |       | 1,510,496    |       |
|                                                                              |       |        |       |         |       |
| Net cash provided by operating activities                                         |       | 8,248,009   |       | 7,152,548    |       |
|                                                                              |       |        |       |         |       |
| Cash flows from investing activities:                                             |       |        |       |         |       |
| Net increase in loans receivable                                                  |       | (47,907,447 | )          | (32,964,799  | )          |
| Purchases of loans receivable                                                     |       | (70,023,873 | )          | (83,263,883  | )          |
| Proceeds from the sale of loans receivable                                        |       | 40,528,222  |       | 12,894,951   |       |
| Increase in real estate held for development                                      |       | (731,059    | )          | (823,830     | )          |
| Purchases of mortgage-backed securities available-for-sale                        |       | (4,035,625  | )          | (2,549,222   | )          |
| Principal payments on mortgage-backed securities available-for-sale               |       | 3,231,485   |       | 5,738,497    |       |
| Maturities of investment securities available-for-sale                            |       | 23,331,922  |       | 25,465,274   |       |
| Purchases of investment securities available-for-sale                             |       | (32,276,933 | )          | (42,909,565  | )          |
| Proceeds from the sale of investment securities                                   |       | 3,747,338   |       | 15,349,744   |       |
| Purchases of office properties and equipment                                      |       | (6,993,235  | )          | (1,334,060   | )          |
| Investment in bank owned life insurance                                           |       | (425,000    | )          | (5,000,000   | )          |
| Purchases of stock in the Federal Home Loan Bank of Chicago                       |       | —      |       | (760,200     | )          |
| Proceeds from the sale of foreclosed real estate                                  |       | —      |       | 2,027,057    |       |
|                                                                              |       |        |       |         |       |
| Net cash used in investing activities                                             |       | (91,554,205 | )          | (108,130,036 | )          |
|                                                                              |       |        |       |         |       |
| Cash flows from financing activities:                                             |       |        |       |         |       |
| Net increase in deposits                                                          |       | 75,896,317  |       | 65,965,874   |       |
| Proceeds from borrowed money                                                      |       | 119,000,785 |       | 91,070,325   |       |
| Repayments on borrowed money                                                      |       | (98,789,536 | )          | (61,051,470  | )          |
| Purchase of treasury stock                                                        |       | (268,963    | )          | (2,514,270   | )          |
| Stock options exercised                                                           |       | 1,126,375   |       | 545,178      |       |
| Cash dividends paid                                                               |       | (1,910,044  | )          | (1,761,869   | )          |
| Net cash provided by financing activities                                         |       | 95,054,934  |       | 92,253,768   |       |
|                                                                              |       |        |       |         |       |
| Net increase/(decrease) in cash and cash equivalents                              |       | 11,748,738  |       | (8,723,720   | )          |
| Cash and cash equivalents at beginning of period                                  |       | 21,875,988  |       | 32,844,290   |       |
|                                                                              |       |        |       |         |       |
| Cash and cash equivalents at end of period                                        |       | $           | 33,624,726 |         | 24,120,570 |   |
|                                                                              |       |        |       |         |       |
| Supplemental disclosures of cash flow information:                                |       |        |       |         |       |
| Cash paid during the period for:                                                  |       |        |       |         |       |
| Interest                                                                          |       | $           | 16,680,058 |         | 16,241,964 |   |
| Income taxes                                                                      |       | 2,005,000   |       | 2,340,000    |       |
| Noncash investing activities - transfer of loans to foreclosed real  estate       |       | —      |       | 39,190       |       |

 

See accompanying notes to consolidated financial statements.

 

3

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**EFCBANCORP, INC.**

**Notes to Unaudited ConsolidatedFinancial Statements**

 

Note 1: BASIS OF PRESENTATION

 

The accompanying unaudited consolidated financialstatements include the accounts of EFC Bancorp, Inc. (the Company), itswholly-owned subsidiary, EFS Bank (the Bank) and its wholly-owned subsidiary,EFS Service Corporation of Elgin.  Theaccompanying unaudited consolidated financial statements also include theaccounts of Computer Dynamics Group, Inc. (CDGI), the Company’s formerlymajority-owned subsidiary.  The Companywas informed in October 2004 of the bankruptcy filing of its minority partnerin CDGI.  Upon notification of thebankruptcy, as of September 30, 2004, the Company recorded its investment inCDGI as a wholly-owned subsidiary. Certain amounts for the prior period have been reclassified to conformto the current period presentation.  TheCompany operates as a single segment.

 

In the opinion of the management of the Company, theaccompanying consolidated financial statements include all normal recurringadjustments necessary for a fair presentation of the financial position andresults of operations for the periods presented.  All significant intercompany transactionshave been eliminated in consolidation. These interim financial statements have been prepared according to therules and regulations of the Securities and Exchange Commission and thereforecertain information and footnote disclosures normally included in financialstatements presented in accordance with U.S. generally accepted accountingprinciples have been condensed or omitted. The results of operations for the interim periods are not necessarilyindicative of the results to be expected for the full year.  It is suggested that the accompanyingunaudited consolidated financial statements be read in conjunction with theCompany’s 2003 Annual Report on Form 10-K. Currently, other than investing in various securities, the Company doesnot directly transact any material business other than through the Bank.  Accordingly, the discussion herein addressesthe operations of the Company as they are conducted through the Bank.

 

4

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Note 2: COMPREHENSIVE INCOME

 

The Company’s comprehensive income for the three andnine month periods ended September 30, 2004 and 2003 are as follows:

 
| ** **                                                                                          | ** ** | **Three  months ended**

**September  30,** | ** ** | **Nine  months ended**

**September  30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2004**                                    | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income                                                                                          |       | $                                           | 1,218,376  |                                       | 1,820,878  |   | $ | 4,731,098 |   | 5,442,381 |   |
| Other comprehensive income, net of tax:                                                             |       |                                        |       |                                       |       |   |   |   |   |
| Unrealized holding gains/(losses) on securities arising during the  period, net of tax effect       |       | 2,123,059                                   |       | (1,577,044                                 | )          | 37,896 |   | (851,953 | ) |
| Reclassification adjustment for net gain on sales of securities  realized in net income, net of tax |       | —                                      |       | (182,943                                   | )          | (157,133 | ) | (514,366 | ) |
|                                                                                                |       |                                        |       |                                       |       |   |   |   |   |
| Comprehensive income                                                                                |       | $                                           | 3,341,435  |                                       | 60,891     |   | 4,611,861 |   | 4,076,062 |   |
|                                                                                                     |            |                                             |            |                                            |            |  |  |  |  |  |  |

 

There were no sales of securities for the three monthsended September 30, 2004.  For the ninemonth period ended September 30, 2004 the sale of securities resulted in a gainof $249,418 ($157,133 net of tax effect). For the three and nine month periods ended September 30, 2003 the saleof securities resulted in gains of $290,385 and $816,454, respectively($182,943 and $514,366 net of tax effect).

