Edgar Filing: EFC BANCORP INC

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

FORM 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2002

o	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.
(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)

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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12(b)-2 of the Exchange Act).

Yes o No ý

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: 4,622,328 shares of common stock, par value $0.01 per share, were outstanding as of November 12, 2002.

EFC Bancorp, Inc.

Form 10-Q

For the Quarter Ended September 30, 2002

INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets at September 30, 2002 and December 31, 2001	1
	Consolidated Statements of Income—For the Three and Nine Months Ended September 30, 2002 and 2001	2
	Consolidated Statements of Cash Flows—For the Nine Months Ended September, 2002 and 2001	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	13
Item 4.	Controls and Procedures	13
PART II:	OTHER INFORMATION	14
Item 1.	Legal Proceedings	14
Item 2.	Changes in Securities and Use of Proceeds	14
Item 3.	Defaults Upon Senior Securities	14
Item 4.	Submission of Matters to a Vote of Security Holders	14
Item 5.	Other Information	14
Item 6.	Exhibits and Reports on Form 8-K	14
SIGNATURES		15
Certifications

PART I. FINANCIAL INFORMATION
EFC BANCORP, INC.

Item 1. Financial Statements.

EFC BANCORP, INC.
AND SUBSIDIARIES

Consolidated Balance Sheets (unaudited)

September 30, 2002 and December 31, 2001

		September 30, 2002			December 31, 2001
Assets
Cash and cash equivalents:
	On hand and in banks	$	2,948,128		3,186,966
	Interest bearing deposits with financial institutions		35,007,194		14,988,324
Loans receivable, net			567,429,893		537,070,664
Mortgage-backed securities available-for-sale, at fair value			14,717,883		13,855,715
Investment securities available-for-sale, at fair value			83,393,645		68,615,462
Foreclosed real estate			1,985,742		—
Stock in Federal Home Loan Bank of Chicago, at cost			9,245,700		8,891,900
Accrued interest receivable			3,860,421		3,682,120
Office properties and equipment, net			12,983,942		10,990,206
Other assets			17,252,838		12,162,083

Total assets		$	748,825,386		673,443,440

Liabilities and Stockholders' Equity
Liabilities:
	Deposits	$	492,481,847		420,084,289
	Borrowed money		171,831,662		175,200,000
	Advance payments by borrowers for taxes and insurance		531,922		1,226,614
	Income taxes payable		269,297		419,125
	Accrued expenses and other liabilities		9,467,149		7,884,849

Total liabilities			674,581,877		604,814,877

Minority interest			(54,330	)	—

Stockholders' Equity:
	Preferred stock, par value $.01 per share, authorized 2,000,000 shares; no shares issued		—		—
	Common stock, par value $.01 per share, authorized 25,000,000 shares; issued 7,491,434 shares		74,914		74,914
	Additional paid-in capital		71,684,612		71,663,695
	Treasury stock, at cost, 2,824,906 and 2,884,873 shares at September 30, 2002 and December 31, 2001, respectively		(33,073,211	)	(33,584,554	)
	Unearned employee stock ownership plan (ESOP), 409,533 and 439,498 shares at September 30, 2002 and December 31, 2001, respectively		(6,123,548	)	(6,571,619	)
	Unearned stock award plan, 65,553 and 107,943 shares at September 30, 2002 and December 31, 2001, respectively		(729,278	)	(1,200,866	)
	Retained earnings, substantially restricted		40,961,399		38,015,742
	Accumulated other comprehensive income		1,502,951		231,251

Total stockholders' equity			74,297,839		68,628,563

Commitments and contingencies			—		—

Total liabilities and stockholders' equity		$	748,825,386		673,443,440

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, 2002 and 2001

		Three months ended September 30,			Nine months ended September 30,
		2002		2001	2002	2001
Interest income:
	Loans secured by real estate	$	8,387,811	8,626,654	25,599,335	24,907,222
	Other loans		1,377,223	1,126,235	3,790,146	3,095,326
	Mortgage-backed securities available-for-sale		124,541	184,003	477,568	645,220
	Investment securities available-for-sale and interest bearing deposits with financial institutions		1,129,267	1,201,799	3,419,047	3,921,678

Total interest income			11,018,842	11,138,691	33,286,096	32,569,446

Interest expense:
	Deposits		3,449,025	4,193,496	10,233,315	12,699,663
	Borrowed money		2,313,926	2,243,800	6,937,225	6,615,046

