AJS BANCORP INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended December 31, 2003

OR

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________ to_________

Commission File Number: 000-33405

AJS Bancorp, Inc.
(Exact Name of Registrant as Specified in its Charter)

United States 36-4485429
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

14757 South Cicero Avenue, Midlothian, Illinois 60445
(Address of Principal Executive Offices) (Zip Code)

(708) 687-7400
(Registrant's Telephone Number including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share
(Title of Class)

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 twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES |X| NO |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-22). YES |_| NO |X|

As of June 30, 2003, there were 2,430,921 shares outstanding of the
Registrant's Common Stock. The aggregate market value of the voting stock held
by non-affiliates of the Registrant, computed by reference to the average bid
and asked prices of the Common Stock as of June 30, 2003, ($20.45) was
$18,100,000.

DOCUMENTS INCORPORATED BY REFERENCE

1. Proxy Statement for the 2004 Annual Meeting of Stockholders (Parts I and
III).

PART I

ITEM 1. BUSINESS

General

AJS Bancorp, Inc.

Following completion of our mutual holding company and stock offering on
December 26, 2001, AJS Bancorp, Inc. became the mid-tier stock holding company
for A. J. Smith Federal Savings Bank. The business of AJS Bancorp, Inc. consists
of holding all of the outstanding common stock of A. J. Smith Federal Savings
Bank. AJS Bancorp, Inc. is chartered under Federal law. As part of our
reorganization, we issued 1,227,544 shares of common stock to our mutual holding
company parent, AJS Bancorp, MHC, and sold 1,179,406 shares to the public. Under
federal regulations, so long as AJS Bancorp, MHC exists, it will own at least
50.1% of the voting stock of AJS Bancorp, Inc. At December 31, 2003, AJS
Bancorp, Inc. had total consolidated assets of $238.4 million, total deposits of
$183.8 million, and stockholders' equity of $32.1 million. Our executive offices
are located at 14757 South Cicero Avenue, Midlothian, Illinois 60445, and our
telephone number is (708) 687-7400.

A. J. Smith Federal Savings Bank

A. J. Smith Federal Savings Bank was founded in 1892 by Arthur J. Smith as
a building and loan cooperative organization. In 1924 we were chartered as an
Illinois savings and loan association, and in 1934 we converted to a federal
charter. In 1984 we amended our charter to become a federally chartered savings
bank. We are a customer-oriented institution, operating from a main office in
Midlothian, Illinois, and two branch offices in Orland Park, Illinois. We opened
our second branch location in Orland Park in 2003. Our primary business activity
is the origination of one- to four-family real estate loans. Since 1994 we also
have originated a significant number of one- to four-family loans to persons
with impaired credit histories which are classified as "subprime loans" under
Office of Thrift Supervision criteria. Although, a portion of our existing loans
consist of subprime loan products, originations of such loans has been
significantly reduced. To a lesser extent, we originate multi-family, commercial
real estate and consumer loans. As part of our current business plan, we intend
to develop our business banking by offering commercial loans and deposit
products and services to business customers. We also invest in securities,
primarily United States Government Agency securities and mortgage-backed
securities. In addition, we offer insurance and investment products and
services.

Market Area

A. J. Smith Federal has been, and continues to be, a community-oriented
savings bank offering a variety of financial products and services to meet the
needs of the communities we serve. Our lending

and deposit-generating area is concentrated in the neighborhoods surrounding our
three offices; our main office in Midlothian, Illinois, and two branch offices
in Orland Park, Illinois. Our office locations are located in Cook County.
However, we consider our market area to be the counties of Will and Cook.
Midlothian is primarily a residential community, and its largest employers are
state and local governments and automobile dealerships. Orland Park has more
retail businesses, as well as light industrial companies. Our market area
economy consists primarily of the services industry, wholesalers and retailers
and manufacturing. Major employers in our market area include the Andrew
Corporation, the Orland Park School District, the Village of Orland Park, and
various retailers including, J. C. Penney, Marshall Fields and Sears. The
economy in our market area is not dependent on any single employer or type of
business.

Competition

We face significant competition in both originating loans and attracting
deposits. The Chicago metropolitan area has a high concentration of financial
institutions, most of which are significantly larger institutions with greater
financial resources than A. J. Smith Federal, and all of which are our
competitors to varying degrees. Our competition for loans comes principally from
commercial banks, savings banks, mortgage banking companies, credit unions,
insurance companies and other financial service companies. Our most direct
competition for deposits has historically come from commercial banks, savings
banks and credit unions. We face additional competition for deposits from
non-depository competitors such as mutual funds, securities and brokerage firms
and insurance companies. The Gramm-Leach-Bliley Act, which permits affiliation
among banks, securities firms and insurance companies, continues to increase
competition among financial services companies.

Lending Activities

General. Our loan portfolio is comprised mainly of one- to four-family
residential real estate loans. The vast majority of these loans have fixed rates
of interest. In addition to one- to four-family residential real estate loans,
our loan portfolio consists primarily of multi-family loans and home equity
lines of credit. At December 31, 2003, our gross loans totaled $157.6 million,
of which $120.8 million, or 76.6%, were secured by one- to four-family
residential real estate, $24.1 million, or 15.3%, were secured by multi-family
residential and commercial real estate, $12.0 million, or 7.7%, were home equity
loans, and $696,000, or 0.4%, were consumer loans. Our lending area is the
Chicago metropolitan area, with an emphasis on lending in the south and
southwest suburbs.

We try to reduce our interest rate risk by making our loan portfolio more
interest rate sensitive. Accordingly, we offer adjustable rate mortgage loans,
short-and medium-term mortgage loans, and three- and five-year balloon
mortgages. In addition, we offer shorter-term consumer loans and home equity
lines of credit with adjustable interest rates.

A portion of our loan originations have consisted of loans to borrowers
with impaired credit ratings, which are classified as "subprime" loans by the
bank regulatory agencies. Our subprime loans are primarily secured by single
family properties located throughout the Chicago metropolitan area, and
generally are first or second mortgage loans. These loans generally have higher
interest rates than traditional one- to four-family loans. Subprime loans are
underwritten using the same criteria as our one- to four-family loans, except
that loan applications will not necessarily be rejected because of the impaired
credit history of a borrower or higher debt to income ratios than are permitted
under Fannie Mae and Freddie Mac underwriting guidelines. At December 31, 2003,
$18.3 million, or 11.6% of our loan portfolio, consisted of subprime loans based
upon Office of Thrift Supervision criteria.

2

Loan Portfolio Composition. The following table shows the composition of
our loan portfolio in dollar amounts and in percentages (before deductions for
loans in process, deferred fees and allowances for losses) as of the dates
indicated.

At December 31,
----------------------------------------------------------------------
2003 2002 2001
--------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
--------- -------- --------- -------- --------- --------
(Dollars in thousands)

Real estate loans:
One- to four-family (1) ............. $ 120,810 76.64% $ 115,880 83.84% $ 115,344 88.01%

Multi-family and commercial ......... 24,066 15.27 13,187 9.54 9,281 7.08
--------- ------ --------- ------ --------- ------
Total real estate loans ......... 144,876 91.91 129,067 93.38 124,625 95.09

Other Loans:
Consumer loans ...................... 696 0.44 782 0.56 765 0.59
Home equity ......................... 12,056 7.65 8,374 6.06 5,667 4.32
--------- ------ --------- ------ --------- ------
Total loans .................... 157,628 100.00% 138,223 100.00% 131,057 100.00%
====== ====== ======

Less:
Allowance for loan losses ........... (1,962) (2,082) (2,508)
Deferred loan (fees) costs .......... (16) 24 (5)
Deferred gain on real estate contract (22) (31) (39)
--------- --------- ---------
Total loans receivable, net ......... $ 155,628 $ 136,134 $ 128,505
========= ========= =========

At December 31,
-----------------------------------------------
2000 1999
--------------------- ---------------------
Amount Percent Amount Percent
--------- -------- --------- --------
(Dollars in thousands)

Real estate loans:
One- to four-family (1) ............. $ 93,962 85.32% $ 91,818 82.03%

Multi-family and commercial ......... 9,442 8.57 11,919 10.65
--------- ------ --------- ------
Total real estate loans ......... 103,404 93.89 103,737 92.68

Other Loans:
Consumer loans ...................... 733 0.66 516 0.46
Home equity ......................... 5,999 5.45 7,676 6.86
--------- ------ --------- ------
Total loans .................... 110,136 100.00% 111,929 100.00%
========= ====== ========= ======

Less:
Allowance for loan losses ........... (2,364) (2,158)
Deferred loan (fees) costs .......... 52 68
Deferred gain on real estate contract (55) (63)
--------- ---------
Total loans receivable, net ......... $ 107,769 $ 109,776
========= =========

- ---------------
(1) Subprime real estate loans totaled $18.3 million, $31.2 million, $47.1
million, $51.6 million and $54.9 million at December 31, 2003, 2002, 2001,
2000 and 1999, respectively.

3

Maturity of Loan Portfolio. The following table sets forth certain
information regarding the dollar amounts maturing and the interest rate
sensitivity of our loan portfolio at December 31, 2003. Mortgages which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.

Multi-Family
One- to Four-Family and Commercial Consumer
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- -------- -------- -------- -------- --------
(Dollars in thousands)

1 year or less ............... $ 869 8.39% $ 4,025 5.70% $ 201 4.90%
Greater than 1 to 3 years .... 2,483 7.81 2,635 6.37 277 6.24
Greater than 3 to 5 years .... 8,194 6.38 11,703 6.22 218 5.13
Greater than 5 to 10 years ... 26,965 6.50 4,517 6.39 -- --
Greater than 10 to 20 years .. 37,823 6.00 1,031 7.95 -- --
More than 20 years ........... 44,476 5.24 155 8.75 -- --

Total ........................ $120,810 $ 24,066 $ 696
======== ======== ========

Home Equity Total
------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- -------- -------- --------
(Dollars in thousands)

1 year or less ............... $ 782 3.87% $ 5,877 5.83%
Greater than 1 to 3 years .... 1,297 4.05 6,692 6.45
Greater than 3 to 5 years .... 9,852 3.85 29,967 5.48
Greater than 5 to 10 years ... 125 3.75 31,607 6.47
Greater than 10 to 20 years .. -- -- 38,854 6.05
More than 20 years ........... -- -- 44,631 5.25

Total ........................ $ 12,056 $157,628
======== ========

The total amount of loans due after December 31, 2004 which have
predetermined interest rates is $113.4 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $38.3
million.

4

One- to four-family Residential Real Estate Loans. Our primary lending
activity consists of originating one- to four-family, owner-occupied, first and
second residential mortgage loans, virtually all of which are secured by
properties located in our market area. At December 31, 2003, these loans totaled
$120.8 million, or 76.6% of our total loan portfolio. During 1994, we began to
originate a substantial number of one- to four-family residential loans to
borrowers with impaired credit histories. These loans are primarily originated
from a network of mortgage brokers throughout our market area, and are
classified as subprime loans by the bank regulatory agencies. We originate
subprime loans using our customary underwriting standards, except that an
application is not necessarily rejected because of the borrower's impaired
credit history and higher debt-to-income ratios than are permitted under Fannie
Mae underwriting guidelines. While subprime loans involve higher risks of loss
than our other one- to four-family residential real estate loans, they provide
us with higher yields to compensate for this risk. In 2001, we de-emphasized our
subprime lending, and we anticipate that our level of subprime loans will
continue to decrease in the future. At December 31, 2003, our subprime loans
totaled $18.3 million, or 11.6% of total loans, wheareas at December 31, 2002,
our subprime loans totaled $31.2 million, or 22.6% of total loans.

We currently offer one- to four-family residential real estate loans with
terms up to 30 years, although we emphasize the origination of one- to
four-family residential loans with terms of 15 years or less. We offer our one-
to four-family residential loans with adjustable or fixed interest rates. At
December 31, 2003, $94.8 million, or 78.5% of our one- to four-family
residential real estate loans had fixed rates of interest, and $26.0 million, or
21.5% of our one- to four-family residential real estate loans, had adjustable
rates of interest. Our fixed rate loans include loans that generally amortize on
a monthly basis over periods between 7 to 30 years. Our subprime loans generally
amortize over a 15-year period. We also offer loans which generally have balloon
payment features after three or five years. Our balloon loans generally amortize
over periods of 15 years or more. One- to four-family residential real estate
loans often remain outstanding for significantly shorter periods than their
contractual terms because borrowers have the right to refinance or prepay their
loans. With respect to subprime loans, our experience has been that these loans
remain outstanding for even shorter periods of time than our other one- to
four-family loans.

We currently offer adjustable rate mortgage loans with an initial interest
rate fixed for one, three or five years, and annual adjustments thereafter based
on changes in a designated market index. Our adjustable rate mortgage loans
generally have an interest rate adjustment limit of 200 basis points per
adjustment, with a maximum lifetime interest rate adjustment limit of 800 basis
points and a floor of 500 basis points. Our adjustable rate mortgages are priced
at a level tied to the one-year United States Treasury bill rate. In order to
make our adjustable rate mortgages more attractive in the current low fixed
mortgage rate environment, we began to offer discounted or teaser rates on our
adjustable rate mortgages in July of 2003. These loans carry initial rates that
are lower than the rate would be if it were to adjust according to the
adjustable rate note and rider. We do not offer adjustable rate mortgages that
offer the possibility of negative amortization.

Regulations limit the amount that a savings association may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal of the property at the time the loan is originated. For loans greater
than $175,000 we utilize outside independent appraisers. For loans up to
$175,000, appraisals are performed by in-house appraisers. For borrowers who do
not obtain private mortgage insurance, our lending policies limit the maximum
loan to value ratio on both fixed rate and adjustable rate mortgage loans to 80%
of the appraised value of the property that is collateral for the loan (and up
to 85% with respect to second fixed-rate mortgage loans). For one- to
four-family residential real estate loans with loan to value ratios of between
80% and 95%, we require the borrower to obtain private mortgage insurance. For
loans in excess of $75,000, we require the borrower to obtain title insurance.
For first mortgage loan products under $75,000, we conduct a title search. For
second mortgage type

5

products in excess of $200,000, title insurance is required. For second mortgage
type products under $200,000, we conduct a title search. We also require
homeowners insurance and fire and casualty insurance on properties securing real
estate loans.

Multi-Family and Commercial Real Estate Loans. At December 31, 2003, $24.1
million, or 15.3% or our total loan portfolio, consisted of loans secured by
multi-family and commercial real estate properties, virtually all of which are
located in the State of Illinois. Our multi-family loans are secured by
multi-family and mixed use properties. Our commercial real estate loans are
secured by improved property such as offices, small business facilities,
unimproved land, warehouses and other non-residential buildings. Our
multi-family and commercial real estate loans are offered with fixed or
adjustable rates. Our fixed rate multi-family and commercial real estate loans
are offered with amortization schedules of up to 25 years, and generally have
three- and five-year balloon features. At December 31, 2003, the average balance
of our multi-family loans, as well as our commercial real estate loans was
$227,000. We generally will make multi-family and commercial real estate loans
for up to 80% of the cost of, or the appraised value of, the property securing
the loan.

Prior to funding a loan secured by multi-family, mixed use or commercial
property, we generally obtain an environmental assessment from an independent,
licensed environmental engineer regarding any environmental risks that may be
associated with the property. The level of the environmental engineer's
evaluation of a property will depend on the facts and circumstances relating to
the specific loan, but generally the environmental engineer's actions will range
from a consultant's discretionary environmental assessment to a Phase II
environmental report. The underwriting process for multi-family and commercial
real estate loans includes an analysis of the debt service coverage of the
collateral property. We typically require a debt service coverage ratio of 120%
or higher. We also require personal guarantees by the principals of the borrower
and a cash flow analysis when applicable.