 

Note 3: COMPUTATION OF PER SHARE EARNINGS

 

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

 

5

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

 
| ** **                                   | ** ** | **Three  months ended**

**September  30,** | ** ** | **Nine  months ended**

**September  30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **2004**                                    | ** ** | **2003**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Basic:                                       |       |                                        |       |                                       |       |   |   |   |   |
| Net income                                   |       | $                                           | 1,218,376  |                                       | 1,820,878  |   | 4,731,098 |   | 5,442,381 |   |
|                                         |       |                                        |       |                                       |       |   |   |   |   |
| Weighted average shares outstanding          |       | 4,340,546                                   |       | 4,205,803                                  |       | 4,287,395 |   | 4,213,292 |   |
|                                         |       |                                        |       |                                       |       |   |   |   |   |
| Basic earnings per share                     |       | $                                           | 0.28       |                                       | 0.43       |   | 1.10 |   | 1.29 |   |
|                                         |       |                                        |       |                                       |       |   |   |   |   |
| Diluted:                                     |       |                                        |       |                                       |       |   |   |   |   |
|                                         |       |                                        |       |                                       |       |   |   |   |   |
| Net income                                   |       | $                                           | 1,218,376  |                                       | 1,820,878  |   | 4,731,098 |   | 5,442,381 |   |
|                                         |       |                                        |       |                                       |       |   |   |   |   |
| Weighted average shares outstanding          |       | 4,340,546                                   |       | 4,205,803                                  |       | 4,287,395 |   | 4,213,292 |   |
| Effect of dilutive stock options outstanding |       | 247,455                                     |       | 243,877                                    |       | 252,164 |   | 234,472 |   |
| Diluted weighted average shares outstanding  |       | 4,588,001                                   |       | 4,449,680                                  |       | 4,539,559 |   | 4,447,764 |   |
|                                         |       |                                        |       |                                       |       |   |   |   |   |
| Diluted earnings per share                   |       | $                                           | 0.27       |                                       | 0.41       |   | 1.04 |   | 1.22 |   |

 

Note 4:  STOCK OPTION PLANS

 

The Company accounts for stock-based compensationplans under APB Opinion No. 25.  For thestock option program, no compensation cost is recognized in connection with thegranting of stock options with an exercise price equal to the fair market valueof the stock on the date of the grant. For the stock award plan, the Company uses the fixed method ofaccounting and records compensation expense, over the vesting period of thegrant, based upon the fair market value of the stock at the date of grant.  In accordance with the disclosurerequirements of SFAS No. 123, as amended by SFAS No. 148, the following tableprovides the pro forma effect on net income and earnings per share if the fairvalue method of accounting for stock-based compensation had been used for allawards:

 
| ** **                                                                                                                                 | ** ** | **For the  Three Months Ended**

**September  30,** | ** ** | **For the  Nine Months Ended**

**September  30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                                                                 | ** ** | **2004**                                            | ** ** | **2003**                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                                                       |       |                                                |       |                                               |       |   |   |   |   |
| Net income as reported                                                                                                                     |       | $                                                   | 1,218,376  |                                               | 1,820,878  |   | 4,731,098 |   | 5,442,381 |   |
| Add: Stock-based compensation, net of tax, included in the  determination of net income, as reported                                       |       | 8,344                                               |       | 127,281                                            |       | 25,032 |   | 381,843 |   |
| Deduct: Stock-based compensation, net of tax, that would have been  reported if the fair value based method had been applied to all awards |       | (27,831                                             | )          | (245,185                                           | )          | (80,394 | ) | (732,202 | ) |
| Pro forma net income                                                                                                                       |       | $                                                   | 1,198,889  |                                               | 1,702,974  |   | 4,675,736 |   | 5,092,022 |   |
|                                                                                                                                       |       |                                                |       |                                               |       |   |   |   |   |
| Basic earnings per share                                                                                                                   |       |                                                |       |                                               |       |   |   |   |   |
| As reported                                                                                                                                |       | $                                                   | 0.28       |                                               | 0.43       |   | 1.10 |   | 1.29 |   |
| Pro forma                                                                                                                                  |       | 0.28                                                |       | 0.40                                               |       | 1.09 |   | 1.21 |   |
|                                                                                                                                       |       |                                                |       |                                               |       |   |   |   |   |
| Diluted earnings per share                                                                                                                 |       |                                                |       |                                               |       |   |   |   |   |
| As reported                                                                                                                                |       | $                                                   | 0.27       |                                               | 0.41       |   | 1.04 |   | 1.22 |   |
| Pro forma                                                                                                                                  |       | 0.26                                                |       | 0.38                                               |       | 1.03 |   | 1.14 |   |

 

6

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

 

Set forth below are highlights and significant itemsfor the third quarter of 2004:

 

•                                          A $424,000 non-recurring charge wasrecorded related to Computer Dynamics Group, Inc., the Company’s majority-ownedsubsidiary;

•                                          The Bank continues to experience margincompression as a result of the recent interest rate environment, whichmanagement continues to monitor;

•                                          Diluted earnings per share were $0.27 forthe quarter and $0.41 for the comparable prior year period;

•                                          Net income was $1.2 million for thequarter and $1.8 million for the comparable prior year period;

•                                          Return on average equity was 5.99% forthe quarter and 9.45% for the comparable prior year period;

•                                          The quarterly dividend was increased to$0.1550 per share from $0.1525 for the second quarter of 2004.

 

The following analysis discusses changes in thefinancial condition at September 30, 2004 and results of operations for thethree and nine months ended September 30, 2004, and should be read inconjunction with the Company’s Unaudited Consolidated Financial Statements andthe notes thereto, appearing in Part I, Item 1 of this document.

