UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





(Mark
One)





x
            ANNUAL
      REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF1934




For the
fiscal ended December 31, 2007.


Or





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





For the
transition period from ______________ to ______________.





Commission
file number: 000-33405





AJS
BANCORP, INC.


(Exact
name of registrant as specified in its charter)





United States
            
            36-4485429(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)







14757 S. Cicero Avenue Midlothian,
      Illinois
            
            60445(Address
      of principal executive offices)
            
            (Zip
      Code)





Registrant's
telephone number, including area code:  (708)
687-7400





Securities
registered pursuant to Section 12(b) of the Act:





Title of each class
            
            Name of each exchange on which
      registeredCommon
      Stock, $0.01 par value
            
            The
      NASDAQ Stock Market, LLC





Securities
registered pursuant to Section 12(g) of the Act: None








Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


YES   ̈  NO  x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


YES   ̈  NO  x





Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


YES
      x  NO
       ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.      x





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):





Large
      accelerated filer   ̈
            Accelerated
      filer   ̈Non-accelerated
      filer   ̈
            Smaller
      reporting company  x





(Do not
check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).  YES   ̈  NO  x





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, computed by reference to the last sale price
on June 30, 2007, as reported by the Nasdaq Capital Market, was approximately
$14.3 million.





As of
March 18, 2008, there was issued and outstanding 2,036,872 shares of the
Registrant’s Common Stock, including 1,227,544 shares owned by AJS Bancorp,
MHC.





DOCUMENTS
INCORPORATED BY REFERENCE:





(1) Proxy
Statement for the 2008 Annual Meeting of Stockholders of the Registrant (Part
III).


(2)
Annual Report to Stockholder (Part II and IV).













TABLE OF CONTENTS






ITEM 1.
            
            DESCRIPTION OF
      BUSINESS
            1ITEM 2.
            
            DESCRIPTION OF
      PROPERTIES
            29ITEM 3.
            
            LEGAL
      PROCEEDINGS
            29ITEM 4.
            
            SUBMISSION OF MATTERS TO A VOTE
      OF SECURITY HOLDERS
            29ITEM 5.
            
            MARKET FOR COMMON EQUITY, RELATED
      STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
      SECURITIES
            29ITEM 6
            
            MANAGEMENT’S DISCUSSION AND
      ANALYSIS OR PLAN OF OPERATIONS
            31ITEM 7.
            
            FINANCIAL
      STATEMENTS
            47ITEM 8.
            
            CHANGES IN AND DISAGREEMENTS WITH
      ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
    DISCLOSURE
            47ITEM 8A.
            
            CONTROLS AND
      PROCEDURES
            47ITEM 8B.
            
            OTHER
      INFORMATION
            48ITEM 9.
            
            DIRECTORS, EXECUTIVE OFFICERS,
      PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH
      SECTION 16(a) OF THE EXCHANGE ACT
            48ITEM 10.
            
            EXECUTIVE
      COMPENSATION
            48ITEM 11.
            
            SECURITY OWNERSHIP OF CERTAIN
      BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS
            48ITEM 12.
            
            CERTAIN RELATIONSHIPS AND
      RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
            48ITEM 13.
            
            EXHIBITS
            49ITEM 14.
            
            PRINCIPAL ACCOUNTANT FEES AND
      SERVICES
            49




Table of Contents





PART
I





ITEM
      1.
            DESCRIPTION OF
      BUSINESS





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





AJS
Bancorp, Inc.





AJS
Bancorp, Inc. is a mid-tier stock holding company for A. J. Smith Federal
Savings Bank (the “Bank” or “A.J. Smith Federal”).  The business of
AJS Bancorp, Inc. consists of holding all of the outstanding common stock of A.
J. Smith Federal Savings Bank.  AJS Bancorp, Inc. is chartered under
federal law.  AJS Bancorp, Inc. has 1,227,544 issued and outstanding
shares of common stock to our mutual holding company parent, AJS Bancorp, MHC
(“MHC”), and 1,179,406 issued and outstanding shares to the public at December
31, 2007.  Under federal regulations, so long as AJS Bancorp, MHC
exists, it will own at least 50.1% of the voting stock of AJS Bancorp,
Inc.  At December 31, 2007, AJS Bancorp, Inc. had total consolidated
assets of $248.4 million, total deposits of $190.5 million, and stockholders’
equity of $27.9 million.  Our executive offices are located at 14757
South Cicero Avenue, Midlothian, Illinois 60445, and our telephone number is
(708) 687-7400.





A.
J. Smith Federal Savings Bank





A. J.
Smith Federal Savings Bank was founded in 1892 by Arthur J. Smith as a building
and loan cooperative organization.  In 1924 we were chartered as an
Illinois savings and loan association, and in 1934 we converted to a federal
charter.  In 1984 we amended our charter to become a federally
chartered savings bank.  We are a customer-oriented institution,
operating from a main office in Midlothian, Illinois, and two branch offices in
Orland Park, Illinois.  Our primary business activity is the
origination of one- to four-family real estate loans.  To a lesser
extent, we originate multi-family, commercial real estate and consumer
loans.  As part of our current business plan, we intend to develop our
business banking by offering commercial loans and deposit products and services
to business customers.  We also invest in securities, primarily United
States Government Agency securities and mortgage-backed
securities.  In addition, we offer insurance and investment products
and services.  During the past two years, as the interest yield cure
flattened and then inverted, we allowed the overall composition of our assets to
become more liquid.  Investment securities has become a larger
percentage of our assets in 2007, while loans have become a smaller portion of
our assets than have historically been the case.  We believe that the
repositioning of our assets in this manner will position A. J. Smith Federal to
take advantage of the changes in long-term interest rates while reducing our
interest rate risk profile.





1
 Table of Contents




Market
Area





A. J.
Smith Federal has been, and continues to be, a community-oriented savings bank
offering a variety of financial products and services to meet the needs of the
communities we serve.  Our lending and deposit-generating area is
concentrated in the neighborhoods surrounding our three offices; our main office
in Midlothian, Illinois, and two branch offices in Orland Park,
Illinois.  Our offices are located in Cook County.  However,
we consider our market area to be the counties of Will and
Cook.  Midlothian is primarily a residential community, and its
largest employers are state and local governments and automobile
dealerships.  Orland Park has more retail businesses, as well as light
industrial companies.  Our market area economy consists primarily of
the services industry, wholesalers and retailers and
manufacturing.  Major employers in our market area include the Orland
Park School District, the Village of Orland Park, and various retailers
including J. C. Penney, Macy’s and Sears.  The economy in our market
area is not dependent on any single employer or type of business.





Competition





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





Lending
Activities





General.  Our
loan portfolio is comprised mainly of one- to four-family residential real
estate loans.  The majority of these loans have fixed rates of
interest.  In addition to one- to four-family residential real estate
loans, our loan portfolio consists of multi-family loans and home equity lines
of credit.  At December 31, 2007, our gross loans totaled $134.4
million, of which $85.8 million, or 63.9%, were secured by one- to four-family
residential real estate, $33.9 million, or 25.2%, were secured by multi-family
residential and commercial real estate, $14.4 million, or 10.7%, were home
equity loans, and $258,000, or 0.19%, were consumer loans.  Our
lending area is the Chicago metropolitan area, with an emphasis on lending in
the south and southwest suburbs.





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





2
 Table of Contents





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





At
      December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent(Dollars
      in thousands)Real
      estate loans:One-
      to four-family residential
            
            $
            85,803
            
            
            
            63.87
            %
            
            $
            86,024
            
            
            
            61.49
            %
            
            $
            101,325
            
            
            
            66.03
            %
            
            $
            115,598
            
            
            
            70.02
            %
            
            $
            120,810
            
            
            
            76.64
            %Multi-family
      and commercial
            
            
            33,888
            
            
            
            25.22
            
            
            
            41,194
            
            
            
            29.45
            
            
            
            38,317
            
            
            
            24.97
            
            
            
            32,713
            
            
            
            19.82
            
            
            
            24,066
            
            
            
            15.27Total
      real estate loans
            
            
            119,691
            
            
            
            
            
            
            
            127,218
            
            
            
            
            
            
            
            139,642
            
            
            
            
            
            
            
            148,311
            
            
            
            
            
            
            
            144,876Other
      Loans:Consumer
      loans
            
            
            258
            
            
            
            0.19
            
            
            
            482
            
            
            
            0.34
            
            
            
            502
            
            
            
            0.33
            
            
            
            649
            
            
            
            0.39
            
            
            
            696
            
            
            
            0.44Home
      equity
            
            
            14,406
            
            
            
            10.72
            
            
            
            12,198
            
            
            
            8.72
            
            
            
            13,279
            
            
            
            8.67
            
            
            
            16,126
            
            
            
            9.77
            
            
            
            12,056
            
            
            
            7.65Total
      loans
            
            
            134,355
            
            
            
            100.00
            %
            
            
            139,898
            
            
            
            100.00
            %
            
            
            153,423
            
            
            
            100.00
            %
            
            
            165,086
            
            
            
            100.00
            %
            
            
            157,628
            
            
            
            100.00
            %Less:Allowance
      for loan losses
            
            
            (1,539
            )
            
            
            
            
            
            
            (1,619
            )
            
            
            
            
            
            
            (1,701
            )
            
            
            
            
            
            
            (1,847
            )
            
            
            
            
            
            
            (1,962
            )Deferred
      loan (fees) costs
            
            
            156
            
            
            
            
            
            
            
            107
            
            
            
            
            
            
            
            56
            
            
            
            
            
            
            
            69
            
            
            
            
            
            
            
            (16
            )Deferred
      gain on real estate contract
            
            
            (6
            )
            
            
            
            
            
            
            (9
            )
            
            
            
            
            
            
            (10
            )
            
            
            
            
            
            
            (17
            )
            
            
            
            
            
            
            (22
            )Total
      loans receivable, net
            
            $
            132,966
            
            
            
            
            
            
            $
            138,377
            
            
            
            
            
            
            $
            151,768
            
            
            
            
            
            
            $
            163,291
            
            
            
            
            
            
            $
            155,628




3
 Table of Contents





Maturity of Loan
Portfolio.  The following table sets forth certain information
regarding the dollar amounts maturing and the interest rate sensitivity of our
loan portfolio at December 31, 2007.  Mortgages which have adjustable
or renegotiable interest rates are shown as maturing in the period during which
the contract is due.  The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.





One- to Four-Family
            
            
            Multi-Family
              and Commercial
            
            
            Consumer
            
            
            Home Equity
            
            
            TotalWeighted
            
            
            
            
            
            Weighted
            
            
            
            
            
            Weighted
            
            
            
            
            
            Weighted
            
            
            
            
            
            WeightedAverage
            
            
            
            
            
            Average
            
            
            
            
            
            Average
            
            
            
            
            
            Average
            
            
            
            
            
            AverageAmount
            
            
            Rate
            
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate
            
            
            Amount
            
            
            Rate(Dollars
      in thousands)1
      year or less
            
            $
            1,947
            
            
            
            6.95
            %
            
            $
            9,899
            
            
            
            7.39
            %
            
            $
            116
            
            
            
            5.87
            %
            
            $
            2,010
            
            
            
            7.11
            %
            
            $
            13,972
            
            
            
            7.28
            %Greater
      than 1 to 3 years
            
            
            3,582
            
            
            
            6.66
            
            
            
            15,462
            
            
            
            6.85
            
            
            
            19
            
            
            
            7.49
            
            
            
            3,459
            
            
            
            7.12
            
            
            
            22,522
            
            
            
            6.86Greater
      than 3 to 5 years
            
            
            3,519
            
            
            
            6.64
            
            
            
            5,667
            
            
            
            7.34
            
            
            
            123
            
            
            
            5.25
            
            
            
            8,937
            
            
            
            6.98
            
            
            
            18,246
            
            
            
            7.01Greater
      than 5 to 10 years
            
            
            15,263
            
            
            
            5.73
            
            
            
            1,858
            
            
            
            6.65
            
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            17,121
            
            
            
            5.83Greater
      than 10 to 20 years
            
            
            20,604
            
            
            
            5.49
            
            
            
            1,002
            
            
            
            6.79
            
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            21,606
            
            
            
            5.55More
      than 20 years
            
            
            40,888
            
            
            
            5.61
            
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            
            
            
            
            40,888
            
            
            
            5.61Total
            
            $
            85,803
            
            
            
            
            
            
            $
            33,888
            
            
            
            
            
            
            $
            258
            
            
            
            
            
            
            $
            14,406
            
            
            
            
            
            
            $
            134,355





The total
amount of loans due after December 31, 2008 which have predetermined interest
rates is $86.8 million, while the total amount of loans due after such date
which have floating or adjustable interest rates is $33.6 million.





4
 Table of Contents





One- to
Four-Family Residential Real Estate Loans.  Our primary lending
activity consists of originating one- to four-family, owner-occupied, first and
second residential mortgage loans, virtually all of which are secured by
properties located in our market area.  At December 31, 2007, these
loans totaled $85.8 million, or 63.9% of our total loan portfolio.





We
currently offer one- to four-family residential real estate loans with terms up
to 40 years, although we emphasize the origination of one- to four-family
residential loans with terms of 15 years or less.  We offer our one-
to four-family residential loans with adjustable or fixed interest
rates.  At December 31, 2007, $66.7 million, or 77.8% of our one- to
four-family residential real estate loans had fixed rates of interest, and $19.1
million, or 22.2% of our one- to four-family residential real estate loans, had
adjustable rates of interest.  Our fixed rate loans include loans that
generally amortize on a monthly basis over periods between 7 to 40
years.  We also offer loans which generally have balloon payment
features after 3 or 5 years.  Our balloon loans generally amortize
over periods of 15 years or more.  One- to four-family residential
real estate loans often remain outstanding for significantly shorter periods
than their contractual terms because borrowers have the right to refinance or
prepay their loans.





