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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission File Number 1-13605
EFC BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 36-4193304
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1695 Larkin Avenue, Elgin, Illinois 60123
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(Address of principal executive offices) (Zip Code)
(847) 741-3900
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changes
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 7,491,434 shares
of common stock, par value $0.01 per share, were outstanding as of August 13,
1998
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EFC Bancorp, Inc.
Form 10-Q
For the Quarter Ended June 30, 1998
INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 1998 and December 31, 1997 . . . . . . . . . . . . . . . . .1
Consolidated Statements of Income - For the Three
Months Ended June 30, 1998 and 1997 and the Six
Months Ended June 30, 1998 and 1997 . . . . . . . . . . . . . . . . .2
Consolidated Statements of Cash Flows - For the
Six Months Ended June 30, 1998 and 1997 . . . . . . . . . . . . . . .3
Notes to Consolidated Financial Statements. . . . . . . . . . . . . .4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . .7
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . 16
PART II: OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . . . . . 16
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . 16
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
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PART I. FINANCIAL INFORMATION
EFC BANCORP, INC.
JUNE 30,1998
Item 1. Financial Statements.
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EFC BANCORP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1998 (unaudited) and December 31, 1997
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<CAPTION>
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June 30 December 31
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Assets 1998 1997
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Cash and cash equivalents:
On hand and in banks $ 2,230,308 1,965,164
Interest bearing deposits with financial institutions 19,703,524 8,133,390
Loans receivable, net 282,592,157 246,695,479
Mortgage-backed securities available-for-sale, at fair value 20,822,743 20,163,460
Investment securities available-for-sale, at fair value 60,867,223 45,483,665
Foreclosed real estate 98,427 98,652
Stock in Federal Home Loan Bank of Chicago, at cost 2,390,600 2,051,000
Accrued interest receivable 1,914,381 1,101,172
Office properties and equipment, net 6,434,808 5,389,546
Other assets 590,075 781,159
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Total assets $ 397,644,246 331,862,687
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Liabilities and Stockholders' Equity
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Liabilities:
Deposits $ 264,929,039 270,013,430
Borrowed money 32,000,000 24,000,000
Advance payments by borrowers for taxes and insurance 548,147 423,996
Income taxes payable - 1,595,540
Accrued expenses and other liabilities 6,048,642 3,599,980
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Total liabilities 303,525,828 299,632,946
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Stockholders' Equity:
Common stock, par value $.01 per share, authorized 25,000,000 shares;
issued and outstanding 7,491,434 and 0 shares, respectively 74,914 -
Additional paid-in capital 72,694,412 -
Retained Earnings, substantially restricted 29,835,863 31,493,996
Unearned ESOP obligation (8,961,298) -
Accumulated other comprehensive income 474,527 735,745
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Total stockholders' equity 94,118,418 32,229,741
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Commitments and contingencies - -
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Total liabilities and stockholders' equity $ 397,644,246 331,862,687
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</TABLE>
See accompanying notes to consolidated financial statements.
1
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EFC BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statement of Income (unaudited)
For the three months ended June 30, 1998 and 1997
and the six months ended June 30, 1998 and 1997
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<CAPTION>
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Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Interest income:
Loans secured by real estate $ 5,080,426 4,733,326 9,918,048 9,389,518
Other loans 286,002 220,478 544,963 427,209
Mortgage-backed securities available-for-sale 320,081 346,267 652,534 727,019
Investment securities and mutual funds
available-for-sale 1,334,844 788,960 2,563,769 1,567,223
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Total interest income 7,021,353 6,089,031 13,679,314 12,110,969
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Interest expense:
Deposits 2,971,997 2,927,262 5,990,696 5,741,747
Borrowed money 461,914 342,415 911,830 740,882
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Total interest expense 3,433,911 3,269,677 6,902,526 6,482,629
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Net interest income before provision for loan losses 3,587,442 2,819,354 6,776,788 5,628,340
Provision for loan losses 54,000 9,000 110,000 18,000
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Net interest income after provision for loan losses 3,533,442 2,810,354 6,666,788 5,610,340
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Noninterest income:
Service fees 157,149 140,174 306,044 281,822
Real estate and insurance commissions 23,457 55,468 36,584 67,415
Gain on sale of foreclosed real estate - - - 7,915
Gain on sale of securities 11,814 - 11,814 -
Other 4,165 8,567 11,089 24,006
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Total noninterest income 196,585 204,209 365,531 381,158
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Noninterest expense:
Compensation and benefits 1,162,363 943,807 2,161,172 1,840,424
Office building, net 86,209 72,253 166,569 168,047
Depreciation and repairs 176,754 140,740 344,196 291,321
Data processing 113,690 77,436 210,149 150,500
Federal insurance premium 42,900 40,981 83,135 81,216
NOW account operating expenses 60,034 57,045 126,650 115,973
Foundation contribution 5,549,210 - 5,549,210 -
Other 495,400 530,588 1,136,871 1,016,133
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Total noninterest expense 7,686,560 1,862,850 9,777,952 3,663,614
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Income (loss) before income taxes (3,956,533) 1,151,713 (2,745,633) 2,327,884
Income tax expense (benefit) (1,498,463) 390,398 (1,087,501) 792,407
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Net income (loss) $ (2,458,070) 761,315 (1,658,132) 1,535,477
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</TABLE>
See accompanying notes to consolidated financial statements.