Loans secured by multi-family residential or commercial real estate
generally have larger loan balances and more credit risk than one- to
four-family residential mortgage loans. This increased credit risk is a result
of several factors, including the concentration of principal in a limited number
of loans and borrowers, the impact of local and general economic conditions on
the borrower's ability to repay the loan, and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family properties typically depends upon the successful
operation of the real property securing the loan. If the cash flow from the
property is reduced, the borrower's ability to repay the loan may be impaired.
However, multi-family and commercial real estate loans generally have higher
interest rates than loans secured by one- to four-family residential real
estate.

As part of our business plan, we intend to develop our commercial lending.
This lending may include non-real estate based loans, although at this time our
non-real estate commercial loans are not a significant part of our lending. We
are actively marketing our commercial business lending capability to local
businesses. In addition, we are advising our existing commercial real estate and
multi-family borrowers of our commercial business lending capability. Commercial
business loans are typically offered with fixed rates and balloon features.

Our underwriting standards for commercial business loans include a review
of the applicant's tax returns, financial statements, credit history and an
assessment of the applicant's ability to meet existing obligations and payments
on the proposed loan based on cash flows generated by the applicant's business.

Commercial business loans generally have higher interest rates and shorter
terms than one- to four-family residential loans, but they also may involve
higher average balances, increased difficulty of loan monitoring and a higher
risk of default since their repayment generally depends on the successful

6

operation of the borrower's business. We generally obtain personal guarantees
from the borrower or a third party as a condition to originating a commercial
business loan.

Home Equity Lines of Credit. We offer home equity lines of credit, the
total of which amounted to $12.0 million, or 7.7% of our total loan portfolio,
as of December 31, 2003. Home equity lines of credit are generally made for
owner-occupied homes, and are secured by first or second mortgages on
residences. We generally offer these loans with a maximum loan to appraised
value ratio of 90% (including senior liens on the collateral property). We
currently offer these lines of credit for a period of five years, and generally
at rates tied to the prevailing prime interest rate. Our home equity lines of
credit are generally underwritten in the same manner as our one- to four-family
residential loans.

Consumer Loans. We are authorized to make loans for a variety of personal
and consumer purposes. As of December 31, 2003, consumer loans totaled $696,000,
or 0.4% of our total loan portfolio. Our consumer loans consist primarily of
automobile loans and loans secured by deposit accounts. Automobile loans
accounted for $514,000 of our consumer loans at December 31, 2003. Our procedure
for underwriting consumer loans includes an assessment of the applicant's credit
history and ability to meet existing obligations and payments of the proposed
loan, as well as an evaluation of the value of the collateral security, if any.
Consumer loans generally entail greater risk than residential mortgage loans,
particularly in the case of loans that are unsecured or are secured by assets
that tend to depreciate in value, such as automobiles. In these cases,
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment for the outstanding loan, and the remaining value often does
not warrant further substantial collection efforts against the borrower.

Loan Originations, Purchases, Sales and Servicing. Although we originate
both fixed-rate and adjustable-rate loans, our ability to generate each type of
loan depends upon borrower demand, market interest rates, borrower preference
for fixed- versus adjustable-rate loans, and the interest rates offered on each
type of loan by other lenders in our market area. These lenders include
commercial banks, savings institutions, credit unions, and mortgage banking
companies, as well as life insurance companies, and Wall Street conduits that
also actively compete for local real estate loans. Our loan originations come
from a number of sources, including real estate broker referrals, existing
customers, borrowers, builders, attorneys, and "walk-in" customers.

Our loan origination activity may be affected adversely by a rising
interest rate environment that typically results in decreased loan demand.
Accordingly, the volume of loan originations and the profitability of this
activity may vary from period to period. Historically, we have originated
mortgage loans for sale in the secondary market, and we may do so in the future,
although this is not a significant part of our business at this time.

In the past, we have sold loans on a servicing retained basis. At December
31, 2003, the dollar amount of mortgage servicing rights was insignificant.

7

The following table shows our loan origination and repayment activities
for the periods indicated. We did not purchase any loans during the periods
indicated.

Years Ended December 31,
-----------------------------------
2003 2002 2001
--------- --------- ---------
(In thousands)
Loans receivable, beginning of period ... $ 138,223 $ 131,057 $ 110,136
Originations by type:
Real estate- one to four-family (1) ..... 50,531 42,596 50,673
Multi-family and commercial ............. 19,426 5,124 4,810
Non-real estate -consumer ............... 452 1,569 4,613
Home equity ............................. 13,588 9,374 1,491
--------- --------- ---------
Total loans originated .................. 83,997 58,663 61,587

Sales ................................... (3,269) (127)

Principal repayments: ................... (61,323) (51,370) (40,666)
--------- --------- ---------

Loans receivable, at end of period ...... $ 157,628 $ 138,223 $ 131,057
========= ========= =========

- ----------------
(1) Including subprime real estate loan originations of $462,000, $1.1 million
and $14.9 million for the years ended December 31, 2003, 2002, and 2001,
respectively.

Loan Approval Procedures and Authority. Our lending activities are subject
to written, non-discriminatory underwriting standards and loan origination
procedures adopted by management and the Board of Directors. All loans,
regardless of size or type, are initially reviewed by a loan officer. Our junior
loan officers have the authority to approve loans in amounts up to $30,000 with
the approval of a designated officer. Senior loan officers who obtain the
approval of a designated officer, have the authority to approve loans in amounts
up to $100,000. Loans in excess of $100,000 and up to the Fannie Mae single
family loan limit, currently $333,700, must be reviewed and approved by a senior
loan officer and a Vice President or Senior Vice President. All loans of
$333,700 or less that do not meet our standard underwriting ratios and credit
criteria must be reviewed by the Senior Vice President or in their absence, an
Assistant Vice President and another bank officer. The Officers Loan Committee,
which consists of Raymond Blake, Edward Milen, Lyn G. Rupich, Donna Manuel and
W. Anthony Kopp, has the authority to approve all loans up to $750,000. Loans in
excess of $750,000 must be approved by the Chief Executive Officer and the Board
of Directors.

Loans-to-One-Borrower. Federal savings banks are subject to the same
loans-to-one-borrower limits as those applicable to national banks, which
restrict loans to one borrower to an amount equal to 15% of unimpaired capital
and unimpaired surplus on an unsecured basis, and an additional amount equal to
10% of unimpaired capital and unimpaired surplus if the loan is secured by
readily marketable collateral (generally, financial instruments and bullion, but
not real estate). At December 31, 2003, our lending limit was $5.3 million. At
December 31, 2003, our largest lending relationship to one borrower totaled $2.6
million. At December 31, 2003, we had 26 lending relations in which the total
amount outstanding exceeded $500,000. All of the loans under these large lending
relationships were performing in accordance with their terms.

Asset Quality

Loan Delinquencies and Collection Procedures. When a borrower fails to
make required payments on a loan, we take a number of steps to induce the
borrower to cure the delinquency and restore the loan to a current status. In
the case of mortgage loans, a reminder notice is sent 15 days after an account
becomes delinquent. After 15 days, we attempt to establish telephone contact
with the borrower. If the borrower does not remit the entire payment due by the
end of the month, then a letter that includes information regarding
home-ownership counseling organizations is sent to the borrower. During the
first 15 days of the following month, a second letter is sent, and we also
attempt to establish telephone contact

8

with the borrower. At this time, and after reviewing the cause of the
delinquency and the borrower's previous loan payment history, we may agree to
accept repayment over a period of time which will generally not exceed 60 days.
However, should a loan become delinquent by two or more payments, and the
borrower is either unwilling or unable to repay the delinquency over a period of
time acceptable to us, we send a notice of default by both regular and certified
mail. This notice will provide the borrower with the terms which must be met to
cure the default, and will again include information regarding home-ownership
counseling.

In the event the borrower does not cure the default within 30 days of the
postmark of the notice of default, we may instruct our attorneys to institute
foreclosure proceedings depending on the loan-to-value ratio or our relationship
with the borrower. We hold property foreclosed upon as real estate owned. We
carry foreclosed real estate at its fair market value less estimated selling
costs. If a foreclosure action begins and the loan is not brought current or
paid in full before the foreclosure sale, we will either sell the real property
securing the loan at the foreclosure sale or sell the property as soon
thereafter as practical.

In the case of consumer loans, customers are mailed delinquency notices
when the loan is 15 days past due. We also attempt to establish telephone
contact with the borrower. If collection efforts are unsuccessful, we may
instruct our attorneys to take further action.

Our policies require that management continuously monitor the status of
the loan portfolio and report to the Board of Directors on a monthly basis.
These reports include information on delinquent loans and foreclosed real estate
and our actions and plans to cure the delinquent status of the loans and to
dispose of any real estate acquired through foreclosure.

Non-Performing Loans. All loans are reviewed on a regular basis and are
placed on a non-accrual status when, in the opinion of management, there is
reasonable probability of loss of principal or the collection of additional
interest is deemed insufficient to warrant further accrual. Generally, we place
all loans more than 90 days past due on non-accrual status. In addition, we
place any loan on non-accrual status if any part of it is classified as loss or
if any part has been charged-off. When a loan is placed on non-accruing status,
total interest accrued and unpaid to date is reversed. Subsequent payments are
either applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the loan.

As of December 31, 2003, our total non-accrual loans were $1.1 million,
compared to $1.1 million at December 31, 2002, and $1.6 million at December 31,
2001.

The following table sets forth our loan delinquencies by type, amount and
percentage at December 31, 2003.

Loans Delinquent For:
---------------------------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
------------------------- ------------------------- -------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in thousands)

Real estate:
One- to four-family ....... 8 $ 485 0.40% 18 $1,430 1.18% 26 $1,915 1.58%
Multi-family and commercial 2 141 0.58 1 3 0.01 3 144 0.59
Consumer and other ........ -- -- -- 4 17 2.44 4 17 2.44
Home equity ............... 2 89 0.73 -- -- -- 2 89 0.73

Total .................. 12 $ 715 0.45% 23 $1,450 0.92% 35 $2,165 1.37%

9

The table below sets forth the amounts and categories of nonperforming
assets in our loan portfolio. For all years presented, we had no troubled debt
restructurings within the meaning of Statement of Financial Accounting Standards
No. 15. For the periods presented, we had no accruing loans delinquent more than
90 days. Foreclosed assets include assets acquired in settlement of loans.

At December 31,
----------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
(Dollars In thousands)

Non-accruing loans:
One- to four-family .................. $1,116 $ 860 $1,124 $ 965 $1,651
Multi-family and commercial .......... 3 113 341 225 --
Consumer and other ................... 17 -- -- 6 22
Home equity .......................... -- 79 111 -- --
------ ------ ------ ------ ------
Total non-accruing loans .......... 1,136 1,052 1,576 1,196 1,673
------ ------ ------ ------ ------

Total nonperforming loans ............ 1,136 1,052 1,576 1,196 1,673

Real estate owned .................... 23 43 161 305 --
------ ------ ------ ------ ------
Total nonperforming assets ........... $1,159 $1,095 $1,737 $1,501 $1,673
====== ====== ====== ====== ======

Total as a percentage of
total assets ....................... 0.49% 0.49% 0.79% 0.77% 0.84%

Nonperforming loans as percentage of
gross loans receivable ............. 0.72% 0.76% 1.20% 1.09% 1.49%

For the year ended December 31, 2003, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $92,000. The amount that was included in
interest income totaled $42,000 for the year ended December 31, 2003.

Real Estate Owned. Real estate owned consists of property acquired through
formal foreclosure or by deed in lieu of foreclosure, and is recorded at the
lower of recorded investment or fair value. Write-downs from recorded investment
to fair value which are required at the time of foreclosure are charged to the
allowance for loan losses. After transfer, the property is carried at the lower
of recorded investment or fair value, less estimated selling expenses.
Adjustments to the carrying value of the properties that result from subsequent
declines in value are charged to operations in the period in which the declines
occur. At December 31, 2003, we held real estate owned of $23,000.

Classification of Assets. Consistent with regulatory guidelines, we
provide for the classification of loans and other assets, such as securities,
that are considered to be of lesser credit quality as substandard, special
mention, doubtful or loss assets. An asset is considered substandard if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. Substandard assets include those
characterized by the distinct possibility that the savings institution will
sustain some loss if the deficiencies are not corrected. Assets classified as
loss are those considered uncollectible and of such little value that their
continuance as assets is not warranted. Doubtful assets are those that are past
maturity and therefore require additional steps to protect our collateral.
Assets that do not expose us to risk sufficient to warrant classification in one
of the aforementioned categories, but which possess some weaknesses, are
required to be designated as special mention by management.

When we classify assets as substandard, we allocate for analytical
purposes a portion of our general valuation allowances or loss reserves to these
assets as we consider prudent. General allowances represent loss allowances that
have been established to recognize the inherent risk associated with lending
activities, but which have not been allocated to particular problem assets. When
we classify problem assets as loss, we establish a specific allowance for losses
equal to 100% of the amount of the assets so classified, or we charge-off the
amount. Our determination as to the classification of assets and the

10

amount of valuation allowances is subject to review by regulatory agencies,
which can order the establishment of additional loss allowances. Management
regularly reviews our asset portfolio to determine whether any assets require
classification in accordance with applicable regulations.

On the basis of management's review of our asset portfolio at December 31,
2003, we had classified $1.2 million of our assets as substandard, $606,000 of
our assets as special mention, and $270,000 as doubtful.

Allowance for Loan Losses. The following table sets forth information
regarding our allowance for loan losses and other ratios at or for the dates
indicated.

Years Ended December 31,
------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(Dollars In thousands)

Balance at beginning of period ........ $ 2,082 $ 2,508 $ 2,364 $ 2,158 $ 1,919

Charge-offs:
One- to four-family ................... (110) (306) (219) (78) (287)
Multi-family and commercial ........... -- (90) -- -- --
Consumer and other .................... -- -- -- (16) --
Home equity ........................... (10) (50) (50) -- --
-------- -------- -------- -------- --------
Total charge-offs ..................... (120) (446) (269) (94) (287)
Recoveries:
One- to four-family loans ............. 61 -- -- -- 1
-------- -------- -------- -------- --------

Net charge-offs (1) ................... (59) (446) (269) (94) (286)
Provisions for loan losses ............ (61) 20 413 300 525
-------- -------- -------- -------- --------
Balance at end of period .............. $ 1,962 $ 2,082 $ 2,508 $ 2,364 $ 2,158
======== ======== ======== ======== ========

Ratio of net charge-offs during
the period to average loans
outstanding during the period ........ 0.04% 0.33% 0.23% 0.09% 0.26%

Ratio of net charge-offs during
the period to non-performing loans ... 5.19 42.40 17.07 7.86 17.10

Ratio of non-performing assets to total
assets at end of period ............. 0.49 0.49 0.79 0.77 0.84
Ratio of allowance for loan losses to
non-performing loans ................. 172.71 197.91 159.15 197.66 128.99
Ratio of allowance for loan losses to
loans receivable, gross .............. 1.24 1.51 1.91 2.15 1.93

- -----------
(1) Net charge-offs of sub-prime loans totaled $110,000, $245,000, $269,000,
$78,000 and $286,000, for the years ended December 31, 2003, 2002, 2001,
2000 and 1999, respectively.

The allowance for loan losses is a valuation account that reflects our
evaluation of the losses known and inherent in our loan portfolio that are both
probable and reasonable to estimate. We maintain the allowance through
provisions for loan losses that we charge to income. We charge losses on loans
against the allowance for loan losses when we believe the collection of loan
principal is unlikely.

