AJS BANCORP INC
None.
Changing Interest Rates May Cause Net Earnings to Decline.        In the event  that  interest  rates  rise,  our net  interest  margin  and interest rate spread will be adversely affected by the high level of assets with fixed rates of interest  which we retain in our  portfolio.  As market  interest rates rise, we will have  competitive  pressures to increase the rates we pay on deposits,  which  will  result  in  a  decrease  of  our  net  interest  income. Furthermore,  the value of our loans will be less  should we choose to sell such loans in the secondary  market.  Since as a general matter our  interest-bearing liabilities reprice or mature more quickly than our interest-earning  assets, an increase in interest rates  generally  would result in a decrease in our average interest rate spread and net interest income.  If Our Allowance for Loan Losses is Not  Sufficient to Cover Actual Loan Losses, Our Earnings Could Decrease.        Our loan customers may not repay their loans according to their terms, and the collateral  securing the payment of these loans may be  insufficient  to pay any remaining loan balance.  We may experience  significant  loan losses,  which could have a material adverse effect on our operating  results.  We make various assumptions and judgments about the  collectibility of our portfolio,  including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans.        In  determining  the amount of the  allowance  for loan losses,  we review individual  delinquent   multi-family  and  commercial  real  estate  loans  for potential impairments in their carrying value.  Additionally,  we apply a factor to the loan portfolio principally based on historical loss experience applied to the composition of the loan portfolio and integrated with our perception of risk in the economy. Since we must use assumptions regarding individual loans and the economy,  our current  allowance  for loan losses may not be sufficient to cover actual  loan  losses,   and   increases  in  the  allowance  may  be  necessary. Consequently,  we may need to significantly increase our provision for losses on loans,  particularly if one or more of our larger loans or credit  relationships becomes  delinquent  or  if  we  expand  our  non-residential,  multi-family  or commercial  business  lending.   In  addition,   federal  and  state  regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize loan charge-offs.  If Economic Conditions Deteriorate,  Our Earnings Could be Adversely Impacted as Borrowers'  Ability  to Repay  Loans  Declines  and the Value of the  Collateral Securing Our Loans Decreases.        Our financial  results may be adversely  affected by changes in prevailing economic  conditions,  including  decreases  in real estate  values,  changes in interest  rates  which may cause a decrease in interest  rate  spreads,  adverse employment  conditions,   the  monetary  and  fiscal  policies  of  the  federal government and other  significant  external events.  Since we have a significant amount of real estate  loans,  decreases in real estate  values could  adversely affect the value of property used as collateral.  Advance changes in the economy may also have a negative  effect on the ability of our  borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings.  Our Public Shareholders Do Not Exercise Voting Control Over AJS Bancorp, Inc.        A  majority  of the  voting  stock of AJS  Bancorp,  Inc.  is owned by AJS Bancorp,  MHC. AJS Bancorp,  MHC is controlled  by its board of  directors,  who consist  of those  persons  who are  members  of the board of  directors  of AJS Bancorp,  Inc. and A. J. Smith Federal Savings Bank. AJS Bancorp, MHC elects all members  of the board of  directors  of AJS  Bancorp,  Inc.,  and,  as a general matter, will control                                          29   the outcome of all matters  presented to the  stockholders of AJS Bancorp,  Inc. for  resolution  by vote,  except for matters that require a vote greater than a majority  vote.  Consequently,  AJS Bancorp,  MHC,  acting  through its board of directors,  is able to control the business and operations of AJS Bancorp,  Inc. and may be able to prevent  any  challenge  to the  ownership  or control of AJS Bancorp, Inc. by stockholders other than AJS Bancorp, MHC. There is no assurance that AJS Bancorp, MHC will not take actions that the public stockholders believe are against their interests.  Strong   Competition   Within  Our   Market   Area  May  Limit  Our  Growth  and Profitability.        Competition in the banking and financial services industry is intense.  In our market  area,  we  compete  with  commercial  banks,  savings  institutions, mortgage brokerage firms,  credit unions,  finance companies,  mutual funds, and brokerage and investment banking firms operating locally and elsewhere.  Many of these competitors have  substantially  greater resources and lending limits than we do and may  offer  certain  services  that we do not or cannot  provide.  Our profitability  depends upon our continued ability to successfully compete in our market area.  We Operate in a Highly  Regulated  Environment and May be Adversely  Affected by Changes in Laws and Regulations.        We are subject to extensive regulation, supervision and examination by the Office of Thrift  Supervision,  our  chartering  authority,  and by the  Federal Deposit Insurance  Corporation,  as insurer of deposits.  As federally chartered holding  companies,  AJS  Bancorp,  Inc.  and AJS  Bancorp,  MHC are  subject to regulation and oversight by the Office of Thrift  Supervision.  Such  regulation and  supervision  govern the activities in which an institution  and its holding companies  may engage  and are  intended  primarily  for the  protection  of the insurance fund and depositors.  Regulatory authorities have extensive discretion in connection with their supervisory and enforcement  activities,  including the imposition   of   restrictions   on  the  operation  of  an   institution,   the classification of assets by the institution and the adequacy of an institution's allowance for loan losses. Any change in such regulation and oversight,  whether in the form of regulatory policy, regulations, or legislation, including changes in the regulations  governing  mutual holding  companies,  could have a material impact  on A.  J.  Smith  Federal  Savings  Bank,  AJS  Bancorp,  Inc.,  and our operations.
Properties        At December 31, 2005,  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, 2005, the net book value of our office locations was $4.3 million.
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, 2005, we were not involved in any legal proceedings,  the outcome of which would be material to our financial condition or results of operations.                                          30
None.                                       PART II
The  Company's  Common Stock is quoted on the  electronic  bulletin  board under the symbol "AJSB."        The following table sets forth the range of the high and low bid prices of the Company's  Common Stock for the prior eight  calendar  quarters and is based upon  information set forth on the over the counter  electronic  bulletin board. The  Company  paid an initial  quarterly  dividend  of $0.10  cents per share on November  25,  2005,  to  stockholders  of  record  on  November  10,  2005.  In conjunction with Office of Thrift Supervision  approval,  AJS Bancorp,  MHC (the "MHC") waived 80% of the quarterly dividend due on its 1,227,554 shares.                                           Prices of Common Stock                                         ------------------------                                             High          Low                                         -----------   ---------- Calendar Quarter Ended March 31, 2004........................  $    27.50    $    22.35 June 30, 2004.........................       26.25         22.00 September 30, 2004....................       25.00         21.50 December 31, 2004.....................       25.00         22.75 March 31, 2005........................       24.40         23.75 June 30, 2005.........................       24.25         23.30 September 30, 2005....................       25.00         23.00 December 31, 2005.....................       23.60         22.50        As of December 31, 2005, the Company had 402 stockholders of record.        The  Company's  second  repurchase  plan was announced on May 18, 2004 and allowed for the  repurchase  of 117,000  shares of the  Company's  stock,  which represented approximately 5% of the Company's outstanding shares.  Subsequently, the Company  announced  increases in the  repurchase  plan of 100,000 and 50,000 shares on March 22, 2005 and October 18, 2005, respectively.  As of December 31, 2005  there are  69,324  shares  remaining  to be  purchased  under the  current repurchase plan.        The following table sets forth the issuer  purchases of equity  securities during the prior three months.                                                                                Total number of       Maximum number of                                                                            shares purchased      shares that may be                                    Total number         Average price       under publicly       purchased under the                                  shares purchased      paid per share       announced plan         repurchase plan                                  ----------------      --------------       --------------         ---------------      October 1-October 31                   8,410               $23.03               192,354                267,000 November 1-November  30                   --                   --               192,354                267,000 December 1- December  31               5,322                22.69               197,676                267,000                                           31
The following tables set forth selected consolidated  historical financial and other data of AJS Bancorp,  Inc. and its  predecessor,  A. J. Smith  Federal Savings  Bank for the periods and at the dates  indicated.  The  information  is derived  in part  from,  and  should be read  together  with,  the  Consolidated Financial Statements and Notes thereto of AJS Bancorp,  Inc. contained elsewhere in this Annual Report.                                                                        At December 31,                                        --------------------------------------------------------------------------                                            2005            2004            2003            2002           2001                                        -----------     -----------     -----------     -----------    -----------                                                                   (Dollars in thousands)       Selected Financial Condition Data: - --------------------------------- Total assets ......................    $   257,905     $   270,869     $   238,384     $   222,570    $   219,780 Loans receivable, net .............        151,768         163,291         155,628         136,134        128,505 Mortgage-backed securities:   Held to maturity ................             95             132             177             269            369   Available for sale ..............         36,130          35,233          13,854          15,770          8,965 Securities:   Held to maturity ................            200              --              --              91            559   Available for sale ..............         35,109          26,250          28,621          36,133         44,846 Deposits ..........................        190,407         198,056         183,847         169,008        171,809 Total borrowings ..................         32,750          36,250          17,000          16,000         13,000 Equity ............................         28,252          30,530          32,105          33,646         31,248                                                                     Years Ended December 31,                                        --------------------------------------------------------------------------                                            2005            2004            2003            2002           2001                                        -----------     -----------     -----------     -----------    -----------                                                                   (Dollars in thousands)       Selected Operations Data: - ------------------------ Total interest income .............    $    12,948     $    12,737     $    12,347     $    13,113    $    13,645 Total interest expense ............          6,023           5,178           5,069           5,426          7,482                                        -----------     -----------     -----------     -----------    -----------   Net interest income .............          6,925           7,559           7,278           7,687          6,163 Provision (recovery) for  loan losses ......................           (130)           (112)            (61)             20            413                                        -----------     -----------     -----------     -----------    ----------- Net interest income after provision    for loan losses ................          7,055           7,671           7,339           7,667          5,750 Noninterest income ................            936             933           1,091           1,599          1,146   Noninterest expense .............          6,200           6,191           6,255           5,855          5,401                                        -----------     -----------     -----------     -----------    -----------   Income before taxes .............          1,791           2,413           2,175           3,411          1,495   Income tax provision ............            694             833             782           1,296            516                                        -----------     -----------     -----------     -----------    -----------      Net income ...................    $     1,097     $     1,580     $     1,393     $     2,115    $       979                                        ===========     ===========     ===========     ===========    =========== Net income per share, basic/diluted     $0.51/.050      $0.70/0.69     $ 0.60/0.60      $0.90/0.90            N/A   - -------------------- N/A - Not  applicable,  as A. J.  Smith  Federal  Savings  Bank did not have any stockholders.                                          32                                                                         Years Ended December 31,                                                           -------------------------------------------------                                                            2005      2004       2003       2002       2001                                                           ------    ------     ------     ------     ------                                                                         (Dollars in thousands)       Selected Financial Rations and Other Data: - ------------------------------------------  Performance Ratios: Return on assets (ratio of net income to average total    assets) ...........................................      0.42%     0.61%      0.58%      0.98%      0.48% Return on equity (ratio of net income to    average equity) ...................................      3.75      5.07       4.15       6.50       4.80 Interest rate spread information: Average during period ................................      2.41      2.78       2.93       3.39       2.95 Net interest margin (1) ..............................      2.71      3.03       3.20       3.78       3.27 Ratio of operating expense to average total assets ...      2.35      2.39       2.62        .72       2.65 Efficiency ratio (2) .................................     78.87     72.90      74.74       3.04      73.90 Ratio of average interest-earning assets to average    interest-bearing liabilities ......................    112.45    112.29     112.29      14.49     107.96  Asset Quality Ratios: Non-performing assets to total assets at end of period       .15      0.36       0.49       0.49       0.79 Allowance for loan losses to non-performing loans ....    431.73    187.89     172.71     197.91     159.15 Allowance for loan losses to loans receivable, gross .      1.11      1.12       1.24       1.51       1.91  Capital Ratios: Equity to total assets at end of period ..............     10.95     11.27      13.47      15.12      14.22 Average equity to average assets .....................     11.08     12.06      14.02      15.14      10.00  Other Data: Number of full-service offices .......................         3         3          3          3          2   - -------------------- (1)   Net interest income divided by average interest earning assets.  (2)   Efficiency  ratio  represents  noninterest  expense as a percentage of net       interest income plus noninterest income.
