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, 2003

or

 

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

 

36-4193304

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

1695 Larkin Avenue, Elgin, Illinois

 

60123

(Address of principal executive offices)

 

(Zip Code)

 

 

 

(847) 741-3900

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed 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  ý   No  o

 

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: 4,579,171 shares of common stock, par value $0.01 per share, were outstanding as of November 12, 2003.

 

 



 

EFC Bancorp, Inc.

 

Form 10-Q

 

For the Quarter Ended September 30, 2003

 

INDEX

 

PART I.

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (unaudited)

 

 

 

 

 

 

Consolidated Balance Sheets at
September 30, 2003 and December 31, 2002

 

 
 
 
 

 

 

Consolidated Statements of Income - For the Three and
Nine Months Ended September 30, 2003 and 2002

 

 
 
 
 

 

 

Consolidated Statements of Cash Flows - For the Nine
Months Ended September 30, 2003 and 2002

 

 

 

 

 

 

 

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

 

 

 

2



 

PART I. FINANCIAL INFORMATION

EFC BANCORP, INC.

 

Item 1. Financial Statements.

EFC BANCORP, INC.

AND SUBSIDIARIES

Consolidated Balance Sheets (unaudited)

September 30, 2003 and December 31, 2002

 

 

 

September 30,
2003

 

December 31,
2002

 

Assets

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

On hand and in banks

 

$

5,085,545

 

4,277,209

 

Interest bearing deposits with financial institutions

 

19,035,025

 

28,567,081

 

Total cash and cash equivalents

 

24,120,570

 

32,844,290

 

 

 

 

 

 

 

Loans receivable, net

 

700,036,380

 

597,048,785

 

Mortgage-backed securities available-for-sale, at fair value

 

11,816,948

 

15,255,684

 

Investment securities available-for-sale, at fair value

 

89,670,384

 

87,981,884

 

Foreclosed real estate

 

39,109

 

1,985,741

 

Stock in Federal Home Loan Bank of Chicago, at cost

 

10,690,400

 

9,362,200

 

Accrued interest receivable

 

3,752,001

 

3,887,410

 

Office properties and equipment, net

 

17,275,263

 

16,796,685

 

Real estate held for development

 

3,757,902

 

2,934,072

 

Bank owned life insurance

 

17,781,013

 

12,246,803

 

Other assets

 

2,669,187

 

2,032,372

 

 

 

 

 

 

 

Total assets

 

$

881,609,157

 

782,375,926

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits

 

$

590,155,718

 

524,189,844

 

Borrowed money

 

201,797,598

 

171,778,743

 

Accrued expenses, income taxes payable and other liabilities

 

13,242,640

 

11,705,771

 

 

 

 

 

 

 

Total liabilities

 

805,195,956

 

707,674,358

 

 

 

 

 

 

 

Minority interest

 

(156,392

)

(75,127

)

 

 

 

 

 

 

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

 

71,967,721

 

71,834,834

 

Retained earnings, substantially restricted

 

45,562,570

 

41,911,421

 

Treasury stock, at cost, 2,912,263 and 2,854,293 shares at September 30, 2003 and December 31, 2002, respectively

 

(35,725,032

)

(33,755,940

)

Unearned employee stock ownership plan (ESOP), 369,578 and 399,544 shares at September 30, 2003 and December 31, 2002, respectively

 

(5,526,135

)

(5,974,199

)

Unearned stock award plan, 17,467 and 51,790 shares at September 30, 2003 and December 31, 2002, respectively

 

(194,321

)

(576,164

)

Accumulated other comprehensive income

 

409,876

 

1,261,829

 

 

 

 

 

 

 

Total stockholders’ equity

 

76,569,593

 

74,776,695

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

881,609,157

 

782,375,926

 

 

See accompanying notes to consolidated financial statements.

 

1



 

EFC BANCORP, INC.

AND SUBSIDIARIES

 

Consolidated Statements of Income (unaudited)

For the three and nine months ended September 30, 2003 and 2002

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans secured by real estate

 

$

8,258,392

 

8,589,699

 

25,448,767

 

25,867,869

 

Other loans

 

1,744,170

 

1,377,223

 

4,729,418

 

3,790,146

 

Mortgage-backed securities available-for-sale

 

107,310

 

124,541

 

415,612

 

477,568

 

Investment securities available-for-sale and interest bearing deposits with financial institutions

 

1,202,610

 

1,129,267

 

3,717,910

 

3,419,047

 

Total interest income

 

11,312,482

 

11,220,730

 

34,311,707

 

33,554,630

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

3,017,886

 

3,449,025

 

9,238,516

 

10,233,315

 

Borrowed money

 

2,372,350

 

2,313,926

 

6,950,759

 

6,937,225

 

Total interest expense

 

5,390,236

 

5,762,951

 

16,189,275

 

17,170,540

 

 

 

 

 

 

 

 

 

 

 

Net interest income before provision for loan losses

 

5,922,246

 

5,457,779

 

18,122,432

 

16,384,090

 

Provision for loan losses

 

140,000

 

225,000

 

463,250

 

675,000

 

Net interest income after provision for loan losses

 

5,782,246

 

5,232,779

 

17,659,182

 

15,709,090

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Service fees

 

572,810

 

406,442

 

