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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 March 31, 1999
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: 7,116,934 shares of common
stock, par value $0.01 per share, were outstanding as of March, 1999.
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EFC Bancorp, Inc.
Form 10-Q
For the Quarter Ended March 31, 1999
INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
March 31, 1999 and December 31, 1998.................................... 1
Consolidated Statements of Operations - For the Three
Months Ended March 31, 1999 and 1998.................................... 2
Consolidated Statements of Cash Flows - For the
Three Months Ended March 31, 1999 and 1998.............................. 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................. 14
PART II: OTHER INFORMATION.......................................................... 14
Item 1. Legal Proceedings.......................................................... 14
Item 2. Changes in Securities and Use of Proceeds.................................. 14
Item 3. Defaults Upon Senior Securities............................................ 14
Item 4. Submission of Matters to a Vote of Security Holders........................ 14
Item 5. Other Information.......................................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................... 15
SIGNATURES............................................................................. 16
</TABLE>
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PART I. FINANCIAL INFORMATION
EFC BANCORP, INC.
MARCH 31, 1999
Item 1. FINANCIAL STATEMENTS.
EFC BANCORP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited)
March 31, 1999 and December 31, 1998
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<CAPTION>
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March 31, December 31,
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Assets 1999 1998
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Cash and cash equivalents:
On hand and in banks $ 2,360,334 2,217,242
Interest bearing deposits with financial institutions 20,509,178 21,062,664
Loans receivable, net 321,711,518 308,990,195
Mortgage-backed securities available-for-sale, at fair value 15,201,506 17,880,124
Investment securities available-for-sale, at fair value 58,358,644 57,636,600
Foreclosed real estate 195,165 192,564
Stock in Federal Home Loan Bank of Chicago, at cost 3,275,000 2,849,840
Accrued interest receivable 1,839,472 1,971,598
Office properties and equipment, net 6,630,241 6,529,734
Other assets 1,612,200 1,545,345
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Total assets $ 431,693,258 420,875,906
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Liabilities and Stockholders' Equity
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Liabilities:
Deposits $ 269,871,519 269,581,995
Borrowed money 65,500,000 57,000,000
Advance payments by borrowers for taxes and insurance 1,015,596 643,051
Income taxes payable 1,569,152 1,263,619
Accrued expenses and other liabilities 4,818,520 3,631,972
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Total liabilities 342,774,787 332,120,637
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Stockholders' Equity:
Preferred stock, par value $.01 per share, authorized 2,000,000 shares;
no shares issued - -
Common stock, par value $.01 per share, authorized 25,000,000 shares;
issued 7,491,434 shares 74,914 74,914
Additional paid-in capital 72,167,210 72,213,277
Treasury stock, at cost, 374,500 shares (4,355,125) (4,355,125)
Unearned employee stock ownership plan (ESOP), 549,371 and 559,360
shares at March 31, 1999 and December 31, 1998, respectively (8,214,521) (8,363,878)
Unearned stock award plan, 274,685 and 289,668 shares at
March 31, 1999 and December 31, 1998, respectively (3,055,877) (3,222,561)
Retained Earnings, substantially restricted 32,080,419 31,757,826
Accumulated other comprehensive income 221,451 650,816
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Total stockholders' equity 88,918,471 88,755,269
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Commitments and contingencies - -
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Total liabilities and stockholders' equity $ 431,693,258 420,875,906
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</TABLE>
See accompanying notes to consolidated financial statements.
1
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EFC BANCORP, INC.
AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
For the three months ended March 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
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Interest income:
Loans secured by real estate $ 5,675,378 4,837,622
Other loans 310,639 258,960
Mortgage-backed securities available-for-sale 276,348 332,452
Investment securities available-for-sale 1,137,686 1,228,925
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Total interest income 7,400,051 6,657,959
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Interest expense:
Deposits 2,715,657 3,018,699
Borrowed money 811,523 449,916
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Total interest expense 3,527,180 3,468,615
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Net interest income before provision for loan losses 3,872,871 3,189,344
Provision for loan losses 45,000 56,000
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Net interest income after provision for loan losses 3,827,871 3,133,344
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Noninterest income:
Service fees 218,879 148,896
Real estate and insurance commissions 8,478 13,127
Other 75,859 6,924
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Total noninterest income 303,216 168,947
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Noninterest expense:
Compensation and benefits 1,368,983 998,809
Office building, net 92,190 80,360
Depreciation and repairs 207,274 167,442
Data processing 102,845 96,459
Federal insurance premium 40,278 40,235
NOW account operating expenses 62,589 66,616
Other 653,981 641,470
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Total noninterest expense 2,528,140 2,091,391
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Income before income taxes 1,602,947 1,210,900
Income tax expense 568,661 410,963
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Net income $ 1,034,286 799,937
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Earnings per share (basic and diluted) $ 0.16 n/a
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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 three months ended March 31, 1999 and 1998
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1999 1998
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Cash flows from operating activities:
Net income $ 1,034,286 799,937
Adjustment to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of premiums and discounts, net 24,171 12,462
Provision for loan losses 45,000 56,000
Stock award plan shares allocated 166,684 -
ESOP shares committed to be released 149,357 -
Change in fair value of ESOP shares (46,067) -
Depreciation of office properties and equipment 136,158 111,191
Decrease (increase) in accrued interest receivable and other assets, net 65,271 (495,318)
Increase in income taxes payable, accrued expenses
and other liabilities, net 1,427,445 2,218,344
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Net cash provided by operating activities 3,002,305 2,702,616
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Cash flows from investing activities:
Net increase in loans receivable (8,140,048) (11,658,224)
Purchases of loans receivable (4,626,275) (1,902,400)
Principal payments on mortgage-backed securities available-for-sale 2,714,205 1,513,403
Maturities of investment securities available-for-sale 9,009,530 8,423,034
Purchases of investment securities available-for-sale (10,495,209) (14,867,695)
Purchases of office properties and equipment (236,665) (257,135)
Purchases of stock in the Federal Home Loan Bank of Chicago (425,160) -
Net increase in foreclosed real estate (2,601) -
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Net cash used in investing activities (12,202,223) (18,749,017)
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Cash flows from financing activities:
Conversion proceeds held - 94,133,607
Net increase in deposits 289,524 9,400,994
Proceeds from borrowed money 8,500,000 14,000,000
Repayments on borrowed money - (4,000,000)
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Net cash provided by financing activities 8,789,524 113,534,601
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Net increase (decrease) in cash and cash equivalents (410,394) 97,488,200
Cash and cash equivalents at beginning of period 23,279,906 10,098,554
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Cash and cash equivalents at end of period $ 22,869,512 107,586,754
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</TABLE>
See accompanying notes to consolidated financial statements.
3
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Item 1. FINANCIAL STATEMENTS, CONTINUED
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 Savings Bank (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. Results of operations for
the interim period are not necessarily indicative of the results to be
expected for the full year. Certain information and footnote disclosure
normally included in financial statements presented in accordance with
generally accepted accounting principles have been condensed or omitted. It
is suggested that the accompanying unaudited consolidated financial
statements be read in conjunction with the Company's 1998 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
Statement of Financial Accounting Standards No. 130, REPORTING
COMPREHENSIVE INCOME, 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's
comprehensive income for the three month periods ended March 31 are as
follows:
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1999 1998
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Net income $ 1,034,286 799,937
Other comprehensive loss, net of tax - unrealized
holding losses on securities arising during the
period (429,365) (176,405)
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Comprehensive income $ 604,921 623,532
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</TABLE>
There were no sales of investment securities as of and for the three months
ended March 31, 1999 and 1998.
4
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Note 3: REORGANIZATION TO A STOCK CORPORATION
On August 12, 1997, the Board of Directors adopted a Plan of Conversion,
as amended pursuant to which the Bank converted (the Plan) from a state
chartered savings bank to a state chartered stock savings bank (the
Conversion). The Plan was approved by the regulatory authorities and the
members at a special meeting. EFC Bancorp, Inc. was formed by the Bank in
October 1977 and acquired 100% of the Bank's outstanding common stock in
connection with the Conversion.
During 1997, the Bank changed its name to Elgin Financial Savings Bank.
On April 3, 1998, the Savings Bank completed the conversion and the
Company 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). 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 net proceeds from the Transaction of $72,769,326, after 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 Savings 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 balance sheet 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 ans Supplemental Eligible Account Holders) who continue
to maintain deposits in the Bank after conversion. In the unlikely event of a
complete liquidation of the Savings Bank, and only in such an event, each
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 Foundation, created in connection with the Conversion, submitted a
request to the Internal Revenue Service to be recognized as a tax-exempt
organization and would likely be classified as a private foundation. The
contributed 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, would be able to carryforward
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 Savings Bank may not declare or pay
cash dividends on or repurchase any of its shares of common stock if the
effect thereof would cause stockholder's equity to be reduced below
applicable regulatory capital maintenance requirements
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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 Savings 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 Savings Bank or its holding company for one year after
conversion except where compelling and valid business reasons are established
and approved by the FDIC.
