**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.20549**

 

**FORM 10-Q**

 

**(Mark One)**
| **ý**                                                                                                                                                                                                                                                                                                                            | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                  |                                                                                          |   |
| **For the quarterly period ended June 30, 2003**                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                  |                                                                                          |   |
| **or**                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                                                                  |                                                                                          |   |
| **o**                                                                                                                                                                                                                                                                                                                                 | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                                  |                                                                                          |   |
| **For the transition period  from                        to                        ** |

 

**Commission FileNumber 1-13605**

 
| **EFC BANCORP, INC.**                                                               |
|-------------------------------------------------------------------------------------|
| (Exact name of registrant as specified in its charter)                              |
|                                                                                |
| **Delaware**                                                                        |   | **36-4193304** |
| (State or other jurisdiction of incorporation or organization)                      |   | (I.R.S. Employer  Identification No.) |
|                                                                                |   |   |
| **1695 Larkin Avenue, Elgin, Illinois**                                             |   | **60123** |
| (Address of principal executive offices)                                            |   | (Zip Code) |
|                                                                                |
| **(847) 741-3900**                                                                  |
| (Registrant’s telephone  number, including area code)                          |
|                                                                                |
| **Not Applicable**                                                                  |
| (Former name, former address and former fiscal year, if changed since  last report) |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.
| Yes ý |   | No o |
|------------|--------|------|

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date: 4,574,799 shares of common stock, par value$0.01 per share, were outstanding as of August 12, 2003.

 

 

----

 

EFC Bancorp, Inc.

 

Form 10-Q

 

For the Quarter Ended June 30, 2003

 

INDEX

 
| PART I.    | FINANCIAL INFORMATION                                                                               |
|------------|-----------------------------------------------------------------------------------------------------|
|       |                                                                                                |
| Item 1.    | Financial Statements (unaudited)                                                                    |
|       |                                                                                                |
|       | Consolidated Balance Sheets at  June 30, 2003 and December 31, 2002                       |
|       |                                                                                                |
|       | Consolidated Statements of Income - For the  Three and Six Months Ended June 30, 2003 and 2002 |
|       |                                                                                                |
|       | Consolidated Statements of Cash Flows - For  the Six Months Ended June 30, 2003 and 2002       |
|       |                                                                                                |
|       | 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.    | Changes in 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 and Reports on Form 8-K                                                                    |
|       |
| SIGNATURES |

 

----

 

**PARTI. FINANCIAL INFORMATION**

**EFC BANCORP, INC.**

** **

Item 1.Financial Statements.

**EFCBANCORP, INC.AND SUBSIDIARIES**

ConsolidatedBalance Sheets (unaudited)

June 30, 2003 and December 31, 2002

 
|                                                                                                                                      |   | **June 30,  2003** |        | **December 31,  2002** |        |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-------------|-----------------------------|-------------|
| Assets                                                                                                                                    |   |                    |        |                        |        |
| Cash and cash equivalents:                                                                                                                |   |                    |        |                        |        |
| On hand and in banks                                                                                                                      |   | $                       | 2,823,092   |                        | 4,277,209   |   |
| Interest bearing deposits with financial institutions                                                                                     |   | 44,659,112              |        | 28,567,081                  |        |
| Loans receivable, net                                                                                                                     |   | 653,694,011             |        | 597,048,785                 |        |
| Mortgage-backed securities available-for-sale, at fair value                                                                              |   | 14,049,805              |        | 15,255,684                  |        |
| Investment securities available-for-sale, at fair value                                                                                   |   | 89,654,075              |        | 87,981,884                  |        |
| Foreclosed real estate                                                                                                                    |   | 39,109                  |        | 1,985,741                   |        |
| Stock in Federal Home Loan Bank of Chicago, at cost                                                                                       |   | 10,535,000              |        | 9,362,200                   |        |
| Accrued interest receivable                                                                                                               |   | 3,888,898               |        | 3,887,410                   |        |
| Office properties and equipment, net                                                                                                      |   | 17,217,636              |        | 16,796,685                  |        |
| Real estate held for development                                                                                                          |   | 3,418,387               |        | 2,934,072                   |        |
| Bank owned life insurance                                                                                                                 |   | 17,568,625              |        | 12,246,803                  |        |
| Other assets                                                                                                                              |   | 1,420,640               |        | 2,032,372                   |        |
|                                                                                                                                      |   |                    |        |                        |        |
| Total assets                                                                                                                              |   | $                       | 858,968,390 |                        | 782,375,926 |   |
|                                                                                                                                      |   |                    |        |                        |        |
| Liabilities  and Stockholders’ Equity                                                                                                |   |                    |        |                        |        |
| Liabilities:                                                                                                                              |   |                    |        |                        |        |
| Deposits                                                                                                                                  |   | $                       | 559,382,643 |                        | 524,189,844 |   |
| Borrowed money                                                                                                                            |   | 210,802,569             |        | 171,778,743                 |        |
| Accrued expenses, income taxes payable and other liabilities                                                                              |   | 12,092,407              |        | 11,705,771                  |        |
|                                                                                                                                      |   |                    |        |                        |        |
| Total liabilities                                                                                                                         |   | 782,277,619             |        | 707,674,358                 |        |
|                                                                                                                                      |   |                    |        |                        |        |
| Minority interest                                                                                                                         |   | (145,777                | )           | (75,127                     | )           |
|                                                                                                                                      |   |                    |        |                        |        |
| 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                                                                                                                |   | 71,918,198              |        | 71,834,834                  |        |
| Retained earnings, substantially restricted                                                                                               |   | 44,349,458              |        | 41,911,421                  |        |
| Treasury stock, at cost, 2,903,635 and 2,854,293 shares at  June 30, 2003 and December 31, 2002, respectively                   |   | (35,495,850             | )           | (33,755,940                 | )           |
| Unearned employee stock ownership plan (ESOP), 379,567 and 399,544  shares at June 30, 2003 and December 31, 2002, respectively |   | (5,675,490              | )           | (5,974,199                  | )           |
| Unearned stock award plan, 28,908 and 51,790 shares at June 30,  2003 and December 31, 2002, respectively                       |   | (321,602                | )           | (576,164                    | )           |
| Accumulated other comprehensive income                                                                                                    |   | 1,986,920               |        | 1,261,829                   |        |
|                                                                                                                                      |   |                    |        |                        |        |
| Total stockholders’ equity                                                                                                           |   | 76,836,548              |        | 74,776,695                  |        |
|                                                                                                                                      |   |                    |        |                        |        |
| Commitments and contingencies                                                                                                             |   | —                  |        | —                      |        |
|                                                                                                                                      |   |                    |        |                        |        |
| Total liabilities and stockholders’ equity                                                                                           |   | $                       | 858,968,390 |                        | 782,375,926 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

1

----

 

**EFCBANCORP, INC.**

**ANDSUBSIDIARIES**

 

Consolidated Statements ofIncome (unaudited)