1,555,618

 

1,108,588

 

Insurance and brokerage commissions

 

136,292

 

59,919

 

250,322

 

370,259

 

Information technology sales and service income, net

 

146,628

 

243,355

 

642,882

 

984,234

 

Gain on sale of foreclosed real estate

 

 

 

41,315

 

 

Gain on sale of securities

 

290,385

 

 

816,454

 

 

Gain on sale of loans

 

 

200,409

 

156,223

 

200,409

 

Bank owned life insurance

 

234,543

 

178,137

 

600,675

 

514,726

 

Other

 

102,626

 

53,290

 

175,855

 

124,700

 

Total noninterest income

 

1,483,284

 

1,141,552

 

4,239,344

 

3,302,916

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

2,740,615

 

2,586,407

 

8,062,139

 

7,706,939

 

Office building, net

 

683,434

 

607,876

 

2,058,996

 

1,658,569

 

Federal insurance premiums

 

21,669

 

19,206

 

66,055

 

56,164

 

Advertising

 

160,877

 

181,981

 

594,003

 

450,553

 

Data processing

 

220,938

 

229,200

 

704,934

 

680,533

 

NOW/checking account expenses

 

177,093

 

155,282

 

432,866

 

402,697

 

Other

 

561,355

 

452,324

 

1,852,196

 

1,307,996

 

Total noninterest expense

 

4,565,981

 

4,232,276

 

13,771,189

 

12,263,451

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes and minority interest

 

2,699,549

 

2,142,055

 

8,127,337

 

6,748,555

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

889,286

 

727,242

 

2,766,221

 

2,173,162

 

 

 

 

 

 

 

 

 

 

 

Income before minority interest

 

1,810,263

 

1,414,813

 

5,361,116

 

4,575,393

 

 

 

 

 

 

 

 

 

 

 

Minority interest

 

10,615

 

34,377

 

81,265

 

36,885

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,820,878

 

1,449,190

 

5,442,381

 

4,612,278

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.43

 

0.34

 

1.29

 

1.10

 

Diluted

 

0.41

 

0.32

 

1.22

 

1.04

 

 

See accompanying notes to consolidated financial statements.

 

2



 

EFC BANCORP, INC.

AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows (unaudited)

For the nine months ended September 30, 2003 and 2002

 

 

 

2003

 

2002

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

5,442,381

 

4,612,278

 

Adjustment to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Amortization of premiums and discounts, net

 

75,318

 

(8,633

)

Provision for loan losses

 

463,250

 

675,000

 

FHLB of Chicago stock dividends

 

(568,000

)

(353,800

)

Stock award plan shares allocated

 

381,843

 

471,588

 

ESOP shares committed to be released

 

448,064

 

448,071

 

Change in fair value of ESOP shares

 

132,887

 

20,917

 

Depreciation of office properties and equipment

 

855,482

 

591,328

 

Gain on sale of foreclosed real estate

 

(41,315

)

 

Gain on sale of securities

 

(816,454

)

 

Gain on sale of loans

 

(156,223

)

(200,409

)

Change in minority interest in subsidiary

 

(81,265

)

(54,330

)

Increase in bank owned life insurance

 

(534,210

)

(455,246

)

Goodwill impairment

 

226,669

 

 

(Increase)/decrease in accrued interest receivable and other assets, net

 

(186,375

)

(1,524,419

)

Increase in income taxes payable, accrued expenses and other liabilities, net

 

1,510,496

 

695,135

 

 

 

 

 

 

 

Net cash provided by operating activities

 

7,152,548

 

4,917,480

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Net (increase)/decrease in loans receivable

 

(32,964,799

)

5,106,839

 

Purchases of loans receivable

 

(83,263,883

)

(51,143,896

)

Proceeds fom the sale of loans

 

12,894,951

 

13,217,497

 

Increase in real estate held for development

 

(823,830

)

(2,900,268

)

Purchases of mortgage-backed securities available-for-sale

 

(2,549,222

)

(5,130,634

)

Principal payments on mortgage-backed securities available-for-sale

 

5,738,497

 

4,147,334

 

Maturities of investment securities available-for-sale

 

25,465,274

 

19,547,992

 

Purchases of investment securities available-for-sale

 

(42,909,565

)

(32,111,658

)

Proceeds from the sale of investment securities

 

15,349,744

 

 

Purchases of office properties and equipment

 

(1,334,060

)

(2,585,064

)

Investment in bank owned life insurance

 

(5,000,000

)

(780,000

)

Purchases of stock in the Federal Home Loan Bank of Chicago

 

(760,200

)

 

Cash used in acquisition of majority-owned susidiary

 

 

(420,000

)

Proceeds from the sale of foreclosed real estate

 

2,027,057

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(108,130,036

)

(53,051,858

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

65,965,874

 

72,397,558

 

Proceeds from borrowed money

 

91,070,325

 

609,750

 

Repayments on borrowed money

 

(61,051,470

)

(3,978,088

)

Purchase of treasury stock

 

(2,514,270

)

(51,325

)

Stock options exercised

 

545,178

 

562,668

 

Cash dividends paid

 

(1,761,869

)

(1,626,153

)

Net cash provided by financing activities

 

92,253,768

 

67,914,410

 

 

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

(8,723,720

)

19,780,032

 

Cash and cash equivalents at beginning of period

 

32,844,290

 

18,175,290

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

24,120,570

 

37,955,322

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

16,241,964

 

17,218,166

 

Income taxes

 

2,340,000

 

2,140,000

 

Noncash investing activities - transfer of loans to foreclosed real estate

 

39,190

 

 

 

See accompanying notes to consolidated financial statements.