Total interest expense			5,762,951	6,437,296	17,170,540	19,314,709

Net interest income before provision for loan losses			5,255,891	4,701,395	16,115,556	13,254,737
Provision for loan losses			225,000	135,000	675,000	330,000

Net interest income after provision for loan losses			5,030,891	4,566,395	15,440,556	12,924,737

Noninterest income:
	Service fees		608,330	308,739	1,377,122	829,784
	Insurance and brokerage commissions		59,919	73,966	370,259	255,510
	Information Technology sales and service income, net		243,355	—	984,234	—
	Gain on sale of securities		—	32,812	—	32,812
	Gain on sale of foreclosed real estate		—	—	—	8,014
	Gain on sale of loans		200,409	—	200,409	—
	Other		231,427	17,511	639,426	47,911

Total noninterest income			1,343,440	433,028	3,571,450	1,174,031

Noninterest expense:
	Compensation and benefits		2,586,407	1,940,722	7,706,939	5,663,616
	Office building, net		607,876	461,660	1,658,569	1,337,670
	Federal insurance premiums		19,206	17,354	56,164	57,311
	Advertising		181,981	113,276	450,553	428,943
	Data processing		229,200	204,756	680,533	614,639
	NOW/checking account expenses		155,282	82,098	402,697	222,190
	Other		452,324	373,302	1,307,996	1,103,907

Total noninterest expense			4,232,276	3,193,168	12,263,451	9,428,276

Income before income taxes and minority interest			2,142,055	1,806,255	6,748,555	4,670,492
Income tax expense			727,242	637,492	2,173,162	1,639,122

Income before minority interest			1,414,813	1,168,763	4,575,393	3,031,370
Minority interest			34,377	—	36,885	—

Net income		$	1,449,190	1,168,763	4,612,278	3,031,370

Earnings per share:
	Basic	$	0.34	0.27	1.10	0.71
	Diluted		0.32	0.27	1.04	0.71

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, 2002 and 2001

			2002			2001
Cash flows from operating activities:
	Net income		$	4,612,278		3,031,370
	Adjustment to reconcile net income to net cash provided by operating activities:
		Amortization of premiums and discounts, net		(8,633	)	114,569
		Provision for loan losses		675,000		330,000
		Stock award plan shares allocated		471,588		476,037
		ESOP shares committed to be released		448,071		448,071
		Change in fair value of ESOP shares		20,917		(111,432	)
		Gain on sale of securities		—		(32,812	)
		Gain on sale of foreclosed real estate		—		(8,014	)
		Gain on sale of loans		(200,409	)	—
		Minority interest in subsidiary		(54,330	)	—
		Depreciation of office properties and equipment		591,328		553,559
		(Increase)/decrease in accrued interest receivable and other assets, net		(5,659,933	)	6,753
		Increase in income taxes payable, accrued expenses and other liabilities, net		695,135		3,222,568

Net cash provided by operating activities				1,591,012		8,030,669

Cash flows from investing activities:
	Net (increase)/decrease in loans receivable			5,106,839		(25,427,983	)
	Purchases of loans receivable			(51,143,896	)	(45,229,516	)
	Proceeds from the sale of loans			13,217,497		—
	Purchases of mortgage-backed securities available-for-sale			(5,130,634	)	(6,241,440	)
	Principal payments on mortgage-backed securities available-for-sale			4,147,334		4,419,684
	Maturities of investment securities available-for-sale			19,547,992		24,135,018
	Proceeds from the sale of investment securities available for sale			—		4,032,812
	Purchases of investment securities available-for-sale			(32,111,658	)	(20,091,594	)
	Purchases of office properties and equipment			(2,585,064	)	(1,327,081	)
	Purchases of stock in the Federal Home Loan Bank of Chicago			(353,800	)	(1,000,000	)
	Cash investment in majority-owned subsidiary			(420,000	)	—
	Proceeds from the sale of foreclosed real estate			—		4,104,916

Net cash used in investing activities				(49,725,390	)	(62,625,184	)

Cash flows from financing activities:
	Net increase in deposits			72,397,558		38,065,721
	Proceeds from borrowed money			609,750		60,000,000
	Repayments on borrowed money			(3,978,088	)	(25,000,000	)
	Cash dividends paid			(1,626,153	)	(1,571,164	)
	Purchase of treasury stock			(51,325	)	(2,192,733	)
	Stock options exercised			562,668		—

Net cash provided by financing activities				67,914,410		69,301,824

Net increase in cash and cash equivalents				19,780,032		14,707,309
Cash and cash equivalents at beginning of period				18,175,290		27,022,671

Cash and cash equivalents at end of period			$	37,955,322		41,729,980

See accompanying notes to consolidated financial statements.