For the three and six months ended June 30,2003 and 2002

 
|                                                                                                |   | **Three  months ended  June 30,** |      | **Six months  ended  June 30,** |      |
|-----------------------------------------------------------------------------------------------------|--------|----------------------------------------|-----------|--------------------------------------|-----------|
|                                                                                                |   | **2003**                               |      | **2002**                             |      | **2003** |   | **2002** |   |
|                                                                                                |   |                                   |      |                                 |      |   |   |   |   |
| Interest income:                                                                                    |   |                                   |      |                                 |      |   |   |   |   |
| Loans secured by real estate                                                                        |   | $                                      | 8,576,037 |                                 | 8,598,090 |   | 17,190,375 |   | 17,278,170 |   |
| Other loans                                                                                         |   | 1,587,731                              |      | 1,236,386                            |      | 2,985,248 |   | 2,412,923 |   |
| Mortgage-backed securities available-for-sale                                                       |   | 134,755                                |      | 167,499                              |      | 308,302 |   | 353,027 |   |
| Investment securities available-for-sale and interest bearing  deposits with financial institutions |   | 1,275,627                              |      | 1,204,160                            |      | 2,515,299 |   | 2,289,780 |   |
| Total interest income                                                                               |   | 11,574,150                             |      | 11,206,135                           |      | 22,999,224 |   | 22,333,900 |   |
|                                                                                                |   |                                   |      |                                 |      |   |   |   |   |
| Interest expense:                                                                                   |   |                                   |      |                                 |      |   |   |   |   |
| Deposits                                                                                            |   | 3,052,728                              |      | 3,420,884                            |      | 6,220,630 |   | 6,784,290 |   |
| Borrowed money                                                                                      |   | 2,305,329                              |      | 2,299,382                            |      | 4,578,409 |   | 4,623,299 |   |
| Total interest expense                                                                              |   | 5,358,057                              |      | 5,720,266                            |      | 10,799,039 |   | 11,407,589 |   |
|                                                                                                |   |                                   |      |                                 |      |   |   |   |   |
| Net interest income before provision for loan losses                                                |   | 6,216,093                              |      | 5,485,869                            |      | 12,200,185 |   | 10,926,311 |   |
| Provision for loan losses                                                                           |   | 142,000                                |      | 225,000                              |      | 323,250 |   | 450,000 |   |
| Net interest income after provision for loan losses                                                 |   | 6,074,093                              |      | 5,260,869                            |      | 11,876,935 |   | 10,476,311 |   |
|                                                                                                |   |                                   |      |                                 |      |   |   |   |   |
| Noninterest income:                                                                                 |   |                                   |      |                                 |      |   |   |   |   |
| Service fees                                                                                        |   | 536,297                                |      | 366,296                              |      | 982,808 |   | 702,145 |   |
| Insurance and brokerage commissions                                                                 |   | 55,165                                 |      | 79,825                               |      | 114,029 |   | 310,340 |   |
| Information technology sales and service income, net                                                |   | 227,564                                |      | 438,478                              |      | 496,254 |   | 740,880 |   |
| Gain on sale of foreclosed real estate                                                              |   | —                                 |      | —                               |      | 41,315 |   | — |   |
| Gain on sale of securities                                                                          |   | 526,069                                |      | —                               |      | 526,069 |   | — |   |
| Gain on sale of loans                                                                               |   | 156,223                                |      | —                               |      | 156,223 |   | — |   |
| Bank owned life insurance                                                                           |   | 195,642                                |      | 170,263                              |      | 366,132 |   | 336,589 |   |
| Other                                                                                               |   | 48,680                                 |      | 28,996                               |      | 73,229 |   | 71,409 |   |
| Total noninterest income                                                                            |   | 1,745,640                              |      | 1,083,858                            |      | 2,756,059 |   | 2,161,363 |   |
|                                                                                                |   |                                   |      |                                 |      |   |   |   |   |
| Noninterest expense:                                                                                |   |                                   |      |                                 |      |   |   |   |   |
| Compensation and benefits                                                                           |   | 2,662,187                              |      | 2,492,944                            |      | 5,321,524 |   | 5,120,533 |   |
| Office building, net                                                                                |   | 676,595                                |      | 542,252                              |      | 1,375,562 |   | 1,050,693 |   |
| Federal insurance premiums                                                                          |   | 21,165                                 |      | 18,450                               |      | 44,386 |   | 36,958 |   |
| Advertising                                                                                         |   | 250,485                                |      | 118,895                              |      | 433,126 |   | 268,572 |   |
| Data processing                                                                                     |   | 243,128                                |      | 269,907                              |      | 483,996 |   | 451,332 |   |
| NOW/checking account expenses                                                                       |   | 122,760                                |      | 124,836                              |      | 255,772 |   | 247,415 |   |
| Other                                                                                               |   | 726,813                                |      | 433,333                              |      | 1,290,841 |   | 855,672 |   |
| Total noninterest expense                                                                           |   | 4,703,133                              |      | 4,000,617                            |      | 9,205,207 |   | 8,031,175 |   |
|                                                                                                |   |                                   |      |                                 |      |   |   |   |   |
| Income before income taxes and minority interest                                                    |   | 3,116,600                              |      | 2,344,110                            |      | 5,427,787 |   | 4,606,499 |   |
|                                                                                                |   |                                   |      |                                 |      |   |   |   |   |
| Income tax expense                                                                                  |   | 1,132,994                              |      | 732,308                              |      | 1,876,935 |   | 1,445,920 |   |
|                                                                                                |   |                                   |      |                                 |      |   |   |   |   |
| Income before minority interest                                                                     |   | 1,983,606                              |      | 1,611,802                            |      | 3,550,852 |   | 3,160,579 |   |
|                                                                                                |   |                                   |      |                                 |      |   |   |   |   |
| Minority interest                                                                                   |   | 49,938                                 |      | (17,152                              | )         | 70,650 |   | 2,509 |   |
|                                                                                                |   |                                   |      |                                 |      |   |   |   |   |
| Net income                                                                                          |   | $                                      | 2,033,544 |                                 | 1,594,650 |   | 3,621,502 |   | 3,163,088 |   |
|                                                                                                |   |                                   |      |                                 |      |   |   |   |   |
| Earnings per share:                                                                                 |   |                                   |      |                                 |      |   |   |   |   |
| Basic                                                                                               |   | $                                      | 0.48      |                                 | 0.38      |   | 0.86 |   | 0.75 |   |
| Diluted                                                                                             |   | 0.46                                   |      | 0.36                                 |      | 0.81 |   | 0.72 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

2

----

 

**EFCBANCORP, INC.**

**ANDSUBSIDIARIES**

 

Consolidated Statements ofCash Flows (unaudited)

For the six months ended June 30, 2003and 2002

 
|                                                                              |   | **2003**    |       | **2002**    |       |
|-----------------------------------------------------------------------------------|--------|-------------|------------|-------------|------------|
|                                                                              |   |        |       |        |       |
| Cash flows from operating activities:                                             |   |        |       |        |       |
| Net income                                                                        |   | $           | 3,621,502  |        | 3,163,088  |   |
| Adjustment to reconcile net income to net cash provided by operating  activities: |   |        |       |        |       |
| Amortization of premiums and discounts, net                                       |   | 54,691      |       | (57,574     | )          |
| Provision for loan losses                                                         |   | 323,250     |       | 450,000     |       |
| FHLB of Chicago stock dividends                                                   |   | (412,600    | )          | (240,000    | )          |
| Stock award plan shares allocated                                                 |   | 254,562     |       | 314,392     |       |
| ESOP shares committed to be released                                              |   | 298,709     |       | 298,714     |       |
| Change in fair value of ESOP shares                                               |   | 83,364      |       | 2,558       |       |
| Depreciation of office properties and equipment                                   |   | 561,530     |       | 377,544     |       |
| Gain on sale of foreclosed real estate                                            |   | (41,315     | )          | —      |       |
| Gain on sale of securities                                                        |   | (526,069    | )          | —      |       |
| Gain on sale of loans                                                             |   | (156,223    | )          | —      |       |
| Change in minority interest in subsidiary                                         |   | (70,650     | )          | (19,953     | )          |
| Increase in bank owned life insurance                                             |   | (321,822    | )          | (1,077,689  | )          |
| (Increase)/decrease in accrued interest receivable and other assets,  net         |   | 144,392     |       | (1,406,590  | )          |
| Increase in income taxes payable, accrued expenses and other  liabilities, net    |   | 370,483     |       | 1,348,305   |       |
|                                                                              |   |        |       |        |       |
| Net cash provided by operating activities                                         |   | 4,183,804   |       | 3,152,795   |       |
|                                                                              |   |        |       |        |       |
| Cash flows from investing activities:                                             |   |        |       |        |       |
| Net increase in loans receivable                                                  |   | (21,458,659 | )          | (1,630,329  | )          |
| Purchases of loans receivable                                                     |   | (48,287,654 | )          | (33,961,128 | )          |
| Proceeds fom the sale of loans                                                    |   | 12,894,951  |       | —      |       |
| Increase in real estate held for development                                      |   | (484,315    | )          | (2,900,268  | )          |
| Purchases of mortgage-backed securities available-for-sale                        |   | (2,549,222  | )          | —      |       |
| Principal payments on mortgage-backed securities available-for-sale               |   | 3,684,435   |       | 2,682,224   |       |
| Maturities of investment securities available-for-sale                            |   | 12,680,478  |       | 12,421,819  |       |
| Purchases of investment securities available-for-sale                             |   | (22,019,838 | )          | (15,800,431 | )          |
| Proceeds from the sale of investment securities                                   |   | 9,397,886   |       | —      |       |
| Purchases of office properties and equipment                                      |   | (982,481    | )          | (1,746,853  | )          |
| Investment in bank owned life insurance                                           |   | (5,000,000  | )          | —      |       |
| Purchases of stock in the Federal Home Loan Bank of Chicago                       |   | (760,200    | )          | —      |       |
| Cash used in acquisition of majority-owned susidiary                              |   | —      |       | (420,000    | )          |
| Proceeds from the sale of foreclosed real estate                                  |   | 2,027,057   |       | —      |       |
|                                                                              |   |        |       |        |       |
| Net cash used in investing activities                                             |   | (60,857,562 | )          | (41,354,966 | )          |
|                                                                              |   |        |       |        |       |
| Cash flows from financing activities:                                             |   |        |       |        |       |
| Net increase in deposits                                                          |   | 35,192,799  |       | 56,596,262  |       |
| Proceeds from borrowed money                                                      |   | 44,064,001  |       | 405,298     |       |
| Repayments on borrowed money                                                      |   | (5,040,175  | )          | (3,817,374  | )          |
| Purchase of treasury stock                                                        |   | (2,244,670  | )          | (4,200      | )          |
| Stock options exercised                                                           |   | 504,760     |       | 323,280     |       |
| Cash dividends paid                                                               |   | (1,165,043  | )          | (1,069,900  | )          |
| Net cash provided by financing activities                                         |   | 71,311,672  |       | 52,433,366  |       |
|                                                                              |   |        |       |        |       |
| Net increase in cash and cash equivalents                                         |   | 14,637,914  |       | 14,231,195  |       |
| Cash and cash equivalents at beginning of period                                  |   | 32,844,290  |       | 18,175,290  |       |
|                                                                              |   |        |       |        |       |
| Cash and cash equivalents at end of period                                        |   | $           | 47,482,204 |        | 32,406,485 |   |
|                                                                              |   |        |       |        |       |
| Supplemental disclosures of cash flow information:                                |   |        |       |        |       |
| Cash paid during the period for:                                                  |   |        |       |        |       |
| Interest                                                                          |   | $           | 10,838,260 |        | 11,394,593 |   |
| Income taxes                                                                      |   | 1,890,000   |       | 1,490,000   |       |
| Noncash investing activities - transfer of loans to foreclosed real  estate       |   | 39,190      |       | —      |       |