 

3



 

Item 1. Financial Statements, continued

 

EFC BANCORP, INC.

Notes to Unaudited 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, EFS Bank (the Bank) and its wholly-owned subsidiary, EFS Service Corporation of Elgin.  The Company purchased an 80% interest in CDGI for $420,000 in January 2002.  The accompanying financial statements include the operating results of CDGI since the date of acquisition.  CDGI is consolidated and a minority interest is recorded for the proportionate interest not owned by the Company.  Certain amounts for the prior year have been reclassified to conform to the current year presentation.  The Company operates as a single segment.

 

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 2002 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, 2003 and 2002 are as follows:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

Net income

 

$

1,820,878

 

1,449,190

 

$

5,442,381

 

4,612,278

 

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

Unrealized holding gains/(losses) on securities arising during the period, net of tax effect

 

(1,577,044

)

716,014

 

(851,953

)

1,271,700

 

Reclassification adjustment for net gain on sales of securities realized in net income

 

(182,943

)

 

(514,366

)

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

60,891

 

2,165,204

 

$

4,076,062

 

$

5,883,978

 

 

4



 

For the three and nine month periods ended September 30, 2003 the sale of securities resulted in gains of $290,385 and $816,454, respectively ($182,943 and $514,366 net of tax effect).  There were no sales of investment securities as of and for the three and nine months ended September 30, 2002.

 

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,

 

 

 

2003

 

2002

 

2003

 

2002

 

Basic:

 

 

 

 

 

 

 

 

 

Net income

 

$

1,820,878

 

1,449,190

 

5,442,381

 

4,612,278

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

4,205,803

 

4,240,404

 

4,213,292

 

4,209,620

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.43

 

0.34

 

1.29

 

1.10

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,820,878

 

1,449,190

 

5,442,381

 

4,612,278

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

4,205,803

 

4,240,404

 

4,213,292

 

4,209,620

 

Effect of dilutive stock options outstanding

 

243,877

 

236,356

 

234,472

 

206,074

 

Diluted weighted average shares outstanding

 

4,449,680

 

4,476,760

 

4,447,764

 

4,415,694

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

0.41

 

0.32

 

1.22

 

1.04

 

 

Note 4:  STOCK OPTION PLANS

 

The Company accounts for the stock-based compensation plans under APB Opinion No. 25.  For the stock option program, no compensation cost is recognized in connection with the granting of stock options with an exercise price equal to the fair market value of the stock on the date of the grant.  For the stock award plan, the Company uses fixed method of accounting and records compensation expense, over the vesting period of the grant, based upon the fair market value of the stock at the date of grant.  In accordance with the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, the following table provides the pro forma effect on net income and earnings per share if the fair value method of accounting for stock-based compensation had been used for all awards:

 

5



 

 

 

For the Three Months
Ended September 30,

 

For the Nine Months
Ended September 30,

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

 

 

 

 

 

 

 

 

Net income as reported

 

$

1,820,878

 

$

1,449,190

 

$

5,442,381

 

$

4,612,278

 

Add: Stock-based compensation, net of tax, included in the determination of net income, as reported

 

127,281

 

157,196

 

381,843

 

471,588

 

Deduct: Stock-based compensation, net of tax, that would have been reported if the fair value based method had been applied to all awards

 

(245,185

)

(269,291

)

(732,202

)

(807,872

)

Pro forma net income

 

$

1,720,974

 

$

1,337,095

 

$

5,092,022

 

$

4,275,994

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

 

 

 

 

 

 

 

 

As reported

 

$

0.43

 

$

0.34

 

$

1.29

 

$

1.10

 

Pro forma

 

0.40

 

0.32

 

1.21

 

1.02

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

As reported

 

$

0.41

 

$

0.32

 

$

1.22

 

$

1.04

 

Pro forma

 

0.38

 

0.30

 

1.14

 

0.97

 

 

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

 

The following analysis discusses changes in the financial condition at September 30, 2003 and results of operations for the three and nine months ended September 30, 2003, 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

 

6



 

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 2002 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, 2003 and December 31, 2002

 