Forward Looking Statements        This Annual Report contains certain "forward-looking statements" which may be  identified by the use of words such as  "believe,"  "expect,"  "anticipate," "should," "planned,"  "estimated," and "potential."  Examples of forward-looking statements  include,  but are not  limited  to,  estimates  with  respect to our financial  condition,  results of  operations  and business  that are subject to various factors which could cause actual results to differ materially from these estimates and most other  statements  that are not  historical in nature.  These factors include,  but are not limited to, general and local economic conditions, changes in interest rates,  deposit flows,  demand for mortgage,  commercial and other loans, real estate values, competition,  changes in accounting principles, policies,  or  guidelines,  changes  in  legislation  or  regulation,  and other economic,  competitive,  governmental,  regulatory,  and  technological  factors affecting our operations, pricing products and services.  General        Our results of operations depend primarily on our net interest income. Net interest  income is the  difference  between the interest  income we earn on our interest-earning  assets,  consisting primarily of loans,  investment securities and  interest-earnings  deposits  with  other  financial  institutions,  and the interest we pay on our  interest-bearing  liabilities,  consisting  primarily of savings  accounts,  time deposits and borrowings.  Our results of operations are also  affected  by our  provisions  for loans  losses,  other  income  and other expense.  Other income consists  primarily of insurance  commissions and service charges on deposit  accounts.  Other expense  consists  primarily of noninterest expense,  including salaries                                          33   and  employee  benefits,  occupancy,  equipment,  data  processing  and  deposit insurance premiums. Our results of operations may also be affected significantly by general and local  economic  and  competitive  conditions,  changes in market interest rates, governmental policies and actions of regulatory authorities.  Business Strategy        Our  business  strategy is to operate as a  well-capitalized,  profitable, community-oriented savings bank dedicated to providing quality customer service. In the past, we implemented our business strategy by emphasizing the origination of one- to  four-family  loans and other loans  secured by real estate.  We will continue to be primarily a one- to four-family lender. Management,  however, has determined  to broaden the scope of our loan  products  and  services to enhance profitability  and reduce the risks inherent in our loan  portfolio,  consistent with safety and  soundness.  In this regard,  we have  determined  to reduce our reliance on subprime  lending and to expand our commercial  business lending and business banking services.  There can be no assurances that we will successfully implement our strategy.        Highlights of our business strategy are as follows:        o     Continuing  One- to  Four-Family  Residential  Real Estate  Lending.             Historically,  we have  emphasized  one- to four-family  residential             lending  within our market area.  As of December  31,  2005,  $101.3             million,  or 66.0%, of our total loan portfolio consisted of one- to             four-family  residential  real estate  loans.  During the year ended             December  31,  2005,  we   originated   $17.0  million  of  one-  to             four-family  residential real estate loans. We intend to continue to             originate  one- to  four-family  loans because of our expertise with             this type of lending.        o     Commercial  and  Multi-Family  Lending.  We intend to originate more             commercial business and multi-family loans to complement our one- to             four-family  residential real estate lending.  These loans will most             likely encumber business real estate whenever possible,  however, we             may use non-real estate based liens when  necessary.  As of December             31, 2005  commercial  business and  multi-family  loans  represented             $38.3  million of 25.0% of our loan  portfolio.  We  continue  to be             committed to developing  our  commercial  business and  multi-family             lending and our commercial  business  banking  services.  We believe             that expanding our commercial and multi-family business lending will             enable us to improve the yield on our loan  portfolio  and diversify             our assets while continuing to meet the needs of our community.        o     Establishing Our Commercial  Business  Banking.  We are committed to             meeting the financial  needs of the communities in which we operate.             In particular,  we have increased our emphasis on business  banking,             and we now offer commercial  deposit  products,  such as transaction             accounts,  to our business  customers.  Our objective is to actively             market our  business  banking  products and services to our existing             customers, as well as new businesses within our market area.  Comparison of Financial Condition at December 31, 2005 and December 31, 2004        Total assets  decreased by $13.0  million,  or 4.8%, to $257.9  million at December 31, 2005 from $270.9  million at December  31,  2004.  The decrease was primarily  due to decreases in loans  receivable,  Federal Home Loan Bank (FHLB) stock,  federal  funds  sold,  and  earning  deposits,  offset by an increase in securities.  Loans receivable  decreased $11.5 million or 7.1% to $151.8 million at December  31,  2005 from $163.3  million at  December  31,  2004.  FHLB stock decreased  $9.1 million or 72.6% to $3.4 million at December 31, 2005 from $12.5 million at December 31, 2004. Federal funds sold decreased $2.8                                          34   million or 86.3% to $454,000 at December  31, 2005 from $3.3 million at December 31,  2004.  Certificates  of  deposits  held  at  other  financial  institutions decreased $1.2 million or 12.3% to $8.6 million at December 31, 2005,  from $9.8 million at December 31, 2004.  Securities  increased  $9.9 million or 16.1%,  to $71.5 million at December 31, 2005 from $61.6 million at December 31, 2004.  The Company decreased its investment in FHLB stock due to uncertainty  regarding the payment and level of the FHLB dividend. There was no gain or loss on the sale of the FHLB  stock.  The  Company  invests in federal  funds sold in the event that there  is no more  profitable,  highly  liquid  investment  available  or if the Company  anticipates  an  increase  in funding  needs  within  the near  future. Therefore, the balance in federal funds sold can and does fluctuate. Certificate of deposits held at other  financial  institutions  decreased as maturities  not being   reinvested.   Securities   increased  due  to  purchases  of  fixed-rate government-backed   notes  and   bonds,   an   additional   investment   in  the adjustable-rate  ARM fund, and mortgage-backed  securities.  The notes and bonds mature  in three  years or less,  the ARM fund can be  redeemed  at any time and reprices  on  average  every  six  months  to a year,  and  the  mortgage-backed securities  are expected to mature in less than ten years,  however  prepayments may cause them to pay down at a faster pace.        Total  deposits  decreased  $7.6 million,  or 3.9%,  to $190.4  million at December  31, 2005 from $198.1  million at December 31,  2004.  Transaction  and savings  accounts  decreased  to $77.5  million at December  31, 2005 from $85.0 million at December  31,  2004;  certificate  of deposit  accounts  decreased to $112.9 million at December 31, 2005 from $113.0 million at December 31, 2004.        Federal Home Loan Bank advances decreased to $32.8 million at December 31, 2005 from $36.3 million at December 31, 2004.  The decrease in FHLB advances was due to maturing advances that were not renewed or replaced.        At December 31, 2005 the Company's  available for sale portfolio had gross unrealized  losses  of $1.8  million  compared  to gross  unrealized  losses  of $232,000 at December 31, 2004. The Company's available for sale  mortgage-backed securities accounted for $1.2 million of the gross unrealized losses at December 31,  2005,  while the  Company's  available  for sale U.S.  governmental  agency securities  had $410,000  gross  unrealized  losses at December  31,  2005.  The Company has reviewed and analyzed its available for sale  portfolio to determine if any security  within the portfolio may have suffered an  other-than-temporary impairment.  SAB  topic 5M  provides  guidance  on  making  other-than-temporary impairment  decisions,  and  requires  an  evidence-based   evaluation  when  an investment  declines  below cost. It  references  the length of time that market value has been less than cost (duration of  impairment)  and the extent to which market value has been less than cost (severity of impairment). We concluded that the cause of the unrealized loss was  interest-rate  driven and does not reflect any impairment related to the financial condition and near-term prospects of the issuer that could effect the earnings potential of the investment.  In addition, the Company also has the intent and ability to hold the  securities  through the expected  recovery  period.  Therefore,  the  Company  anticipates  leveling  or declining  interest  rates will result in the recovery of the available for sale securities market value.        At December  31, 2005 the  Company had  non-performing  assets of $394,000 compared to $983,000 as of December 31, 2004.  The allowance for loan losses was $1.7 million at December 31, 2005,  and $1.8 million at December 31, 2004.  This represents a ratio of  allowance  for loan losses to gross loans  receivable  of 1.11% at December  31, 2005 and 1.12% at December 31, 2004.  The  allowance  for loan losses to  non-performing  loans was 431.7% at December 31, 2005 and 187.9% at December 31, 2004. Total stockholders' equity decreased $2.3 million to $28.3 million at  December  31,  2005 from $30.5  million at December  31,  2004.  The decrease  in  stockholders'  equity  during  the past  twelve  months  primarily resulted  from the  repurchase of shares of the  Company's  stock,  as well as a decrease in other comprehensive  income due to the decreased market value of the available for sale  securities  portfolio.  These  decreases  were offset by net income of $1.1  million  for the twelve  months  ended  December  31,  2005.  In addition,  the Company declared an initial quarterly dividend of $0.10 cents per share,  payable                                          35   on November 25, 2005, to  stockholders  of record on November 10, 2005. With the approval  of the Office of Thrift  Supervision  ("OTS")  AJS  Bancorp,  MHC (the "MHC") waived 80% of the quarterly dividend due on its 1,227,554 shares.  Comparison of Financial Condition at December 31, 2004 and December 31, 2003        Our total assets  increased by $32.5 million,  or 13.6%, to $270.9 million at December 31, 2004 from $238.4  million at December  31,  2003.  Cash and cash equivalents  decreased  $2.8  million or 14.0% to $17.0  million at December 31, 2004 from $19.8 million at December 31, 2003.  Certificates  of deposits held at other financial  institutions  are $9.8 million at December 31, 2004; there were no  investments  in  certificates  of deposit at December 31,  2003.  Securities increased  $19.0  million or 44.5%,  to $61.6  million at December 31, 2004 from $42.7 million at December 31, 2003. Loans  receivable  increased $7.7 million or 4.9% to $163.3  million at December 31, 2004 from $155.6 million at December 31, 2003.  Securities  increased due to an arrangement whereby the Company purchased $19.5 million in mortgage-backed securities funded by cash and Federal Home Loan Bank ("FHLB") advances.  The mortgage-backed  securities purchased represent the Company's  attempt to lock in a spread between the interest  earned on the asset and the lower interest paid on the FHLB  advances.  Federal Home Loan Bank stock decreased $1.1 million, to $12.5 million at December 31, 2004 from $13.6 million at December 31, 2003.        Total  deposits  increased  $14.2  million,  or 7.7%, to $198.1 million at December  31, 2004 from  $183.8  million at December  31,  2003.  Our new branch facility,  which opened in December of 2002, has total deposits of $15.1 million as of December 31, 2004.  Transaction  and savings  accounts  increased to $85.0 million  at  December  31,  2004  from  $82.5  million  at  December  31,  2003; certificate of deposit accounts increased to $113.0 million at December 31, 2004 from $101.4 million at December 31, 2003.        Federal Home Loan Bank advances increased to $36.3 million at December 31, 2004 from $17.0 million at December 31, 2003.  The increase in FHLB advances was primarily used to fund the purchase of mortgage  backed  securities  that paid a higher yield than our cost of the advances.        At December  31, 2004 the  Company had  non-performing  assets of $983,000 compared to $1.2 million as of December 31, 2003.  The allowance for loan losses was $1.8 million at December  31,  2004,  and $2.0 million at December 31, 2003. This  represents a ratio of allowance for loan losses to gross loans  receivable of 1.12% at December 31, 2004 and 1.24% at December 31, 2003.  The allowance for loan losses to  non-performing  loans was 187.9% at December 31, 2004 and 172.7% at December 31, 2003. Total stockholders' equity decreased $1.6 million to $30.5 million at  December  31,  2004 from $32.1  million at December  31,  2003.  The decrease was primarily  the result of the Company's  purchase of $3.0 million in common  stock and  recording  a  liability  for the put  option  feature  on the allocated  portion of the Employee Stock Option Plan (ESOP).  The Company's ESOP allows the  employee to "put" the common  stock back to the Company in the event that there is not an actively traded market for the Company's stock. Equity also decreased  due  to  a  $443,000   change  in   unrealized   gain  on  securities available-for-sale.  These  decreases  were offset by net income of $1.6 million for the year ended December 31, 2004.  Comparison  of  Operating  Results  for the Years  Ended  December  31, 2005 and December 31, 2004        General. Net income decreased $483,000,  or 30.6%, to $1.1 million for the year ended December 31, 2005,  from $1.6 million for the year ended December 31, 2004.  The  decrease  in net income  resulted  from a decrease  in net  interest income,  while non-interest income and non-interest  expense remained relatively stable.        Interest Income.  Total interest income increased to $12.9 million for the twelve  months ended  December 31, 2005,  up $211,000 or 1.7% from $12.7 million for the same period in 2004. The increase in interest income resulted  primarily from  increases  in  the  average   balances   outstanding  for  securities  and interest-earning  deposits  offset by  decreases  in average  balances  in loans receivable and federal funds.        Interest  income from loans  decreased by $278,000 to $9.1 million for the year ended December 31, 2005,  from $9.4 million for the year ended December 31, 2004.  The  decrease                                          36   in interest income from loans was due to a decrease in average  outstanding loan balances  during the year.  Average loan balances were $156.8 million during the year ended December 31, 2005 compared to average loan balances of $163.5 million during the year ended  December 31, 2004.  The average  yield on loans  remained stable at 5.8%  during 2005 and 2004.  We expect the  average  yield on loans to remain stable or trend slightly higher during 2006.        Interest income from securities  increased by $456,000 to $2.7 million for the year ended  December  31, 2005  compared to $2.2  million for the year ended December 31, 2004. The increase was due to higher average outstanding securities balances during the year. Average securities  balances were $72.3 million during the year ended  December  31, 2005  compared to average  securities  balances of $56.8  million  during the year ended  December 31, 2004.  Our average yield was 3.7% during the year ended  December 31, 2005,  compared to an average  yield of 3.9% for 2004.        Interest income from interest-earning deposits increased $38,000, or 3.7%, to $1.1 million for the year ended December 31, 2005,  from $1.0 million for the year ended  December 31, 2004.  The  increase  resulted  from an increase in the average  outstanding  balance to $24.6  million  from $23.5  million,  while the average yield remained stable at 4.4% for the comparable  twelve-month  periods. The  increase in the  average  balance of  interest  earning  deposits is caused primarily by investments in certificates of deposit and money market accounts at other  financial  institutions,  offset by a decrease in the  investment in FHLB stock.  The  certificates of deposit  portfolio had an average yield of 3.4% for the period ended  December 31, 2005 compared to an average yield of 3.1% for the same period in 2004.  The money market  account had an average yield of 3.4% for the period ended  December 31, 2005 compared to an average yield of 2.0% for the same period in 2004.  The average  investment  in FHLB stock  decreased  to $6.7 million  during the year ended December 31, 2005,  while the average  investment was $13.6 million during the year ended December 31, 2004. The average yield for the  investment in FHLB stock was 6.8% for the twelve months ended  December 31, 2005 while the average  yield for the  comparable  period in 2004 was 6.2%.  The Company decreased its investment in FHLB stock due to uncertainty  regarding the payment and level of the FHLB  dividend.  On October  18, 2005 the Federal  Home Loan Bank of Chicago  announced a policy to  discontinue  excess  capital  stock redemptions or "voluntary" stock  redemptions.  Voluntary stock is stock held by members  beyond the amount  required as a condition of  membership or to support advance  borrowings.  The most recent,  fourth quarter Federal Home Loan Bank of Chicago  dividend  announced  on January 18, 2006 was at an  annualized  rate of 3.00%.        Interest Expense.  Interest expense on deposits increased by $560,000,  or 13.8% to $4.6 million for the year ended  December  31, 2005,  from $4.0 million for 2004.  The increase in our cost of deposits was due to the increase in short term market interest rates and  certificates of deposit maturing and renewing at higher rates during 2005.  Average deposits  decreased to $193.4 million for the year ended December 31, 2005,  from $194.8 million for 2004. Our average cost of deposits  increased  to 2.4%  from  2.1% for the  respective  periods.  Interest expense on  borrowings  increased  to $1.4  million for the twelve  months ended December 31, 2005,  from $1.1 million for the same period during 2004.  This was due to an increase in the average Federal Home Loan Bank borrowings.        Net Interest Income.  Net interest income decreased by $634,000 or 8.4% to $6.9 million for the twelve  months ended  December 31, 2005,  from $7.6 million for the same period in 2004.  Our net  interest  rate spread  decreased 37 basis points to 2.41% from 2.78%,  while our net  interest  margin  decreased 32 basis points to 2.71%  from  3.03%.  The ratio of average  interest-earning  assets to average  interest-bearing                                          37   liabilities  increased to 112.45% for the year ended  December 31, 2005 compared to 112.29% for the same period in 2004.        Provision for Loan Losses. We establish  provisions for loan losses, which are charged to  operations,  at a level  management  believes is  appropriate to absorb probable incurred credit losses in the loan portfolio.  In evaluating the level of the allowance for loan losses,  management  considers  historical  loss experience,  the types of loans and the  amount of loans in the loan  portfolio, adverse  situations that may affect the borrower's  ability to repay,  estimated value of any underlying  collateral,  and prevailing economic  conditions.  This evaluation  is  inherently   subjective  as  it  requires   estimates  that  are susceptible to significant  revision as more information becomes available or as future  events  change.  Based on our  evaluation  of these  factors,  we made a negative  provision  of  $130,000  for the year ended  December  31,  2005 and a negative $112,000 provision for the same period in 2004. The provision decreased due to an overall  improvement in the quality of our assets as our subprime loan balances  continued to decrease to $7.8 million at December 31, 2005, from $12.5 million at December 31, 2004. We used the same methodology and generally similar assumptions  in assessing the adequacy of the  allowance  for both periods.  The allowance for loan losses was $1.7 million,  or 1.11%,  of loans  outstanding at December 31, 2005, as compared with $1.8 million, or 1.12%, of loans outstanding at December 31, 2004. The non-performing  assets to total assets at December 31, 2005 was 0.15% as  compared  to 0.36% at  December  31,  2004.  The level of the allowance  is based on  estimates  and the  ultimate  losses  may vary  from the estimates.        Management assesses the allowance for loan losses on a quarterly basis and makes  provisions for loan losses as necessary in order to maintain the adequacy of the  allowance.  While  management  uses  available  information to recognize losses on loans,  future loan loss  provisions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination  process,  periodically  review the allowance for loan losses and may  require us to  recognize  additional  provisions  based on their judgment of information available to them at the time of their examination.  The allowance  for loan losses as of December 31, 2005 is maintained at a level that represents  management's best estimate of inherent losses in the loan portfolio, and such losses were both probable and reasonably estimable.        Non-interest  Income.  Non-interest  income remained  relatively stable at $936,000  for the year ended  December  31,  2005,  compared to $933,000 for the comparable  period in 2004.  