 

Seeaccompanying notes to consolidated financial statements.

 

3

----

 

**EFC BANCORP, INC.**

**Notes to UnauditedConsolidated Financial Statements**

 

Note 1: BASIS OF PRESENTATION

 

Theaccompanying unaudited consolidated financial statements include the accountsof EFC Bancorp, Inc. (the Company), its majority-owned subsidiary, ComputerDynamics Group Inc. (CDGI), its wholly-owned subsidiary, EFS Bank (the Bank)and its wholly-owned subsidiary, EFS Service Corporation of Elgin.  The Company purchased an 80% interest in CDGIfor $420,000 in January 2002.  Theaccompanying financial statements include the operating results of CDGI sincethe date of acquisition.  CDGI isconsolidated and a minority interest is recorded for the proportionate interestnot owned by the Company.  Certainamounts for the prior year have been reclassified to conform to the currentyear presentation.  The Company operatesas a single segment.

 

In the opinionof the management of the Company, the accompanying consolidated financialstatements include all normal recurring adjustments necessary for a fairpresentation of the financial position and results of operations for theperiods presented.  All significantintercompany transactions have been eliminated in consolidation.  These interim financial statements have beenprepared according to the rules and regulations of the Securities and ExchangeCommission and therefore certain information and footnote disclosures normallyincluded in financial statements presented in accordance with accountingprinciples generally accepted in the United States of America have beencondensed or omitted.  The results ofoperations for the interim periods are not necessarily indicative of theresults to be expected for the full year. It is suggested that the accompanying unaudited consolidated financialstatements be read in conjunction with the Company’s 2002 Annual Report on Form10-K.  Currently, other than investingin various securities, the Company does not directly transact any materialbusiness other than through the Bank. Accordingly, the discussion herein addresses the operations of theCompany as they are conducted through the Bank.

 

Note 2: COMPREHENSIVE INCOME

 

The Company’scomprehensive income for the three and six month periods ended June 30,2003 and 2002 are as follows:

 
|                                                                                    |   | **Three  months ended  June 30,** |      | **Six months  ended  June 30,** |       |
|-----------------------------------------------------------------------------------------|--------|----------------------------------------|-----------|--------------------------------------|------------|
|                                                                                    |   | **2003**                               |      | **2002**                             | ** ** | **2003** | ** ** | **2002** | ** ** |
| Net income                                                                              |   | $                                      | 2,033,544 |                                 | 1,594,650  |   | $ | 3,621,502 |   | 3,163,088 |   |
| Other comprehensive income, net of tax:                                                 |   |                                   |      |                                 |       |   |   |   |   |
| Unrealized holding gains on securities  arising during the period, net of tax effect    |   | 776,414                                |      | 752,939                              |       | 725,091 |   | 555,686 |   |
| Reclassification adjustment for net gain on  sales of securities realized in net income |   | (331,423                               | )         | —                               |       | (331,423 | ) | — |   |
|                                                                                    |   |                                   |      |                                 |       |   |   |   |   |
| Comprehensive income                                                                    |   | $                                      | 2,478,535 |                                 | 2,347,589  |   | $ | 4,015,170 |   | $ | 3,718,774 |   |
|                                                                                         |        |                                        |           |                                      |            |  |  |  |  |  |  |  |

 

4

----

 

For both thethree and six month periods ended June 30, 2003 the sale of securitiesresulted in a gain of $526,069 ($331,423 net of tax effect).  There were no sales of investment securitiesas of and for the three and six months ended June 30, 2002.

 

Note 3: COMPUTATION OF PERSHARE EARNINGS

 

Basic earningsper share is calculated by dividing net income by the weighted average numberof common shares outstanding.  Dilutedearnings per share is calculated by dividing net income by the weighted averagenumber of common shares outstanding adjusted for the dilutive effect of outstandingstock options.  ESOP shares are onlyconsidered outstanding for earnings per share calculations when they arereleased or committed to be released.

 

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

 
|                                          |   | **Three  months ended  June 30,** |      | **Six months  ended  June 30,** |      |
|-----------------------------------------------|--------|----------------------------------------|-----------|--------------------------------------|-----------|
|                                          |   | **2003**                               |      | **2002**                             |      | **2003** |   | **2002** |   |
| Basic:                                        |   |                                   |      |                                 |      |   |   |   |   |
| Net income                                    |   | $                                      | 2,033,544 |                                 | 1,594,650 |   | 3,621,502 |   | 3,163,088 |   |
|                                          |   |                                   |      |                                 |      |   |   |   |   |
| Weighted average shares outstanding           |   | 4,215,597                              |      | 4,207,308                            |      | 4,217,099 |   | 4,193,973 |   |
|                                          |   |                                   |      |                                 |      |   |   |   |   |
| Basic earnings per share                      |   | $                                      | 0.48      |                                 | 0.38      |   | 0.86 |   | 0.75 |   |
|                                          |   |                                   |      |                                 |      |   |   |   |   |
| Diluted:                                      |   |                                   |      |                                 |      |   |   |   |   |
|                                          |   |                                   |      |                                 |      |   |   |   |   |
| Net income                                    |   | $                                      | 2,033,544 |                                 | 1,594,650 |   | 3,621,502 |   | 3,163,088 |   |
|                                          |   |                                   |      |                                 |      |   |   |   |   |
| Weighted average shares outstanding           |   | 4,215,597                              |      | 4,207,308                            |      | 4,217,099 |   | 4,193,973 |   |
| Effect of dilutive stock options  outstanding |   | 238,963                                |      | 236,119                              |      | 233,487 |   | 202,536 |   |
| Diluted weighted average shares outstanding   |   | 4,454,560                              |      | 4,443,427                            |      | 4,450,586 |   | 4,396,509 |   |
|                                          |   |                                   |      |                                 |      |   |   |   |   |
| Diluted earnings per share                    |   | $                                      | 0.46      |                                 | 0.36      |   | 0.81 |   | 0.72 |   |

 

Note 4:  STOCK OPTION PLANS

 

The Companyaccounts for the stock-based compensation plans under APB Opinion No. 25.  For the stock option program, nocompensation cost is recognized in connection with the granting of stockoptions with an exercise price equal to the fair market value of the stock onthe date of the grant.  For the stockaward plan, the Company uses fixed method of accounting and recordscompensation expense, over the vesting period of the grant, based upon the fairmarket value of the stock at the date of grant.  In accordance with the disclosure requirements of SFAS No. 123,as amended by SFAS No. 148, the following table provides the pro forma effecton net income and earnings per share if the fair value method of accounting forstock-based compensation had been used for all awards:

 

5

----

 
|                                                                                                                                        |   | **For the  Three Months Ended  June 30,** |      | **For the  Six Months Ended  June 30,** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|-----------|----------------------------------------------|--------|
|                                                                                                                                        |   | **2003**                                       |      | **2002**                                     |   | **2003** |   | **2002** |   |
|                                                                                                                                        |   |                                           |      |                                         |   |   |   |   |   |
| Net income as reported                                                                                                                      |   | $                                              | 2,033,544 |                                         | $      | 1,594,650 |   | $ | 3,621,502 |   | $ | 3,163,088 |   |
| Add: Stock-based compensation, net of tax,  included in the determination of net income, as reported                                        |   | 127,281                                        |      | 157,196                                      |   | 254,562 |   | 314,392 |   |
| Deduct: Stock-based compensation, net of  tax, that would have been reported if the fair value based method had been  applied to all awards |   | (245,185                                       | )         | (269,291                                     | )      | (487,016 | ) | (538,581 | ) |
| Pro forma net income                                                                                                                        |   | $                                              | 1,915,640 |                                         | $      | 1,482,555 |   | $ | 3,389,048 |   | $ | 2,938,899 |   |
|                                                                                                                                        |   |                                           |      |                                         |   |   |   |   |   |
| Basic earnings per share                                                                                                                    |   |                                           |      |                                         |   |   |   |   |   |
| As reported                                                                                                                                 |   | $                                              | 0.48      |                                         | $      | 0.38 |   | $ | 0.86 |   | $ | 0.75 |   |
| Pro forma                                                                                                                                   |   | 0.45                                           |      | 0.35                                         |   | 0.80 |   | 0.70 |   |
|                                                                                                                                        |   |                                           |      |                                         |   |   |   |   |   |
| Diluted earnings per share                                                                                                                  |   |                                           |      |                                         |   |   |   |   |   |
| As reported                                                                                                                                 |   | $                                              | 0.46      |                                         | $      | 0.36 |   | $ | 0.81 |   | $ | 0.72 |   |
| Pro forma                                                                                                                                   |   | 0.43                                           |      | 0.33                                         |   | 0.76 |   | 0.67 |   |

 

Item 2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.

 

The followinganalysis discusses changes in the financial condition at June 30, 2003 andresults of operations for the three and six months ended June 30, 2003,and should be read in conjunction with the Company’s Unaudited ConsolidatedFinancial Statements and the notes thereto, appearing in Part I, Item 1 of thisdocument.

 

**Forward-Looking Statements**

 

This reportcontains certain forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. The Company intends such forward-lookingstatements to be covered by the safe harbor provisions for forward-lookingstatements contained in the Private Securities Litigation Reform Act of 1995,and is including this statement for purposes of these safe harbor provisions.Forward-looking statements, which are based on certain assumptions and describefuture plans, strategies and expectations of the Company, are generallyidentified by use of the words “believe,” “expect,” “intend,” “anticipate,”“estimate,” “project,” or similar expressions. The Company’s ability to predictresults or the actual effect of future plans or strategies is inherentlyuncertain. Factors which could have a material adverse effect on the operationsof the Company and the subsidiaries include, but are not limited to, changesin: interest rates, general economic conditions, legislative/regulatorychanges, monetary and fiscal policies of the U.S. Government, includingpolicies of the U.S. Treasury and the Federal Reserve Board, the quality orcomposition of the loan or investment portfolios, demand for loan products,deposit flows, competition, demand for financial services in the Company’smarket area and accounting principles and guidelines. These risks anduncertainties should be considered in evaluating forward-looking statements andundue reliance should not be placed on such statements. Further informationconcerning the Company and its business, including additional factors thatcould materially affect the Company’s financial results, is included in theCompany’s filings with the

 

6

----

 

SEC, including its 2002 AnnualReport on Form 10-K.

 

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

 

**Comparison of Financial Condition atJune 30, 2003 and December 31, 2002**

 

Total assetsat June 30, 2003 were $859.0 million, which represented an increase of$76.6 million, or 9.8%, compared to $782.4 million at December 31, 2002.The increase in total assets was primarily a result of an increase in loansreceivable of $56.7 million, or 9.5%, to $653.7 million at June 30, 2003from $597.0 million at December 31, 2002. The increase in loans receivable was primarily attributable to strongloan demand and loan purchases during the period. In addition, cash and cashequivalents increased $14.7 million, or 44.6%, to $47.5 million atJune 30, 2003 from $32.8 million at December 31, 2002, investmentsecurities increased $1.7 million, or 1.9%, to $89.7 million at June 30,2003 from $88.0 million at December 31, 2002, and bank owned lifeinsurance, which increased $5.4 million, or 43.5%, to $17.6 million atJune 30, 2003 from $12.2 million at December 31, 2002.  This increase was due to an investment of$5.0 million made in May 2003. These increases were partially offset by a decrease in mortgage-backedsecurities of $1.3 million, or 7.9% to $14.0 at June 30, 2003 from $15.3million at December 31, 2002 and by the sale of foreclosed real estate of$1.9 million from December 31, 2002 to June 30, 2003.  This property was sold in January 2003resulting in a gain of approximately $41,000. The growth in total assets was funded by increases in deposits andborrowed money.  Deposits increased$35.2 million to $559.4 million at June 30, 2003 from $524.2 million atDecember 31, 2002.  Borrowed money,representing FHLB advances, increased $39.0 million to $210.8 million atJune 30, 2003 from $171.8 million at December 31, 2002.   Stockholders’ equity increased $2.0 millionto $76.8 million at June 30, 2003 from $74.8 million at December 31,2002.  The increase in stockholders’equity was primarily the result of the Company’s net income for the six monthsended June 30, 2003 and a $725,000 increase in the Company’s accumulatedother comprehensive income relating to the change in fair value of itsavailable-for-sale investment portfolio, which were partially offset by stockrepurchases and dividends paid.

 

**Comparison of Operating Results For the ThreeMonths Ended June 30, 2003 and 2002**

 

***General.***  The Company’s net income increased $439,000,or 27.5%, to $2.0 million for the three months ended June 30, 2003 ascompared to the prior year period.

 

***Interest Income.***  Interest income increased $368,000, or 3.3%,to $11.6 million for the three months ended June 30, 2003, compared with$11.2 million for the same period in 2002. This increase resulted from an increase in the average balance ofinterest-earning assets, partially offset by a decrease in the average rateearned on those interest-earning assets. The average balance of interest-earning assets increased by $109.1million, or 16.0%, to $789.9 million for the three months ended June 30,2003 from $680.8 million for the comparable period in 2002. The average yieldon interest-earning assets decreased by 73 basis points to 5.96% for the three 

 

7

----

 

months ended June 30, 2003from 6.69% for the three months ended June 30, 2002.

 

Mortgage loaninterest income decreased by $22,000 for the three months ended June 30,2003 compared with the same period in 2002. The average balance of mortgage loans increased $52.9 million, while themortgage loan yield decreased by 71 basis points from 7.07% to 6.36%.  Interest income from other loans increased$351,000 for the three months ended June 30, 2003. This increase resultedfrom a combination of an increase in average balance of $29.7 million, partiallyoffset by a 46 basis point decrease in yield from 6.38% for the three monthsended June 30, 2002 to 5.92% for the three months ended June 30,2003.  Interest income from investmentsecurities, mortgage-backed securities and short-term deposits remainedunchanged at $1.3 million for the three months ended June 30, 2003,compared with the same period in 2002. An increase in average balance of $25.7million was offset by a 95 basis point decrease in yield from 5.30% for thethree months ended June 30, 2002 to 4.35% for the three months endedJune 30, 2003.  The decrease inyield is largely attributed to the effect of the lower interest rateenvironment reducing yields on investment securities.  The average yields are reported on a tax equivalent basis.