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), its majority-owned subsidiary, Computer Dynamics Group Inc. (CDGI), its wholly-owned subsidiary, Elgin Financial Savings Bank (the Bank) and its wholly-owned subsidiary, Fox Valley Service Corporation of Elgin. A controlling interest in CDGI was purchased for $420,000 in January 2002. The accompanying financial statements include the operating results of CDGI for the three and nine months ended September 30, 2002 since the date of acquisition. Certain amounts for the prior year have been reclassified to conform to the current year presentation.

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. These interim financial statements have been prepared according to the rules and regulations of the Securities and Exchange Commission and therefore certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America 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 2001 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, 2002 and 2001 are as follows:

		Three months ended September 30,				Nine months ended September 30,
		2002		2001		2002		2001
Net income		$	1,449,190	1,168,763		$	4,612,278	3,031,370
Other comprehensive income, net of tax:
	Unrealized holding gains on securities arising during the period, net of tax effect		716,014	453,582			1,271,700	966,223
Reclassification adjustment for net gain on sales of securities realized in net income			—	(20,672	)		—	(20,672	)

Comprehensive income		$	2,165,204	1,601,673		$	5,883,978	3,976,921

There were no sales of investment securities as of and for the three and nine months ended September 30, 2002. For both the three and nine month periods ended September 30, 2001 the sale of securities resulted in a gain of $32,812 ($20,672 net of tax effect).

Note 3: COMPUTATION OF PER SHARE EARNINGS

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 the weighted average number of common shares outstanding adjusted for the dilutive effect of outstanding stock options. ESOP shares are only considered outstanding for earnings per share calculations when they are released or committed to be released.

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

	Three months ended September 30,			Nine months ended September 30,
	2002		2001	2002	2001
Basic:
Net income	$	1,449,190	1,168,763	4,612,278	3,031,370
Weighted average shares outstanding		4,240,404	4,241,304	4,209,620	4,276,511

Basic earnings per share	$	0.34	0.27	1.10	0.71

Diluted:
Net income	$	1,449,190	1,168,763	4,612,278	3,031,370
Weighted average shares outstanding		4,240,404	4,241,304	4,209,620	4,276,511
Effect of dilutive stock options outstanding		236,356	66,248	206,074	14,394

Diluted weighted average shares outstanding		4,476,760	4,307,552	4,415,694	4,290,905

Diluted earnings per share	$	0.32	0.27	1.04	0.71

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, 2002 and results of operations for the three and nine months ended September 30, 2002, 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 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 2001 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, 2002 and December 31, 2001

Total assets at September 30, 2002 were $748.8 million, which represented an increase of $75.4 million, or 11.2%, compared to $673.4 million at December 31, 2001. The increase in total assets was primarily as a result of an increase in loans receivable of $30.3 million, or 5.7%, to $567.4 million at September 30, 2002 from $537.1 million at December 31, 2001. The increase in loans receivable was primarily attributable to strong loan demand and loan purchases during the period. In addition, cash and cash equivalents increased $19.8 million, or 108.8%, to $38.0 million at September 30, 2002 from $18.2 million at December 31, 2001 and investment securities increased $14.8 million, or 21.5%, to $83.4 million at September 30, 2002 from $68.6 million at December 31, 2001. The growth in total assets was funded by increases in deposits. Deposits increased $72.4 million to $492.5 million at September 30, 2002 from $420.1 million at December 31, 2001. Stockholders' equity increased by $5.7 million to $74.3 million at September 30, 2002 from $68.6 million at December 31, 2001. The increase in stockholders' equity was primarily the result of the Company's increase in net income during the period, proceeds from the exercise of stock options, and a $1.3 million increase in the Company's accumulated other comprehensive income relating to its available-for-sale investment portfolio, the effect of which was partially offset by dividends paid.

Comparison of Operating Results For the Three Months Ended September 30, 2002 and 2001

General. The Company's net income increased $280,000, or 24.0%, to $1.4 million for the three months ended September 30, 2002, from $1.2 million for the three months ended September 30, 2001.