 

**Critical Accounting Policy**

 

The allowance for loan and lease losses is consideredby 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 incorporate 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-Looking Statements**

 

This report contains certain forward-lookingstatements within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended.The Company intends such forward-looking statements to be covered by the safeharbor provisions for forward-looking statements contained in the PrivateSecurities

 

7

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Litigation Reform Act of 1995, and is including this statement forpurposes of these safe harbor provisions. Forward-looking statements, which arebased on certain assumptions and describe future plans, strategies andexpectations of the Company, are generally identified by use of the words “believe,”“expect,” “intend,” “anticipate,” “estimate,” “project,” or similarexpressions. The Company’s ability to predict results or the actual effect offuture plans or strategies is inherently uncertain. Factors which could have amaterial adverse effect on the operations of the Company and its subsidiariesinclude, but are not limited to, changes in: interest rates, general economicconditions, legislative/regulatory changes, monetary and fiscal policies of theU.S. Government, including policies of the U.S. Treasury and the FederalReserve Board, the quality or composition of the loan or investment portfolios,demand for loan products, deposit flows, competition, demand for financialservices in the Company’s market area and accounting principles and guidelines.These risks and uncertainties should be considered in evaluatingforward-looking statements and undue reliance should not be placed on suchstatements. Further information concerning the Company and its business,including additional factors that could materially affect the Company’sfinancial results, is included in the Company’s filings with the SEC, includingits 2003 Annual Report on Form 10-K.

 

The Company does not undertake - and specificallydisclaims any obligation - to publicly release the result of any revisionswhich may be made to any forward-looking statements to reflect events orcircumstances after the date of such statements or to reflect the occurrence ofanticipated or unanticipated events.

 

**Comparison of Financial Condition at September 30,2004 and December 31, 2003**

 

Total assets at September 30, 2004 were $999.0million, which represented an increase of $101.9 million, or 11.4%, compared to$897.1 million at December 31, 2003. The increase in total assets was primarilya result of an increase in net loans receivable of $77.1 million, or 10.8%, to$794.0 million at September 30, 2004 from $716.9 million at December 31,2003.  Of this increase, $69.3 million,or 89.9%, was directly related to commercial loans, which totaled $183.6million at September 30, 2004. Commercial loans totaled $114.3 million at December 31, 2003.  This growth is consistent with management’slong-term strategy for the Bank, which includes branch expansion andcompetitive pricing of deposit accounts in its local market area.  In addition, cash and cash equivalentsincreased $11.7 million, or 53.7%, to $33.6 million at September 30, 2004 from$21.9 million at December 31, 2003, investment securities increased $5.5million, or 6.1%, to $96.2 million at September 30, 2004 from $90.7 million atDecember 31, 2003 and office properties and equipment increased $6.0 million,or 34.3%, to $23.7 million at September 30, 2004 from $17.7 million at December31, 2003, which is primarily due to the Company’s continued branch expansionefforts.  The most recent branch wasopened in September 2004.  Theseincreases were partially offset by a decrease in other assets of $2.2 million,or 78.1%, to $609,000 at September 30, 2004 from $2.8 million at December 31, 2003.  The loan growth was funded by increases indeposits and borrowed money.  Depositsincreased $75.9 million, or 12.7%, to $672.7 million at September 30, 2004 from$596.8 million at December 31, 2003. Borrowed money, primarily representing FHLB advances, increased $20.2million to $232.0 million at September 30, 2004 from $211.8 million at December31, 2003.  Stockholders’ equity increased$4.8 million to $83.2 million at September 30, 2004 from $78.4 million atDecember 31, 2003.  The increase instockholders’ equity was primarily the result of

 

8

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the Company’s net income for the nine months ended September 30, 2004,which was partially offset by stock repurchases totaling $269,000 and dividendspaid of $1.9 million.

 

**Comparison of Operating Results For the ThreeMonths Ended September 30, 2004 and 2003**

 

***General.*** The Company’s net income decreased $603,000, or 33.1%, to $1.2 millionfor the three months ended September 30, 2004 as compared to the prior yearperiod.

 

***InterestIncome.***  Interest income increased $526,000, or 4.7%,to $11.8 million for the three months ended September 30, 2004, compared to thesame period in 2003.  This increaseresulted from an increase in the average balance of interest-earning assets,partially offset by a decrease in the average rate earned on interest-earningassets.  The average yield oninterest-earning assets decreased by 40 basis points to 5.17% for the threemonths ended September 30, 2004 from 5.57% for the three months ended September30, 2003.  The decrease in yield isprimarily due to the lower overall level of interest rates.  The average balance of interest-earningassets increased by $105.6 million, or 12.8%, to $931.4 million for the threemonths ended September 30, 2004 from $825.8 million for the comparable periodin 2003.  This increase resultedprimarily from an increase in the average balance of loans receivable of $105.6million from $685.6 million for the three months ended September 30, 2003 to$791.2 million for the three months ended September 30, 2004.

 

Mortgage loan interest income decreased by $650,000for the three months ended September 30, 2004 compared with the same period in2003.  The average balance of mortgageloans increased $20.3 million to $579.5 million, while the mortgage loan yielddecreased by 66 basis points from 5.91% to 5.25%.  Interest income from other loans increased$1.1 million for the three months ended September 30, 2004.  This increase resulted from a combination ofan increase in average balance of $85.2 million to $211.6 million, partiallyoffset by a 10 basis point decrease in yield from 5.52% for the three monthsended September 30, 2003 to 5.42% for the three months ended September 30,2004.  Of the increase in other loans,$78.8 million is attributed to commercial loans, which increased 79.6%, to$177.8 million for the three months ended September 30, 2004 from $99.0 millionfor the comparable period in 2003. Interest income from investment securities including stock in theFederal Home Loan Bank of Chicago, mortgage-backed securities and short-termdeposits increased $55,000 to $1.4 million for the three months ended September30, 2004, compared with the same period in 2003.  The average balance decreased $22,000 and theyield increased 20 basis points from 4.29% for the three months ended September30, 2003 to 4.49% for the three months ended September 30, 2004.  The average yields are reported on a taxequivalent basis.