2
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EFC BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
For the six months ended June 30, 1998 and 1997
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1998 1997
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Cash flows from operating activities:
Net income (loss) $ (1,658,132) 1,535,477
Adjustment to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Amortization of premiums and discounts, net 49,624 (19,948)
Provision for loan losses 110,000 18,000
Depreciation of office properties and equipment 234,135 187,146
Gain on sale of foreclosed real estate - (7,915)
Gain on sale of investment securities (11,814) -
Decrease (increase) in accrued interest receivable and other assets, net (622,125) 134,755
Increase in income taxes payable, accrued expenses
and other liabilities, net 1,062,618 1,099,691
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Net cash provided by (used in) operating activities (835,694) 2,947,206
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Cash flows from investing activities:
Net increase in loans receivable (29,557,278) (5,634,542)
Purchases of loans receivable (6,449,400) (238,977)
Purchases of mortgage-backed securities available-for-sale (4,549,273) (2,112,347)
Principal payments on mortgage-backed securities available-for-sale 3,757,673 4,031,814
Maturities of investment securities available-for-sale 13,452,108 9,109,550
Proceeds from the sale of investment securities available-for-sale 2,011,814 -
Purchases of investment securities available-for-sale (31,099,537) (10,733,978)
Purchases of office properties and equipment (1,279,397) (607,628)
Purchases of stock in the Federal Home Loan Bank of Chicago (339,600) -
Proceeds from the sale of foreclosed real estate 225 74,716
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Net cash used in investing activities (54,052,665) (6,111,392)
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Cash flows from financing activities:
Proceeds from the issuance of common stock 72,769,326 -
Increase in unearned ESOP obligation (8,961,298) -
Net increase (decrease) in deposits (5,084,391) 5,885,022
Proceeds from borrowed money 14,000,000 46,000,000
Repayments on borrowed money (6,000,000) (48,000,000)
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Net cash provided by financing activities 66,723,637 3,885,022
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Net increase in cash and cash equivalents 11,835,278 720,836
Cash and cash equivalents at beginning of period 10,098,554 10,953,010
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Cash and cash equivalents at end of period $ 21,933,832 11,673,846
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</TABLE>
See accompanying notes to consolidated financial statements.
3
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Item 1. Financial Statements, continued
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EFC BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of EFC Bancorp, Inc. (the Company) and its wholly-owned subsidiary,
Elgin Financial Center, SB (the Bank) and its wholly-owned subsidiary, Fox
Valley Service Corp.
In the opinion of the management of the Company, the accompanying
consolidated financial statements include all normal recurring adjustments
necessary for a fair presentation of the financial position and results of
operations for the periods presented. All significant intercompany
transactions have been eliminated in consolidation. Certain information and
footnote disclosures normally included in financial statements presented in
accordance with generally accepted accounting principles have been condensed
or omitted. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for the full year. It is
suggested that the accompanying unaudited consolidated financial statements
be read in conjunction with the Company's 1997 Annual Report on Form 10-K.
Currently, other than investing in various securities, the Company does not
directly transact any material business other than through the Bank.
Accordingly, the discussion herein addresses the operations of the Company as
they are conducted through the Bank.
Note 2: COMPREHENSIVE INCOME
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME, which is effective
for fiscal years beginning after December 15, 1997. This statement established
standards for reporting and displaying comprehensive income and its components
(revenue, expenses, gains and losses) in a full set of general purpose financial
statements. The Company adopted SFAS No.130 on January 1, 1998. The Company's
comprehensive income for the three and six month periods ended June 30, are as
follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Net income (loss) $(2,458,700) 761,315 (1,658,132) 1,535,477
Other comprehensive income (loss), net of tax:
Unrealized holding gain (losses) on
securities arising during the period (92,256) 190,435 (268,661) (97,307)
Less:
reclassification adjustment
for net gain realized in net income (7,443) - (7,443) -
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Comprehensive income (loss) $(2,543,513) 951,750 (1,919,350) 1,438,170
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4
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There were no sales of investment securities during the six months ended
June 30, 1997. During the second quarter of 1998 the sale of investment
securities resulted in a gain of $11,814 ($7,443 net of tax effect).