Interest Income. Interest income decreased $120,000, or 1.1%, to $11.0 million for the three months ended September 30, 2002, compared with $11.1 million for the same period in 2001. This decrease resulted from an increase in the average balance of interest-earning assets, offset by a decrease in the average rate earned on those interest-earning assets. The average balance of interest-earning assets increased by $76.2 million, or 12.2%, to $703.6 million for the three months ended September 30, 2002 from $627.4 million for the comparable period in 2001. The average yield on interest-earning assets decreased by 80 basis points to 6.33% for the three months ended September 30, 2002 from 7.13% for the three months ended September 30, 2001.

Mortgage loan interest income decreased by $239,000 for the three months ended September 30, 2002 compared with the same period in 2001. The average balance of mortgage loans increased $26.7 million, while the loan yield decreased by 62 basis points from 7.55% to 6.93%. Interest income from other loans increased $251,000 for the three months ended September 30, 2002. This increase resulted from a combination of an increase in average balance of $25.3 million, offset by a 113 basis point decrease in yield from 7.64% for the three months ended September 30, 2001 to 6.51% for the three months ended September 30, 2002. Interest income from investment securities, mortgage-backed securities and short-term deposits decreased by $32,000 for the three months ended September 30, 2002, compared with the same period in 2001. This decrease resulted from a combination of an increase in average balance of $23.6 million, offset by a 104 basis point decrease in yield from 5.02% for the three months ended September 30, 2001 to 3.98% for the three months ended September 30, 2002. The decrease in yield is largely attributed to the effect of the lower interest rate environment reducing yields on short-term deposits.

Interest Expense. Interest expense decreased by $674,000, or 10.5%, to $5.8 million for the three months ended September 30, 2002 from $6.4 million for the three months ended September 30, 2001. This decrease resulted from an increase in the average balance of interest-bearing liabilities, offset by a decrease in the average rate paid on those interest-bearing liabilities. The average balance of interest-bearing liabilities increased by $82.5 million, or 15.2%, to $625.7 million for the three months ended September 30, 2002 from $543.2 million for the three months ended September 30, 2001. This change reflects a $79.4 million increase in the deposit accounts, which is primarily attributable to a $41.6 million increase in money market accounts, a $24.4 million increase in passbook savings accounts and a $9.9 million increase in certificates of deposit, partially offset by a decrease of $3.5 million in NOW accounts. The remaining $3.2 million increase is attributable to advances from the FHLB-Chicago. The average rate paid on combined deposits and borrowed money decreased by 106 basis points to 3.68% for the three months ended September 30, 2002 from 4.74% for the three months ended September 30, 2001.

Net Interest Income Before Provision for Loan Losses. Net interest income before provision for loan losses increased $554,000, or 11.8%, to $5.3 million for the three months ended September 30, 2002 from $4.7 million for the comparable period in 2001. The net interest margin as a percent of interest-earning assets increased by 3 basis points to 3.05% for the three months ended September 30, 2002 from 3.02% for the comparable period in 2001.

Provision for Loan Losses. The provision for loan losses increased by $90,000, to $225,000 for the three months ended September 30, 2002 from $135,000 in 2001. This increase is primarily due to the growth and change in the composition of the loan portfolio. At September 30, 2002, December 31, 2001 and September 30, 2001, non-performing loans totaled $2.1 million, $2.6 million and $1.2 million, respectively. At September 30, 2002, the ratio of the allowance for loan losses to non-performing loans was 136.5% compared to 87.4% at December 31, 2001 and 175.4% at September 30, 2001. The ratio of the allowance to total loans was 0.52%, 0.42% and 0.40%, at September 30, 2002, December 31, 2001 and September 30, 2001, respectively. There were no charge-offs for the three months ended September 30, 2002. Charge-offs totaled $16,000 for the three months ended September 30, 2001. Management periodically calculates an allowance sufficiency analysis based upon the portfolio composition, asset classifications, loan-to-value ratios, probable impairments in the loan portfolio, and other factors.

Noninterest Income. Noninterest income totaled $1.3 million and $433,000 for the three months ended September 30, 2002 and 2001, respectively. The increase in noninterest income is primarily attributable to increases in service fees of $300,000, information/technology sales and service income of $243,000 related to the Company's majority-owned subsidiary CDGI, an increase of $178,000 in the cash surrender value of the Company's bank owned life insurance primarily purchased in December 2001, and $200,000 in gains on sale of loans. There were no loan sales for the comparable period in 2001.