Our evaluation of risk in maintaining the allowance for loan losses
includes the review of all loans on which the collectibility of principal may
not be reasonably assured. We consider the following factors as part of this
evaluation: our historical loan loss experience, known and inherent risks in the
loan portfolio, (particularly subprime real estate loans), the estimated value
of the underlying collateral, peer group information and current economic and
market trends. There may be other factors that may warrant our consideration in
maintaining an allowance at a level sufficient to provide for probable losses.
This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revisions as more information becomes available or as
future events change. Although we believe that we have established and
maintained the allowance for loan losses at adequate levels, future additions
may be

11

necessary if economic and other conditions in the future differ substantially
from the current operating environment.

In addition, the Office of Thrift Supervision, as an integral part of its
examination process, periodically reviews our loan and foreclosed real estate
portfolios and the related allowance for loan losses and valuation allowance for
foreclosed real estate. The Office of Thrift Supervision may require us to
increase the allowance for loan losses or the valuation allowance for foreclosed
real estate based on its review of information available at the time of the
examination, thereby adversely affecting our results of operations.

12

Allocation of the Allowance for Loans Losses. The following table presents
our allocation of the allowance for loan losses by loan category and the
percentage of loans in each category to total loans at the periods indicated.

At December 31,
---------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------- -------------------------------- ------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(Dollars in thousands)

One- to four-family ........ $ 1,450 $ 120,800 76.64% $ 1,655 $ 115,880 83.84% $ 2,057 $ 115,344 88.01%
Multi-family and commercial 19 24,066 15.27 58 13,187 9.54 133 9,281 7.08
Consumer and other ......... 7 696 0.44 3 782 0.56 8 765 0.59
Home equity ................ 227 12,056 7.65 278 8,374 6.06 232 5,667 4.32
Unallocated ................ 88 -- -- 88 -- -- 78 -- --
--------- --------- ------ --------- --------- ------ --------- --------- ------
Total loans .............. $ 1,962 $ 157,618 100.00% $ 2,082 $ 138,223 100.00% $ 2,508 $ 131,057 100.00%
========= ========= ====== ========= ========= ====== ========= ========= ======

At December 31,
----------------------------------------------------------------------
2000 1999
--------------------------------- ---------------------------------
Percent of Percent
Loans in of Loans
Loan Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)

One- to four-family ......... $ 1,889 $ 93,962 85.32% $ 1,695 $ 91,818 82.03%
Multi-family and commercial . 160 9,442 8.57 124 11,919 10.65
Consumer and other .......... 9 733 0.66 9 516 0.46
Home equity ................. 221 5,999 5.45 240 7,676 6.86
Unallocated ................. 85 -- -- 90 -- --
--------- --------- ------ --------- --------- ------
Total loans ............... $ 2,364 $ 110,136 100.00% $ 2,158 $ 111,929 100.00%
========= ========= ====== ========= ========= ======

13

Management evaluates the total balance of the allowance for loan losses
based on several factors that are not loan specific but are reflective of the
probable, incurred losses inherent in the loan portfolio. This includes
management's periodic review of loan collectibility in light of historical
experience, the nature and volume of the loan portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral, prevailing economic conditions such as housing trends, inflation
rates and unemployment rates, geographic concentrations of loans within our
immediate market area, and both peer financial institution historic loan loss
experience and levels of allowance for loan losses. Generally, small balance,
homogenous type loans, such as one- to four-family, mortgage, consumer and home
equity loans are evaluated for impairment in total. The allowance related to
these loans is established primarily by using loss experience data by general
loan type. Subprime loans are evaluated as a separate group due to their higher
credit risk characteristics. Nonperforming loans are evaluated individually,
based primarily on the value of the underlying collateral securing the loan.
Larger loans, such as multi-family mortgages are also generally evaluated for
impairment individually. The allowance is allocated to each loan type based on
the results of the evaluation described above. Small differences between the
allocated allowance balance and the recorded allowance amount is reflected as
"unallocated" to absorb losses resulting form the inherent imprecision involved
in the loss evaluation process.

Investment Activities

We are permitted under federal law to invest in various types of liquid
assets, including United States Government obligations, securities of various
federal agencies and of state and municipal governments, deposits at the Federal
Home Loan Bank of Chicago, certificates of deposit of federally insured
institutions, certain bankers' acceptances and federal funds. Within certain
regulatory limits, we may also invest a portion of our assets in commercial
paper and corporate debt securities. We are also required to maintain an
investment in FHLB stock.

SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that securities be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold these securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity."

We do not currently use or maintain a trading account. Debt and equity
securities not classified as "held to maturity" are classified as "available for
sale." These securities are reported at fair value, and unrealized gains and
losses on the securities are excluded from earnings and reported, net of
deferred taxes, as a separate component of equity.

All of our securities carry market risk insofar as increases in market
rates of interest may cause a decrease in their market value. Investments in
securities are made based on certain considerations, which include the interest
rate, tax considerations, yield, settlement date and maturity of the security,
our liquidity position, and anticipated cash needs and sources. The effect that
the proposed security would have on our credit and interest rate risk and
risk-based capital is also considered. We purchase securities to provide
necessary liquidity for day-to-day operations, and when investable funds exceed
loan demand.

Generally, our investment policy is to invest funds in various categories
of securities and maturities based upon our liquidity needs, asset/liability
management policies, investment quality, marketability and performance
objectives. The board of directors reviews our securities portfolio on a monthly
basis.

14

We had no securities classified as held to maturity at December 31, 2003.
Our securities classified as available-for-sale totaled $28.6 million at
December 31, 2003, and consisted of Federal agency obligations, primarily
Federal Farm Credit Bank notes and Federal Home Loan Bank obligations with
maturities of one to five years, and an ARM mutual fund. At December 31, 2003,
we had $5.2 million invested in an adjustable rate mortgage mutual fund that
invests primarily in adjustable rate mortgage backed securities, and
collateralized mortgage obligations.

We also have $13.6 million invested in Federal Home Loan Bank stock at
December 31, 2003. For further information regarding our securities portfolio,
see Note 3 to Consolidated Financial Statements.

15

The following table sets forth the composition of our securities portfolio
at the dates indicated.

At December 31,
-----------------------------------------------------------------------------------------
2003 2002
------------------------------------------ -------------------------------------------
Carrying % of Fair % of Carrying % of Fair % of
Value Total Value Total Value Total Value Total
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)

Securities classified as
held to maturity (at
amortized cost):

Municipal bonds ........... $ -- --% $ -- --% $ 91 0.22% $ 91 0.22%

Securities classified as
available for sale (at fair
value):

Shay ARM mutual fund ...... 5,209 12.33 5,209 12.33 3,137 7.71 3,137 7.71

U.S. Government securities -- -- -- -- 1,016 2.50 1,016 2.50

FHLB ...................... 18,263 43.25 18,263 43.25 25,373 62.34 25,373 62.34

FFCB ...................... 3,076 7.28 3,076 7.28 3,478 8.54 3,478 8.54

FHLMC ..................... -- -- -- -- 1,015 2.49 1,015 2.49

FNMA ...................... 2,020 4.78 2,020 4.78 2,058 5.06 2,058 5.06

Other equity investments .. 53 0.13 53 0.13 56 0.14 56 0.14
-------- ------ -------- ------ -------- ------ -------- ------

Subtotal .................. 28,621 67.77 28,621 67.77 36,133 88.78 36,133 88.78
-------- ------ -------- ------ -------- ------ -------- ------
FHLB stock ................ 13,612 32.23 13,612 32.23 4,477 11.00 4,477 11.00
-------- ------ -------- ------ -------- ------ -------- ------

Total securities and FHLB
stock ..................... $ 42,233 100.00% $ 42,233 100.00% $ 40,701 100.00% $ 40,701 100.00%
======== ====== ======== ====== ======== ====== ======== ======

Average remaining life of
securities ................ 12.5 months 17.3 months

Other interest-earning
assets:

Interest-bearing deposits
with banks ................ $ 9,829 100.00% $ 9,829 100.00% $ 9,955 62.39% $ 9,955 62.39%

Federal funds sold ........ -- -- -- -- 6,000 37.61 6,000 37.61
-------- ------ -------- ------ -------- ------ -------- ------

Total ..................... $ 9,829 100.00% $ 9,829 100.00% $ 15,955 100.00% $ 15,955 100.00%
======== ====== ======== ====== ======== ====== ======== ======

At December 31,
------------------------------------------
2001
------------------------------------------
Carrying % of Fair % of
Value Total Value Total
-------- -------- -------- --------
(Dollars in thousands)

Securities classified as
held to maturity (at
amortized cost):

Municipal bonds ........... $ 559 1.20% $ 559 1.20%

Securities classified as
available for sale (at fair
value):

Shay ARM mutual fund ...... -- -- -- --

U.S. Government securities 1,014 2.17 1,014 2.17

FHLB ...................... 37,107 79.43 37,107 79.43

FFCB ...................... 6,725 14.39 6,725 14.39

FHLMC ..................... -- -- -- --

FNMA ...................... -- -- -- --

Other equity investments .. -- -- -- --
-------- ------ -------- ------

Subtotal .................. 44,846 95.99 44,846 95.99
-------- ------ -------- ------

FHLB stock ................ 1,314 2.81 1,314 2.81
-------- ------ -------- ------

Total securities and FHLB
stock ..................... $ 46,719 100.00% $ 46,719 100.00%
======== ====== ======== ======

Average remaining life of
securities ................ 18.1 months

Other interest-earning
assets:

Interest-bearing deposits
with banks ................ $ 9,037 33.42% $ 9,037 33.42%

Federal funds sold ........ 18,000 66.58 18,000 66.58
-------- ------ -------- ------

Total ..................... $ 27,037 100.00% $ 27,037 100.00%
======== ====== ======== ======

16

Mortgage-Backed Securities

Mortgage-backed securities represent a participation interest in a pool of
one- to four-family or multi-family mortgages. The mortgage originators use
intermediaries (generally United States Government agencies and
government-sponsored enterprises) to pool and repackage the participation
interests in the form of securities, with investors such as A. J. Smith Federal
receiving the principal and interest payments on the mortgages. Such United
States Government agencies and government-sponsored enterprises guarantee the
payment of principal and interest to investors.

Mortgage-backed securities are typically issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a specific range and have varying
maturities. The characteristics of the underlying pool of mortgages, i.e.,
fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the
certificate holder. The life of a mortgage-backed pass-through security thus
approximates the life of the underlying mortgages. Our mortgage-backed
securities consist primarily of Fannie Mae, Freddie Mac and Ginnie Mae
securities.

At December 31, 2003, our mortgage-backed securities totaled $14.0
million, which represented 5.9% of our total assets at that date. At December
31, 2003, $13.9 million of our mortgage-backed securities were classified as
available-for-sale. At that date, virtually all of our mortgage-backed
securities had fixed rates of interest. We purchased $10.5 million of
mortgage-backed securities during the year ended December 31, 2003, and $10.0
million during the year ended December 31, 2002. For information regarding the
maturities of our mortgage-backed securities, see Note 3 of Notes to
Consolidated Financial Statements.

Mortgage-backed securities generally yield less than the mortgage loans
underlying such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk to the security holder. In
addition, mortgage-backed securities are more liquid than individual mortgage
loans and we may use them to collateralize borrowings or other obligations of A.
J. Smith Federal.

The following table sets forth the composition of our mortgage-backed
securities at the dates indicated.

At December 31,
-----------------------------------------------------------------
2003 2002 2001
------------------- ------------------- -------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
-------- -------- -------- -------- -------- --------
(Dollars in thousands)

Mortgage-backed securities
classified as held to maturity
(at amortized cost):
Ginnie Mae ..................... $ 176 1.25% $ 254 1.58% $ 340 3.64%
Freddie Mac .................... -- -- 14 0.09 26 0.28
Other .......................... 1 0.01 1 0.01 3 0.03
Mortgage-backed securities
classified as available for sale
(at fair value):
Fannie Mae ..................... 12,129 86.45 13,971 87.11 6,600 70.71
Freddie Mac .................... 1,725 12.29 1,799 11.21 2,365 25.34

Total .................... $ 14,031 100.00% $ 16,039 100.00% $ 9,334 100.00%
======== ====== ======== ====== ======== ======

17

Carrying Values, Yields and Maturities. The composition and maturities of
our debt securities portfolio and of our mortgage-backed securities, excluding
equity investments and FHLB stock, are indicated in the following table. Cost
represents the amortized cost of the securities and mortgage-backed securities
at December 31, 2003. See Note 3 to the Notes to Consolidated Financial
Statements.

At December 31, 2003
--------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Securities
---------- ---------- ---------- ---------- ------------------------
Amortized Amortized Amortized Amortized Amortized
Cost Cost Cost Cost Cost Fair Value
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)

Securities ............... $ 11,050 $ 11,007 $ 1,000 $ -- $ 23,057 $ 23,359
Mortgage-backed securities -- 6 1,299 12,675 13,980 14,033
---------- ---------- ---------- ---------- ---------- ----------
Total securities ......... $ 11,050 $ 11,013 $ 2,299 $ 12,675 $ 37,037 $ 37,392
========== ========== ========== ========== ========== ==========

Weighted average yield ... 5.74% 3.48% 4.87% 5.07% 4.78%

Sources of Funds

General. Deposits have been our primary source of funds for lending and
other investment purposes. In addition to deposits, we derive funds primarily
from principal and interest payments on loans. These loan repayments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market conditions.
Borrowings may be used on a short-term basis to compensate for reductions in the
availability of funds from other sources, and may be used on a longer-term basis
for general business purposes.

Deposits. Our deposits are generated primarily from residents within our
primary market area. Deposit account terms vary, with the principal differences
being the minimum balance required, the time periods the funds must remain on
deposit and the interest rate. We are not currently using, nor have we used in
the past, brokers to obtain deposits. Our deposit products include demand, NOW,
money market, savings, and term certificate accounts. We establish interest
rates, maturity terms, service fees and withdrawal penalties on a periodic
basis. Management determines the rates and terms based on rates paid by
competitors, our need for funds or liquidity, growth goals and federal and state
regulations.

Deposit Activity. The following table sets forth our deposit flows during
the periods indicated.

Years Ended December 31,
-------------------------------------
2003 2002 2001
--------- --------- ---------
(Dollars in thousands)

Opening balance ........... $ 169,008 $ 171,809 $ 161,251
Deposits .................. 517,327 444,269 482,870
Withdrawals ............... (507,549) (450,552) (477,631)
Interest credited ......... 5,061 3,482 5,319
--------- --------- ---------

Ending balance ............ $ 183,847 $ 169,008 $ 171,809
========= ========= =========

Net increase (decrease) ... $ 14,839 $ (2,801) $ 10,558
========= ========= =========

Percent increase (decrease) 8.78% (1.63)% 6.55%
========= ========= =========

18

Deposit Accounts. The following table sets forth the dollar amount of
savings deposits in the various types of deposit programs we offered as of the
dates indicated.

At December 31,
-----------------------------------------------------------------
2003 2002 2001
------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- --------
(Dollars in thousands)

Transactions and Savings Deposits:

Checking accounts ................ $ 3,607 1.96% $ 3,309 1.96% $ 3,233 1.88%
Passbook accounts ................ 51,755 28.15 44,328 26.23 40,939 23.83
NOW accounts ..................... 19,603 10.66 19,322 11.43 24,894 14.49
Money market accounts ............ 7,514 4.09 7,720 4.57 11,900 6.93
-------- ------ -------- ------ -------- ------

Total non-certificates ........... 82,479 44.86 74,679 44.19 80,966 47.13
-------- ------ -------- ------ -------- ------

Certificates:

0.00 - 3.99% .................... 64,824 35.26 48,339 28.59 31,566 18.37
4.00 - 5.99% .................... 26,516 14.42 30,634 18.13 30,754 17.90
6.00 - 7.99% .................... 10,011 5.45 15,340 9.08 28,486 16.58
8.00 - 9.99% .................... 17 0.01 16 0.01 37 0.02
-------- ------ -------- ------ -------- ------

Total certificates ............... 101,368 55.14 94,329 55.81 90,843 52.87
-------- ------ -------- ------ -------- ------
Total deposits ................... $183,847 100.00% $169,008 100.00% $171,809 100.00%
======== ====== ======== ====== ======== ======

Deposit Maturity Schedule. The following table presents, by rate category,
the remaining period to maturity of time deposit accounts outstanding as of
December 31, 2003.