Note 3: CONVERSION TO STOCK FORM OF OWNERSHIP
On August 12, 1997, the Board of Directors adopted a Plan of Conversion, as
amended (the Plan) pursuant to which the Bank converted from a state chartered
savings bank to a state chartered stock savings bank.
On April 3, 1998, the Savings Bank completed the conversion and EFC
Bancorp, Inc. completed the issuance and sale of 6,936,513 shares of its own
common stock (the Transaction), at a price of $10.00 per share, through an
initial public offering (IPO), with the Savings Bank's members receiving all of
the shares. The stock of the Bank was issued to a holding company, EFC Bancorp,
Inc. (the Company) formed in connection with the conversion. The Company also
contributed 554,921 shares of its common stock, from authorized, but unissued
shares, to a charitable foundation (the Foundation) immediately following the
conversion. The Company received gross proceeds from the Transaction of
$69,365,130, before the reduction from gross proceeds of $2,145,000 for IPO
related expenses, which were initially deferred. On the date of the Transaction,
$12,490,054 of deposits and $56,875,076 of nondepository stock subscription
funds were transferred to stockholder's equity and $37,258,531 of nondepository
stock subscription funds were subsequently returned to subscribers; also
subsequent to the Transaction, the ESOP purchased, through a $8,961,298 loan
from the Company, 599,314 shares of common stock on the open market.
The Bank established a liquidation account, as of the date of conversion,
in the amount of $31,024,068, equal to its retained earnings as of the date of
the latest consolidated statement of financial condition appearing in the final
prospectus. The Liquidation Account is established to provide a limited priority
claim on the assets of the Bank to qualifying pre-conversion depositors
(Eligible and Supplemental Eligible Account Holders) who continue to maintain
deposits in the Bank after conversion. In the unlikely event of a complete
liquidation of the Bank, and only in such event, each Eligible Account Holder
and Supplemental Eligible Account Holder would then receive from the Liquidation
Account a liquidation distribution based on his proportionate share of the then
total remaining qualifying deposits.
The Company established a Foundation in connection with the conversion. The
amount of shares the Company contributed to the Foundation equaled 8.0% of the
total amount of common stock sold in the Conversion. The Foundation was formed
as a complement to the Bank's existing community activities and is dedicated to
community activities and the promotion of charitable causes.
The Foundation submitted a request to the Internal Revenue Service to be
recognized as a tax-exempt organization and will likely be classified as a
private foundation. The contribution of common stock to the Foundation by the
Company will be tax deductible, subject to an annual limitation based on 10% of
the Company's annual taxable income. The Company, however, will
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be able to carry forward any unused portion of the deduction for five years
following the contribution. The Company recognized a $5,549,000 expense for
the full amount of the contribution, offset in part by the $2,053,000
corresponding tax benefit, during the second quarter of 1998.
Subsequent to the conversion, the Bank may not declare or pay cash
dividends on or repurchase any of its shares of common stock if the effect
thereof would cause stockholders' equity to be reduced below applicable
regulatory capital maintenance requirements or if such declaration and payment
would otherwise violate regulatory requirements or would reduce the bank's
capital level below the amount then required for the aforementioned Liquidation
Account. Also, capital distribution regulations limit the Bank's ability to make
capital distributions which include dividends, stock redemptions or repurchases,
cash-out mergers, interest payments on certain convertible debt and other
transactions charged to the capital account based on their capital level and
supervisory condition. Federal regulations also preclude any repurchase of the
stock of the Bank or its holding company for one year after conversion except
where compelling and valid business reasons are established and approved by the
FDIC.
6
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PART I: FINANCIAL INFORMATION
EFC BANCORP, INC
JUNE 30, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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The following analysis discusses changes in the financial condition at
June 30, 1998 and results of operations for the three and six months ended
June 30, 1998, and should be read in conjunction with the Bank's Consolidated
Financial Statements and the notes thereto, appearing in Part I, Item 1 of
this document.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company intends
such forward-looking statements to be covered by the safe harbor provisions
for forward-looking statements contained in the Private Securities 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 describe future plans, strategies and expectations of the
Company, are generally identified by use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," or similar expressions. The
Company's ability to predict results or the actual effect of future plans or
strategies is inherently uncertain. Factors which could have a material
adverse effect on the operations of the Company and the subsidiaries include,
but are not limited to, changes in: interest rates, general economic
conditions, legislative/regulatory changes, monetary and fiscal policies of
the U.S. Government, including policies of the U.S. Treasury and the Federal
Reserve Board, the quality or composition of the loan or investment
portfolios, demand for loan products, deposit flows, competition, demand for
financial services in the Company's market area and accounting principles and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Company and its business,
including additional factors that could materially affect the Company's
financial results, is included in the Company's filings with the SEC.