Noninterest Expense. Noninterest expense increased $1.0 million, to $4.2 million for the three months ended September 30, 2002 from $3.2 million for the comparable period in 2001. Compensation and benefits increased by $646,000. This increase was primarily due to a combination of annual salary increases, the addition of staff and the related compensation and benefits expenses of CDGI. The additional staff expenses are primarily attributed to the opening of the Bank's new Carpentersville, Illinois branch. All other operating expenses, including advertising, audit, data processing, marketing, postage, communications, and other expense increased by a combined $393,000, or 31.4%, to $1.6 million for the three months ended September 30, 2002 from $1.2 million for the three months ended September 30, 2001. Of the increase in other operating expenses, $158,000 or 40.3% is related to CDGI.

Management continues to emphasize the importance of expense management and control while continuing to provide expanded banking services to a growing market base.

Income Tax Expense. Income tax expense totaled $727,000 and $637,000 for the three months ended September 30, 2002 and 2001, respectively. The increase was primarily due to a $336,000 increase in earnings before income taxes to $2.1 million for the three months ended September 30, 2002 from $1.8 million for the prior year period. The effective tax rate was 34.0% and 35.3% for the three months ended September 30, 2002 and 2001, respectively. The decrease in the effective tax rate for the three months ended September 30, 2002 is primarily due to the increase in tax exempt income including municipal interest income and an increase in income from bank owned life insurance.

Comparison of Operating Results For the Nine Months Ended September 30, 2002 and 2001

General. The Company's net income increased $1.6 million, or 52.2%, to $4.6 million for the nine months ended September 30, 2002, from $3.0 million for the nine months ended September 30, 2001.

Interest Income. Interest income increased $717,000, or 2.2%, to $33.3 million for the nine months ended September 30, 2002, compared with $32.6 million for the same period in 2001. The increase in interest income was primarily due to an increase in average interest-earning assets, which increased by $82.3 million, or 13.7%, to $682.1 million for the nine months ended September 30, 2002 from $599.8 million for the comparable period in 2001, offset by a decrease in the average yield on interest-earning assets by 69 basis points to 6.57% for the nine months ended September 30, 2002 from 7.26% for the nine months ended September 30, 2001.

Mortgage loan interest income increased by $692,000 for the nine months ended September 30, 2002 compared with the same period in 2001. The average balance of mortgage loans increased $43.1 million, while the loan yield decreased by 48 basis points from 7.56% to 7.08%. Interest income from other loans increased $695,000 for the nine months ended September 30, 2002. This increase resulted from a combination of an increase in average balance of $26.4 million, offset by a 156 basis point decrease in yield from 8.08% for the nine months ended September 30, 2001 to 6.52% for the nine months ended September 30, 2002. Interest income from investment securities, mortgage-backed securities and short-term deposits decreased by $334,000 for the nine months ended September 30, 2002, compared with the same period in 2001. This decrease resulted from a combination of an increase in average balance of $12.1 million, offset by a 100 basis point decrease in yield from 5.58% for the nine months ended September 30, 2001 to 4.58% for the nine months ended September 30, 2002. The decrease in yield is largely attributed to the effect of the lower interest rate environment reducing yields on short-term deposits.

Interest Expense. Interest expense decreased by $2.1 million, or 11.1%, to $17.2 million for the nine months ended September 30, 2002 from $19.3 million for the nine months ended September 30, 2001. This decrease resulted from an increase in the average balance of interest-bearing liabilities, offset by a decrease in the average rate paid on those interest-bearing liabilities. The average balance of interest-bearing liabilities increased by $87.4 million, or 16.8%, to $606.4 million for the nine months ended September 30, 2002 from $519.0 million for the nine months ended September 30, 2001. This change reflects a $75.3 million increase in the deposit accounts, which is primarily attributable to a $50.4 million increase in money market accounts and a $28.1 million increase in passbook savings accounts, partially offset by a decrease of $6.1 million in certificates of deposits. The remaining $12.1 million increase is attributable to advances from the FHLB-Chicago. The average rate paid on combined deposits and borrowed money decreased by 118 basis points to 3.78% for the nine months ended September 30, 2002 from 4.96% for the nine months ended September 30, 2001.