8.00%- Percent
0-3.99% 4.00-5.99% 6.00-7.99% or greater Total of Total
-------- ---------- ---------- ---------- -------- --------
(Dollars in thousands)

Certificate accounts maturing
in quarter ending:

March 31, 2004 .............. $ 17,200 $ 1,111 $ 77 $ -- $ 18,388 18.14%
June 30, 2004 ............... 10,110 930 450 -- 11,490 11.34
September 30, 2004 .......... 5,363 768 390 -- 6,521 6.43
December 31, 2004 ........... 6,857 380 950 -- 8,187 8.08
March 31, 2005 .............. 7,783 1,419 4,115 5 13,322 13.14
June 30, 2005 ............... 1,269 974 1,605 -- 3,848 3.80
September 30, 2005 .......... 1,756 2,114 714 -- 4,584 4.52
December 31, 2005 ........... 2,289 795 1,078 -- 4,162 4.11
March 31, 2006 .............. 2,062 773 116 12 2,963 2.92
June 30, 2006 ............... 690 609 125 -- 1,424 1.40
September 30, 2006 .......... 1,038 819 9 -- 1,866 1.84
December 31, 2006 ........... 1,447 782 -- -- 2,229 2.20
March 31, 2007 .............. -- -- -- -- -- --

Thereafter .................. 6,960 15,042 382 -- 22,384 22.08
-------- -------- -------- -------- -------- ------

Total .................... $ 64,824 $ 26,516 $ 10,011 $ 17 $101,368 100.00%
======== ======== ======== ======== ======== ======

Percent of total ......... 63.95% 26.16% 98.7% 0.02%

19

Large Certificates. The following table indicates the amount of our
certificates of deposit and other deposits by time remaining until maturity as
of December 31, 2003.

Maturity
-------------------------------------------------------------
3 Months Over 3 to Over 6 to Over 12
or Less 6 Months 12 Months Months Total
--------- --------- --------- --------- ---------
(In thousands)

Certificates of deposit less than $100,000 $ 14,839 $ 9,286 $ 8,607 $ 41,819 $ 74,551
Certificates of deposit of $100,000 or more 3,173 2,104 2,035 13,699 21,011
Public funds (1) .......................... 375 100 4,066 1,265 5,806

Total certificates of deposit ............. $ 18,387 $ 11,490 $ 14,708 $ 56,783 $ 101,368
========= ========= ========= ========= =========

- -----------
(1) Deposits from governmental and other public entities. The amounts shown
under public funds include deposits of $100,000 or more totaling $5.7
million.

Borrowings. We may obtain advances from the Federal Home Loan Bank of
Chicago upon the security of the common stock we own in the Federal Home Loan
Bank and our qualifying residential mortgage loans and mortgage-backed
securities, provided certain standards related to creditworthiness are met.
These advances are made pursuant to several credit programs, each of which has
its own interest rate and range of maturities. Federal Home Loan Bank advances
are generally available to meet seasonal and other withdrawals of deposit
accounts and to permit increased lending.

The following table sets forth the maximum month-end balance and average
balance of FHLB advances, securities sold under agreements to repurchase and
other borrowings for the periods indicated.

Years Ended December 31,
--------------------------------
2003 2002 2001
-------- -------- --------
(In thousands)
Maximum balance:
FHLB advances ........................ $ 19,000 $ 17,000 $ 13,000

Average balance:
FHLB advances ........................ $ 18,373 $ 14,000 $ 12,167

The following table sets forth the balances of, and weighted average
interest rate on, certain borrowings at the dates indicated.

At December 31,
----------------------------------
2003 2002 2001
-------- -------- --------
(Dollars In thousands)

FHLB advances ................................. $ 17,000 $ 16,000 $ 13,000

Weighted average interest rate of FHLB advances 4.52% 4.91% 6.19%

20

Employees

At December 31, 2003, we had a total of 54 full-time and 30 part-time
employees. Our employees are not represented by any collective bargaining group.
Management believes that we have good relations with our employees.

Service Corporation Activities

As a federally chartered savings bank, we are permitted by Office of
Thrift Supervision regulations to invest up to 2% of our assets in the stock of,
or loans to, service corporation subsidiaries. We may invest an additional 1% of
our assets in service corporations if the additional funds are used for
inner-city or community development purposes, and up to 50% of our total capital
in conforming loans to service corporations in which we own more than 10% of the
capital stock. In addition to investments in service corporations, we may invest
an unlimited amount in operating subsidiaries engaged solely in activities in
which A. J. Smith Federal may engage as a federal savings bank.

A.J.S. Insurance, LLC was our wholly owned service corporation subsidiary
which until December 31, 2003 offered insurance and investment products such as
homeowners' insurance, fixed and variable rate annuities and mutual funds. As of
December 31, 2003, A.J.S. Insurance LLC, became inactive and the products and
services it offered are now offered by A. J. Smith Federal Savings Bank. We will
continue to offer all the products that were formerly offered by the LLC.

Regulation

Loans-to-One-Borrower. Federal savings banks generally may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
unimpaired capital and surplus on an unsecured basis. An additional amount may
be lent, equal to 10% of unimpaired capital and surplus, if the loan is secured
by readily marketable collateral, which is defined to include certain securities
and bullion, but generally does not include real estate. As of December 31,
2003, we were in compliance with our loans-to-one-borrower limitations.

Qualified Thrift Lender Test. As a federal savings bank, we are required
to satisfy a qualified thrift lender test whereby we must maintain at least 65%
of our "portfolio assets" in "qualified thrift investments." These consist
primarily of residential mortgages and related investments, including
mortgage-backed and related securities. "Portfolio assets" generally means total
assets less specified liquid assets up to 20% of total assets, goodwill and
other intangible assets, and the value of property used to conduct business. A
savings bank that fails the qualified thrift lender test must either convert to
a bank charter or operate under specified restrictions. As of December 31, 2003,
we maintained 85.53% of our portfolio assets in qualified thrift investments
and, therefore, we met the qualified thrift lender test.

Capital Distributions. Office of Thrift Supervision regulations govern
capital distributions by savings institutions, which include cash dividends,
stock repurchases and other transactions charged to the capital account of a
savings institution. A savings institution must file an application for Office
of Thrift Supervision approval of the capital distribution if either (1) the
total capital distributions for the applicable calendar year exceed the sum of
the institution's net income for that year to date plus the institution's
retained net income for the preceding two years, (2) the institution would not
be at least adequately capitalized following the distribution, (3) the
distribution would violate any applicable statute, regulation, agreement or
Office of Thrift Supervision-imposed condition, or (4) the institution is not
eligible for expedited review of its filings. If an application is not required
to be filed, savings institutions which are a subsidiary of a holding company,
as well as certain other institutions, must still file a notice

21

with the Office of Thrift Supervision at least 30 days before the board of
directors declares a dividend or approves a capital distribution.

Any additional capital distributions would require prior regulatory
approval. In the event our capital falls below our fully phased-in requirement
or the Office of Thrift Supervision notifies us that we are in need of more than
normal supervision, our ability to make capital distributions could be
restricted. In addition, the Office of Thrift Supervision could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if it determines that the distribution would
constitute an unsafe or unsound practice.

Community Reinvestment Act and Fair Lending Laws. Federal savings banks
have a responsibility under the Community Reinvestment Act and related
regulations of the Office of Thrift Supervision to help meet the credit needs of
their communities, including low- and moderate-income neighborhoods. In
addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit
lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of the Community Reinvestment Act could, at a minimum,
result in regulatory restrictions on its activities, and failure to comply with
the Equal Credit Opportunity Act and the Fair Housing Act could result in
enforcement actions by the Office of Thrift Supervision, as well as other
federal regulatory agencies and the Department of Justice. We received a
Satisfactory Community Reinvestment Act rating in our most recent examination by
the Office of Thrift Supervision.

Transactions with Related Parties. Our authority to engage in transactions
with related parties or "affiliates" or to make loans to specified insiders, is
limited by Sections 23A and 23B of the Federal Reserve Act. The term "affiliate"
for these purposes generally means any company that controls or is under common
control with an institution, including AJS Bancorp, Inc. and its non-savings
institution subsidiaries. Section 23A limits the aggregate amount of certain
"covered" transactions with any individual affiliate to 10% of the capital and
surplus of the savings institution and also limits the aggregate amount of
covered transactions with all affiliates to 20% of the savings institution's
capital and surplus. Covered transactions with affiliates are required to be
secured by collateral in an amount and of a type described in Section 23A, and
purchasing low quality assets from affiliates is generally prohibited. Section
23B provides that covered transactions with affiliates, including loans and
asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.

Our authority to extend credit to executive officers, directors and 10%
stockholders, as well as entities controlled by these persons, is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and also by
Regulation O. Among other things, these regulations generally require these
loans to be made on terms substantially the same as those offered to
unaffiliated individuals and do not involve more than the normal risk of
repayment. However, recent regulations now permit executive officers and
directors to receive the same terms through benefit or compensation plans that
are widely available to other employees, as long as the director or executive
officer is not given preferential treatment compared to other participating
employees. Regulation O also places individual and aggregate limits on the
amount of loans we may make to these persons based, in part, on our capital
position, and requires approval procedures to be followed. At December 31, 2003,
we were in compliance with these regulations.

22

Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institution, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1.0 million per day. The
Federal Deposit Insurance Corporation also has the authority to recommend to the
Director of the Office of Thrift Supervision that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the Federal Deposit Insurance Corporation has authority to take action
under specified circumstances.

Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness to
implement the safety and soundness standards required under the Federal law. The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. The guidelines address internal controls and
information systems; internal audit systems; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation, fees
and benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard. If an institution fails to meet these
standards, the appropriate federal banking agency may require the institution to
submit a compliance plan.

Regulatory Guidance Relating to Subprime Lending. The Federal bank
regulatory agencies have issued regulatory guidance relating to the examination
of financial institutions that are engaged in significant subprime lending
activities. The purpose of the guidance is to provide regulatory agencies with
expanded guidelines when examining savings institutions that have significant
subprime lending programs.

The regulatory guidance emphasizes that the federal banking agencies
believe that responsible subprime lending can expand credit access for consumers
and offer attractive returns for the savings institution. The guidance is
applicable to savings institutions that have subprime lending programs greater
than or equal to 25% of core capital. As part of the regulatory guidance,
examiners must provide greater scrutiny of (i) an institution's ability to
administer its higher risk subprime portfolio, (ii) the allowance for loan
losses to ensure that the portion of the allowance allocated to the subprime
portfolio is sufficient to absorb the estimated credit losses for the portfolio,
and (iii) the level of risk-based capital that the savings institution has to
ensure that such capital levels are adequate to support the savings
institution's subprime lending activities. The Office of Thrift Supervision has
not required us to restrict our subprime lending activities, nor has it required
us to maintain specific levels in our allowance for loan losses or risk based
capital as a result of our subprime lending activities.

23

Capital Requirements

Office of Thrift Supervision capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS rating system) and an 8% risk-based capital ratio. In addition, the
prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions
receiving the highest rating on the CAMELS financial institution rating system),
and, together with the risk-based capital standard itself, a 4% Tier 1
risk-based capital standard. Office of Thrift Supervision regulations also
require that in meeting the tangible, leverage and risk-based capital standards,
institutions must generally deduct investments in and loans to subsidiaries
engaged in activities as principal that are not permissible for a national bank.

The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks believed inherent in the type of asset. Core
capital is defined as common stockholders' equity (including retained earnings),
certain noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets, and up to
45% of unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.

The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the Office of Thrift Supervision has
deferred implementation of the interest rate risk capital charge. At December
31, 2003, A. J. Smith Federal met each of its capital requirements. In addition,
we have has not been advised by the Office of Thrift Supervision of any
deficiencies in our allowance for loan losses or capital levels as a result of
our subprime lending program.

24

Prompt Corrective Regulatory Action

Under the Office of Thrift Supervision Prompt Corrective Action
regulations, the Office of Thrift Supervision is required to take supervisory
actions against undercapitalized institutions, the severity of which depends
upon the institution's level of capital. Generally, a savings institution that
has total risk-based capital of less than 8.0%, or a leverage ratio or a Tier 1
core capital ratio that is less than 4.0%, is considered to be undercapitalized.
A savings institution that has total risk-based capital less than 6.0%, a Tier 1
core risk-based capital ratio of less than 3.0% or a leverage ratio that is less
than 3.0% is considered to be "significantly undercapitalized." A savings
institution that has a tangible capital to assets ratio equal to or less than
2.0% is deemed to be "critically undercapitalized." Generally, the banking
regulator is required to appoint a receiver or conservator for an institution
that is "critically undercapitalized." The regulation also provides that a
capital restoration plan must be filed with the Office of Thrift Supervision
within 45 days of the date an institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The Office of Thrift Supervision may also take any one
of a number of discretionary supervisory actions against undercapitalized
institutions, including the issuance of a capital directive and the replacement
of senior executive officers and directors.

Insurance of Deposit Accounts

The Federal Deposit Insurance Corporation has adopted a risk-based deposit
insurance assessment system. The Federal Deposit Insurance Corporation assigns
an institution to one of three capital categories based on the institution's
financial information, as of the reporting period ending seven months before the
assessment period, and one of three supervisory subcategories within each
capital group. The three capital categories are well capitalized, adequately
capitalized and undercapitalized. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
Federal Deposit Insurance Corporation by the institution's primary federal
regulator and information which the Federal Deposit Insurance Corporation
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. The
Federal Deposit Insurance Corporation is authorized to raise the assessment
rates. The Federal Deposit Insurance Corporation has exercised this authority
several times in the past and may raise insurance premiums in the future. If
this type of action is taken by the Federal Deposit Insurance Corporation, it
could have an adverse effect on our earnings.

Federal Home Loan Bank System

We are a member of the Federal Home Loan Bank System, which consists of 12
regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a
central credit facility primarily for member institutions. As a member of the
Federal Home Loan Bank of Chicago, we are required to acquire and hold shares of
capital stock in the Federal Home Loan Bank in an amount equal to at least 1% of
the aggregate principal amount of our unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of our borrowings
from the Federal Home Loan Bank, whichever is greater. As of December 31, 2003,
we were in compliance with this requirement. The Federal Home Loan Banks are
required to provide funds for the resolution of insolvent thrifts and to
contribute funds for affordable housing programs. These requirements could
reduce the amount of dividends that the Federal Home Loan Banks pay to their
members and could also result in the Federal Home Loan Banks imposing a higher
rate of interest on advances to their members.

25

Federal Reserve System

Federal Reserve Board regulations require savings institutions to maintain
noninterest-earning reserves against their transaction accounts, such as
negotiable order of withdrawal and regular checking accounts. At December 31,
2003, we were in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements imposed by the Office of Thrift
Supervision.

Holding Company Regulation

General. AJS Bancorp, MHC and AJS Bancorp, Inc. are nondiversified mutual
savings and loan holding companies within the meaning of the Home Owners' Loan
Act. As such, AJS Bancorp, MHC and AJS Bancorp, Inc. are registered with the
Office of Thrift Supervision and are subject to Office of Thrift Supervision
regulations, examinations, supervision and reporting requirements. In addition,
the Office of Thrift Supervision has enforcement authority over AJS Bancorp,
Inc. and AJS Bancorp, MHC and their subsidiaries. Among other things, this
authority permits the Office of Thrift Supervision to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution. As federal corporations, AJS Bancorp, Inc. and AJS Bancorp, MHC are
generally not subject to state business organization laws.

