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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, 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: 5,407,390 shares of common
stock, par value $0.01 per share, were outstanding as of August 13, 1999.
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EFC Bancorp, Inc.
Form 10-Q
For the Quarter Ended June 30, 1999
INDEX
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<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
June 30, 1999 and December 31, 1998..................................1
Consolidated Statements of Income - For the Three and
Six Months Ended June 30, 1999 and 1998..............................2
Consolidated Statements of Cash Flows - For the
Six Months Ended June 30, 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...................17
PART II: OTHER INFORMATION............................................................17
Item 1. Legal Proceedings............................................................17
Item 2. Changes in Securities and Use of Proceeds....................................17
Item 3. Defaults Upon Senior Securities..............................................17
Item 4. Submission of Matters to a Vote of Security Holders..........................17
Item 5. Other Information............................................................17
Item 6. Exhibits and Reports on Form 8-K.............................................17
SIGNATURES...................................................................................18
</TABLE>
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PART I. FINANCIAL INFORMATION
EFC BANCORP, INC.
JUNE 30, 1999
Item 1. FINANCIAL STATEMENTS.
EFC BANCORP, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Balance Sheets (unaudited)
June 30, 1999 and December 31, 1998
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June 30, December 31,
Assets 1999 1998
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<S> <C> <C>
Cash and cash equivalents:
On hand and in banks $ 2,657,189 2,217,242
Interest bearing deposits with financial institutions 11,226,645 21,062,664
Loans receivable, net 342,582,248 308,990,195
Mortgage-backed securities available-for-sale, at fair value 13,712,903 17,880,124
Investment securities available-for-sale, at fair value 59,474,389 57,636,600
Foreclosed real estate 111,185 192,564
Stock in Federal Home Loan Bank of Chicago, at cost 4,160,000 2,849,840
Accrued interest receivable 2,228,683 1,971,598
Office properties and equipment, net 7,237,910 6,529,734
Other assets 1,507,192 1,545,345
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Total assets $ 444,898,344 420,875,906
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Liabilities and Stockholders' Equity
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Liabilities:
Deposits $ 288,101,539 269,581,995
Borrowed money 83,200,000 57,000,000
Advance payments by borrowers for taxes and insurance 776,150 643,051
Income taxes payable 765,044 1,263,619
Accrued expenses and other liabilities 3,731,047 3,631,972
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Total liabilities 376,573,780 332,120,637
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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 72,128,834 72,213,277
Treasury stock, at cost, 2,084,044 shares at June 30, 1999 and
374,500 shares at December 31, 1998, respectively (25,101,132) (4,355,125)
Unearned employee stock ownership plan (ESOP), 539,382 and 559,360
shares at June 30, 1999 and December 31, 1998, respectively (8,065,164) (8,363,878)
Unearned stock award plan, 259,703 and 289,668 shares at
June 30, 1999 and December 31, 1998, respectively (2,889,193) (3,222,561)
Retained Earnings, substantially restricted 32,617,264 31,757,826
Accumulated other comprehensive income (loss) (440,959) 650,816
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Total stockholders' equity 68,324,564 88,755,269
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Commitments and contingencies - -
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Total liabilities and stockholders' equity $ 444,898,344 420,875,906
============================================================================================================================
</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 and six months ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Interest income:
Loans secured by real estate $ 5,916,458 5,080,426 11,591,836 9,918,048
Other loans 319,061 286,002 629,700 544,963
Mortgage-backed securities available-for-sale 243,766 320,081 520,114 652,534
Investment securities available-for-sale 1,119,780 1,334,844 2,257,466 2,563,769
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Total interest income 7,599,065 7,021,353 14,999,116 13,679,314
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Interest expense:
Deposits 2,748,504 2,971,997 5,464,161 5,990,696
Borrowed money 998,617 461,914 1,810,140 911,830
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Total interest expense 3,747,121 3,433,911 7,274,301 6,902,526
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Net interest income before provision for loan losses 3,851,944 3,587,442 7,724,815 6,776,788
Provision for loan losses 45,000 54,000 90,000 110,000
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Net interest income after provision for loan losses 3,806,944 3,533,442 7,634,815 6,666,788
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Noninterest income:
Service fees 242,442 157,149 461,321 306,044
Real estate and insurance commissions 24,742 23,457 33,220 36,584
Gain on sale securities - 11,814 - 11,814
Other 90,669 4,165 166,528 11,089
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Total noninterest income 357,853 196,585 661,069 365,531
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Noninterest expense:
Compensation and benefits 1,291,706 1,162,363 2,660,689 2,161,172
Office building, net 98,249 86,209 190,439 166,569
Depreciation and repairs 194,069 176,754 401,343 344,196
Data processing 94,484 113,690 197,329 210,149
Federal insurance premium 40,278 42,900 80,556 83,135
NOW account operating expenses 67,880 60,034 130,469 126,650
Foundation contribution - 5,549,210 - 5,549,210
Other 693,296 495,400 1,347,277 1,136,871
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Total noninterest expense 2,479,962 7,686,560 5,008,102 9,777,952
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Income (loss) before income taxes 1,684,835 (3,956,533) 3,287,782 (2,745,633)
Income tax expense (benefit) 607,252 (1,498,463) 1,175,913 (1,087,501)
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Net income (loss) $ 1,077,583 (2,458,070) 2,111,869 (1,658,132)
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Earnings per share (basic and diluted) $ 0.18 n/a 0.33 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 six months ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
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1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,111,869 (1,658,132)
Adjustment to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Amortization of premiums and discounts, net 52,435 49,624
Provision for loan losses 90,000 110,000
Stock award plan shares allocated 333,368 -
ESOP shares committed to be released 298,714 -
Change in fair value of ESOP shares (84,443) -
Gain on sale of investment securities - (11,814)
Depreciation of office properties and equipment 272,316 234,135
Increase in accrued interest receivable and other assets, net (218,932) (622,125)
Increase (decrease) in income taxes payable, accrued expenses
and other liabilities, net (109,121) 1,062,618
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Net cash provided by (used in) operating activities 2,746,206 (835,694)
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Cash flows from investing activities:
Net increase in loans receivable (19,098,288) (29,557,278)
Purchases of loans receivable (14,583,765) (6,449,400)
Purchases of mortgage-backed securities available-for-sale - (4,549,273)
Principal payments on mortgage-backed securities available-for-sale 4,139,264 3,757,673
Maturities of investment securities available-for-sale 9,016,105 13,452,108
Proceeds from the sale of investment securities available-for-sale - 2,011,814
Purchases of investment securities available-for-sale (12,668,165) (31,099,537)
Purchases of office properties and equipment (980,492) (1,279,397)
Purchases of stock in the Federal Home Loan Bank of Chicago (1,310,160) (339,600)
Proceeds from the sale of foreclosed real estate 83,980 225
Net increase in foreclosed real estate (2,601) -
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Net cash used in investing activities (35,404,122) (54,052,665)
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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)
Cash dividends paid (711,693) -
Purchase of treasury stock (20,746,007) -
Net increase (decrease) in deposits 18,519,544 (5,084,391)
Proceeds from borrowed money 26,200,000 14,000,000
Repayments on borrowed money - (6,000,000)
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Net cash provided by financing activities 23,261,844 66,723,637
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Net increase (decrease) in cash and cash equivalents (9,396,072) 11,835,278
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 $ 13,883,834 21,933,832
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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. 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 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
The Company's comprehensive income for the three and six month periods
ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Net income (loss) $ 1,077,583 (2,458,070) $ 2,111,869 (1,658,132)
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on
securities arising during the period (662,410) (92,886) (1,091,775) (268,661)
Less:
reclassification adjustment
for net gain realized in net income - (7,443) - (7,443)
----------- ----------- ------------ -------------
Comprehensive income (loss) $ 415,173 (2,543,513) $ 1,020,094 (1,919,350)
=========== =========== ============ =============
</TABLE>
There were no sales of investment securities during the six months ended June
30, 1999. During the second quarter of 1998 the sale of investment securities
resulted in a gain of $11,814 ($7,443 net of tax effect).
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 1997 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 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 combined effect of the
net proceeds from the Transaction and the contribution to the Foundation
amounted to $72,769,326. The Company received net proceeds from the
Transaction of $67,220,130, 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 in 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 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 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 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
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, 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 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 or if such declaration and
payment would otherwise violate regulatory requirements or would reduce the
5
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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.
In addition to the 25,000,000 authorized shares of common stock, the
Company is authorized to issue 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 June 30, 1999, there were no
shares of preferred stock issued.