 

***InterestExpense. ***Interest expense increased by $614,000,or 11.4%, to $6.0 million for the three months ended September 30, 2004,compared to the same period in 2003. This increase resulted from an increase in the average balance ofinterest-bearing liabilities, offset by a decrease in the average rate paid onthose interest-bearing liabilities.  Theaverage balance of interest-bearing liabilities increased by $107.7 million, or14.6%, to $844.9 million for the three months ended September 30, 2004 from$737.2 million for the three months ended September 30, 2003.  This change reflects a $72.7 million increasein deposit accounts, which is attributable

 

9

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to a $4.1 million increase in passbook savings accounts, a $83.0million increase in certificates of deposit and a $1.9 million increase in NOWaccounts.  These increases were partiallyoffset by a decrease of $16.3 million in money market accounts.  In addition, borrowings increased $34.9million to $225.3 million for the three months ended September 30, 2004 from$190.4 million for the comparable period in 2003.  The average rate paid on combined depositsand borrowed money decreased by 8 basis points to 2.84% for the three monthsended September 30, 2004 from 2.92% for the three months ended September 30,2003.

 

***NetInterest Income Before Provision for Loan Losses.*** Net interest income before provision for loan losses decreased $88,000,or 1.5%, to $5.8 million for the three months ended September 30, 2004 from$5.9 million for the comparable period in 2003. The average balance of interest-earning assets increased $105.6 millionfor the three months ended September 30, 2004 compared to the comparable prioryear period.  The increase ininterest-earning assets was primarily the result of increases in the averagebalance of mortgage loans of $20.3 million, $8.5 million in investmentsecurities and an $85.2 million increase in other loans.  These increases were partially offset by an$8.1 million decrease in cash and cash equivalents and a $1.3 million decreasein mortgage-backed securities.  The taxequivalent net interest margin as a percent of interest-earning assetsdecreased by 36 basis points to 2.60% for the three months ended September 30,2004 from 2.96% for the comparable period in 2003.  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 2004.  Increasing the net interestmargin is dependent on the Bank’s ability to generate higher-yielding assetsand lower-cost deposits.  Managementcontinues to closely monitor the net interest margin.

 

***Provisionfor Loan Losses.***  The provision for loan losses increased by$70,000, to $210,000 for the three months ended September 30, 2004 from$140,000 in 2003.  The increase in theprovision for loan losses is primarily due to the increased risk in the loanportfolio based on a greater emphasis placed on commercial lending, which isgenerally considered to involve a higher degree of risk.  At September 30, 2004, December 31, 2003 andSeptember 30, 2003, non-performing loans totaled $2.5 million, $2.8 million and$2.9 million, respectively.  At September30, 2004, the ratio of the allowance for loan losses to non-performing loanswas 168.2% compared to 135.7% at December 31, 2003 and 126.1% at September 30,2003.  The ratio of the allowance tototal loans was 0.54%, 0.52% and 0.51%, at September 30, 2004, December 31,2003 and September 30, 2003, respectively. Charge-offs for the three months ended September 30, 2004 totaled$3,000.  There were no charge-offs forthe three months ended September 30, 2003. Management periodically performs an allowance sufficiency analysis basedupon the portfolio composition, asset classifications, loan-to-value ratios,probable impairments in the loan portfolio, and other factors.

 

***NoninterestIncome. ***Noninterest income totaled $1.3 millionand $1.5 million for the three months ended September 30, 2004 and 2003,respectively.  The decrease innoninterest income is primarily attributable to decreases of $290,000 in gainon sale of securities and $71,000 in revenues generated by Computer DynamicsGroup, Inc. (“CDGI”).  The decrease inincome generated by CDGI is largely due to a decrease in sales related to aweaker demand for CDGI’s services.  Thesedecreases were partially offset by increases of $222,000 in service fees,

 

10

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$15,000 in insurance and brokerage commissions and $16,000 in gain onsale of loans.  Service fees increasedprimarily due to the growth in the number of deposit accounts.

 

***NoninterestExpense. ***Noninterest expense increased $779,000,to $5.3 million for the three months ended September 30, 2004 from $4.6 millionfor the comparable period in 2003.  Ofthis increase, $424,000 was due to a non-recurring charge related to theCompany’s majority-owned subsidiary CDGI. The Company was informed in October of the bankruptcy filing of itsminority partner in CDGI.  Accordingly, areceivable from the minority owner totaling $265,000 was written-off.  Additionally, upon notification of thebankruptcy, the Company recorded its investment in CDGI as a wholly-ownedsubsidiary, which resulted in a $159,000 charge to expense to eliminate theminority interest.  In addition, expensesrelating to professional audit and outsourced internal audit fees increased$59,000, advertising increased $90,000 and data processing expenses increased$65,000 from the comparable period in 2003. Management continues to emphasize the importance of expense managementand control while continuing to provide expanded banking services to a growingmarket base.

 

***IncomeTax Expense. ***Income tax expense totaled $351,000 and$889,000 for the three months ended September 30, 2004 and 2003,respectively.  The decrease in income taxexpense was primarily the result of a decrease in income before income taxesand minority interest of $1.1 million to $1.6 million for three months endedSeptember 30, 2004 from $2.7 million for the comparable prior year period.  The effective tax rate was 22.4% and 32.9%for the three months ended September 30, 2004 and 2003, respectively.  The decrease in the effective tax rate is dueto tax benefits received from the exercise of nonqualified stock options,increases in bank owned life insurance and municipal securities, for which therelated income is non-taxable.

 

**Comparison of Operating Results For the NineMonths Ended September 30, 2004 and 2003**

 

***General.*** The Company’s net income decreased $711,000, or 13.1%, to $4.7 millionfor the nine months ended September 30, 2004 as compared to the prior yearperiod.

 

***InterestIncome.***  Interest income increased $206,000, or 1.0%,to $34.5 million for the nine months ended September 30, 2004, compared to thesame period in 2003.  This increaseresulted from an increase in the average balance of interest-earning assets,partially offset by a decrease in the average rate earned on interest-earningassets.  The average balance ofinterest-earning assets increased by $101.7 million, or 12.9%, to $892.6million for the nine months ended September 30, 2004 from $790.9 million forthe comparable period in 2003.  Thisincrease resulted primarily from an increase in the average balance of loansreceivable of $105.6 million from $650.1 million for the nine months endedSeptember 30, 2003 to $755.7 million for the nine months ended September 30,2004.  The average yield oninterest-earning assets decreased by 67 basis points to 5.22% for the ninemonths ended September 30, 2004 from 5.89% for the nine months ended September30, 2003

 

Mortgage loan interest income decreased by $2.2million for the nine months ended September 30, 2004 compared with the sameperiod in 2003.  The average balance ofmortgage loans increased $30.2 million, while the mortgage loan yield decreasedby 85 basis points from