In addition to the 25,000,000 authorized shares of common stock, the
Company authorized 2,000,000 shares of preferred stock with a par value of
$.01 per share. The Board of Directors is authorized, subject to any
limitations by law, to provide for the issuance of the shares of preferred
stock in series, to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of each series and any qualifications,
limitations or restrictions thereof. As of March 31, 1999, there were no
shares of preferred stock issued.
6
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PART I: FINANCIAL INFORMATION
EFC BANCORP, INC
MARCH 31, 1999
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following analysis discusses changes in the financial condition and
results of operations at and for the three months ended March 31, 1999, and
should be read in conjunction with the Company's unaudited 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 MARCH 31, 1999 AND DECEMBER 31, 1998
Total assets at March 31, 1999 were $431.7 million, which represented an
increase of
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$10.8 million, or 2.6%, compared to $420.9 million at December 31, 1998. The
change in assets was primarily due to an increase in loans receivable. Loans
receivable, net increased by $12.7 million, or 4.1% , to $321.7 million at
March 31, 1999 as compared to $309.0 million at December 31, 1998. The
increase in loans receivable was primarily attributable to a favorable rate
environment during the quarter. The growth in total assets was largely
funded by increases in borrowed money. Borrowed money, representing FHLB
advances, increased by $8.5 million to $65.5 million at March 31, 1999 as
compared to $57.0 million at December 31, 1998.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND
1998
GENERAL. The Company's net income increased $234,000, or 29.3%, to
$1,034,000 for the three months ended March 31, 1999, from $800,000 for the
three months ended March 31, 1998.
INTEREST INCOME. Interest income increased $742,000, or 11.2%, to $7.4
million for the three months ended March 31, 1999, compared with the same
period in 1998. The increase in interest income was primarily due to an
increase in the average balance of interest-earning assets of $42.9 million,
or 11.5%, to $415.4 million for the three months ended March 31, 1999 from
$372.5 million for the comparable period in 1998, the effect of which was
partially offset by a decrease in the average yield on interest-earning
assets by 2 basis points to 7.13% for the three months ended March 31, 1999
from 7.15% for the three months ended March 31, 1998.
Mortgage loan interest income increased by $838,000 for the three months
ended March 31, 1999. The average balance of mortgage loans increased $59.5
million, while loan yield decreased by 48 basis points from 8.04% to 7.56%.
Interest income from investment securities and mortgage backed securities
decreased by $47,000 for the three months ended March 31, 1999, compared with
the same period in 1998. This decrease resulted from a combination of a
decrease in average balance of $2.3 million and a 5 basis point decline in
yield. Interest income on short term deposits decreased by $115,000 as a
result of a decrease in the average balance partially offset by an increase
in yield. The yield on short term deposits increased by 36 basis points. The
related average balance decreased by $18.4 million to $24.7 million for the
three months ended March 31, 1999, as compared to $43.1 million for the three
months ended March 31, 1998.
INTEREST EXPENSE. Interest expense increased by $59,000, or 1.7%, to
$3.5 million for the three months ended March 31, 1999. 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 $19.2 million, or 6.4%, to $320.4
million at March 31, 1999 from $301.2 million at March 31, 1998. This change
reflects an $9.8 million decrease in the deposit accounts, offset by a $29.0
million increase attributable to advances from the FHLB-Chicago. The average
rate paid on combined deposits and borrowed money decreased by 21 basis
points to 4.40% for the three months ended March 31, 1999 from 4.61% for the
three months ended March 31, 1998.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest
income before provision for loan losses increased $684,000, or 21.4%, to $3.9
million for the three months
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ended March 31, 1999 from $3.2 million for the comparable period in 1998.