Note 4: STOCK TENDER OFFER
On April 23, 1999, the Company announced that its Board of Directors
authorized the repurchase of up to 1,779,233 shares of its common stock,
which represents 25 percent of its outstanding shares as of April 16, 1999.
The repurchase was made through a "Modified Dutch Auction Tender" (the
"Tender Offer"). Under this procedure, the Company's shareholders were given
the opportunity to sell part or all of their shares to the Company at a price
not less than $10.00 per share and not more than $12.00 per share.
The Tender Offer expired on June 1, 1999. As a result of the offer,
the Company purchased 1,709,544 or 24.0% of the outstanding shares of common
stock at $12.00 per share. The purchase price, including offering costs,
totaled $20,746,007. After the auction, the Company had 5,407,390 shares of
common stock outstanding.
6
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PART I: FINANCIAL INFORMATION
EFC BANCORP, INC
JUNE 30, 1999
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following analysis discusses changes in the financial condition at
June 30, 1999 and results of operations for the three and six months ended
June 30, 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 and
Litigation Reform Act of 1995, and is including this statement for purposes
of these safe harbor provisions. Forward-looking statements, which are based
on certain assumptions and 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, including its 1998 Annual Report on Form 10-K.
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.
7
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COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1999 AND DECEMBER 31, 1998
Total assets at June 30, 1999 were $444.9 million, which represented
an increase of $24.0 million, or 5.7%, 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 $33.6 million, or 10.9% , to
$342.6 million at June 30, 1999 as compared to $309.0 million at December 31,
1998. Of the $33.6 million increase, $14.6 million was due to loans
purchased. The increase in loans receivable was primarily attributable to a
favorable rate environment during the quarter. The growth in total assets was
funded by increases in borrowed money and savings deposits. Borrowed money,
representing FHLB advances, increased by $26.2 million to $83.2 million at
June 30, 1999 as compared to $57.0 million at December 31, 1998. Savings
deposits increased $18.5 million to $288.1 million at June 30, 1999 as
compared to $269.6 million at December 31, 1998. Stockholders' equity
decreased by $20.4 million to $68.3 million at June 30, 1999 as compared to
$88.8 million at December 31, 1998. This decrease was primarily due to the
Company successfully completing the Modified Dutch Auction Tender, that
expired on June 1, 1999, in which 1,709,544 or 24.0% of the outstanding
shares of common stock were purchased at $12.00 per share. Funds invested in
interest bearing deposits were used for the repurchase. After the auction,
the Company had 5,407,390 shares of common stock outstanding. In addition to
the auction, dividends totaling $1,252,432 were declared during the first six
months of 1999.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND
1998
GENERAL. The Company's net income increased $3.6 million, to $1.1
million for the three months ended June 30, 1999, from a loss of $2.5 million
for the three months ended June 30, 1998. The increase is directly
attributable to the prior 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 $578,000, or 8.2%, to $7.6
million for the three months ended June 30, 1999, compared with the same
period in 1998. The increase in interest income was primarily due to an
increase in average interest-earning assets, which increased by $48.5
million, or 12.6%, to $434.0 million for the three months ended June 30, 1999
from $385.5 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 28 basis points to 7.00% for the three months ended June 30, 1999
from 7.28% for the three months ended June 30, 1998.
Mortgage loan interest income increased by $836,000 for the three
months ended June 30, 1999. The average balance of mortgage loans increased
$57.8 million, while loan yield decreased by 34 basis points from 7.68% to
7.34%. Interest income from investment securities and mortgage backed
securities decreased by $164,000 for the three months ended June 30, 1999,
8
<PAGE>
compared with the same period in 1998. This decrease resulted from a
combination of a decrease in average balance of $2.9 million and a 62 basis
point decline in yield. Interest income on short term deposits decreased by
$137,000 as a result of decreases in yield and average balance. The yield on
short term deposits decreased by 70 basis points. The related average balance
decreased by $10.9 million to $18.8 million for the three months ended June
30, 1999, as compared to $29.7 million for the three months ended June 30,
1998. This decrease is due to a combination of the reallocation from
short-term deposits of the stock subscription proceeds received in March 1998
and the April 1999 Tender Offer.
