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EFC BANCORP INC
10-Q, 1999-11-12
SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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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 September 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

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EFC BANCORP, INC.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		36-4193304 (I.R.S. Employer Identification No.)
1695 Larkin Avenue, Elgin, Illinois (Address of principal executive offices)		60123 (Zip Code)

(847) 741-3900
(Registrant's telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal year, if changes since last report)

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    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 / /

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: 5,365,790 shares of common stock, par value $0.01 per share, were outstanding as of November 9, 1999.

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EFC Bancorp, Inc.
Form 10-Q
For the Quarter Ended September 30, 1999

INDEX

				Page
PART I.		FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Balance Sheets at September 30, 1999 and December 31, 1998		1
		Consolidated Statements of Income—For the Three and Nine Months Ended September 30, 1999 and 1998		2
		Consolidated Statements of Cash Flows—For the Nine Months Ended September 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		6
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		14
PART II:		OTHER INFORMATION
Item 1.		Legal Proceedings		15
Item 2.		Changes in Securities and Use of Proceeds		15
Item 3.		Defaults Upon Senior Securities		15
Item 4.		Submission of Matters to a Vote of Security Holders		15
Item 5.		Other Information		15
Item 6.		Exhibits and Reports on Form 8-K		15
SIGNATURES				16

PART I. FINANCIAL INFORMATION
EFC BANCORP, INC.
September 30, 1999

Item 1. Financial Statements.

EFC BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited)
September 30, 1999 and December 31, 1998

		September 30, 1999			December 31, 1998
Assets
Cash and cash equivalents:
On hand and in banks		$	5,029,680		$	2,217,242
Interest bearing deposits with financial institutions			14,971,259			21,062,664
Loans receivable, net			369,686,944			308,990,195
Mortgage-backed securities available-for-sale, at fair value			12,560,643			17,880,124
Investment securities available-for-sale, at fair value			58,594,512			57,636,600
Foreclosed real estate			83,334			192,564
Stock in Federal Home Loan Bank of Chicago, at cost			4,960,000			2,849,840
Accrued interest receivable			2,148,754			1,971,598
Office properties and equipment, net			8,049,928			6,529,734
Other assets			1,569,589			1,545,345
Total assets		$	477,654,643		$	420,875,906
Liabilities and Stockholders' Equity
Liabilities:
Deposits		$	308,913,355		$	269,581,995
Borrowed money			94,200,000			57,000,000
Advance payments by borrowers for taxes and insurance			511,865			643,051
Accrued expenses and other liabilities			5,223,885			4,895,591
Total liabilities			408,849,105			332,120,637
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			72,086,163			72,213,277
Treasury stock, at cost, 2,084,044 shares at September 30, 1999 and 374,500 shares at December 31, 1998, respectively			(25,101,132	)		(4,355,125	)
Unearned employee stock ownership plan (ESOP), 529,392 and 559,360 shares at September 30, 1999 and December 31, 1998, respectively			(7,915,807	)		(8,363,878	)
Unearned stock award plan, 244,720 and 289,668 shares at September 30, 1999 and December 31, 1998, respectively			(2,722,509	)		(3,222,561	)
Retained Earnings, substantially restricted			33,045,972			31,757,826
Accumulated other comprehensive income (loss)			(662,063	)		650,816
Total stockholders' equity			68,805,538			88,755,269
Commitments and contingencies			—			—
Total liabilities and stockholders' equity		$	477,654,643		$	420,875,906

See accompanying notes to consolidated financial statements.