Net Interest Income Before Provision for Loan Losses. Net interest income before provision for loan losses increased $2.8 million, or 21.6%, to $16.1 million for the nine months ended September 30, 2002 from $13.3 million for the comparable period in 2001. The net interest margin as a percent of interest-earning assets increased by 26 basis points to 3.22% for the nine months ended September 30, 2002 from 2.96% for the comparable period in 2001.

Provision for Loan Losses. The provision for loan losses increased by $345,000, to $675,000 for the nine months ended September 30, 2002 from $330,000 in 2001. This increase is primarily due to the growth and change in the composition of the loan portfolio. At September 30, 2002, December 31, 2001 and September 30, 2001, non-performing loans totaled $2.1 million, $2.6 million and $1.2 million, respectively. Charge-offs totaled $3,000 and $101,000 for the nine months ended September 30, 2002 and 2001, 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 $3.6 million and $1.2 million for the nine months ended September 30, 2002 and 2001, respectively. The increase in noninterest income is primarily attributable to increases in service fees of $547,000, insurance and brokerage commissions of $114,000, gains on sale of loans of $200,000, information/technology sales and service income of $984,000 related to the Company's majority-owned subsidiary CDGI and an increase of $515,000 in the cash surrender value of the Company's bank owned life insurance. The increase in insurance and brokerage commissions is the result of a greater emphasis placed on this area.

Noninterest Expense. Noninterest expense increased $2.9 million, to $12.3 million for the nine months ended September 30, 2002 from $9.4 million for the comparable period in 2001. Compensation and benefits increased by $2.0 million. This increase was primarily due to a combination of annual salary increases, the addition of staff and the related compensation and benefits expenses of CDGI. The additional staff expenses are primarily attributed to the opening of the Bank's new Carpentersville, Illinois branch. All other operating expenses, including advertising, audit, data processing, marketing, postage, communications, and other expense increased by a combined $792,000, or 21.0%, to $4.6 million for the nine months ended September 30, 2002 from $3.8 million for the nine months ended September 30, 2001. Of the increase in other operating expenses, $450,000 or 56.8% is related to CDGI. Management continues to emphasize the importance of expense management and control while continuing to provide expanded banking services to a growing market base.

Income Tax Expense. Income tax expense totaled $2.2 million and $1.6 million for the nine months ended September 30, 2002 and 2001, respectively. The increase was primarily due to a $2.0 million increase in earnings before income taxes to $6.7 million for the nine months ended September 30, 2002 from $4.7 million for the prior year period. The effective tax rate was 32.2% and 35.1% for the nine months ended September 30, 2002 and 2001, respectively. The decrease in the effective tax rate for the nine months ended September 30, 2002 is primarily due to the increase in tax exempt income including municipal interest income and increase in income from bank owned life insurance.

Liquidity and Capital Resources

The Company's primary source of funding for dividends and periodic stock repurchases has been dividends from the Bank. The Bank's ability to pay dividends and other capital distributions to the Company is generally limited by OTS regulations.

The Bank's primary sources of funds are savings deposits, proceeds from the principal and interest payments on loans and proceeds from the maturity of securities and borrowings from the 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 single-family, 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.

In addition to the primary investing activities of the Bank, the Company has repurchased shares of its common stock from time to time in the open market. The Company is in the process of its sixth stock repurchase program, which was previously announced in September 2001. Under this program the Company is authorized to repurchase up to 231,808, or 5.0% of its outstanding common stock. Under this current program, 32,800 shares of the Company's common stock have been repurchased at an average price per share of $12.84. As of September 30, 2002, the Company repurchased a total of 2,888,073 shares of the Company's common stock at an average price per share of $11.65.

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, 2002, cash and interest-bearing demand accounts totaled $38.0 million, or 5.1% of total assets.

See the "Consolidated Statements of Cash Flows" in the Unaudited Consolidated Financial Statements included in this Form 10-Q for the sources and uses of cash flows for operating, investing and financing activities for the nine months ended September 30, 2002 and 2001.

At September 30, 2002, the Bank exceeded all of its regulatory capital requirements. The following is a summary of the Bank's regulatory capital ratios at September 30, 2002:

Total Capital to Total Assets	9.24	%
Total Capital to Risk-Weighted Assets	13.69	%
Tier I Leverage Ratio	9.10	%
Tier I to Risk-Weighted Assets	13.39	%

At September 30, 2002, the Company had a Total Capital to Total Assets ratio of 9.92%.