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





Regulations
limit the amount that a savings association may lend relative to the appraised
value of the real estate securing the loan, as determined by an appraisal of the
property at the time the loan is originated.  For loans greater than
$175,000 we utilize outside independent appraisers.  For loans up to
$175,000, we utilize outside independent appraisers to perform a drive-by
appraisal.  For borrowers who do not obtain private mortgage
insurance, our lending policies limit the maximum loan to value ratio on both
fixed rate and adjustable rate mortgage loans to 80% of the appraised value of
the property that is collateral for the loan (and up to 85% with respect to
second fixed-rate mortgage loans).  For one- to four-family
residential real estate loans with loan to value ratios of between 80% and 97%,
we require the borrower to obtain private mortgage insurance.  For
loans in excess of $75,000, we require the borrower to obtain title
insurance.  For first mortgage loan products under $75,000, we conduct
a title search.  For second mortgage type products in excess of
$200,000, title insurance is required.  For second mortgage type
products under $200,000, we conduct a title search.  We also require
homeowners’ insurance and fire and casualty insurance on properties securing
real estate loans.





5
 Table of Contents





Multi-Family
Loans and Commercial  Lending.  At December 31, 2007,
$33.9 million, or 25.2% of our total loan portfolio, consisted of loans secured
by multi-family and commercial real estate properties, virtually all of which
are located in the state of Illinois.  Our multi-family loans are
secured by multi-family and mixed use properties.  Our commercial real
estate loans are secured by improved property such as offices, small business
facilities, unimproved land, warehouses and other non-residential
buildings.  Our multi-family and commercial real estate loans are
offered with fixed or floating rates based upon the prime rate.  Our
fixed rate multi-family and commercial real estate loans are offered with
amortization schedules of up to 25 years, and generally have three- and
five-year balloon features.  At December 31, 2007, the average balance
of our multi-family and commercial real estate loans was $278,000.We generally will make
multi-family and commercial real estate loans for up to 80% of the lesser of
cost or the appraised value of the property securing the loan.





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





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





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





Commercial
business loans generally have higher interest rates and shorter terms than one-
to four-family residential loans, but they also may involve higher average
balances, increased difficulty of loan monitoring and a higher risk of default
since their repayment generally depends on the successful operation of the
borrower’s business.  We generally obtain personal guarantees from the
borrower or a third party as a condition to originating a commercial business
loan.





6
 Table of Contents





Home Equity Lines
of Credit.  We offer home equity lines of credit, the total of
which amounted to $14.4 million, or 10.7% of our total loan portfolio, as of
December 31, 2007.  Home equity lines of credit are generally made for
owner-occupied homes, and are secured by first or second mortgages on
residences.  We generally offer these loans with a maximum loan to
appraised value ratio of 90% (including senior liens on the collateral
property).  We currently offer these lines of credit for a period of 5
years, and generally at rates tied to the prevailing prime interest
rate.  Our home equity lines of credit are generally underwritten in
the same manner as our one- to four-family residential loans.





Consumer
Loans.  We are authorized
to make loans for a variety of personal and consumer purposes.  As of
December 31, 2007, consumer loans totaled $258,000, and consisted primarily of
automobile loans and loans secured by deposit accounts.  Automobile
loans accounted for $171,000 of our consumer loans and loans secured by deposit
accounts were $87,000 at December 31, 2007.  Our procedure for
underwriting consumer loans includes an assessment of the applicant’s credit
history and ability to meet existing obligations and payments of the proposed
loan, as well as an evaluation of the value of the collateral security, if
any.  Consumer loans generally entail greater risk than residential
mortgage loans, particularly in the case of loans that are unsecured or are
secured by assets that tend to depreciate in value, such as
automobiles.  In these cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan, and the remaining value often does not warrant further
substantial collection efforts against the borrower.





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





Our loan
origination activity may be affected adversely by a rising interest rate
environment that typically results in decreased loan
demand.  Historically, a declining interest rate environment generally
would result in increased loan demand, however, in the case of declining real
estate values, our loan origination activity may also decline as fewer home
purchases occur.  Accordingly, the volume of loan originations and the
profitability of this activity may vary from period to
period.  Historically, we have originated mortgage loans for sale in
the secondary market, and we may do so in the future, although this is not a
significant part of our business at this time.





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





Years Ended December 31,2007
            
            
            2006
            
            
            2005(In
      thousands)Loans
      receivable, beginning of period
            
            $
            139,898
            
            
            $
            153,423
            
            
            $
            165,086Originations
      by type:Real
      estate- one to four-family
            
            
            14,730
            
            
            
            11,137
            
            
            
            17,005Multi-family
      and commercial
            
            
            8,120
            
            
            
            14,487
            
            
            
            20,698Non-real
      estate -consumer
            
            
            319
            
            
            
            1,046
            
            
            
            445Home
      equity
            
            
            8,991
            
            
            
            8,532
            
            
            
            7,614Total
      loans originated
            
            
            32,160
            
            
            
            35,202
            
            
            
            45,762Sales
            
            
            -
            
            
            
            (3,310
            )
            
            
            (1,977
            )Principal
      repayments:
            
            
            (37,703
            )
            
            
            (45,417
            )
            
            
            (55,448
            )Loans
      receivable, at end of period
            
            $
            134,355
            
            
            $
            139,898
            
            
            $
            153,423




7
 Table of Contents





Loan Approval
Procedures and Authority.Our lending activities are subject
to written, non-discriminatory underwriting standards and loan origination
procedures adopted by management and the Board of Directors.  A loan
officer initially reviews all loans, regardless of size or
type.  Loans up to the Fannie Mae single family loan limit, currently
$417,000, must be reviewed and approved by a loan underwriter, a Vice President
or Senior Vice President of the loan department.  All loans of
$417,000 or less that do not meet our standard underwriting ratios and credit
criteria must be reviewed by the Vice President or in their absence, a Senior
Vice President, or the Officers’ Loan Committee.  The Officers’ Loan
Committee, which consists of Raymond Blake, Edward Milen, Lyn G. Rupich, Donna
Manuel and W. Anthony Kopp, has the authority to approve all loans up to
$750,000.  The Chief Executive Officer and the Board of Directors must
approve loans in excess of $750,000.





Loans-to-One-Borrower.  Federal
savings banks are subject to the same loans-to-one-borrower limits as those
applicable to national banks, which restrict loans to one borrower to an amount
equal to 15% of unimpaired capital and unimpaired surplus on an unsecured basis,
and an additional amount equal to 10% of unimpaired capital and unimpaired
surplus if the loan is secured by readily marketable collateral (generally,
financial instruments and bullion, but not real estate).  At December
31, 2007, our lending limit was $4.6 million.  At December 31, 2007,
our largest lending relationship to one borrower totaled $4.0
million.  At December 31, 2007, we had 23 lending relationships in
which the total amount outstanding exceeded $500,000.   Two of
these lending relationships totaling $3.0 million are impaired, while one
lending relationship totaling $2.9 million is on the Company’s watch list as of
December 31, 2007.  The Company’s watch list includes any commercial
loan that has for the past twelve months been late paying three times or
more.





Asset
Quality





Loan
Delinquencies and Collection Procedures.  When a borrower fails
to make required payments on a loan, we take a number of steps to induce the
borrower to cure the delinquency and restore the loan to a current
status.  In the case of mortgage loans, a reminder notice is sent 15
days after an account becomes delinquent.  After 15 days, we attempt
to establish telephone contact with the borrower.  If the borrower
does not remit the entire payment due by the end of the month, then a letter
that includes information regarding home-ownership counseling organizations is
sent to the borrower.  During the first 15 days of the following
month, a second letter is sent, and we also attempt to establish telephone
contact with the borrower.  At this time, and after reviewing the
cause of the delinquency and the borrower’s previous loan payment history, we
may agree to accept repayment over a period of time, which will generally not
exceed 60 days.  However, should a loan become delinquent by two or
more payments, and the borrower is either unwilling or unable to repay the
delinquency over a period of time acceptable to us, we send a notice of default
by both regular and certified mail.  This notice will provide the
borrower with the terms which must be met to cure the default, and will again
include information regarding home-ownership counseling.  In the case
of commercial mortgage loans, attempts will be made to work out a repayment plan
that will preserve the current ownership of the property while allowing the
Company to retain a performing lending relationship.





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





8
 Table of Contents





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





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





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





As of
December 31, 2007, our total non-accrual loans were $934,000, compared to
$540,000 at December 31, 2006.





The
following table sets forth our loan delinquencies by type, amount and percentage
at December 31, 2007.





Loans
      Delinquent For:60-89
      Days
            
            
            90
      Days and Over
            
            
            Total
      Delinquent LoansNumber
            
            
            Amount
            
            
            Percent
              of
      Loan
              Category
            
            
            Number
            
            
            Amount
            
            
            Percent
              of
      Loan
              Category
            
            
            Number
            
            
            Amount
            
            
            Percent
              of
      Loan
              Category(Dollars
      in thousands)Real
      estate:One-
      to four-family
            
            
            7
            
            
            $
            607
            
            
            
            0.71
            %
            
            
            7
            
            
            $
            774
            
            
            
            0.90
            %
            
            
            14
            
            
            $
            1,381
            
            
            
            1.61
            %Multi-family
      and commercial
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1
            
            
            
            68
            
            
            
            0.20
            
            
            
            1
            
            
            
            68
            
            
            
            0.20Consumer
      and other
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Home
      equity
            
            
            2
            
            
            
            109
            
            
            
            0.76
            
            
            
            2
            
            
            
            92
            
            
            
            0.64
            
            
            
            4
            
            
            
            201
            
            
            
            1.40Total
            
            
            9
            
            
            $
            716
            
            
            
            0.53
            %
            
            
            10
            
            
            $
            934
            
            
            
            0.70
            %
            
            
            19
            
            
            $
            1,650
            
            
            
            1.23
            %





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





At December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(Dollars
      in thousands)Non-performing
      loans:One-
      to four-family
            
            $
            774
            
            
            $
            132
            
            
            $
            326
            
            
            $
            981
            
            
            $
            1,116Multi-family
      and commercial
            
            
            68
            
            
            
            278
            
            
            
            -
            
            
            
            -
            
            
            
            3Consumer
      and other
            
            
            -
            
            
            
            1
            
            
            
            1
            
            
            
            2
            
            
            
            17Home
      equity
            
            
            92
            
            
            
            129
            
            
            
            67
            
            
            
            -
            
            
            
            -Total
      non-performing loans
            
            
            934
            
            
            
            540
            
            
            
            394
            
            
            
            983
            
            
            
            1,136Real
      estate owned
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            23Total
      non-performing assets
            
            $
            934
            
            
            $
            540
            
            
            $
            394
            
            
            $
            983
            
            
            $
            1,159Total
      as a percentage of total assets
            
            
            0.38
            %
            
            
            0.20
            %
            
            
            0.15
            %
            
            
            0.36
            %
            
            
            0.49
            %Non-performing
      loans as percentage of gross loans receivable
            
            
            0.70
            %
            
            
            0.39
            %
            
            
            0.26
            %
            
            
            0.60
            %
            
            
            0.72
            %




9
 Table of Contents





For the
year ended December 31, 2007, gross interest income which would have been
recorded had the non-performing loans been current in accordance with their
original terms amounted to $71,000.  The amount that was included in
interest income totaled $38,000 for the year ended December 31,
2007.





Real Estate
Owned.Real
estate owned consists of property acquired through formal foreclosure or by deed
in lieu of foreclosure, and is recorded at the lower of recorded investment or
fair value.  Write-downs from recorded investment to fair value, which
are required at the time of foreclosure, are charged to the allowance for loan
losses.  After transfer, the property is carried at the lower of
recorded investment or fair value, less estimated selling
expenses.  Adjustments to the carrying value of the properties that
result from subsequent declines in value are charged to operations in the period
in which the declines occur.  At December 31, 2007, we did not have
any real estate owned.





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





When we
classify assets as substandard, we allocate for analytical purposes a portion of
our general valuation allowances or loss reserves to these assets as we consider
prudent.  General allowances represent loss allowances that have been
established to recognize the inherent risk associated with lending activities,
but which have not been allocated to particular problem assets.  When
we classify problem assets as loss, we establish a specific allowance for losses
equal to 100% of the amount of the assets so classified, or we charge-off the
amount.  Our determination as to the classification of assets and the
amount of valuation allowances is subject to review by regulatory agencies,
which can order the establishment of additional loss
allowances.  Management regularly reviews our assets to determine
whether any require reclassification.





On the
basis of management’s review of our assets at December 31, 2007, we had
classified assets of $4.0 million as substandard.