EFC BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
For the three and nine months ended September 30, 1999 and 1998

		Three months ended September 30,					Nine months ended September 30,
		1999			1998		1999		1998
Interest income:
Loans secured by real estate		$	6,404,202		5,325,534		18,140,517		15,243,582
Other loans			376,021		306,462		1,005,721		851,424
Mortgage-backed securities available-for-sale			227,151		317,379		747,265		969,913
Investment securities available-for-sale			1,117,847		1,316,265		3,375,313		3,880,034
Total interest income			8,125,221		7,265,640		23,268,816		20,944,953
Interest expense:
Deposits			3,040,829		2,942,624		8,504,990		8,933,320
Borrowed money			1,186,800		600,180		2,996,940		1,512,010
Total interest expense			4,227,629		3,542,804		11,501,930		10,445,330
Net interest income before provision for loan losses			3,897,592		3,722,836		11,766,886		10,499,623
Provision for loan losses			45,000		84,000		135,000		194,000
Net interest income after provision for loan losses			3,852,592		3,638,836		11,631,886		10,305,623
Noninterest income:
Service fees			249,871		193,383		711,193		499,427
Real estate and insurance commissions			34,451		26,706		67,671		63,290
Gain on sale securities			12,715		—		12,715		11,814
Other			14,949		35,924		36,997		52,989
Total noninterest income			311,986		256,013		828,576		627,520
Noninterest expense:
Compensation and benefits			1,420,579		1,223,125		4,081,268		3,384,297
Office building, net			88,801		76,658		279,240		243,227
Depreciation and repairs			205,634		181,187		606,976		525,383
Data processing			109,953		88,435		307,282		298,584
Federal insurance premium			40,278		30,030		120,834		113,165
NOW account operating expenses			68,719		65,753		199,188		192,404
Foundation contribution			—		—		—		5,549,210
Other			743,059		689,526		2,090,336		1,832,371
Total noninterest expense			2,677,023		2,354,714		7,685,124		12,138,641
Income (loss) before income taxes			1,487,555		1,540,135		4,775,338		(1,205,498	)
Income tax expense (benefit)			518,107		470,454		1,694,021		(617,047	)
Net income (loss)		$	969,448		1,069,681		3,081,317		(588,451	)
Earnings (loss) per share (basic and diluted)		$	0.20		0.15		0.53		(0.20	)

See accompanying notes to consolidated financial statements.

EFC BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
For the nine months ended September 30, 1999 and 1998

		1999			1998
Cash flows from operating activities:
Net income (loss)		$	3,081,317		(588,451	)
Adjustment to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of premiums and discounts, net			73,386		78,166
Provision for loan losses			135,000		194,000
Stock award plan shares allocated			500,052		—
ESOP shares committed to be released			448,071		—
Change in fair value of ESOP shares			(127,114	)	—
Gain on sale of investment securities			(12,715	)	(11,814	)
Depreciation of office properties and equipment			420,474		362,793
Increase in accrued interest receivable and other assets, net			(201,400	)	(634,940	)
Increase in income taxes payable, accrued expenses and other liabilities, net			495,753		10,003
Net cash provided by (used in) operating activities			4,812,824		(590,243	)
Cash flows from investing activities:
Net increase in loans receivable			(34,554,869	)	(45,043,199	)
Purchases of loans receivable			(26,251,630	)	(7,134,836	)
Purchases of mortgage-backed securities available-for-sale			—		(4,549,273	)
Principal payments on mortgage-backed securities available-for-sale			5,171,777		5,652,028
Maturities of investment securities available-for-sale			11,078,008		20,460,496
Proceeds from the sale of investment securities available-for-sale			10,012,715		2,011,814
Purchases of investment securities available-for-sale			(24,113,865	)	(40,417,232	)
Purchases of office properties and equipment			(1,940,668	)	(1,512,314	)
Purchases of stock in the Federal Home Loan Bank of Chicago			(2,110,160	)	(549,000	)
Proceeds from the sale of foreclosed real estate			83,980		—
Net (increase) in foreclosed real estate			—		(1,069,653	)
Net cash used in investing activities			(62,624,712	)	(72,151,169	)
Cash flows from financing activities:
Proceeds from the issuance of common stock			—		72,769,326
Purchase of common stock by ESOP			—		(8,961,298	)
Cash dividends paid			(1,252,432	)	—
Purchase of treasury stock			(20,746,007	)	—
Net increase (decrease) in deposits			39,331,360		(6,142,091	)
Proceeds from borrowed money			64,200,000		34,000,000
Repayments on borrowed money			(27,000,000	)	(6,000,000	)
Net cash provided by financing activities			54,532,921		85,665,937
Net increase (decrease) in cash and cash equivalents			(3,278,967	)	12,924,525
Cash and cash equivalents at beginning of period			23,279,906		10,098,554
Cash and cash equivalents at end of period		$	20,000,939		23,023,079