Permitted Activities. Pursuant to Section 10(o) of the Home Owners' Loan
Act and Office of Thrift Supervision regulations and policy, a mutual holding
company, such as AJS Bancorp, MHC, and a federally chartered mid-tier holding
company such as AJS Bancorp, Inc. may engage in the following activities: (i)
investing in the stock of a savings association; (ii) acquiring a mutual
association through the merger of such association into a savings association
subsidiary of such holding company or an interim savings association subsidiary
of such holding company; (iii) merging with or acquiring another holding
company, one of whose subsidiaries is a savings association; (iv) investing in a
corporation, the capital stock of which is available for purchase by a savings
association under federal law or under the law of any state where the subsidiary
savings association or associations share their home offices; (v) furnishing or
performing management services for a savings association subsidiary of such
company; (vi) holding, managing or liquidating assets owned or acquired from a
savings subsidiary of such company; (vii) holding or managing properties used or
occupied by a savings association subsidiary of such company; (viii) acting as
trustee under deeds of trust; (ix) any other activity (A) that the Federal
Reserve Board, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the
Director, by regulation, prohibits or limits any such activity for savings and
loan holding companies; or (B) in which multiple savings and loan holding
companies were authorized (by regulation) to directly engage on March 5, 1987;
(x) any activity permissible for financial holding companies under Section 4(k)
of the Bank Holding Company Act, including securities and insurance
underwriting; and (xi) purchasing, holding, or disposing of stock acquired in
connection with a qualified stock issuance if the purchase of such stock by such
savings and loan holding company is approved by the Director. If a mutual
holding company acquires or merges with another holding company, the holding
company acquired or the holding company resulting from such merger or
acquisition may only invest in assets and engage in activities listed in (i)
through (xi) above, and has a period of two years to cease any nonconforming
activities and divest of any nonconforming investments.

The Home Owners' Loan Act prohibits a savings and loan holding company,
including AJS Bancorp, Inc. and AJS Bancorp, MHC, directly or indirectly, or
through one or more subsidiaries, from acquiring another savings institution or
holding company thereof, without prior written approval of the Office of Thrift
Supervision. It also prohibits the acquisition or retention of, with certain
exceptions, more than 5% of a nonsubsidiary savings institution, a nonsubsidiary
holding company, or a

26

nonsubsidiary company engaged in activities other than those permitted by the
Home Owners' Loan Act; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the Office of Thrift Supervision must consider the
financial and managerial resources, future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
fund, the convenience and needs of the community and competitive factors.

The Office of Thrift Supervision is prohibited from approving any
acquisition that would result in a multiple savings and loan holding company
controlling savings institutions in more than one state, subject to two
exceptions: (i) the approval of interstate supervisory acquisitions by savings
and loan holding companies, and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.

Waivers of Dividends by AJS Bancorp, MHC. Office of Thrift Supervision
regulations require AJS Bancorp, MHC to notify the Office of Thrift Supervision
of any proposed waiver of its receipt of dividends from AJS Bancorp, Inc. The
Office of Thrift Supervision reviews dividend waiver notices on a case-by-case
basis, and, in general, does not object to any such waiver if: (i) the mutual
holding company's board of directors determines that such waiver is consistent
with such directors' fiduciary duties to the mutual holding company's members;
(ii) for as long as the savings association subsidiary is controlled by the
mutual holding company, the dollar amount of dividends waived by the mutual
holding company are considered as a restriction on the retained earnings of the
savings association, which restriction, if material, is disclosed in the public
financial statements of the savings association as a note to the financial
statements; (iii) the amount of any dividend waived by the mutual holding
company is available for declaration as a dividend solely to the mutual holding
company, and, in accordance with SFAS 5, where the savings association
determines that the payment of such dividend to the mutual holding company is
probable, an appropriate dollar amount is recorded as a liability; and (iv) the
amount of any waived dividend is considered as having been paid by the savings
association in evaluating any proposed dividend under Office of Thrift
Supervision capital distribution regulations. AJS Bancorp, MHC may waive
dividends paid by AJS Bancorp, Inc. Under Office of Thrift Supervision
regulations, our public stockholders would not be diluted because of any
dividends waived by AJS Bancorp, MHC (and waived dividends would not be
considered in determining an appropriate exchange ratio) in the event AJS
Bancorp, MHC converts to stock form.

Conversion of AJS Bancorp, MHC to Stock Form. Office of Thrift Supervision
regulations permit AJS Bancorp, MHC to convert from the mutual form of
organization to the capital stock form of organization (a "Conversion
Transaction"). There can be no assurance when, if ever, a Conversion Transaction
will occur, and the Board of Directors has no current intention or plan to
undertake a Conversion Transaction. In a Conversion Transaction a new holding
company would be formed as the successor to AJS Bancorp, Inc. (the "New Holding
Company"), AJS Bancorp, MHC's corporate existence would end, and certain
depositors of A. J. Smith Federal would receive the right to subscribe for
additional shares of the New Holding Company. In a Conversion Transaction, each
share of common stock held by stockholders other than AJS Bancorp, MHC
("Minority Stockholders") would be automatically converted into a number of
shares of common stock of the New Holding Company determined pursuant an
exchange ratio that ensures that Minority Stockholders own the same percentage
of common stock in the New Holding Company as they owned in AJS Bancorp, Inc.
immediately prior to the Conversion Transaction. Under Office of Thrift
Supervision regulations, Minority Stockholders would not be diluted because of
any dividends waived by AJS Bancorp, MHC (and waived dividends would not be
considered in determining an appropriate exchange ratio), in the event AJS
Bancorp, MHC converts to stock form. The total number of shares held by Minority
Stockholders after a Conversion

27

Transaction also would be increased by any purchases by Minority Stockholders in
the stock offering conducted as part of the Conversion Transaction.

The USA PATRIOT Act

In response to the events of September 11, 2001, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on
October 26, 2001. The USA PATRIOT Act gives the Federal Government new powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing and broadened anti-money
laundering requirements.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 was enacted in response to public concerns
regarding corporate accountability in connection with recent accounting
scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate
responsibility, to provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies, and to protect investors by
improving the accuracy and reliability of corporate disclosures pursuant to the
securities laws. The Sarbanes-Oxley Act generally applies to all companies that
file or are required to file periodic reports with the SEC, under the Securities
Exchange Act of 1934.

The Sarbanes-Oxley Act includes very specific additional disclosure
requirements and new corporate governance rules requiring the SEC and securities
exchanges to adopt extensive additional disclosure, corporate governance and
other related rules, and mandates further studies of certain issues by the SEC.
The Sarbanes-Oxley Act represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees.

Although we anticipate that we will incur additional expense in complying
with the provisions of the Sarbanes-Oxley Act and the regulations that have been
promulgated to implement the Sarbanes-Oxley Act, management does not expect that
such compliance will have a material impact on our results of operations or
financial condition.

Taxation

Federal Taxation

For federal income tax purposes, AJS Bancorp, Inc. and A. J. Smith Federal
file separate federal income tax returns on a calendar year basis using the
accrual method of accounting.

As a result of the enactment of the Small Business Job Protection Act of
1996, all savings banks and savings associations may convert to a commercial
bank charter, diversify their lending, or merge into a commercial bank without
having to recapture any of their pre-1988 tax bad debt reserve accumulations.
However, transactions which would require recapture of the pre-1988 tax bad debt
reserve include redemption of A. J. Smith Federal's stock, payment of dividends
or distributions in excess of earnings and profits, or failure by the
institution to qualify as a bank for federal income tax purposes. At December
31, 2003, A. J. Smith Federal had approximately $2.4 million of pre-1988 bad
debt reserves. A deferred tax liability has not been provided on this amount as
management does not intend to make distributions, redeem stock or fail certain
bank tests that would result in recapture of the reserve.

28

Deferred income taxes arise from the recognition of items of income and
expense for tax purposes in years different from those in which they are
recognized in the consolidated financial statements. AJS Bancorp, Inc. will
account for deferred income taxes by the asset and liability method, applying
the enacted statutory rates in effect at the balance sheet date to differences
between the book basis and the tax basis of assets and liabilities. The
resulting deferred tax liabilities and assets will be adjusted to reflect
changes in the tax laws.

AJS Bancorp, Inc. is subject to the corporate alternative minimum tax to
the extent it exceeds AJS Bancorp, Inc.'s regular income tax for the year. The
alternative minimum tax will be imposed at the rate of 20% of a specially
computed tax base. Included in this base are a number of preference items,
including interest on certain tax-exempt bonds issued after August 7, 1986, and
an "adjusted current earnings" computation which is similar to a tax earnings
and profits computation. In addition, for purposes of the alternative minimum
tax, the amount of alternative minimum taxable income that may be offset by net
operating losses is limited to 90% of alternative minimum taxable income.

A. J. Smith Federal's income tax returns have not been audited by the
Internal Revenue Service within the past five years.

State Taxation

Illinois State Taxation. AJS Bancorp, Inc. is required to file Illinois
income tax returns and pay tax at an effective tax rate of 7.18% of Illinois
taxable income. For these purposes, Illinois taxable income generally means
federal taxable income subject to certain modifications, primarily the exclusion
of interest income on United States obligations.

MANAGEMENT

Executive Officers of AJS Bancorp, Inc.

The following individuals hold the following executive officer positions
of AJS Bancorp, Inc.

Name Age Position
- ------------------ ----- ---------------------
Thomas R. Butkus 56 Chairman of the Board and Chief Executive Officer

Lyn G. Rupich 41 President

W. Anthony Kopp 53 Senior Vice President

Pamela N. Favero 40 Chief Financial Officer

Availability of Annual Report on Form 10-K

Our Annual Report on Form 10-K may be accessed on our website at
www.ajsmithbank.com.

29

ITEM 2. PROPERTIES

Properties

At December 31, 2003, we conducted our business from our main office at
14757 South Cicero, Midlothian, Illinois, a branch office located at 8000 West
159th Street, Orland Park, Illinois and a branch office located at 11275 W.
143rd Street, Orland Park, Illinois. We own all of our branch locations. At
December 31, 2003, the net book value of our office locations was $4.5 million.

ITEM 3. LEGAL PROCEEDINGS

We are involved, from time to time, as plaintiff or defendant in various
legal actions arising in the normal course of our business. At December 31,
2003, we were not involved in any legal proceedings, the outcome of which would
be material to our financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

(a) The Company's Common Stock is quoted on the electronic bulletin board
under the symbol "AJSB."

The following table sets forth the range of the high and low bid prices of
the Company's Common Stock for the prior eight calendar quarters and is based
upon information provided by Nasdaq. The Company has not paid any dividends
since the completion of its initial public offering.

Prices of Common Stock
----------------------
High Low
------- -------
Calendar Quarter Ended
March 31, 2002 ................................. $14.15 $13.50
June 30, 2002 .................................. 15.35 14.00
September 30, 2002 ............................. 15.00 14.05
December 31, 2002 .............................. 17.75 14.60
March 31, 2003 ................................. 18.00 17.40
June 30, 2003 .................................. 20.75 17.50
September 30, 2003 ............................. 21.20 20.20
December 31, 2003 .............................. 23.50 21.10

As of December 31, 2003, the Company had 448 stockholders of record.

(d) None.

30

ITEM 6. SELECTED FINANCIAL DATA

The following tables set forth selected consolidated historical financial
and other data of AJS Bancorp, Inc. and its predecessor A. J. Smith Federal
Savings Bank for the periods and at the dates indicated. The information is
derived in part from, and should be read together with, the Consolidated
Financial Statements and Notes thereto of AJS Bancorp, Inc. contained elsewhere
in this Annual Report.

At December 31,
----------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(Dollars in thousands)

Selected Financial Condition Data:
Total Assets ..................... $238,384 $222,570 $219,780 $195,690 $199,251
Loans receivable, net ............ 155,628 136,134 128,505 107,769 109,776
Mortgage-backed securities:
Held to maturity ............... 177 269 369 472 536
Available for sale ............. 13,854 15,770 8,965 10,420 9,305
Securities:
Held to maturity ............... -- 91 559 319 388
Available for sale ............. 28,621 36,133 44,846 46,957 37,153
Deposits ......................... 183,847 169,008 171,809 161,251 161,793
Total borrowings ................. 17,000 16,000 13,000 12,000 17,500
Equity ........................... 32,105 33,646 31,248 19,215 16,947

Years Ended December 31,
-----------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(Dollars in thousands)

Selected Operations Data:
Total interest income........ $ 12,347 $ 13,113 $ 13,645 $ 14,236 $ 13,418
Total interest expense....... 5,069 5,426 7,482 8,504 7,532
--------- --------- --------- --------- ---------
Net interest income........ 7,278 7,687 6,163 5,732 5,886
Provision for loan losses.... (61) 20 413 300 525
---------- --------- --------- --------- ---------
Net interest income after
provision for loan losses.. 7,339 7,667 5,750 5,432 5,361
Noninterest income........... 1,091 1,599 1,146 1,036 1,164
Noninterest expense........ 6,255 5,855 5,401 4,463 4,472
--------- --------- --------- --------- ---------
Income before taxes........ 2,175 3,411 1,495 2,005 2,053
Income tax provision....... 782 1,296 516 666 791
--------- --------- --------- --------- ---------
Net income.............. $ 1,393 $ 2,115 $ 979 $ 1,339 $ 1,262
========= ========= ========= ========= =========
Net income per share....... $ .60 $ .90 N/A N/A N/A

- ----------
N/A - Not applicable, as A. J. Smith Federal Savings Bank did not have any
stockholders.

31

Years Ended December 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------

(Dollars in thousands)
Selected Financial Rations and Other Data:

Performance Ratios:
Return on assets (ratio of net income to
average total assets) ...................... 0.58% 0.98% 0.48% 0.69% 0.65%
Return on equity (ratio of net income to
average equity) ............................ 4.15 6.50 4.80 7.39 7.51
Interest rate spread information:
Average during period ......................... 2.93 3.39 2.95 2.77 2.96
Net interest margin (1) ....................... 3.20 3.78 3.27 3.04 3.21
Ratio of operating expense to average total
assets ...................................... 2.62 .72 2.65 2.23 2.30
Efficiency ratio (2) .......................... 74.74 3.04 73.90 65.94 63.43
Ratio of average interest-earning assets to
average interest-bearing liabilities ........ 112.29 14.49 107.96 105.84 105.95

Asset Quality Ratios:
Non-performing assets to total assets at end of
period ...................................... 0.49 0.49 0.79 0.77 0.84
Allowance for loan losses to non-performing
loans ....................................... 172.71 197.91 159.15 197.66 128.99
Allowance for loan losses to loans receivable,
gross ....................................... 1.24 1.51 1.91 2.15 1.93

Capital Ratios:
Equity to total assets at end of period ....... 13.47 15.12 14.22 9.82 8.76
Average equity to average assets .............. 14.02 15.14 10.00 9.06 8.65
Other Data:
Number of full-service offices ................ 3 3 2 2 2

- -----------
(1) Net interest income divided by average interest earning assets.

(2) Efficiency ratio represents noninterest expense as a percentage of net
interest income plus noninterest income.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Forward Looking Statements

This Annual Report contains certain "forward-looking statements" which may
be identified by the use of words such as "believe," "expect," "anticipate,"
"should," "planned," "estimated," and "potential." Examples of forward-looking
statements include, but are not limited to, estimates with respect to our
financial condition, results of operations and business that are subject to
various factors which could cause actual results to differ materially from these
estimates and most other statements that are not historical in nature. These
factors include, but are not limited to, general and local economic conditions,
changes in interest rates, deposit flows, demand for mortgage, commercial and
other loans, real estate values, competition, changes in accounting principles,
policies, or guidelines, changes in legislation or regulation, and other
economic, competitive, governmental, regulatory, and technological factors
affecting our operations, pricing products and services.

