SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934 For the Fiscal Year Ended December 31, 2004

                                       OR

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

      For the transition period from ___________________ to ___________________

                        Commission File Number: 000-33405

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

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

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

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

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

                                      None
                                      ----

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

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

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

YES _X_ NO ___

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

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

      As of June 30,  2004,  there  were  2,267,932  shares  outstanding  of the
Registrant's  Common Stock.  The aggregate market value of the voting stock held
by  non-affiliates  of the Registrant,  computed by reference to the average bid
and  asked  prices  of the  Common  Stock  as of June  30,  2004,  ($22.25)  was
$16,275,697.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.    Proxy Statement for the 2005 Annual Meeting of  Stockholders  (Parts I and
      III).


<PAGE>

                                     PART I

ITEM 1. 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.

      Following  completion of our mutual holding  company and stock offering on
December 26, 2001, AJS Bancorp,  Inc.  became the mid-tier stock holding company
for A. J. Smith Federal Savings Bank (the "Bank").  The business of AJS Bancorp,
Inc.  consists of holding  all of the  outstanding  common  stock of A. J. Smith
Federal Savings Bank. AJS Bancorp,  Inc. is chartered under Federal law. As part
of our reorganization,  we issued 1,227,544 shares of common stock to our mutual
holding company parent, AJS Bancorp,  MHC ("MHC"),  and sold 1,179,406 shares to
the public.  Under federal  regulations,  so long as AJS Bancorp, MHC exists, it
will own at least 50.1% of the voting stock of AJS Bancorp, Inc. At December 31,
2004, AJS Bancorp,  Inc. had total consolidated assets of $270.9 million,  total
deposits of $198.1  million,  and  stockholders'  equity of $30.5  million.  Our
executive offices are located at 14757 South Cicero Avenue, Midlothian, Illinois
60445, and our telephone number is (708) 687-7400.

A. J. Smith Federal Savings Bank

      A. J. Smith Federal Savings Bank was founded in 1892 by Arthur J. Smith as
a building and loan  cooperative  organization.  In 1924 we were chartered as an
Illinois  savings and loan  association,  and in 1934 we  converted to a federal
charter.  In 1984 we amended our charter to become a federally chartered savings
bank. We are a  customer-oriented  institution,  operating from a main office in
Midlothian, Illinois, and two branch offices in Orland Park, Illinois. We opened
our second branch location in Orland Park in 2003. Our primary business activity
is the origination of one- to four-family real estate loans. To a lesser extent,
we originate multi-family, commercial real estate and consumer loans. As part of
our current business plan, we intend to develop our business banking by offering
commercial  loans and deposit  products and services to business  customers.  We
also invest in securities,  primarily United States Government Agency securities
and mortgage-backed  securities.  In addition, we offer insurance and investment
products and services.

Market Area

      A. J. Smith Federal has been,  and  continues to be, a  community-oriented
savings bank  offering a variety of financial  products and services to meet the
needs of the communities we serve.  Our lending and  deposit-generating  area is
concentrated in the neighborhoods surrounding our three offices; our main


<PAGE>

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

Competition

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

Lending Activities

      General.  Our loan  portfolio is comprised  mainly of one- to  four-family
residential real estate loans. The vast majority of these loans have fixed rates
of interest.  In addition to one- to four-family  residential real estate loans,
our loan  portfolio  consists  primarily of  multi-family  loans and home equity
lines of credit.  At December 31, 2004, our gross loans totaled $165.1  million,
of  which  $115.6  million,  or  70.0%,  were  secured  by one-  to  four-family
residential real estate,  $32.7 million,  or 19.8%, were secured by multi-family
residential and commercial real estate, $16.1 million, or 9.8%, were home equity
loans,  and  $649,000,  or 0.4%,  were consumer  loans.  Our lending area is the
Chicago  metropolitan  area,  with an  emphasis  on  lending  in the  south  and
southwest suburbs.

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

      A portion of our loan  originations  have  consisted of loans to borrowers
with impaired  credit ratings,  which are classified as "subprime"  loans by the
bank  regulatory  agencies.  Our subprime loans are primarily  secured by single
family  properties  located  throughout  the  Chicago   metropolitan  area,  and
generally are first or second mortgage loans.  These loans generally have higher
interest rates than  traditional one- to four-family  loans.  Subprime loans are
underwritten  using the same criteria as our one- to four-family  loans,  except
that loan  applications will not necessarily be rejected because of the impaired
credit  history of a borrower or higher debt to income ratios than are permitted
under Fannie Mae and Freddie Mac underwriting guidelines.  At December 31, 2004,
$12.5 million, or 7.6% of our loan portfolio,  consisted of subprime loans based
upon Office of Thrift Supervision criteria.


                                       2
<PAGE>

      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.

<TABLE>
<CAPTION>
                                                                          At December 31,
                                              ------------------------------------------------------------------------
                                                       2004                     2003                      2002
                                              ---------------------    ---------------------     ---------------------
                                               Amount       Percent      Amount      Percent      Amount       Percent
                                              ---------    --------    ---------    --------     ---------    --------
                                                                                                 (Dollars in thousands)
<S>                                           <C>            <C>       <C>            <C>        <C>            <C>
Real estate loans:
------------------
 One- to four-family (1) ..................   $ 115,598       70.02%   $ 120,810       76.64%    $ 115,880       83.84%
 Multi-family and commercial ..............      32,713       19.82       24,066       15.27        13,187        9.54
                                              ---------    --------    ---------    --------     ---------    --------
     Total real estate loans ..............     148,311                  144,876       91.91       129,067       93.38

Other Loans:
------------
 Consumer loans ...........................         649        0.39          696        0.44           782        0.56
 Home equity ..............................      16,126        9.77       12,056        7.65         8,374        6.06
                                              ---------    --------    ---------    --------     ---------    --------
      Total loans .........................                  100.00%     157,628      100.00%      138,223      100.00%
                                                           ========                 ========                  ========

Less:
-----
 Allowance for loan losses ................      (1,847)                  (1,962)                   (2,082)
 Deferred loan (fees) costs ...............          69                      (16)                       24
 Deferred gain on real estate contract ....         (17)                     (22)                      (31)
                                              ---------                ---------                 ---------
 Total loans receivable, net ..............   $ 163,291                $ 155,628                 $ 136,134
                                              =========                =========                 =========

<CAPTION>
                                                             At December 31,
                                              -----------------------------------------------
                                                       2001                      2000
                                              ---------------------     ---------------------
                                                Amount      Percent       Amount      Percent
                                              ---------    --------     ---------    --------