The $3,000  increase was the result of increases in service fees and other  non-interest  income items. The other non-interest items included  primarily  rental income,  gain on the sale of loans,  and gain on the sale of fixed assets. A decrease in insurance commissions and other non-interest income items, primarily correspondent fees, offset these increases.        Service fees  increased due to increases in collection of NOW account fees and debit card fees.  NOW account  service fees did not  individually  increase, however,  the Company did not waive  service  fees due as  regularly as was done during  2004.  The  increase  in debit  card  revenues  is due to the  Company's customer  base  becoming more familiar with and using the debit cards more often since their inception in September of 2003.        Rental income increased due to the leasing during the twelve-months  ended December 31, 2005 of a previously vacant unit in one of the branch offices. Gain on the sale of loans  increased  $27,000  during the  twelve-month  period ended December 31, 2005 due to the Company's sale of fixed-rate  mortgage  loans.  The loans were sold  servicing-retained and we intend to continue to sell fixed-rate mortgage loans in the future.  There were no loan sales during 2004. The gain on the sale of fixed assets occurred due to the sale of a Company-owned automobile. The Company recognized a $13,000 gain on the sale.                                          38         Insurance  commission  income  fell  $37,000 due to lower sales of annuity products during the  twelve-month  period ended December 31, 2005, when compared to the  same  period  in  2004.  Correspondent  fees  declined  $11,000  for the twelve-month  period ended 2005 when compared to the same period ended 2004. The decrease was due to fewer loans being originated with the intention to have them funded through our  correspondent  sources  during 2005 then were  originated as correspondent loans in 2004. Correspondent loans are typically loans that do not qualify under the Company's  underwriting  guidelines  and, as such, the Company does not make an underwriting decision on them.        Non-interest  Expense.  Non-interest  expense  remained  constant  at $6.2 million for the year ended December 31, 2005 and 2004. Occupancy costs increased $116,000, advertising and promotion costs increased $32,000, and data processing costs increased  $14,000.  These increases were offset by a decrease in salaries and employee benefits of $140,000,  and a decrease in other non-interest expense items of $13,000.        Occupancy  costs  increased  during  the  year  ended  December  31,  2005 primarily  due to  increased  real estate tax  expense  when  compared  with the previous  year.  Real  estate  tax  assessments  were  higher  than the  Company originally estimated.        Advertising  costs  increased  during 2005 as we  continued to promote our newer branch facility in Orland Park, as well as several promotion specials that took place during the year ended December 31, 2005.        Salaries and employee benefits  decreased  primarily due to a reduction in the number of full time equivalent  employees to 64 at December 31, 2005 from 66 at December 31, 2004. In addition,  the  recognition  and retention plan ("RRP") expense decreased  $44,000 during the twelve-months  ended 2005 when compared to the same period in 2004.        During 2004, FASB Statement 123R, Accounting for Stock-Based Compensation, was  approved.  This  statement  will  require the  expensing  of stock  options beginning  January 1, 2006. The future adoption of this standard is not expected to materially affect the Company's operating results.        Provision  for Income Taxes.  The provision for income taxes  decreased to $694,000,  or 38.7%,  of income before income taxes for the year ended  December 31,  2005 from  $833,000  or 34.5% of  income  before  taxes for the year  ended December  31,  2004.  The  decrease  was  primarily  due to a decrease in pretax earnings.  The taxes due as a percentage of pretax earnings increased due to the Company  increasing  its tax accrual  based on  revisions  to certain  estimated deferred and permanent tax items from what had been previously estimated.  Comparison  of  Operating  Results  for the Years  Ended  December  31, 2004 and December 31, 2003        General. Net income increased $187,000,  or 13.4%, to $1.6 million for the year ended December 31, 2004,  from $1.4 million for the year ended December 31, 2003.  The  increase in net income  resulted  from an  increase in net  interest income,  a decrease in non-interest  expense and a decrease in the provision for loan losses, partially offset by a decrease in non-interest income.        Interest Income.  Total interest income increased to $12.7 million for the twelve  months ended  December 31, 2004,  up $390,000 or 3.2% from $12.3 million for the same period in 2003. The increase in interest income resulted  primarily from increases in interest  earned on deposits and, to a lesser extent  interest earned on loans, partially offset by a decrease in income on federal funds sold.                                          39         Interest  income from loans  increased  by $59,000 to $9.4 million for the year ended December 31, 2004,  from $9.3 million for the year ended December 31, 2003.  The  increase  in  interest  income  from loans was due to an increase in average  outstanding  loan balances during the year.  Average loan balances were $163.5  million during the year ended December 31, 2004 compared to average loan balances of $148.9  million during the year ended December 31, 2003. The average yield on loans  decreased  to 5.8%  during  2004,  from 6.3%  during  2003.  The decrease in yield was primarily due to overall  declining  interest rates in the marketplace. We expect the yield on loans to stabilize during 2005.        Interest  income from  securities  decreased by $8,000 to $2.2 million for the year ended December 31, 2004 compared to 2003. The decrease was due to lower interest  rates  earned  on these  assets  due to a  general  decline  in market interest  rates.  The average  balance in securities  increased  during the year ended  December  31, 2004 to $56.8  million from $48.7  million  during the year ended  December  31,  2003.  Our  average  yield was 3.9%  during the year ended December 31, 2004, compared to an average yield of 4.6% for 2003.        Interest income from  interest-earning  deposits  increased  $368,000,  or 55.0%,  to $1.0 million for the year ended December 31, 2004,  from $669,000 for the year ended  December 31, 2003.  The increase  resulted from increases in the average outstanding balance to $23.5 million from $20.8 million, and an increase in the average yield to 4.4% from 3.2%.  The increase in the average  balance of interest  earning deposits is caused primarily by investments in certificates of deposit and money market accounts at other financial institutions. These are new accounts  opened  during 2004.  The  certificates  of deposit  portfolio  had an average yield of 3.1%, and the money market account had an average yield of 2.0% during 2004. These investments along with a higher average investment in Federal Home Loan Bank (FHLB) stock during the year ended December 31, 2004,  caused our average yield for  interest-earning  deposits as a whole to increase rather than to  decline  as  would  be  expected  given  the  lower  interest  rates  in the marketplace.  The average  investment in FHLB stock was $13.6 million during the year ended December 31, 2004, compared to an average investment of $11.3 million during the year ended December 31, 2003.        Interest  income on federal  funds sold  decreased to $69,000 for the year ended December 31, 2004,  from $98,000 for the same period in 2003.  This is due to lower average  federal fund balances for 2004.  Our yield was 1.2% on average federal fund  balances of $2.7 million for December 31, 2004,  whereas the yield was 1.1% on average federal fund balances of $9.0 million for December 31, 2003.        Interest Expense.  Interest expense on deposits decreased by $164,000,  or 3.9% to $4.0 million for the year ended December 31, 2004, from $4.2 million for 2003.  The  decrease in our cost of deposits  was due to the general  decline in market interest rates and certificates of deposit maturing and renewing at lower rates during 2004.  Average  deposits  increased to $194.8  million for the year ended  December  31,  2004,  from $184.2  million for 2003.  Our average cost of deposits  decreased  to 2.1%  from  2.3% for the  respective  periods.  Interest expense on  borrowings  increased  to $1.1  million for the twelve  months ended December 31, 2004,  from $859,000 for the same period during 2003.  This was due to additional Federal Home Loan Bank borrowings.        Net Interest Income.  Net interest income increased by $281,000 or 3.9% to $7.6 million for the twelve  months ended  December 31, 2004,  from $7.3 million for the same period in 2003.  Our net  interest  rate spread  decreased 16 basis points to 2.77% from 2.93%,  while our net  interest  margin  decreased 17 basis points to 3.03%  from  3.20%.  The ratio of average  interest-earning  assets to average  interest-bearing  liabilities  remained stable at 112.29% for the years ended December 31, 2004 and 2003.        Provision for Loan Losses. We establish  provisions for loan losses, which are charged to  operations,  at a level  management  believes is  appropriate to absorb probable incurred credit losses in the loan portfolio.  In evaluating the level of the allowance for loan losses,  management  considers  historical                                          40   loss  experience,  the  types  of  loans  and the  amount  of  loans in the loan portfolio,  adverse  situations that may affect the borrower's ability to repay, estimated  value  of  any  underlying   collateral,   and  prevailing   economic conditions.  This evaluation is inherently  subjective as it requires  estimates that  are  susceptible  to  significant  revision  as more  information  becomes available or as future events change.  Based on our evaluation of these factors, we made a negative  provision of $112,000  for the year ended  December 31, 2004 and a negative  $61,000  provision  for the same period in 2003.  The  provision decreased  due to an  overall  improvement  in the  quality of our assets as our subprime  loan  balances  continued to decrease to $12.5 million at December 31, 2004, from $18.3 million at December 31, 2003. We used the same  methodology and generally  similar  assumptions  in assessing  the adequacy of the allowance for both periods. The allowance for loan losses was $1.8 million, or 1.12%, of loans outstanding  at December 31, 2004, as compared with $2.0 million,  or 1.24%,  of loans  outstanding  at December 31,  2003.  The  non-performing  assets to total assets at December 31, 2004 was 0.36% as compared to 0.49% at December 31, 2003. The level of the  allowance  is based on estimates  and the ultimate  losses may vary from the estimates.        Management assesses the allowance for loan losses on a quarterly basis and makes  provisions for loan losses as necessary in order to maintain the adequacy of the  allowance.  While  management  uses  available  information to recognize losses on loans,  future loan loss  provisions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination  process,  periodically  review the allowance for loan losses and may  require us to  recognize  additional  provisions  based on their judgment of information available to them at the time of their examination.  The allowance  for loan losses as of December 31, 2004 is maintained at a level that represents  management's best estimate of inherent losses in the loan portfolio, and such losses were both probable and reasonably estimable.        Non-interest  Income.  Non-interest  income  decreased to $933,000 for the year ended  December 31, 2004,  from $1.1 million for the  comparable  period in 2003.  The  $158,000  decrease  was the result of  reductions  in service  fees, insurance  commission income,  gain on the sale of loans and gain on the sale of securities.  These decreases were offset by increases in  correspondent  fees of $13,000 and other non-interest  income of $13,000.  Service fees declined due to reductions in late fees collected of $29,000, and lower payoff fees collected of $5,000 and reduced  amortization  of previously  deferred  loan fees.  Insurance commission income fell $82,000 due to lower sales of annuity products during the twelve-month period ended December 31, 2004, when compared to the same period in 2003. Gain on the sale of loans decreased  $53,000,  as there were no loan sales during  2004,  however,  we may sell  loans in the  future.  Gain on the sale of securities  decreased $34,000, as there were no sales of securities during 2004. The increase in  correspondent  fees is due to more loans being  originated with the intention to have them funded through our correspondent  sources during 2004 then were originated as  correspondent  loans in 2003.  Correspondent  loans are typically loans that do not qualify under the Company's underwriting  guidelines and, as such, the Company does not make an underwriting  decision on them. Other non-interest  income  increased  primarily due to the  settlement of $6,000 of a forgery  case during the year ended  December  31,  2004.  The forgery  loss was previously thought uncollectable and therefore it was written off.        Non-interest  Expense.  Non-interest  expense  decreased  $64,000  to $6.2 million  for the year  ended  December  31,  2004,  from $6.3  million  in 2003. Occupancy  costs  accounted  for  $87,000 of this  decrease,  professional  fees decreased $20,000,  postage and supplies  decreased  $37,000,  offset in part by advertising and promotion costs, which increased $63,000.        Occupancy  costs  decreased  during  the  year  ended  December  31,  2004 primarily due to decreased  real estate tax expense,  and decreased  maintenance expense,  offset by an increase in  depreciation  costs,  when compared with the previous  year.  Real estate  taxes  decreased  due to actual real estate  taxes charged                                          41   at less than the Company's original estimated taxes. Maintenance costs decreased during the year ended  December  31,  2004 when  compared  to the same period in 2003,  due to the complete  repainting of the office and the  replacement  of an ejector  pump  at our  80th  Avenue  branch  office  facility  in  Orland  Park. Offsetting   these  decreases  was  an  increase  in  depreciation   costs.  Our depreciation  costs  increased  primarily  due to the  replacement  of aging and obsolete computer equipment.        Professional  fees  decreased due to lower legal fees incurred  during the year ended December 31, 2004 when compared with the same period in 2003. Postage and supplies decreased during 2004 due to the opening of our new branch facility in December of 2002.  Increased postage and supplies were used during 2003 as we promoted the opening of the new facility.  Advertising  costs  increased  during 2004 due to the  continued  promotion  of our new  branch  facility,  as well as several  promotion  specials that took place during the year ended  December 31, 2004.        Provision  for Income Taxes.  The provision for income taxes  increased to $833,000,  or 34.5%,  of income before income taxes for the year ended  December 31,  2004 from  $782,000  or 35.9% of income  before  taxes,  for the year ended December 31, 2003, due to an increase in pretax earnings.                                          42         Average Balance Sheets        The following  tables  present for the periods  indicated the total dollar amount of interest income on average  interest-earning  assets and the resultant yields, the interest expense on average interest-bearing liabilities,  expressed both in dollars and rates,  as well as yields and costs at December 31, 2005. No tax equivalent  adjustments  were made. All average balances are monthly average balances. Non-accruing loans have been included in the table as loans carrying a zero yield.                                                               Years Ended December 31,                                  ------------------------------------------------------------------------------                                                  2005                                     2004                                  -----------------------------------     --------------------------------------                                    Average     Interest                    Average     Interest                                  Outstanding    Earned/                  Outstanding    Earned/                                    Balance       Paid      Yield/Rate      Balance       Paid      Yield/Rate                                  -----------  -----------  -----------   -----------  -----------  -----------                                                             (Dollars in thousands)        Interest-earning assets:     Loans receivable ..........  $   156,832  $     9,127         5.82%  $   163,468  $     9,405         5.75%     Securities ................       72,301        2,682         3.71        56,801        2,226         3.92     Interest-earning deposits       and other ...............       24,613        1,075         4.36        23,506        1,037         4.41     Federal funds .............        2,230           64         3.00         5,702           69         1.21                                  -----------  -----------  -----------   -----------  -----------   ----------        Total interest-earning          assets ...............  $   255,976       12,948         5.06   $   249,477       12,737         5.11                                  ===========  -----------  -----------   ===========  -----------   ----------  Interest-bearing liabilities:     Passbook savings ..........  $    48,713          487         1.00   $    51,421          407         0.79     NOW accounts ..............       22,958           77         0.34        23,946           58         0.24     Money market accounts .....        8,347          170         2.04         9,238           80         0.87     Time deposits .............      113,424        3,872         3.41       110,200        3,501         3.18                                  -----------  -----------                -----------  -----------        Total deposits .........      193,442        4,606         2.38       194,805        4,046         2.08     FHLB advances .............       34,184        1,416         4.14        27,358        1,132         4.14                                  -----------  -----------  -----------   -----------  -----------   ----------        Total interest-bearing          liabilities ..........  $   227,626        6,023         2.65   $   222,163        5,178         2.33                                  ===========  -----------  -----------   ===========  -----------   ----------  Net interest income ...........               $     6,925                             $     7,559                                               ===========                             ===========  Net interest rate spread ......                                   2.41%                                   2.78%                                                            ===========                             =========== Net earning assets ............  $    28,350                             $    27,314                                  ===========                             =========== Net yield on average interest-   earning assets ..............                                   2.71%                                   3.03%                                                            ===========                             =========== Average interest-earning assets   to average interest-bearing   liabilities .................                                 112.45%                                 112.29%                                                            ===========                             ===========                                               Years Ended December 31,                                  --------------------------------------                                                   2003                                  --------------------------------------                                    Average     Interest                                  Outstanding    Earned/                                    Balance       Paid      Yield/Rate                                  -----------  -----------  -----------                                          (Dollars in thousands)     Interest-earning assets:     Loans receivable ..........  $   148,862  $     9,346         6.28%     Securities ................       48,748        2,234         4.58     Interest-earning deposits       and other ...............       20,809          669         3.21     Federal funds .............        9,008           98         1.09                                  -----------  -----------  -----------        Total interest-earning          assets ...............  $   227,427       12,347         5.43                                  ===========  -----------  ----------- Interest-bearing liabilities:     Passbook savings ..........  $    48,624          518         1.07     NOW accounts ..............       23,098           66         0.29     Money market accounts .....        8,878           75         0.84     Time deposits .............      103,555        3,551         3.43                                  -----------  -----------        Total deposits .........      184,155        4,210         2.29     FHLB advances .............       18,373          859         4.68                                  -----------  -----------  -----------        Total interest-bearing          liabilities ..........  $   202,528        5,069         2.50                                  ===========  -----------  -----------  Net interest income ...........               $     7,278                                               =========== Net interest rate spread ......                                   2.93%                                                            =========== Net earning assets ............  $    24,899                                  =========== Net yield on average interest-   earning assets ..............                                   3.20%                                                            =========== Average interest-earning assets   to average interest-bearing   liabilities .................                                 