INTEREST EXPENSE. Interest expense increased by $313,000, or 9.1%, to
$3.7 million for the three months ended June 30, 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 $55.0 million, or 19.0%, to $343.9
million at June 30, 1999 from $288.9 million at June 30, 1998. This change
reflects an $11.8 million increase in the deposit accounts, with the
remaining $43.2 million increase attributable to advances from the
FHLB-Chicago. The average rate paid on combined deposits and borrowed money
decreased by 39 basis points to 4.36% for the three months ended June 30,
1999 from 4.75% for the three months ended June 30, 1998.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest
income before provision for loan losses increased $265,000, or 7.4%, to $3.9
million for the three months ended June 30, 1999 from $3.6 million for the
comparable period in 1998. This increase was primarily attributable to an
interest rate spread increase of 11 basis points from 2.53% for the three
months ended June 30, 1998 to 2.64% for the three months ended June 30, 1999.
The net interest margin as a percent of interest-earning assets decreased by
17 basis points to 3.55% for the three months ended June 30, 1999 as compared
to 3.72% for the comparable period in 1998. This decrease is due to a net
decrease in interest-earning assets in excess of interest-bearing
liabilities, offset by the aforementioned increase in interest rate spread.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased by
$9,000, to $45,000 for the three months ended June 30, 1999 from $54,000 in
1998. At June 30, 1999, December 31, 1998 and June 30, 1998, non-performing
loans totaled $761,000, $1.0 million and $2.0 million, respectively. At June
30, 1999, the ratio of the allowance for loan losses to non-performing loans
was 192.0% compared to 136.5% at December 31, 1998 and 60.3% at June 30,
1998. The decrease in non-performing loans is primarily due to a $1.2 million
first mortgage loan adversely classified at June 30, 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 0.43%, 0.44% and 0.43%, at June 30, 1999,
December 31, 1998 and June 30, 1998, respectively. There were no charge-offs
for the three months ended June 30, 1999. 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.
NONINTEREST INCOME. Noninterest income totaled $358,000 and $197,000
for the three months ended June 30, 1999 and 1998, respectively. The increase
in noninterest income is
9
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primarily attributable to an $85,000 increase in service fees and $87,000
increase in loan fees.
NONINTEREST EXPENSE. Noninterest expense decreased $5.2 million, to
$2.5 million for the three months ended June 30, 1999 from $7.7 million for
the comparable period in 1998. 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 $129,000, or 11.1%, to $1.3 million for the three
months ended June 30, 1999 compared to $1.2 million for the three months
ended June 30, 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 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 $213,000, or 21.9%, to $1.2 million for the three months ended June
30, 1999 compared to $975,000 for 1998. Of this increase, $45,000 is related
to costs associated with the preparation of the annual report and the annual
meeting, and $26,000 of media advertising. 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 $607,000 for the three
months ended June 30, 1999 compared to a benefit of ($1.5 million) for the
comparable period in 1998. The increase in the provision for income taxes was
the result of a combination of an increase in income before income tax
expense and a decrease in the effective income tax rate. The effective income
tax rate decreased to 36.0% for the three months ended June 30, 1999 from
37.9% for the three months ended June 30, 1998. Earnings before income tax
expense increased by $5.6 million, to $1.7 million for the three months ended
June 30, 1999 from a loss of $3.9 million for the same period in 1998. This
increase is primarily attributable to the previous one-time non-recurring
$5.5 million donation made to establish the Foundation.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
1998
GENERAL. The Company's net income increased $3.8 million, to $2.1
million for the six months ended June 30, 1999, from a $1.7 million loss for
the six months ended June 30, 1998. The increase 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). The donation
was funded with authorized but unissued common stock immediately following
the conversion. The 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.
INTEREST INCOME. Interest income increased $1.3 million, or 9.7%, to
$15.0 million for the six months ended June 30, 1999, compared with the same
period in 1998. The increase in interest
10
<PAGE>
income was primarily due to an increase in average interest-earning assets,
which increased by $45.7 million, or 12.1%, to $424.7 million for the six
months ended June 30, 1999 from $379.0 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 16 basis points to 7.06% for the six
months ended June 30, 1999 from 7.22% for the six months ended June 30, 1998.