<S>                                           <C>            <C>        <C>            <C>
Real estate loans:
 One- to four-family (1) ..................   $ 115,344       88.01%    $  93,962       85.32%
 Multi-family and commercial ..............       9,281        7.08         9,442        8.57
                                              ---------    --------     ---------    --------
     Total real estate loans ..............     124,625       95.09       103,404       93.89

Other Loans:
 Consumer loans ...........................         765        0.59           733        0.66
 Home equity ..............................       5,667        4.32         5,999        5.45
                                              ---------    --------     ---------    --------
      Total loans .........................     131,057      100.00%      110,136      100.00%
                                                           ========                  ========

Less:
 Allowance for loan losses ................      (2,508)                   (2,364)
 Deferred loan (fees) costs ...............          (5)                       52
 Deferred gain on real estate contract ....         (39)                      (55)
                                              ---------                 ---------
 Total loans receivable, net ..............   $ 128,505                 $ 107,769
                                              =========                 =========
</TABLE>
________________________

(1)   Subprime real estate loans totaled $12.5  million,  $18.3  million,  $31.2
      million, $47.1 million and $51.6 million at December 31, 2004, 2003, 2002,
      2001 and 2000, respectively.


                                       3
<PAGE>

      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, 2004.  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.

<TABLE>
<CAPTION>
                                                         Multi-Family
                                  One-to Four-Family    and Commercial         Consumer          Home Equity            Total
                                  ------------------  ------------------  ------------------  ------------------  ------------------
                                            Weighted            Weighted            Weighted            Weighted            Weighted
                                             Average             Average             Average             Average             Average
                                   Amount     Rate     Amount     Rate     Amount     Rate     Amount     Rate     Amount     Rate
                                  --------  --------  --------  --------  --------  --------  --------  --------  --------  --------
                                                                       (Dollars in thousands)
<C>                               <C>         <C>     <C>         <C>     <C>         <C>     <C>         <C>     <C>         <C>
1 year or less ................   $    734    8.04%   $  2,363    5.91%   $    347    4.04%   $  1,428    6.10%   $  4,872    6.15%
Greater than 1 to 3 years .....      1,873    7.44       9,381    5.89         198    5.84       3,932    5.14      15,384    5.89
Greater than 3 to 5 years .....      9,227    6.32      16,100    6.08         104    5.34      10,766    5.16      36,197    5.87
Greater than 5 to 10 years ....     23,218    6.13       3,877    6.59          --      --          --      --      27,095    6.20
Greater than 10 to 20 years ...     35,594    5.59         992    6.26          --      --          --      --      36,586    5.61
More than 20 years ............     44,952    5.20          --      --          --      --          --      --      44,952    5.20
                                  --------            --------            --------            --------            --------
Total .........................   $115,598            $ 32,713            $    649            $ 16,126            $165,086
                                  ========            ========            ========            ========            ========
</TABLE>

      The  total  amount  of loans  due  after  December  31,  2005  which  have
predetermined  interest rates is $121.7 million, while the total amount of loans
due after such date which have  floating or adjustable  interest  rates is $38.6
million.


                                       4
<PAGE>

      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, 2004, these loans totaled
$115.6 million, or 70.0% of our total loan portfolio.

      We currently offer one- to four-family  residential real estate loans with
terms  up to 30  years,  although  we  emphasize  the  origination  of  one-  to
four-family  residential loans with terms of 15 years or less. We offer our one-
to four-family  residential  loans with  adjustable or fixed interest  rates. At
December  31,  2004,  $92.2  million,  or  79.7%  of  our  one-  to  four-family
residential real estate loans had fixed rates of interest, and $23.4 million, or
20.3% of our one- to four-family  residential  real estate loans, had adjustable
rates of interest. Our fixed rate loans include loans that generally amortize on
a monthly  basis over periods  between 7 to 30 years.  We also offer loans which
generally have balloon payment  features after three or five years.  Our balloon
loans  generally  amortize over periods of 15 years or more. One- to four-family
residential real estate loans often remain outstanding for significantly shorter
periods  than  their  contractual  terms  because  borrowers  have the  right to
refinance or prepay their loans.

      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. In
order to make our adjustable  rate mortgages more  attractive in the current low
fixed mortgage rate environment, we began to offer discounted or teaser rates on
our adjustable  rate mortgages in July of 2003.  These loans carry initial rates
that are  lower  than the rate  would be if it were to adjust  according  to the
adjustable rate note and rider.  We do not offer  adjustable rate mortgages that
offer the possibility of negative amortization.

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

      Multi-Family and Commercial Real Estate Loans. At December 31, 2004, $32.7
million,  or 19.8% or our total loan  portfolio,  consisted of loans  secured by
multi-family and commercial real estate  properties,  virtually all of which are
located  in the  State of  Illinois.  Our  multi-family  loans  are  secured  by
multi-family  and mixed use  properties.  Our  commercial  real estate loans are
secured  by  improved  property  such as  offices,  small  business  facilities,
unimproved   land,   warehouses  and  other   non-residential   buildings.   Our
multi-family  and  commercial  real  estate  loans  are  offered  with  fixed or
adjustable  rates. Our fixed rate  multi-family and commercial real estate loans
are offered with  amortization  schedules of up to 25 years,  and generally have
three- and five-year balloon features. At December 31, 2004, the average balance
of our multi-family and commercial real estate loans was $258,000.  We generally
will


                                       5
<PAGE>

make multi-family and commercial real estate loans for up to 80% of the cost of,
or the appraised value of, the property securing the loan.

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

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

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

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

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

      Home Equity  Lines of Credit.  We offer home equity  lines of credit,  the
total of which amounted to $16.1 million,  or 9.8% of our total loan  portfolio,
as of December 31,  2004.  Home equity  lines of credit are  generally  made for
owner-occupied   homes,  and  are  secured  by  first  or  second  mortgages  on
residences.  We  generally  offer these loans with a maximum  loan to  appraised
value ratio of 90%  (including  senior  liens on the  collateral  property).  We
currently offer these lines of credit for a period of five years,  and generally
at rates tied to the  prevailing  prime  interest rate. Our home equity lines of
credit are generally  underwritten in the same manner as our one- to four-family
residential loans.