 

***InterestExpense. ***Interestexpense decreased by $362,000, or 6.3%, to $5.4 million for the three monthsended June 30, 2003 from $5.7 million for the three months endedJune 30, 2002.  This decreaseresulted from an increase in the average balance of interest-bearingliabilities, offset by a decrease in the average rate paid on thoseinterest-bearing liabilities. The average balance of interest-bearingliabilities increased by $99.5 million, or 16.5%, to $704.3 million for thethree months ended June 30, 2003 from $604.8 million for the three months endedJune 30, 2002.  This increase ispartially attributed to the opening of a new branch office inJuly 2002.  This change reflects an$82.8 million increase in the deposit accounts, which is attributable to a$30.9 million increase in money market accounts, a $13.1 million increase inpassbook savings accounts, a $36.1 million increase in certificates of depositand a $2.7 million increase in NOW accounts. In addition, advances from the FHLB – Chicago increased $16.7 million to$188.4 million for the three months ended June 30, 2003 from $171.7million for the comparable period in 2002. The average rate paid on combined deposits and borrowed money decreasedby 74 basis points to 3.04% for the three months ended June 30, 2003 from3.78% for the three months ended June 30, 2002.

 

***Net Interest IncomeBefore Provision for Loan Losses.***  Net interest income before provision forloan losses increased $730,000, or 13.3%, to $6.2 million for the three monthsended June 30, 2003 from $5.5 million for the comparable period in2002.  The average balance ofinterest-earning assets increased $109.1 million for the three months endedJune 30, 2003 compared to the comparable prior year period.  The increase in interest-earning assets wasprimarily the result of an increase in the average balance of mortgage loans of$52.9 million and a $29.7 million increase in other loans.  The tax equivalent net interest margin as apercent of interest-earning assets decreased by eight basis points to 3.25% forthe three months ended June 30, 2003 from 3.33% for the comparable periodin 2002.

 

***Provision for LoanLosses.*** The provision for loan losses decreased by $83,000, to $142,000 for thethree months ended June 30, 2003 from $225,000 in 2002.  At June 30, 2003, December 31,2002 and June 30, 2002, non-performing loans totaled $2.6 million, $2.4million

 

8

----

 

and $3.5 million,respectively.  Nonperforming assetsdecreased $1.8 million to $2.6 million at June 30, 2003 from $4.4 millionat December 31, 2002, largely due to the sale of foreclosed real estate inJanuary 2003.  At June 30,2003, the ratio of the allowance for loan losses to non-performing loans was132.7% compared to 131.1% at December 31, 2002 and 77.1% at June 30,2002.  The ratio of the allowance tototal loans was 0.53%, 0.53% and 0.47%, at June 30, 2003,December 31, 2002 and June 30, 2002, respectively.  There were no charge-offs for the threemonths ended June 30, 2003 and $2,000 for the comparable period in2002.  Management periodicallycalculates an allowance sufficiency analysis based upon the portfoliocomposition, asset classifications, loan-to-value ratios, probable impairmentsin the loan portfolio, and other factors.

 

***NoninterestIncome. ***Noninterestincome totaled $1.7 million and $1.1 million for the three months endedJune 30, 2003 and 2002, respectively. The increase in noninterest incomeis primarily attributable to increases of $526,000 in gain on sale ofsecurities, $156,000 in gain on sale of loans and $170,000 in servicefees.  The gain on sale of securitieswas the result of repositioning the balance sheet and favorable marketconditions.  The gain on sale of loanswas due to favorable market conditions and interest rate risk strategy.  Service fees increased primarily due to theoffering of an overdraft privilege account product to our customers.  These increases were partially offset bydecreases of $211,000 in income generated by Computer Dynamics Group, Inc.(“CDGI”) and $25,000 in insurance and brokerage commissions.  The decrease in income generated by CDGI islargely due to a decrease in sales related to a weaker demand for technologyservices.  The decrease in insurance andbrokerage commissions is partially due to the lower interest rate environment.

 

***NoninterestExpense. ***Noninterestexpense increased $703,000, to $4.7 million for the three months endedJune 30, 2003 from $4.0 million for the comparable period in 2002.  Of this increase, $169,000 was directlyrelated to compensation and benefits, and $134,000 is related to officebuilding operations resulting from the costs related to the two new branchoffices placed in service over the last year. In addition, expenses relating to advertising increased $131,000 to$250,000 for the three months ended June 30, 2003, respectively from$119,000 for the comparable period in 2002, respectively.  The increase in advertising expense ispartially attributed to the Bank’s name change, which occurred in 2002.  In addition, the Company incurred a goodwillimpairment of $181,000, relating to its majority owned subsidiary CDGI, for thethree months ended June 30, 2003. The goodwill impairment is primarily due to a weaker demand fortechnology services.  Managementcontinues to emphasize the importance of expense management and control whilecontinuing to provide expanded banking services to a growing market base.

 

***Income TaxExpense. ***Incometax expense totaled $1.1 million and $732,000 for the three months endedJune 30, 2003 and 2002, respectively. This increase was primarily due to a $401,000 increase in earningsbefore income taxes.  The effective taxrate was 36.4% and 31.2% for the three months ended June 30, 2003 and2002, respectively.  The increase in theeffective tax rate is partially due to a reduction in the municipal bondinvestment portfolio and the goodwill impairment related to CDGI.

 

9

----

 

**Comparison of Operating Results For the SixMonths Ended June 30, 2003 and 2002**

 

***General.***  The Company’s net income increased $458,000,or 14.5%, to $3.6 million for the three months ended June 30, 2003 ascompared to the prior year period.

 

***Interest Income.***  Interest income increased $665,000, or 3.0%,to $23.0 million for the six months ended June 30, 2003, compared with$22.3 million for the same period in 2002. This increase resulted from an increase in the average balance ofinterest-earning assets, partially offset by a decrease in the average rateearned on those interest-earning assets. The average balance of interest-earning assets increased by $102.1million, or 15.2%, to $773.4 million for the six months ended June 30,2003 from $671.3 million for the comparable period in 2002. The average yieldon interest-earning assets decreased by 71 basis points to 6.05% for the sixmonths ended June 30, 2003 from 6.76% for the six months endedJune 30, 2002.

 

Mortgage loaninterest income decreased by $88,000 for the six months ended June 30,2003 compared with the same period in 2002. The average balance of mortgage loans increased $50.3 million, while themortgage loan yield decreased by 71 basis points from 7.18% to 6.47%. Interestincome from other loans increased $572,000 for the six months endedJune 30, 2003. This increase resulted from a combination of an increase inaverage balance of $26.3 million, partially offset by a 59 basis point decreasein yield from 6.53% for the six months ended June 30, 2002 to 5.94% forthe six months ended June 30, 2003. Interest income from investment securities, mortgage-backed securitiesand short-term deposits increased by $135,000 for the six months endedJune 30, 2003, compared with the same period in 2002. This increaseresulted from a combination of an increase in average balance of $24.7 million,offset by a 66 basis point decrease in yield from 5.17% for the six monthsended June 30, 2002 to 4.51% for the six months ended June 30,2003.  The decrease in yield is largelyattributed to the effect of the lower interest rate environment reducing yieldson investment securities.  The averageyields are reported on a tax equivalent basis.

 

***InterestExpense. ***Interestexpense decreased by $609,000, or 5.3%, to $10.8 million for the six monthsended June 30, 2003 from $11.4 million for the six months endedJune 30, 2002.  This decreaseresulted from an increase in the average balance of interest-bearingliabilities, offset by a decrease in the average rate paid on thoseinterest-bearing liabilities. The average balance of interest-bearingliabilities increased by $92.9 million, or 15.6%, to $689.6 million for the sixmonths ended June 30, 2003 from $596.7 million for the six months endedJune 30, 2002. This increase is partially attributed to the opening of anew branch office in July 2002. This change reflects an $85.8 million increase in the deposit accounts,which is attributable to a $33.0 million increase in money market accounts, a$12.7 million increase in passbook savings accounts, a $36.9 million increasein certificates of deposit and a $3.2 million increase in NOW accounts.  In addition, advances from the FHLB –Chicago increased $7.1 million to $181.4 million for the six months endedJune 30, 2003 from $174.3 million for the comparable period in 2002.  The average rate paid on combined depositsand borrowed money decreased by 69 basis points to 3.13% for the six monthsended June 30, 2003 from 3.82% for the six months ended June 30,2002.

 

10

----

 

***Net Interest IncomeBefore Provision for Loan Losses.***  Net interest income before provision forloan losses increased $1.3 million, or 11.7%, to $12.2 million for the sixmonths ended June 30, 2003 from $10.9 million for the comparable period in2002.  The average balance ofinterest-earning assets increased $102.1 million for the six months endedJune 30, 2003 compared to the comparable prior year period.  The increase in interest-earning assets wasprimarily the result of an increase in the average balance of mortgage loans of$50.3 million and a $26.3 million increase in other loans.  The tax equivalent net interest margin as apercent of interest-earning assets decreased by 10 basis points to 3.26% forthe six months ended June 30, 2003 from 3.36% for the comparable period in2002.