This increase was primarily attributable to a $23.7 million increase in
average interest-earning assets in excess of average interest-bearing
liabilities to $95.0 million for the three months ended March 31, 1999 from
$71.3 million for the same period in 1998. Interest rate spread increased by
19 basis points to 2.73% for the three months ended March 31, 1999 from 2.54%
for the three months ended March 31, 1998. The net interest margin as a
percent of interest-earning assets increased by 31 basis points to 3.73% for
the three months ended March 31, 1999 as compared to 3.42% for the comparable
period in 1998. This increase is due to a net increase in interest-earning
assets in excess of interest-bearing liabilities, as well as the
aforementioned increase in interest rate spread.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased by
$11,000, to $45,000 for the three months ended March 31, 1999 from $56,000 in
1998. At March 31, 1999 and 1998, non-performing loans totaled $1.0 million
and $2.0 million, respectively. At March 31, 1999, the ratio of the allowance
for loan losses to non-performing loans was 141.3% compared to136.5% at
December 31, 1998 and 60.5% at March 31, 1998. The decrease in non-performing
loans is primarily due to a $1.2 million first mortgage loan adversely
classified at March 31, 1998. This property was subsequently sold and is no
longer in the Bank's loan portfolio. The ratio of the allowance to total
loans was .44%, .44% and .33%, at March 31, 1999, December 31, 1998 and March
31, 1998, respectively. Charge-offs for the three months ended March 31, 1999
amounted to $2,000. There were no charge-offs for the three months ended
March 31, 1998. 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.
NONINTEREST INCOME. Noninterest income totaled $303,000 and $169,000
for the three months ended March 31, 1999 and 1998, respectively. The
increase in noninterest income is primarily attributable to a $70,000
increase in service fees and a $70,000 increase in loan fees . These
increases are due to new fee policies as well as increased loan volume.
NONINTEREST EXPENSE. Noninterest expense increased by $437,000, or
20.9%, to $2.5 million for the three months ended March 31, 1999 from $2.1
million for the comparable period in 1998. Compensation and benefits
increased by $370,000, or 37.1%, to $1.4 million for the three months ended
March 31, 1999 compared to $1.0 million for the three months ended March 31,
1998. This increase was primarily due to a combination of annual salary
increases, the addition of staff, the adoption of an Employee Stock
Ownership Plan which was established in connection with the Conversion, and
the adoption of a stock-based employee benefit plan on October 27, 1998. All
other operating expenses, including advertising, marketing, insurance,
postage, communications, data processing and other office expense increased
by a combined $67,000, or 6.1%, to $1.2 million for the three months ended
March 31, 1999 compared to $1.1 million for 1998. 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 totaled $569,000 for the three
months ended March 31, 1999 compared to $411,000 for the comparable period in
1998. The increase in the
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provision for income taxes was the result of a combination of an increase in
earnings before income tax expense and an increase in the effective income
tax rate. The effective income tax rate increased to 35.5% for the three
months ended March 31, 1999 from 33.9% for the three months ended March 31,
1998. Earnings before income tax expense increased by $392,000, or 32.4%, to
$1.6 million for the three months ended March 31, 1999 from $1.2 million for
the same period in 1998.
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 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' 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 March
31, 1999, cash and interest-bearing demand accounts totaled $22.9 million, or
5.3% of total assets.
See the "Consolidated Statements 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 three months ended March 31, 1999 and 1998.
At March 31, 1999, the Bank exceeded all of its regulatory capital
requirements. The following is a summary of the Bank's regulatory capital at
March 31, 1999:
Total Capital to Total Assets................ 16.83%
Total Capital to Risk-Weighted Assets........ 27.74%
Tier I Leverage Ratio........................ 16.69%
Tier I to Risk-Weighted Assets............... 27.18%
At March 31, 1999, the Company had a Total Capital to Total Assets ratio of
20.60%.
On March 17, 1999, the Company announced its first quarterly dividend of
$0.10 per share. The effective date of the dividend was March 31, 1999.
Payment of the cash dividend was made on April 12, 1999.
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SUBSEQUENT EVENT
On April 23, 1999, the Company announced that its Board of Directors
authorized the repurchase of up to 25 per cent of its outstanding shares as
of April 16, 1999. The repurchase will be made through a "Modified Dutch
Auction Tender." The maximum number of shares that will be repurchased is
1,779,233. The period for tendering shares under this offering will end on
June 1, 1999.
YEAR 2000 COMPLIANCE
With the new Millennium approaching, organizations are examining their
computer systems to ensure they are Year 2000 compliant. The issue, in
simple terms, is that many existing computer programs and firmware use only
two digits to identify the year in a date field. The designs of these
products were engineered without considering the impact of the upcoming
century change. As the century is implied in the date on January 1, 2000,
computers and or systems that are not year 2000 compliant could assume the
year is 1900 or generate incorrect data. Systems that calculate, compare or
sort using the incorrect date will cause erroneous results, ranging from
system malfunctions to incorrect or incomplete transaction processing. If
not remedied, potential risks include business interruption or shut down,
financial loss, reputation loss and legal liability. The Bank primarily
utilizes a third party vendor which has completed their process of
modification, upgrade and replacement of its computer software applications
and systems to accommodate the "Year 2000" date changes.