The Company does not undertake - and specifically disclaims any
obligation - to publicly release the result of any revisions which may be
made to any forward-looking statements to reflect events or circumstances
after the date of such statements or to reflect the occurrence of anticipated
or unanticipated events.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997
Total assets at June 30, 1998 were $397.6 million, which represented an
increase of $65.7 million, or 19.8%, compared to $331.9 million at December
31, 1997. The change in assets was
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primarily due to an increase in loans receivable, cash and cash equivalents
and investment securities. Loans receivable, net increased by $35.9 million,
or 14.6% , to $282.6 million at June 30, 1998 as compared to $246.7 million
at December 31, 1997. The increase in loans receivable was attributable to
loan originations exceeding repayments in a favorable decreasing rate
environment during the quarter. Cash and cash equivalents increased by $11.8
million to $21.9 million at June 30, 1998 as compared to $10.1 million at
December 31, 1997. Investment securities increased by $15.4 million, or
33.8%, to $60.9 million at June 30, 1998 as compared to $45.5 million at
December 31, 1997. The increase in cash and cash equivalents and investment
securities was directly related to the proceeds generated by the recent stock
conversion. The growth in total assets was funded by increases in borrowed
money and the aforementioned proceeds generated in the stock conversion.
Borrowed money, representing FHLB advances, increased by $8.0 million to
$32.0 million at June 30, 1998 as compared to $24.0 million at December 31,
1997. Stockholders' equity increased by $61.9 million to $94.1 million at
June 30, 1998 as compared to $32.2 million at December 31, 1997. This
increase resulted from the stock conversion as previously noted.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
1997
GENERAL. The Company's net income decreased $3.2 million, to a $2.5
million loss for the three months ended June 30, 1998, from $761,000 for the
three months ended June 30, 1997. The decrease is directly attributable to
the establishment and funding of the Elgin Financial Foundation ("the
Foundation"). On April 3, 1998, the Company completed its conversion to the
stock form of ownership. As part of the conversion the Company established
the Foundation with a one-time $5.5 million non-recurring pre-tax donation
($3.5 million after tax). This donation was funded with authorized but
unissued common stock immediately following the conversion. This contribution
amounted to 8.0% of the common stock sold. The net income of the Company,
excluding the one-time, non-recurring contribution to the Foundation,
amounted to $1.0 million for the three months ended June 30, 1998.
INTEREST INCOME. Interest income increased $932,000, or 15.3%, to $7.0
million for the three months ended June 30, 1998, compared with the same
period in 1997. This increase resulted from a combination of an increase in
average interest-earning assets, which increased by $69.8 million, or 22.1%,
to $385.5 million for the three months ended June 30, 1998 from $315.7
million for the comparable period in 1997 and a decrease in average yield.
Mortgage loan interest income increased by $347,000 for the three months
ended June 30, 1998. The average balance of mortgage loans increased $29.7
million, and loan yield decreased by 38 basis points from 8.06% to 7.68%.
Interest income from investment securities and mortgage backed securities
increased by $302,000 for the three months ended June 30, 1998, compared with
the same period in 1997. This increase resulted from a combination of an
increase in average balance of $17.1 million and a one basis point increase
in yield. Interest income on short term deposits increased by $212,000 as a
result of increases in yield and average balance. The yield on short term
deposits increased by 84 basis points. The related average balance increased
by $20.2 million to $29.7 million for the three months ended June 30, 1998,
as compared to $9.5 million for the three months ended June 30, 1997. This
increase is directly related to the stock subscription proceeds received in
March, 1998. Overall, the average yield on interest-earning assets decreased
by 44 basis points to 7.28% for the
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three months ended June 30, 1998 from 7.72% for the three months ended June
30, 1997.
INTEREST EXPENSE. Interest expense increased by $164,000, or 5.0%, to $3.4
million for the three months ended June 30, 1998, from $3.3 million for the
three months ended June 30, 1997. This increase resulted from the combination of
an increase in the average balance of interest-bearing liabilities, offset by
an overall decrease in the average rate paid on those interest bearing
liabilities. The average balance of interest-bearing liabilities increased by
$14.8 million, or 5.4%, to $288.9 million at June 30, 1998 from $274.0 million
at June 30, 1997. This change reflects a $4.8 million increase in the deposit
accounts, with the remaining $10.0 million increase attributable to advances
from the FHLB-Chicago. The average rate paid on combined deposits and borrowed
money decreased by 2 basis points to 4.75% for the three months ended June 30,
1998 from 4.77% for the three months ended June 30, 1997.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest
income before provision for loan losses increased $768,000, or 27.2%, to $3.6
million for the three months ended June 30, 1998 from $2.8 million for the
comparable period in 1997. This increase was primarily attributable to a
$55.1 million increase in average interest-earning assets in excess of
average interest-bearing liabilities to $96.7 million for the three months
ended June 30, 1998 from $41.6 million for the same period in 1997. Interest
rate spread decreased by 41 basis points from 2.94% for the three months
ended June 30, 1997 to 2.53% for the three months ended June 30, 1998.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses
increased by $45,000, to $54,000 for the three months ended June 30, 1998 from
$9,000 in 1997. At June 30, 1998 and 1997, non-performing loans totaled $2.1
million and $642,000, respectively. At June 30, 1998, the ratio of the allowance
for loan losses to non-performing loans was 57.5% compared to 128.7% at June 30,
1997. The increase in non-performing loans is primarily due to a $1.2 million
first mortgage loan becoming adversely classified during the third quarter of
1997. The Bank classified the loan as substandard and non-performing. The ratio
of the allowance to total loans was 0.43% and 0.34%, at June 30, 1998 and 1997,
respectively. There were no charge-offs for the three months ended June 30,
1997. Charge-offs for the three months ended June 30, 1998 amounted to $34,000.
Management periodically calculates an allowance sufficiency analysis based upon
the portfolio composition, asset classifications, loan-to-value ratios,
potential impairments in the loan portfolio, and other factors. Management
believes that the provision for loan losses and the allowance for loan losses
are currently reasonable and adequate to cover any potential losses reasonably
expected in the existing loan portfolio. While management estimates loan losses
using the best available information, no assurance can be given that future
additions to the allowance will not be necessary based on changes in economic
and real estate market conditions, further information obtained regarding
problem loans, identification of additional problem loans and other factors,
both within and outside of management's control.
NONINTEREST INCOME. Noninterest income totaled $197,000 and $204,000 for
the three months ended June 30, 1998 and 1997, respectively. The decrease in
noninterest income is primarily attributable to a $17,000 increase in service
fee income to $157,000 for the three
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months ended June 30, 1998 from $140,000 for the comparable period in 1997
offset by a $32,000 decrease in insurance commissions to $23,000 for the
three months ended June 30, 1998 from $55,000 for the three months ended June
30, 1997.
NONINTEREST EXPENSE. Noninterest expense increased by $5.8 million, to
$7.7 million for the three months ended June 30, 1998 from $1.9 million for
the comparable period in 1997. On April 3, 1998 the Company completed its
conversion to the stock form of ownership. As part of the conversion the
Company established the Elgin Financial Foundation with a one-time $5.5
million non-recurring pre-tax donation. This donation was funded with
authorized but unissued common stock immediately following the conversion.
This contribution amounted to 8.0% of the common stock sold. Compensation and
benefits increased by $219,000, or 23.2%, to $1.2 million for the three
months ended June 30, 1998 compared to $944,000 for the three months ended
June 30, 1997. This increase was primarily due to a combination of annual
salary increases, the addition of staff and the adoption of an Employee Stock
Ownership Plan which was established in connection with the conversion. It is
likely, salary and benefit expense will increase in future quarters assuming
a stock based employee benefit plan is adopted by the Company. All other
operating expenses, including advertising, marketing, insurance, postage,
communications, data processing and other office expense increased by a
combined $56,000, or 6.1%, to $975,000 for the three months ended June 30,
1998 compared to $919,000 for 1997. Management continues to emphasize the
importance of expense management and control in order to continue to provide
expanded banking services to a growing market base.
INCOME TAX EXPENSE. Income tax expense (benefit) totaled ($1.5 million)
for the three months ended June 30, 1998 compared to $390,000 for the
comparable period in 1997. The decrease in the provision for income taxes was
the result of a combination of a decrease in income before income tax expense
and an increase in the effective income tax rate. The effective income tax
rate increased to 37.9% for the three months ended June 30, 1998 from 33.9%
for the three months ended June 30, 1997. Income before income tax expense
decreased by $5.1 million, to a loss of $4.0 million for the three months
ended June 30, 1998 from $1.1 million for the same period in 1997. This
decrease is primarily attributable to the one-time non-recurring $5.5 million
donation made to establish the Foundation.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1997
GENERAL. The Company's net income decreased $3.2 million, to a $1.7
million loss for the six months ended June 30, 1998, from $1.5 million for
the six months ended June 30, 1997. The decrease is directly attributable to
the establishment and funding of the Foundation. On April 3, 1998, the
Company completed its conversion to the stock form of ownership. As part of
the conversion the Company established the Foundation with a one-time $5.5
million non-recurring pre-tax donation ($3.5 million after tax). This
donation was funded with authorized but unissued common stock immediately
following the conversion. This contribution amounted to 8.0% of the common
stock sold. The net income of the Company, excluding the one-time,
non-recurring contribution to the Foundation, amounted to $1.8 million for
the six months ended June 30, 1998.