112.29%                                                            ===========                                           43   Rate/Volume Analysis           The following  table  presents the dollar amount of changes in interest income and interest expense for major components of interest-earning  assets and interest-bearing  liabilities.  It distinguishes  between the changes related to outstanding  balances and those due to the changes in interest  rates.  For each category   of   interest-earning   assets  and   interest-bearing   liabilities, information is provided on changes  attributable to (i) changes in volume (i.e., changes  in  volume  multiplied  by old rate) and (ii)  changes  in rate  (i.e., changes in rate multiplied by old volume).  For purposes of this table,  changes attributable  to both rate and volume,  which  cannot be  segregated,  have been allocated  proportionately  to the  change  due to volume  and the change due to rate.                                                                   Years Ended December 31,                                            ------------------------------------------------------------------                                                     2005 vs. 2004                      2004 vs. 2003                                            --------------------------------   -------------------------------                                            Increase/(Decrease)                 Increase/(Decrease)                                                   Due to            Total            Due to           Total                                            -------------------    Increase    --------------------   Increase                                             Volume      Rate     (Decrease)    Volume      Rate     (Decrease)                                                                        (In thousands)        Interest-earning assets    Loans receivable .....................  $   (385)  $    107   $   (278)    $    876   $   (817)  $     59    Securities ...........................       580       (124)       456          341       (349)        (8)    Interest-earning deposits and other ..        48        (12)        36           95        273        368    Federal funds ........................       (60)        58         (2)         (39)        10        (29)                                            --------   --------   --------     --------   --------   --------        Total interest-earning assets ....  $    183   $     29   $    212     $  1,273   $   (883)  $    390                                            ========   ========   ========     ========   ========   ========  Interest-bearing liabilities    Transaction and savings deposits .....       (32)       221        189           33       (147)      (114)    Certificate accounts .................       102        269        371          228       (278)       (50)    Borrowings ...........................       282          2        284          420       (147)       273                                            --------   --------   --------     --------   --------   --------        Total interest-bearing liabilities  $    352   $    492   $    844     $    681   $   (572)  $    109                                            ========   ========   ========     ========   ========   ========  Net interest income .....................  $   (169)  $   (463)  $   (634)    $    592   $   (311)  $    281   Management of Market Risk        General.  The  majority  of our assets and  liabilities  are  monetary  in nature. Consequently,  our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our  business  strategy is to manage  interest  rate risk and reduce the exposure  of our net  interest  income  to  changes  in market  interest  rates. Accordingly,   our  Board  of  Directors  has  established  an   Asset/Liability Management  Committee which is responsible for evaluating the interest rate risk inherent in our assets and  liabilities,  for determining the level of risk that is appropriate,  given our business strategy,  operating  environment,  capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines  approved by the Board of Directors.  Senior management  monitors the  level of  interest  rate risk on a  regular  basis and the  Asset/Liability Management  Committee,  which consists of senior  management  operating  under a policy  adopted  by the  Board of  Directors,  meets as  needed  to  review  our asset/liability policies and interest rate risk position.        We have sought to manage our interest  rate risk by more closely  matching the  maturities  of  our  interest-rate-sensitive  assets  and  liabilities.  In particular,  we offer one, three-, five- and seven-year adjustable rate mortgage loans, and three-and five-year balloon loans.  Furthermore,  our experience with subprime  loans has been that these loans remain a part of our  portfolio  for a significantly  shorter period of time than other one- to four-family loans. In a low interest rate  environment,  borrowers  typically prefer fixed-rate loans to adjustable-rate  mortgages.  We  intend to sell into the  secondary  market  our originations of longer-term  fixed-rate loans. We do not solicit high-rate jumbo certificates of deposit or brokered funds.                                          44         Net  Portfolio  Value.  In past  years,  many  savings  associations  have measured interest rate sensitivity by computing the "gap" between the assets and liabilities  which are expected to mature or reprice within certain time periods based on assumptions  regarding loan prepayment and deposit decay rates formerly provided  by the  Office of Thrift  Supervision.  However,  the Office of Thrift Supervision  now  requires the  computation  of amounts by which the net present value  of  an   institution's   cash   flow   from   assets,   liabilities   and off-balance-sheet  items (the  institution's net portfolio value or "NPV") would change in the event of a range of assumed changes in market interest rates.  The Office of Thrift Supervision  provides all institutions that file a Consolidated Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report with an interest rate sensitivity report of net portfolio value. The Office of Thrift Supervision  simulation  model  uses a  discounted  cash  flow  analysis  and an option-based  pricing approach to measuring the interest rate sensitivity of net portfolio value. The Office of Thrift  Supervision  model estimates the economic value of each type of asset, liability and off-balance-sheet  contract under the assumption  that the United States  Treasury yield curve  increases or decreases instantaneously  by 100 to 300 basis  points in 100 basis  point  increments.  A basis point equals one-hundredth of one percent, and 100 basis points equals one percent.  An increase in interest rates from 7% to 8% would mean, for example, a 100 basis point  increase in the "Change in Interest  Rates" column  below.  The Office of Thrift  Supervision  provides  us the  results  of the  interest  rate sensitivity  model,  which is based on  information  we provide to the Office of Thrift Supervision to estimate the sensitivity of our net portfolio value.        The table below sets forth,  as of December  31, 2005 (the latest date for which  information  is  available),  the estimated  changes in our net portfolio value that would result from the designated  instantaneous changes in the United States Treasury yield curve.                                                                       Net Portfolio Value as                                                                    a % of Present Value of                                   Net Portfolio Value                Assets/Liabilities                      ----------------------------------------     -------------------------      Change in    Interest Rates      Estimated        Amount of    (Basis Points)         NPV            Change       Percent      NPV Ratio      Change(1)    --------------         ---            ------       -------      ---------      ------                         (Dollars in thousands)               +300         $   28,638       $ (8,266)        (22)%          11.41%       (248)         +200             31,497         (5,407)        (15)           12.30        (159)         +100             34,425         (2,479)         (7)           13.19         (70)           0              36,904                                       13.89         -100             38,671          1,767           5            14.34          45         -200             38,856          1,952           5            14.27          38   (1)   Expressed in basis points.        The table above indicates that at December 31, 2005, in the event of a 100 basis point decrease in interest rates, we would experience a 5% increase in net portfolio  value.  In the event of a 100 basis point increase in interest rates, we would experience a 7% decrease in net portfolio value.        Certain  shortcomings  are inherent in the  methodology  used in the above interest rate risk measurement.  Modeling changes in net portfolio value require making  certain  assumptions  that may or may not  reflect  the  manner in which actual yields and costs  respond to changes in market  interest  rates.  In this regard,  the net portfolio value table presented assumes that the composition of our  interest-sensitive  assets and  liabilities  existing at the beginning of a period  remains  constant  over the period  being  measured  and assumes  that a particular  change in interest  rates is  reflected  uniformly  across the yield curve,   regardless  of  the  duration  or  repricing  of  specific  assets  and liabilities.  Accordingly,  although the net portfolio  value table  provides an indication  of our interest  rate risk  exposure at a particular  point in time, such  measurements  are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on its net interest  income,  and will differ from actual results.                                          45   Critical Accounting Policies and Estimates        The  preparation  of financial  statements in conformity  with  accounting principles   generally  accepted  in  the  United  States  of  America  requires management to make estimates and assumptions that affect the reported amounts of assets and  liabilities  and disclosure of contingent  assets and liabilities at the date of the financial  statements  and the reported  amounts of revenues and expenses  during  the  reporting  period.  By  their  nature,  changes  in these assumptions and estimates  could  significantly  affect the Company's  financial position  or results of  operations.  Actual  results  could  differ  from those estimates. Discussed below are selected critical accounting policies that are of particular significance to the Company.        Allowance  for Loan  Losses.  The  allowance  for loan  losses  represents management's  estimate of probable credit losses inherent in the loan portfolio. Estimating  the amount of the  allowance  for loan losses  requires  significant judgment and the use of  estimates  related to the amount and timing of expected future cash flows on impaired  loans,  estimated  losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and  conditions,  all of which may be susceptible to significant  change. The loan  portfolio also  represents the largest asset type on the  consolidated balance  sheet.  Loan  losses are  charged  off  against  the  allowance,  while recoveries of amounts  previously  charged off are credited to the allowance.  A provision  for loan  losses  is  charged  to  operations  based on  management's periodic  evaluation  of the  factors  previously  mentioned,  as well as  other pertinent factors.        The allowance for loan losses consists of specific allocations on impaired loans under Statement of Financial  Accounting  Standards (SFAS) 114 and general allocation for inherent credit risks under SFAS 5. The SFAS 114 component of the allowance  for loan losses  reflects  expected  losses  resulting  from analyses developed  through specific credit  allocations for individual loans. The SFAS 5 component of the allowance  reflects  historical  loss  experience for each loan category  adjusted for trends and credit risks. The specific credit  allocations are based on analyses  involving a high  degree of  judgment in  estimating  the amount of loss associated with specific loans,  including  estimating the amount and timing of future  cash flows and  collateral  values.  The  historical  loss analysis is performed  quarterly and loss factors are updated regularly based on actual experience and trends and credit risk.        The  allowance  reflects  management's  estimate of probable  inherent but undetected  losses  within  the  portfolio  due  to  uncertainties  in  economic conditions,  delays in obtaining information,  including unfavorable information about a borrower's financial condition, the difficulty in identifying triggering events that correlate  perfectly to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors. In addition,  the unallocated  allowance  includes a  component  that  accounts  for the  inherent imprecision in loan loss models. Uncertainty surrounding the strength and timing of economic cycles also affects estimates of loss. The historical losses used in the migration  analysis may not be  representative  of actual  unrealized losses inherent in the portfolio.        There are many factors  affecting the allowance for loan losses;  some are quantitative  while others require  qualitative  judgment.  Although  management believes its process for determining the allowance  adequately  considers all of the  potential  factors  that could  potentially  result in credit  losses,  the process  includes  subjective  elements and may be  susceptible  to  significant change.  To  the  extent  actual  outcomes  differ  from  management  estimates, additional  provision for credit  losses could be required that could  adversely affect earnings or financial position in future periods.                                          46   Liquidity and Capital Resources        We  maintain  liquid  assets at levels we  consider  adequate  to meet our liquidity  needs.  Our liquidity  ratio  averaged  19.1% and 16.3% for the years ended December 31, 2005 and 2004. We adjust our liquidity levels to fund deposit outflows,  pay real estate taxes on mortgage loans,  repay our borrowings and to fund loan commitments. We also adjust liquidity as appropriate to meet asset and liability management objectives.        Our primary sources of liquidity are deposits, amortization and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term  investments,  and earnings and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly  influenced  by  general  interest  rates,   economic  conditions,   and competition.  We set the  interest  rates on our  deposits to maintain a desired level of total  deposits.  In addition,  we invest  excess  funds in  short-term interest-earning  investments and other assets,  which provide liquidity to meet lending requirements. Short-term interest-bearing deposits with the Federal Home Loan Bank of Chicago  amounted  to $2.1  million at  December  31, 2005 and $4.1 million at December 31, 2004. For additional  information  about cash flows from our operating,  financing, and investing activities, see Consolidated Statements of Cash Flows included in the consolidated financial statements.        A significant  portion of our liquidity consists of securities  classified as available-for-sale and cash and cash equivalents,  which are a product of our operating,   investing  and  financing  activities,   and  of  government-backed securities classified as available-for-sale. Our primary sources of cash are net income,  principal  repayments  on loans  and  mortgage-backed  securities,  and increases in deposit  accounts,  along with  advances from the Federal Home Loan Bank of Chicago.        Liquidity  management is both a daily and  long-term  function of business management.  If we require funds beyond our ability to generate them internally, borrowing  agreements  exist with the  Federal  Home Loan Bank of Chicago  which provide an  additional  source of funds.  At  December  31,  2005,  we had $32.7 million in advances from the Federal Home Loan Bank of Chicago.  Of this amount, $4.0 million is due within one year,  $12.3 million is due between one and three years,  $13.1 million is due between four and five years and $3.3 million is due after five years.        At December 31, 2005, we had  outstanding  commitments  of $3.3 million to originate  loans.  This amount does not include the unfunded portion of loans in process.  At December 31, 2005,  certificates of deposit  scheduled to mature in less than one year totaled $57.3 million. Based on prior experience,  management believes  that a  significant  portion of such  deposits  will  remain  with us, although there can be no assurance that this will be the case. In addition,  the cost of such  deposits  may be  significantly  higher  upon  renewal in a rising interest rate environment.  We intend to utilize our high levels of liquidity to fund our lending activities.        Liquidity.  We are  required to maintain  liquid  assets in an amount that would ensure our safe and sound  operation.  Our liquidity ratio at December 31, 2005 was 19.9%.                                          47         The following table sets forth our contractual  obligations and commercial commitments at December 31, 2005.                                                         Less than                                            Total       1 year      1-3 Years    4-5 years   After 5 Years                                         -----------  -----------  -----------  -----------  -----------                                                             (Dollars in thousands)       FHLB advances ........................  $    32,750  $     4,000  $    12,325  $    13,125  $     3,300 Time deposits ........................      112,887       57,272       43,314       12,301           --                                                 Total                                           Amounts     Less than                                          Committed     1 year      1-3 Years    4-5 years   Over 5 Years                                         -----------  -----------  -----------  -----------  -----------                                                             (Dollars in thousands)       Lines of credit ......................  $    14,645  $       649  $     6,147  $     7,849  $        -- Standby letters of credit (1) ........           80           80           --           --           -- Other commitments to extend credit (1)        3,345        3,345           --           --           --                                         -----------  -----------  -----------  -----------  -----------    Total .............................  $    18,070  $     4,074  $     6,147  $     7,849  $        --                                         ===========  ===========  ===========  ===========  ===========   - ---------------- (1)   Represents amounts committed to customers.  Impact of Inflation and Changing Prices        The  consolidated  financial  statements and related notes of AJS Bancorp, Inc. have been  prepared in  accordance  with  accounting  principles  generally accepted in the United States of America ("GAAP").  GAAP generally  requires the measurement of financial  position and operating  results in terms of historical dollars without  consideration  for changes in the relative  purchasing power of money over time due to  inflation.  The impact of  inflation is reflected in the increased cost of our operations.  Unlike industrial  companies,  our assets and liabilities  are primarily  monetary in nature.  As a result,  changes in market interest  rates  have a  greater  impact  on  performance  than  the  effect  of inflation.
See  ITEM  7   "Management's   Discussion   and   Analysis  of   Financial Consolidation and Results of Operations--Management of Market Risk."
The  financial   statements   identified  in  Item  15(a)(1)   hereof  are incorporated by reference hereunder.  ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND FINANCIAL DISCLOSURE - --------------------------------------------------------------------------------        None.
(a)  Evaluation  of  disclosure   controls  and   procedures.        Under the supervision and with the participation of our management, including our Chief Executive Officer, President and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the fiscal year (the "Evaluation Date"). Based upon that evaluation, the                                          48   Chief Executive  Officer,  President and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely  alerting  them to the  material  information  relating  to us (or our consolidated subsidiaries) required to be included in our periodic SEC filings.        (b) Changes in internal controls.        There were no significant changes made in our internal controls during the period covered by this report or, to our knowledge,  in other factors that could significantly affect these controls subsequent to the date of their evaluation.        See the  Certifications  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
None.                                      PART III
Information  concerning Directors of the Company is incorporated herein by reference from the Company's definitive Proxy Statement (the "Proxy Statement"), specifically  the section  captioned  "Proposal  I--Election  of  Directors." In addition,  see  "Executive  Officers  of  AJS  Bancorp,  Inc."  in  Item  1  for information concerning the Company's executive officers.        The Board of  Directors  has adopted a Code of Ethics,  applicable  to the Chief  Executive  Officer,  President and Chief Financial  Officer.  The Code of Ethics may be accessed through our website at  www.ajsmithbank.com  and is filed                                                ------------------- as Exhibit 14 hereto.
Information  concerning  executive  compensation is incorporated herein by reference from the Company's Proxy Statement, specifically the section captioned "Executive Compensation."
Information concerning security ownership of certain owners and management is  incorporated  herein  by  reference  from  the  Company's  Proxy  Statement, specifically  the section  captioned  "Voting  Securities  and Principal  Holder Thereof."