 

11

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6.27% to 5.42%.  Interest incomefrom other loans increased $2.6 million for the nine months ended September 30,2004.  This increase resulted from acombination of an increase in the average balance of $75.4 million, partiallyoffset by a 50 basis point decrease in yield from 5.78% for the nine monthsended September 30, 2003 to 5.28% for the nine months ended September 30,2004.  Of the increase in other loans,$68.7 million is attributed to commercial loans, which increased 82.4%, to$152.1 million for the nine months ended September 30, 2004 from $83.4 millionfor the comparable period in 2003. Interest income from investment securities including stock in theFederal Home Loan Bank of Chicago, mortgage-backed securities and short-termdeposits decreased $147,000 to $4.0 million for the nine months ended September30, 2004, compared with the same period in 2003.  The average balance decreased $3.8 millionand the yield decreased 21 basis points from 4.49% for the nine months endedSeptember 30, 2003 to 4.28% for the nine months ended September 30, 2004.  The average yields are reported on a taxequivalent basis.

 

***InterestExpense. ***Interest expense increased $614,000, or3.8%, to $16.8 million for the nine months ended June 30, 2004 compared to thesame period in 2003.  There was anincrease in the average balance of interest-bearing liabilities, and a decreasein the average rate paid on those interest-bearing liabilities for the ninemonths ended September 30, 2004 from the nine months ended September 30,2003.  The average balance ofinterest-bearing liabilities increased by $100.9 million, or 14.3%, to $806.3million for the nine months ended September 30, 2004 from $705.4 million forthe nine months ended September 30, 2003. This change reflects a $75.3 million increase in deposit accounts, whichis attributable to a $14.1 million increase in passbook savings accounts, a$65.3 million increase in certificates of deposit and a $4.0 million increasein NOW accounts.  These increases werepartially offset by a decrease of $8.1 million in money market accounts.  In addition, borrowings increased $25.5million to $209.9 million for the nine months ended September 30, 2004 from$184.4 million for the comparable period in 2003.  The average rate paid on combined depositsand borrowed money decreased by 28 basis points to 2.78% for the nine monthsended September 30, 2004 from 3.06% for the nine months ended September 30,2003.

 

***NetInterest Income Before Provision for Loan Losses.*** Net interest income before provision for loan losses decreased $408,000,or 2.3%, to $17.7 million for the nine months ended September 30, 2004 from$18.1 million for the comparable period in 2003.  The average balance of interest-earningassets increased $101.8 million for the nine months ended September 30, 2004compared to the comparable prior year period. The increase in interest-earning assets was primarily the result ofincreases in the average balance of mortgage loans of $30.2 million and a $75.4million increase in other loans.  Theseincreases were partially offset by a $3.7 million decrease in mortgage-backedsecurities.  The tax equivalent netinterest margin as a percent of interest-earning assets decreased by 45 basispoints to 2.71% for the nine months ended September 30, 2004 from 3.16% for thecomparable period in 2003.  The Bankcontinues to experience margin compression as a result of the recent interestrate environment and efforts to reduce interest rate risk.  These efforts included the sale ofapproximately $32.7 million of fixed rate mortgage loans in 2004.  Increasing the net interest margin isdependent on the Bank’s ability to generate higher-yielding assets andlower-cost deposits.  Managementcontinues to closely monitor the net interest margin.

 

12

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***Provisionfor Loan Losses.***  The provision for loan losses increased by$87,000, to $550,000 for the nine months ended September 30, 2004 from $463,000in 2003.  The increase in the provisionfor loan losses is primarily due to the increased risk in the loan portfoliobased on a greater emphasis placed on commercial lending, which is generallyconsidered to involve a higher degree of risk. At September 30, 2004, December 31, 2003 and September 30, 2003,non-performing loans totaled $2.5 million, $2.8 million and $2.9 million,respectively.  At September 30, 2004, theratio of the allowance for loan losses to non-performing loans was 168.2%compared to 135.7% at December 31, 2003 and 126.1% at September 30, 2003.  The ratio of the allowance to total loans was0.54%, 0.52% and 0.51%, at September 30, 2004, December 31, 2003 and September30, 2003, respectively.  Charge-offs forthe nine months ended September 30, 2004 totaled $18,000.  There were no charge-offs for the nine monthsended September 30, 2003.  Managementperiodically performs an allowance sufficiency analysis based upon theportfolio composition, asset classifications, loan-to-value ratios, probableimpairments in the loan portfolio, and other factors.

 

***NoninterestIncome. ***Noninterest income totaled $4.4 millionand $4.2 million for the nine months ended September 30, 2004 and 2003,respectively. The increase in noninterest income is primarily attributable toincreases of $525,000 in service fees, $243,000 in insurance and brokeragecommissions, $149,000 in gain on sale of property, which was a buildingpreviously occupied by the Bank and $122,000 in gain on sale of loans.  Service fees increased primarily due to thegrowth in number of deposit accounts. Insurance and brokerage commissions increased primarily due to thehiring of three additional salespeople during the third quarter of 2003.  These increases were partially offset bydecreases of $332,000 in revenues generated by CDGI and $567,000 in gain onsale of securities.  The decrease in incomegenerated by CDGI is largely due to a decrease in sales related to a weakerdemand for CDGI’s services.

 

***NoninterestExpense. ***Noninterest expense increased $1.3million, to $15.1 million for the nine months ended September 30, 2004 from$13.8 million for the comparable period in 2003.  As previously discussed, $424,000 of the increaseis due to a non-recurring charge related to the Company’s majority-ownedsubsidiary CDGI.  In addition, $274,000was directly related to compensation and benefits, $156,000 is related to dataprocessing, $168,000 is related to advertising and $162,000 is related toprofessional audit and outsourced internal audit fees.  The increase in compensation and benefits isprimarily due to a combination of annual salary increases and the addition ofstaff.  Management continues to emphasizethe importance of expense management and control while continuing to provideexpanded banking services to a growing market base.

 

***IncomeTax Expense. ***Income tax expense totaled $1.7 millionand $2.8 million for the nine months ended September 30, 2004 and 2003,respectively.  The decrease in income taxexpense was primarily the result of a decrease in income before income taxesand minority interest of $1.6 million to $6.5 million for nine months endedSeptember 30, 2004 from $8.1 million for the comparable prior year period.  The effective tax rate was 26.8% and 34.0%for the nine months ended September 30, 2004 and 2003, respectively.  The decrease in the effective tax rate is dueto tax benefits received from the exercise of nonqualified stock options,increases in bank owned life insurance and municipal securities, for which therelated income is non-taxable.