 

***Provision for LoanLosses.*** The provision for loan losses decreased by $127,000, to $323,000 for thesix months ended June 30, 2003 from $450,000 in 2002.  At June 30, 2003, December 31,2002 and June 30, 2002, non-performing loans totaled $2.6 million, $2.4million and $3.5 million, respectively. Nonperforming assets decreased $1.8 million to $2.6 million atJune 30, 2003 from $4.4 million at December 31, 2002, largely due tothe sale of foreclosed real estate in January 2003.  At June 30, 2003, the ratio of theallowance for loan losses to non-performing loans was 132.7% compared to 131.1%at December 31, 2002 and 77.1% at June 30, 2002.  The ratio of the allowance to total loanswas 0.53%, 0.53% and 0.47%, at June 30, 2003, December 31, 2002 and June 30,2002, respectively.  There were nocharge-offs for the six months ended June 30, 2003 and $2,000 for thecomparable period in 2002.  Managementperiodically calculates an allowance sufficiency analysis based upon theportfolio composition, asset classifications, loan-to-value ratios, probableimpairments in the loan portfolio, and other factors.

 

***NoninterestIncome. ***Noninterestincome totaled $2.8 million and $2.2 million for the six months endedJune 30, 2003 and 2002, respectively. The increase in noninterest incomeis primarily attributable to increases of $526,000 in gain on sale ofsecurities, $156,000 in gain on sale of loans and $281,000 in servicefees.  The gain on sale of securitieswas the result of repositioning the balance sheet and favorable market conditions.  The gain on sale of loans was due tofavorable market conditions and interest rate risk strategy.  Service fees increased primarily due to theoffering of an overdraft privilege account product to our customers.  These increases were partially offset bydecreases of $245,000 in income generated by Computer Dynamics Group, Inc.(“CDGI”) and $196,000 in insurance and brokerage commissions.  The decrease in income generated by CDGI islargely due to a decrease in sales related to a weaker demand for technologyservices.  The decrease in insurance andbrokerage commissions is partially due to the lower interest rate environment.

 

***NoninterestExpense. ***Noninterestexpense increased $1.2 million, to $9.2 million for the six months endedJune 30, 2003 from $8.0 million for the comparable period in 2002.  Of this increase, $201,000 was directlyrelated to compensation and benefits, $325,000 is related to office buildingoperations resulting from the costs related to the two new branch officesplaced in service over the last year. In addition, expenses relating to advertising increased $164,000 to$433,000 for the six months ended June 30, 2003 from $269,000 for thecomparable period in 2002.  The increasein advertising expense is partially attributed to the Bank’s name change, whichoccurred in 2002.  In addition, theCompany incurred a goodwill impairment of $200,000, relating to its majorityowned subsidiary CDGI, for the six months ended June 30, 2003. The 

 

11

----

 

goodwill impairment isprimarily due to a weaker demand for technology services.  Management continues to emphasize theimportance of expense management and control while continuing to provideexpanded banking services to a growing market base.

 

***Income TaxExpense. ***Incometax expense totaled $1.9 million and $1.4 million for the six months endedJune 30, 2003 and 2002, respectively. This slight increase was primarily due to a $431,000 increase inearnings before income taxes.  Theeffective tax rate was 34.6% and 31.4% for the six months ended June 30,2003 and 2002, respectively.  Theincrease in the effective tax rate is partially due to a reduction in themunicipal bond investment portfolio and the goodwill impairment related toCDGI.

 

**Liquidity and Capital Resources**

 

The Company’s primary source of funding for dividends and periodicstock repurchases has been dividends from the Bank.  The Bank’s ability to pay dividends and other capitaldistributions to the Company is generally limited by OTS regulations.

 

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

 

The primaryinvesting activities of the Bank are the origination and purchase of primarilyresidential one-to-four-family loans and, to a lesser extent multi-family andcommercial real estate, construction and land, commercial and consumer loansand the purchase of mortgage-backed securities.  In addition, the Bank purchases loans, secured by single-family,multi-family and commercial real estate. Deposit flows are affected by the level of interest rates, the interestrates and products offered by the local competitors and other factors.

 

In addition tothe primary investing activities of the Bank, the Company has repurchasedshares of its common stock from time to time in the open market.  The Company is currently authorized torepurchase shares pursuant to its sixth stock repurchase program, which waspreviously announced in September 2001. Under this program the Company is authorized to repurchase up to231,808, or 5.0% of its outstanding common stock.  Under this current program, 204,900 shares of the Company’scommon stock have been repurchased at an average price per share of$17.43.  During the three months endedJune 30, 2003, 33,200 shares were purchased at an average price of$19.25.  As of June 30, 2003, theCompany repurchased a total of 3,060,173 shares of the Company’s common stockat an average price per share of $12.02 since becoming a public company in1998.

 

The Bank’smost liquid assets are cash and interest-bearing demand accounts. The levels ofthese assets are dependent on the Bank’s operating, financing, lending andinvesting activities during any given period. At June 30, 2003, cash and interest-bearing demand accounts totaled$47.5 million, or 5.5% of total assets.

 

12

----

 

See the“Consolidated Statements of Cash Flows” in the Unaudited Consolidated FinancialStatements included in this Form 10-Q for the sources and uses of cash flowsfor operating, investing and financing activities for the six months endedJune 30, 2003 and 2002.

 

AtJune 30, 2003, the Bank exceeded all of its regulatory capitalrequirements. The following is a summary of the Bank’s regulatory capitalratios at June 30, 2003:

 
| Total Capital to Total Assets         |   | 8.57  | % |
|---------------------------------------|--------|-------|---|
| Total Capital to Risk-Weighted Assets |   | 12.47 | % |
| Tier I Leverage Ratio                 |   | 8.58  | % |
| Tier I to Risk-Weighted Assets        |   | 12.13 | % |

 

At June 30, 2003, theCompany had a Total Capital to Total Assets ratio of 8.95%.

 

OnJune 18, 2003, the Company announced its second quarter dividend of$0.1425 per share.  The dividend waspaid on July 8, 2003 to stockholders of record on June 30, 2003.

 

##### **Financial Instruments with Off-Balance SheetRisk**

##### ** **

The Bank isparty to financial instruments with off-balance sheet risk in the normal courseof business to meet the financing needs of its customers.  Those financial instruments primarilyinclude commitments to extend credit. Commitments to extend credit are agreements to lend to a customer solong as there is no violation of any condition established in the contract. TheBank evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained is basedon management’s credit evaluation of the customer.  The Bank’s exposure to credit loss in the event of nonperformanceby the customer is represented by the contractual amount of those financialinstruments.  The commitments tooriginate first mortgage loans represent amounts, which the Bank plans to fundwithin a period of 30 to 90 days.

 

The Bank’sapproved, but unused lines of credit are based on underwriting standards thatgenerally do not allow total borrowings, including the equity line of credit toexceed 80% of the current appraised value of the customer’s residence.  However, the Bank offers home equity linesof credit up to 90% of the home’s current appraised value at a 1% higherinterest rate.

 

The Bank’sstandby letters of credit are conditional commitments issued by the Bank toguarantee performance of a customer to a third party.  The credit risk involved in these transactions is essentially thesame as that involved in extending a loan to a customer in the normal course ofbusiness.  Standby letters of credit arecollateralized by mortgages, savings accounts or liens on business assets.  The fair value of standby letters of creditapproximates the amount of recorded related fees, which are not consideredmaterial.  The maximum risk ofaccounting loss for these items, which is represented by the total commitmentoutstanding, totaled $5.2 million at June 30, 2003.

 

13

----

 

At June 30, 2003 andDecember 31, 2002, the bank had the following commitments:

 
|                      |   | **June 30,  2003** |       | **December 31,  2002** |   |
|---------------------------|--------|-------------------------|------------|-----------------------------|--------|
| First mortgage loans      |   | $                       | 15,990,000 |                        | $      | 11,965,000 |   |
| Construction loans        |   | 2,599,000               |       | 808,000                     |   |
| Unused lines of credit    |   | 35,029,000              |       | 32,666,000                  |   |
| Standby letters of credit |   | 5,170,000               |       | 4,927,000                   |   |
|                           |        |                         |            |                             |        |  |  |

 

**Recent Accounting Pronouncements**

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costsassociated with exit or disposal activities and nullifies Emerging Task Force(EITF) Issue No. 94-3, “Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring).”  This Statement iseffective for exit or disposal activities that are initiated afterDecember 31, 2002.  Adoption ofthis statement did not have a material effect on the Company’s consolidatedfinancial statements.