Information  concerning  relationships  and  transactions  is incorporated herein by reference from the Company's Proxy Statement, specifically the section captioned "Transactions with Certain Related Persons."                                          49
Information   concerning   principal   accountant  fees  and  services  is incorporated herein by reference from the Company's Proxy Statement.                                       PART IV
The exhibits and  financial  statement  schedules  filed as a part of this Form 10-K are as follows:        (a)(1) Financial Statements              --------------------              o     Report of Independent Registered Public Accounting Firm              o     Consolidated Statements of Financial Condition at December 31,                   2005 and 2004              o     Consolidated Statements of Income for the Years Ended December                   31, 2005, 2004 and 2003              o     Consolidated  Statements of Stockholders' Equity for the Years                   Ended December 31, 2005, 2004 and 2003              o     Consolidated  Statements  of Cash  Flows for the  Years  Ended                   December 31, 2005, 2004 and 2003              o     Notes to Consolidated Financial Statements.        (a)(2) Financial Statement Schedules              -----------------------------              No  financial  statement  schedules  are filed  because the required             information  is not  applicable  or is included in the  consolidated             financial statements or related notes.        (a)(3) Exhibits              --------              10.1  Employment Agreement with Thomas R. Butkus(1)              10.2  Employment Agreement with Lyn G. Rupich(2)              10.3  AJS Bancorp, Inc. 2003 Stock Option Plan(3)              10.4  AJS Bancorp, Inc. 2003 Recognition and Retention Plan(3)              10.5  Amendments to 2003 Stock Option Plan              13    Financial Statements              14    Code of Ethics(1)              21    Subsidiaries of the Registrant              23    Consent of Auditors to incorporate  financial  statements into                   Form S-8              31.1  Certification  of Chief Executive  Officer pursuant to Section                   302 of the Sarbanes-Oxley Act of 2002              31.2  Certification  of  President  pursuant  to Section  302 of the                   Sarbanes-Oxley Act of 2002              31.3  Certification  of Chief Financial  Officer pursuant to Section                   302 of the Sarbanes-Oxley Act of 2002              32    Certification  of Chief Executive  Officer and Chief Financial                   Officer pursuant to Section 906 of the  Sarbanes-Oxley  Act of                   2002        (b)   The exhibits listed under (a)(3) above are filed  herewith.        (c)   Not applicable.  - ------------------- (1)   Incorporated by reference to the Company's  Annual Report on Form 10-K for       the year ended December 31, 2003.  (2)   Incorporated  by reference  to the  Company's  Current  Report on Form 8-K       filed on October 25, 2005.  (3)   Incorporated by reference to the Company's  registration statement on Form       S-8 (commission file number 333-105598, filed on May 28, 2003).                                          50                                      SIGNATURES           Pursuant to the  requirements  of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.                                              AJS Bancorp, Inc.  Date: March 16, 2006                        By:   /s/ Thomas R. Butkus                                                   --------------------                                                   Thomas R. Butkus,                                                   Chairman of the Board and                                                   Chief Executive Officer        Pursuant to the requirements of the Securities  Exchange Act of 1934, this report  has  been  signed  below  by the  following  persons  on  behalf  of the registrant and in the capacities and on the dates indicated.     By:    /s/ Thomas R. Buktus                           By:   /s/ Lyn G. Rupich        --------------------                                 -----------------        Thomas R.  Butkus, Chairman of the Board             Lyn G. Rupich, President           and Chief Executive Officer                       (Principal Executive Officer)  Date:  March 16, 2006                                 Date: March 16, 2006   By:    /s/ Pamela N. Favero                           By:   Roger L. Aurelio         -------------------                                 ----------------        Pamela N. Favero, Chief Financial Officer            Roger L. Aurelio, Director  Date:  March 16, 2006                                 Date: March 16, 2006   By:    Raymond J. Blake                               By:   Richard J. Nogal        ----------------                                     ----------------        Raymond J. Blake, Director                           Richard J. Nogal, Director  Date:  March 16, 2006                                 Date: March 16, 2006   By:    Edward S. Milen        ---------------        Edward S. Milen, Director  Date:  March 16, 2006                                           51    EX-13 2 ex13.txt EX-13                                      EXHIBIT 13                                FINANCIAL STATEMENTS                                   AJS BANCORP, INC.                               Midlothian, Illinois                          CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                                      CONTENTS  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM...................   F-2  CONSOLIDATED FINANCIAL STATEMENTS       CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION.......................   F-3       CONSOLIDATED STATEMENTS OF INCOME....................................   F-4       CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY......................   F-5       CONSOLIDATED STATEMENTS OF CASH FLOWS................................   F-6       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ..........................   F-8  All schedules are omitted as the required  information  either is not applicable or is included in the consolidated financial statements or related notes.                REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  Board of Directors AJS Bancorp, Inc. Midlothian, Illinois  We have audited the accompanying  consolidated statements of financial condition of AJS  Bancorp,  Inc.  as of  December  31,  2005  and  2004,  and the  related consolidated statements of income, stockholders' equity, and cash flows for each of the three  years in the period  ended  December  31,  2005.  These  financial statements   are  the   responsibility   of  the   Company's   management.   Our responsibility  is to express an opinion on these financial  statements based on our audits.  We conducted our audits in accordance  with the standards of the Public  Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,  evidence  supporting  the amounts and  disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant  estimates  made by  management,  as well as evaluating  the overall financial  statement  presentation.   We  believe  that  our  audits  provide  a reasonable basis for our opinion.  In our opinion, the consolidated  financial statements referred to above present fairly, in all material respects, the financial position of AJS Bancorp, Inc. as of December 31, 2005 and 2004,  and the results of its  operations  and its cash flows for each of the three years in the period  ended  December  31,  2005,  in conformity with U.S. generally accepted accounting principles.                                                /s/ Crowe Chizek and Company LLC                                                  Crowe Chizek and Company LLC  Oak Brook, Illinois February 17, 2006                                         F-2                                   AJS BANCORP, INC.                  CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION                            December 31, 2005 and 2004                              (Dollars in thousands)  - --------------------------------------------------------------------------------                                                                             2005         2004                                                                          ----         ----    ASSETS Cash and cash equivalents      Cash and due from banks (interest-bearing:  2005 - $11,477;        2004 - $10,751)                                                $  14,776    $  13,717      Federal funds sold                                                     454        3,314                                                                       ---------    ---------          Total cash and cash equivalents                                 15,230       17,031  Certificates of deposit                                                   8,584        9,783 Securities available for sale                                            71,239       61,483 Securities held to maturity (fair value:  2005 - $295;   2004 - $134)                                                              295          132 Loans, net of allowance of $1,701 and $1,847                            151,768      163,291 Federal Home Loan Bank stock                                              3,416       12,459 Premises and equipment                                                    4,541        4,760 Accrued interest receivable                                                 960          969 Other assets                                                              1,872          961                                                                       ---------    ---------       Total assets                                                     $ 257,905    $ 270,869                                                                       =========    =========  LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities      Deposits                                                         $ 190,407    $ 198,056      Federal Home Loan Bank advances                                     32,750       36,250      Advance payments by borrowers for taxes and insurance                1,746        1,795      Other liabilities and accrued interest payable                       4,750        4,238                                                                       ---------    ---------          Total liabilities                                              229,653      240,339  Stockholders' equity      Preferred stock, $.01 par value, 20,000,000 shares authorized;        none issued                                                           --           --      Common stock, $.01 par value, 50,000,000 shares authorized;        2,444,521 shares issued                                               24           24      Additional paid-in capital                                          10,839       10,830      Treasury stock, at cost (2005 - 296,714 shares;        2004 - 177,464 shares)                                            (6,931)      (4,075)      Unearned RRP shares                                                   (486)        (682)      Unearned ESOP shares                                                    --         (189)      Retained earnings                                                   25,820       24,837      Accumulated other comprehensive loss                                (1,014)        (215)                                                                       ---------    ---------          Total stockholders' equity                                      28,252       30,530                                                                       ---------    ---------                Total liabilities and stockholders' equity              $ 257,905    $ 270,869                                                                       =========    =========   - --------------------------------------------------------------------------------            See accompanying notes to consolidated financial statements.                                         F-3                                   AJS BANCORP, INC.                         CONSOLIDATED STATEMENTS OF INCOME                   Years ended December 31, 2005, 2004, and 2003                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------                                                   2005        2004        2003                                                  ----        ----        ---- Interest and dividend income     Loans                                      $  9,127    $  9,405    $  9,346     Securities                                    2,682       2,226       2,234     Interest-earning deposits and other           1,075       1,037         669     Federal funds sold                               64          69          98                                                --------    --------    --------        Total interest income                     12,948      12,737      12,347  Interest expense     Deposits                                      4,606       4,046       4,210     Federal Home Loan Bank advances and other     1,417       1,132         859                                                --------    --------    --------        Total interest expense                     6,023       5,178       5,069                                                --------    --------    --------  Net interest income                               6,925       7,559       7,278  Provision for loan losses                          (130)       (112)        (61)                                                --------    --------    --------  Net interest income after provision   for loan losses                                 7,055       7,671       7,339  Noninterest income     Service fees                                    514         502         539     Gain (loss) on sale of other real estate          6           2         (19)     Insurance commissions                           195         232         314     Gain on sale of loans                            27          --          53     Gain on sale of securities                       --          --          34     Rental income                                   124         109         108     Correspondent fees                               15          26          13     Other                                            55          62          49                                                --------    --------    --------        Total noninterest income                     936         933       1,091  Noninterest expense     Compensation and employee benefits            3,481       3,621       3,632     Occupancy expense                               897         781         868     Data processing expense                         392         378         361     Advertising and promotion                       404         372         309     Professional                                    224         147         167     Postage and supplies                            163         175         212     Bank security                                   130         124         118      Other                                           509         593         588                                                --------    --------    --------        Total noninterest expense                  6,200       6,191       6,255                                                --------    --------    --------  Income before income taxes                        1,791       2,413       2,175  Income taxes                                        694         833         782                                                --------    --------    --------  Net income                                     $  1,097    $  1,580    $  1,393                                                ========    ========    ========  Earnings per share     Basic                                      $    .51    $    .70    $    .60     Diluted                                         .50         .69         .60  - --------------------------------------------------------------------------------            See accompanying notes to consolidated financial statements.                                         F-4                                   AJS BANCORP, INC.                  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                   Years ended December 31, 2005, 2004, and 2003                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------                                                                  Additional               Unearned     Unearned                                                      Common     Paid-In    Treasury      Stock        ESOP      Retained                                                       Stock     Capital      Stock       Awards      Shares     Earnings                                                       -----     -------      -----       ------      ------     --------        Balance at January 1, 2003                           $     24   $ 11,308    $     --    $     --    $   (566)   $ 21,864 Purchase of 73,000 shares treasury stock                   --         --      (1,459)         --          --          -- Allocation of stock awards                                 --        722         384      (1,106)         --          -- ESOP shares earned                                         --        188          --          --         189          -- Reclassification due to changes in fair value   of common stock is ESOP subject to contingent   repurchase obligation                                    --     (1,246)         --          --          --          -- Stock awards earned                                        --         --          --         182          --          -- Comprehensive income     Net income                                             --         --          --          --          --       1,393     Change in unrealized gain on securities       available for sale, net of taxes                     --         --          --          --          --          --                                                      --------   --------    --------    --------    --------    --------        Total comprehensive income  Balance at December 31, 2003                               24     10,972      (1,075)       (924)       (377)     23,257 Purchase of 125,864 shares of treasury stock               --         --      (3,000)         --          --          -- ESOP shares earned                                         --        272          --          --         188          -- Reclassification due to changes in fair value   of common stock in ESOP subject to contingent   repurchase obligation                                    --       (438)         --          --          --          -- Stock awards earned                                        --         24          --         242          --          -- Comprehensive income     Net income                                             --         --          --          --          --       1,580     Change in unrealized gain (loss) on securities       available for sale, net of taxes                     --         --          --          --          --          --                                                      --------   --------    --------    --------    --------    --------        Total comprehensive income  Balance at December 31, 2004                               24     10,830      (4,075)       (682)       (189)     24,837 Purchase of 124,950 shares of treasury stock               --         --      (2,976)         --          --          -- Allocation of stock awards                                 --          2          --          (2)         --          -- ESOP shares earned                                         --        258          --          --         189          -- Reclassification due to changes in fair value   of common stock in ESOP subject to contingent   repurchase obligation                                    --       (298)         --          --          --          -- Stock awards earned                                        --         55          --         198          --          -- Stock options exercised                                    --         (8)        120          --          --          -- Cash dividend ($0.10 per share)                            --         --          --          --          --        (114) Comprehensive income     Net income                                             --         --          --          --          --       1,097     Change in unrealized gain (loss) on securities       available for sale, net of taxes                     --         --          --          --          --          --                                                      --------   --------    --------    --------    --------    --------        Total comprehensive income  Balance at December 31, 2005                         $     24   $ 10,839    $ (6,931)   $   (486)   $     --    $ 25,820                                                      ========   ========    ========    ========    ========    ========                                                              Accumulated                                                              Other                                                          Comprehensive                                                          Income (Loss)       Total                                                          -------------       -----    Balance at January 1, 2003                                $  1,016          $ 33,646 Purchase of 73,000 shares treasury stock                        --            (1,459) Allocation of stock awards                                      --                -- ESOP shares earned                                              --               377 Reclassification due to changes in fair value   of common stock is ESOP subject to contingent   repurchase obligation                                         --            (1,246) Stock awards earned                                             --               182 Comprehensive income     Net income                                                  --             1,393     Change in unrealized gain on securities       available for sale, net of taxes                        (788)             (788)                                                           --------          --------        Total comprehensive income                                                605                                                                             --------  Balance at December 31, 2003                                   228            32,105 Purchase of 125,864 shares of treasury stock                    --            (3,000) ESOP shares earned                                              --               460 Reclassification due to changes in fair value   of common stock in ESOP subject to contingent   repurchase obligation                                         --              (438) Stock awards earned                                             --               266 Comprehensive income     Net income                                                  --             1,580     Change in unrealized gain (loss) on securities       available for sale, net of taxes                        (443)             (443)                                                           --------          --------        Total comprehensive income                                              1,137                                                                             --------  Balance at December 31, 2004                                  (215)           30,530 Purchase of 124,950 shares of treasury stock                    --            (2,976) Allocation of stock awards                                      --                -- ESOP shares earned                                              --               447 Reclassification due to changes in fair value   of common stock in ESOP subject to contingent   repurchase obligation                                         --              (298) Stock awards earned                                             --               253 Stock options exercised                                         --               112 Cash dividend ($0.10 per share)                                 --              (114) Comprehensive income     Net income                                                  --             1,097     Change in unrealized gain (loss) on securities       available for sale, net of taxes                        (799)             (799)                                                           --------          --------        Total comprehensive income                                                298                                                                             --------  Balance at December 31, 2005                              $ (1,014)         $ 28,252                                                           ========          ========   - --------------------------------------------------------------------------------            See accompanying notes to consolidated financial statements.                                         F-5                                   AJS BANCORP, INC.                       CONSOLIDATED STATEMENTS OF CASH FLOWS                   Years ended December 31, 2005, 2004, and 2003                              (Dollars in thousands)  - --------------------------------------------------------------------------------                                                             2005        2004        2003                                                          ----        ----        ----     Cash flows from operating activities      Net income                                        $  1,097    $  1,580    $  1,393      Adjustments to reconcile net income to net cash        provided by operating activities          Depreciation                                       298         310         299          Provision for loan losses                         (130)       (112)        (61)          Deferred income taxes                              205        (248)        364          Discount accretion on securities, net               83          89          84          Stock award compensation expense                   253         266         182          ESOP compensation expense                          447         460         377          Federal Home Loan Bank stock dividends            (457)       (847)       (635)          Dividend reinvestments                          (3,288)       (124)       (106)          Gain on sale of securities                          --          --         (34)          Gain on sale of loans                              (27)         --         (53)          Changes in               Accrued interest receivable                     9          (2)        328               Other assets                                 (609)        394         177               Accrued interest payable                        5          59          (6)               Other liabilities                             209         (40)         84                                                        --------    --------    --------                   Net cash (used in) provided by                     operating activities                 (1,905)      1,785       2,393  Cash flows from investing activities      Securities available for sale          Purchases                                      (20,484)    (35,706)    (22,713)          Maturities and principal payments               12,627      16,009      26,994          Proceeds from sales                                 --          --       3,915      Securities held to maturity          Purchases                                         (200)         --          --          Maturities and principal payments                   37          45         183      Purchase of certificates of deposit                 (1,195)     (9,783)         --      Maturities of certificates of deposit                2,394          --          --      Loan originations, net                              11,680      (7,549)    (19,360)      Proceeds from sale of other real estate                 --          21          --      Purchase of equipment                                  (79)       (195)       (579)      Proceeds from the sale of Federal Home Loan          Bank stock                                       9,500       2,000          --      Purchase of Federal Home Loan Bank stock                --          --      (8,500)                                                        --------    --------    --------          Net cash provided by (used in) investing            activities                                    14,280     (35,158)    (20,060)   - --------------------------------------------------------------------------------            See accompanying notes to consolidated financial statements.                                    (Continued)                                         F-6                                   AJS BANCORP, INC.                       