On September 18, 2002, the Company announced its third quarter dividend of $0.1350 per share. The dividend was paid on October 8, 2002 to stockholders of record on September 30, 2002.

Recent Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 141, "Business Combinations" (SFAS No. 141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. SFAS No. 142 was effective January 1, 2002 for calendar year companies. The adoption of SFAS No. 141 and No. 142 did not have a material impact on the Company's results of operations or financial condition.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This Statement is effective for exit or disposal activities that are initiated after December 31, 2002. Adoption of this statement is not expected to have a material effect on the Company's consolidated financial statements.

In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial Institutions." This statement, which provides guidance on the accounting for the acquisition of a financial institution, applies to all acquisitions except transactions between two or more mutual enterprises. The provisions of this Statement that relate to the application of SFAS No. 144 apply to certain long-term customer-relationship intangible assets recognized in an acquisition of a financial institution, including those acquired in transactions between mutual enterprises. The excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired in a business combination represents goodwill that should be accounted for under SFAS No. 142. If certain criteria in this SFAS No. 147 are met, the amount of the unidentifiable intangible asset will be reclassified to goodwill upon the adoption of SFAS No. 142, and financial institutions meeting these conditions will be required to restate previously issued financials. Provisions of this statement that relate to the application of the purchase method of accounting are effective for acquisitions on or after October 1, 2002. The provision of this Statement relating to accounting for impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002, with earlier application permitted. The adoption of this Statement is not expected to have a material effect on the Company's consolidated financial statements.

Average Balance Sheet

The following tables set forth certain information relating to the Bank for the three and nine months ended September 30, 2002 and 2001, respectively. The average yields and costs are derived by dividing income or expense by the average balance of interest-earning assets or interest-bearing liabilities, respectively, for the periods shown and reflect annualized yields and costs. Average balances are derived from average monthly balances. The yields and costs include fees, which are considered adjustments to yields. Tax exempt income has been calculated on a tax equivalent basis.

			Three Months Ended September 30, 2002					Three Months Ended September 30, 2001
			Average Balance		Interest	Yield/Cost		Average Balance	Interest	Yield/Cost
			(in thousands)
Assets:
Interest earning assets:
	Short-term deposits and FHLB stock		$	47,170	219	1.86	%	38,497	233	2.42	%
	Investment securities			76,195	1,026	5.38	%	60,483	1,000	6.61	%
	Mortgage-backed securities			11,802	124	4.22	%	11,905	184	6.18	%
	Mortgage loans			483,823	8,388	6.93	%	457,160	8,627	7.55	%
	Other loans			84,625	1,378	6.51	%	59,366	1,133	7.64	%

		Total interest earning assets		703,615	11,135	6.33	%	627,411	11,177	7.13	%

Noninterest earning assets				40,119				20,206

		Total assets	$	743,734				647,617

Liabilities and stockholders' equity
Interest-bearing liabilities
	Deposits:
	Money market accounts		$	126,082	865	2.74	%	84,504	885	4.19	%
	Passbook savings accounts			100,433	574	2.29	%	76,020	604	3.18	%
	NOW Accounts			32,264	84	1.04	%	28,783	67	0.94	%
	Certificates of deposit			195,231	1,926	3.95	%	185,351	2,637	5.69	%

		Total deposits		454,010	3,449	3.04	%	374,658	4,193	4.48	%
	FHLB Advances			171,700	2,313	5.39	%	168,533	2,244	5.33	%

	Total interest-bearing liabilities			625,710	5,762	3.68	%	543,191	6,437	4.74	%

Noninterest-bearing liabilities				44,669				36,291

		Total liabilities		670,379				579,482
Total stockholders' equity				73,355				68,135

	Total liabilities and stockholders' equity		$	743,734				647,617

Net interest income before provision for loan losses					5,373				4,740

Interest rate spread						2.65	%			2.39	%

Net interest margin as a percent of interest earning assets						3.05	%			3.02	%

Ratio of interest-earning assets to interest-bearing liabilities						112.45	%			115.50	%

			Nine Months Ended September 30, 2002					Nine Months Ended September 30, 2001
			Average Balance		Interest	Yield/Cost		Average Balance	Interest	Yield/Cost
			(in thousands)
Assets:
Interest earning assets:
	Short-term deposits and FHLB stock		$	37,893	552	1.94	%	36,535	1,026	3.74	%
	Investment securities			72,175	3,195	5.90	%	59,927	2,956	6.58	%
	Mortgage-backed securities			12,054	478	5.28	%	12,835	645	6.70	%
	Mortgage loans			482,233	25,599	7.08	%	439,168	24,907	7.56	%
	Other loans			77,706	3,797	6.52	%	51,346	3,111	8.08	%