 

13

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**Liquidity and Capital Resources**

 

The Company’s primary sourceof funding for dividends and periodic stock repurchases have been dividendsfrom the Bank.  The Bank’s ability to paydividends and other capital distributions to the Company is generally limitedby the Office of Thrift Supervision regulations.

 

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

 

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

 

In addition to the primary investing activities of theBank, the Company has repurchased shares of its common stock from time to timein the open market.  As of September 30,2004, the Company repurchased a total of 3,087,081 shares of the Company’scommon stock at an average priceper share of $12.11 since becoming a public company in 1998.  There currently is no formal repurchase planin place and there were no shares repurchased during the three months endedSeptember 30, 2004.

 

The Bank’s most liquid assets are cash andinterest-bearing demand accounts. The levels of these assets are dependent onthe Bank’s operating, financing, lendingand investing activities during any given period.  At September 30, 2004, cash andinterest-bearing demand accounts totaled $33.6 million, or 3.4% of totalassets.

 

See the “Consolidated Statements of Cash Flows” in theUnaudited Consolidated Financial Statements included in this Form 10-Q for thesources and uses of cash flowsfor operating, investing and financing activities for the nine months endedSeptember 30, 2004 and 2003.

 

At September 30, 2004, the Bank exceeded all of itsregulatory capital requirements. The following is a summary of the Bank’sregulatory capital ratios at September30, 2004:

 

14

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| ** **                               | ** ** | **Actual** | ** ** | **For capital adequacy**

**purposes** | ** ** | **To be well capitalized under**

**prompt corrective action** | ** ** |
|------------------------------------------|------------|------------|------------|----------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                               | ** ** | **Amount** | ** ** | **Ratio**                              | ** ** | **Amount**                                                     | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| September 30, 2004:                      |       |       |       |                                   |       |                                                           |       |   |   |   |   |   |   |
| Total capital (to risk weighted assets)  |       | $          | 78,126,000 |                                   | 10.83      | %                                                              | $          | 57,704,000 |   | 8.0 | % | $ | 72,130,000 |   | 10.0 | % |
| Tier I capital (to risk weighted assets) |       | 76,844,000 |       | 10.65                                  |       | 28,852,000                                                     |       | 4.0 |   | 43,278,000 |   | 6.0 |   |
| Tier I capital (to average assets)       |       | 76,844,000 |       | 7.79                                   |       | 39,470,000                                                     |       | 4.0 |   | 49,338,000 |   | 5.0 |   |
|                                          |            |            |            |                                        |            |                                                                |            |  |  |  |  |  |  |  |  |  |

 

At September 30, 2004, the Company had a Total Capitalto Total Assets ratio of 8.33%.

 

On September 15, 2004, the Company announced its thirdquarter dividend of $0.1550 per share. The dividend was paid on October 12, 2004 to stockholders of record onSeptember 30, 2004.

 

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

 

The Bank is party to financial instruments withoff-balance sheet risk in the normal course of business to meet the financingneeds of its customers.  Those financialinstruments primarily include commitments to extend credit.  Commitments to extend credit are agreementsto lend to a customer so long as there is no violation of any conditionestablished in the contract. The Bank evaluates each customer’screditworthiness on a case-by-case basis. The amount of collateral obtained is based on management’s creditevaluation of the customer.  The Bank’sexposure to credit loss in the event of nonperformance by the customer isrepresented by the contractual amount of those financial instruments.  The commitments to originate first mortgageloans represent amounts, which the Bank plans to fund within a period of 30 to90 days.

 

The Bank’s approved, but unused lines of credit arebased on underwriting standards that allow total borrowings, including theequity line of credit to exceed 80% of the current appraised value of thecustomer’s residence.  However, the Bankcharges a 1% higher interest rate on home equity lines of credit up to 90% ofthe home’s current appraised value.

 

The Bank’s standby letters of credit are conditionalcommitments issued by the Bank to guarantee performance of a customer to athird party.  The credit risk involved inthese transactions is essentially the same as that involved in extending a loanto a customer 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, which are not considered material.  The maximum risk of accounting loss for theseitems, which is represented by the total commitment outstanding, totaled $13.9million at September 30, 2004.

 

15

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At September 30, 2004 and December 31, 2003, the bank had the followingcommitments to extend credit:

 
| ** **                | ** ** | **September 30,**

**2004** | ** ** | **December 31,**

**2003** | ** ** |
|---------------------------|------------|-----------------------------|------------|----------------------------|------------|
| First mortgage loans      |       | $                           | 6,208,000  |                       | $          | 7,306,000 |   |
| Construction loans        |       | 2,080,000                   |       | 4,210,000                  |       |
| Unused lines of credit    |       | 34,985,000                  |       | 42,342,000                 |       |
| Standby letters of credit |       | 13,913,000                  |       | 5,434,000                  |       |
|                           |            |                             |            |                            |            |  |  |

 

**Contractual Obligations**

 

The Bank has certain obligationsand commitments to make future payments under contract.  There has been no material change incontractual obligations from December 31, 2003.

 

**Recent Accounting Pronouncements**

 

In December 2003, the American Institute of CertifiedPublic 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 is not expected tohave a material impact on the Company’s consolidated financial statements.

 

In March 2004, the FASB reached a consensus on EITF03-1,  “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 and whether the impairment is otherthan temporary.  EITF 03-1 alsoincorporates into its consensus the required disclosures about unrealizedlosses on investments announced by the EITF in late 2003 and adds newdisclosure requirements relating to cost-method investments.  The impairment accounting guidance was tobecome effective for reporting periods beginning after June 15, 2004.  The new disclosure requirements are effectivefor annual reporting periods after June 15, 2004.  In September 2004, the FASB delayed theeffective date of EITF 03-1 for measurement and recognition of impairmentlosses until implementation guidance is issued. We do not expect the adoption of the impairment guidance contained inEITF 03-1 to have a material impact on our financial position or results ofoperations.