The Bank has undertaken a company-wide initiative to addresss the year
2000 issue. Using the guidelines set forth in the Federal Financial
Institutions Examination Council (FFIEC) Interagency statements, Year 2000
Project Management Awareness, the Company has developed a comprehensive
action plan to prepare, as necessary, computer systems and facilities. As
part of the action plan the Board of Directors approved the formation of a
Year 2000 Steering Committee. The Year 2000 Steering Committee consists of
representatives of the data processing, lending, savings, operations,
accounting and compliance areas. The members of this committee have primary
responsibility for fulfillment of the Bank's Year 2000 commitment.
The Bank has completed the assessment stage of the action plan. As part
of this stage an inventory of all software and hardware used internally and
at the third party service bureau was performed and documented, including
operational hardware categorized as non-IT (information technologies)
systems. After inventorying all systems the Bank performed a risk assessment
to determine whether system components were compliant. There were five
vendors that were identified as mission critical and letters of Year 2000
readiness were obtained from them. Of the five vendors, four are ready at
this time and one is in the renovation and validation phase. The risk
assessment process was used to generate an Inventory Risk Analysis Matrix
(IRAM) of both hardware and software. The IRAM is being used as a guide for
the renovation and validation stages of the action plan.
The Renovation and Validation stages of the Action Plan are
approximately 95% complete and are expected to be completed during the second
quarter of 1999. A duplicate of the
11
<PAGE>
current in house systems was built and is being utilized for testing with our
service provider, BISYS. BISYS is a national financial service bureau
identified by Elgin Financial Savings Bank as a mission critical service
provider. BISYS has notified the Bank, in writing, that its remediation
efforts are completed. Testing is 100% complete. Although the Bank is
currently analyzing the returned testing data, the data that has been
analyzed, shows no Year 2000 issues on our renovated systems. Members of our
Year 2000 Steering Committee are coordinating the testing and follow up
validation of testing. In addition, the Bank's compliance officer is
monitoring adherence to the comprehensive action plan. The FDIC also
conducts Year 2000 examinations of the Bank.
The Bank is focusing on developing appropriate policies or risk
mitigation actions to address Year 2000 related failures prior to the
millennium. The Bank is in the process of developing contingency plans and
expects to have them completed in the second quarter of 1999. The
contingency plan has the following elements to date: The Bank has a backup
generator installed; Data Processing has implemented daily backups of file
servers at all branches; Cash reserves will be increased in the third quarter
to account for increased demand; and a trial balance of all accounts will be
generated at year end to allow Bank operations to resume manually.
Relative to Year 2000 related corporate risks, the Bank's most likely
worst case scenario relates to possible excess amount of customer withdrawals
resulting from depositor concern over Year 2000 failures. Accordingly, the
Bank has developed a customer awareness program to inform customers of the
Bank's efforts to be Year 2000 compliant, and in so doing assure that their
funds are secure. Parts of this program include a mailing to all account
holder households, customer seminars, and articles in the Bank's local
newspaper.
The Bank estimates that its external costs related to the Year 2000 will
be approximately $80,000, and has incurred and recorded approximately $43,000
in expense through March 31, 1999. This level of cost is not considered
material to the operations of the Company. Internal staff time spent on Year
2000 activities has been extensive, however, such time and expense has not
been quantified.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," in June 1998. SFAS No. 133 standardizes
the accounting for derivative instruments, including certain derivative
instruments embedded 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 changes in the fair value (I.E.,
gains or losses) 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 the hedged 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 or loss
on the derivative
12
<PAGE>
instrument is reported initially as a component of other comprehensive
income (outside earnings) and subsequently reclassified into earnings when
the forecasted transaction affects earnings. Any amounts excluded from the
assessment of hedge effectiveness as well as the ineffective portion of the
gain or loss is reported in earnings immediately. SFAS No. 133 is effective
for all quarters of fiscal years beginning after June 15, 1999. Earlier
application is encouraged, but is permitted only as of the beginning of any
fiscal quarter that begins after the issuance of the statement. This
statement should not be applied retroactively to financial statements of
prior periods. The Company anticipates that the adoption of SFAS No. 133 will
not have a material impact in the Company's results of operations.