		Total interest earning assets		682,061	33,621	6.57	%	599,811	32,645	7.26	%

Noninterest earning assets				37,718				20,086

		Total assets	$	719,779				619,897

Liabilities and stockholders' equity
Interest-bearing liabilities
	Deposits:
	Money market accounts		$	117,156	2,506	2.85	%	66,794	2,195	4.38	%
	Passbook savings accounts			99,997	1,774	2.37	%	71,919	1,776	3.29	%
	NOW Accounts			31,662	241	1.02	%	28,766	237	1.10	%
	Certificates of deposit			184,122	5,712	4.14	%	190,188	8,492	5.95	%

		Total deposits		432,937	10,233	3.15	%	357,667	12,700	4.73	%
	FHLB Advances			173,422	6,937	5.33	%	161,311	6,615	5.47	%

	Total interest-bearing liabilities			606,359	17,170	3.78	%	518,978	19,315	4.96	%

Noninterest-bearing liabilities				42,012				33,161

		Total liabilities		648,371				552,139
Total stockholders' equity				71,408				67,758

	Total liabilities and stockholders' equity		$	719,779				619,897

Net interest income before provision for loan losses					16,451				13,330

Interest rate spread						2.79	%			2.30	%

Net interest margin as a percent of interest earning assets						3.22	%			2.96	%

Ratio of interest-earning assets to interest-bearing liabilities						112.48	%			115.58	%

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, 2002.

								NPV as % of Portfolio Value of Assets
	Net Portfolio Value
Change in Interest Rates in Basis Points (Rate Shock)	Net Portfolio Value
Change in Interest Rates in Basis Points (Rate Shock)	Amount		$ Change			% Change		NPV Ratio		% Change
	(In thousands)
+300	$	51,927	$	(54,034	)	(50.99	)%	7.14	%	(47.07	)%
+200		74,601		(31,360	)	(29.60	)	9.93		(26.39	)
+100		93,675		(12,286	)	(11.59	)	12.14		(10.01	)
Static		105,961		—		—		13.49		—
-100		119,298		13,337		12.59		14.91		10.53
-200		122,895		16,934		15.98		15.26		13.12
-300		125,393		19,432		18.34		15.51		14.97

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 may differ from actual results.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within 90 days of the filing date of this report, the chief executive officer and the chief financial officer of the Company concluded that the Company's disclosure controls and procedures were adequate.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the Company's financial condition, results of operations and cash flows.

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.

(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 Incorporated herein by reference to Footnote 3 on page 5 of this document.
		99.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
		99.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b): Reports on Form 8-K

None.

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

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 14, 2002	By:	/s/ Barrett J. O'Connor

		Barrett J. O'Connor President and Chief Executive Officer (Principal executive officer)
Dated:	November 14, 2002	By:	/s/ James J. Kovac

		James J. Kovac Executive Vice President and Chief Financial Officer (Principal financial and accounting officer)

Certification

I, Barrett J. O'Connor, certify that:

1. I have reviewed this quarterly report on Form 10-Q of EFC Bancorp, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

By:		/s/ Barrett J. O'Connor
Barrett J. O'Connor Chief Executive Officer November 14, 2002

Certification

I, James J. Kovac, certify that:

1. I have reviewed this quarterly report on Form 10-Q of EFC Bancorp, Inc.;

a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

By:		/s/ James J. Kovac
James J. Kovac Chief Financial Officer November 14, 2002

QuickLinks

EFC Bancorp, Inc. Form 10-Q For the Quarter Ended September 30, 2002 INDEX
PART I. FINANCIAL INFORMATION EFC BANCORP, INC.

Item 1. Financial Statements.

EFC BANCORP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited) September 30, 2002 and December 31, 2001
EFC BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) For the three and nine months ended September 30, 2002 and 2001
EFC BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) For the nine months ended September 30, 2002 and 2001
EFC BANCORP, INC. Notes to Consolidated Financial Statements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Item 2. Changes in Securities and Use of Proceeds.

Item 3. Defaults Upon Senior Securities.

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

Item 5. Other Information.

Item 6. Exhibits and Reports on Form 8-K.

SIGNATURES