10
 Table of Contents





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





Years Ended December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003(Dollars
      in thousands)Balance
      at beginning of period
            
            $
            1,619
            
            
            $
            1,701
            
            
            $
            1,847
            
            
            $
            1,962
            
            
            $
            2,082Charge-offs:One-
      to four-family
            
            
            -
            
            
            
            (7
            )
            
            
            (70
            )
            
            
            (115
            )
            
            
            (110
            )Multi-family
      and commercial
            
            
            (228
            )
            
            
            (75
            )
            
            
            -
            
            
            
            -
            
            
            
            -Consumer
      and other
            
            
            (2
            )
            
            
            -
            
            
            
            (1
            )
            
            
            -
            
            
            
            -Home
      equity
            
            
            (50
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (10
            )Total
      charge-offs
            
            
            (280
            )
            
            
            (82
            )
            
            
            (71
            )
            
            
            (115
            )
            
            
            (120
            )Recoveries:One-
      to four-family loans
            
            
            21
            
            
            
            28
            
            
            
            55
            
            
            
            112
            
            
            
            61Net
      charge-offs
            
            
            (259
            )
            
            
            (54
            )
            
            
            (16
            )
            
            
            (3
            )
            
            
            (59
            )Provisions
      for loan losses
            
            
            179
            
            
            
            (28
            )
            
            
            (130
            )
            
            
            (112
            )
            
            
            (61
            )Balance
      at end of period
            
            $
            1,539
            
            
            $
            1,619
            
            
            $
            1,701
            
            
            $
            1,847
            
            
            $
            1,962Net
      charge-offs during the period to average loans outstanding during the
      period
            
            
            0.19
            %
            
            
            0.04
            %
            
            
            0.01
            %
            
            
            -
            %
            
            
            0.04
            %Net
      charge-offs during the period to non-performing loans
            
            
            27.73
            
            
            
            10.00
            
            
            
            4.06
            
            
            
            0.31
            
            
            
            5.19Non-performing
      assets to total assets at end of period
            
            
            0.38
            
            
            
            0.20
            
            
            
            0.15
            
            
            
            0.36
            
            
            
            0.49Allowance
      for loan losses to non-performing loans
            
            
            164.78
            
            
            
            299.81
            
            
            
            431.73
            
            
            
            187.89
            
            
            
            172.71Allowance
      for loan losses to loans receivable, gross
            
            
            1.15
            
            
            
            1.16
            
            
            
            1.11
            
            
            
            1.12
            
            
            
            1.24





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





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





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





11
 Table of Contents





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





At
      December 31,2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Amount
      of Loan Loss Allowance
            
            
            Loan
      Amounts by Category
            
            
            Percent
      of Loans in Each Category to Total
                Loans
            
            
            Amount
      of Loan Loss Allowance
            
            
            Loan
      Amounts by Category
            
            
            Percent
      of Loans in Each Category to Total
                Loans
            
            
            Amount
      of Loan Loss Allowance
            
            
            Loan
      Amounts by Category
            
            
            Percent
      of Loans in Each Category to Total
                Loans
            
            
            Amount
      of Loan Loss Allowance
            
            
            Loan
      Amounts by Category
            
            
            Percent
      of Loans in Each Category to Total
                Loans
            
            
            Amount
      of Loan Loss Allowance
            
            
            Loan
      Amounts by Category
            
            
            Percent
      of Loans in Each Category to Total
                Loans(Dollars
      in thousands)One-
      to four-family
            
            $
            778
            
            
            $
            85,803
            
            
            
            63.87
            %
            
            $
            786
            
            
            $
            86,024
            
            
            
            61.49
            %
            
            $
            949
            
            
            $
            101,325
            
            
            
            66.04
            %
            
            $
            1,098
            
            
            $
            115,598
            
            
            
            70.02
            %
            
            $
            1,450
            
            
            $
            120,800
            
            
            
            76.64
            %Multi-family
      and commercial
            
            
            456
            
            
            
            33,888
            
            
            
            25.22
            
            
            
            561
            
            
            
            41,194
            
            
            
            29.45
            
            
            
            538
            
            
            
            38,317
            
            
            
            24.97
            
            
            
            353
            
            
            
            32,713
            
            
            
            19.82
            
            
            
            190
            
            
            
            24,066
            
            
            
            15.27Consumer
      and other
            
            
            2
            
            
            
            258
            
            
            
            0.19
            
            
            
            5
            
            
            
            482
            
            
            
            0.34
            
            
            
            8
            
            
            
            502
            
            
            
            .33
            
            
            
            7
            
            
            
            649
            
            
            
            0.39
            
            
            
            7
            
            
            
            696
            
            
            
            0.44Home
      equity
            
            
            155
            
            
            
            14,406
            
            
            
            10.72
            
            
            
            125
            
            
            
            12,198
            
            
            
            8.72
            
            
            
            145
            
            
            
            13,279
            
            
            
            8.66
            
            
            
            258
            
            
            
            16,126
            
            
            
            9.77
            
            
            
            227
            
            
            
            12,056
            
            
            
            7.65Unallocated
            
            
            148
            
            
            
            -
            
            
            
            -
            
            
            
            142
            
            
            
            -
            
            
            
            -
            
            
            
            61
            
            
            
            -
            
            
            
            -
            
            
            
            131
            
            
            
            -
            
            
            
            -
            
            
            
            88
            
            
            
            -
            
            
            
            -Total
      loans
            
            $
            1,539
            
            
            $
            134,355
            
            
            
            100.00
            %
            
            $
            1,619
            
            
            $
            139,898
            
            
            
            100.00
            %
            
            $
            1,701
            
            
            $
            153,423
            
            
            
            100.00
            %
            
            $
            1,847
            
            
            $
            165,086
            
            
            
            100.00
            %
            
            $
            1,962
            
            
            $
            157,618
            
            
            
            100.00
            %




12
 Table of Contents





Management
evaluates the total balance of the allowance for loan losses based on several
factors that are not loan specific but are reflective of the probable, incurred
losses inherent in the loan portfolio.  This includes management’s
periodic review of loan collectibility in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may affect the
borrower’s ability to repay, estimated value of any underlying collateral,
prevailing economic conditions such as housing trends, inflation rates and
unemployment rates, geographic concentrations of loans within our immediate
market area, and levels of allowance for loan losses.  Generally,
small balance, homogenous type loans, such as one- to four-family, mortgage,
consumer and home equity loans are evaluated for impairment in
total.  The allowance related to these loans is established primarily
by using loss experience data by general loan type.  Nonperforming
loans are evaluated individually, based primarily on the value of the underlying
collateral securing the loan.  Larger loans, such as multi-family
mortgages, are also generally evaluated for impairment
individually.  The allowance is allocated to each loan type based on
the results of the evaluation described above.  Inherent credit risks
that cannot be allocated to specific loan groups are presented as “unallocated”
in the table.





Investment
Activities





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





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





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





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





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





13
 Table of Contents





Securities
classified as held to maturity, excluding mortgage-backed securities, totaled
$65,000 at December 31, 2007.Our securities
classified as available-for-sale, other than mortgage-backed securities, totaled
$38.2 million at December 31, 2007, and consisted of Federal agency obligations,
primarily Federal Farm Credit Bank (FFCB) notes and FHLB obligations with
maturities of one to five years, and an ARM mutual fund.  At December
31, 2007, we had $11.4 million invested in an adjustable rate mortgage mutual
fund that invests primarily in adjustable rate mortgage backed securities, and
collateralized mortgage obligations.





We also
have a $2.5 million investment in FHLB stock at December 31, 2007, which is
carried separately for securities due to the restrictions on sale or
transfer.  For further information regarding our securities portfolio,
see Note 2 to Consolidated Financial Statements.





14
 Table of Contents





The
following table sets forth the composition of our securities portfolio
(excluding mortgage-backed securities) and other interest earning assets at the
dates indicated.





At
      December 31,2007
            
            
            2006
            
            
            2005Carrying
      Value
            
            
            %
      of
                Total
            
            
            Fair
                Value
            
            
            %
      of
                Total
            
            
            Carrying
                Value
            
            
            %
      of
                Total
            
            
            Fair
                Value
            
            
            %
      of
                Total
            
            
            Carrying
                Value
            
            
            %
      of
                Total
            
            
            Fair
                Value
            
            
            %
      of
                Total(Dollars
      in thousands)Securities
      classified as held to maturity (at amortized cost):State
      and municipal bonds
            
            $
            65
            
            
            
            0.16
            %
            
            $
            65
            
            
            
            0.16
            %
            
            $
            130
            
            
            
            0.35
            %
            
            $
            130
            
            
            
            0.35
            %
            
            $
            200
            
            
            
            0.52
            %
            
            $
            200
            
            
            
            0.52
            %Securities
      classified as available for sale (at fair value):Mutual
      fund
            
            
            11,437
            
            
            
            28.12
            
            
            
            11,437
            
            
            
            28.12
            
            
            
            10,904
            
            
            
            29.24
            
            
            
            10,904
            
            
            
            29.24
            
            
            
            8,473
            
            
            
            21.88
            
            
            
            8,473
            
            
            
            21.88FHLB
            
            
            23,120
            
            
            
            56.85
            
            
            
            23,120
            
            
            
            56.85
            
            
            
            19,770
            
            
            
            53.01
            
            
            
            19,770
            
            
            
            53.01
            
            
            
            23,633
            
            
            
            61.03
            
            
            
            23,633
            
            
            
            61.03FFCB
            
            
            3,524
            
            
            
            8.66
            
            
            
            3,524
            
            
            
            8.66
            
            
            
            3,979
            
            
            
            10.67
            
            
            
            3,979
            
            
            
            10.67
            
            
            
            1,959
            
            
            
            5.06
            
            
            
            1,959
            
            
            
            5.06Fannie
      Mae
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            988
            
            
            
            2.55
            
            
            
            988
            
            
            
            2.55Equity
      investments
            
            
            76
            
            
            
            0.19
            
            
            
            76
            
            
            
            0.19
            
            
            
            62
            
            
            
            0.16
            
            
            
            62
            
            
            
            0.16
            
            
            
            56
            
            
            
            0.14
            
            
            
            56
            
            
            
            0.14Subtotal
            
            
            38,222
            
            
            
            93.98
            
            
            
            38,222
            
            
            
            93.98
            
            
            
            34,845
            
            
            
            93.43
            
            
            
            34,845
            
            
            
            93.43
            
            
            
            35,309
            
            
            
            91.18
            
            
            
            35,309
            
            
            
            91.18FHLB
      stock
            
            
            2,450
            
            
            
            6.02
            
            
            
            2,450
            
            
            
            6.02
            
            
            
            2,450
            
            
            
            6.57
            
            
            
            2,450
            
            
            
            6.57
            
            
            
            3,416
            
            
            
            8.82
            
            
            
            3,416
            
            
            
            8.82Total
      securities and FHLB stock
            
            $
            40,672
            
            
            
            100.00
            %
            
            $
            40,672
            
            
            
            100.00
            %
            
            $
            37,295
            
            
            
            100.00
            %
            
            $
            37,295
            
            
            
            100.00
            %
            
            $
            38,725
            
            
            
            100.00
            %
            
            $
            38,725
            
            
            
            100.00
            %Average
      remaining life of securities
            
            9.8
      months
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10.9
      months
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13.2
      monthsOther
      interest-earning assets:Interest-earning
      deposits with banks
            
            $
            6,622
            
            
            
            98.85
            %
            
            $
            6,714
            
            
            
            100.00
            %
            
            $
            38,061
            
            
            
            84.03
            %
            
            $
            38,061
            
            
            
            84.03
            %
            
            $
            20,061
            
            
            
            97.79
            %
            
            $
            20,061
            
            
            
            97.79
            %Federal
      funds sold
            
            
            77
            
            
            
            1.15
            
            
            
            -
            
            
            
            -
            
            
            
            7,231
            
            
            
            15.97
            
            
            
            7,231
            
            
            
            15.97
            
            
            
            454
            
            
            
            2.21
            
            
            
            454
            
            
            
            2.21Total
            
            $
            6,699
            
            
            
            100.00
            %
            
            $
            6,714
            
            
            
            100.00
            %
            
            $
            45,292
            
            
            
            100.00
            %
            
            $
            45,292
            
            
            
            100.00
            %
            
            $
            20,515
            
            
            
            100.00
            %
            
            $
            20,515
            
            
            
            100.00
            %




15
 Table of Contents





Mortgage-Backed
Securities





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





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





At
December 31, 2007, our mortgage-backed securities totaled $43.2 million, which
represented 17.4% of our total assets at that date.  At December 31,
2007, a majority of our mortgage-backed securities were classified as
available-for-sale.  At that date, virtually all of our
mortgage-backed securities had fixed rates of interest.  We purchased
$16.9 million of mortgage-backed securities during the year ended December 31,
2007, and $4.7 million during the year ended December 31, 2006.





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





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





At December 31,2007
            
            
            2006
            
            
            2005Carrying
            
            
            %
      of
            
            
            Carrying
            
            
            %
      of
            
            
            Carrying
            
            
            %
      ofValue
            
            
            Total
            
            
            Value
            
            
            Total
            
            
            Value
            
            
            Total(Dollars
      in thousands)Mortgage-backed
      securities classified as held to maturity (at amortized
    cost):Ginnie
      Mae
            
            $
            60
            
            
            
            0.14
            %
            
            $
            74
            
            
            
            0.22
            %
            
            $
            95
            
            
            
            0.26
            %Mortgage-backed
      securities classified as available for sale (at fair
    value):Fannie
      Mae
            
            
            34,767
            
            
            
            80.43
            
            
            
            29,310
            
            
            
            85.87
            
            
            
            30,300
            
            
            
            83.65Freddie
      Mac
            
            
            8,398
            
            
            
            19.43
            
            
            
            4,749
            
            
            
            13.91
            
            
            
            5,830
            
            
            
            16.09Total
            
            $
            43,225
            
            
            
            100.00
            %
            
            $
            34,133
            
            
            
            100.00
            %
            
            $
            36,225
            
            
            
            100.00
            %





16
 Table of Contents





Carrying Values,
Yields and Maturities.  The composition and maturities of our
debt securities portfolio and of our mortgage-backed securities are indicated in
the following table.  Cost represents the amortized cost of the
securities and mortgage-backed securities at December 31, 2007.