      Consumer  Loans. We are authorized to make loans for a variety of personal
and consumer purposes. As of December 31, 2004, consumer loans totaled $649,000,
or 0.4% of our total loan  portfolio.  Our consumer  loans consist  primarily of
automobile  loans  and loans  secured  by  deposit  accounts.  Automobile  loans
accounted  for  $315,000  of our  consumer  loans and loans  secured  by deposit


                                       6
<PAGE>

accounts  were $332,000 at December 31, 2004.  Our  procedure  for  underwriting
consumer  loans  includes an assessment of the  applicant's  credit  history and
ability to meet existing  obligations and payments of the proposed loan, as well
as an evaluation of the value of the collateral security, if any. Consumer loans
generally entail greater risk than residential  mortgage loans,  particularly in
the case of loans  that are  unsecured  or are  secured  by assets  that tend to
depreciate in value, such as automobiles. In these cases, repossessed collateral
for a defaulted  consumer  loan may not provide an adequate  source of repayment
for the outstanding loan, and the remaining value often does not warrant further
substantial collection efforts against the borrower.

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

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


                                       7
<PAGE>

      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,
                                            -----------------------------------
                                               2004         2003         2002
                                            ---------    ---------    ---------
                                                       (In thousands)
Loans receivable, beginning of period ...   $ 157,628    $ 138,223    $ 131,057
Originations by type:
Real estate- one to four-family .........      22,405       50,531       42,596
Multi-family and commercial .............      17,337       19,426        5,124
Non-real estate -consumer ...............         329          452        1,569
Home equity .............................      12,280       13,588        9,374
                                            ---------    ---------    ---------
Total loans originated ..................                   83,997       58,663

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

Principal repayments: ...................     (44,893)     (61,323)     (51,370)
                                            ---------    ---------    ---------
Loans receivable, at end of period ......   $ 165,086    $ 157,628    $ 138,223
                                            =========    =========    =========

      Loan Approval Procedures and Authority. Our lending activities are subject
to  written,  non-discriminatory  underwriting  standards  and loan  origination
procedures  adopted  by  management  and the  Board  of  Directors.  All  loans,
regardless of size or type, are initially  reviewed by a loan officer.  Loans up
to the Fannie Mae single family loan limit, currently $359,650, must be reviewed
and approved by a loan underwriter, a Vice President or Senior Vice President of
the loan department. All loans of $359,650 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.  Loans in excess of $750,000 must be approved by the Chief
Executive Officer and the Board of Directors.

      Loans-to-One-Borrower.  Federal  savings  banks  are  subject  to the same
loans-to-one-borrower  limits  as those  applicable  to  national  banks,  which
restrict  loans to one borrower to an amount equal to 15% of unimpaired  capital
and unimpaired  surplus on an unsecured basis, and an additional amount equal to
10% of  unimpaired  capital  and  unimpaired  surplus  if the loan is secured by
readily marketable collateral (generally, financial instruments and bullion, but
not real estate).  At December 31, 2004, our lending limit was $4.9 million.  At
December 31, 2004, our largest lending relationship to one borrower totaled $3.6
million.  At December 31, 2004,  we had 32 lending  relations in which the total
amount outstanding exceeded $500,000. All of the loans under these large lending
relationships were performing in accordance with their terms.

Asset Quality

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


                                       8
<PAGE>

the  terms  which  must be met to cure  the  default,  and  will  again  include
information regarding home-ownership counseling.

      In the event the borrower does not cure the default  within 30 days of the
postmark of the notice of default,  we may instruct  our  attorneys to institute
foreclosure proceedings depending on the loan-to-value ratio or our relationship
with the borrower.  We hold property  foreclosed  upon as real estate owned.  We
carry  foreclosed  real estate at its fair market value less  estimated  selling
costs 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.

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

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

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

      As of  December  31,  2004,  our total  non-accrual  loans  were  $983,000
compared to $1.1 million at December 31, 2003,  and $1.1 million at December 31,
2002.

      The following table sets forth our loan  delinquencies by type, amount and
percentage at December 31, 2004.

<TABLE>
<CAPTION>
                                                                         Loans Delinquent For:
                                     --------------------------------------------------------------------------------------------
                                              60-89 Days                   90 Days and Over            Total Delinquent Loans
                                     -----------------------------   -----------------------------   ----------------------------
                                                          Percent                         Percent                        Percent
                                                          of Loan                         of Loan                        of Loan
                                     Number     Amount    Category   Number     Amount    Category   Number     Amount   Category
                                     ------     ------    --------   ------     ------    --------   ------     ------   --------
                                                                 (Dollars in thousands)
<S>                                       <C>   <C>         <C>          <C>    <C>         <C>          <C>    <C>         <C>
Real estate:
  One- to four-family ............        7     $  489      0.42%        17     $  898      0.78%        24     $1,387      1.20%
  Multi-family and commercial ....       --         --        --         --         --        --         --         --        --
  Consumer and other .............        1          1      0.15          2          2      0.31          3          3      0.46
  Home equity ....................       --         --        --         --         --        --         --         --        --
                                     ------     ------               ------     ------               ------     ------
     Total .......................        8     $  490      0.30%        19     $  900      0.55%        27     $1,390      1.66%
                                     ======     ======               ======     ======               ======     ======
</TABLE>


                                       9
<PAGE>

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

<TABLE>
<CAPTION>
                                                                At December 31,
                                            ---------------------------------------------------
                                              2004       2003       2002       2001       2000
                                            -------    -------    -------    -------    -------
                                                           (Dollars In thousands)
<S>                                         <C>        <C>        <C>        <C>        <C>
Non-accruing loans:
One- to four-family .....................   $   981    $ 1,116    $   860    $ 1,124    $   965
Multi-family and commercial .............        --          3        113        341        225
Consumer and other ......................         2         17         --         --          6
Home equity .............................        --         --         79        111         --
                                            -------    -------    -------    -------    -------
   Total non-accruing loans .............       983      1,136      1,052      1,576      1,196
                                            -------    -------    -------    -------    -------

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

Real estate owned .......................        --         23         43        161        305
                                            -------    -------    -------    -------    -------
Total nonperforming assets ..............   $   983    $ 1,159    $ 1,095    $ 1,737    $ 1,501
                                            =======    =======    =======    =======    =======

Total as a percentage of
  total assets ..........................      0.36%      0.49%      0.49%      0.79%      0.77%

Nonperforming loans as percentage of
  gross loans receivable ................      0.60%      0.72%      0.76%      1.20%     1.09%
</TABLE>

      For the year ended December 31, 2004,  gross  interest  income which would
have been recorded had the  non-accruing  loans been current in accordance  with
their  original  terms  amounted to  $102,000.  The amount that was  included in
interest income totaled $43,000 for the year ended December 31, 2004.