CONSOLIDATED STATEMENTS OF CASH FLOWS                   Years ended December 31, 2005, 2004, and 2003                              (Dollars in thousands)  - --------------------------------------------------------------------------------                                                                   2005        2004        2003                                                                ----        ----        ----     Cash flows from financing activities      Dividends paid                                          $   (114)   $     --    $     --      Net change in deposits                                    (7,649)     14,209      14,839      Purchases of Federal Home Loan Bank advances               1,000      23,450       3,000      Maturities of Federal Home Loan Bank advances             (4,500)     (4,200)     (2,000)      Purchase of common stock                                  (2,976)     (3,000)     (1,459)      Proceeds from exercise of stock options                      112          --          --      Net change in advance payments by borrowers        for taxes and insurance                                    (49)        144         192                                                              --------    --------    --------          Net cash provided by (used in) financing            activities                                         (14,176)     30,603      14,572                                                              --------    --------    --------  Net change in cash and cash equivalents                        (1,801)     (2,770)     (3,095)  Cash and cash equivalents at beginning of year                 17,031      19,801      22,896                                                              --------    --------    --------  Cash and cash equivalents at end of year                     $ 15,230    $ 17,031    $ 19,801                                                              ========    ========    ========  Supplemental disclosures of cash flow information      Cash paid during the year for          Interest                                            $  6,018    $  5,119    $  5,075          Income taxes                                           1,069         616         755       Noncash investing and financing activities          Other real estate acquired in settlement of loans         --          --           8   - --------------------------------------------------------------------------------            See accompanying notes to consolidated financial statements.                                         F-7                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Principles of Consolidation:  The consolidated  financial statements include the accounts of AJS Bancorp,  Inc. ("the Company") and its wholly owned  subsidiary, A. J. Smith Federal  Savings Bank ("the  Bank").  All  significant  intercompany balances and transactions have been eliminated.  The Company is 57.2% owned by a mutual  holding  company,  AJS  Bancorp,   MHC.  These  consolidated   financial statements  do not  include  AJS  Bancorp,  MHC and  its  results  or  financial condition.  Nature of Operations: The only business of the Company is ownership of the Bank. The Bank is a  federally  chartered  savings  bank with  operations  located  in Midlothian  and  Orland  Park,   Illinois.   The  Bank  provides   single-family residential and home equity loans and commercial  loans to customers and accepts deposits from customers  located in the southern  suburbs of Chicago,  Illinois. Substantially  all of the loans are  secured  by  specific  items of  collateral including business assets,  consumer assets, and commercial and residential real estate.  Commercial  loans are  expected  to be  repaid  from  cash  flows  from operations of businesses.  There are no significant  concentrations  of loans to any one industry or  customer.  However,  the ability of the  customers to repay their loans is dependent on the real estate and general  economic  conditions in the area.  Use of  Estimates:  To prepare  financial  statements  in  conformity  with U.S. generally  accepted  accounting  principles,   management  makes  estimates  and assumptions  based on available  information.  These  estimates and  assumptions affect the amounts  reported in the financial  statements,  and the  disclosures provided and future results could differ. The allowance for loan losses and fair values of financial instruments are particularly subject to change.  Cash  Flows:  Cash  and cash  equivalents  include  cash,  deposits  with  other financial  institutions  with  original  maturities  of less  than 90 days,  and federal  funds  sold.   Net  cash  flows  are  reported  for  loan  and  deposit transactions.  Securities:  Debt  securities  are classified as held to maturity and carried at amortized cost when  management has the positive intent and ability to hold them to maturity.  Debt  securities  are  classified  as available for sale when they might be sold before maturity.  Equity securities with readily determinable fair values are classified as available for sale.  Securities  available for sale are carried at fair value,  with  unrealized  holding  gains and losses  reported in other  comprehensive  income.  Other  securities  such as Federal Home Loan Bank stock are carried at cost.  Interest income includes amortization of purchase premium or discount. Gains and losses on sales are based on the amortized cost of the security sold. Securities are written down to fair value when a decline in fair value is not temporary.  - --------------------------------------------------------------------------------                                    (Continued)                                         F-8                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  The Company evaluates securities for other-than-temporary impairment on at least a quarterly basis and more  frequently when economic or market concerns  warrant such evaluation.  Consideration is given to the length of time and the extent to which the fair  value  has been less than  cost,  the  financial  condition  and near-term  prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any  anticipated  recovery in fair value.  In  analyzing  an issuer's  financial condition,  the Company may consider  whether the  securities  are issued by the federal  government or its agencies,  whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition.  Loans:  Loans  originated  and  intended  for sale in the  secondary  market are carried at the lower of cost or market in the aggregate.  Net unrealized losses, if any, are  recorded as a valuation  allowance  and charged to earnings.  Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding,  net of unearned  interest,  deferred loan fees and costs,  and an allowance for loan losses.  Interest income is reported on the interest method and includes  amortization of net deferred loan fees and costs over the contractual loan term. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days.  All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or  cost-recovery  method,  until  qualifying  for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually  due are  brought  current  and  future  payments  are  reasonably assured.  Allowance  for Loan  Losses:  The  allowance  for  loan  losses  is a  valuation allowance for probable  incurred  credit losses,  increased by the provision for loan losses and decreased by charge-offs less recoveries.  Management  estimates the  allowance  balance  required  using  past loan loss  experience;  known and inherent losses in the nature and volume of the portfolio that are both probable and estimable;  information  about specific borrower  situations;  and estimated collateral values,  economic conditions,  and other factors.  Allocations of the allowance may be made for specific loans,  but the entire allowance is available for any loan that, in management's judgment,  should be charged off. Loan losses are  charged   against  the  allowance  where   management   believes  that  the uncollectiblity of a loan balance is confirmed.  - --------------------------------------------------------------------------------                                    (Continued)                                          F-9                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  A loan is  impaired  when full  payment  under the loan  terms is not  expected. Impairment  is evaluated in total for  smaller-balance  loans of similar  nature such as residential  mortgage and consumer loans and on an individual loan basis for other loans. If a loan is impaired,  a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows  using the  loan's  existing  rate or at the fair value of  collateral  if repayment is expected solely from the collateral.  Premises and  Equipment:  Land is carried at cost.  Premises and  equipment  are stated at cost less accumulated  depreciation.  Depreciation is calculated using primarily the  straight-line  method and is provided  over the estimated  useful lives of 15 to 50 years for premises and 1 to 10 years for equipment.  Servicing  Rights:  Servicing  rights are recognized as assets for the allocated value of retained servicing rights on loans sold.  Servicing rights are expensed in  proportion  to and over the  period of  estimated  net  servicing  revenues. Impairment is evaluated  based on the fair value of the rights,  using groupings of the underlying loans as to interest rates and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance.  Servicing rights are  not  material  and are  included  with  other  assets  on the  consolidated statement of financial condition.  Servicing fee income is recorded for fees earned for servicing  loans.  The fees are based on a contractual  percentage of the  outstanding  principal or a fixed amount per loan and are  recorded as income when  earned.  The  amortization  of mortgage servicing rights is netted against loan servicing fee income.  Other Real Estate Owned: Real estate  properties  acquired through or in lieu of loan  foreclosure are recorded at the lower of cost or fair value less estimated costs to sell.  Costs  relating  to  improvement  of property  are  capitalized, whereas costs relating to holding property are expensed.  Valuations are periodically performed by management, and an allowance for losses is established by a charge to income if the carrying value of a property exceeds its estimated fair value less estimated costs to sell.  Income Taxes: Income tax expense is the total of the current year income tax due or refundable  and the change in deferred tax assets and  liabilities.  Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences  between  carrying  amounts and tax bases of assets and liabilities, computed  using enacted tax rates.  A valuation  allowance,  if needed,  reduces deferred tax assets to the amount expected to be realized.  - --------------------------------------------------------------------------------                                    (Continued)                                          F-10                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  Loan Commitments and Related Financial Statements: Financial instruments include off-balance-sheet  credit  instruments,  such as  commitments  to make loans and commercial letters of credit,  issued to meet customer financing needs. The face amount for these  items  represents  the  exposure to loss,  before  considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.  Instruments that are considered  financial  guarantees in accordance with FASB Interpretation No. 45 are recorded at fair value.  Fair Value of Financial  Instruments:  Fair values of financial  instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value  estimates  involve  uncertainties  and matters  of  significant   judgment  regarding  interest  rates,   credit  risk, prepayments,  and other factors,  especially in the absence of broad markets for particular  items.   Changes  in  assumptions  or  in  market  conditions  could significantly affect the estimates.  Earnings Per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares  outstanding  during the period. Employee  stock  ownership  plan  shares  are  considered  outstanding  for this calculation  unless  unearned.  Diluted  earnings per common share  includes the dilutive  effect of  additional  potential  common shares  issuable  under stock options and the vesting of stock  awards.  Earnings and  dividends per share are restated  for all stock  splits and  dividends  through the date of issue of the financial statements.  Comprehensive  Income:  Comprehensive  income  consists  of net income and other comprehensive  income.  Other comprehensive income includes unrealized gains and losses on securities  available for sale,  which are also recognized as separate components of stockholders' equity.  Employee Stock  Ownership  Plan ("ESOP"):  The cost of shares issued to the ESOP but not yet allocated to participants is presented in the consolidated statement of  financial  condition as a reduction of  stockholders'  equity.  Compensation expense  is  recorded  based  on the  market  price  of the  shares  as they are committed to be released for allocation to participant accounts.  The difference between the market price and the cost of the shares  committed to be released is recorded as an  adjustment to paid-in  capital.  Dividends on ESOP shares reduce retained  earnings;  dividends  on unearned  ESOP shares are used to reduce debt service.   Shares  are   considered   outstanding  in  the  earnings  per  share calculations  as they are committed to be released;  unallocated  shares are not considered outstanding. Because participants may require the Company to purchase their ESOP shares upon termination of their employment and certain predetermined dates  according  to the ESOP  plan  document,  the fair  value of the  put-able allocated ESOP shares is reclassified from stockholder's  equity and included in other liabilities.  - --------------------------------------------------------------------------------                                    (Continued)                                         F-11                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  Stock  Compensation:  Employee  compensation  expense  under  stock  options  is reported using the intrinsic value method.  No stock-based  compensation cost is reflected in net income,  as all options  granted had an exercise price equal to or  greater  than the market  price of the  underlying  common  stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense were measured  using the fair value  recognition  provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.                                                                    2005           2004          2003                                                                 ----           ----          ----          Net income as reported                                  $    1,097    $    1,580    $    1,393      Deduct:  Stock-based compensation        expense determined under fair value based method             (24)          (24)          (25)                                                              ----------    ----------    ----------           Pro forma net income                                $    1,073    $    1,556    $    1,368                                                              ==========    ==========    ==========       Basic earnings per share as reported                    $     .51     $      .70    $      .60      Pro forma basic earnings per share                            .50            .69           .59       Diluted earnings per share as reported                        .50            .69           .60      Pro forma diluted earnings per share                          .49            .68           .59   The pro forma  effects  are  computed  using  option  pricing  models  using the following  weighted-average  assumptions as of grant date for options granted in 2003. No options were granted since 2003.                                                                   2003                                                                  ----       Risk-free interest rate                                     2.37%      Expected option life                                        5.0 years      Expected stock price volatility                            15.03%      Dividend yield                                              0.0%  Effect of Newly  Issued But Not Yet  Effective  Accounting  Standards:  FAS 123, Revised,  requires  companies  to record  compensation  cost for  stock  options provided to employees in return for employment service.  The cost is measured at the fair value of the options when  granted,  and this cost is expensed over the employment service period,  which is normally the vesting period of the options. This will apply to awards granted beginning in 2006. Compensation cost will also be recorded  for prior option  grants that vest after the date of adoption.  The effect on results of operations will depend on the level of future option grants and the calculation of fair value of the options granted at such future date, as well as the vesting periods provided, and so  - --------------------------------------------------------------------------------                                    (Continued)                                         F-12                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)  cannot  currently be predicted.  Existing  options that will vest after adoption date are expected to result in additional  compensation expense of approximately $24 in 2006 and $25 in 2007.  Dividend  Restriction:  Banking  regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to the  stockholders.  These  restrictions pose no practical limit on the  ability of the bank or the  holding  company to pay  dividends  at historical levels.  Operating  Segment:  Internal  financial  information is primarily  reported and aggregated  in a  single  line of  business,  banking.  Accordingly,  all of the financial  service  operations  are considered by management to be aggregated in one reportable operating segment.  Reclassifications:  Certain items on the prior year  financial  statements  have been  reclassified  with no effect on net income to conform to the current  year presentation.  NOTE 2 - SECURITIES  The fair value of securities available for sale and the related gross unrealized gains and losses  recognized in accumulated  other  comprehensive  income (loss) were as follows:                                                              Gross           Gross                                            Fair        Unrealized      Unrealized                                            Value          Gains          Losses                                            -----          -----          ------          December 31, 2005      -----------------          U.S. governmental agencies     $    26,580    $         1    $      (410)          Mortgage-backed                     36,130             36         (1,159)          Mutual fund                          8,473             --           (183)          Equity investment                       56             55             --                                         -----------    -----------    -----------                Total                     $    71,239    $        92    $    (1,752)                                         ===========    ===========    ===========       December 31, 2004      -----------------          U.S. governmental agencies     $    20,897    $        17    $      (158)          Mortgage-backed                     35,233            129           (324)          Mutual fund                          5,297             --            (71)          Equity investment                       56             54             --                                         -----------    -----------    -----------                Total                     $    61,483    $       200    $      (553)                                         ===========    ===========    ===========   - --------------------------------------------------------------------------------                                    (Continued)                                         F-13                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 2 - SECURITIES (Continued)  The amortized cost, unrecognized gains and losses, and fair values of securities held to maturity follow:                                                            Gross             Gross                                      Amortized      Unrecognized      Unrecognized         Fair                                        Cost             Gains            Losses            Value                                        ----             -----            ------            -----           December 31, 2005      -----------------          Mortgage-backed           $        95      $        --       $        --      $        95          State and Municipal               200               --                --              200                                    -----------      -----------       -----------      -----------                                     $       295      $        --       $        --      $       295                                    ===========      ===========       ===========      ===========       December 31, 2004      -----------------          Mortgage-backed           $       132      $         2       $        --      $       134                                    ===========      ===========       ===========      ===========   Contractual  maturities  of  securities  at  December  31, 2005 were as follows. Securities  not  due  at  a  single  maturity  date,  including  mortgage-backed securities and mutual funds, are shown separately.                                                        Available                   Held to                                                     for Sale                   Maturity                                                       Fair           Amortized           Fair                                                       Value            Cost              Value                                                       -----            ----              -----          Due in one year or less                      $    12,910       $       200      $       200      Due after one year through five years             13,670                --               --      Due after five years                                  --                --               --      Mortgage-backed securities                        36,130                95               95      Mutual fund                                        8,473                --               --      Equity investment                                     56                --               --                                                   -----------       -----------      -----------                                                    $    71,239       $       295      $       295                                                   ===========       ===========      ===========   Securities with a carrying value of approximately $9,879 and $11,036 at December 31, 2005 and 2004 were pledged to secure public  deposits and for other purposes as required or permitted by law.  Proceeds from the sale of securities available for sale were $3,915 during 2003. Gross gains of $34 were realized on those sales.  No sales were recorded  during 2005 or 2004.  - --------------------------------------------------------------------------------                                    (Continued)                                         F-14                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 2 - SECURITIES (Continued)  Securities  with  unrealized  losses at year end not recognized in income are as follows:                                    Less Than 12 Months            12 Months or More                 Total                                 -------------------            -----------------                 -----                                 Fair        Unrealized         Fair      Unrealized        Fair      Unrealized                                 Value          Loss            Value        Loss           Value        Loss                                 -----          ----            -----        ----           -----        ---- 2005 - ----        U.S. government agencies     $  12,821      $    (165)      $  12,757    $    (245)     $  25,578    $    (410) Mortgage-backed                 11,575           (251)         23,523         (908)        35,098       (1,159) Mutual fund                      3,191            (41)          5,226         (142)         8,417         (183)                              ---------      ---------       ---------    ---------      ---------    ---------      Total temporarily       impaired               $  27,587      $    (457)      $  41,506    $  (1,295)     $  69,093    $  (1,752)                              =========      =========       =========    =========      =========    =========  2004 - ---- U.S. government agencies     $  14,893      $    (140)      $     982    $     (18)     $  15,875    $    (158) Mortgage-backed                 24,764           (269)          3,705          (55)        28,469         (324) Mutual fund                        170             (1)          5,127          (70)         5,297          (71)                              ---------      ---------       ---------    ---------      ---------    ---------      Total temporarily       impaired               $  39,827      $    (410)      $   9,814    $    (143)     $  49,641    $    (553)                              =========      =========       =========    =========      =========    =========   Unrealized  losses have not been  recognized  into income  because the  issuer's bonds are of high credit quality and/or they are backed by the government,  such as Fannie Mae or Freddie Mac bonds and mortgage-backed  securities. In addition, management  has the intent and ability to hold them for the  foreseeable  future and the decline in fair value is largely  due to  increases  in market  interest rates.  The fair value is expected to recover as the  securities  approach their maturity date and/or market rates change.  NOTE 3 - LOANS  Loans consist of:                                                                     2005            2004                                                                  ----            ----         Mortgage loans:          Secured by one-to-four-family residences            $    101,325    $    115,598          Multi-family and other loans secured by other            properties                                              38,317          32,713          Home equity loans                                         13,279          16,126      Consumer and other loans                                         502             649                                                              ------------    ------------                                                                   153,423         165,086      Allowance for loan losses                                     (1,701)         (1,847)      Deferred loan (fees) costs and other                              46              52                                                              ------------    ------------           Loans, net                                          $    151,768    $    163,291                                                              ============    ============   - --------------------------------------------------------------------------------                                    (Continued)                                         F-15                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 3 - LOANS (Continued)  The Bank's mortgage loan portfolio  includes  "subprime" loans made to borrowers with  weakened  credit  characteristics,  such as prior  payment  delinquencies, foreclosures,  bankruptcies,  or diminished  repayment  ability.  These subprime loans totaled $7,755 and $12,538 at December 31, 2005 and 2004.  Changes in the allowance for loan losses follow:                                                                   2005           2004          2003                                                                ----           ----          ----          Beginning balance                                      $    1,847    $    1,962    $    2,082      Provision for loan losses                                    (130)         (112)          (61)      Charge-offs                                                   (71)         (115)         (120)      Recoveries                                                     55           112            61                                                             ----------    ----------    ----------           Ending balance                                     $    1,701    $    1,847    $    1,962                                                             ==========    ==========    ==========   Impaired loans were as follows:                                                                    2005          2004           2003                                                                 ----          ----           ----          Impaired loans with no allocated allowance        for loan losses                                       $       98    $       70    $      164                                                              ==========    ==========    ==========       Average of impaired loans during the year                      161           216           281      Interest income recognized during impairment                     7            28            24      Cash-basis interest income recognized                            7            28            20   Nonperforming loans were as follows:                                                                   2005           2004          2003                                                                ----           ----          ----          Nonaccrual loans                                        $      394    $      983    $   1,136      Loans past due over 90 days still on accrual                    --            --           --   Nonperforming loans and impaired loans are defined  differently.  