At December 31, 2007Less
      Than
            
            
            1
      to 5
            
            
            5
      to 10
            
            
            Over1 Year
            
            
            Years
            
            
            Years
            
            
            10 Years
            
            
            Total SecuritiesAmortized
            
            
            Amortized
            
            
            Amortized
            
            
            Amortized
            
            
            AmortizedCost
            
            
            Cost
            
            
            Cost
            
            
            Cost
            
            
            Cost
            
            
            Fair Value(Dollars
      in thousands)Securities
            
            $
            9,564
            
            
            $
            16,984
            
            
            $
            -
            
            
            $
            -
            
            
            $
            26,548
            
            
            $
            26,709Mortgage-backed
      securities
            
            
            -
            
            
            
            1,493
            
            
            
            26,466
            
            
            
            15,698
            
            
            
            43,657
            
            
            
            43,225Total
      securities
            
            $
            9,564
            
            
            $
            18,477
            
            
            $
            26,466
            
            
            $
            15,698
            
            
            $
            70,205
            
            
            $
            69,934Weighted
      average yield
            
            
            4.07
            %
            
            
            4.90
            %
            
            
            4.79
            %
            
            
            4.82
            %
            
            
            4.73
            %





Sources
of Funds





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





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





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








Years Ended December 31,2007
            
            
            2006
            
            
            2005(Dollars
      in thousands)Opening
      balance
            
            $
            202,176
            
            
            $
            190,407
            
            
            $
            198,056Deposits
            
            
            409,277
            
            
            
            408,178
            
            
            
            422,686Withdrawals
            
            
            (428,913
            )
            
            
            (400,369
            )
            
            
            (435,519
            )Interest
      credited
            
            
            7,994
            
            
            
            3,960
            
            
            
            5,184Ending
      balance
            
            $
            190,534
            
            
            $
            202,176
            
            
            $
            190,407Net
      increase (decrease)
            
            $
            (11,642
            )
            
            $
            11,769
            
            
            $
            (7,649
            )Percent
      increase (decrease)
            
            
            (5.76
            )%
            
            
            6.18
            %
            
            
            (3.86
            )%





17
 Table of Contents





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





At December 31,2007
            
            
            2006
            
            
            2005Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent(Dollars
      in thousands)Transactions and
      Savings Deposits:Checking
      accounts
            
            $
            3,681
            
            
            
            1.93
            %
            
            $
            4,152
            
            
            
            2.05
            %
            
            $
            3,273
            
            
            
            1.72
            %Passbook
      accounts
            
            
            38,103
            
            
            
            20.00
            
            
            
            40,463
            
            
            
            20.02
            
            
            
            46,854
            
            
            
            24.61NOW
      accounts
            
            
            18,702
            
            
            
            9.81
            
            
            
            18,946
            
            
            
            9.37
            
            
            
            18,947
            
            
            
            9.95Money
      market accounts
            
            
            7,291
            
            
            
            3.83
            
            
            
            9,336
            
            
            
            4.62
            
            
            
            8,446
            
            
            
            4.44Total
      non-certificates
            
            
            67,777
            
            
            
            35.57
            
            
            
            72,897
            
            
            
            36.06
            
            
            
            77,520
            
            
            
            40.72Certificates:0.00
      - 3.99%
            
            
            31,877
            
            
            
            16.73
            
            
            
            33,103
            
            
            
            16.37
            
            
            
            71,214
            
            
            
            37.404.00
      - 5.99%
            
            
            90,325
            
            
            
            47.41
            
            
            
            95,392
            
            
            
            47.18
            
            
            
            40,942
            
            
            
            21.506.00
      - 7.99%
            
            
            543
            
            
            
            0.28
            
            
            
            762
            
            
            
            0.37
            
            
            
            711
            
            
            
            0.378.00
      - 9.99%
            
            
            12
            
            
            
            0.01
            
            
            
            22
            
            
            
            0.02
            
            
            
            20
            
            
            
            0.01Total
      certificates
            
            
            122,757
            
            
            
            64.43
            
            
            
            129,279
            
            
            
            63.94
            
            
            
            112,887
            
            
            
            59.28Total
      deposits
            
            $
            190,534
            
            
            
            100.00
            %
            
            $
            202,176
            
            
            
            100.00
            %
            
            $
            190,407
            
            
            
            100.00
            %








Deposit Maturity
Schedule.  The following table presents, by rate category, the
remaining period to maturity of time deposit accounts outstanding as of December
31, 2007.





0-3.99%
            
            
            
            4.00-5.99%
            
            
            
            6.00-7.99%
            
            
            8.00%-
                or
      greater
            
            
            Total
            
            
            Percent
                of
      Total(Dollars
      in thousands)Certificate accounts
      maturing
              in quarter
      ending:March
      31, 2008
            
            $
            12,637
            
            
            $
            46,748
            
            
            $
            -
            
            
            $
            6
            
            
            $
            59,391
            
            
            
            48.38
            %June
      30, 2008
            
            
            5,943
            
            
            
            11,598
            
            
            
            -
            
            
            
            -
            
            
            
            17,541
            
            
            
            14.29September
      30, 2008
            
            
            3,733
            
            
            
            13,668
            
            
            
            -
            
            
            
            -
            
            
            
            17,401
            
            
            
            14.18December
      31, 2008
            
            
            5,945
            
            
            
            3,239
            
            
            
            419
            
            
            
            -
            
            
            
            9,603
            
            
            
            7.82March
      31, 2009
            
            
            458
            
            
            
            2,540
            
            
            
            -
            
            
            
            6
            
            
            
            3,004
            
            
            
            2.45June
      30, 2009
            
            
            446
            
            
            
            1,414
            
            
            
            -
            
            
            
            -
            
            
            
            1,860
            
            
            
            1.51September
      30, 2009
            
            
            364
            
            
            
            1,414
            
            
            
            -
            
            
            
            -
            
            
            
            1,778
            
            
            
            1.45December
      31, 2009
            
            
            369
            
            
            
            835
            
            
            
            11
            
            
            
            -
            
            
            
            1,215
            
            
            
            0.99March
      31, 2010
            
            
            826
            
            
            
            1,809
            
            
            
            -
            
            
            
            -
            
            
            
            2,635
            
            
            
            2.15June
      30, 2010
            
            
            389
            
            
            
            1,628
            
            
            
            27
            
            
            
            -
            
            
            
            2,044
            
            
            
            1.66September
      30, 2010
            
            
            126
            
            
            
            539
            
            
            
            -
            
            
            
            -
            
            
            
            665
            
            
            
            0.54December
      31, 2010
            
            
            49
            
            
            
            615
            
            
            
            -
            
            
            
            -
            
            
            
            664
            
            
            
            0.54March
      31, 2011
            
            
            11
            
            
            
            678
            
            
            
            72
            
            
            
            -
            
            
            
            761
            
            
            
            0.62Thereafter
            
            
            581
            
            
            
            3,600
            
            
            
            14
            
            
            
            -
            
            
            
            4,195
            
            
            
            3.42Total
            
            $
            31,877
            
            
            $
            90,325
            
            
            $
            543
            
            
            $
            12
            
            
            $
            122,757
            
            
            
            100.00
            %Percent
      of total
            
            
            25.97
            %
            
            
            73.58
            %
            
            
            0.44
            %
            
            
            0.01
            %





18
 Table of Contents





Large
Certificates.  The following table indicates the amount of our
certificates of deposit and other deposits by time remaining until maturity as
of December 31, 2007.





Maturity3
      Months
                or
      Less
            
            
            Over
      3 to 6
                Months
            
            
            Over
      6 to 12
                Months
            
            
            Over
      12
                Months
            
            
            Total(In
      thousands)Certificates
      of deposit less than $100,000
            
            $
            41,927
            
            
            $
            13,790
            
            
            $
            16,944
            
            
            $
            14,322
            
            
            $
            86,983Certificates
      of deposit of $100,000 or more
            
            
            16,299
            
            
            
            3,685
            
            
            
            6,138
            
            
            
            4,499
            
            
            
            30,621Public
      funds (1)
            
            
            1,160
            
            
            
            66
            
            
            
            3,927
            
            
            
            -
            
            
            
            5,153Total
      certificates of deposit
            
            $
            59,386
            
            
            $
            17,541
            
            
            $
            27,009
            
            
            $
            18,821
            
            
            $
            122,757


______________________


(1)
            Deposits
      from governmental and other public entities.  The amounts shown
      under public funds include deposits of $100,000 or more totaling $5.0
      million.





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





The
following table sets forth the maximum month-end balance and average balance of
FHLB advances for the periods indicated.








Years Ended December
    31,2007
            
            
            2006
            
            
            2005(In
      thousands)Maximum
      balance:FHLB
      advances
            
            $
            28,750
            
            
            $
            32,750
            
            
            $
            36,250Average
      balance:FHLB
      advances
            
            $
            25,614
            
            
            $
            29,963
            
            
            $
            34,167





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





At December 31,2007
            
            
            2006
            
            
            2005(Dollars
      in thousands)FHLB
      advances
            
            $
            23,350
            
            
            $
            28,750
            
            
            $
            32,750Weighted
      average interest rate of FHLB advances
            
            
            4.45
            %
            
            
            4.25
            %
            
            
            4.06
            %





19
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Employees





At
December 31, 2007, we had a total of 46 full-time and 12 part-time
employees.  Our employees are not represented by any collective
bargaining group.  Management believes that we have good relationships
with our employees.





Regulation





Loans-to-One-Borrower. Federal savings banks
generally may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of unimpaired capital and unimpaired surplus on an
unsecured basis.  An additional amount may be lent, equal to 10% of
unimpaired capital and unimpaired surplus, if the loan is secured by readily
marketable collateral, which is defined to include certain securities and
bullion, but generally does not include real estate.  As of December
31, 2007, we were in compliance with our loans-to-one-borrower
limitations.





Qualified Thrift
Lender Test.As a federal savings
bank, we are required to satisfy a qualified thrift lender test whereby we must
maintain at least 65% of our “portfolio assets” in “qualified thrift
investments”.  These consist primarily of residential mortgages and
related investments, including mortgage-backed and related
securities.  “Portfolio assets” generally means total assets less
specified liquid assets up to 20% of total assets, goodwill and other intangible
assets, and the value of property used to conduct business.  A savings
bank that fails the qualified thrift lender test must either convert to a bank
charter or operate under specified restrictions.  As of December 31,
2007, we maintained 86.88% of our portfolio assets in qualified thrift
investments and, therefore, we met the qualified thrift lender
test.





Capital
Distributions.Office of Thrift
Supervision regulations govern capital distributions by savings institutions,
which include cash dividends, stock repurchases and other transactions charged
to the capital account of a savings institution.  A savings
institution must file an application for Office of Thrift Supervision approval
of the capital distribution if either (1) the total capital distributions for
the applicable calendar year exceed the sum of the institution’s net income for
that year to date plus the institution’s retained net income for the preceding
two years that is still available for distribution, (2) the institution would
not be at least adequately capitalized following the distribution, (3) the
distribution would violate any applicable statute, regulation, agreement or
Office of Thrift Supervision-imposed condition, or (4) the institution is not
eligible for expedited review of its filings. If an application is not required
to be filed, savings institutions, which are a subsidiary of a holding company,
as well as certain other institutions, must still file a notice with the Office
of Thrift Supervision at least 30 days before the board of directors declares a
dividend or approves a capital distribution.





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





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





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





Our
authority to extend credit to executive officers, directors and 10%
stockholders, as well as entities controlled by these persons, is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and its
implementing regulation, Regulation O.  Among other things, this
regulation generally requires these loans to be made on terms substantially the
same as those offered to unaffiliated individuals and do not involve more than
the normal risk of repayment.  However, the regulation permits
executive officers and directors to receive the same terms through benefit or
compensation plans that are widely available to other employees, as long as the
director or executive officer is not given preferential treatment compared to
other participating employees. Regulation O also places individual and aggregate
limits on the amount of loans we may make to these persons based, in part, on
our capital position, and requires approval procedures to be
followed.  At December 31, 2007, we were in compliance with these
regulations.





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





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





21
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Capital
Requirements





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





The
risk-based capital standard for savings institutions requires the maintenance of
Tier 1 (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks believed inherent in the type of asset. Core
capital is defined as common stockholders’ equity (including retained earnings),
certain noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets, and up to
45% of unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core
capital.  At December 31, 2007, A.J. Smith Federal met each of its
capital requirements.





22
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Prompt
Corrective Regulatory Action





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





Insurance
of Deposit Accounts





Deposit
accounts in A. J. Smith Federal are insured by the Federal Deposit Insurance
Corporation generally up to a maximum of $100,000 per separately insured
depositor and up to a maximum of $250,000 for self-directed retirement
accounts.  A. J. Smith’s deposits, therefore, are subject to Federal
Deposit Insurance Corporation deposit insurance assessments.





On
February 15, 2006, federal legislation to reform federal deposit insurance was
enacted.  This new legislation required, among other things, that the
Federal Deposit Insurance Corporation adopt regulations increasing the maximum
amount of federal deposit insurance coverage per separately insured depositor
beginning in 2010 (with a cost of living adjustment to become effective in five
years) and modifying the deposit fund’s reserve ratio for a range between 1.15%
and 1.50% of estimated insured deposits.





On
November 2, 2006, the Federal Deposit Insurance Corporation adopted final
regulations establishing a risk-based assessment system that will enable the
Federal Deposit Insurance Corporation to more closely tie each financial
institution’s premiums to the risk it poses to the deposit insurance
fund.  Under the new risk-based assessment system, which became
effective in the beginning of 2007, the Federal Deposit Insurance Corporation
evaluated the risk of each financial institution based on three primary sources
of information:  (1) its supervisory rating, (2) its financial ratios,
and (3) its long-term debt issuer rating, if the institution has
one.  The new rates for nearly all of the financial institution
industry will vary between five and seven cents for every $100 of domestic
deposits.  At the same time, the Federal Deposit Insurance Corporation
also adopted final regulations designating the reserve ratio for the deposit
insurance fund during 2007 at 1.25% of estimated insured deposits.





Effective
March 31, 2006, the Federal Deposit Insurance Corporation merged the Bank
Insurance Fund and the Savings Association Insurance Fund into a single
insurance fund called the Deposit Insurance Fund.  The merger of the
two separate insurance funds did not affect the authority of the Financing
Corporation, a mixed-ownership government corporation, to impose and collect,
with approval of the Federal Deposit Insurance Corporation, assessments for
anticipated payments, insurance costs and custodial fees on bonds issued by the
Financing Corporation in the 1980s to recapitalize the Federal Savings and Loan
Insurance Corporation.  The bonds issued by the Financing Corporation
are due to mature in 2017 through 2019.  For the quarter ended
December 31, 2007, the Financing Corporation assessment was equal to 1.37 basis
points for each $100 in domestic deposits maintained at an
institution.