      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, 2004, 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


                                       10
<PAGE>

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

      On the basis of management's review of our asset portfolio at December 31,
2004, we had classified  $766,000 of our assets as substandard,  $489,000 of our
assets as special mention, and $114,000 as doubtful.

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

<TABLE>
<CAPTION>
                                                               Years Ended December 31,
                                               ------------------------------------------------------
                                                 2004       2003        2002        2001        2000
                                               -------    -------     -------     -------     -------
                                                               (Dollars In thousands)
<S>                                            <C>        <C>         <C>         <C>         <C>
Balance at beginning of period .............   $ 1,962    $ 2,082     $ 2,508     $ 2,364     $ 2,158

Charge-offs:
One- to four-family ........................      (115)      (110)       (306)       (219)        (78)
Multi-family and commercial ................        --         --         (90)         --          --
Consumer and other .........................        --         --          --          --         (16)
Home equity ................................        --        (10)        (50)        (50)         --
                                               -------    -------     -------     -------     -------
Total charge-offs ..........................      (115)      (120)       (446)       (269)        (94)
Recoveries:
One- to four-family loans ..................       112         61          --          --          --
                                               -------    -------     -------     -------     -------

Net charge-offs ............................        (3)       (59)       (446)       (269)        (94)
Provisions for loan losses .................      (112)       (61)         20         413         300
                                               -------    -------     -------     -------     -------
Balance at end of period ...................   $ 1,847    $ 1,962     $ 2,082     $ 2,508     $ 2,364
                                               =======    =======     =======     =======     =======

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

Ratio of net charge-offs during
 the period to non-performing loans ........      0.31       5.19       42.40       17.07        7.86

Ratio of non-performing assets to total
  assets at end of period ..................      0.36       0.49        0.49        0.79        0.77
Ratio of allowance for loan losses to
 non-performing loans ......................    187.89     172.71      197.91      159.15      197.66
Ratio of allowance for loan losses to
 loans receivable, gross ...................      1.12       1.24        1.51        1.91        2.15
</TABLE>

----------

      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.


                                       11
<PAGE>

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


                                       12
<PAGE>

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

<TABLE>
<CAPTION>
                                                                          At December 31,
                                 ---------------------------------------------------------------------------------------------------
                                              2004                              2003                              2002
                                 -------------------------------   -------------------------------   -------------------------------
                                                      Percent of                        Percent of                        Percent of
                                                       Loans in                          Loans in                          Loans in
                                              Loan       Each                   Loan       Each                   Loan       Each
                                 Amount of   Amounts   Category    Amount of   Amounts   Category    Amount of   Amounts   Category
                                 Loan Loss     by      to Total    Loan Loss     by      to Total    Loan Loss     by      to Total
                                 Allowance  Category    Loans      Allowance  Category    Loans      Allowance  Category    Loans
                                 ---------  --------  ----------   ---------  --------  ----------   ---------  --------  ----------
                                                                                           (Dollars in thousands)
<S>                              <C>        <C>           <C>      <C>        <C>           <C>      <C>        <C>           <C>
One- to four-family ...........  $  1,098   $115,598      70.02%   $  1,450   $120,800      76.64%   $  1,655   $115,880      83.84%
Multi-family and commercial ...       353     32,713      19.82          19     24,066      15.27          58     13,187       9.54
Consumer and other ............         7        649       0.39           7        696       0.44           3        782       0.56
Home equity ...................       258     16,126       9.77         227     12,056       7.65         278      8,374       6.06
Unallocated ...................       131         --         --          88         --         --          88         --         --
                                 --------   --------   --------    --------   --------   --------    --------   --------   --------
  Total loans .................  $  1,847   $165,086     100.00%   $  1,962   $157,618     100.00%   $  2,082   $138,223     100.00%
                                 ========   ========   ========    ========   ========   ========    ========   ========   ========

<CAPTION>
                                                           At December 31,
                                 -------------------------------------------------------------------
                                               2001                               2000
                                 --------------------------------   --------------------------------
                                                       Percent of                         Percent of
                                                        Loans in                           Loans in
                                               Loan       Each                    Loan       Each
                                 Amount of    Amounts   Category    Amount of    Amounts   Category
                                 Loan Loss      by      to Total    Loan Loss      by      to Total
                                 Allowance   Category    Loans      Allowance   Category    Loans
                                 ---------   --------  ----------   ---------   --------  ----------

<S>                              <C>         <C>           <C>      <C>         <C>           <C>
One- to four-family ...........  $  2,057    $115,344      88.01%   $  1,889    $ 93,962      85.32%
Multi-family and commercial ...       133       9,281       7.08         160       9,442       8.57
Consumer and other ............         8         765       0.59           9         733       0.66
Home equity ...................       232       5,667       4.32         221       5,999       5.45
Unallocated ...................        78          --         --          85          --         --
                                 --------    --------   --------    --------    --------   --------
  Total loans .................  $  2,508    $131,057     100.00%   $  2,364    $110,136     100.00%
                                 ========    ========   ========    ========    ========   ========
</TABLE>


                                       13
<PAGE>

      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.  Small  differences  between the
allocated  allowance  balance and the recorded  allowance amount is reflected as
"unallocated" to absorb losses resulting form the inherent  imprecision involved
in the loss evaluation process.

Investment Activities

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

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

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

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

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


                                       14
<PAGE>

      We had no securities  classified as held to maturity at December 31, 2004.
Our  securities  classified  as  available-for-sale  totaled  $26.2  million  at
December  31,  2004,  and  consisted of Federal  agency  obligations,  primarily
Federal  Farm  Credit  Bank notes and Federal  Home Loan Bank  obligations  with
maturities  of one to five years,  and an ARM mutual fund. At December 31, 2004,
we had $5.3 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 $12.5  million  invested  in Federal  Home Loan Bank stock at
December 31, 2004. For further information  regarding our securities  portfolio,
see Note 2 to Consolidated Financial Statements.