See accompanying notes to consolidated financial statements.

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 nine month periods ended September 30, 1999 and 1998 are as follows:

		Three months ended September 30,					Nine months ended September 30,
		1999			1998		1999			1998
Net income (loss)		$	969,448		1,069,681		$	3,081,317		(588,451	)
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities arising during the period			(229,114	)	267,785			(1,320,889	)	(876	)
Less:
reclassification adjustment for net gain realized in net income			(8,010	)	—			(8,010	)	(7,443	)
Comprehensive income (loss)		$	748,344		1,337,466		$	1,768,438		(581,884	)

For the three and nine month periods ended September 30, 1999 the sale of investment securities resulted in a gain of $12,715 ($8,010 net of tax effect). For the three and nine month periods ended September 30, 1998 the sale of investment securities resulted in a gain of $0 and $11,814 ($7,443 net of tax effect), respectively.

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 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 September 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.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

    The following analysis discusses changes in the financial condition at September 30, 1999 and results of operations for the three and nine months ended September 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.

Comparison of Financial Condition at September 30, 1999 and December 31, 1998

    Total assets at September 30, 1999 were $477.7 million, which represented an increase of $56.8 million, or 13.5%, compared to $420.9 million at December 31, 1998. The increase in total assets was primarily as a result of an increase in loans receivable of $60.7 million, or 19.6%, to $369.7 million at September 30, 1999 from $309.0 million at December 31, 1998. Of the $60.7 million increase, $26.3 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 $37.2 million to $94.2 million at September 30, 1999 from $57.0 million at December 31, 1998. Savings deposits increased $39.3 million to $308.9 million at September 30, 1999 from $269.6 million at December 31, 1998. Stockholders' equity decreased by $20.0 million to $68.8 million at September 30, 1999 from $88.8 million at December 31, 1998. The decrease in stockholders' equity was primarily due to the Company's successful completion of a Modified Dutch Auction Tender, that expired on June 1, 1999, wherein 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 to fund the repurchase. After this transaction, there were 5,407,390 shares of common stock outstanding. In addition to the auction, dividends totaling $1.8 million were declared during the first nine months of 1999.

Comparison of Operating Results For the Three Months Ended September 30, 1999 and 1998

    General.  The Company's net income decreased $100,000, to $969,000 for the three months ended September 30, 1999, from $1.1 million for the three months ended September 30, 1998.

    Interest Income.  Interest income increased $860,000, or 11.8%, to $8.1 million for the three months ended September 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 $55.5 million, or 14.0%, to $452.5 million for the three months ended September 30, 1999 from $397.0 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 14 basis points to 7.18% for the three months ended September 30, 1999 from 7.32% for the three months ended September 30, 1998.

    Mortgage loan interest income increased by $1.1 million for the three months ended September 30, 1999. The average balance of mortgage loans increased $62.7 million, while the loan yield decreased by 14 basis points from 7.64% to 7.50%. Interest income from investment securities and mortgage backed securities decreased by $207,000 for the three months ended September 30, 1999, compared with the same period in 1998. This decrease resulted from a combination of a decrease in average balance of $11.0 million and an 11 basis point decline in yield. Interest income on short term deposits decreased by $82,000 as a result of a decrease in yield. The related average balance increased by $500,000 to $19.5 million for the three months ended September 30, 1999, from $19.0 million for the three months ended September 30, 1998.