23
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Federal
Home Loan Bank System





We are a
member of the Federal Home Loan Bank System, which consists of 12 regional
Federal Home Loan Banks.  The Federal Home Loan Bank System provides a
central credit facility primarily for member institutions.  As a
member of the Federal Home Loan Bank of Chicago (FHLB), we are required to
acquire and hold shares of capital stock in the Federal Home Loan Bank in an
amount equal to at least 1% of the aggregate principal amount of our unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 1/20 of our borrowings from the FHLB, whichever is
greater.  As of December 31, 2007, we were in compliance with this
requirement. The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts and to contribute funds for affordable housing
programs.  These requirements could reduce the amount of dividends
that the Federal Home Loan Banks pay to their members and could also result in
the Federal Home Loan Banks imposing a higher rate of interest on advances to
their members.  On February 10, 2005 the FHLB announced that the
Federal Housing Finance Board, the regulator for the FHLB, accepted their
business plan.  Included in the business plan were guidelines for a
new dividend policy requiring its dividend payout ratio in a given quarter not
to exceed 90% of Adjusted Core Net Income for that quarter.  In
addition, quarterly dividends of greater than 5.5%, on an annualized basis, will
require regulatory approval.  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.





Federal
Reserve System





Federal
Reserve Board regulations require savings institutions to maintain
noninterest-earning reserves against their transaction accounts, such as
negotiable order of withdrawal and regular checking accounts.  At
December 31, 2007, we were in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the
Office of Thrift Supervision.





Holding
Company Regulation





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





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





24
 Table of Contents




The Home
Owners’ Loan Act prohibits a savings and loan holding company, including AJS
Bancorp, Inc. and AJS Bancorp, MHC, directly or indirectly, or through one or
more subsidiaries, from acquiring another savings institution or holding company
thereof, without prior written approval of the Office of Thrift
Supervision.  It also prohibits the acquisition or retention of, with
certain exceptions, more than 5% of a non-subsidiary savings institution, a
non-subsidiary holding company, or a non-subsidiary company engaged in
activities other than those permitted by the Home Owners’ Loan Act; or acquiring
or retaining control of an institution that is not federally
insured.  In evaluating applications by holding companies to acquire
savings institutions, the Office of Thrift Supervision must consider the
financial and managerial resources, future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
fund, the convenience and needs of the community and competitive
factors.





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





25
 Table of Contents





Waivers of
Dividends by AJS Bancorp, MHC.  Office of Thrift Supervision
regulations require AJS Bancorp, MHC to notify the Office of Thrift Supervision
of any proposed waiver of its receipt of dividends from AJS Bancorp,
Inc.  The Office of Thrift Supervision reviews dividend waiver notices
on a case-by-case basis, and, in general, does not object to any such waiver if:
(i) the mutual holding company’s board of directors determines that such waiver
is consistent with such directors’ fiduciary duties to the mutual holding
company’s members; (ii) for as long as the savings association subsidiary is
controlled by the mutual holding company, the dollar amount of dividends waived
by the mutual holding company are considered as a restriction on the retained
earnings of the savings association, which restriction, if material, is
disclosed in the public financial statements of the savings association as a
note to the financial statements; (iii) the amount of any dividend waived by the
mutual holding company is available for declaration as a dividend solely to the
mutual holding company, and, in accordance with SFAS 5, where the savings
association determines that the payment of such dividend to the mutual holding
company is probable, an appropriate dollar amount is recorded as a liability;
and (iv) the amount of any waived dividend is considered as having been paid by
the savings association in evaluating any proposed dividend under Office of
Thrift Supervision capital distribution regulations.   AJS
Bancorp, MHC may waive dividends paid by AJS Bancorp, Inc. Under Office of
Thrift Supervision regulations, our public stockholders would not be diluted
because of any dividends waived by AJS Bancorp, MHC (and waived dividends would
not be considered in determining an appropriate exchange ratio) in the event AJS
Bancorp, MHC converts to stock form.  During the twelve months ended
2007 the Company paid four regular quarterly dividends of $0.11 per share to
stockholders of record.  In conjunction with the Office of Thrift
Supervision approval, AJS Bancorp, MHC waived 100% of the dividends due on its
1,227,544 shares.  The Company anticipates that AJS Bancorp, MHC will
waive 100% of dividends in the foreseeable future.





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





The
USA PATRIOT Act





In
response to the events of September 11, 2001, the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on October
26, 2001.  The USA PATRIOT Act gave the Federal Government new powers
to address terrorist threats through enhanced domestic security measures,
expanded surveillance powers, increased information sharing and broadened
anti-money laundering requirements.  The USA PATRIOT Act has no
material impact on the Bank’s operations.





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Sarbanes-Oxley
Act of 2002





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





The
Sarbanes-Oxley Act includes very specific additional disclosure requirements and
new corporate governance rules requiring the SEC and securities exchanges to
adopt extensive additional disclosure, corporate governance and other related
rules, and mandates further studies of certain issues by the SEC.  The
Sarbanes-Oxley Act represents significant federal involvement in matters
traditionally left to state regulatory systems, such as the regulation of the
accounting profession, and to state corporate law, such as the relationship
between a board of directors and management and between a board of directors and
its committees.  Recently, the SEC created a committee to evaluate
Sarbanes-Oxley issues that may affect small public
companies.  Specifically being reviewed are the requirements under
Sarbanes-Oxley section 404, which require significant oversight of a public
company’s internal control over the financial
statements.  Implementation of Section 404 compliance for the external
auditor’s attestation report has been delayed.  The Company cannot
accurately predict what additional expenses may be incurred in complying with
all of the provisions of the Sarbanes-Oxley Act





Taxation





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





As a
result of the enactment of the Small Business Job Protection Act of 1996, all
savings banks and savings associations may convert to a commercial bank charter,
diversify their lending, or merge into a commercial bank without having to
recapture any of their pre-1988 tax bad debt reserve
accumulations.  However, transactions which would require recapture of
the pre-1988 tax bad debt reserve include redemption of A. J. Smith Federal’s
stock, payment of dividends or distributions in excess of earnings and profits,
or failure by the institution to qualify as a bank for federal income tax
purposes.  At December 31, 2007, A. J. Smith Federal had approximately
$2.4 million of pre-1988 tax bad debt reserves.  A deferred tax
liability has not been provided on this amount, as management does not intend to
make distributions, redeem stock or fail certain bank tests that would result in
recapture of the reserve.





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





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





27
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A. J.
Smith Federal’s income tax returns have not been audited by the Internal Revenue
Service within the past five years.





Illinois State
Taxation.  AJS Bancorp, Inc. is required to file Illinois
income tax returns and pay tax at an effective tax rate of 7.3% of Illinois
taxable income. For these purposes, Illinois taxable income generally means
federal taxable income subject to certain modifications, primarily the exclusion
of interest income on United States obligations.





MANAGEMENT





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





Name
            
            Age
            
            PositionThomas
      R. Butkus
            
            60
            
            Chairman
      of the Board and Chief Executive OfficerLyn
      G. Rupich
            
            45
            
            PresidentW.
      Anthony Kopp
            
            57
            
            Senior
      Vice PresidentPamela
      N. Favero
            
            44
            
            Chief
      Financial Officer





Availability
of Annual Report on Form 10-KSB





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





28
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ITEM
      2.
            DESCRIPTION OF
      PROPERTIES





Properties





At
December 31, 2007, 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, 2007, the net book value of our office
locations was $4.1 million.





ITEM
      3.
            LEGAL
      PROCEEDINGS





We are involved, from time to time, as
plaintiff or defendant in various legal actions arising in the normal course of
our business.  At December 31, 2007, we were not involved in any legal
proceedings, the outcome of which would be material to our financial condition
or results of operations.





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





None.





PART
II





ITEM
      5.
            MARKET FOR COMMON
      EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF
      EQUITY SECURITIES





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. During
the twelve months ended 2007 the Company paid four regular quarterly dividends
of $0.11 cents per share to stockholders of record.  In conjunction
with Office of Thrift Supervision approval, AJS Bancorp, MHC (the “MHC”) waived
100% of the quarterly dividends due on its 1,227,544 shares.





Prices
      of Common StockHigh
            
            
            LowCalendar
      Quarter EndedMarch
      31, 2006
            
            
            23.90
            
            
            
            23.00June
      30, 2006
            
            
            25.00
            
            
            
            23.55September
      30, 2006
            
            
            25.00
            
            
            
            23.50December
      31, 2006
            
            
            26.50
            
            
            
            24.60March
      31,2007
            
            
            27.12
            
            
            
            24.14June
      30, 2007
            
            
            24.83
            
            
            
            24.53September
      30, 2007
            
            
            25.25
            
            
            
            23.16December
      31, 2007
            
            
            25.36
            
            
            
            19.89








As of
December 31, 2007, the Company had 360 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, 50,000 and
50,000 shares on March 22, 2005, October 18, 2005, and August 21, 2007,
respectively.  As of December 31, 2007 there are 11,382 shares
remaining to be purchased under the current repurchase plan.





29
 Table of Contents




The
following table sets forth the issuer purchases of equity securities during the
prior three months.





Total
      number
                shares
      purchased
            
            
            Average
      price
                paid
      per share
            
            
            Total
      number of shares purchased under publicly announced
    plan
            
            
            Maximum
      number of shares that may be purchased under the repurchase
      planOctober
      1– October 31
            
            
            -
            
            
            $
            -
            
            
            
            249,181
            
            
            
            317,000November
      1- November  30
            
            
            7,000
            
            
            
            23.80
            
            
            
            256,181
            
            
            
            317,000December
      1- December  31
            
            
            49,437
            
            
            
            23.53
            
            
            
            305,618
            
            
            
            317,000





Set forth
below is certain information as of December 31, 2007 regarding equity
compensation to directors and executive officers of the Company approved by
stockholders.  Other than the employee stock ownership plan, the
Company did not have any equity plans in place that were not approved by
stockholders.




Plan
            Number
      of securities to be issued upon exercise of outstanding options and
      rights
            Weighted
      average
              exercise
      price
            Number
      of securities remaining available for issuance under
  planEquity
      compensation plans approved by stockholders
            100,485
      options
              10,434
      nonvested restricted stock
            $      18.81
      (1)
            7,456
      (options)/900 (restricted stock)Equity
      compensation plans not approved by stockholders
            -
            -
            -Total
            110,919
            $     18.81(1)
            7,456
      (options)/900 (restricted stock)


(1)
Represents the exercise price of options awarded under the stock option
plan.





30
 Table of Contents





ITEM
      6
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF
  OPERATIONS





Forward
Looking Statements





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





General





Our
results of operations depend primarily on our net interest
income.  Net interest income is the difference between the interest
income we earn on our interest-earning assets, consisting primarily of loans,
investment securities and interest-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 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:





•
            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, 2007, $85.8 million, or 63.9%, of our
      total loan portfolio consisted of one- to four-family residential real
      estate loans.  During the year ended December 31, 2007, we
      originated $14.7 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.








•
            Commercial and Multi-Family
      Real Estate Lending.  We intend to originate 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,
      2007 commercial real estate and multi-family loans represented $33.9
      million or 25.2% of our loan portfolio.  While we continue to be
      committed to developing our commercial business and multi-family lending
      and our commercial business banking services, we believe that it is
      prudent to temporarily tighten our commercial and multi-family business
      lending during the present turbulent real estate market and uncertain
      economic picture.





31
 Table of Contents





•
            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, 2007 and December 31, 2006





Total
assets as of December 31, 2007 were $248.3 million, a decrease of $18.2 million
or 6.8% from $266.5 million at December 31, 2006.  The decrease was
primarily due to decreases in cash and cash equivalents, certificates of
deposit, and loans receivable, offset by increases in securities and other
assets.  Deposits at other financial institutions consisting of
certificates of deposit decreased $2.5 million or 45.4% to $3.0 million at
December 31, 2007 from $5.5 million at December 31, 2006.  The
decrease was due to the certificates maturing and not being
replaced.  Loans receivable decreased $5.4 million or 3.9% to $133.0
million at December 31, 2007 from $138.4 million at December 31,
2006.  The decrease in loans was primarily due to payoffs and
tightened underwriting and credit standards in the commercial loan
category.Securities increased
$12.5 million or 18.1% to $81.4 million at December 31, 2007 from $69.0 million
at December 31, 2006.  The increase in securities reflects purchases
of fixed-rate government-backed notes and bonds and mortgage-backed securities.
The average term to maturity of the fixed-rate note and bond securities was 26
months; the average term to maturity of the mortgage-back securities was 120
months.  These investments provided slightly higher yields than
overnight federal fund investments.  Other assets increased $2.8
million or 92.5% to $5.8 million at December 31, 2007 from $3.0 million at
December 31, 2006.  The increase in other assets is primarily due to
the purchase of $3.0 million in bank owned life insurance in August of
2007.  The Company is the sole owner and beneficiary of this life
insurance, and the asset will be used to offset the costs of existing benefits
for the employees. The change in our asset composition reflects management’s
decision to be less aggressive in competing for the higher interest rate time
deposits.  As a result, our deposits reduced and accordingly so did
liquid assets.





Total
deposits decreased $11.6 million or 5.8% to $190.5 million at December 31, 2007
from $202.2 million at December 31, 2006.  The decrease was primarily
in certificates of deposit and passbook savings
accounts.  Certificates of deposit decreased $6.5 million to $122.8
million at December 31, 2007 from $129.3 million at December 31,
2006.  Passbook savings accounts decreased $2.4 million to $38.1
million at December 31, 2007 compared to $40.5 million at December 31,
2006.





FHLB
advances decreased $5.4 million or 18.8% to $23.4 million at December 31, 2007
from $28.8 million at December 31, 2006.  The decrease was due to the
advances maturing and not being replaced.





The
Company had non-performing assets of $934,000 as of December 31, 2007 and
$540,000 as of December 31, 2006.  The increase in non-performing
assets resulted from an increase in non-performing single-family
loans.  The allowance for loan losses totaled $1.5 million at December
31, 2007 and $1.6 million atDecember 31,
2006.  This represents a ratio of the allowance for loan losses to
gross loans receivable of 1.15% at December 31, 2007 and 1.16% at December 31,
2006.  The allowance for loan losses to non-performing loans was
164.8% at December 31, 2007 and 299.8% at December 31, 2006.