Total assets at September 30, 2003 were $881.6 million, which represented an increase of $99.2 million, or 12.7%, compared to $782.4 million at December 31, 2002. The increase in total assets was primarily a result of an increase in loans receivable of $103.0 million, or 17.3%, to $700.0 million at September 30, 2003 from $597.0 million at December 31, 2002.  The increase in loans receivable was primarily attributable to strong loan demand and loan purchases during the period.  In addition, stock in Federal Home Loan Bank of Chicago increased $1.3 million, or 14.2%, to $10.7 million at September 30, 2003 from $9.4 million at December 31, 2002, and bank owned life insurance increased $5.6 million, or 45.2%, to $17.8 million at September 30, 2003 from $12.2 million at December 31, 2002.  This increase was due to an investment of $5.0 million made in May 2003.  These increases were partially offset by decreases in cash and cash equivalents of $8.7 million, or 26.6%, to $24.1 million at September 30, 2003 from $32.8 million at December 31, 2002, decreases in mortgage-backed securities of $3.5 million, or 22.5% to $11.8 at September 30, 2003 from $15.3 million at December 31, 2002 and by the sale of foreclosed real estate of $1.9 million from December 31, 2002 to September 30, 2003.  This property was sold in January 2003 resulting in a gain of approximately $41,000.  The growth in total assets was funded by increases in deposits and borrowed money.  Deposits increased $66.0 million to $590.2 million at September 30, 2003 from $524.2 million at December 31, 2002.  Borrowed money, primarily representing FHLB advances, increased $30.0 million to $201.8 million at September 30, 2003 from $171.8 million at December 31, 2002.  Stockholders’ equity increased $1.8 million to $76.6 million at September 30, 2003 from $74.8 million at December 31, 2002.  The increase in stockholders’ equity was primarily the result of the Company’s net income for the nine months ended September 30, 2003, which was partially offset by an $852,000 decrease in the Company’s accumulated other comprehensive income relating to the change in fair value of its available-for-sale investment portfolio, stock repurchases totaling $2.5 million and dividends paid of $1.8 million.

 

Comparison of Operating Results For the Three Months Ended September 30, 2003 and 2002

 

General.  The Company’s net income increased $372,000, or 25.7%, to $1.8 million for the three months ended September 30, 2003 as compared to the prior year period.

 

Interest Income.  Interest income increased $92,000, or 1.0%, to $11.3 million for the three months ended September 30, 2003, compared with $11.2 million for the same period in 2002.  This increase resulted from an increase in the average balance of interest-earning assets,

 

7



 

partially offset by a decrease in the average rate earned on those interest-earning assets.  The average balance of interest-earning assets increased by $122.2 million, or 17.4%, to $825.8 million for the three months ended September 30, 2003 from $703.6 million for the comparable period in 2002.  The average yield on interest-earning assets decreased by 91 basis points to 5.57% for the three months ended September 30, 2003 from 6.48% for the three months ended September 30, 2002.

 

Mortgage loan interest income decreased by $331,000 for the three months ended September 30, 2003 compared with the same period in 2002.  The average balance of mortgage loans increased $75.4 million, while the mortgage loan yield decreased by 119 basis points from 7.10% to 5.91%.  Interest income from other loans increased $367,000 for the three months ended September 30, 2003. This increase resulted from a combination of an increase in average balance of $41.8 million, partially offset by a 100 basis point decrease in yield from 6.52% for the three months ended September 30, 2002 to 5.52% for the three months ended September 30, 2003.  Interest income from investment securities, mortgage-backed securities and short-term deposits increased $56,000 to $1.3 million for the three months ended September 30, 2003, compared with the same period in 2002.  The average balance increased $5.1 million and the yield increased four basis points from 4.25% for the three months ended September 30, 2002 to 4.29% for the three months ended September 30, 2003.  The average yields are reported on a tax equivalent basis.

 

Interest Expense.  Interest expense decreased by $373,000, or 6.5%, to $5.4 million for the three months ended September 30, 2003 from $5.8 million for the three months ended September 30, 2002.  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 $111.5 million, or 17.8%, to $737.2 million for the three months ended September 30, 2003 from $625.7 million for the three months ended September 30, 2002.  This increase is partially attributed to the opening of a new branch office in July 2002.  This change reflects a $92.8 million increase in the deposit accounts, which is attributable to a $22.0 million increase in money market accounts, a $25.4 million increase in passbook savings accounts, a $40.7 million increase in certificates of deposit and a $4.7 million increase in NOW accounts.  In addition, borrowings increased $18.7 million to $190.4 million for the three months ended September 30, 2003 from $171.7 million for the comparable period in 2002.  The average rate paid on combined deposits and borrowed money decreased by 76 basis points to 2.92% for the three months ended September 30, 2003 from 3.68% for the three months ended September 30, 2002.

 

Net Interest Income Before Provision for Loan Losses.  Net interest income before provision for loan losses increased $464,000, or 8.5%, to $5.9 million for the three months ended September 30, 2003 from $5.5 million for the comparable period in 2002.  The average balance of interest-earning assets increased $122.2 million for the three months ended September 30, 2003 compared to the comparable prior year period.  The increase in interest-earning assets was primarily the result of an increase in the average balance of mortgage loans of $75.4 million and a $41.8 million increase in other loans.  The tax equivalent net interest margin as a percent of interest-earning assets decreased by 25 basis points to 2.96% for the three months ended September 30, 2003 from 3.21% for the comparable period in 2002.