                                       15
<PAGE>

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

<TABLE>
<CAPTION>
                                                                            At December 31,
                                        ----------------------------------------------------------------------------------------
                                                2004                   2003                              2002
                                        ----------------------------------------------------------------------------------------
                                          Fair       % of      Carrying     % of      Carrying     % of        Fair       % of
                                          Value      Total      Value       Total      Value       Total       Value      Total
                                        --------    -------    --------    -------    --------    -------    --------    -------
                                                                     (Dollars in thousands)
<S>                                     <C>          <C>       <C>          <C>       <C>          <C>       <C>          <C>
Securities classified as held to
  maturity (at amortized cost):

Municipal bonds .....................   $     --         --%   $     --%        --    $     91       0.22%   $     91       0.22%
Securities classified as
available for sale (at fair
value):
Shay ARM mutual fund ................      5,297      13.68       5,209      12.33       3,137       7.71       3,137       7.71
U.S. Government securities ..........         --         --          --         --       1,016       2.50       1,016       2.50
FHLB ................................     16.955      43.80      18,263      43.25      25,373      62.34      25,373      62.34
FFCB ................................      1,955       5.05       3,076       7.28       3,478       8.54       3,478       8.54
Freddie Mac .........................         --         --          --         --       1,015       2.49       1,015       2.49
Fannie Mae ..........................      1,987       5.13       2,020       4.78       2,058       5.06       2,058       5.06
Other equity investments ............         56       0.14          53       0.13          56       0.14          56       0.14
                                        --------    -------    --------    -------    --------    -------    --------    -------
Subtotal ............................     26,250      67.81      28,621      67.77      36,133      88.78      36,133      88.78
                                        --------    -------    --------    -------    --------    -------    --------    -------
FHLB stock ..........................     12,459      32.19      13,612      32.23       4,477      11.00       4,477      11.00
                                        --------    -------    --------    -------    --------    -------    --------    -------
Total securities and FHLB
stock ...............................   $ 38,709     100.00%   $ 42,233     100.00%   $ 40,701     100.00%   $ 40,701     100.00%
                                        ========    =======    ========    =======    ========    =======    ========    =======

Average remaining life of
securities...........................   13.3 months            12.5 months            17.3 months

Other interest-earning
assets:

Interest-earning deposits
with banks
                                        $ 20,534      86.10%   $  9,829     100.00%   $  9,955      62.39%   $  9,955      62.39%
Federal funds sold ..................      3,314      13.90          --         --       6,000      37.61       6,000      37.61
                                        --------    -------    --------    -------    --------    -------    --------    -------
Total ...............................   $ 23,848     100.00%   $  9,829     100.00%   $ 15,955     100.00%   $ 15,955     100.00%
                                        ========    =======    ========    =======    ========    =======    ========    =======
</TABLE>


                                       16
<PAGE>

Mortgage-Backed Securities

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

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

      At  December  31,  2004,  our  mortgage-backed  securities  totaled  $35.4
million,  which  represented 13.1% of our total assets at that date. At December
31, 2004,  $35.2 million of our  mortgage-backed  securities  were classified as
available-for-sale.   At  that  date,   virtually  all  of  our  mortgage-backed
securities  had  fixed  rates  of  interest.   We  purchased  $24.5  million  of
mortgage-backed  securities  during the year ended  December 31, 2004, and $10.5
million during the year ended December 31, 2003.

      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.

<TABLE>
<CAPTION>
                                                               At December 31,
                                     -------------------------------------------------------------------
                                             2004                    2003                    2002
                                     -------------------     -------------------     -------------------
                                     Carrying     % of       Carrying     % of       Carrying     % of
                                      Value       Total        Value      Total       Value       Total
                                     --------    -------     --------    -------     --------    -------
                                                            (Dollars in thousands)
<S>                                  <C>            <C>      <C>            <C>      <C>            <C>
Mortgage-backed securities
 classified as held to maturity
  (at amortized cost):
 Ginnie Mae                          $    132       0.37%    $    176       1.25%    $    254       1.58%
 Freddie Mac                               --         --           --         --           14       0.09
 Other                                     --         --            1       0.01            1       0.01
Mortgage-backed securities
 classified as available for sale
  (at fair value):
 Fannie Mae                            29,685      83.94       12,129      86.45       13,971      87.11
 Freddie Mac                            5,548      15.69        1,725      12.29        1,799      11.21
                                     --------    -------     --------    -------     --------    -------

       Total                         $ 35,365     100.00%    $ 14,031     100.00%    $ 16,039     100.00%
                                     ========    =======     ========    =======     ========    =======
</TABLE>


                                       17
<PAGE>

      Carrying Values, Yields and Maturities.  The composition and maturities of
our debt securities portfolio and of our mortgage-backed  securities,  excluding
equity  investments and FHLB stock, are indicated in the following  table.  Cost
represents the amortized cost of the securities and  mortgage-backed  securities
at December 31, 2004.

<TABLE>
<CAPTION>
                                                              At December 31, 2004
                                   -------------------------------------------------------------------------
                                   Less Than     1 to 5       5 to 10       Over
                                    1 Year        Years        Years      10 Years        Total Securities
                                   ---------    ---------    ---------    ---------    ---------------------
                                   Amortized    Amortized    Amortized    Amortized    Amortized      Fair
                                     Cost         Cost         Cost         Cost         Cost         Value
                                   --------     --------     --------     --------     --------     --------
                                                             (Dollars in thousands)
<S>                                <C>          <C>          <C>          <C>          <C>          <C>
Securities ....................    $  5,005     $ 16,033     $     --     $     --     $ 21,038     $ 20,897
Mortgage-backed securities ....          --          145       17,712       17,704       35,560       35,367
                                   --------     --------     --------     --------     --------     --------
Total securities ..............    $  5,005     $ 16,178     $ 17,712     $ 17,704     $ 56,598     $ 56,264
                                   ========     ========     ========     ========     ========     ========

Weighted average yield ........        4.27%        3.05%        4.17%        4.80%        4.06%
</TABLE>

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,
                                         -------------------------------------
                                            2004          2003          2002
                                         ---------     ---------     ---------
                                                (Dollars in thousands)

Opening balance .....................    $ 183,847     $ 169,008     $ 171,809
Deposits ............................      464,289       517,327       444,269
Withdrawals .........................     (453,205)     (507,549)     (450,552)
Interest credited ...................        3,125         5,061         3,482
                                         ---------     ---------     ---------

Ending balance ......................    $ 198,056     $ 183,847     $ 169,008
                                         =========     =========     =========

Net increase (decrease) .............    $  14,209     $  14,839     $  (2,801)
                                         =========     =========     =========

Percent increase (decrease) .........         7.73%         8.78%        (1.63)%
                                         =========     =========     =========


                                       18
<PAGE>

      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.