32
 Table of Contents





Total
stockholders’ equity decreased $821,000 to $27.9 million at December 31, 2007
from $28.7 million at December 31, 2006.  The decrease in
stockholders’ equity primarily resulted from the repurchase of shares of the
Company’s stock during the twelve months ended December 31, 2007 offset by net
income of $559,000 and an increase in other comprehensive income due to the
increased market value of the available for sale securities
portfolio.  The Company repurchased 99,832 shares of its common stock
at a cost of $2.4 million during the twelve months ended December 31,
2007.  In addition, during the year the Company declared and paid
dividends of $0.41 cents per share.  With the non-objection of the
Office of Thrift Supervision (“OTS”) AJS Bancorp, MHC (the “MHC”) waived 100% of
the quarterly dividend due on its 1,227,554 shares.  The Company has
requested and received a non-objection letter from the OTS on the waiver of the
quarterly dividend payments due on the MHC shares through the quarter ended
September 30, 2008.





Comparison
of Financial Condition at December 31, 2006 and December 31, 2005





Total
assets as of December 31, 2006 were $266.5 million, an increase of $8.6 million
or 3.3% from $257.9 million at December 31, 2005.  The increase was
primarily due to an increase in cash and cash equivalents offset by decreases in
certificates of deposit, securities, loans receivable, and Federal Home Loan
Bank (FHLB) stock.  Deposits at other financial institutions
consisting of certificates of deposit decreased $3.1 million or 36.0% to $5.5
million at December 31, 2006 from $8.6 million at December 31,
2005.  The decrease was due to the certificates
maturing.  Securities decreased $2.5 million or 3.6% to $69.0 million
at December 31, 2006 from $71.5 million at December 31, 2005.  Loans
receivable decreased $13.4 million or 8.8% to $138.4 million at December 31,
2006 from $151.8 million at December 31, 2005.  Federal Home Loan Bank
stock decreased $966,000 or 28.3% to $2.4 million at December 31, 2006 from $3.4
million at December 31, 2005.  The Company continued to decrease its
investment in Federal Home Loan Bank stock due to liquidity and dividend policy
changes at the Federal Home Loan Bank.  There was no gain or loss on
the sale of the Federal Home Loan Bank stock.  The change in our asset
composition reflects management’s decision to have a more liquid asset mix
during the current inverted interest rate environment.





Total
deposits increased $11.8 million or 6.2% to $202.2 million at December 31, 2006
from $190.4 million at December 31, 2005.  The increase was primarily
in certificates of deposit, offset by a decrease in passbook savings
accounts.  Certificates of deposit increased to $129.3 million at
December 31, 2006 from $112.9 million at December 31, 2005.  Passbook
savings accounts decreased $6.4 million to $40.5 million at December 31, 2006
compared to $46.9 million at December 31, 2005.





FHLB
advances decreased to $28.8 million at December 31, 2006 from $32.8 million at
December 31, 2005.  The decrease was due to the advances maturing and
not being replaced.





At
December 31, 2006 our securities available for sale portfolio had gross
unrealized losses of $1.4 million compared to gross unrealized losses of $1.8
million at December 31, 2005.  Our available for sale mortgage-backed
securities accounted for $1.0 million of the gross unrealized losses at December
31, 2006, while our available for sale U.S. governmental agency securities had
$215,000 gross unrealized losses at December 31, 2006.  Our mutual
fund, which holds adjustable rate mortgage securities and mortgage-backed
securities, had gross unrealized losses of $201,000 at December 31, 2006
compared to gross unrealized losses of $183,000 at December 31,
2005.  We have reviewed and analyzed our available for sale portfolio
to determine if any security within the portfolio may have suffered an
other-than-temporary impairment.  Staff Accounting Bulletin 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, we also have the intent and ability to hold the securities through the
expected recovery period.  Therefore, we anticipate leveling or
declining interest rates will result in the recovery of the available for sale
securities market value.





33
 Table of Contents





We had
non-performing assets, all nonaccrual loans, of $540,000 as of December 31, 2006
and $394,000 as of December 31, 2005.  The allowance for loan losses
totaled $1.6 million at December 31, 2006 and $1.7 million at December 31,
2005.  This represents a ratio of the allowance for loan losses to
gross loans receivable of 1.16% at December 31, 2006 and 1.11% at December 31,
2005.  The allowance for loan losses to non-performing loans was
299.8% at December 31, 2006 and 431.7% at December 31, 2005.  We had
four non-performing subprime loans totaling $199,000 at December 31,
2006.





Total
stockholders’ equity increased $497,000 to $28.7 million at December 31, 2006
from $28.3 million at December 31, 2005.  The increase in
stockholders’ equity during the past twelve months primarily resulted from net
income of $911,000, as well as an increase in other comprehensive income due to
the increased market value of the available for sale securities portfolio. These
increases were partially offset by the repurchase of shares of our stock during
the twelve months ended December 31, 2006.  Stock compensation and
ESOP related transactions increased equity a net total of $90,000.  In
addition, during the year we declared and paid three quarterly dividends of
$0.10 cents per share, and one quarterly dividend of $0.11 cents per share
totaling $363,000.  With the non-objection of the Office of Thrift
Supervision (“OTS”) AJS Bancorp, MHC (the “MHC”) waived 100% of the quarterly
dividend due on its 1,227,544 shares.   The Company has requested
and received a non-objection letter from the OTS on the waiver of the quarterly
dividend payments due on the MHC shares through the quarter ended September 30,
2008.





Comparison
of Operating Results for the Years Ended December 31, 2007 and December 31,
2006





General.  Net income
decreased $352,000, or 38.6%, to $559,000 for the year ended December 31, 2007,
from $911,000 for the year ended December 31, 2006.  The decrease in
net income resulted primarily from decreases in net interest income, and an
increase in the provision for loan losses, the impairment of our investment in a
mutual fund, offset by a decrease in income tax expense.  The 2006 to
2007 changes in non-interest income and non-interest expense were only a net
$28,000.  However, the Company recorded a $244,000 charge to other
non-interest expense due to the other than temporary impairment of a mutual fund
as of December 31, 2007.   The Company recorded the impairment
due to an inability to definitively forecast a recovery within a reasonable time
period.





Interest
Income.  Total interest income increased to $13.9 million for
the twelve months ended December 31, 2007, up $301,000 or 2.2% from $13.6
million for the same period in 2006.  The increase in our interest
income is primarily due to a higher average yield earned on all categories of
our interest-earning assets.





Interest
income from loans decreased by $758,000 to $8.5 million for the year ended
December 31, 2007, from $9.3 million for the year ended December 31,
2006.  The decrease in interest income from loans was due to a
decrease in the average loan balances during the year.  The average
yield on loans increased to 6.3% during 2007 from 6.2% during 2006. Average loan
balances were $134.7 million during the year ended December 31, 2007 compared to
average loan balances of $149.4 million during the year ended December 31,
2006.





34
 Table of Contents





Interest
income from securities increased by $917,000 to $3.8 million for the year ended
December 31, 2007 compared to $2.9 million for the year ended December 31,
2006.  The increase was due to increases in the average balances of
securities and in interest rates earned on the securities during the
year.  Average securities balances were $82.5 million during the year
ended December 31, 2007 compared to average securities balances of $70.3 million
during the year ended December 31, 2006.  The increase in the average
securities balances reflects purchases of fixed-rate government-backed notes and
bonds and mortgage-backed securities. The average term to maturity of the
fixed-rate note and bond securities was 26 months; the average term to maturity
of the mortgage-back securities was 120 months. The average yield on securities
increased to 4.6% during 2007 from 4.1% during 2006.





Interest
income from interest-earning deposits  and other increased $231,000,
or 18.8%, to $1.5 million for the year ended December 31, 2007, from $1.2
million for the year ended December 31, 2006.  The increase resulted
from increases in the average balances and an increase in the interest rate
earned on the deposits.  Average balances increased to $29.0 million
from $26.2 million, while the average yield increased to 5.0% from 4.7% for the
comparable twelve-month periods.  The increase in the average balance
of interest earning deposits was caused primarily by an increase in demand
account balances at other financial institutions, offset by a decrease in our of
certificates of deposit balances held at other financial institutions and a
decrease in our investment in FHLB stock.





Interest
income from federal funds sold decreased $89,000, or 37.4%, to $149,000 for the
year ended December 31, 2007, from $238,000 for the year ended December 31,
2006.  The decrease resulted primarily from a decrease in the average
balances.  Average balances decreased to $2.9 million from $4.9
million, while the average yield increased to 5.1% from 4.9% for the comparable
twelve-month periods.  The decrease in average balances was due to a
reduction in investment in federal funds sold as the Company shifted funds into
demand accounts at the Federal Home Loan Bank towards the end of
2007.





Interest
Expense.  Interest expense on deposits increased by $825,000,
or 14.4% to $6.6 million for the year ended December 31, 2007, from $5.7 million
for 2006.  The increase in our cost of deposits reflected the higher
average market interest rates during 2007, certificates of deposit maturing and
renewing at higher rates during 2007, as well as an increase in average deposit
balances during the year.  Average deposits increased to $196.3
million for the year ended December 31, 2007, from $194.0 million for
2006.  Our average cost of deposits increased to 3.3% from 3.0% for
the respective periods.  Interest expense on borrowings decreased to
$1.2 million for the twelve months ended December 31, 2007, from $1.3 million
for the same period during 2006, which was due to a decrease in the average FHLB
borrowings.





Net
interest income decreased by $382,000 or 5.8% to $6.2 million for the year ended
December 31, 2007 from $6.6 million for the same period in
2006.  Average interest earning assets were $249.1 million and $250.7
million during the comparative 2007 and 2006 twelve-month periods while the
average yield was 5.58% and 5.42%, respectively.  Our net interest
rate spread decreased 18 basis points to 2.11% from 2.29% while our net interest
margin decreased 14 basis points to 2.48% from 2.62%.  The ratio of
average interest-earning assets to average interest-bearing liabilities
increased to 112.24% for the year ended 2007 from 111.96% for the year ended
December 31, 2006.  The decrease in our net interest rate spread and
net interest margin reflects the fact that during the year ended December 31,
2007 the cost of average interest-bearing liabilities increased at a faster pace
than the yield earned on interest-earning assets.





35
 Table of Contents





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 provision of $179,000 for the year ended December
31, 2007 and a negative $28,000 provision for the same period in
2006.  The loan loss provision made for the year ended December 31,
2007 was based, in part, on concerns regarding economic conditions as real
estate values trend downwards and increased commercial loan credit risk that may
be imbedded in the portfolio, as well as, additional specific reserves allocated
for on commercial and single-family properties.  The Company recorded
a $197,000 specific reserve on two commercial office buildings, with a lending
relationship totaling $2.7 million, owned by the same entity that in October
2007 reported increased vacancies and weaknesses in cash flow.  The
loans secured by the commercial office buildings are currently performing,
however the Company felt a $197,000 loss on these properties was
necessary.  The Company has a commercial lending relationship totaling
$294,000 that is impaired and one commercial lending relationship totaling $2.9
million that is on the Company’s watch list as of December 31,
2007.  The Company’s watch list includes any commercial loan that has
for the past twelve months been late paying three times or more.  We
used the same methodology while updating credit risk assumptions in assessing
the adequacy of the allowance.  The allowance for loan losses was $1.5
million or 1.15% of loans outstanding at December 31, 2007 compared to $1.6
million, or 1.16%, of loans outstanding at December 31, 2006.  The
non-performing assets to total assets at December 31, 2007 was 0.38% as compared
to 0.20% at December 31, 2006.  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, 2007 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 $81,000 or 8.6% to $858,000 for the year
ended December 31, 2007 from $939,000 for the year ended 2006.  The
decrease was primarily due to a $45,000 decrease in insurance commissions, a
$54,000 decrease in gain on the sale of loans, and a $19,000 decrease in rental
income, offset by a $51,000 increase in other non-interest income.





Insurance
commission income decreased $45,000 or 23.9% for the year ended December 31,
2007 when compared to the year ended December 31, 2006.  Insurance
commissions decreased primarily due to a reduction in the insurance sales staff
during the year ended December 31, 2007.





Gain on
the sale of loans decreased $54,000 or 100% during the twelve-month period ended
December 31, 2007 reflecting management’s decision to portfolio the loans
originated during 2007.  Management may decide to sell loans in the
secondary market in the future.  Rental income decreased $19,000 or
13.7% primarily due to several vacant rental units that were occupied during
2006. During the twelve months ended December 31, 2007 four rental units located
at our 80th Avenue
facility terminated their leases. The termination of these four leases will
result in reduced rental income of approximately $18,000 per
quarter.  Accordingly, the Company expects the rental income to
decline in the future





36
 Table of Contents





Other
non-interest income increased $51,000 or 108.5% for the year ended December 31,
2007 when compared to the year ended December 31, 2006.  The increase
was primarily due to an increase in the cash surrender value of the Company’s
bank owned life insurance (“BOLI”).





Non-interest
Expense.Non-interest expense decreased $53,000 to $6.0
million for the year ended December 31, 2007 compared to $6.1 million for the
same period in 2006.  The decrease primarily reflects decreases in
salaries and employee benefits, occupancy expense, advertising and promotion
costs and postage and supplies, offset by increases in loss on the sale of other
real estate owned, loss on impairment of mutual fund and other non-interest
expense items.





Salaries
and employee benefits decreased $205,000 or 5.9% to $3.3 million for the year
ended December 31, 2007 compared to $3.5 million for the same period last
year.  Salaries and employee benefits decreased primarily due to a
reduction in the number of full time equivalent employees for the comparable
periods.  The Company had 58 full time equivalent employees at
December 31, 2007 compared to 64 full time equivalent employees at December 31,
2006.





Occupancy
expense decreased $71,000 or 8.4% to $779,000 for the year ended December 31,
2007 compared to $850,000 for the same period in 2006.  The decrease
reflects the Company’s successful appeal of the real estate tax assessment and
the resulting refund of real estate taxes received during the year ended
December 31, 2007, as well as a decrease in depreciation expenses for the year
ended December 31, 2007 when compared to the same period in 2006.





Advertising
and promotion costs decreased $51,000 or 15.8% to $271,000 for the year ended
December 31, 2007 compared to $322,000 for the period last year.  The
decrease was primarily due to a cost reduction program implemented in the
beginning of 2007.