 

16

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**Average Balance Sheet**

 

The following tables setforth certain information relating to the Bank for the three and nine monthsended September 30, 2004 and 2003, 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 $211,000 and $195,000 for the three months ended September30, 2004 and 2003 and $413,000 and $610,000 for the nine months ended September30, 2004 and 2003, respectively.

 
| ** **                                                       | ** ** | **Three  Months Ended**

**September  30, 2004** | ** ** | **Three  Months Ended**

**September  30, 2003** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                               | ** ** | **Average**

**Balance**                         | ** ** | **Interest**                                     | ** ** | **Yield/Cost** | ** ** | **Average**

**Balance** | ** ** | **Interest** | ** ** | **Yield/Cost** | ** ** |
| Assets:                                                          |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Interest earning assets:                                         |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Short-term deposits and FHLB stock                               |       | $37,386                                          |       | 223                                              |       | 2.39 | % | 44,510 |   | 202 |   | 1.82 | % |
| Investment securities                                            |       | 91,653                                           |       | 1,253                                            |       | 5.47 | % | 83,181 |   | 1,195 |   | 5.75 | % |
| Mortgage-backed securities                                       |       | 11,209                                           |       | 98                                               |       | 3.50 | % | 12,534 |   | 107 |   | 3.41 | % |
| Mortgage loans                                                   |       | 579,520                                          |       | 7,609                                            |       | 5.25 | % | 559,186 |   | 8,259 |   | 5.91 | % |
| Other loans                                                      |       | 211,637                                          |       | 2,866                                            |       | 5.42 | % | 126,390 |   | 1,745 |   | 5.52 | % |
| Total interest earning assets                                    |       | 931,405                                          |       | 12,049                                           |       | 5.17 | % | 825,801 |   | 11,508 |   | 5.57 | % |
| Noninterest earning assets                                       |       | 58,224                                           |       |                                             |       |   |   | 51,559 |   |   |   |   |   |
| Total assets                                                     |       | $989,629                                         |       |                                             |       |   |   | 877,360 |   |   |   |   |   |
| Liabilities and stockholders’ equity                        |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities                                     |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Deposits:                                                        |       |                                             |       |                                             |       |   |   |   |   |   |   |   |   |
| Money market accounts                                            |       | $131,786                                         |       | 547                                              |       | 1.66 | % | 148,128 |   | 642 |   | 1.73 | % |
| Passbook savings accounts                                        |       | 129,961                                          |       | 467                                              |       | 1.44 | % | 125,827 |   | 462 |   | 1.47 | % |
| NOW Accounts                                                     |       | 38,890                                           |       | 48                                               |       | 0.49 | % | 36,991 |   | 68 |   | 0.74 | % |
| Certificates of deposit                                          |       | 318,903                                          |       | 2,330                                            |       | 2.92 | % | 235,894 |   | 1,846 |   | 3.13 | % |
| Total deposits                                                   |       | 619,540                                          |       | 3,392                                            |       | 2.19 | % | 546,840 |   | 3,018 |   | 2.21 | % |
| FHLB Advances                                                    |       | 225,333                                          |       | 2,612                                            |       | 4.64 | % | 190,366 |   | 2,372 |   | 4.98 | % |
| Total interest-bearing liabilities                               |       | 844,873                                          |       | 6,004                                            |       | 2.84 | % | 737,206 |   | 5,390 |   | 2.92 | % |
| Noninterest-bearing liabilities                                  |       | 63,426                                           |       |                                             |       |   |   | 63,048 |   |   |   |   |   |
| Total liabilities                                                |       | 908,299                                          |       |                                             |       |   |   | 800,254 |   |   |   |   |   |
| Total stockholders’ equity                                  |       | 81,330                                           |       |                                             |       |   |   | 77,106 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                  |       | $989,629                                         |       |                                             |       |   |   | 877,360 |   |   |   |   |   |
| Net interest income before provision for loan losses             |       |                                             |       | 6,045                                            |       |   |   |   |   | 6,118 |   |   |   |
| Interest rate spread                                             |       |                                             |       |                                             |       | 2.33 | % |   |   |   |   | 2.65 | % |
| Net interest margin as a percent of interest earning assets      |       |                                             |       |                                             |       | 2.60 |   |   |   |   |   | 2.96 | % |
| Ratio of interest-earning assets to interest-bearing liabilities |       |                                             |       |                                             |       | 110.24 | % |   |   |   |   | 112.02 | % |

 

17

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| ** **                                                       | ** ** | **Nine  Months Ended**

**September  30, 2004** | ** ** | **Nine  Months Ended**

**September  30, 2003** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands)**                                               | ** ** | **Average**

**Balance**                        | ** ** | **Interest**                                    | ** ** | **Yield/Cost** | ** ** | **Average**

**Balance** | ** ** | **Interest** | ** ** | **Yield/Cost** | ** ** |
| Assets:                                                          |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Interest earning assets:                                         |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Short-term deposits and FHLB stock                               |       | $                                               | 38,806     |                                            | 633        |   | 2.17 | % | 38,511 |   | 536 |   | 1.86 | % |
| Investment securities                                            |       | 87,121                                          |       | 3,463                                           |       | 5.30 | % | 87,528 |   | 3,789 |   | 5.77 | % |
| Mortgage-backed securities                                       |       | 11,001                                          |       | 302                                             |       | 3.66 | % | 14,728 |   | 415 |   | 3.76 | % |
| Mortgage loans                                                   |       | 571,123                                         |       | 23,220                                          |       | 5.42 | % | 540,907 |   | 25,449 |   | 6.27 | % |
| Other loans                                                      |       | 184,574                                         |       | 7,313                                           |       | 5.28 | % | 109,193 |   | 4,732 |   | 5.78 | % |
| Total interest earning assets                                    |       | 892,625                                         |       | 34,931                                          |       | 5.22 | % | 790,867 |   | 34,921 |   | 5.89 | % |
| Noninterest earning assets                                       |       | 54,947                                          |       |                                            |       |   |   | 46,369 |   |   |   |   |   |
| Total assets                                                     |       | $                                               | 947,572    |                                            |       |   |   |   | 837,236 |   |   |   |   |   |
| Liabilities and stockholders’ equity                        |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities                                     |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Deposits:                                                        |       |                                            |       |                                            |       |   |   |   |   |   |   |   |   |
| Money market accounts                                            |       | $                                               | 138,394    |                                            | 1,675      |   | 1.61 | % | 146,530 |   | 2,103 |   | 1.91 | % |
| Passbook savings accounts                                        |       | 131,075                                         |       | 1,370                                           |       | 1.39 | % | 116,937 |   | 1,419 |   | 1.62 | % |
| NOW Accounts                                                     |       | 39,393                                          |       | 145                                             |       | 0.49 | % | 35,344 |   | 210 |   | 0.80 | % |
| Certificates of deposit                                          |       | 287,563                                         |       | 6,243                                           |       | 2.89 | % | 222,261 |   | 5,506 |   | 3.30 | % |
| Total deposits                                                   |       | 596,425                                         |       | 9,433                                           |       | 2.11 | % | 521,072 |   | 9,238 |   | 2.36 | % |
| FHLB Advances                                                    |       | 209,900                                         |       | 7,370                                           |       | 4.68 | % | 184,367 |   | 6,951 |   | 5.03 | % |
| Total interest-bearing liabilities                               |       | 806,325                                         |       | 16,803                                          |       | 2.78 | % | 705,439 |   | 16,189 |   | 3.06 | % |
| Noninterest-bearing liabilities                                  |       | 60,523                                          |       |                                            |       |   |   | 55,765 |   |   |   |   |   |
| Total liabilities                                                |       | 866,848                                         |       |                                            |       |   |   | 761,204 |   |   |   |   |   |
| Total stockholders’ equity                                  |       | 80,724                                          |       |                                            |       |   |   | 76,032 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                  |       | $                                               | 947,572    |                                            |       |   |   |   | 837,236 |   |   |   |   |   |
| Net interest income before provision for loan losses             |       |                                            |       | 18,128                                          |       |   |   |   |   | 18,732 |   |   |   |
| Interest rate spread                                             |       |                                            |       |                                            |       | 2.44 | % |   |   |   |   | 2.83 | % |
| Net interest margin as a percent of interest earning assets      |       |                                            |       |                                            |       | 2.71 | % |   |   |   |   | 3.16 | % |
| Ratio of interest-earning assets to interest-bearing liabilities |       |                                            |       |                                            |       | 110.70 | % |   |   |   |   | 112.11 | % |