<TABLE>
<CAPTION>
                                                                    At December 31,
                                           -----------------------------------------------------------------
                                                   2004                   2003                   2002
                                           -------------------    -------------------    -------------------
                                             Amount    Percent      Amount    Percent      Amount    Percent
                                           ---------   -------    ---------   -------    ---------   -------
                                                               (Dollars in thousands)
<S>                                        <C>          <C>       <C>          <C>       <C>          <C>
Transactions and Savings Deposits:
----------------------------------

Checking accounts ......................   $  12,764      6.44%   $   3,607      1.96%   $   3,309      1.96%
Passbook accounts ......................      50,651     25.57       51,755     28.15       44,328     26.23
NOW accounts ...........................      11,020      5.56       19,603     10.66       19,322     11.43
Money market accounts ..................      10,575      5.34        7,514      4.09        7,720      4.57
                                           ---------   -------    ---------   -------    ---------   -------

Total non-certificates .................      85,010     42.91       82,479     44.86       74,679     44.19
                                           ---------   -------    ---------   -------    ---------   -------

Certificates:
-------------

 0.00 - 3.99% ..........................      80,997     40.90       64,824     35.26       48,339     28.59
 4.00 - 5.99% ..........................      23,661     11.95       26,516     14.42       30,634     18.13
 6.00 - 7.99% ..........................       8,370      4.23       10,011      5.45       15,340      9.08
 8.00 - 9.99% ..........................          18      0.01           17      0.01           16      0.01
                                           ---------   -------    ---------   -------    ---------   -------

Total certificates .....................     113,046     57.09      101,368     55.14       94,329     55.81
                                           ---------   -------    ---------   -------    ---------   -------
Total deposits .........................   $ 198,056    100.00%   $ 183,847    100.00%   $ 169,008    100.00%
                                           =========   =======    =========   =======    =========   =======
</TABLE>

      Deposit Maturity Schedule. The following table presents, by rate category,
the  remaining  period to maturity of time deposit  accounts  outstanding  as of
December 31, 2004.

<TABLE>
<CAPTION>
                                                   4.00-       6.00-      8.00%-                Percent
                                      0-3.99%      5.99%       7.99%    or greater     Total    of Total
                                     --------    --------    --------   ----------   --------   --------
                                                             (Dollars in thousands)
Certificate accounts maturing
-----------------------------
in quarter ending:
------------------
<S>                                  <C>         <C>         <C>         <C>         <C>           <C>
March 31, 2005 ...................   $ 21,585    $  1,487    $  4,254    $      5    $ 27,331      24.18%
June 30, 2005 ....................      7,032       1,012       1,629          --       9,673       8.56
September 30, 2005 ...............     11,895       2,173         748          --      14,816      13.11
December 31, 2005 ................      9,890         828       1,106          --      11,824      10.46
March 31, 2006 ...................      4,457         811         122          13       5,403       4.78
June 30, 2006 ....................      1,614         622         102          --       2,338       2.07
September 30, 2006 ...............      3,189         816          10          --       4,015       3.55
December 31, 2006 ................      2,590         785          --          --       3,375       2.99
March 31, 2007 ...................      1,938       5,613          58          --       7,609       6.73
June 30, 2007 ....................      3,714       4,677          11          --       8,402       7.43
September 30, 2007 ...............        467       2,388          --          --       2,855       2.53
December 31, 2007 ................      1,262       1,542          --          --       2,804       2.48
March 31, 2008 ...................      2,801         860          --          --       3,661       3.24

Thereafter .......................      8,563          47         330          --       8,940       7.91
                                     --------    --------    --------    --------    --------   --------
   Total .........................   $ 80,997    $ 23,661    $  8,370    $     18    $113,046     100.00%
                                     ========    ========    ========    ========    ========   ========
   Percent of total ..............      71.65%      20.93%       7.40%      0.02%
</TABLE>


                                       19
<PAGE>

      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, 2004.

<TABLE>
<CAPTION>
                                                                            Maturity
                                                    --------------------------------------------------------
                                                    3 Months    Over 3 to   Over 6 to   Over 12
                                                    or Less     6 Months    12 Months    Months       Total
                                                    --------    --------    --------    --------    --------
                                                                         (In thousands)
<S>                                                 <C>         <C>         <C>         <C>         <C>
Certificates of deposit less than $100,000 .....    $ 19,903    $  8,511    $ 17,064    $ 37,055    $ 82,533
Certificates of deposit of $100,000 or more ....       7,389       1,062       4,862      11,863      25,176
Public funds (1) ...............................          --         100       4,714         523       5,337
                                                    --------    --------    --------    --------    --------

Total certificates of deposit ..................    $ 27,292    $  9,673    $ 26,640    $ 49,441    $113,046
                                                    ========    ========    ========    ========    ========
</TABLE>

----------
(1)   Deposits from  governmental and other public  entities.  The amounts shown
      under  public funds  include  deposits of $100,000 or more  totaling  $5.2
      million.

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

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

                                                    Years Ended December 31,
                                                --------------------------------
                                                  2004        2003        2002
                                                --------    --------    --------
                                                         (In thousands)
Maximum balance:
----------------
 FHLB advances .............................    $ 36,250    $ 19,000    $ 17,000

Average balance:
----------------
 FHLB advances .............................    $ 27,358    $ 18,373    $ 14,000

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

<TABLE>
<CAPTION>
                                                               At December 31,
                                                       --------------------------------
                                                         2004        2003        2002
                                                       --------    --------    --------
                                                      (Dollars In thousands)
<S>                                                    <C>         <C>         <C>
FHLB advances ......................................   $ 36,250    $ 17,000    $ 16,000

Weighted average interest rate of FHLB advances ....       4.05%       4.52%       4.91%
</TABLE>


                                       20
<PAGE>

Employees

      At December  31,  2004,  we had a total of 55  full-time  and 19 part-time
employees. Our employees are not represented by any collective bargaining group.
Management believes that we have good relations 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 surplus on an unsecured basis. An additional  amount may
be lent, equal to 10% of unimpaired capital and surplus,  if the loan is secured
by readily marketable collateral, which is defined to include certain securities
and bullion,  but  generally  does not include  real estate.  As of December 31,
2004, 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, 2004,
we maintained  85.64% of our portfolio  assets in qualified  thrift  investments
and, therefore, we met the qualified thrift lender test.

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

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

      Community  Reinvestment  Act and Fair Lending Laws.  Federal savings banks
have  a  responsibility  under  the  Community   Reinvestment  Act  and  related
regulations of the Office of Thrift Supervision to help meet the credit needs of
their  communities,   including  low-  and  moderate-income  neighborhoods.   In
addition,  the Equal  Credit  Opportunity  Act and the Fair Housing Act prohibit
lenders  from  discriminating  in  their  lending  practices  on  the  basis  of
characteristics  specified in those statutes. An institution's failure to comply
with the  provisions  of the  Community  Reinvestment  Act could,  at a minimum,
result in regulatory restrictions on its activities,  and failure to comply with
the Equal Credit


                                       21
<PAGE>

Opportunity Act and the Fair Housing Act could result in enforcement  actions by
the Office of Thrift  Supervision,  as well as other federal regulatory agencies
and the Department of Justice. We received a Satisfactory Community Reinvestment
Act rating in our most recent examination by the Office of Thrift Supervision.