    Interest Expense.  Interest expense increased by $685,000, or 19.3%, to $4.2 million for the three months ended September 30, 1999 from $3.5 million for the three months ended September 30, 1998. This increase resulted from the combination of an increase in the average balance of interest-bearing liabilities, partially offset by an overall decrease in the average rate paid on those interest-bearing liabilities. The average balance of interest-bearing liabilities increased by $80.3 million, or 27.1%, to $376.6 million at September 30, 1999 from $296.3 million at September 30, 1998. This change reflects a $32.7 million increase in the deposit accounts, with the remaining $47.6 million increase attributable to advances from the FHLB-Chicago. The average rate paid on combined deposits and borrowed money decreased by 29 basis points to 4.49% for the three months ended September 30, 1999 from 4.78% for the three months ended September 30, 1998.

    Net Interest Income Before Provision for Loan Losses.  Net interest income before provision for loan losses increased $175,000, or 4.7%, to $3.9 million for the three months ended September 30, 1999 from $3.7 million for the comparable period in 1998. This increase was primarily attributable to an interest rate spread increase of 15 basis points to 2.69% for the three months ended September 30, 1999 from 2.54% for the three months ended September 30, 1998. The net interest margin as a percent of interest-earning assets decreased by 30 basis points to 3.45% for the three months ended September 30, 1999 from 3.75% for the comparable period in 1998. This decrease is due to a net decrease in interest-earning assets in excess of interest-bearing liabilities of $24.8 million, partially offset by the aforementioned increase in interest rate spread.

    Provision for Loan Losses.  The provision for loan losses decreased by $39,000, to $45,000 for the three months ended September 30, 1999 from $84,000 in 1998. At September 30, 1999, December 31, 1998 and September 30, 1998, non-performing loans totaled $1.9 million, $1.0 million and $767,000, respectively. As of October 5, 1999, four loans totaling $531,000 or 28.2% of total non-performing loans as of September 30, 1999, were brought current, subsequently reducing non-performing loans to $1.4 million. At September 30, 1999, the ratio of the allowance for loan losses to non-performing loans was 78.7% compared to 136.5% at December 31, 1998 and 167.7% at September 30, 1998. The ratio of the allowance to total loans was 0.40%, 0.44% and 0.43%, at September 30, 1999, December 31, 1998 and September 30, 1998, respectively. Charge-offs for the three months ended September 30, 1999 amounted to $25,000. There were no charge-offs for the prior year three month period. 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 $312,000 and $256,000 for the three months ended September 30, 1999 and 1998, respectively. The increase in noninterest income is primarily attributable to an $56,000 increase in service fees.

    Noninterest Expense.  Noninterest expense increased $322,000, to $2.7 million for the three months ended September 30, 1999 from $2.4 million for the comparable period in 1998. Compensation and benefits increased by $197,000, or 16.1%, to $1.4 million for the three months ended September 30, 1999 compared to $1.2 million for the three months ended September 30, 1998. This increase was primarily due to a combination of annual salary increases, the addition of staff 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 $125,000, or 11.0%, to $1.2 million for the three months ended September 30, 1999 from $1.1 million for the three months ended September 30, 1998. Of this increase, $22,000 is related to data processing costs and $88,000 to 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 $518,000 for the three months ended September 30, 1999 compared to $470,000 for the comparable period in 1998. The increase in the provision for income taxes was the result of an increase in the effective income tax rate. The effective income tax rate increased to 34.8% for the three months ended September 30, 1999 from 30.6% for the three months ended September 30, 1998. Income before income tax expense remained relatively unchanged, decreasing $53,000 from the three months ended September 30, 1998 to the current three month period.

Comparison of Operating Results For the Nine Months Ended September 30, 1999 and 1998

    General.  The Company's net income increased $3.7 million, to $3.1 million for the nine months ended September 30, 1999, from a $588,000 loss for the nine months ended September 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 $2.9 million for the nine months ended September 30, 1998.