 

In December 2002, the FASB issued Statement 148, “Accounting forStock-Based Compensation –Transition and Disclosure” (FAS 148). FAS 148 amends FAS 123, “Accounting for Stock-Based Compensation, toprovide alternative methods of transition for a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  In addition, this Statement amends thedisclosure requirements of FAS 123 to require prominent disclosures in both theannual and interim financial statements about the method of accounting forstock-based employee compensation and the effect of the method used on reportedresults.  Adoption of this statement didnot have a material effect on the Company’s consolidated financial statements.

 

InJanuary 2003, the FASB issued Interpretation No. 46, “Consolidation ofVariable Interest Entities” which provides new accounting guidance on when toconsolidate a variable interest entity. A variable interest entity exists when either the total equityinvestment at risk is not sufficient to permit the entity to finance itsactivities by itself, or the equity investors lack one of three characteristicsassociated with owning a controlling financial interest.  Those characteristics include the direct orindirect ability to make decisions about an entity’s activities through votingrights or similar rights, the obligation to absorb the expected loss of anentity if they occur, and the right to receive the expected residual return ofthe entity if they occur.  We do notexpect that the adoption of this Interpretation will have a material impact onour consolidated financial statements.

 

In April 2003,the FASB issued SFAS No.149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities.” This Statement amends and clarifies accounting for derivativeinstruments, including certain derivative instruments embedded in other contracts,and for hedging activities.  ThisStatement is effective for contracts entered into or modified afterJune 30, 2003 and for hedging relationships designated after June 30,2003.  We do not expect that theadoption of this Statement will have a material impact on our consolidatedfinancial

14

----

 

statements.

 

InMay 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity.”  This Statement would require that certainfinancial instruments with characteristics of both liabilities and equity beclassified on the consolidated balance sheets as liabilities.  The Statement is effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning afterJune 15, 2003.  We do not expectthat the adoption of this Statement will have a material impact on ourconsolidated financial statements.

 

15

----

 

**Average Balance Sheet**

 

The following tables set forth certain information relating to the Bankfor the three and six months ended June 30, 2003 and 2002,respectively.  The average yields andcosts are derived by dividing income or expense by the average balance ofinterest-earning assets or interest-bearing liabilities, respectively, for theperiods shown and reflect annualized yields and costs.  Average balances are derived from averagemonthly balances.  The yields and costsinclude fees, which are considered adjustments to yields.  Tax exempt income has been calculated on atax equivalent basis using a tax rate of 34% and amounted to $200,000 and$175,000 for the three months ended June 30, 2003 and 2002, and $414,000and $346,000 for the six months ended June 30, 2003 and 2002,respectively.

 
|                                                              |   | **Three  Months Ended  June 30, 2003** |    | **Three  Months Ended  June 30, 2002** |   |
|-------------------------------------------------------------------|--------|---------------------------------------------|---------|---------------------------------------------|--------|
| **(in thousands)**                                                |   | **Average  Balance**                        |    | **Interest**                                |   | **Yield/Cost** |   | **Average  Balance** |   | **Interest** |   | **Yield/Cost** |   |
| Assets:                                                           |   |                                        |    |                                        |   |   |   |   |   |   |   |   |   |
| Interest earning assets:                                          |   |                                        |    |                                        |   |   |   |   |   |   |   |   |   |   |
| Short-term deposits and FHLB stock                                |   | $                                           | 36,898  |                                        | 184    |   | 2.00 | % | 34,243 |   | 176 |   | 2.06 | % |
| Investment securities                                             |   | 91,951                                      |    | 1,290                                       |   | 5.61 | % | 71,311 |   | 1,202 |   | 6.74 | % |
| Mortgage-backed securities                                        |   | 14,839                                      |    | 135                                         |   | 3.63 | % | 11,556 |   | 168 |   | 5.80 | % |
| Mortgage loans                                                    |   | 538,990                                     |    | 8,576                                       |   | 6.36 | % | 486,124 |   | 8,598 |   | 7.07 | % |
| Other loans                                                       |   | 107,253                                     |    | 1,589                                       |   | 5.92 | % | 77,556 |   | 1,237 |   | 6.38 | % |
| Total interest earning assets                                     |   | 789,931                                     |    | 11,774                                      |   | 5.96 | % | 680,790 |   | 11,381 |   | 6.69 | % |
| Noninterest earning assets                                        |   | 45,628                                      |    |                                        |   |   |   | 38,902 |   |   |   |   |   |
| Total assets                                                      |   | $                                           | 835,559 |                                        |   |   |   |   | 719,692 |   |   |   |   |   |
| Liabilities and stockholders’ equity                         |   |                                        |    |                                        |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities                                      |   |                                        |    |                                        |   |   |   |   |   |   |   |   |   |
| Deposits:                                                         |   |                                        |    |                                        |   |   |   |   |   |   |   |   |   |
| Money market accounts                                             |   | $                                           | 145,926 |                                        | 707    |   | 1.94 | % | 115,058 |   | 851 |   | 2.96 | % |
| Passbook savings accounts                                         |   | 116,922                                     |    | 479                                         |   | 1.64 | % | 103,800 |   | 630 |   | 2.43 | % |
| NOW Accounts                                                      |   | 35,325                                      |    | 64                                          |   | 0.73 | % | 32,582 |   | 85 |   | 1.05 | % |
| Certificates of deposit                                           |   | 217,776                                     |    | 1,803                                       |   | 3.31 | % | 181,667 |   | 1,855 |   | 4.08 | % |
| Total deposits                                                    |   | 515,949                                     |    | 3,053                                       |   | 2.37 | % | 433,107 |   | 3,421 |   | 3.16 | % |
| FHLB Advances                                                     |   | 188,367                                     |    | 2,305                                       |   | 4.90 | % | 171,700 |   | 2,299 |   | 5.36 | % |
| Total interest-bearing liabilities                                |   | 704,316                                     |    | 5,358                                       |   | 3.04 | % | 604,807 |   | 5,720 |   | 3.78 | % |
| Noninterest-bearing liabilities                                   |   | 54,988                                      |    |                                        |   |   |   | 43,698 |   |   |   |   |   |
| Total liabilities                                                 |   | 759,304                                     |    |                                        |   |   |   | 648,505 |   |   |   |   |   |
| Total stockholders’ equity                                   |   | 76,255                                      |    |                                        |   |   |   | 71,187 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                   |   | $                                           | 835,559 |                                        |   |   |   |   | 719,692 |   |   |   |   |   |
| Net interest income before provision for loan  losses             |   |                                        |    | 6,416                                       |   |   |   |   |   | 5,661 |   |   |   |
| Interest rate spread                                              |   |                                        |    |                                        |   | 2.92 | % |   |   |   |   | 2.91 | % |
| Net interest margin as a percent of  interest earning assets      |   |                                        |    |                                        |   | 3.25 | % |   |   |   |   | 3.33 | % |
| Ratio of interest-earning assets to  interest-bearing liabilities |   |                                        |    |                                        |   | 112.16 | % |   |   |   |   | 112.56 | % |

 