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

      Our  authority to extend credit to executive  officers,  directors and 10%
stockholders,  as well as entities  controlled  by these  persons,  is currently
governed by Sections  22(g) and 22(h) of the Federal  Reserve  Act,  and also by
Regulation  O. Among other things,  these  regulations  generally  require these
loans  to  be  made  on  terms  substantially  the  same  as  those  offered  to
unaffiliated  individuals  and do not  involve  more  than  the  normal  risk of
repayment.  However,  recent  regulations  now  permit  executive  officers  and
directors to receive the same terms through benefit or  compensation  plans that
are widely  available to other  employees,  as long as the director or executive
officer is not given  preferential  treatment  compared  to other  participating
employees.  Regulation  O also places  individual  and  aggregate  limits on the
amount of loans we may make to these  persons  based,  in part,  on our  capital
position, and requires approval procedures to be followed. At December 31, 2004,
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,  and  attorneys,  appraisers  and  accountants  who  knowingly  or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution.  Formal enforcement action may range from the issuance of a
capital  directive  or cease and  desist  order to removal  of  officers  and/or
directors of the institution,  receivership,  conservatorship or the termination
of deposit  insurance.  Civil  penalties  cover a wide range of  violations  and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made,  in which case  penalties  may be as high as $1.0  million per day. The
Federal Deposit Insurance Corporation also has the authority to recommend to the
Director of the Office of Thrift  Supervision that  enforcement  action be taken
with respect to a particular savings institution.  If action is not taken by the
Director, the Federal Deposit Insurance Corporation has authority to take action
under specified circumstances.

      Standards  for Safety and  Soundness.  Federal law  requires  each federal
banking agency to prescribe for all insured  depository  institutions  standards
relating to, among other  things,  internal  controls,  information  systems and
audit  systems,  loan  documentation,  credit  underwriting,  interest rate risk
exposure,  asset growth,  compensation,  and other  operational  and  managerial
standards as the agency deems appropriate.  The federal banking agencies adopted
Interagency Guidelines Prescribing Standards


                                       22
<PAGE>

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

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

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

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,


                                       23
<PAGE>

long-term  perpetual   preferred  stock,   mandatory   convertible   securities,
subordinated  debt and intermediate  preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of  risk-weighted  assets,  and up to
45% of unrealized  gains on  available-for-sale  equity  securities with readily
determinable fair market values.  Overall,  the amount of supplementary  capital
included as part of total capital cannot exceed 100% of core capital.

      The capital  regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating  their  risk-based
capital requirements. For the present time, the Office of Thrift Supervision has
deferred  implementation  of the interest rate risk capital charge.  At December
31, 2004, A. J. Smith Federal met each of its capital requirements.

Prompt Corrective Regulatory Action

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

Insurance of Deposit Accounts

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


                                       24
<PAGE>

Federal Home Loan Bank System

      We are a member of the Federal Home Loan Bank System, which consists of 12
regional  Federal Home Loan Banks.  The Federal Home Loan Bank System provides a
central credit facility  primarily for member  institutions.  As a member of the
Federal Home Loan Bank of Chicago, we are required to acquire and hold shares of
capital stock in the Federal Home Loan Bank in an amount equal to at least 1% of
the aggregate  principal  amount of our unpaid  residential  mortgage  loans and
similar  obligations  at the beginning of each year,  or 1/20 of our  borrowings
from the Federal Home Loan Bank,  whichever is greater. As of December 31, 2004,
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.

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,
2004,  we were in  compliance  with these  reserve  requirements.  The  balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy  liquidity  requirements  imposed by the Office of Thrift
Supervision.

Holding Company Regulation

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

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


                                       25
<PAGE>

activity  permissible for financial  holding companies under Section 4(k) of the
Bank Holding Company Act, including securities and insurance  underwriting;  and
(xi)  purchasing,  holding,  or disposing of stock acquired in connection with a
qualified  stock issuance if the purchase of such stock by such savings and loan
holding  company  is  approved  by the  Director.  If a mutual  holding  company
acquires or merges with another holding company, the holding company acquired or
the holding company resulting from such merger or acquisition may only invest in
assets and engage in  activities  listed in (i) through  (xi)  above,  and has a
period of two  years to cease any  nonconforming  activities  and  divest of any
nonconforming investments.

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

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

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

      Conversion of AJS Bancorp, MHC to Stock Form. Office of Thrift Supervision
regulations  permit  AJS  Bancorp,  MHC to  convert  from  the  mutual  form  of
organization   to  the  capital  stock  form  of   organization  (a  "Conversion
Transaction"). There can be no assurance when, if ever, a Conversion


                                       26
<PAGE>

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

The USA PATRIOT Act

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

Sarbanes-Oxley Act of 2002

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

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

      Although we anticipate that we will incur additional  expense in complying
with the provisions of the Sarbanes-Oxley Act and the regulations that have been
promulgated to implement the Sarbanes-Oxley Act, management does not expect that
such  compliance  will have a material  impact on our results of  operations  or
financial  condition for 2005.  The cost of compliance is expected to be between
$120,000 to $150,000 for 2006 expense, which represents 7.6% to 9.5% of 2004 net
income.  These expenses are expected to continue annually  thereafter,  although
the dollar amount of the expense may change.


                                       27
<PAGE>

                                    TAXATION

Federal Taxation

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

      As a result of the enactment of the Small  Business Job  Protection Act of
1996,  all savings  banks and savings  associations  may convert to a commercial
bank charter,  diversify their lending,  or merge into a commercial bank without
having to recapture  any of their  pre-1988 tax bad debt reserve  accumulations.
However, transactions which would require recapture of the pre-1988 tax bad debt
reserve include redemption of A. J. Smith Federal's stock,  payment of dividends
or  distributions  in  excess  of  earnings  and  profits,  or  failure  by  the
institution  to qualify as a bank for federal  income tax purposes.  At December
31, 2004, 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.