Some loans may be included in both categories,  whereas other loans may only be included in one category.  There were no impaired  loans with an  allocated  allowance  for loan losses.  - --------------------------------------------------------------------------------                                    (Continued)                                         F-16                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 3 - LOANS (Continued)  Certain  directors and executive  officers of the Bank and companies  with which they are affiliated  have obtained loans from the Bank on various  occasions.  A summary of such loans made by the Bank is as follows:                                                         2005          2004          2003                                                      ----          ----          ----          Beginning balance                            $    1,563    $    1,735    $   1,313      New loans                                           583           410        2,170      Effect of changes in related parties                 --          (128)         124      Repayments                                         (594)         (454)      (1,872)                                                   ----------    ----------    ---------           Ending balance                           $    1,552    $    1,563    $   1,735                                                   ==========    ==========    =========   Mortgage  loans  serviced  for  others  are  not  included  in the  consolidated statements of financial condition.  The unpaid principal balances of these loans follows:                                                       2005           2004                                                      ----           ----      Mortgage loan portfolios serviced for:          Fannie Mae                               $     5,736    $     5,319          Freddie Mac                                       95            114                                                   -----------    -----------       Balance, end of year                         $     5,831    $     5,433                                                   ===========    ===========  The carrying  value of mortgage  servicing  rights is $20 and $0 at December 31, 2005 and 2004.  Custodial  escrow  balances  maintained in  connection  with the foregoing loan servicing were  approximately  $310 and $309 at December 31, 2005 and 2004.  NOTE 4 - PREMISES AND EQUIPMENT  Premises and equipment consist of:                                                             2005         2004                                                            ----         ----       Land                                              $    1,351    $    1,351      Office buildings and improvements                      5,233         5,227      Furniture, fixtures, and equipment                     1,700         1,713                                                        ----------    ----------                                                             8,284         8,291      Less accumulated depreciation                          3,743         3,531                                                        ----------    ----------                                                         $    4,541    $    4,760                                                        ==========    ==========  - --------------------------------------------------------------------------------                                    (Continued)                                         F-17                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 5 - DEPOSITS  Certificates  of deposit in  denominations  of  $100,000  or more were  $29,699, $30,389,  and $24,600 at December 31, 2005,  2004, and 2003.  Deposit amounts in excess of $100,000 are not federally insured.  Deposit accounts are summarized as follows:                                                      2005            2004                                                      ----            ----           Passbook accounts                      $     46,854     $     50,651          NOW and checking accounts                    22,220           23,784          Money market accounts                         8,446           10,575          Certificates of deposit                     112,887          113,046                                                 ------------     ------------                Total deposits                    $    190,407     $    198,056                                                 ============     ============  Scheduled maturities of time certificates are as follows:             Year                              December 31, 2005            ----                              -----------------             2006                                  $  57,272            2007                                     32,675            2008                                     10,639            2009                                      4,758            2010                                      7,543                                                  ---------                                                   $ 112,887                                                  =========  Interest expense on deposits is summarized as follows:                                          2005           2004         2003                                         ----           ----         ----       NOW                             $       77    $       58    $       66      Money market                           170            80            75      Passbook                               621           407           518      Certificates of deposit              3,738         3,501         3,551                                      ----------    ----------    ----------                                       $    4,606    $    4,046    $    4,210                                      ==========    ==========    ==========  Non-interest-bearing  deposits  (NOW  accounts)  totaled  $11,808 and $12,708 at December 31, 2005 and 2004.  Deposit  accounts  held by directors  and executive officers totaled $852 and $1,287 at December 31, 2005 and 2004.  - --------------------------------------------------------------------------------                                    (Continued)                                         F-18                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES  Advances from the Federal Home Loan Bank consist of:                                        Fixed     Maturity Date                      Rate         2005           2004     -------------                      ----         ----           ----      January 24, 2005                   1.55%     $       --     $       500     January 27, 2005                   2.12              --             500     March 23, 2005                     1.47              --             500     May 6, 2005                        6.10              --           2,000     July 22, 2005                      3.56              --             500     November 14, 2005                  2.90              --             500     January 23, 2006                   2.02             500             500     January 27, 2006                   2.71             500             500     March 23, 2006                     1.93             500             500     April 26, 2006                     2.61           1,000           1,000     May 8, 2006                        2.91             500             500     July 24, 2006                      3.69             500             500     November 13, 2006                  3.43             500             500     January 23, 2007                   2.69             500             500     January 29, 2007                   3.26             400             400     March 23, 2007                     2.53             500             500     April 26, 2007                     3.35           1,000           1,000     May 7, 2007                        3.57           1,000           1,000     July 23, 2007                      4.06             500             500     November 13, 2007                  3.74             500             500     November 27, 2007                  5.28           1,000           1,000     January 23, 2008                   3.21             500             500     January 28, 2008                   3.68             400             400     March 24, 2008                     2.96             625             625     April 28, 2008                     3.84           1,000           1,000     May 7, 2008                        4.08           1,000           1,000     June 18, 2008                      4.33           1,000           1,000     July 22, 2008                      4.41             500             500     November 13, 2008                  4.16             500             500     November 17, 2008                  3.64             400             400     November 27, 2008                  5.48           1,000           1,000     March 20, 2009                     5.63           3,000           3,000     March 23, 2009                     3.35             625             625     June 17, 2009                      4.40           1,000           1,000     June 22, 2009                      4.67           1,000           1,000  - --------------------------------------------------------------------------------                                    (Continued)                                         F-19                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES (Continued)                                  Fixed      Maturity Date               Rate         2005           2004      -------------               ----         ----           ----       June 25, 2009               4.61%     $    1,000     $     1,000      July 1, 2009                4.54           1,000           1,000      August 10, 2009             3.88             650             650      September 16, 2009          3.68             600             600      September 28, 2009          3.79           2,000           2,000      March 23, 2010              3.71             250             250      July 2, 2010                4.69           1,000           1,000      October 25, 2010            4.16           1,000           1,000      July 7, 2011                4.61             800             800      October 26, 2011            4.02             400             400      November 17, 2011           4.31           1,100           1,100      January 10, 2012            4.36           1,000              --                                            ----------     -----------                                             $   32,750     $    36,250                                            ==========     ===========  The advances are secured by a blanket lien on qualifying first mortgage loans in an amount  equal to at least 170% of the  amount of  outstanding  advances.  The advances  are also  subject to a  prepayment  penalty  equivalent  to the unpaid interest cash flows at rates effective at the time of the prepayment.  Maturities over the next five years and thereafter are as follows:               2006                                       $  4,000              2007                                          5,400              2008                                          6,925              2009                                         10,875              2010                                          2,250              2011 and thereafter                           3,300                                                         --------                                                          $ 32,750                                                         ========  - --------------------------------------------------------------------------------                                    (Continued)                                         F-20                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 7 - INCOME TAXES  Income tax expense was as follows:                                          2005            2004           2003                                         ----            ----           ----      Current          Federal                     $       971    $       483    $       374          State                               126             52             43      Deferred                               (403)           298            365                                      -----------    -----------    -----------           Total                       $       694    $       833    $       782                                      ===========    ===========    ===========  Effective  tax rates differ from federal  statutory  rates  applied to financial statement income due to the following.                                                        2005            2004           2003                                                     ----            ----           ----           Income tax at federal statutory rate        $       609    $       820    $       740      Effect of          State taxes, net of federal benefit              50             73             52          Other, net                                       35            (60)           (10)                                                  -----------    -----------    -----------       Total                                       $       694    $       833    $       782                                                  ===========    ===========    ===========       Effective tax rate                                38.7%           34.5%          35.9%                                                  ==========     ===========    ===========   The net  deferred  tax  assets  included  in other  assets  in the  consolidated statements of financial condition are as follows:                                                                        2005         2004                                                                     ----         ----         Deferred tax assets          Allowance for loan losses                              $      695    $      763          Accrued expenses                                              729           696          Unrealized loss on securities available for sale              644           138          Other                                                          34            24                                                                 ----------    ----------                                                                      2,102         1,621      Deferred tax liabilities          Premises and equipment                                       (321)         (340)          Federal Home Loan Bank stock dividends                       (259)         (650)          Deferred loan fees                                           (121)         (139)                                                                 ----------    ----------                                                                       (701)       (1,129)                                                                 ----------    ----------       Net deferred tax asset                                     $    1,401    $      492                                                                 ==========    ==========    - --------------------------------------------------------------------------------                                    (Continued)                                         F-21                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 7 - INCOME TAXES (Continued)  Federal  income tax laws provided  additional bad debt  deductions  through 1987 totaling $2,372. Accounting standards do not require a deferred tax liability to be  recorded  on this  amount,  which  liability  otherwise  would total $921 at December 31, 2005. If the Bank were liquidated or otherwise  ceased to be a bank or if tax laws were to change, this amount would be expensed.  NOTE 8 - EMPLOYEE BENEFITS  The Bank maintains a contributory  profit sharing plan for its employees.  To be eligible to participate, an employee must have completed one year of service, be credited with 1,000 hours of service  during that period,  and have attained the age of 18. Bank  contributions to the plan are  discretionary  and determined by the Board of  Directors.  Profit  sharing  expense  was $10 for the years  ended December 31, 2005, 2004 and 2003.  The Bank sponsors  nonqualified  unfunded retirement plans for certain directors and  officers,   which  provide  annual  benefit   payments  to  directors  upon retirement.  The Bank's  liability  for the plans  totaled  $1,877 and $1,793 at December 31, 2005 and 2004.  Expense  related to the plans totaled $97, $94, and $104 for the years ended December 31, 2005, 2004, and 2003.  NOTE 9 - EMPLOYEE STOCK OWNERSHIP PLAN  As part of the conversion  transaction,  the Company established an ESOP for the benefit of substantially all employees.  The ESOP borrowed $944 from the Company and used those funds to acquire 94,352 shares of the Company's  stock at $10 per share.  Shares issued to the ESOP are allocated to ESOP participants  based on principal and interest repayments made by the ESOP on the loan from the Company.  The loan was secured by shares  purchased  with the loan  proceeds  and was repaid by the ESOP with funds from the Company's  discretionary  contributions to the ESOP and earnings on the ESOP's assets. Principal payments were scheduled to occur over a ten-year  period;  however,  the  Company  elected  to prepay the loan and as of December 31, 2005, the loan is paid in full. There are no plans to adopt another Employee Stock Option Plan at this time.  Participants  receive the shares at the end of  employment.  A  participant  may require  stock  received  to be  repurchased  unless  the  stock is traded on an established market.  - --------------------------------------------------------------------------------                                    (Continued)                                         F-22                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 9 - EMPLOYEE STOCK OWNERSHIP PLAN (Continued)  During 2005, 2004, and 2003,  approximately 18,870 shares per year of stock with an average fair value of $23.65,  $24.38, and $19.98 per share were committed to be released,  resulting in ESOP  compensation  expense of $447,  $460, and $377. Shares held by the ESOP at December 31 are as follows:                                                                 2005      2004                                                                ----      ----        Allocated shares                                        86,152    70,092       Shares distributed from plan                             8,200     5,390       Unallocated shares                                          --    18,870                                                              -------   -------            Total ESOP shares                                   94,352    94,352                                                              =======   =======        Fair value of unallocated shares                       $    --   $   453                                                              =======   =======        Fair value of allocated shares subject to repurchase         obligation                                           $ 1,981   $ 1,684                                                              =======   =======  NOTE 10 - EMPLOYEE STOCK BENEFITS  The  Company  adopted a stock  option  plan in May 2003 under the terms of which options  for  114,685  shares of the  Company's  common  stock  were  granted to directors,  officers, and employees.  Exercise price is the market price at date of  grant,  so  there  is no  compensation  expense  recognized  in  the  income statement. The options become exercisable in equal installments over a five-year period  from the date of grant.  The  options  expire ten years from the date of grant.  There are a total of 6,256 options  available for future grant under the stock option plan.  - --------------------------------------------------------------------------------                                    (Continued)                                          F-23                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 10 - EMPLOYEE STOCK BENEFITS  A summary of the activity in the plan for 2005 is as follows:                                                     2005                    2004                                                  ----                    ----                                                      Weighted                Weighted                                                       Average                 Average                                                      Exercise                Exercise                                           Shares       Price      Shares       Price                                           ------       -----      ------       -----            Outstanding at beginning of year     112,685   $   18.75     114,685   $   18.75       Granted                                   --          --          --          --       Exercised                              6,000       18.75          --          --       Forfeited                              1,000       18.75       2,000       18.75                                          ---------   ---------   ---------   ---------        Outstanding at end of year           105,685       18.75     112,685   $   18.75                                          =========   =========   =========   =========        Options exercisable at year end       42,274                  27,337   At December 31,  2005,  105,685  options  outstanding  had an exercise  price of $18.75 with a weighted average remaining life of 7.4 years.  Pursuant to its 2003  stock-based  incentive  plan,  the Company  awarded 58,971 shares  of  restricted  stock in May 2003.  These  shares  normally  vest over a five-year  period,  unless  certain  circumstances  occur that  trigger  earlier vesting  according to the approved  Recognition and Retention Plan ("RRP").  The unamortized cost of shares not yet earned (vested) is reported as a reduction of stockholders' equity.  A summary of the activity in the RRP for is as follows:                                                             2005       2004                                                           ----       ----        RRP remaining to be vested at beginning of year    42,936     56,171       Granted                                               100         --       Vested                                            (10,634)   (13,235)       Forfeited                                            (400)        --                                                         -------    -------        RRP remaining to be vested at end of year          32,002     42,936                                                         =======    =======  Compensation expense for restricted stock awards totaled $198, $242 and $182 for the years ended December 31, 2005, 2004 and 2003.  - --------------------------------------------------------------------------------                                    (Continued)                                         F-24                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS  The carrying  amount and estimated fair value of financial  instruments  were as follows.                                                              December 31, 2005                 December 31, 2004                                                           -----------------                 -----------------                                                         Carrying       Fair              Carrying       Fair                                                          Amount        Value              Amount        Value                                                          ------        -----              ------        -----          Financial assets        Cash and cash equivalents                      $   15,230   $   15,230           $   17,031   $   17,031        Certificates of deposit                             8,584        8,584                9,783        9,783        Securities available for sale                      71,239       71,239               61,483       61,483        Securities held to maturity                           295          295                  132          134        Loans, net                                        151,768      150,458              163,291      164,169        Federal Home Loan Bank stock                        3,416        3,416               12,459       12,459        Accrued interest receivable                           960          960                  969          969      Financial liabilities        Deposits                                         (190,407)    (190,341)            (198,056)    (199,221)        Advances from Federal Home          Loan Bank                                       (32,750)     (32,258)             (36,250)     (36,402)        Advances from borrowers for taxes          and insurance                                    (1,746)      (1,746)              (1,795)      (1,795)        Accrued interest payable                             (148)        (148)                (143)        (143)   The  methods  and  assumptions  used to  estimate  fair value are  described  as follows.  Carrying  amount is the  estimated  fair  value  for cash and cash  equivalents, short-term borrowings, Federal Home Loan Bank stock, accrued interest receivable and payable,  demand  deposits,  short-term  debt,  and  variable  rate loans or deposits  that reprice  frequently  and fully.  Security  fair value is based on market prices or dealer quotes and, if no such information is available,  on the rate and term of the security and information  about the issuer.  For fixed rate loans or  deposits  and for  variable  rate loans or  deposits  with  infrequent repricing  or repricing  limits,  fair value is based on  discounted  cash flows using current market rates applied to the estimated  life and credit risk.  Fair values for impaired loans are estimated  using  discounted cash flow analysis or underlying  collateral  values.  Fair  value of loans  held for sale is based on market  quotes.  Fair  value of debt is  based  on  current  rates  for  similar financing. Fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements.  - --------------------------------------------------------------------------------                                    (Continued)                                         F-25                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 12 - REGULATORY CAPITAL  The Bank is subject to regulatory capital  requirements  administered by federal banking  agencies.  Capital  adequacy  guidelines and,  additionally  for banks, prompt corrective action regulations  involve  quantitative  measures of assets, liabilities,  and certain  off-balance-sheet  items  calculated under regulatory accounting  practices.  Capital amounts and  classifications are also subject to qualitative  judgments by regulators.  Failure to meet capital  requirements can initiate regulatory action.  Prompt  corrective  action  regulations  provide  five   classifications:   well capitalized,    adequately    capitalized,    undercapitalized,    significantly undercapitalized, and critically undercapitalized,  although these terms are not used to  represent  overall  financial  condition.  If  adequately  capitalized, regulatory   approval   is   required   to   accept   brokered   deposits.    If undercapitalized,  capital  distributions  are  limited,  as is asset growth and expansion, and capital restoration plans are required.  The Bank's actual and required capital amounts and ratios are presented below:                                                                                                        To Be Well                                                                                                  Capitalized Under                                                                            For Capital           Prompt Corrective                                                    Actual               Adequacy Purposes        Action Provisions                                               -----------------         -----------------        -----------------                                               Amount      Ratio       Amount        Ratio       Amount      Ratio                                               ------      -----       ------        -----       ------      -----        As of December 31, 2005 - -----------------------    Total capital to risk-weighted assets    $  30,333     23.1%      $ 10,483       8.0%       $  13,104    10.0%    Tier I (core) capital to risk-      weighted assets                           28,695     21.9          5,241       4.0%           7,862     6.0    Tier I (core) capital to      adjusted total assets                     28,695     11.1         10,379       4.0%          12,974     5.0  As of December 31, 2004 - -----------------------    Total capital to risk-weighted assets    $  30,005     22.7%      $ 10,695       8.0%       $  13,244    10.0%    Tier I (core) capital to risk-      weighted assets                           28,347     21.4          5,297       4.0%           7,946     6.0    Tier I (core) capital to      adjusted total assets                     28,347     10.4         10,866       4.0%          13,583     5.0   The  Qualified  Thrift  Lender  test  requires  that at least  65% of  assets be maintained in housing-related finance and other specified areas. If this test is not met, limits are placed on growth,  branching, new investments,  Federal Home Loan Bank advances,  and dividends or the Bank must convert to a commercial bank charter. Management believes that this test is met.  - --------------------------------------------------------------------------------                                    (Continued)                                         F-26                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 12 - REGULATORY CAPITAL (Continued)  As of December 31, 2005, the most recent  notification from the Office of Thrift Supervision  ("the  OTS")  categorized  the Bank as well  capitalized  under the regulatory  framework for prompt correction  action.  There are no conditions or events since that notification that management  believes have changed the Bank's category.  The Bank has  obtained OTS approval to dividend up to $1.5 million to the holding company by August 11, 2006.  During  2005,  the  Company  paid a cash  dividend  of $0.10 per share.  The OTS approved a waiver of dividends on the shares held by the mutual holding company. The amount of  dividends  waived,  totaling  $98, is a  restriction  on retained earnings of the Company.  NOTE 13 - EARNINGS PER COMMON SHARE  A  reconciliation  of the numerator and  denominator  of the earnings per common share computation for the year ended December 31 follows:                                                                          2005         2004                                                                       ----         ----          Basic           Net income                                               $    1,097   $    1,580                                                                    ==========   ==========                 Weighted average common shares outstanding           2,168,196    2,276,918                Less:  average unallocated ESOP shares                   9,435       28,305                                                                    ----------   ----------            Average shares                                            2,158,761    2,248,613                                                                    ==========   ==========            Basic earnings per common share                          $      .51   $      .70                                                                    ==========   ==========        Diluted           Net income                                               $    1,097   $    1,580                                                                    ==========   ==========                 Weighted average common shares                  outstanding for basic earnings per common share    2,158,761    2,248,613                Add:  dilutive effects of assumed exercises of                  stock options and stock awards                        24,989       30,587                                                                    ----------   ----------                 Average shares and dilutive potential                  common shares                                      2,183,750    2,279,200                                                                    ==========   ==========        Diluted earnings per common share                            $      .50   $      .69                                                                    ==========   ==========   - --------------------------------------------------------------------------------                                    (Continued)                                         F-27                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 14 - OFF-BALANCE-SHEET ACTIVITIES  Some financial instruments,  such as loan commitments,  credit lines, letters of credit, and overdraft  protection,  are issued to meet customer financing needs. These are  agreements to provide  credit or to support the credit of others,  as long as  conditions  established  in the  contract  are met,  and  usually  have expiration dates.  Commitments may expire without being used.  Off-balance-sheet risk to credit loss exists up to the face amount of these instruments,  although material losses are not  anticipated.  The same credit policies are used to make such  commitments  as are used for  loans,  including  obtaining  collateral  at exercise of the commitment.  The contractual amount of financial instruments with  off-balance-sheet risk was as follows at year end:                                                 2005                        2004                                              ----                        ----                                        Fixed       Variable        Fixed       Variable                                       Rate          Rate          Rate          Rate                                       ----          ----          ----          ----            Commitments to make loans    $     2,438   $       907   $     5,222   $     1,247       Unused lines of credit and         letters of credit                   --        14,725            --        13,412   Commitments  to make loans are  generally  made for periods of 120 days or less. The fixed rate loan commitments have interest rates ranging from 4.875% to 8.10% and the commitments are to extend credit ranging from 1 year to 30 years.  The Bank has previously  sold fixed rate mortgages to Fannie Mae and Freddie Mac with and without  recourse.  Recourse  obligations on sold loans are recorded at fair value.                                             2005                  2004                                            ----                  ----                                     Contract   Carrying   Contract  Carrying                                      Amount      Value     Amount     Value                                      ------      -----     ------     -----      Loans sold with recourse         $191       $191       $208       $208  In the normal  course of  business,  there are  various  outstanding  contingent liabilities,  such as claims and legal  actions,  that are not  reflected in the financial  statements.  In the opinion of  management,  no  material  losses are anticipated as a result of these actions or claims.  - --------------------------------------------------------------------------------                                    (Continued)                                         F-28                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                            December 31, 2005 and 2004                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 15 - OTHER COMPREHENSIVE INCOME  Other comprehensive income components and related taxes were as follows:                                                          2005        2004        2003                                                       ----        ----        ----           Unrealized holding gains and losses         on securities available for sale            $ (1,306)   $   (724)   $ (1,254)       Less reclassification adjustments for gains         and losses later recognized in income             --          --         (34)                                                     --------    --------    --------           Net unrealized gains and losses             (1,306)       (724)     (1,288)        Tax effect                                         507         281         500                                                     --------    --------    --------            Other comprehensive income                $   (799)   $   (443)   $   (788)                                                     ========    ========    ========   NOTE 16 - PARENT COMPANY CONSOLIDATED FINANCIAL STATEMENTS  The following are the condensed balance sheets and statements of income and cash flows for AJS Bancorp, Inc. without subsidiary.                              CONDENSED BALANCE SHEETS                            December 31, 2005 and 2004                                                           2005         2004                                                          ----         ---- ASSETS Cash and cash equivalents                              $   2,522    $  3,894 ESOP loan                                                     --         189 Investment in bank subsidiary                             27,680      28,133                                                        ---------    --------                                                         $  30,202    $ 32,216                                                        =========    ========  LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities                                            $   1,950    $  1,686 Stockholders' equity                                      28,252      30,530                                                        ---------    --------                                                         $  30,202    $ 32,216                                                        =========    ========  - --------------------------------------------------------------------------------                                    (Continued)                                         F-29                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 16 - PARENT COMPANY CONSOLIDATED FINANCIAL STATEMENTS   (Continued)                           CONDENSED STATEMENTS OF INCOME               For the years ended December 31, 2005, 2004, and 2003                                                             2005        2004        2003                                                         ----        ----        ----     Income      ESOP loan                                        $     12    $     17    $     23      Deposits in financial institutions                     68          31          46      Dividends from subsidiary                           1,500       3,000          --                                                       --------    --------    --------                                                           1,580       3,048          69 Other expenses      Other operating expenses                              162         121         120                                                       --------    --------    --------  Income before income taxes and equity in   undistributed earnings                                 1,418       2,927         (51)  Income taxes                                               (32)        (27)        (19)                                                       --------    --------    --------  Income before equity in undistributed   earnings of bank subsidiary                            1,450       2,954         (32)  Equity in undistributed earnings of bank subsidiary         --          --       1,425 Dividends in excess of earnings                           (353)     (1,374)         --                                                       --------    --------    --------  Net income                                            $  1,097    $  1,580    $  1,393                                                       ========    ========    ========   - --------------------------------------------------------------------------------                                    (Continued)                                         F-30                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 16 - PARENT COMPANY CONSOLIDATED FINANCIAL STATEMENTS   (Continued)                         CONDENSED STATEMENTS OF CASH FLOWS               For the years ended December 31, 2005, 2004, and 2003                                                              2005       2004       2003                                                           ----       ----       ----     Operating activities      Net income                                          $ 1,097    $ 1,580    $ 1,393      Adjustments to reconcile net income to net        cash provided by (used in) operating activities      Equity in undistributed earnings of        bank subsidiary                                       353      1,374     (1,425)      Change in other assets and liabilities                  (33)        (8)       (10)                                                          -------    -------    -------          Net cash provided by (used in)            operating activities                            1,417      2,946        (42)  Financing activities      Dividends paid                                         (114)        --         --      Payment received on loan to ESOP                        189        189        189      Purchase of common stock                             (2,976)    (3,000)    (1,459)      Proceeds for exercising stock options                   112         --         --                                                          -------    -------    -------          Net cash used in financing activities            (2,789)    (2,811)    (1,270)                                                          -------    -------    -------  Net change in cash and cash equivalents                   (1,372)       135     (1,312)  Cash and cash equivalents at beginning of year             3,894      3,759      5,071                                                          -------    -------    -------  Cash and cash equivalents at end of year                 $ 2,522    $ 3,894    $ 3,759                                                          =======    =======    =======   - --------------------------------------------------------------------------------                                    (Continued)                                         F-31                                   AJS BANCORP, INC.                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                   (Dollars in thousands, except per share data)  - --------------------------------------------------------------------------------  NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)                                                               Earnings                                                              Per Shares                         Interest   Net Interest   Net        Basic and                          Income      Income      Income       Diluted                          ------      ------      ------       ------- 2005 - ----     First quarter       $  3,276     $  1,837    $   371      $   .17     Second quarter         3,218        1,723        329          .15     Third quarter          3,237        1,717        253          .12     Fourth quarter         3,216        1,647        144          .07  2004 - ----     First quarter       $  3,039     $  1,894    $   359      $   .16     Second quarter         3,160        1,917        348          .15     Third quarter          3,236        1,878        442          .20     Fourth quarter         3,301        1,869        431          .20/.19  - --------------------------------------------------------------------------------                                         F-32     EX-21 3 ex21.txt EX-21                                      EXHIBIT 21                           SUBSIDIARIES OF THE REGISTRANT                             SUBSIDIARIES OF THE REGISTRANT  Subsidiary                               Ownership      State of Incorporation - ----------                               ---------      ----------------------  A. J. Smith Federal Savings Bank            100%               Federal  A. J. S Insurance, LLC                      100%              Illinois     EX-23 4 ex23.txt EX-23                                      EXHIBIT 23                         CONSENT OF AUDITORS TO INCORPORATE                        FINANCIAL STATEMENTS INTO FORM S-8                                                                          Exhibit 23              CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  We consent to the  incorporation  by reference  in  Registration  Statement  No. 333-105598  on Form S-8 of the AJS Bancorp,  Inc. 2003 Stock Option Plan and the AJS  Bancorp,  Inc.  2003  Recognition  and  Retention  Plan of our report dated February 17, 2006  appearing in this Annual  Report on Form 10-K of AJS Bancorp, Inc.                                          /s/ Crowe Chizek and Company LLC                                             Crowe Chizek and Company LLC  Oak Brook, Illinois March 24, 2006    EX-31.1 5 ex31-1.txt EX-31.1                               EXHIBITS 31.1, 31.2, 31.3                      CERTIFICATION OF CHIEF EXECUTIVE OFFICER,                       PRESIDENT AND CHIEF FINANCIAL OFFICER             PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002                                                                        Exhibit 31.1                      Certification of Chief Executive Officer             Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002             ---------------------------------------------------------        I, Thomas R. Butkus, certify that  1.    I have reviewed this annual report on Form 10-K of AJS Bancorp, Inc.;  2.    Based on my  knowledge,  this  annual  report  does not contain any untrue       statement of a material fact or omit to state a material fact necessary to       make the statements made, in light of the  circumstances  under which such       statements were made, not misleading with respect to the period covered by       this annual report;  3.    Based on my  knowledge,  the  financial  statements,  and other  financial       information included in this annual report, fairly present in all material       respects the financial condition,  results of operations and cash flows of       the  registrant  as of, and for,  the  periods  presented  in this  annual       report;  4.    The  registrant's  other  certifying  officers and I are  responsible  for       establishing  and  maintaining  disclosure  controls  and  procedures  (as       defined in Exchange Act Rules  13a-15(e) and 15d-15(e)) for the registrant       and have:        a)    designed  such  disclosure  controls and  procedures  to ensure that             material  information  relating  to the  registrant,  including  its             consolidated  subsidiaries,  is made  known to us by  others  within             those entities,  particularly during the period in which this annual             report is being prepared;        b)    evaluated the effectiveness of the registrant's  disclosure controls             and  procedures and presented in this report our  conclusions  about             the effectiveness of the disclosure  controls and procedures,  as of             the  end  of the  period  covered  by  this  report  based  on  such             evaluation; and        c)    disclosed  in this  report any change in the  registrant's  internal             control  over   financial   reporting   that  occurred   during  the             registrant's  most recent fiscal  quarter (the  registrant's  fourth             fiscal  quarter in the case of an annual report) that has materially             affected,   or  is  reasonably  likely  to  materially  affect,  the             registrant's internal control over financial reporting;  5.    The registrant's other certifying officers and I have disclosed,  based on       our most recent  evaluation of internal control over financial  reporting,       to the  registrant's  auditors and the audit committee of the registrant's       board of directors (or persons performing the equivalent functions):        a)    all significant  deficiencies and material  weaknesses in the design             or operation of internal control over financial  reporting which are             reasonably  likely to adversely affect the  registrant's  ability to             record, process, summarize and report financial information; and        b)    any fraud,  whether or not  material,  that  involves  management or             other  employees  who have a  significant  role in the  registrant's             internal control over financial reporting.   March 16, 2006                /s/ Thomas R. Butkus                              --------------------------- Date                         Thomas R. Butkus                              Chairman of the Board and Chief Executive Officer     EX-31.2 6 ex31-2.txt EX-31.2                                                                      Exhibit 31.2                             Certification of President             Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002             ---------------------------------------------------------           I, Lyn G. Rupich, certify that:  1.    I have reviewed this annual report on Form 10-K of AJS Bancorp, Inc.;  2.    Based on my  knowledge,  this  annual  report  does not contain any untrue       statement of a material fact or omit to state a material fact necessary to       make the statements made, in light of the  circumstances  under which such       statements were made, not misleading with respect to the period covered by       this annual report;  3.    Based on my  knowledge,  the  financial  statements,  and other  financial       information included in this annual report, fairly present in all material       respects the financial condition,  results of operations and cash flows of       the  registrant  as of, and for,  the  periods  presented  in this  annual       report;  4.    The  registrant's  other  certifying  officers and I are  responsible  for       establishing  and  maintaining  disclosure  controls  and  procedures  (as       defined in Exchange Act Rules  13a-15(e) and 15d-15(e)) for the registrant       and have:        a)    designed  such  disclosure  controls and  procedures  to ensure that             material  information  relating  to the  registrant,  including  its             consolidated  subsidiaries,  is made  known to us by  others  within             those entities,  particularly during the period in which this annual             report is being prepared;        b)    evaluated the effectiveness of the registrant's  disclosure controls             and  procedures and presented in this report our  conclusions  about             the effectiveness of the disclosure  controls and procedures,  as of             the  end  of the  period  covered  by  this  report  based  on  such             evaluation; and        c)    disclosed  in this  report any change in the  registrant's  internal             control  over   financial   reporting   that  occurred   during  the             registrant's  most recent fiscal  quarter (the  registrant's  fourth             fiscal  quarter in the case of an annual report) that has materially             affected,   or  is  reasonably  likely  to  materially  affect,  the             registrant's internal control over financial reporting;  5.    The registrant's other certifying officers and I have disclosed,  based on       our most recent  evaluation of internal control over financial  reporting,       to the  registrant's  auditors and the audit committee of the registrant's       board of directors (or persons performing the equivalent functions):        a)    all significant  deficiencies and material  weaknesses in the design             or operation of internal control over financial  reporting which are             reasonably  likely to adversely affect the  registrant's  ability to             record, process, summarize and report financial information; and        b)    any fraud,  whether or not  material,  that  involves  management or             other  employees  who have a  significant  role in the  registrant's             internal control over financial reporting.   March 16, 2006                           /s/ Lyn G. Rupich Date                                     ------------------                                         Lyn G. Rupich                                         President     EX-31.3 7 ex31-3.txt EX-31.3                                                                      Exhibit 31.3                      Certification of Chief Financial Officer             Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002             ---------------------------------------------------------        I, Pamela N. Favero, certify that  1.    I have reviewed this annual report on Form 10-K of AJS Bancorp, Inc.;  2.    Based on my  knowledge,  this  annual  report  does not contain any untrue       statement of a material fact or omit to state a material fact necessary to       make the statements made, in light of the  circumstances  under which such       statements were made, not misleading with respect to the period covered by       this annual report;  3.    Based on my  knowledge,  the  financial  statements,  and other  financial       information included in this annual report, fairly present in all material       respects the financial condition,  results of operations and cash flows of       the  registrant  as of, and for,  the  periods  presented  in this  annual       report;  4.    The  registrant's  other  certifying  officers and I are  responsible  for       establishing  and  maintaining  disclosure  controls  and  procedures  (as       defined in Exchange Act Rules  13a-15(e) and 15d-15(e)) for the registrant       and have:        a)    designed  such  disclosure  controls and  procedures  to ensure that             material  information  relating  to the  registrant,  including  its             consolidated  subsidiaries,  is made  known to us by  others  within             those entities,  particularly during the period in which this annual             report is being prepared;        b)    evaluated the effectiveness of the registrant's  disclosure controls             and  procedures and presented in this report our  conclusions  about             the effectiveness of the disclosure  controls and procedures,  as of             the  end  of the  period  covered  by  this  report  based  on  such             evaluation; and        c)    disclosed  in this  report any change in the  registrant's  internal             control  over   financial   reporting   that  occurred   during  the             registrant's  most recent fiscal  quarter (the  registrant's  fourth             fiscal  quarter in the case of an annual report) that has materially             affected,   or  is  reasonably  likely  to  materially  affect,  the             registrant's internal control over financial reporting;  5.    The registrant's other certifying officers and I have disclosed,  based on       our most recent  evaluation of internal control over financial  reporting,       to the  registrant's  auditors and the audit committee of the registrant's       board of directors (or persons performing the equivalent functions):        a)    all significant  deficiencies and material  weaknesses in the design             or operation of internal control over financial  reporting which are             reasonably  likely to adversely affect the  registrant's  ability to             record, process, summarize and report financial information; and        b)    any fraud,  whether or not  material,  that  involves  management or             other  employees  who have a  significant  role in the  registrant's             internal control over financial reporting.   March 16, 2006                                       /s/ Pamela N. Favero Date                                                 --------------------                                                      Pamela N. Favero                                                      Chief Financial Officer     EX-32 8 ex32.txt EX-32                                     EXHIBIT 32              CERTIFICATION OF CHIEF EXECUTIVE OFFICER , PRESIDENT AND                              CHIEF FINANCIAL OFFICER                          PURSUANT TO SECTION 906 OF THE                            SARBANES-OXLEY ACT OF 2002                                                                          Exhibit 32                              Certification pursuant to                              18 U.S.C. Section 1350,                              as adopted pursuant to                   Section 906 of the Sarbanes-Oxley Act of 2002        Thomas R. Butkus,  Chairman of the Board and Chief Executive Officer,  Lyn G.  Rupich,  President  and Pamela N.  Favero,  Chief  Financial  Officer of AJS Bancorp,  Inc. (the "Company") each certify in their capacity as officers of the Company that they have  reviewed  the annual  report of the Company on Form 10-K for the  fiscal  year  ended  December  31,  2005  and that to the best of their knowledge:  1.    the report fully complies with the  requirements  of Sections 13(a) of the       Securities Exchange Act of 1934; and  2.    the information  contained in the report fairly presents,  in all material       respects,  the  financial  condition  and  results  of  operations  of the       Company.  The purpose of this  statement  is solely to comply  with Title 18,  Chapter 63, Section  1350 of the United  States  Code,  as  amended  by  Section  906 of the Sarbanes-Oxley Act of 2003.  March 16, 2006                              /s/ Thomas R. Butkus Date                                        --------------------                                             Chairman of the Board and Chief                                             Executive Officer  March 16, 2006                              /s/ Lyn G. Rupich Date                                        --------------------                                             President  March 16, 2006                              /s/ Pamela N. Favero Date                                        --------------------                                             Chief Financial Officer     -----END PRIVACY-ENHANCED MESSAGE-----