Postage
and supplies costs decreased $44,000 or 21.7% to $159,000 for the year ended
December 31, 2007 compared to $203,000 for the period last year.  The
decrease was primarily due to the implementation of a cost reduction program
during 2007, as well as the printing and mailing of advertisements that was done
in-house rather than outsourced during 2006.





Loss on
sale of other real estate owned increased $56,000 due to the foreclosure and
subsequent sale of one commercial loan property that occurred during the 2007
year.  There was no real estate owned during the year ended
2006.





The
Company has recorded a $244,000 loss related to an other than temporary
impairment on the Company’s Shay AMF Ultra Short Mortgage fund (“mutual
fund”).  The Company’s investment in the mutual fund has exceeded its
market value since mid-year 2003, however, the Company has had the intent and
ability to hold the fund until its forecasted recovery
period.  Historically, the fund’s market value has correlated
inversely with short-term interest rates, therefore, the projected recovery was
expected to occur as short-term interest rates declined.  However, as
short-term interest rates declined the fund no longer performed as it had
historically, most likely due to the unusual market conditions that have
occurred in the recent past.  The Company continues to believe the
fund will recover its previous market value, however, the forecasted recovery
period is uncertain.  The Company does not believe there is
significant credit risk imbedded within the mutual fund’s portfolio, and intends
to continue to hold the fund for the foreseeable future.  However,
since the forecasted recovery period is no longer certain, the Company felt that
it was appropriate to record the decline in the market value of the fund into
earnings at December 31, 2007.  The Company intends to adopt the FASB
issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities as of
January 1, 2008 for the Company’s equity securities, which will include the
mutual fund, therefore, further changes in the market value of this fund will
flow through earnings.





Other
non-interest expense items increased $49,000 or 9.1% to $587,000 for the twelve
months ended December 31, 2007 compared to $538,000 for the same period last
year.  The increase was primarily due to costs associated with
the maintenance and repair of the Company’s other real estate
owned.  The Company had no other real estate owned during
2006.





37
 Table of Contents





Provision for Income
Taxes.  The provision for income taxes decreased to $275,000,
or 33.0% of income before income taxes for the year ended December 31, 2007 from
$540,000 or 37.2% of income before taxes for the year ended December 31,
2006.  The decrease was primarily due to a decrease in pretax
earnings, as well as an increase in state-tax exempt securities held during
2007.





Comparison
of Operating Results for the Years Ended December 31, 2006 and December 31,
2005





General.  Net income
decreased $186,000, or 17.0%, to $911,000 for the year ended December 31, 2006,
from $1.1 million for the year ended December 31, 2005.  The decrease
in net income resulted primarily from a decrease in net interest income. The
2005 to 2006 changes in provision, non-interest income, non-interest expense and
income taxes were only a net $134,000.  Non-interest expense decreased
slightly during 2006 and non-interest income remained relatively
stable.





Interest
Income.  Total interest income increased to $13.6 million for
the twelve months ended December 31, 2006, up $641,000 or 5.0% from $12.9
million for the same period in 2005.  The increase in our interest
income is primarily due to a higher average yield earned on all categories of
our interest-earning assets.





Interest
income from loans increased by $123,000 to $9.3 million for the year ended
December 31, 2006, from $9.1 million for the year ended December 31,
2005.  The increase in interest income from loans was due to an
increase in interest rates earned on the loans during the year.  The
average yield on loans increased to 6.2% during 2006 from 5.8% during 2005.
Average loan balances were $149.4 million during the year ended December 31,
2006 compared to average loan balances of $156.8 million during the year ended
December 31, 2005.





Interest
income from securities increased by $192,000 to $2.9 million for the year ended
December 31, 2006 compared to $2.7 million for the year ended December 31,
2005.  The increase was due to an increase in interest rates earned on
the securities during the year.  The average yield on securities
increased to 4.1% during 2006 from 3.7% during 2005.  Average
securities balances were $70.3 million during the year ended December 31, 2006
compared to average securities balances of $72.3 million during the year ended
December 31, 2005.





Interest
income from interest-earning deposits increased $152,000, or 14.1%, to $1.2
million for the year ended December 31, 2006, from $1.1 million for the year
ended December 31, 2005.  The increase resulted from increases in the
average balances and an increase in the interest rate earned on the
deposits.  Average balances increased to $26.2 million from $24.6
million, while the average yield increased to 4.7% from 4.4% for the comparable
twelve-month periods.  The increase in the average balance of interest
earning deposits was caused primarily by an increase in money market account
balances at one financial institution, offset by a decrease in our of
certificates of deposit balances held at other financial institutions and a
decrease in our investment in FHLB stock.   The average
investment in the money market account was $14.5 million during the twelve
months ended December 31, 2006 with an average yield of 5.2% for the period
ended December 31, 2006 compared to a balance investment of $5.8 million with an
average yield of 3.4% for the same period in 2005.  Our certificates
of deposit with other financial institutions had an average balance of $6.7
million with an average yield of 3.8% for the period ended December 31, 2006
compared to an average balance of $9.5 million with an average yield of 3.4% for
the same period in 2005.  The average balance of FHLB stock decreased
to $3.0 million during the year ended December 31, 2006, while the average
balance was $6.7 million during the year ended December 31, 2005.  The
average yield for the investment in FHLB stock was 3.3% for the twelve months
ended December 31, 2006 while the average yield for the comparable period in
2005 was 6.8%.





38
 Table of Contents





Interest
Expense.  Interest expense on deposits increased by $1.1
million, or 24.5% to $5.7 million for the year ended December 31, 2006, from
$4.6 million for 2005.  The increase in our cost of deposits reflected
the higher short term market interest rates, and certificates of deposit
maturing and renewing at higher rates during 2006, as well as an increase in
average deposit balances during the year.  Average deposits increased
to $194.0 million for the year ended December 31, 2006, from $193.4 million for
2005.  Our average cost of deposits increased to 3.0% from 2.4% for
the respective periods.  Interest expense on borrowings decreased to
$1.3 million for the twelve months ended December 31, 2006, from $1.4 million
for the same period during 2005, which was due to a decrease in the average FHLB
borrowings.





Net
interest income decreased by $353,000 or 5.1% to $6.6 million for the year ended
December 31, 2006 from $6.9 million for the same period in
2005.  Average interest earning assets were $250.7 million and $256.0
million during the comparative 2006 and 2005 twelve-month periods while the
average yield was 5.42% and 5.06%, respectively. Our net interest rate spread
decreased 12 basis points to 2.29% from 2.41% while our net interest margin
decreased 9 basis points to 2.62% from 2.71%.  The ratio of average
interest-earning assets to average interest-bearing liabilities decreased to
111.96% for the year ended 2006 from 112.45% for the year ended December 31,
2005.  The decrease in our net interest rate spread and net interest
margin reflects the fact that during the year ended December 31, 2006 the cost
of average interest-bearing liabilities increased at a faster pace than the
yield earned on interest-earning assets.





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 $28,000 for the year ended
December 31, 2006 and a negative $130,000 provision for the same period in
2005.  The negative provision decreased due to concerns related to
market risk that may be imbedded in the loan portfolio as real estate values
stabilize or trend slightly downwards.  Our balance of subprime loan
balances continued to decrease to $5.2 million for the year ended December 31,
2006, from $7.8 million for the year ended December 31, 2005.  We used
the same methodology while updating credit risk assumptions in assessing the
adequacy of the allowance.  The allowance for loan losses was $1.6
million or 1.16% of loans outstanding at December 31, 2006 compared to $1.7
million, or 1.11%, of loans outstanding at December 31, 2005.  The
non-performing assets to total assets at December 31, 2006 was 0.20% as compared
to 0.15% at December 31, 2005.  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, 2006 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.





39
 Table of Contents





Non-interest Income.Non-interest income remained relatively stable totaling $939,000 for the
year ended December 31, 2006, compared to $936,000 for the comparable period in
2005.  The $3,000 increase was the result of increases in rental
income and gain on loan sales, offset by decreases in insurance commissions and
service charges on accounts.





Non-interest
Expense.Non-interest expense decreased $112,000 to $6.1
million for the year ended December 31, 2006 compared to $6.2 million for the
same period in 2005.  The decrease was primarily due to an $82,000
decrease in advertising and promotion costs, a $47,000 decrease in occupancy
costs and a $24,000 decrease in data processing costs.  These
decreases were offset by a $62,000 increase in other non-interest expense
items.





Advertising
and promotion costs decreased due to a reduction in budgeted spending in this
area for the 2006 year compared to the 2005 year.  Occupancy costs
decreased primarily due to lower real estate taxes from successful challenges of
property tax assessment and decreases in depreciation costs as assets reached
their fully depreciated status during the twelve months ended December 31,
2006.  In addition, other office building expenses decreased due to
the cost of real estate appraisals performed in 2005.





Data
processing costs decreased primarily due to the Company using a lower-cost
provider for the coding of checks, as well as the Company realizing a one-time
savings on bundled purchases of software packages.  Other non-interest
expenses increased primarily due to an increase in cash station expenses, bank
service charges and auto expenses.  Cash station expenses increased
due to increases in the billings received from our cash station
provider.  Bank service charges increased due to the Company’s
decision to reduce its excess cash held at our correspondent
bank.  This allowed the Company to invest those funds in higher
yielding investments, but also caused the increase in service
charges.  Auto expense increased in conjunction with the approval of
the auto lease coverage for the President of the Company.





Provision for Income
Taxes.  The provision for income taxes decreased to $540,000,
or 37.2% of income before income taxes for the year ended December 31, 2006 from
$694,000 or 38.7% of income before taxes for the year ended December 31,
2005.  The decrease was primarily due to a decrease in pretax
earnings.





40
 Table of Contents





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,
2007.  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 31,2007
            
            
            2006
            
            
            2005Average
            
            
            
            
            
            Interest
            
            
            Average
            
            
            
            
            
            Interest
            
            
            Average
            
            
            InterestOutstanding
            
            
            
            
            
            Earned/
            
            
            Outstanding
            
            
            
            
            
            Earned/
            
            
            Outstanding
            
            
            Earned/Balance
            
            
            Paid
            
            
            Yield/Rate
            
            
            Balance
            
            
            Paid
            
            
            Yield/Rate
            
            
            Balance
            
            
            Paid
            
            
            Yield/Rate(Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable
            
            $
            134,709
            
            
            $
            8,492
            
            
            
            6.30
            %
            
            $
            149,394
            
            
            $
            9,250
            
            
            
            6.19
            %
            
            $
            156,832
            
            
            $
            9,127
            
            
            
            5.82
            %Securities
            
            
            82,526
            
            
            
            3,791
            
            
            
            4.59
            
            
            
            70,338
            
            
            
            2,874
            
            
            
            4.09
            
            
            
            72,301
            
            
            
            2,682
            
            
            
            3.71Interest-earning
      deposits and other
            
            
            28,996
            
            
            
            1,458
            
            
            
            5.03
            
            
            
            26,156
            
            
            
            1,227
            
            
            
            4.69
            
            
            
            24,613
            
            
            
            1,075
            
            
            
            4.36Federal
      funds
            
            
            2,881
            
            
            
            149
            
            
            
            5.17
            
            
            
            4,859
            
            
            
            238
            
            
            
            4.90
            
            
            
            2,230
            
            
            
            64
            
            
            
            3.00Total
      interest-earning assets
            
            $
            249,112
            
            
            
            13,890
            
            
            
            5.58
            
            
            $
            250,747
            
            
            
            13,589
            
            
            
            5.42
            
            
            $
            255,976
            
            
            
            12,948
            
            
            
            5.06Interest-bearing
      liabilities:Passbook
      savings
            
            $
            39,258
            
            
            
            448
            
            
            
            1.14
            
            
            $
            42,686
            
            
            
            468
            
            
            
            1.10
            
            
            $
            48,713
            
            
            
            487
            
            
            
            1.00NOW
      accounts
            
            
            22,741
            
            
            
            58
            
            
            
            0.26
            
            
            
            22,005
            
            
            
            69
            
            
            
            0.31
            
            
            
            22,958
            
            
            
            77
            
            
            
            0.34Money
      market accounts
            
            
            8,949
            
            
            
            259
            
            
            
            2.89
            
            
            
            8,717
            
            
            
            246
            
            
            
            2.82
            
            
            
            8,347
            
            
            
            170
            
            
            
            2.04Time
      deposits
            
            
            125,374
            
            
            
            5,796
            
            
            
            4.62
            
            
            
            120,588
            
            
            
            4,953
            
            
            
            4.11
            
            
            
            113,424
            
            
            
            3,872
            
            
            
            3.41Total
      deposits
            
            
            196,322
            
            
            
            6,561
            
            
            
            3.34
            
            
            
            193,996
            
            
            
            5,736
            
            
            
            2.96
            
            
            
            193,442
            
            
            
            4,606
            
            
            
            2.38FHLB
      advances
            
            
            25,614
            
            
            
            1,139
            
            
            
            4.45
            
            
            
            29,963
            
            
            
            1,281
            
            
            
            4.28
            
            
            
            34,184
            
            
            
            1,416
            
            
            
            4.14Total
      interest-bearing liabilities
            
            $
            221,936
            
            
            
            7,700
            
            
            
            3.47
            
            
            $
            223,959
            
            
            
            7,017
            
            
            
            3.13
            
            
            $
            227,626
            
            
            
            6,023
            
            
            
            2.65Net
      interest income
            
            
            
            
            
            $
            6,190
            
            
            
            
            
            
            
            
            
            
            $
            6,572
            
            
            
            
            
            
            
            
            
            
            $
            6,925Net
      interest rate spread
            
            
            
            
            
            
            
            
            
            
            2.11
            %
            
            
            
            
            
            
            
            
            
            
            2.29
            %
            
            
            
            
            
            
            
            
            
            
            2.41
            %Net
      earning assets
            
            $
            27,176
            
            
            
            
            
            
            
            
            
            
            $
            26,788
            
            
            
            
            
            
            
            
            
            
            $
            28,350Net
      yield on average interest- earning assets
            
            
            
            
            
            
            
            
            
            
            2.48
            %
            
            
            