    Interest Income.  Interest income increased $2.3 million, or 11.1%, to $23.3 million for the nine months ended September 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 $49.0 million, or 12.7%, to $434.0 million for the nine months ended September 30, 1999 from $385.0 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 10 basis points to 7.15% for the nine months ended September 30, 1999 from 7.25% for the nine months ended September 30, 1998.

    Mortgage loan interest income increased by $2.9 million for the nine months ended September 30, 1999. The average balance of mortgage loans increased $60.0 million, while loan yield decreased by 25 basis points to 7.53% for the nine months ended September 30, 1999 from 7.78% for the nine months ended September 30, 1998. Interest income from investment securities and mortgage backed securities decreased by $394,000 for the nine months ended September 30, 1999, compared with the same period in 1998. This decrease resulted from a combination of a decrease in average balance of $4.6 million and a 29 basis point decline in yield. Interest income on short term deposits decreased by $333,000 as a result of decreases in yield and average balance. The yield on short term deposits decreased by 50 basis points. The related average balance decreased by $9.6 million to $21.0 million for the nine months ended September 30, 1999, from $30.6 million for the nine months ended September 30, 1998. This decrease is primarily 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 $1.1 million, or 10.1%, to $11.5 million for the nine months ended September 30, 1999, from $10.4 million for the nine months ended September 30, 1998. This increase resulted from the combination of an increase in the average balance of interest-bearing liabilities, partially offset by an overall decrease in the average rate paid on those interest-bearing liabilities. The average balance of interest-bearing liabilities increased by $51.5 million, or 17.4%, to $347.0 million at September 30, 1999 from $295.5 million at September 30, 1998. This change reflects an $11.6 million increase in the deposit accounts, with the remaining $39.9 million increase attributable to advances from the FHLB-Chicago. The average rate paid on combined deposits and borrowed money decreased by 29 basis points to 4.42% for the nine months ended September 30, 1999 from 4.71% for the nine months ended September 30, 1998.

    Net Interest Income Before Provision for Loan Losses.  Net interest income before provision for loan losses increased $1.3 million, or 12.1%, to $11.8 million for the nine months ended September 30, 1999 from $10.5 million for the comparable period in 1998. This increase was primarily attributable to an increase in interest rate spread by 19 basis points to 2.73% for the nine months ended September 30, 1999 from 2.54% for the nine months ended September 30, 1998. The net interest margin as a percent of interest-earning assets decreased by 2 basis points to 3.62% for the nine months ended September 30, 1999 from 3.64% for the comparable period in 1998.

    Provision for Loan Losses.  The provision for loan losses decreased by $59,000, to $135,000 for the nine months ended September 30, 1999 from $194,000 in 1998. At September 30, 1999, December 31, 1998 and September 30, 1998, non-performing loans totaled $1.9 million, $1.0 million and $767,000, respectively. As of October 5, 1999, four loans totaling $531,000 or 28.2% of total non-performing loans as of September 30, 1999, were brought current, subsequently reducing non-performing loans to $1.4 million. At

September 30, 1999, the ratio of the allowance for loan losses to non-performing loans was 78.7% compared to 136.5% at December 31, 1998 and 167.7% at September 30, 1998. The ratio of the allowance to total loans was 0.40%, 0.44% and 0.43%, at September 30, 1999, December 31, 1998 and September 30, 1998, respectively. Charge-offs totaled $27,000 and $34,000 for the nine months ended September 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 $829,000 and $628,000 for the nine months ended September 30, 1999 and 1998, respectively. The increase in noninterest income is primarily attributable to a $212,000 increase in service fees.