 

18

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Item 3.    Quantitativeand Qualitative Disclosures About Market Risk.

 

The Bank’s interest rate sensitivity is monitored bymanagement through the use of a Net Portfolio Value Model which generatesestimates of the change in the Bank’s net portfolio value (“NPV”) over a rangeof interest rate scenarios.  NPV is thepresent value of expected cash flows from assets, liabilities, and off-balancesheet contracts.  The NPV ratio, underany interest rate scenario, is defined as the NPV in that scenario divided bythe market value of assets in the same scenario.  The model assumes estimated prepayment rates,reinvestment rates and deposit decay rates. The Sensitivity Measure is the decline in the NPV ratio, in basispoints, caused by a 3% increase or 1% decrease in rates, whichever produces alarger decline.  The higher theinstitution’s Sensitivity Ratio, the greater its exposure to interest rate riskis considered to be.  The following NPVTable sets forth the Bank’s NPV as of September 30, 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                                                   |       | $                        | 47,284     |                                             | $          | (32,584 | ) | (40.80 | )% | 4.85 | % | (38.45 | )% |
| +200                                                   |       | 59,533                   |       | (20,335                                          | )          | (25.46 | ) | 6.03 |   | (23.48 | ) |
| +100                                                   |       | 73,453                   |       | (6,415                                           | )          | (8.03 | ) | 7.33 |   | (6.98 | ) |
| Static                                                 |       | 79,868                   |       | —                                           |       | — |   | 7.88 |   | — |   |
| -100                                                   |       | 77,201                   |       | (2,667                                           | )          | (3.34 | ) | 7.59 |   | (3.68 | ) |
|                                                        |            |                          |            |                                                  |            |  |  |  |  |  |  |  |  |

 

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

 

Item 4.    Controlsand Procedures

 

The Company’s management, including the Company’sprincipal executive officer and principal financial officer, have evaluated theeffectiveness of the Company’s “disclosure controls and procedures,” as suchterm is defined in Rule 13a-15(e) promulgated under the Securities Exchange Actof 1934, as amended, (the “Exchange Act”). Based upon their

 

19

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evaluation, the principal executive officer and principal financialofficer concluded that, as of the end of the period covered by this report, theCompany’s disclosure controls and procedures were effective for the purpose ofensuring that the information required to be disclosed in the reports that theCompany files or submits under the Exchange Act with the Securities andExchange Commission (the “SEC”) (1) is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms, and(2) is accumulated and communicated to the Company’s management, including itsprincipal executive and principal financial officers, as appropriate to allowtimely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’sinternal control over financial reporting occurred during the quarter endedSeptember 30, 2004 that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

20

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**PART II.  OTHER INFORMATION**

 

Item 1.                                                             Legal Proceedings.

 

The Company is not involved in any pending legal proceedingsother than routine legal proceedings occurring in the ordinary course ofbusiness.  Such routine legalproceedings, in the aggregate, are believed by management to be immaterial tothe Company’s financial condition, results of operations and cash flows.

 

Item 2.                                                             Unregistered Sales of Equity Securities and Use ofProceeds.

 

None.

 

Item 3.                                                             Defaults Upon Senior Securities.

 

None.

 

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

 

None.

 

Item 5.                                                             Other Information.

 

None.

 

Item 6.                                                             Exhibits

 

(a)                                  Exhibits

 
| 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. *                                                                                                |
| 10.1 |   | The EFS Bank Supplemental Executive Retirement  Agreement between EFS Bank and Randy C. Blackburn (filed herewith)                               |
| 10.2 |   | The EFS Bank Supplemental Executive Retirement  Agreement between EFS Bank and Eric J. Wedeen (filed herewith)                                   |
| 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 theExhibits filed with the Registration Statement on Form S-1 and any amendmentsthereto. Initially filed with the Securities and Exchange Commission (“SEC”) onOctober 24, 1997.

 

21

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned hereunto duly authorized.

 

 
|   | EFC BANCORP, INC.                                                                                                |
|--------|------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                             |
|   |                                                                                                             |
| Dated: | November 12, 2004                                                                                                |   | By: | /s/ Barrett J. O’Connor |   |
|   | Barrett J. O’Connor

Chief Executive Officer

(Principal executive officer)                                 |
|   |                                                                                                             |
| Dated: | November 12, 2004                                                                                                |   | By: | /s/ Eric J. Wedeen |   |
|   | Eric J. Wedeen

Senior Vice President and Chief

Financial Officer

(Principal financial and accounting officer) |

 

22

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