10
<PAGE>
INTEREST INCOME. Interest income increased $1.6 million, or 13.0%, to
$13.7 million for the six months ended June 30, 1998, compared with the same
period in 1997. This increase resulted from a combination of an increase in
average interest-earning assets, which increased by $64.3 million, or 20.4%,
to $379.0 million for the six months ended June 30, 1998 from $314.7 million
for the comparable period in 1997 and a decrease in average yield. Mortgage
loan interest income increased by $529,000 for the six months ended June 30,
1998. The average balance of mortgage loans increased $19.2 million, and loan
yield decreased by 19 basis points from 8.04% to 7.85%. Interest income from
investment securities and mortgage backed securities increased by $449,000
for the six months ended June 30, 1998, compared with the same period in
1997. This increase resulted from a combination of an increase in average
balance of $16.4 million offset by a 36 basis point decrease in yield.
Interest income on short term deposits increased by $468,000 as a result of
increases in yield and average balance. The yield on short term deposits
increased by 72 basis points. The related average balance increased by $26.0
million to $36.4 million for the six months ended June 30, 1998, as compared
to $10.4 million for the six months ended June 30, 1997. This increase is
directly related to the stock subscription proceeds received in March, 1998.
Overall, the average yield on interest-earning assets decreased by 48 basis
points to 7.22% for the six months ended June 30, 1998 from 7.70% for the six
months ended June 30, 1997.
INTEREST EXPENSE. Interest expense increased by $420,000, or 6.5%, to
$6.9 million for the six months ended June 30, 1998, from $6.5 million for
the six months ended June 30, 1997. This increase resulted from the
combination of an increase in the average balance of interest-bearing
liabilities, offset by an overall decrease in the average rate paid on those
interest-bearing liabilities. The average balance of interest-bearing
liabilities increased by $19.7 million, or 7.14%, to $295.0 million at June
30, 1998 from $275.3 million at June 30, 1997. This change reflects a $11.5
million increase in the deposit accounts, with the remaining $8.2 million
increase attributable to advances from the FHLB-Chicago. The average rate
paid on combined deposits and borrowed money decreased by 3 basis points to
4.68% for the six months ended June 30, 1998 from 4.71% for the six months
ended June 30, 1997.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest
income before provision for loan losses increased $1.1 million, or 20.4%, to
$6.8 million for the six months ended June 30, 1998 from $5.6 million for the
comparable period in 1997. This increase was primarily attributable to a
$44.7 million increase in average interest-earning assets in excess of
average interest-bearing liabilities to $84.0 million for the six months
ended June 30, 1998 from $39.3 million for the same period in 1997. Interest
rate spread decreased by 45 basis points from 2.99% for the six months ended
June 30, 1997 to 2.54% for the six months ended June 30, 1998.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses
increased by $92,000, to $110,000 for the six months ended June 30, 1998 from
$18,000 in 1997. At June 30, 1998 and 1997, non-performing loans totaled $2.1
million and $642,000, respectively. At June 30, 1998, the ratio of the
allowance for loan losses to non-performing loans was 57.5% compared to
128.7% at June 30, 1997. The increase in non-performing loans is primarily
due to a $1.2 million first mortgage loan becoming adversely classified
during the third quarter of 1997. The Bank classified the loan as substandard
and non-performing. The ratio of the allowance to total loans
11
<PAGE>
was 0.43% and 0.34%, at June 30, 1998 and 1997, respectively. There were no
charge-offs for the six months ended June 30, 1997. Charge-offs for the six
months ended June 30, 1998 amounted to $34,000. Management periodically
calculates an allowance sufficiency analysis based upon the portfolio
composition, asset classifications, loan-to-value ratios, potential
impairments in the loan portfolio, and other factors. Management believes
that the provision for loan losses and the allowance for loan losses are
currently reasonable and adequate to cover any potential losses reasonably
expected in the existing loan portfolio. While management estimates loan
losses using the best available information, no assurance can be given that
future additions to the allowance will not be necessary based on changes in
economic and real estate market conditions, further information obtained
regarding problem loans, identification of additional problem loans and other
factors, both within and outside of management's control.
NONINTEREST INCOME. Noninterest income totaled $366,000 and $381,000
for the six months ended June 30, 1998 and 1997, respectively. Service fee
income increased $24,000 to $306,000 for the six months ended June 30, 1998
from $282,000 for the comparable period in 1997 this was offset by a $30,000
decrease in insurance commissions to $37,000 for the six months ended June
30, 1998 from $67,000 for the six months ended June 30, 1997.
NONINTEREST EXPENSE. Noninterest expense increased by $6.1 million, to
$9.8 million for the six months ended June 30, 1998 from $3.7 million for the
comparable period in 1997. On April 3, 1998 the Company completed its
conversion to the stock form of ownership. As part of the conversion the
Company established the Elgin Financial Foundation with a one-time $5.5
million non-recurring pre-tax donation. This donation was funded with
authorized but unissued common stock immediately following the conversion.