    Noninterest Expense.  Noninterest expense decreased by $4.4 million, to $7.7 million for the nine months ended September 30, 1999 from $12.1 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 $697,000, or 20.6%, to $4.1 million for the nine months ended September 30, 1999 compared to $3.4 million for the nine months ended September 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 $399,000, or 12.4%, to $3.6 million for the nine months ended September 30, 1999 compared to $3.2 million for the comparable period in 1998. Of this increase, $62,000 is due to costs associated with the preparation of the annual report and the annual meeting, and $123,000 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 $1.7 million for the nine months ended September 30, 1999 compared to a benefit of ($617,000) for the comparable period in 1998. The increase in the provision for income taxes was the result of an increase in income before income tax expense. Earnings before income tax expense increased by $6.0 million, to $4.8 million for the nine months ended September 30, 1999 from a loss of $1.2 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.

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 September 30, 1999, cash and interest-bearing demand accounts totaled $20.0 million, or 4.2% 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 nine months ended September 30, 1999 and 1998.

    At September 30, 1999, the Bank exceeded all of its regulatory capital requirements. The following is a summary of the Bank's regulatory capital ratios at September 30, 1999:

Total Capital to Total Assets		12.38%
Total Capital to Risk-Weighted Assets		20.00%
Tier I Leverage Ratio		12.24%
Tier I to Risk-Weighted Assets		19.51%

At September 30, 1999, the Company had a Total Capital to Total Assets ratio of 14.40%.

    On September 23, 1999, the Company announced its third quarter dividend of $0.10 per share. The effective date of the dividend was October 4, 1999. Payment of the cash dividend was made on October 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 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. 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 have been 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 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 $58,000 in expense through September 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 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

    The Bank's interest rate sensitivity is monitored by management through the use of a Net Portfolio Value Model which generates estimates of the change in the Bank's net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets, liabilities, and off-balance sheet contracts. The NPV ratio, under any interest rate scenario, is defined as the NPV in that scenario divided by the market value of assets in the same scenario. The model assumes estimated prepayment rates, reinvestment rates and deposit decay rates. The Sensitivity Measure is the decline in the NPV ratio, in basis points, caused by a 2% increase or decrease in rates, whichever produces a larger decline. The higher the institution's Sensitivity Ratio, the greater its exposure to interest rate risk is considered to be. The following NPV Table sets forth the Bank's NPV as of September 30, 1999.

(In thousands)

										NPV as % of Portfolio Value of Assets
		Net Portfolio Value
Change in Interest Rates in Basis Points (Rate Shock)
		Amount			$ Change			% Change		NPV Ratio		% Change
+300		$	42,857		$	(22,773	)	(34.70	)%	9.53	%	(30.89	)%
+200			49,686			(15,944	)	(24.29	)	10.86		(21.25	)
+100			57,526			(8,104	)	(12.35	)	12.33		(10.59	)
Static			65,630			—		—		13.79		—
-100			70,311			4,681		7.13		14.59		5.80
-200			74,628			8,998		13.71		15.27		10.73
-300			75,012			9,382		14.30		15.22		10.37

    Certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in NPV require the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the NPV Table presented assumes that the composition of the Bank's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the NPV Table provides an indication of the Bank's interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Bank's net interest income and will differ from actual results.

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 (§249.308 of this Chapter).

		(a)		Exhibits
				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
				27.0		Financial Data Schedule
		(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.

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: November 12, 1999		By:	/s/ BARRETT J. O'CONNOR    Barrett J. O'Connor President and Chief Executive Officer (principal executive officer)
Dated: November 12, 1999		By:	/s/ JAMES J. KOVAC    James J. Kovac Senior Vice President and Chief Financial Officer (Principal financial and accounting officer)

QuickLinks

(Mark One)

INDEX

Item 1. Financial Statements.

EFC BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) For the three and nine months ended September 30, 1999 and 1998

EFC BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) For the nine months ended September 30, 1999 and 1998

Item 1. Financial Statements, continued

EFC BANCORP, INC. Notes to Consolidated Financial Statements

Note 4: STOCK TENDER OFFER
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

(In thousands)

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.
Item 2. Changes in Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K (§249.308 of this Chapter).

SIGNATURES

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