 

8



 

Provision for Loan Losses.  The provision for loan losses decreased by $85,000, to $140,000 for the three months ended September 30, 2003 from $225,000 in 2002.  At September 30, 2003, December 31, 2002 and September 30, 2002, non-performing loans totaled $2.9 million, $2.4 million and $2.1 million, respectively.  Nonperforming assets decreased $1.5 million to $2.9 million at September 30, 2003 from $4.4 million at December 31, 2002, largely due to the sale of foreclosed real estate in January 2003.  At September 30, 2003, the ratio of the allowance for loan losses to non-performing loans was 126.1% compared to 131.1% at December 31, 2002 and 136.5% at September 30, 2002.  The ratio of the allowance to total loans was 0.51%, 0.53% and 0.52%, at September 30, 2003, December 31, 2002 and September 30, 2002, respectively.  There were no charge-offs for the three months ended September 30, 2003 and 2002.  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 $1.5 million and $1.1 million for the three months ended September 30, 2003 and 2002, respectively. The increase in noninterest income is primarily attributable to increases of $290,000 in gain on sale of securities, $166,000 in service fees and $76,000 in insurance and brokerage commissions.  The gain on sale of securities was the result of repositioning the balance sheet and favorable market conditions.  Service fees increased primarily due to the offering of an overdraft privilege account product to our customers.  These increases were partially offset by decreases of $97,000 in income generated by Computer Dynamics Group, Inc. (“CDGI”) and $200,000 in gain on sale of loans.  The decrease in income generated by CDGI is largely due to a decrease in sales related to a weaker demand for technology services.

 

Noninterest Expense.  Noninterest expense increased $334,000, to $4.6 million for the three months ended September 30, 2003 from $4.2 million for the comparable period in 2002.  Of this increase, $154,000 was directly related to compensation and benefits, and $76,000 is related to office building operations resulting from the costs related to the two new branch offices placed in service over the last year.  In addition, the Company incurred a goodwill impairment of $26,000, relating to its majority owned subsidiary CDGI, for the three months ended September 30, 2003.  The goodwill impairment is primarily due to a weaker demand for technology services.  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 $889,000 and $727,000 for the three months ended September 30, 2003 and 2002, respectively.  This increase was primarily due to a $557,000 increase in earnings before income taxes.  The effective tax rate was 32.9% and 34.0% for the three months ended September 30, 2003 and 2002, respectively.  The decrease in the effective tax rate is partially due to the increase in bank owned life insurance.

 

Comparison of Operating Results For the Nine Months Ended September 30, 2003 and 2002

 

General.  The Company’s net income increased $830,000, or 18.0%, to $5.4 million for

 

9



 

the nine months ended September 30, 2003 as compared to the prior year period.

 

Interest Income.  Interest income increased $757,000, or 2.3%, to $34.3 million for the nine months ended September 30, 2003, compared with $33.6 million for the same period in 2002.  This increase resulted from an increase in the average balance of interest-earning assets, partially offset by a decrease in the average rate earned on those interest-earning assets.  The average balance of interest-earning assets increased by $108.9 million, or 16.0%, to $790.9 million for the nine months ended September 30, 2003 from $682.0 million for the comparable period in 2002.  The average yield on interest-earning assets decreased by 77 basis points to 5.89% for the nine months ended September 30, 2003 from 6.66% for the nine months ended September 30, 2002.

 

Mortgage loan interest income decreased by $419,000 for the nine months ended September 30, 2003 compared with the same period in 2002.  The average balance of mortgage loans increased $58.7 million, while the mortgage loan yield decreased by 88 basis points from 7.15% to 6.27%.  Interest income from other loans increased $939,000 for the nine months ended September 30, 2003. This increase resulted from a combination of an increase in average balance of $31.5 million, partially offset by a 74 basis point decrease in yield from 6.52% for the nine months ended September 30, 2002 to 5.78% for the nine months ended September 30, 2003.  Interest income from investment securities, mortgage-backed securities and short-term deposits increased by $237,000 for the nine months ended September 30, 2003, compared with the same period in 2002. This increase resulted from a combination of an increase in average balance of $18.6 million, offset by a 33 basis point decrease in yield from 4.82% for the nine months ended September 30, 2002 to 4.49% for the nine months ended September 30, 2003.  The decrease in yield is largely attributed to the effect of the lower interest rate environment reducing yields on investment securities.  The average yields are reported on a tax equivalent basis.

 

Interest Expense.  Interest expense decreased by $981,000, or 5.7%, to $16.2 million for the nine months ended September 30, 2003 from $17.2 million for the nine months ended September 30, 2002.  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 $99.0 million, or 16.3%, to $705.4 million for the nine months ended September 30, 2003 from $606.4 million for the nine months ended September 30, 2002.  This increase is partially attributed to the opening of a new branch office in July 2002.  This change reflects an $88.1 million increase in the deposit accounts, which is attributable to a $29.4 million increase in money market accounts, a $16.9 million increase in passbook savings accounts, a $38.1 million increase in certificates of deposit and a $3.7 million increase in NOW accounts.  In addition, borrowings increased $11.0 million to $184.4 million for the nine months ended September 30, 2003 from $173.4 million for the comparable period in 2002.  The average rate paid on combined deposits and borrowed money decreased by 72 basis points to 3.06% for the nine months ended September 30, 2003 from 3.78% for the nine months ended September 30, 2002.

 

Net Interest Income Before Provision for Loan Losses.  Net interest income before provision for loan losses increased $1.7 million, or 10.6%, to $18.1 million for the nine months ended September 30, 2003 from $16.4 million for the comparable period in 2002.  The average

 

10



 

balance of interest-earning assets increased $108.9 million for the nine months ended September 30, 2003 compared to the comparable prior year period.  The increase in interest-earning assets was primarily the result of an increase in the average balance of mortgage loans of $58.7 million and a $31.5 million increase in other loans.  The tax equivalent net interest margin as a percent of interest-earning assets decreased by 15 basis points to 3.16% for the nine months ended September 30, 2003 from 3.31% for the comparable period in 2002.