This contribution amounted to 8.0% of the common stock sold. Compensation and
benefits increased by $321,000, or 17.4%, to $2.2 million for the six months
ended June 30, 1998 compared to $1.8 million for the six months ended June
30, 1997. This increase was primarily due to a combination of annual salary
increases, the addition of staff and the adoption of an Employee Stock
Ownership Plan which was established in connection with the conversion. It is
likely, salary and benefit expense will increase in future quarters assuming
a stock based employee benefit plan is adopted by the Company. All other
operating expenses, including advertising, marketing, insurance, postage,
communications, data processing and other office expense increased by a
combined $250,000, or 13.7%, to $2.1 million for the six months ended June
30, 1998 compared to $1.8 million for the comparable period in 1997.
Management continues to emphasize the importance of expense management and
control in order to continue to provide expanded banking services to a
growing market base.
INCOME TAX EXPENSE. Income tax expense (benefit) totaled ($1.1 million)
for the six months ended June 30, 1998 compared to $792,000 for the
comparable period in 1997. The decrease in the provision for income taxes was
the result of a combination of a decrease in income before income tax expense
and an increase in the effective income tax rate. The effective income tax
rate increased to 39.6% for the six months ended June 30, 1998 from 34.0% for
the six months ended June 30, 1997. Income before income tax expense
decreased by $5.0 million, to a loss of $2.7 million for the six months
ended June 30, 1998 from $2.3 million for the same period in 1997. This
decrease is primarily attributable to the one-time non-recurring $5.5 million
donation made to establish the Foundation.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are savings deposits, proceeds from the
principal and interest payments on loans and proceeds from the maturation of
securities and, to a lesser extent, borrowings from FHLB-Chicago. While
maturities and scheduled amortization of loans and securities are predictable
sources of funds, deposit outflows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The primary investing activities of the Bank are the origination of
residential one-to-four-family loans and, to a lesser extent multi-family and
commercial real estate, construction and land, commercial and consumer loans and
the purchase of mortgage-backed and mortgage-related securities. Deposit flows
are affected by the level of interest rates, the interest rates and products
offered by the local competitors, the Bank and other factors.
The Bank's most liquid assets are cash and interest-bearing demand
accounts. The levels of these assets are dependent on the Bank's operating,
financing, lending and investing activities during any given period. At June 30,
1998, cash and interest-bearing demand accounts totaled $21.9 million, or 5.4%
of total assets.
See the "Consolidated Statement of Cash Flows" in the Unaudited
Consolidated Financial Statements included in this Form 10-Q for the sources and
uses of cash flows for operating, investing and financing activities for the six
months ended June 30, 1998.
At June 30, 1998, the Bank exceeded all of its regulatory capital
requirements. The following is a summary of the Bank's regulatory capital ratios
at June 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Total Capital to Total Assets........................... 18.01%
Total Capital to Risk-Weighted Assets................... 30.20%
Tier I Leverage Ratio................................... 16.30%
Tier I to Risk-Weighted Assets.......................... 29.66%
</TABLE>
At June 30, 1998, the Company had a Total Capital to Total Assets ratio of
23.67%.
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed without considering the impact of
the upcoming change in the century. If not corrected, many computer applications
and systems could fail or create erroneous results by or at the year 2000. The
Bank primarily utilizes a third party vendor and such vendor's proprietary
software to process its electronic data. The third party data processor vendor
is in the process of modifying, upgrading or replacing its computer software
applications and systems as necessary to accommodate the "year 2000" dating
changes necessary to permit correct recording of year dates for 2000 or later
years. The Vendor also has engaged various consultants to review
13
<PAGE>
its "year 2000" issues and has begun to implement a "year 2000" compliance
program. The Bank has prepared a "year 2000" Plan and is in the process of
testing internal systems for compliance. The Bank does not currently have
information concerning the compliance status of all suppliers and customers.
In the event that any of the Bank's significant suppliers do not successfully
and timely achieve "year 2000" compliance, the Bank's business or operations
could be adversely affected. The cost, if any, that may arise from "year
2000" issues is not currently determinable.
RECENT ACCOUNTING PRONOUNCEMENTS
During 1995, the Financial Accounting Standards Board issued Statement
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, (SFAS No. 123) which
provides new accounting guidelines over the treatment of employee stock
options. The Statement gives entities a choice of either adopting a new fair
value method of accounting for employee stock options and expensing any
related compensation costs in the income statement, or continuing to apply
Accounting Principles Board Opinion No. 25 and provide proforma disclosure of
the affect of the fair value method within the financial statements. The
Statement is effective for financial statements beginning after December 15,
1995. The Company will adopt the provisions of the Statement upon the
formation of a stock option plan.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, EARNINGS PER SHARE (SFAS
No. 128). This Statement established standards for computing and presenting
earnings per share (EPS). Basic EPS excludes dilutions and is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities to issue common stock were
exercised or converted into common stock and is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15, EARNINGS PER SHARE. Dual
presentation of basic and diluted earnings per share are required on the face
of the income statements of all public entities with complex capital
structures. This Standard supercedes Opinion No. 15 and is effective for
financial statements issued for periods ending after December 15, 1997. The
Statement will be adopted beginning in the third quarter of 1998.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 131, DISCLOSURE ABOUT SEGMENT OF AN
ENTERPRISE AND RELATED INFORMATION (SFAS No. 131) which establishes standards
for the way that public business enterprises report information about
operating segments in annual financial statements. This Statement requires
that those enterprises report selected information about operating segments
in interim financial reports issued to shareholders. This Statement
supercedes FASB No. 14 FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS
ENTERPRISE. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and
in assessing performance. The Company adopted the Statement on January 1,
1998 and it did not have a material impact on the Company.