Mortgage loan interest income increased by $1.7 million for the six
months ended June 30, 1999. The average balance of mortgage loans increased
$58.7 million, while loan yield decreased by 40 basis points from 7.85% to
7.45%. Interest income from investment securities and mortgage backed
securities decreased by $210,000 for the six months ended June 30, 1999,
compared with the same period in 1998. This decrease resulted from a
combination of a decrease in average balance of $2.6 million and a 34 basis
point decline in yield. Interest income on short term deposits decreased by
$251,000 as a result of decreases in yield and average balance. The yield on
short term deposits decreased by 8 basis points. The related average balance
decreased by $14.7 million to $21.7 million for the six months ended June 30,
1999, as compared to $36.4 million for the six months ended June 30, 1998.
This decrease is due to a combination of the reallocation from short-term
deposits of the stock subscription proceeds received in March 1998 and the
April 1999 Tender Offer.
INTEREST EXPENSE. Interest expense increased by $372,000, or 5.4%, to
$7.3 million for the six months ended June 30, 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 $37.1 million, or 12.6%, to $332.1
million at June 30, 1999 from $295.0 million at June 30, 1998. This change
reflects a $1.0 million increase in the deposit accounts, with the remaining
$36.1 million increase attributable to advances from the FHLB-Chicago. The
average rate paid on combined deposits and borrowed money decreased by 30
basis points to 4.38% for the six months ended June 30, 1999 from 4.68% for
the six months ended June 30, 1998.
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES. Net interest
income before provision for loan losses increased $948,000, or 14.0%, to $7.7
million for the six months ended June 30, 1999 from $6.8 million for the
comparable period in 1998. This increase was primarily attributable to a $8.6
million increase in average interest-earning assets in excess of average
interest-bearing liabilities to $92.6 million for the six months ended June
30, 1999 from $84.0 million for the same period in 1998. Interest rate spread
increased by 14 basis points from 2.54% for the six months ended June 30,
1998 to 2.68% for the six months ended June 30, 1999. The net interest margin
as a percent of interest-earning assets increased by 6 basis points to 3.64%
for the six months ended June 30, 1999 as compared to 3.58% 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
$20,000, to $90,000 for the six months ended June 30, 1999 from $110,000 in
1998. At June 30, 1999, December 31, 1998 and June 30, 1998, non-performing
loans totaled $761,000, $1.0 million and $2.0 million, respectively. At June
30, 1999, the ratio of the allowance for loan losses to non-
11
<PAGE>
performing loans was 192.0% compared to 136.5% at December 31, 1998 and 60.3%
at June 30, 1998. The decrease in non-performing loans is primarily due to a
$1.2 million first mortgage loan adversely classified at June 30, 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 0.43%. 0.44% and 0.43%, at June
30, 1999, December 31, 1998 and June 30, 1998, respectively. Charge-offs
totaled $2,000 and $34,000 for the six months ended June 30, 1999 and 1998,
respectively. 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 $661,000 and $366,000
for the six months ended June 30, 1999 and 1998, respectively. The increase
in noninterest income is primarily attributable to a $155,000 increase in
service fees and $155,000 increase in loan fees.
NONINTEREST EXPENSE. Noninterest expense decreased by $4.8 million, to
$5.0 million for the six months ended June 30, 1999 from $9.8 million for the
comparable period in 1998. 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 $500,000, or 23.1%, to $2.7 million for the six months
ended June 30, 1999 compared to $2.2 million for the six months ended June
30, 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 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 $280,000, or 13.5%, to $2.3 million for the six months ended June
30, 1999 compared to $2.1 million for the comparable period in 1997. Of this
increase, $55,000 is due to costs associated with the preparation of the
annual report and the annual meeting, and $39,000 of media advertising.
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 $1.2 million for the
six months ended June 30, 1999 compared to a benefit of ($1.1 million) for
the comparable period in 1998. The increase in the provision for income taxes
was the result of a combination of an increase in income before income tax
expense and a decrease in the effective income tax rate. The effective income
tax rate decreased to 35.8% for the six months ended June 30, 1999 from 39.6%
for the six months ended June 30, 1998. Earnings before income tax expense
increased by $6.0 million, to $3.3 million for the six months ended June 30,
1999 from a loss of $2.7 million for the same period in 1998. This increase
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 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. In
addition, the Bank purchases loans, consisting of multi-family and commercial
real estate. 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, 1999, cash and interest-bearing demand accounts totaled $13.9 million, or
3.1% 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, 1999.