The FASB has issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities after the Securitization of Mortgage Loans Held for Sale by a
Mortgage Banking Enterprise: an amendment of FASB Statement No. 65," which
is effective for the first fiscal quarter beginning after December 31, 1998.
This statement requires that after the securitization of a mortgage loan held
for sale, an entity engaged in mortgage banking activities classify the
resulting mortgage-backed securities or other retained interests based on its
ability and intent to sell or hold those investments. This statement
conforms the subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking entity with the
required accounting for securities retained after the securitization of other
types of assets by a nonmortgage banking enterprise. The Company, as
required, adopted SFAS No. 134 in the first quarter 1999, which did not have
a material impact on the Company's results of operations.
13
<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, 1998 to March 31, 1999.
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.
The annual meeting of the stockholders was held on April 27, 1999. The
following proposals were voted on by the stockholders:
<TABLE>
<CAPTION>
PROPOSAL FOR WITHHELD ABSTAIN
- -------- ---------- -------- -------
<S> <C> <C> <C>
1)Election of Directors -
nominees for three year term
Leo M. Flanagan, Jr. 6,212,943 238,833
Peter A. Traeger 6,213,798 237,978
James A. Alpeter 6,183,630 268,146
<CAPTION>
FOR AGAINST ABSTAIN
- -------- ---------- -------- -------
<S> <C> <C> <C>
2)Approval of Amended and
Restated EFC Bancorp, Inc.
Stock Based Incentive Plan 5,917,166 477,718 56,892
3)Approval of appointment of
KPMG LLP as the Company's
independent auditors for the
year ended December 31, 1999 6,338,768 101,329 11,679
</TABLE>
14
<PAGE>
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (Section 249.308 OF THIS CHAPTER).
(a) Exhibits
11.0 Statement re: Computation of Per Share Earnings
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None.
15
<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: May 14, 1999 By: /s/ Barrett J. O'Connor
------------ -------------------------------------
Barrett J. O'Connor
President and Chief Executive Officer
(principal executive officer)
Dated: May 14, 1999 By: /s/ James J. Kovac
------------ -------------------------------------
James J. Kovac
Senior Vice President and Chief
Financial Officer
(Principal financial and accounting
officer)
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THIS
SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,360
<INT-BEARING-DEPOSITS> 20,509
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 73,560
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 323,128
<ALLOWANCE> 1,416
<TOTAL-ASSETS> 431,693
<DEPOSITS> 269,872
<SHORT-TERM> 10,000
<LIABILITIES-OTHER> 7,403
<LONG-TERM> 55,500
0
0
<COMMON> 75
<OTHER-SE> 88,843
<TOTAL-LIABILITIES-AND-EQUITY> 431,693
<INTEREST-LOAN> 5,986
<INTEREST-INVEST> 1,414
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,400
<INTEREST-DEPOSIT> 2,716
<INTEREST-EXPENSE> 3,527
<INTEREST-INCOME-NET> 3,873
<LOAN-LOSSES> 45
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,528
<INCOME-PRETAX> 1,603
<INCOME-PRE-EXTRAORDINARY> 1,603
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,034
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
<YIELD-ACTUAL> 7.13
<LOANS-NON> 1,003
<LOANS-PAST> 1,003
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,373
<CHARGE-OFFS> 2
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,416
<ALLOWANCE-DOMESTIC> 1,416
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 219
</TABLE>
<PAGE>
Exhibit 11.0 - Computation of Per Share Earnings
During the third quarter of 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE (SFAS No. 128).
Basic earnings per share is calculated by dividing net income by the weighted
average number of common shares outstanding. Diluted earnings per share is
calculated by dividing net income by average number of shares adjusted for
the dilutive effect of outstanding stock options. ESOP shares are only
considered outstanding for earnings per share calculations when they are
committed to be released.
Presented below are the calculations for the basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
1999
-------------
<S> <C>
Basic:
- ------
Net income $1,034,286
Weighted average shares outstanding 6,564,234
----------
----------
Basic earnings per share $ .16
----------
----------
Diluted:
- --------
Net income $1,034,286
Weighted average shares outstanding 6,564,234
Effect of dilutive stock options outstanding -
----------
Diluted weighted average shares outstanding 6,564,234
----------
----------
Diluted earnings per share $ .16
----------
----------
</TABLE>
17