In February 1998, the Financial Accounting Standards Board issued Statement
No. 132,
14
<PAGE>
EMPLOYERS' DISCLOSURES ABOUT PENSION AND OTHER POST RETIREMENT BENEFITS -
AN AMENDMENT OF FASB STATEMENTS NO. 87, 88, AND 106. This Statement revises
employers' disclosures about pension and other post-retirement benefit plans,
but does not change the measurement or recognition of these plans. It
standardizes the disclosure requirements to the extent practicable, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis and eliminates certain
disclosures that are no longer as useful as they were when Statements 87, 88,
and 106 were issued. This Statement is effective for fiscal years beginning
after December 15, 1997. The Company adopted the Statement on January 1, 1998
and the disclosure requirements are not expected to have a material impact on
the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
Statement standardizes the accounting for derivative instruments, including
certain derivative instruments imbedded in other contracts. Under the standard,
entities are required to carry all derivative instruments in the statement of
financial position at fair value. The accounting for the changes in fair value
of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and, if so, on the reason for
holding it. If certain conditions are met, entities may elect to designate a
derivative instrument as a hedge of exposures to changes in fair values, cash
flows, or foreign currencies. If hedge exposure is a fair value exposure, the
gain or loss on the derivative instrument is recognized in earnings in the
period of change together with the offsetting loss or gain on the hedged item
attributable to the risk being hedged. If the hedged exposure is a cash flow
exposure, the effective portion of the gain on the derivative instrument is
reported initially as a component of other comprehensive income and subsequently
reclassified into earnings when the forecasted transaction affects earnings. Any
amount excluded from the assessment of hedge effectiveness as well as the
ineffective portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to the accounting for fair
value and cash flow hedges. If the derivative instrument is not designated as a
hedge, the gain or loss is recognized in earnings in the period of change. The
Company anticipates that the adoption of this Statement will not have a material
impact in the Company's financial statements.
15
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
-----------------------------------------------------------
There have been no material changes in information regarding
quantitative and qualitative disclosures about market risk from the
information presented as of December 31, 1997, in the 1997 Form 10-K, to June
30, 1998.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
None.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (SECTION 249.308 OF THIS CHAPTER).
<TABLE>
<CAPTION>
<S> <C>
(a) Exhibits
11.0 Statement re: Computation of Per Share Earnings (not
applicable as the Company did not have stock
outstanding until April 3, 1998. The statement will
be provided for the Quarter ended September 30, 1998)
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None.
</TABLE>
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EFC BANCORP, INC.
Dated: August 13, 1998 By: /s/ Barrett J. O'Connor
----------------------- -----------------------------------
Barrett J. O'Connor
President and Chief Executive Officer
(principal executive officer)
Dated: August 13, 1998 By: /s/ James J. Kovac
----------------------- ------------------------------------
James J. Kovac
Senior Vice President and Chief
Financial Officer
(Principal financial and accounting
officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,230
<INT-BEARING-DEPOSITS> 19,704
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 81,690
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 283,794
<ALLOWANCE> 1,202
<TOTAL-ASSETS> 397,644
<DEPOSITS> 264,929
<SHORT-TERM> 0
<LIABILITIES-OTHER> 6,596
<LONG-TERM> 32,000
0
0
<COMMON> 75
<OTHER-SE> 94,044
<TOTAL-LIABILITIES-AND-EQUITY> 397,644
<INTEREST-LOAN> 10,463
<INTEREST-INVEST> 3,216
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 13,679
<INTEREST-DEPOSIT> 5,991
<INTEREST-EXPENSE> 6,903
<INTEREST-INCOME-NET> 6,777
<LOAN-LOSSES> 110
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 9,778
<INCOME-PRETAX> (2,746)
<INCOME-PRE-EXTRAORDINARY> (2,746)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,658)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.22
<LOANS-NON> 1,993
<LOANS-PAST> 1,993
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,126
<CHARGE-OFFS> 34
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,202
<ALLOWANCE-DOMESTIC> 1,202
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 98
</TABLE>