At June 30, 1999, the Bank exceeded all of its regulatory capital
requirements. The following is a summary of the Bank's regulatory capital
ratios at June 30, 1999:
<TABLE>
<CAPTION>
<S> <C>
Total Capital to Total Assets............................... 13.27%
Total Capital to Risk-Weighted Assets....................... 21.98%
Tier I Leverage Ratio....................................... 12.96%
Tier I to Risk-Weighted Assets.............................. 21.44%
</TABLE>
At June 30, 1999, the Company had a Total Capital to Total Assets ratio of
15.36%.
On June 18, 1999, the Company announced its second quarter dividend of
$0.10 per share. The effective date of the dividend was June 30, 1999.
Payment of the cash dividend was made on July 12, 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
13
<PAGE>
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 address 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 100%
complete. A duplicate of the current in-house system 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 complete. In addition, testing is 100%
complete. The Bank has analyzed the testing data and no known Year 2000
issues were found on our renovated systems. 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 has developed contingency plans, which will be validated
by a third party. The contingency plan has the following phases of
operations; Organizational Planning, Business Impact Analysis, Plan
Generation, and Validation. In addition, as part of the contingency plans,
the Bank has purchased an interactive trial balance system that allows
customer account balances to be accessed quickly.
Relative to Year 2000 related corporate risks, the Bank's most likely
worst case scenario
14
<PAGE>
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
$55,000 in expense through June 30, 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 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. During June, 1999, the FASB issued the Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133 - an amendment of FASB Statement No. 133," ("SFAS 137")
that delays SFAS 133 until fiscal years beginning after June 15, 2000. 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
was effective as of 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
15
<PAGE>
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.
16
<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, in the 1998 Form 10-K, to June
30, 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.
None.
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (Ssection 249.308 OF THIS CHAPTER).
(a) Exhibits
<TABLE>
<S> <C>
3.1 Certificate of Incorporation of EFC Bancorp, Inc. *
3.2 Bylaws of EFC Bancorp, Inc. *
11.0 Statement re: Computation of Per Share
Earnings (not applicable for the comparable
1998 periods as the Company did not have
stock outstanding until April 3, 1998).
27.0 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None.
---------------
* Incorporated herein by reference from the Exhibits filed with
the Registration Statement on Form S-1 and any amendments
thereto. Registration Statement No. 333-38637 filed with the
Securities and Exchange Commission on October 24, 1997.
17
<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, 1999 By: /s/ Barrett J. O'Connor
--------------- --------------------------------
Barrett J. O'Connor
President and Chief Executive Officer
(principal executive officer)
Dated: August 13, 1999 By: /s/ James J. Kovac
--------------- -------------------------------
James J. Kovac
Senior Vice President and Chief
Financial Officer
(Principal financial and accounting officer)
18
<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 Six Months
Ended Ended
June 30, June 30,
1999 1999
---------- ----------
<S> <C> <C>
BASIC:
Net income $1,077,583 2,111,869
Weighted average shares outstanding 6,066,897 6,314,191
========== ==========
Basic earnings per share $ 0.18 0.33
========== ==========
DILUTED:
Net income $1,077,583 2,111,869
Weighted average shares outstanding 6,066,897 6,314,191
Effect of dilutive stock options outstanding - -
---------- ----------
Diluted weighted average shares outstanding 6,066,897 6,314,191
========== ==========
Diluted earnings per share $ 0.18 0.33
========== ==========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,657
<INT-BEARING-DEPOSITS> 11,227
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 73,187
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 344,043
<ALLOWANCE> 1,461
<TOTAL-ASSETS> 444,898
<DEPOSITS> 288,102
<SHORT-TERM> 22,000
<LIABILITIES-OTHER> 5,271
<LONG-TERM> 61,200
0
0
<COMMON> 75
<OTHER-SE> 68,250
<TOTAL-LIABILITIES-AND-EQUITY> 444,898
<INTEREST-LOAN> 12,222
<INTEREST-INVEST> 2,777
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14,999
<INTEREST-DEPOSIT> 5,464
<INTEREST-EXPENSE> 7,274
<INTEREST-INCOME-NET> 7,725
<LOAN-LOSSES> 90
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,008
<INCOME-PRETAX> 3,288
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,112
<EPS-BASIC> .33
<EPS-DILUTED> .33
<YIELD-ACTUAL> 7.06
<LOANS-NON> 761
<LOANS-PAST> 761
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,373
<CHARGE-OFFS> 2
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,461
<ALLOWANCE-DOMESTIC> 1,461
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 240
</TABLE>