 

Provision for Loan Losses.  The provision for loan losses decreased by $212,000, to $463,000 for the nine months ended September 30, 2003 from $675,000 in 2002.  At September 30, 2003, December 31, 2002 and September 30, 2002, non-performing loans totaled $2.9 million, $2.4 million and $2.1 million, respectively.  Nonperforming assets decreased $1.5 million to $2.9 million at September 30, 2003 from $4.4 million at December 31, 2002, largely due to the sale of foreclosed real estate in January 2003.  At September 30, 2003, the ratio of the allowance for loan losses to non-performing loans was 126.1% compared to 131.1% at December 31, 2002 and 136.5% at September 30, 2002.  The ratio of the allowance to total loans was 0.51%, 0.53% and 0.52%, at September 30, 2003, December 31, 2002 and September 30, 2002, respectively.  There were no charge-offs for the nine months ended September 30, 2003 and $3,000 for the comparable period in 2002.  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 $4.2 million and $3.3 million for the nine months ended September 30, 2003 and 2002, respectively. The increase in noninterest income is primarily attributable to increases of $816,000 in gain on sale of securities and $447,000 in service fees.  The gain on sale of securities was the result of repositioning the balance sheet and favorable market conditions.  Service fees increased primarily due to the offering of an overdraft privilege account product to our customers.  These increases were partially offset by decreases of $341,000 in income generated by Computer Dynamics Group, Inc. (“CDGI”) and $120,000 in insurance and brokerage commissions.  The decrease in income generated by CDGI is largely due to a decrease in sales related to a weaker demand for technology services.  The decrease in insurance and brokerage commissions is partially due to the lower interest rate environment.

 

Noninterest Expense.  Noninterest expense increased $1.5 million, to $13.8 million for the nine months ended September 30, 2003 from $12.3 million for the comparable period in 2002.  Of this increase, $355,000 was directly related to compensation and benefits, $400,000 is related to office building operations resulting from the costs related to the two new branch offices placed in service over the last year.  In addition, expenses relating to advertising increased $143,000 to $594,000 for the nine months ended September 30, 2003 from $451,000 for the comparable period in 2002.  The increase in advertising expense is primarily attributed to the Bank’s name change, which occurred in 2002.  In addition, the Company incurred a goodwill impairment of $227,000, relating to its majority owned subsidiary CDGI, for the nine months ended September 30, 2003. The goodwill impairment is primarily due to a weaker demand for technology services.  Management continues to emphasize the importance of expense management and control while continuing to provide expanded banking services to a growing market base.

 

11



 

Income Tax Expense.  Income tax expense totaled $2.8 million and $2.2 million for the nine months ended September 30, 2003 and 2002, respectively.  This increase was primarily due to a $1.4 million increase in earnings before income taxes.  The effective tax rate was 34.0% and 32.2% for the nine months ended September 30, 2003 and 2002, respectively.  The increase in the effective tax rate is partially due to a reduction in the municipal bond investment portfolio and the goodwill impairment related to CDGI.

 

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 and purchase of primarily 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 securities.  In addition, the Bank purchases loans, secured by 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 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 currently authorized to repurchase shares pursuant to 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, 218,900 shares of the Company’s common stock have been repurchased at an average price per share of $17.54.  During the three months ended September 30, 2003, 14,000 shares were purchased at an average price of $19.26.  As of September 30, 2003, the Company repurchased a total of 3,074,173 shares of the Company’s common stock at an average price per share of $12.05 since becoming a public company in 1998.

 

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, 2003, cash and interest-bearing demand accounts totaled $24.1 million, or 2.7% 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

 

12



 

operating, investing and financing activities for the nine months ended September 30, 2003 and 2002.

 

At September 30, 2003, the Bank exceeded all of its regulatory capital requirements. The following is a summary of the Bank’s regulatory capital ratios at September 30, 2003:

 

Total Capital to Total Assets

 

8.33

%

Total Capital to Risk-Weighted Assets

 

11.77

%

Tier I Leverage Ratio

 

8.32

%

Tier I to Risk-Weighted Assets

 

11.70

%

 

At September 30, 2003, the Company had a Total Capital to Total Assets ratio of 8.69%.

 

On September 16, 2003, the Company announced its third quarter dividend of $0.1450 per share.  The dividend was paid on October 7, 2003 to stockholders of record on September 30, 2003.

 

Financial Instruments with Off-Balance Sheet Risk

 

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  Those financial instruments primarily include commitments to extend credit.  Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract. The Bank evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained is based on management’s credit evaluation of the customer.  The Bank’s exposure to credit loss in the event of nonperformance by the customer is represented by the contractual amount of those financial instruments.  The commitments to originate first mortgage loans represent amounts, which the Bank plans to fund within a period of 30 to 90 days.

 

The Bank’s approved, but unused lines of credit are based on underwriting standards that allow total borrowings, including the equity line of credit to exceed 80% of the current appraised value of the customer’s residence.  However, the Bank charges a 1% higher interest rate on home equity lines of credit up to 90% of the home’s current appraised value.