General

Our results of operations depend primarily on our net interest income. Net
interest income is the difference between the interest income we earn on our
interest-earning assets, consisting primarily of loans, investment securities
and interest-bearing deposits with other financial institutions, and the
interest we pay on our interest-bearing liabilities, consisting primarily of
savings accounts and time deposits. Our results of operations are also affected
by our provisions for loans losses, other income and other expense. Other income
consists primarily of insurance commissions and service charges on deposit
accounts. Other expense consists primarily of noninterest expense, including
salaries and employee benefits,

32

occupancy, equipment, data processing and deposit insurance premiums. Our
results of operations may also be affected significantly by general and local
economic and competitive conditions, changes in market interest rates,
governmental policies and actions of regulatory authorities.

Business Strategy

Our business strategy is to operate as a well-capitalized, profitable,
community-oriented savings bank dedicated to providing quality customer service.
In the past, we implemented our business strategy by emphasizing the origination
of one- to four-family loans and other loans secured by real estate. We will
continue to be primarily a one- to four-family lender. Management, however, has
determined to broaden the scope of our loan products and services to enhance
profitability and reduce the risks inherent in our loan portfolio, consistent
with safety and soundness. In this regard, we have determined to reduce our
reliance on subprime lending and to expand our commercial business lending and
business banking services. There can be no assurances that we will successfully
implement our strategy.

Highlights of our business strategy are as follows:

o Continuing One- to Four-Family Residential Real Estate Lending.
Historically, we have emphasized one- to four-family residential
lending within our market area. As of December 31, 2003, $120.8
million, or 76.6%, of our total loan portfolio consisted of one- to
four-family residential real estate loans. During the year ended
December 31, 2003, we originated $50.5 million of one- to
four-family residential real estate loans. We intend to continue to
originate one- to four-family loans because of our expertise with
this type of lending.

o Reducing Reliance on Subprime Loans. In 1994, we began originating
"subprime" loans through mortgage brokers to borrowers with impaired
credit histories. Since that time and up to the end of 1999, a
significant number of our one- to four-family loan originations were
subprime loans primarily because they offered higher yields than
traditional one- to four-family mortgage loans. At December 31,
1999, $54.9 million of our loans, comprising 49.1% of our total
loans, consisted of loans categorized as subprime loans. Beginning
in 2000, we determined to de-emphasize the origination of such
loans, because they carry greater credit risk. At December 31, 2003,
our subprime loans totaled $18.3 million, or 11.6% of total loans.

o Commercial Business Lending. We intend to originate more commercial
business loans to complement our one- to four-family residential
real estate lending. These loans will most likely encumber business
real estate whenever possible, however, we may use non-real estate
based liens when necessary. Although commercial business loans were
an insignificant component of our loan portfolio at December 31,
2003, we are committed to developing our commercial business lending
and our commercial business banking services. We have added a senior
commercial banking officer to our staff with extensive experience in
originating and servicing commercial business loans. We may add one
or more additional experienced commercial business lending personnel
to our staff as circumstances warrant. We believe that expanding our
commercial business lending will enable us to improve the yield on
our loan portfolio and diversify our assets while continuing to meet
the needs of our community.

o Establishing Our Commercial Business Banking. We are committed to
meeting the financial needs of the communities in which we operate.
In particular, we have increased our emphasis on business banking,
and we now offer commercial deposit products, such

33

as transaction accounts, to our business customers. Our objective is
to actively market our business banking products and services to our
existing customers, as well as new businesses within our market
area.

o Controlled Growth of Our Business. We intend to grow and expand our
operations as market conditions warrant and consistent with our loan
underwriting and capital criteria. In this regard, we are
diversifying our lending operations by introducing commercial
business lending, and we are marketing our deposit products to our
commercial customers. In addition, we built a new branch facility in
Orland Park, Illinois, which opened in December 2002. Should market
conditions be such that we feel the institution would benefit from
an additional branch we may pursue the opening of a fourth branch
facility. We believe these strategies will increase our presence in
our market area.

Comparison of Financial Condition at December 31, 2003 and December 31, 2002

Our total assets increased by $15.8 million, or 7.1%, to $238.4 million at
December 31, 2003 from $222.6 million at December 31, 2002. Cash and cash
equivalents decreased $3.1 million or 13.5% to $19.8 million at December 31,
2003 from $22.9 million at December 31, 2002. Securities decreased $9.6 million
or 18.4%, to $42.7 million at December 31, 2003 from $52.2 million at December
31, 2002. Loans receivable increased $19.5 million or 14.3% to $155.6 at
December 31,2003 from $136.1 million at December 31, 2002. The increase in loans
and decrease in cash and cash equivalents and securities represents our attempt
to invest the cash and proceeds from securities maturities into higher yielding
assets. Federal Home Loan Bank (FHLB) stock increased $9.1 million, to $13.6
million at December 31, 2003 from $4.5 million at December 31, 2002. The
increase in FHLB stock reflects the desire to obtain the relatively high
dividend rate paid by the FHLB when compared to other possible investments with
the same risk/return profile.

Total deposits increased $14.8 million, or 8.8%, to $183.8 million at
December 31, 2003 from $169.0 million at December 31, 2002. $6.5 million of the
increase in deposits is due to the opening of our new branch facility in
December of 2002. Transaction and savings accounts increased to $82.5 million at
December 31, 2003 from $74.7 million at December 31, 2002; certificate of
deposit accounts increased to $101.4 million from $94.3 million at December 31,
2002.

Federal Home Loan Bank advances increased to $17.0 million at December 31,
2003 from $16.0 million at December 31, 2002. The increase in FHLB advances was
used to fund the purchase of mortgage backed securities that paid a higher yield
than our cost of the advances.

At December 31, 2003 the Company had non-performing assets of $1.2 million
compared to $1.1 million as of December 31, 2002. The allowance for loan losses
was $2.0 million at December 31, 2003, and $2.1 million at December 31, 2002.
This represents a ratio of allowance for loan losses to gross loans receivable
of 1.24% at December 31, 2003 and 1.51% at December 31, 2002. Sub-prime loan
balances decreased $12.9 million to $18.3 million at December 31, 2003 from
$31.2 million at December 31, 2002. The decrease in sub-prime loans reflects our
decision to de-emphasize this type of lending.

Total stockholders' equity decreased $1.5 million to $32.1 million at
December 31, 2003 from $33.6 million at December 31, 2002. The decrease was
primarily the result of the Company's purchase of $1.5 million in treasury stock
and recording a liability for the put option feature on the allocated portion of
the Employee Stock Option Plan (ESOP). The Company's ESOP allows the employee to
"put" the stock back to the Company in the event that there is not an actively
traded market for the Company's stock. Equity also decreased due to a $788,000
change in unrealized gain on securities available-for-sale. These decreases were
offset by net income of $1.4 million for the year ended December 31, 2003.

34

Comparison of Financial Condition at December 31, 2002 and December 31, 2001

Our total assets increased by $2.8 million, or 1.3%, to $222.6 million at
December 31, 2002 from $219.8 million at December 31, 2001. Loans receivable
increased $7.6 million, or 5.9%, to $136.1 at December 31,2002 from $128.5
million at December 31, 2001. Securities decreased $2.5 million or 4.6%, to
$52.2 million at December 31, 2002, from $54.7 million at December 31, 2001. The
increase in loans and decrease in securities represents the Bank's attempt to
invest the cash received from maturing securities into higher yielding loans.

Total deposits decreased $2.8 million, or 1.6%, to $169.0 million at
December 31, 2002 from $171.8 million at December 31, 2001. While deposits were
relatively stable, our transaction and savings deposits decreased to $74.7
million at December 31, 2002, from $81.0 million at December 31, 2001, largely
due to the refund of excess stock subscription money that was on deposit as of
December 31, 2001. Our certificate of deposit accounts increased to $94.3
million from $90.8 million at December 31, 2001.

Federal Home Loan Bank advances increased to $16.0 million at December 31,
2002, from $13.0 million at December 31, 2001. The increase in FHLB advances was
used to fund the purchase of mortgage backed securities that would allow us to
enhance revenue by creating a positive spread between the yield on the
securities and the cost of the advances.

At December 31, 2002 the Company had non-performing assets of $1.1 million
compared to $1.7 million as of December 31, 2001. The allowance for loan losses
was $2.1 million at December 31, 2002, and $2.5 million at December 31, 2001.
This represents a ratio of allowance for loan losses to gross loans receivable
of 1.51% at December 31, 2002 and 1.91% at December 31, 2001. Sub-prime loan
balances decreased $15.9 million to $31.2 million at December 31, 2002, from
$47.1 million at December 31, 2001. The decrease in sub-prime loans reflects our
decision to de-emphasize this type of lending.

Total stockholders' equity increased to $33.6 million at December 31,
2002, from $31.2 million at December 31, 2001. The increase was primarily the
result of the Company's net income of $2.1 million for the year ended December
31, 2002.

Comparison of Operating Results for the Years Ended December 31, 2003 and
December 31, 2002

General. Net income decreased $722,000, or 34.1%, to $1.4 million for the
year ended December 31, 2003, from $2.1 million for the year ended December 31,
2002. The decrease in net income resulted from a decrease in net interest
income, a decrease in non-interest income, and an increase in non-interest
expense, partially offset by a decrease in the provision for loan losses.

Interest Income. Total interest income declined to $12.3 million for the
twelve months ended December 31, 2003, down $766,000 or 5.8% from $13.1 million
for the same period in 2002. The decrease in interest income resulted primarily
from decreases in income on loans and securities partially offset by increases
in income on federal funds sold and income on interest bearing deposits.

Interest income from loans decreased $399,000 to $9.3 million for the year
ended December 31, 2003, from $9.7 million for the year ended December 31, 2002.
The decrease in interest income from loans was due to a decline in the average
yield on loans, which decreased to 6.3% during 2003, from 7.3% during 2002. The
decrease in yield was primarily due to overall declining interest rates in the
marketplace. Our average balance of loans increased to $148.9 million during
2003, from an average balance of loans of $133.7 million during 2002.

35

Interest income from securities decreased $683,000 to $2.2 million for the
year ended December 31, 2003, from $2.9 million for the year ended 2002. The
decrease was due to lower interest rates earned on these assets due to a general
decline in market interest rates, as well as lower average balances in
securities. During 2003, we reinvested the maturing assets into higher earning
loan products. Our average yield was 4.6% and the average balance of securities
was $48.7 million for 2003. Our average yield was 5.7% and the average balance
of securities was $51.0 million for 2002.

Interest income from interest-earning deposits increased $279,000, or
71.5%, to $669,000 for the year ended December 31, 2003, from $390,000 for the
year ended December 31, 2002. The increase resulted from increases in the
average outstanding balance to $20.8 million from $15.4 million, and an increase
in the average yield to 3.2% from 2.5%. This reflects our decision to carry an
investment of $13.6 million in FHLB stock, which had a relatively high yield of
6.50% for the last three months of 2003. This relatively higher earning asset
caused our average yield for interest-bearing deposits as a whole to increase
rather than to decline as would be expected given the lower interest rates in
the marketplace. Our FHLB stock totaled $13.6 million at December 31, 2003,
compared to $4.5 million at December 31, 2002.

Interest income on federal funds sold increased to $98,000 for the year
ended December 31, 2003, from $61,000 for the same period in 2002. This is due
to higher average federal fund balances for 2003, our yield was 1.1% on average
federal fund balances of $9.0 million for December 31, 2003, whereas the yield
was 1.7% on average federal fund balances of $3.5 million for December 31, 2002.

Interest Expense. Interest expense on deposits decreased by $441,000, or
9.5% to $4.2 million for the year ended December 31, 2003, from $4.7 million for
2002. The decrease in our cost of deposits was due to the general decline in
market interest rates and certificates of deposit maturing and renewing at lower
rates during 2003. Average deposits increased to $184.2 million for the year
ended December 31, 2003, from $163.9 million for 2002. Our average cost of
deposits decreased to 2.3% from 2.8% for the respective periods. Interest
expense on borrowings increased to $859,000 for the twelve months ended December
31, 2003, from $775,000 for the same period during 2002. This was due to
additional Federal Home Loan Bank borrowings.

Net Interest Income. Net interest income decreased by $409,000 or 5.3% to
$7.3 million for the twelve months ended December 31, 2003, from $7.7 million
for the same period in 2002. Our net interest rate spread decreased 46 basis
points to 2.93% from 3.39%, while our net interest margin decreased 58 basis
points to 3.20% from 3.78%. The ratio of average interest-earning assets to
average interest-bearing liabilities fell to 112.29% for the year ended December
31, 2003, from 114.49% for the same period in 2002.

Provision for Loan Losses. We establish provisions for loan losses, which
are charged to operations, at a level management believes is appropriate to
absorb probable incurred credit losses in the loan portfolio. In evaluating the
level of the allowance for loan losses, management considers historical loss
experience, the types of loans and the amount of loans in the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral, peer group information, and prevailing
economic conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available or as future events change. Based on our evaluation of these
factors, we made a negative provision of $61,000 for the year ended December 31,
2003 and a $20,000 provision for the same period in 2002. The provision
decreased due to an overall improvement in the quality of our assets as our
subprime loan balances fell to $18.3 million at December 31, 2003, from $31.2
million at December 31, 2002. We used the same methodology and generally similar
assumptions in assessing the adequacy of the allowance for both periods.
Originations of subprime loans during the year ended December 31, 2003 and 2002
were

36

$462,000 and $1.1 million, respectively. The allowance for loan losses was $2.0
million, or 1.24%, of loans outstanding at December 31, 2003, as compared with
$2.1 million, or 1.51%, of loans outstanding at December 31, 2002. The level of
the allowance is based on estimates and the ultimate losses may vary from the
estimates.

Management assesses the allowance for loan losses on a quarterly basis and
makes provisions for loan losses as necessary in order to maintain the adequacy
of the allowance. While management uses available information to recognize
losses on loans, future loan loss provisions may be necessary based on changes
in economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the allowance for loan
losses and may require us to recognize additional provisions based on their
judgment of information available to them at the time of their examination. The
allowance for loan losses as of December 31, 2003 is maintained at a level that
represents management's best estimate of inherent losses in the loan portfolio,
and such losses were both probable and reasonably estimable.

Noninterest Income. Noninterest income decreased to $1.1 million for the
year ended December 31, 2003, from $1.6 million for the comparable period in
2002. The $500,000 decrease was the result of reductions in gain on sale of
other real estate, insurance commission income, rental income, and correspondent
fees. Gain on the sale of other real estate decreased $162,000, insurance
commissions decreased $78,000, rental income decreased $50,000 and correspondent
fees decreased $277,000 for the year ended December 31, 2003, when compared to
the same period in 2002. The decrease in gain on sale of other real estate is
the result of several properties that were repossessed and sold in 2002 for more
than what was originally expected. The decrease in insurance commissions was due
to lower sales of annuity products during the twelve-month period ended December
31, 2003, when compared to the same period in 2002. The decrease in rental
income occurred due to a loan on an apartment building defaulting during 2002
and the resulting repossession and collection of rents that subsequently took
place in 2002 until we found a buyer for the property. The decrease in
correspondent fees is a result of our decision to reduce the staffing in that
department which resulted in a decrease in loan volume. These decreases were
offset by increases in various other noninterest income items of $48,000 for the
year ended December 31, 2003, when compared to the year ended December 31, 2002.
The increase in other noninterest income was the result of a profit on the sale
of securities and gain on the sale of loans held for sale. We do not expect
sales such as these to be an integral part of our business.

