AJS BANCORP INC - 10-K Annual Report

Back to GetFilings.com

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 electr