 

The Bank’s standby letters of credit are conditional commitments issued by the Bank to guarantee performance of a customer to a third party.  The credit risk involved in these transactions is essentially the same as that involved in extending a loan to a customer in the normal course of business.  Standby letters of credit are collateralized by mortgages, savings accounts or liens on business assets.  The fair value of standby letters of credit approximates the amount of recorded related fees, which are not considered material.  The maximum risk of accounting loss for these items, which is represented by the total commitment outstanding, totaled $4.6 million at September 30, 2003.

 

13



 

At September 30, 2003 and December 31, 2002, the bank had the following commitments to extend credit:

 

 

 

September 30,
2003

 

December 31,
2002

 

First mortgage loans

 

$

12,009,000

 

$

11,965,000

 

Construction loans

 

4,670,000

 

808,000

 

Unused lines of credit

 

38,179,000

 

32,666,000

 

Standby letters of credit

 

4,558,000

 

4,927,000

 

 

Recent Accounting Pronouncements

 

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 did not have a material effect on the Company’s consolidated financial statements.

 

In December 2002, the FASB issued Statement 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (FAS 148).  FAS 148 amends FAS 123, “Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, this Statement amends the disclosure requirements of FAS 123 to require prominent disclosures in both the annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  Adoption of this statement did not have a material effect on the Company’s consolidated financial statements.

 

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” which provides new accounting guidance on when to consolidate a variable interest entity.  A variable interest entity exists when either the total equity investment at risk is not sufficient to permit the entity to finance its activities by itself, or the equity investors lack one of three characteristics associated with owning a controlling financial interest.  Those characteristics include the direct or indirect ability to make decisions about an entity’s activities through voting rights or similar rights, the obligation to absorb the expected loss of an entity if they occur, and the right to receive the expected residual return of the entity if they occur.  On October 9, 2003, the FASB issued a deferral to December 31, 2003 of the implementation of FIN 46 for variable interest entities in existence prior to February 1, 2003.  We do not expect that the adoption of this Interpretation will have a material impact on our consolidated financial statements.

 

In April 2003, the FASB issued SFAS No.149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.”  This Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts,

 

14



 

and for hedging activities.  This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003.  Adoption of this Statement did not have a material impact on our consolidated financial statements.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.”  This Statement would require that certain financial instruments with characteristics of both liabilities and equity be classified on the consolidated balance sheets as liabilities.  The Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.  On October 29, 2003, the FASB deferred the application of certain requirements of SFAS No. 150.  Adoption of this Statement did not have a material impact on our consolidated financial statements.

 

15



 

 

Average Balance Sheet

 

                                                The following tables set forth certain information relating to the Bank for the three and nine months ended September 30, 2003 and 2002, 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 using a tax rate of 34% and amounted to $196,000 and $182,000 for the three months ended September 30, 2003 and 2002, and $610,000 and $529,000 for the nine months ended September 30, 2003 and 2002, respectively.

 

 

 

Three Months Ended
September 30, 2003

 

Three Months Ended
September 30, 2002

 

(in thousands)

 

Average
Balance

 

Interest

 

Yield/Cost

 

Average
Balance

 

Interest

 

Yield/Cost

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term deposits and FHLB stock

 

$

44,510

 

202

 

1.81

%

47,170

 

219

 

1.86

%

Investment securities

 

83,181

 

1,195

 

5.75

%

76,195

 

1,092

 

5.73

%

Mortgage-backed securities

 

12,534

 

107

 

3.42

%

11,802

 

124

 

4.22

%

Mortgage loans

 

559,186

 

8,259

 

5.91

%

483,823

 

8,590

 

7.10

%

Other loans

 

126,390

 

1,745

 

5.52

%

84,625

 

1,378

 

6.52

%

Total interest earning assets

 

825,801

 

11,508

 

5.57

%

703,615

 

11,403

 

6.48

%

Noninterest earning assets

 

51,559

 

 

 

 

 

40,119

 

 

 

 

 

Total assets

 

$

877,360

 

 

 

 

 

743,734

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

$

148,128

 

642

 

1.73

%

126,082

 

865

 

2.74

%

Passbook savings accounts

 

125,827

 

462

 

1.47

%

100,433

 

574

 

2.29

%

NOW Accounts

 

36,991

 

68

 

0.74

%

32,264

 

84

 

1.04

%

Certificates of deposit

 

235,894

 

1,846

 

3.13

%

195,231

 

1,926

 

3.95

%

Total deposits

 

546,840

 

3,018

 

2.21

%

454,010

 

3,449

 

3.04

%

FHLB Advances

 

190,367

 

2,372

 

4.98

%

171,700

 

2,314

 

5.39

%

Total interest-bearing liabilities

 

737,207

 

5,390

 

2.92

%

625,710

 

5,763

 

3.68

%

Noninterest-bearing liabilities

 

63,047

 

 

 

 

 

44,669

 

 

 

 

 

Total liabilities

 

800,254

 

 

 

 

 

670,379

 

 

 

 

 

Total stockholders’ equity

 

77,106

 

 

 

 

 

73,355

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

877,360

 

 

 

 

 

743,734

 

 

 

 

 

Net interest income before provision for loan losses

 

 

 