Noninterest Expense. Noninterest expense increased $400,000 to $6.3
million for the year ended December 31, 2003, from $5.9 million in 2002.
Salaries and benefit expense accounted for $354,000 of this increase, occupancy
costs increased $65,000, advertising and promotion expense increased $16,000,
offset in part by data processing costs which decreased $35,000.

Salaries and employee benefits represented 58.1% and 56.0% of total
noninterest expense for the years ended December 31, 2003 and 2002. The increase
in salaries and benefits is primarily the result of the implementation of the
recognition and retention plan (RRP), which was approved at the annual meeting
on May 21, 2003. The RRP increased salary and benefit expense by $182,000 in
2003. As the RRP was only in place since May of 2003 we would expect the costs
associated with the plan to increase in 2004 when it will be expensed for a full
year. In addition, normal salary increases, an increase in costs associated with
the ESOP, greater insurance costs, and additional staffing for our new branch
facility caused the salary and employee benefits to increase.

Occupancy costs increased during the year ended December 31, 2003 due to
increased real estate tax expense, increased maintenance and increased
depreciation expense, when compared with the previous year, offset by a decrease
in furniture and fixture depreciation expense. Increased real estate taxes,
maintenance and building depreciation costs all rose due to the purchase of our
new branch office

37

in Orland Park. Offsetting these increases was a decrease in furniture and
fixture depreciation costs. Our depreciation costs declined due to a group of
our assets reaching fully depreciated status in mid-2002. We expect furniture
and fixture depreciation costs to increase in 2004 as we replace aging and
obsolete computer equipment. Advertising costs increased during 2003 due to the
promotion of our new branch facility. Data processing costs decreased in 2003 as
a result of the renegotiation of our service contract.

Provision for Income Taxes. The provision for income taxes decreased to
$782,000, or 35.9%, of income before income taxes for the year ended December
31, 2003 from $1.3 million, or 38.0% of income before taxes, for the year ended
December 31, 2002, due to a decline in pretax earnings.

Comparison of Operating Results for the Years Ended December 31, 2002 and
December 31, 2001

General. Net income increased $1.1 million, or 116.0%, to $2.1 million for
the year ended December 31, 2002, from $979,000 for the year ended December 31,
2001. The increase in net income resulted from a decrease in interest expense, a
decrease in the provision for loan losses and an increase an noninterest income,
partially offset by a decrease in interest income and an increase in noninterest
expense.

Interest Income. Total interest income declined to $13.1 million for the
twelve months ended December 31, 2002, down $532,000 or 3.9% from $13.6 million
for the same period in 2001. The decrease in interest income resulted primarily
from decreases in income on securities and federal funds sold, offset by an
increase in interest income on loans and interest bearing deposits.

Interest income from loans increased $200,000 to $9.7 million for the year
ended December 31, 2002, from $9.5 million for the year ended December 31, 2001.
The increase in interest income from loans was due to increased loan balances as
the average yield on loans fell to 7.29% for 2003, from 8.09% in 2001. This drop
in yield was primarily due to overall declining interest rates in the
marketplace.

The gain in interest income from loans was more than offset by a decrease
in securities income of $506,000 and a decrease in federal fund income of
$302,000. These decreases were primarily due to lower interest rates earned on
these assets due to a general decline in market interest rates, as well as
shrinking balances in securities and federal funds as we reinvested our cash in
higher earning loan products. Our yield was 5.72% on average securities balances
of $51.0 million for December 31, 2002, whereas our yield was 6.18% on average
securities balances of $55.4 million for December 31, 2001. Similarly, our yield
was 1.74% on average federal fund balances of $3.5 million for December 31,
2002, whereas the yield was 4.76% on average federal fund balances of $7.6
million for December 31, 2001.

Interest income from interest-bearing deposits increased $76,000, or
24.2%, to $390,000 for the year ended December 31, 2002, from $314,000 for the
year ended December 31, 2001. The increase resulted from an increase in the
average outstanding balance to $15.4 million from $7.4 million, while the
average yield decreased to 2.5% from 4.2%, reflecting lower market interest
rates in 2002.

Interest Expense. Interest expense on deposits decreased by $2.1 million
or 30.9% to $4.7 million for the year ended December 31, 2002, from $6.7 million
for 2001. The decrease in our cost of deposits was due to the general decline in
market interest rates and certificates of deposit maturing and renewing at lower
rates during 2002. Average deposits increased to $163.9 million for the year
ended December 31, 2002, from $162.3 million for 2001. Our average cost of
deposits decreased to 2.84% from 4.14% for the respective periods. Interest
expense on borrowings increased marginally to $775,000 for the twelve months
ended December 31, 2002, from $756,000 for the same period during 2001. This was
largely due to additional Federal Home Loan Bank borrowings.

38

Net Interest Income. Net interest income increased by $1.5 million or
24.7% to $7.7 million for the twelve months ended December 31, 2002, from $6.2
million for the same period in 2001. Our net interest rate spread increased 44
basis points to 3.39% from 2.95%, while our net interest margin increased 51
basis points to 3.78% from 3.27%. The ratio of average interest-earning assets
to average interest-bearing liabilities improved to 114.49% for the year ended
December 31, 2002, from 107.96% for the same period in 2001.

Provision for Loan Losses. We establish provisions for loan losses, which
are charged to operations, at a level management believes is appropriate to
absorb probable incurred credit losses in the loan portfolio. In evaluating the
level of the allowance for loan losses, management considers historical loss
experience, the types of loans and the amount of loans in the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral, peer group information, and prevailing
economic conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available or as future events change. Based on our evaluation of these
factors, we made provisions of $20,000 and $413,000 for the years ended December
31, 2002 and 2001, respectively. The provision decreased by $393,000 due to a
decrease in nonperforming assets to $1.1 million at December 31, 2002, from $1.7
million at December 31, 2001. We used the same methodology and generally similar
assumptions in assessing the adequacy of the allowance for both periods.
Originations of subprime loans during the year ended December 31, 2002 and 2001
were $1.1 million and $14.9 million, respectively. The allowance for loan losses
was $2.1 million, or 1.51% of loans outstanding at December 31, 2002, as
compared with $2.5 million, or 1.91%, of loans outstanding at December 31, 2001.
The level of the allowance is based on estimates and the ultimate losses may
vary from the estimates.

Management assesses the allowance for loan losses on a quarterly basis and
makes provisions for loan losses as necessary in order to maintain the adequacy
of the allowance. While management uses available information to recognize
losses on loans, future loan loss provisions may be necessary based on changes
in economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the allowance for loan
losses and may require us to recognize additional provisions based on their
judgment of information available to them at the time of their examination. The
allowance for loan losses as of December 31, 2002 is maintained at a level that
represents management's best estimate of inherent losses in the loan portfolio,
and such losses were both probable and reasonably estimable.

Noninterest Income. Noninterest income increased to $1.6 million for the
year ended December 31, 2002, from $1.1 million for the comparable period in
2001. The $453,000 increase included higher insurance commissions of $73,000, an
increase in correspondent fees of $290,000, and an increase in rental income of
$40,000. These increases were partially offset by a decrease in service charge
fees of $87,000 in 2002. Insurance commissions have been consistently rising
over this twelve-month period due to greater sales of insurance products.
Correspondent fee income has increased due to the addition of our new
correspondent lending department, which started at the beginning of this year.
The increase in rental income occurred due to a loan on an apartment building
defaulting and the resulting repossession and collection of rents that
subsequently took place until we found a buyer for the property.

Noninterest Expense. Noninterest expense increased $454,000 to $5.9
million for the year ended December 31, 2002, from $5.4 million in 2001.
Salaries and benefit expense accounted for $319,000 of this increase, occupancy
costs increased $32,000, advertising and promotion expense increased $52,000,
data processing costs increased $26,000, other noninterest expenses increased
$195,000, while the amortization of mortgage servicing rights decreased
$170,000.

39

Salaries and employee benefits represented 56.0% and 54.8% of total
noninterest expense for the years ended December 31, 2002 and 2001. The increase
in salaries and benefits is a result of normal salary increases, an increase in
costs associated with the ESOP, greater insurance costs, and additional staffing
for our new branch facility.

Occupancy costs increased mostly due to increased real estate tax expense,
when compared with the previous year. We received a refund of $70,000 in real
estate taxes in the fourth quarter of 2001. The $70,000 refund reduced occupancy
costs for the year 2001. Additionally, real estate tax expense increased due to
the purchase of our new branch office in Orland Park. We expect our real estate
taxes to increase in the future as this new property moves into the "fully
improved" category. Offsetting the increase in real estate taxes is a $33,000
decrease in depreciation costs. Our depreciation costs declined due to a group
of our assets reaching fully depreciated status in 2002.

Advertising costs increased due to the promotion of our new branch
facility. Data processing costs and other noninterest expense increased partly
as a result of normal annual increases and partially due to the addition of our
new branch.

Mortgage servicing rights are recognized as assets for purchased rights
and for the allocated value of retained servicing rights on loans sold. Mortgage
servicing rights are expensed in proportion to and over the period of the life
of the loan that was sold. Mortgage services rights are impaired when the fair
value of the rights are compromised, either because the underlying loans are
prepaid or the loans become delinquent or nonperforming. During the year ended
December 31, 2001, we recorded an impairment charge of $154,000 to reflect the
impact of declining interest rate environment in 2001, which reflected in higher
prepayment speeds due to increased loan prepayments. For further information,
see Notes 1 and 3 to Notes to the Consolidated Financial Statements.

Other noninterest expense increased $195,000, or 22.5%, to $1.1 million
for the year ended December 31, 2002, from $868,000 during the same period in
2001. This increase reflects higher costs of $75,000 associated with becoming a
public company, a portion of which was due to filing and printing costs, an
increase in loan expenses of $36,000, an increase of $25,000 in postage which
primarily occurred due to the increased mail solicitations our correspondent
lending department engaged in during the year, and an increase in our legal
expense during the year of $24,000.

Provision for Income Taxes. The provision for income taxes increased to
$1.3 million, or 38.0%, of income before income taxes for the year ended
December 31, 2002, from $516,000, or 34.5% of income before taxes, for the year
ended December 31, 2001.

40

Average Balance Sheets

The following tables present for the periods indicated the total dollar
amount of interest income on average interest-earning assets and the resultant
yields, the interest expense on average interest-bearing liabilities, expressed
both in dollars and rates, as well as yields and costs at December 31, 2003. No
tax equivalent adjustments were made. All average balances are monthly average
balances. Non-accruing loans have been included in the table as loans carrying a
zero yield.

At December 31, 2003
------------------------------------
Actual Balance Yield/Rate
-------------- --------------
(Dollars in thousands)

Interest-earning assets:
Loans receivable (1) ...................... $157,628 5.73%
Securities ................................ 42,281 4.50
Interest-bearing deposits and other ....... 23,568 4.52
-------- ------
Total interest-earning assets ........... $223,477 5.37
======== ======

Interest-bearing liabilities:
Passbook savings .......................... $ 51,755 1.00
NOW accounts .............................. 19,603 0.27
Checking accounts ......................... 3,607 0.0
Money market accounts ..................... 7,514 0.72
Time deposits ............................. 101,368 3.21
-------- ------
Total deposits .......................... 183,847 2.11
FHLB advances ............................. 17,000 4.52
-------- ------
Total interest-bearing liabilities ...... $200,847 2.31
======== ======

Net interest income ......................... 7,278
Net interest rate spread .................... 3.06%
======
Net earning assets .......................... $ 22,630
========
Average interest-earning assets to average
interest-liabilities ...................... 111.27%
======

- ------------
(1) Yield at December 31, 2003 excludes loan fees.

41

Average Balance Sheets

Years Ended December 31,
----------------------------------------------------------------------------------
2003 2002
--------------------------------------- ---------------------------------------
Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate
------- ---- ---------- ------- ---- ----------
(Dollars in thousands)

Interest-earning assets:
Loans receivable .......... $148,862 $ 9,346 6.28% $133,745 $ 9,745 7.29%
Securities ................ 48,748 2,234 4.58 51,022 2,917 5.72
Interest-bearing deposits
and other ............... 20,809 669 3.21 15,358 390 2.54
Federal funds ............. 9,008 98 1.09 3,500 61 1.74
-------- -------- ------ -------- -------- ------
Total interest-earning
assets ............... $227,427 12,347 5.43 $203,625 13,113 6.44
======== -------- ------ ======== -------- ------

Interest-bearing liabilities:
Passbook savings .......... 48,624 518 1.07 $ 42,996 652 1.52
NOW accounts .............. 23,098 66 0.29 21,146 91 0.43
Money market accounts ..... 8,878 75 0.84 8,483 137 1.61
Time deposits ............. 103,555 3,551 3.43 91,228 3,771 4.13
-------- -------- -------- --------
Total deposits ......... 184,155 4,210 2.29 163,853 4,651 2.84
FHLB advances ............. 18,373 859 4.68 14,000 775 5.54
-------- -------- ------ -------- -------- ------
Total interest-bearing
liabilities .......... $202,528 5,069 2.50 $177,853 5,426 3.05
======== -------- ------ ======== -------- ------

Net interest income ........... $ 7,278 $ 7,687
Net interest rate spread ...... 2.93% 3.39%
====== ======
Net earning assets ............ $ 24,899 $ 25,772
Net yield on average interest-
earning assets .............. 3.20% 3.78%
====== ======
Average interest-earning assets
to average interest-bearing
liabilities ................. 112.29% 114.49%
====== ======

Years Ended December 31,
---------------------------------------
2001
---------------------------------------
Average Interest
Outstanding Earned/
Balance Paid Yield/Rate
------- ---- ----------
(Dollars in thousands)

Interest-earning assets:
Loans receivable .......... $118,028 $ 9,545 8.09%
Securities ................ 55,357 3,423 6.18
Interest-bearing deposits
and other ............... 7,419 314 4.23
Federal funds ............. 7,625 363 4.76
-------- -------- ------
Total interest-earning
assets ............... $188,429 13,645 7.24
======== -------- ------

Interest-bearing liabilities:
Passbook savings .......... $ 38,299 1,027 2.68
NOW accounts .............. 20,519 150 0.73
Money market accounts ..... 9,840 317 3.22
Time deposits ............. 93,716 5,232 5.58
-------- --------
Total deposits ......... 162,374 6,726 4.14
FHLB advances ............. 12,167 756 6.21
-------- -------- ------
Total interest-bearing
liabilities .......... $174,541 7,482 4.29
======== -------- ------

Net interest income ........... $ 6,163
Net interest rate spread ...... 2.95%
======
Net earning assets ............ $ 13,888
Net yield on average interest-
earning assets .............. 3.27%
======
Average interest-earning assets
to average interest-bearing
liabilities ................. 107.96%
======

42

Rate/Volume Analysis

The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and those due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.