16

----

 
|                                                              |   | **Six  Months Ended  June 30, 2003** | ** ** | **Six  Months Ended  June 30, 2002** | ** ** |
|-------------------------------------------------------------------|--------|-------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                                                |   | **Average  Balance**                      | ** ** | **Interest**                              | ** ** | **Yield/Cost** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Yield/Cost** | ** ** |
| Assets:                                                           |   |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Interest earning assets:                                          |   |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Short-term deposits and FHLB stock                                |   | $                                         | 35,511     |                                      | 334        |   | 1.88 | % | 33,255 |   | 334 |   | 2.01 | % |
| Investment securities                                             |   | 89,701                                    |       | 2,594                                     |       | 5.78 | % | 70,165 |   | 2,292 |   | 6.53 | % |
| Mortgage-backed securities                                        |   | 15,826                                    |       | 308                                       |       | 3.90 | % | 12,179 |   | 353 |   | 5.80 | % |
| Mortgage loans                                                    |   | 531,767                                   |       | 17,190                                    |       | 6.47 | % | 481,438 |   | 17,278 |   | 7.18 | % |
| Other loans                                                       |   | 100,595                                   |       | 2,987                                     |       | 5.94 | % | 74,247 |   | 2,422 |   | 6.53 | % |
| Total interest earning assets                                     |   | 773,400                                   |       | 23,413                                    |       | 6.05 | % | 671,284 |   | 22,679 |   | 6.76 | % |
| Noninterest earning assets                                        |   | 43,774                                    |       |                                      |       |   |   | 36,518 |   |   |   |   |   |
| Total assets                                                      |   | $                                         | 817,174    |                                      |       |   |   |   | 707,802 |   |   |   |   |   |
|                                                              |   |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Liabilities and stockholders’ equity                         |   |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities                                      |   |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Deposits:                                                         |   |                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Money market accounts                                             |   | $                                         | 145,731    |                                      | 1,461      |   | 2.01 | % | 112,693 |   | 1,641 |   | 2.91 | % |
| Passbook savings accounts                                         |   | 112,493                                   |       | 957                                       |       | 1.70 | % | 99,780 |   | 1,200 |   | 2.40 | % |
| NOW Accounts                                                      |   | 34,520                                    |       | 143                                       |       | 0.82 | % | 31,360 |   | 157 |   | 1.00 | % |
| Certificates of deposit                                           |   | 215,444                                   |       | 3,660                                     |       | 3.40 | % | 178,568 |   | 3,786 |   | 4.24 | % |
| Total deposits                                                    |   | 508,188                                   |       | 6,221                                     |       | 2.45 | % | 422,401 |   | 6,784 |   | 3.21 | % |
| FHLB Advances                                                     |   | 181,367                                   |       | 4,578                                     |       | 5.05 | % | 174,283 |   | 4,623 |   | 5.31 | % |
| Total interest-bearing liabilities                                |   | 689,555                                   |       | 10,799                                    |       | 3.13 | % | 596,684 |   | 11,407 |   | 3.82 | % |
| Noninterest-bearing liabilities                                   |   | 52,123                                    |       |                                      |       |   |   | 40,684 |   |   |   |   |   |
| Total liabilities                                                 |   | 741,678                                   |       |                                      |       |   |   | 637,368 |   |   |   |   |   |
| Total stockholders’ equity                                   |   | 75,496                                    |       |                                      |       |   |   | 70,434 |   |   |   |   |   |
| Total liabilities and stockholders’ equity                   |   | $                                         | 817,174    |                                      |       |   |   |   | 707,802 |   |   |   |   |   |
| Net interest income before provision for  loan losses             |   |                                      |       | 12,614                                    |       |   |   |   |   | 11,272 |   |   |   |
| Interest rate spread                                              |   |                                      |       |                                      |       | 2.92 | % |   |   |   |   | 2.94 | % |
| Net interest margin as a percent of  interest earning assets      |   |                                      |       |                                      |       | 3.26 | % |   |   |   |   | 3.36 | % |
| Ratio of interest-earning assets to  interest-bearing liabilities |   |                                      |       |                                      |       | 112.16 | % |   |   |   |   | 112.50 | % |

 

17

----

 

Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk.

 

The Bank’sinterest rate sensitivity is monitored by management through the use of a Net PortfolioValue Model which generates estimates of the change in the Bank’s net portfoliovalue (“NPV”) over a range of interest rate scenarios.  NPV is the present value of expected cashflows from assets, liabilities, and off-balance sheet contracts.  The NPV ratio, under any interest ratescenario, is defined as the NPV in that scenario divided by the market value ofassets in the same scenario.  The modelassumes estimated prepayment rates, reinvestment rates and deposit decayrates.  The Sensitivity Measure is thedecline in the NPV ratio, in basis points, caused by a 2% increase or decreasein rates, whichever produces a larger decline. The higher the institution’s Sensitivity Ratio, the greater its exposureto interest rate risk is considered to be.  The following NPV Table sets forth the Bank’s NPV as ofJune 30, 2003.

 
| **Change in  Interest Rates  in Basis Points  (Rate Shock)** |   |                                       |   |         |   |          |   |         |   |   |   |
|--------------------------------------------------------------|--------|--------------------------------------------|--------|--------------|--------|---------------|--------|--------------|--------|--------|--------|
| **Net  Portfolio Value**                                     |   | **NPV as% of  Portfolio  Value of Assets** |
| **Amount**                                                   |   | **$ Change**                               |   | **% Change** |   | **NPV Ratio** |   | **% Change** |
|                                                         |   | **(In  thousands)**                        |   |         |   |          |   |         |   |
|                                                         |   |                                       |   |         |   |          |   |         |   |   |   |
| +300                                                         |   | $                                          | 54,726 |         | $      | (39,839       | )      | (42.13       | )%     | 6.54   | %      | (38.94 | )% |
| +200                                                         |   | 69,020                                     |   | (25,545      | )      | (27.01        | )      | 8.10         |   | (24.37 | )      |
| +100                                                         |   | 84,762                                     |   | (9,803       | )      | (10.37        | )      | 9.76         |   | (8.87  | )      |
| Static                                                       |   | 94,565                                     |   | —       |   | —        |   | 10.71        |   | — |   |
| -100                                                         |   | 96,853                                     |   | 2,288        |   | 2.42          |   | 10.84        |   | 1.21   |   |
| -200                                                         |   | 92,859                                     |   | (1,706       | )      | (1.80         | )      | 10.34        |   | (3.45  | )      |
| -300                                                         |   | 86,996                                     |   | (7,569       | )      | (8.00         | )      | 9.65         |   | (9.90  | )      |
|                                                              |        |                                            |        |              |        |               |        |              |        |        |        |  |  |

 

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

 

Item 4.  Controls and Procedures

 

(a)  Evaluation of disclosure controls andprocedures.  The Company maintainscontrols and procedures designed to ensure that information required to bedisclosed in the reports that the Company files or submits under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the rules and forms of the

 

18

----

 

Securities and ExchangeCommission.  Based upon their evaluationof those controls and procedures performed within 90 days of the filing date ofthis report, the chief executive officer and the chief financial officer of theCompany concluded that the Company’s disclosure controls and procedures wereadequate.

 

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

 

19

----

 

**PARTII.  OTHER INFORMATION**

Item 1.                    LegalProceedings.

 

The Company isnot involved in any pending legal proceedings other than routine legalproceedings occurring in the ordinary course of business.  Such routine legal proceedings, in theaggregate, are believed by management to be immaterial to the Company’sfinancial condition, results of operations and cash flows.

 

Item 2.                    Changes inSecurities and Use of Proceeds.

 

None.

 

Item 3.                    DefaultsUpon Senior Securities.

 

None.

 

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

 

None.

 

Item 5.                    OtherInformation.

 

None.

 

Item 6.                    Exhibitsand Reports on Form 8-K.

 
| (a)    | Exhibits            |   |
|--------|---------------------|--------|
|   | 3.1                 |   | Certificate  of Incorporation of EFC Bancorp, Inc. * |   |
|   | 3.2                 |   | Bylaws of  EFC Bancorp, Inc. * |   |
|   | 4.0                 |   | Specimen  Stock Certificate of EFC Bancorp, Inc. * |   |
|   | 11.0                |   | Statement  re: Computation of Per Share Earnings Incorporated herein by reference to  Footnote 3 on page 5 of this document. |   |
|   | 31.1                |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. |   |
|   | 31.2                |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. |   |
|   | 32.1                |   | Certification  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |   |
| (b)    | Reports on Form 8-K |   |
|   | None.               |   |

 

----

|   | *    Incorporated  herein by reference from the Exhibits filed with the Registration Statement  on Form S-1 and any amendments thereto.Registration Statement No. 333-38637  filed with the Securities and Exchange Commission (“SEC”) on October 24,  1997. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

20

----

 

**SIGNATURES**

 

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

 

 
|   | EFC BANCORP, INC.     |
|--------|-----------------------|
|   |                  |   |
|   |                  |   |
| Dated: | August 12,  2003 |   | By: | /s/ Barrett  J. O’Connor |   |
|   |                  | Barrett J.  O’Connor |
|   |                  | President  and Chief Executive Officer  (Principal executive officer) |
|   |                  |   |
|   |                  |   |
| Dated: | August 12,  2003 |   | By: | /s/ James J.  Kovac |   |
|   |                  | James J.  Kovac |
|   |                  | Executive  Vice President and Chief |
|   |                  | Financial  Officer  (Principal financial and accounting officer) |
|        |                       |  |  |  |  |  |

 

21

----