6,118

 

 

 

 

 

5,640

 

 

 

Interest rate spread

 

 

 

 

 

2.65

%

 

 

 

 

2.80

%

Net interest margin as a percent of interest earning assets

 

 

 

 

 

2.96

%

 

 

 

 

3.21

%

Ratio of interest-earning assets to interest-bearing liabilities

 

 

 

 

 

112.02

%

 

 

 

 

112.45

%

 

16



 

 

 

Nine Months Ended
September 30, 2003

 

Nine Months Ended
September 30, 2002

 

(in thousands)

 

Average
Balance

 

Interest

 

Yield/Cost

 

Average
Balance

 

Interest

 

Yield/Cost

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term deposits and FHLB stock

 

$

38,511

 

536

 

1.85

%

37,894

 

552

 

1.95

%

Investment securities

 

87,528

 

3,789

 

5.77

%

72,175

 

3,385

 

6.25

%

Mortgage-backed securities

 

14,728

 

415

 

3.76

%

12,053

 

478

 

5.28

%

Mortgage loans

 

540,907

 

25,449

 

6.27

%

482,233

 

25,868

 

7.15

%

Other loans

 

109,193

 

4,732

 

5.78

%

77,706

 

3,801

 

6.52

%

Total interest earning assets

 

790,867

 

34,921

 

5.89

%

682,061

 

34,084

 

6.66

%

Noninterest earning assets

 

46,369

 

 

 

 

 

37,718

 

 

 

 

 

Total assets

 

$

837,236

 

 

 

 

 

719,779

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market accounts

 

$

146,530

 

2,103

 

1.91

%

117,156

 

2,506

 

2.85

%

Passbook savings accounts

 

116,937

 

1,419

 

1.62

%

99,997

 

1,774

 

2.37

%

NOW Accounts

 

35,344

 

211

 

0.79

%

31,662

 

241

 

1.02

%

Certificates of deposit

 

222,261

 

5,506

 

3.30

%

184,122

 

5,712

 

4.14

%

Total deposits

 

521,072

 

9,239

 

2.36

%

432,937

 

10,233

 

3.15

%

FHLB Advances

 

184,367

 

6,950

 

5.03

%

173,423

 

6,938

 

5.33

%

Total interest-bearing liabilities

 

705,439

 

16,189

 

3.06

%

606,360

 

17,171

 

3.78

%

Noninterest-bearing liabilities

 

55,765

 

 

 

 

 

42,011

 

 

 

 

 

Total liabilities

 

761,204

 

 

 

 

 

648,371

 

 

 

 

 

Total stockholders’ equity

 

76,032

 

 

 

 

 

71,408

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

837,236

 

 

 

 

 

719,779

 

 

 

 

 

Net interest income before provision for loan losses

 

 

 

18,732

 

 

 

 

 

16,913

 

 

 

Interest rate spread

 

 

 

 

 

2.83

%

 

 

 

 

2.88

%

Net interest margin as a percent of interest earning assets

 

 

 

 

 

3.16

%

 

 

 

 

3.31

%

Ratio of interest-earning assets to interest-bearing liabilities

 

 

 

 

 

112.11

%

 

 

 

 

112.48

%

 

17



 

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, 2003.

 

Change in
Interest Rates
in Basis Points
(Rate Shock)

 

Net Portfolio Value

 


NPV as % of Portfolio
Value of Assets

 

 

Amount

 

$ Change

 

% Change

 

NPV Ratio

 

% Change

 

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

+300

 

$

51,308

 

$

(29,503

)

(36.51

)%

5.95

%

(33.82

%)

+200

 

65,075

 

(15,736

)

(19.47

)

7.43

 

(17.35

)

+100

 

75,310

 

(5,501

)

(6.81

)

8.48

 

(5.67

)

Static

 

80,811

 

 

 

8.99

 

 

-100

 

74,074

 

(6,737

)

(8.34

)

8.23

 

(8.45

)

-200

 

65,396

 

(15,415

)

(19.08

)

7.27

 

(19.13

)

-300

 

57,749

 

(23,062

)

(28.54

)

6.42

 

(28.59

)

 

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 4Controls and Procedures

 

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”).  Based upon their

 

18



 

evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

19



 

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. *

 

 

 

  4.0

Specimen Stock Certificate 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.

 

 

 

31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

 

 

 

31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

 

 

 

32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350

 

 

 

 

 

 

 

(b)

Reports on Form 8-K

 

 

 

 

 

 

 

On July 31, 2003, the EFC Bancorp, Inc. furnished a Current Report on Form 8-K announcing its financial results for the quarter ended June 30, 2003.

 

 

 

 

 

 

 

On August 8, 2003, the EFC Bancorp, Inc. furnished a Current Report on Form 8-K announcing that it has been named to the FSB 100.

 


 

 

*

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.

 

20



 

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 13, 2003

 

By:

/s/ Barrett J. O’Connor

 

 

 

Barrett J. O’Connor

 

 

President and Chief Executive Officer

 

 

(Principal executive officer)

 

 

 

Dated:

November 13, 2003

 

By:

/s/ James J. Kovac

 

 

 

James J. Kovac

 

 

Executive Vice President and Chief
Financial Officer

 

 

(Principal financial and accounting officer)

 

21