Years Ended December 31,
--------------------------------------------------------------------------
2003 vs. 2002 2002 vs. 2001
------------------------------------ -----------------------------------
Increase/(Decrease) Increase/(Decrease)
Due to Total Due to Total
---------------------- Increase ---------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(In thousands)

Interest-earning assets
Loans receivable ..................... $ 1,033 $ (1,432) $ (399) $ 1,199 $ (999) $ 200
Securities ........................... (125) (558) (683) (258) (248) (506)
Interest-bearing deposits and other .. 159 120 279 238 (162) 76
Federal funds ........................ 67 (30) 37 (139) (163) (302)
--------- --------- --------- --------- --------- ---------
Total interest-earning assets .... $ 1,134 $ (1,900) $ (766) $ 1,040 $ (1,572) $ (532)
========= ========= ========= ========= ========= =========

Interest-bearing liabilities
Transaction and savings deposits ..... 92 (313) (221) 79 (693) (614)
Certificate accounts ................. 471 (691) (220) (139) (1,322) (1,461)
Borrowings ........................... 217 (133) 84 114 (95) 19
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities $ 780 $ (1,137) $ (357) $ 54 $ (2,110) $ (2,056)
========= ========= ========= ========= ========= =========

Net interest income ..................... $ 354 $ (763) $ (409) $ 986 $ 538 $ 1,524

Management of Market Risk

General. The majority of our assets and liabilities are monetary in
nature. Consequently, our most significant form of market risk is interest rate
risk. Our assets, consisting primarily of mortgage loans, have longer maturities
than our liabilities, consisting primarily of deposits. As a result, a principal
part of our business strategy is to manage interest rate risk and reduce the
exposure of our net interest income to changes in market interest rates.
Accordingly, our Board of Directors has established an Asset/Liability
Management Committee which is responsible for evaluating the interest rate risk
inherent in our assets and liabilities, for determining the level of risk that
is appropriate, given our business strategy, operating environment, capital,
liquidity and performance objectives, and for managing this risk consistent with
the guidelines approved by the Board of Directors. Senior management monitors
the level of interest rate risk on a regular basis and the Asset/Liability
Management Committee, which consists of senior management operating under a
policy adopted by the Board of Directors, meets as needed to review our
asset/liability policies and interest rate risk position.

We have sought to manage our interest rate risk by more closely matching
the maturities of our interest-rate-sensitive assets and liabilities. In
particular, we offer one; three-and five-year adjustable rate mortgage loans,
and three-and five-year balloon loans. Furthermore, our experience with subprime
loans has been that these loans remain a part of our portfolio for a
significantly shorter period of time than other one- to four-family loans. In a
low interest rate environment, borrowers typically prefer fixed-rate loans to
adjustable-rate mortgages. We intend to sell into the secondary market our
originations of longer-term fixed-rate loans. We do not solicit high-rate jumbo
certificates of deposit or brokered funds.

Net Portfolio Value. In past years, many savings associations have
measured interest rate sensitivity by computing the "gap" between the assets and
liabilities which are expected to mature or

43

reprice within certain time periods based on assumptions regarding loan
prepayment and deposit decay rates formerly provided by the Office of Thrift
Supervision. However, the Office of Thrift Supervision now requires the
computation of amounts by which the net present value of an institution's cash
flow from assets, liabilities and off-balance-sheet items (the institution's net
portfolio value or "NPV") would change in the event of a range of assumed
changes in market interest rates. The Office of Thrift Supervision provides all
institutions that file a Consolidated Maturity/Rate Schedule as a part of their
quarterly Thrift Financial Report with an interest rate sensitivity report of
net portfolio value. The Office of Thrift Supervision simulation model uses a
discounted cash flow analysis and an option-based pricing approach to measuring
the interest rate sensitivity of net portfolio value. The Office of Thrift
Supervision model estimates the economic value of each type of asset, liability
and off-balance-sheet contract under the assumption that the United States
Treasury yield curve increases or decreases instantaneously by 100 to 300 basis
points in 100 basis point increments. A basis point equals one-hundredth of one
percent, and 100 basis points equals one percent. An increase in interest rates
from 7% to 8% would mean, for example, a 100 basis point increase in the "Change
in Interest Rates" column below. The Office of Thrift Supervision provides us
the results of the interest rate sensitivity model, which is based on
information we provide to the Office of Thrift Supervision to estimate the
sensitivity of our net portfolio value.

The table below sets forth, as of September 30, 2003 (the latest date for
which information is available), the estimated changes in our net portfolio
value that would result from the designated instantaneous changes in the United
States Treasury yield curve.

Net Portfolio Value as
a % of Present Value of
Net Portfolio Value Assets/Liabilities
------------------------------------------------- -----------------------
Change in
Interest Rates Estimated Amount of
(Basis Points) NPV Change Percent NPV Ratio Change(1)
-------------- --- ------ ------- --------- ------
(Dollars in thousands)

+300 $ 27,831 $ (8,054) (22)% 11.67% (262)
+200 30,881 (5,004) (14) 12.71 (158)
+100 33,624 (2,261) (6) 13.61 (68)
0 35,885 14.29
-100 35,904 19 -- 14.19 (10)

(1) Expressed in basis points.

The table above indicates that at September 30, 2003, in the event of a
100 basis point decrease in interest rates, we would experience a nominal change
in net portfolio value. In the event of a 100 basis point increase in interest
rates, we would experience a 6% decrease in net portfolio value.

Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes in net portfolio value require
making certain assumptions that may or may not reflect the manner in which
actual yields and costs respond to changes in market interest rates. In this
regard, the net portfolio value table presented assumes that the composition of
our interest-sensitive assets and liabilities existing at the beginning of a
period remains constant over the period being measured and assumes that a
particular change in interest rates is reflected uniformly across the yield
curve, regardless of the duration or repricing of specific assets and
liabilities. Accordingly, although the net portfolio value table provides an
indication of our 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 its net interest income, and
will differ from actual results.

44

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. By their nature, changes in these
assumptions and estimates could significantly affect the Company's financial
position or results of operations. Actual results could differ from those
estimates. Discussed below are those critical accounting policies that are of
particular significance to the Company.

Allowance for Loan Losses. The allowance for loan losses represents
management's estimate of probable credit losses inherent in the loan and lease
portfolio. Estimating the amount of the allowance for loan losses requires
significant judgment and the use of estimates related to the amount and timing
of expected future cash flows on impaired loans, estimated losses on pools of
homogeneous loans based on historical loss experience, and consideration of
current economic trends and conditions, all of which may be susceptible to
significant change. The loan portfolio also represents the largest asset type on
the consolidated balance sheet. Loan losses are charged off against the
allowance, while recoveries of amounts previously charged off are credited to
the allowance. A provision for loan losses is charged to operations based on
management's periodic evaluation of the factors previously mentioned, as well as
other pertinent factors.

The allowance for loan losses consists of an allocated component and an
unallocated component. The components of the allowance for loan losses represent
an estimation done pursuant to either Statement of Financial Accounting
Standards No. (SFAS) 5, Accounting for Contingencies, or SFAS 114, Accounting by
Creditors for Impairment of a Loan. The allocated component of the allowance for
loan losses reflects expected losses resulting from analyses developed through
specific credit allocations for individual loans and historical loss experience
for each loan category. The specific credit allocations are based on regular
analyses of all loans over a fixed-dollar amount where the internal credit
rating is at or below a predetermined classification. These analyses involve a
high degree of judgment in estimating the amount of loss associated with
specific loans, including estimating the amount and timing of future cash flows
and collateral values. The historical loan loss element is determined
statistically using a loss analysis that examines loss experience. The loss
migration analysis is performed quarterly and loss factors are updated regularly
based on actual experience. The allocated component of the allowance for loan
losses also includes consideration of concentrations and changes in portfolio
mix and volume.

The unallocated portion of the allowance reflects management's estimate of
probable inherent but undetected losses within the portfolio due to
uncertainties in economic conditions, delays in obtaining information, including
unfavorable information about a borrower's financial condition, the difficulty
in identifying triggering events that correlate perfectly to subsequent loss
rates, and risk factors that have not yet manifested themselves in loss
allocation factors. In addition, the unallocated allowance includes a component
that accounts for the inherent imprecision in loan loss models. Uncertainty
surrounding the strength and timing of economic cycles also affects estimates of
loss. The historical losses used in the analysis may not be representative of
actual unrealized losses inherent in the portfolio.

There are many factors affecting the allowance for loan losses; some are
quantitative while others require qualitative judgment. Although management
believes its process for determining the allowance adequately considers all of
the potential factors that could potentially result in credit losses, the
process includes subjective elements and may be susceptible to significant
change. To the extent actual outcomes differ from management estimates,
additional provision for credit losses could be required that could adversely
affect earnings or financial position in future periods.

45

Liquidity and Capital Resources

We maintain liquid assets at levels we consider adequate to meet our
liquidity needs. Our liquidity ratio averaged 21.7% and 28.7% for the years
ended December 31, 2003 and 2002. We adjust our liquidity levels to fund deposit
outflows, pay real estate taxes on mortgage loans, repay our borrowings and to
fund loan commitments. We also adjust liquidity as appropriate to meet asset and
liability management objectives.

Our primary sources of liquidity are deposits, amortization and prepayment
of loans and mortgage-backed securities, maturities of investment securities and
other short-term investments, and earnings and funds provided from operations.
While scheduled principal repayments on loans and mortgage-backed securities are
a relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions, and
competition. We set the interest rates on our deposits to maintain a desired
level of total deposits. In addition, we invest excess funds in short-term
interest-earning investments and other assets, which provide liquidity to meet
lending requirements. Short-term interest-bearing deposits with the Federal Home
Loan Bank of Chicago amounted to $9.8 million at December 31, 2003 and $10.0
million at December 31, 2002. For additional information about cash flows from
our operating, financing, and investing activities, see Consolidated Statements
of Cash Flows included in the financial statements.

A significant portion of our liquidity consists of securities classified
as available-for-sale and cash and cash equivalents, which are a product of our
operating, investing and financing activities, and of government-backed
securities classified as available-for-sale. Our primary sources of cash are net
income, principal repayments on loans and mortgage-backed securities, and
increases in deposit accounts, along with advances from the Federal Home Loan
Bank of Chicago.

Liquidity management is both a daily and long-term function of business
management. If we require funds beyond our ability to generate them internally,
borrowing agreements exist with the Federal Home Loan Bank of Chicago which
provide an additional source of funds. At December 31, 2003, we had $17.0
million in advances from the Federal Home Loan Bank of Chicago. Of this amount,
$4.2 million is due within one year, $5.0 million is due between one and three
years, $4.8 million is due between four and five years and $3.0 million is due
after five years.

At December 31, 2003, we had outstanding commitments of $11.7 million to
originate loans. This amount does not include the unfunded portion of loans in
process. At December 31, 2003, certificates of deposit scheduled to mature in
less than one year totaled $44.6 million. Based on prior experience, management
believes that a significant portion of such deposits will remain with us,
although there can be no assurance that this will be the case. In addition, the
cost of such deposits may be significantly higher upon renewal in a rising
interest rate environment. We intend to utilize our high levels of liquidity to
fund our lending activities.

Liquidity. We are required to maintain liquid assets in an amount that
would ensure our safe and sound operation. Our liquidity ratio at December 31,
2003 was 17.67%.

46

The following table sets forth our contractual obligations and commercial
commitments at December 31, 2003.

Less than After
Total 1 year 1-3 Years 4-5 years 5 Years
--------- --------- --------- --------- ---------
(In thousands)

FHLB advances ............ $ 17,000 $ 4,200 $ 5,000 $ 4,800 $ 3,000

Total
Amounts Less than Over
Committed 1 year 1-3 Years 4-5 years 5 Years
--------- --------- --------- --------- ---------
(In thousands)

Lines of credit ...................... $ 12,884 $ 1,834 $ 4,585 $ 6,465 $ --
Standby letters of credit (1) ........ 228 228 -- -- --
Other commitments to extend credit (1) 11,712 11,712 -- -- --
--------- --------- --------- --------- ---------
Total ............................. $ 24,824 $ 13,774 $ 4,585 $ 6,465 $ --
========= ========= ========= ========= =========

- ----------
(1) Represents amounts committed to customers.

Impact of Inflation and Changing Prices

The consolidated financial statements and related notes of A. J. Smith
Federal have been prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). GAAP generally requires the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increased cost of our operations. Unlike industrial companies, our assets and
liabilities are primarily monetary in nature. As a result, changes in market
interest rates have a greater impact on performance than the effect of
inflation.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See ITEM 7 "Management's Discussion and Analysis of Financial
Consolidation and Results of Operations--Management of Market Risk."

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements identified in Item 15(a)(1) hereof are
incorporated by reference hereunder.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management,
including our Chief Executive Officer, President and Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as
of the end of the fiscal year (the "Evaluation Date"). Based upon that
evaluation, the Chief Executive Officer, President and Chief Financial Officer
concluded that, as of the Evaluation Date,

47

our disclosure controls and procedures were effective in timely alerting them to
the material information relating to us (or our consolidated subsidiaries)
required to be included in our periodic SEC filings.

(b) Changes in internal controls.

There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.

See the Certifications pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information concerning Directors of the Company is incorporated herein by
reference from the Company's definitive Proxy Statement (the "Proxy Statement"),
specifically the section captioned "Proposal I--Election of Directors." In
addition, see "Executive Officers of AJS Bancorp, Inc." in Item 1 for
information concerning the Company's executive officers.

The Board of Directors has adopted a Code of Ethics, applicable to the
Chief Executive Officer, President and Chief Financial Officer. The Code of
Ethics may be accessed through our website at www.ajsmithbank.com and is filed
as Exhibit 14 hereto.

ITEM 11. EXECUTIVE COMPENSATION

Information concerning executive compensation is incorporated herein by
reference from the Company's Proxy Statement, specifically the section captioned
"Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information concerning security ownership of certain owners and management
is incorporated herein by reference from the Company's Proxy Statement,
specifically the section captioned "Voting Securities and Principal Holder
Thereof."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information concerning relationships and transactions is incorporated
herein by reference from the Company's Proxy Statement, specifically the section
captioned "Transactions with Certain Related Persons."

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information concerning principal accountant fees and services is
incorporated herein by reference from the Company's Proxy Statement.

48

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

The exhibits and financial statement schedules filed as a part of this
Form 10-K are as follows:

(a)(1) Financial Statements

o Report of Independent Auditors

o Consolidated Statements of Financial Condition at December 31,
2003 and 2002

o Consolidated Statements of Income for the Years Ended December
31, 2003, 2002 and 2001

o Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2003, 2002 and 2001

o Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001

o Notes to Consolidated Financial Statements.

(a)(2) Financial Statement Schedules

No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated
financial statements or related notes.

(a)(3) Exhibits

10.1 Employment Agreement with Thomas R. Butkus

10.2 AJS Bancorp, Inc. 2003 Stock Option Plan(1)

10.3 AJS Bancorp, Inc. 2003 Recognition and Retention Plan(1)
Financial Statements

13 Financial Statements

14 Code of Ethics

21 Subsidiaries of the Registrant

23 Consent of Auditors to incorporate financial statements into
Form S-8

31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002

31.3 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002

32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002

(b) Reports on Form 8-K

On October 23, 2003, the Company filed a Current Report on Form 8-K
to report its third quarter earnings, under Item 12. Results of
Operations and Financial Condition.

(c) The exhibits listed under (a)(3) above are filed herewith.

(d) Not applicable.

- ------------
(1) Incorporated by reference to the Company's registration statement on Form
S-8 (commission file number 333-105598, filed on May 28, 2003).

49

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

AJS Bancorp, Inc.

Date: March 23, 2004 By: s/s Thomas R. Butkus
---------------------------------
Thomas R. Butkus,
Chairman of the Board and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

By: s/s Thomas R. Butkus By: s/s Lyn G. Rupich
------------------------------- --------------------------------
Thomas R. Butkus, Chairman of the Board Lyn G. Rupich, President
and Chief Executive Officer (Principal Executive Officer)

Date: March 23, 2004 Date: March 23, 2004

By: s/s Pamela N. Favero By: s/s Roger L. Aurelio
------------------------------- --------------------------------
Pamela N. Favero, Chief Financial Officer Roger L. Aurelio, Director

Date: March 23, 2004 Date: March 23, 2004

By: s/s Raymond J. Blake By: s/s Richard J. Nogal
------------------------------- --------------------------------
Raymond J. Blake, Director Richard J. Nogal, Director

Date: March 23, 2004 Date: March 23, 2004

By: s/s Edward S. Milen
------------------------------
Edward S. Milen, Director

Date: March 23, 2004

50