            
            
            
            
            
            
            
            2.62
            %
            
            
            
            
            
            
            
            
            
            
            2.71
            %Average
      interest-earning assets to average interest-bearing
      liabilities
            
            
            
            
            
            
            
            
            
            
            112.24
            %
            
            
            
            
            
            
            
            
            
            
            111.96
            %
            
            
            
            
            
            
            
            
            
            
            112.45
            %





41
 Table of Contents





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 31,2007 vs. 2006
            
            
            2006 vs. 2005Increase/(Decrease)
            
            
            Total
            
            
            Increase/(Decrease)
            
            
            TotalDue to
            
            
            Increase
            
            
            Due to
            
            
            IncreaseVolume
            
            
            Rate
            
            
            (Decrease)
            
            
            Volume
            
            
            Rate
            
            
            (Decrease)(In
      thousands)Interest-earning
      assetsLoans
      receivable
            
            $
            (923
            )
            
            $
            165
            
            
            $
            (758
            )
            
            $
            (445
            )
            
            $
            568
            
            
            $
            123Securities
            
            
            534
            
            
            
            383
            
            
            
            917
            
            
            
            (74
            )
            
            
            266
            
            
            
            192Interest-earning
      deposits and other
            
            
            139
            
            
            
            92
            
            
            
            231
            
            
            
            70
            
            
            
            83
            
            
            
            153Federal
      funds
            
            
            (102
            )
            
            
            13
            
            
            
            (89
            )
            
            
            109
            
            
            
            65
            
            
            
            174Total
      interest-earning assets
            
            $
            (352
            )
            
            $
            653
            
            
            $
            301
            
            
            $
            (340
            )
            
            $
            986
            
            
            $
            642Interest-bearing
      liabilitiesTransaction
      and savings deposits
            
            
            (30
            )
            
            
            12
            
            
            
            (18
            )
            
            
            (59
            )
            
            
            108
            
            
            
            49Certificate
      accounts
            
            
            197
            
            
            
            646
            
            
            
            843
            
            
            
            245
            
            
            
            836
            
            
            
            1,081Borrowings
            
            
            (186
            )
            
            
            44
            
            
            
            (142
            )
            
            
            (175
            )
            
            
            40
            
            
            
            (135
            )Total
      interest-bearing liabilities
            
            $
            (19
            )
            
            $
            702
            
            
            $
            683
            
            
            $
            11
            
            
            $
            984
            
            
            $
            995Net
      interest income
            
            $
            (333
            )
            
            $
            (49
            )
            
            $
            (382
            )
            
            $
            (351
            )
            
            $
            (2
            )
            
            $
            (353
            )





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.  In a low interest rate
environment, borrowers typically prefer fixed-rate loans to adjustable-rate
mortgages.  We may sell our originations of longer-term fixed-rate
loans into the secondary market.  We do not solicit high-rate jumbo
certificates of deposit or brokered funds.





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





42
 Table of Contents





The table
below sets forth, as of September 30, 2007 (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 asNet
      Portfolio Value
            
            
            a
      % of Present Value of Assets/LiabilitiesChange
      inInterest
      Rates
            
            
            Estimated
            
            
            Amount
      of(Basis Points)
            
            
            NPV
            
            
            Change
            
            
            Percent
            
            
            NPV Ratio
            
            
            Change(1)(Dollars
      in thousands)+300
            
            
            $
            27,621
            
            
            $
            (9,077
            )
            
            
            (25
            )%
            
            
            10.97
            %
            
            
            (292
            )+200
            
            
            
            30,778
            
            
            
            (5,920
            )
            
            
            (16
            )
            
            
            12.02
            
            
            
            (187
            )+100
            
            
            
            33,870
            
            
            
            (2,828
            )
            
            
            (8
            )
            
            
            13.01
            
            
            
            (88
            )+50
            
            
            
            35,326
            
            
            
            (1,372
            )
            
            
            (4
            )
            
            
            13.47
            
            
            
            (42
            )0
            
            
            
            36,698
            
            
            
            -
            
            
            
            -
            
            
            
            13.89
            
            
            
            --50
            
            
            
            37,913
            
            
            
            1,215
            
            
            
            3
            
            
            
            14.25
            
            
            
            36-100
            
            
            
            38,850
            
            
            
            2,152
            
            
            
            6
            
            
            
            14.52
            
            
            
            63-200
            
            
            
            39,876
            
            
            
            3,178
            
            
            
            9
            
            
            
            14.78
            
            
            
            89


(1)
Expressed in basis points.





The table
above indicates that at December 31, 2007, in the event of a 200 basis point
decrease in interest rates, we would experience a 9% increase in net portfolio
value.  In the event of a 200 basis point increase in interest rates,
we would experience a 16% 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
our net interest income, and will differ from actual results.





43
 Table of Contents





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.  Significant influences currently impacting the Company’s
allowance for loan losses are rising real estate inventories which is applying
downward pressure in real estate values and general economic
conditions.  Management continues to monitor these credit risk trends
during each quarterly allowance for loan loss analysis.





We review
investment securities with significant declines in fair value for potential
other-than-temporary impairment pursuant to the guidance set forth in Statement
of Financial Accounting Standards 115, “Accounting for Certain Investments in
Debt and Equity Securities” (“SFAS 115”) on a quarterly basis.





44
 Table of Contents





The
Emerging Issues Task Force Issue 03-1, “The Meaning of Other-than-Temporary
Impairment and Its Application to Certain Instruments” (“EITF 03-1”) provides
that, for equity securities and debt securities that can contractually be
prepaid for less than their initial cost, an impairment is considered to be
other than temporary unless the investor has the ability and intent to hold the
investment for a reasonable period of time sufficient for a forecasted market
price recovery, and evidence indicating that the full initial cost of the
investment is recoverable within a reasonable period of time outweighs evidence
to the contrary. For other debt securities, an impairment is considered other
than temporary if the holder does not have the ability and intent to hold the
debt security until its maturity date or the date the forecasted recovery
occurs, or if it is probable that the investor will be unable to collect all
amounts due according to the contractual terms of the debt security. Appropriate
and unbiased weighting must be given to all reasonably available information,
including the severity and duration of the loss in relation to the forecasted
recovery period and other relevant evidence. .





We have
developed a methodology for conducting quarterly impairment testing on
marketable equity securities with dividends that adjust periodically based on
market interest rate indices such as the mutual funds that we own.





Liquidity
and Capital Resources





We
maintain liquid assets at levels we consider adequate to meet our liquidity
needs.  Our liquidity ratio averaged 20.4% and 22.1% for the years
ended December 31, 2007 and 2006.  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-earning deposits with the Federal
Home Loan Bank of Chicago amounted to $3.2 million at December 31, 2007 and $1.6
million at December 31, 2006.  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.





45
 Table of Contents





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,
2007, we had $23.4 million in advances from the Federal Home Loan Bank of
Chicago.  Of this amount, $7.0 million is due within one year, $13.1
million is due between one and three years, $3.3 million is due between four and
five years.





At
December 31, 2007, we had outstanding commitments of $6.1 million to originate
loans.  This amount does not include the unfunded portion of loans in
process.  At December 31, 2007, certificates of deposit scheduled to
mature in less than one year totaled $103.9 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, 2007 was
18.3%.





The
following table sets forth our contractual obligations and commercial
commitments at December 31, 2007.





Total
            
            
            Less
      than
              1
      year
            
            
            1-3
      Years
            
            
            4-5
      years
            
            
            After
      5 Years(In
      thousands)FHLB
      advances
            
            $
            23,350
            
            
            $
            6,925
            
            
            $
            13,125
            
            
            $
            3,300
            
            
            $
            -Time
      deposits
            
            
            122,757
            
            
            
            103,936
            
            
            
            13,865
            
            
            
            4,956
            
            
            
            -Non-qualified,
      unfunded retirement plan.
            
            
            1,498
            
            
            
            96
            
            
            
            -
            
            
            
            -
            
            
            
            1,402





Total
      Amounts Committed
            
            
            Less
      than
              1
      year
            
            
            1-3
      Years
            
            
            4-5
      years
            
            
            Over
      5 Years(In
      thousands)Lines
      of credit
            
            $
            14,544
            
            
            $
            2,531
            
            
            $
            4,672
            
            
            $
            7,132
            
            
            $
            209Standby
      letters of credit (1)
            
            
            190
            
            
            
            190
            
            
            
            -
            
            
            
            -
            
            
            
            -Other
      commitments to extend credit (1)
            
            
            6,055
            
            
            
            6,055
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
            
            $
            20,789
            
            
            $
            8,776
            
            
            $
            4,672
            
            
            $
            7,132
            
            
            $
            209





(1)
            Represents
      amounts committed to customers.





Not
included above is the $1.8 million liability for the Employee Stock Ownership
Plan   (“ESOP”) put option. This option allows the ESOP
participant, following termination of their employment, to ‘put’ their stock
back to the Company at the fair market value as determined by an independent
appraisal.  It is unlikely that all of the plan participants will put
their stock back to the Company at any one time, however, should they choose to
do so the participants could put their stock back to the Company during
2008.





Impact
of Inflation and Changing Prices





Accounting
principles generally accepted in the United States of America (“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.





46
 Table of Contents




ITEM
      7.
            FINANCIAL
      STATEMENTS





The
financial statements are attached as Exhibit 13 hereto and are incorporated by
reference hereunder.





ITEM
      8.
            CHANGES IN AND
      DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





None.





ITEM
      8A.
            CONTROLS AND
      PROCEDURES





(a)
            Evaluation
      of disclosure controls and
procedures.





Under the
supervision and with the participation of our management, including our Chief
Executive Officer, President and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end
of the fiscal year (the “Evaluation Date”). Based upon that evaluation, the
Chief Executive Officer, President and Chief Financial Officer concluded that,
as of the Evaluation Date, 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)
            Management’s
      annual report on internal control over financial
  reporting





The
management of AJS Bancorp, Inc. (the “Company”) is responsible for establishing
and maintaining adequate internal control over financial reporting, as such term
is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. The Company’s
internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the Company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America, and
that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and (iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could
have a material affect on the financial statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  All internal control systems, no
matter how well designed, have inherent limitations, including the possibility
of human error and the circumvention of overriding controls.  However,
even effective internal control over financial reporting can provide only
reasonable assurance with respect to financial statement
preparation.  Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that degree of compliance with the policies
or procedures may deteriorate.




Management
has assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2007, based on the framework set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.  Based on that assessment,
management concluded that, as of December 31, 2007, the Company’s internal
control over financial reporting was effective based on the criteria established
in the Internal Control-Integrated Framework.




47
 Table of Contents





This
annual report does not include an attestation report of the company’s registered
public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
company’s registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only
management’s report in the annual report.




(c)
            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.





ITEM
      8B.
            OTHER
      INFORMATION





None.





PART
III





ITEM
      9.
            DIRECTORS, EXECUTIVE
      OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE
      WITH SECTION 16(a) OF THE EXCHANGE
ACT





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





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





ITEM
      10.
            EXECUTIVE
      COMPENSATION





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





ITEM
      11.
            SECURITY OWNERSHIP OF
      CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS





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





ITEM
      12.
            CERTAIN RELATIONSHIPS
      AND RELATED TRANSACTIONS, AND DIRECTOR
  INDEPENDENCE





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”.





48
 Table of Contents




ITEM
      13.
            EXHIBITS





3.1
            Certificate
      of Incorporation of AJS Bancorp, Inc.(1)3.2
            Bylaws
      of AJS Bancorp, Inc.(1)4
            Form
      of Common Stock Certificate of AJS Bancorp, Inc.(1)10.1
            Employment
      Agreement with Thomas R. Butkus(2)10.2
            Employment
      Agreement with Lyn G. Rupich(3)10.3
            AJS
      Bancorp, Inc. 2003 Stock Option Plan(4)10.4
            AJS
      Bancorp, Inc. 2003 Recognition and Retention Plan(4)10.5
            Amendments
      to 2003 Stock Option Plan(5)13
            Financial
      Statements14
            Code
      of Ethics(2)21
            Subsidiaries
      of the Registrant23
            Consent
      of Auditors to incorporate financial statements into Form
    S-831.1
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2
            Certification
      of President pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.3
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002


___________________


(1)
            Incorporated
      by reference to the Company’s registration statement on Form S-1
      (commission file number 333-69482, filed on September 17, 2001, as
      amended)


(2)
            Incorporated
      by reference to the Company’s Annual Report on Form 10 - K for the year
      ended December 31, 2003


(3)
            Incorporated
      by reference to the Company’s Current Report on Form 8 - K filed on
      October 25, 2005


(4)
            Incorporated
      by reference to the Company’s registration statement on Form S-8
      (commission file number 333-105598, filed on May 28,
  2003)


(5)
            Incorporated
      by reference to the Company’s Annual Report on Form 10 - K for the year
      ended December 31, 2005




ITEM
      14.
            PRINCIPAL ACCOUNTANT
      FEES AND SERVICES





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





49
 Table of Contents





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
      19, 2008
            By:
            /s/ Thomas R.
      ButkusThomas
      R. Butkus,Chairman
      of the Board andChief
      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.
      Butkus
            By:
            /s/ Lyn G.
      RupichThomas
      R.  Butkus, Chairman of the Board
            
            Lyn
      G. Rupich, Presidentand
      Chief Executive Officer
            
            (Principal
      Executive Officer)Date:
            March
      19, 2008
            Date:
            March
      19, 2008By:
            /s/ Pamela N.
      Favero
            By:
            /s/ Roger L.
      AurelioPamela
      N. Favero, Chief Financial Officer
            
            Roger
      L. Aurelio, DirectorDate:
            March
      19, 2008
            Date:
            March
      19, 2008By:
            /s/ Raymond J.
      Blake
            By:
            /s/ Richard J.
      NogalRaymond
      J. Blake, Director
            
            Richard
      J. Nogal, DirectorDate:
            March
      19, 2008
            Date:
            March
      19, 2008By:
            /s/ Edward S.
      MilenEdward
      S. Milen, DirectorDate:
            March
      19, 2008




50