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

State Taxation

      Illinois State  Taxation.  AJS Bancorp,  Inc. is required to file Illinois
income tax  returns  and pay tax at an  effective  tax rate of 7.3% 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.  During  2004,  the Illinois
Department of Revenue (IDOR)  audited the Company's and the Bank's  Illinois tax
returns for the years ended 2003,  2002 and 2001.  IDOR  recommended the Company
file unitary tax returns, or consolidated returns with the Bank and MHC, for the
years audited and for future filings. This change resulted in no effect for 2001
and an immaterial refund for 2002 and 2003, respectively.  We expect this change
to minimally decrease the Company's Illinois revenue taxes in the future.


                                       28
<PAGE>

                                   MANAGEMENT

Executive Officers of AJS Bancorp, Inc.

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

     Name              Age            Position
--------------        -----    ----------------------

Thomas R. Butkus       57      Chairman of the Board and Chief Executive Officer

Lyn G. Rupich          42      President

W. Anthony Kopp        54      Senior Vice President

Pamela N. Favero       41      Chief Financial Officer

Availability of Annual Report on Form 10-K

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

ITEM 2. PROPERTIES
------------------

Properties

      At December 31, 2004,  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, 2004, the net book value of our office locations was $4.4 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,
2004, we were not involved in any legal proceedings,  the outcome of which would
be material to our financial condition or results of operations.

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

      None.

                                     PART II

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

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


                                       29
<PAGE>

      The following table sets forth the range of the high and low bid prices of
the Company's  Common Stock for the prior eight  calendar  quarters and is based
upon  information set forth on the over the counter  electronic  bulletin board.
The  Company  has not paid any  dividends  since the  completion  of its initial
public offering.

                                                        Prices of Common Stock
                                                      --------------------------
                                                          High           Low
                                                      -----------    -----------
Calendar Quarter Ended
March 31, 2003....................................      $ 18.00        $ 17.40
June 30, 2003.....................................        20.75          17.50
September 30, 2003................................        21.20          20.20
December 31, 2003.................................        23.50          21.10
March 31, 2004....................................        27.50          22.35
June 30, 2004.....................................        26.25          22.00
September 30, 2004................................        25.00          21.50
December 31, 2004.................................        25.00          22.75

      As of December 31, 2004, the Company had 412 stockholders of record.

      The  Company's  second  repurchase  plan was announced on May 18, 2004 and
allows  for the  repurchase  of 117,000  shares of the  Company's  stock,  which
represented approximately 5% of the Company's outstanding shares.

      Issuer purchases of equity securities during the prior three months.

<TABLE>
<CAPTION>
                                                                   Total number of     Maximum number of
                                                                  shares purchased    shares that may be
                              Total number      Average price      under publicly     purchased under the
                            shares purchased    paid per share     announced plan       repurchase plan
<S>                                <C>              <C>                <C>                  <C>
October 1-October 31               500              $23.15             76,025               117,000
November 1-November  30             --                  --             76,025               117,000
December 1- December  31            --                  --             76,025               117,000
</TABLE>


                                       30
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA
-------------------------------

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

<TABLE>
<CAPTION>
                                                                  At December 31,
                                           -------------------------------------------------------------
                                              2004         2003         2002         2001         2000
                                           ---------    ---------    ---------    ---------    ---------
                                                               (Dollars in thousands)
<S>                                        <C>          <C>          <C>          <C>          <C>
Selected Financial Condition Data:
----------------------------------
Total assets ...........................   $ 270,869    $ 238,384    $ 222,570    $ 219,780    $ 195,690
Loans receivable, net ..................     163,291      155,628      136,134      128,505      107,769
Mortgage-backed securities:
  Held to maturity .....................         132          177          269          369          472
  Available for sale ...................      35,233       13,854       15,770        8,965       10,420
Securities:
  Held to maturity .....................          --           --           91          559          319
  Available for sale ...................      26,250       28,621       36,133       44,846       46,957
Deposits ...............................     198,056      183,847      169,008      171,809      161,251
Total borrowings .......................      36,250       17,000       16,000       13,000       12,000
Equity .................................      30,530       32,105       33,646       31,248       19,215

<CAPTION>
                                                              Years Ended December 31,
                                           -------------------------------------------------------------
                                              2004         2003         2002         2001         2000
                                           ---------    ---------    ---------    ---------    ---------
                                                               (Dollars in thousands)
<S>                                        <C>          <C>          <C>          <C>          <C>
Selected Operations Data:
-------------------------
Total interest income ..................   $  12,737    $  12,347    $  13,113    $  13,645    $  14,236
Total interest expense .................       5,178        5,069        5,426        7,482        8,504
                                           ---------    ---------    ---------    ---------    ---------
  Net interest income ..................       7,559        7,278        7,687        6,163        5,732
Provision (recovery) for loan
losses .................................        (112)         (61)          20          413          300
                                           ---------    ---------    ---------    ---------    ---------
Net interest income after provision
   for loan losses .....................       7,671        7,339        7,667        5,750        5,432
Noninterest income .....................         933        1,091        1,599        1,146        1,036
  Noninterest expense ..................       6,191        6,255        5,855        5,401        4,463
                                           ---------    ---------    ---------    ---------    ---------
  Income before taxes ..................       2,413        2,175        3,411        1,495        2,005
  Income tax provision .................         833          782        1,296          516          666
                                           ---------    ---------    ---------    ---------    ---------
     Net income ........................   $   1,580    $   1,393    $   2,115    $     979    $   1,339
                                           =========    =========    =========    =========    =========
Net income per share, basic/diluted ....   $ .70/.69    $ .60/.60    $ .90/.90          N/A          N/A
</TABLE>

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


                                       31
<PAGE>

<TABLE>
<CAPTION>
                                                                             Years Ended December 31,
                                                                --------------------------------------------------
                                                                 2004       2003       2002       2001       2000
                                                                ------     ------     ------     ------     ------
                                                                              (Dollars in thousands)
<S>                                                             <C>        <C>        <C>        <C>        <C>
Selected Financial Rations and Other Data:
------------------------------------------

Performance Ratios:
Return on assets (ratio of net income to average
   total assets) ...........................................      0.61%      0.58%      0.98%      0.48%      0.69%
Return on equity (ratio of net income to average
   equity) .................................................      5.07       4.15       6.50       4.80       7.39
Interest rate spread information:
Average during period ......................................      2.78       2.93       3.39       2.95       2.77
Net interest margin (1) ....................................      3.03       3.20       3.78       3.27       3.04
Ratio of operating expense to average total assets .........      2.39       2.62       2.72       2.65       2.23
Efficiency ratio (2) .......................................     72.90      74.74      73.04      73.90      65.94
Ratio of average interest-earning assets to average
   interest-bearing liabilities ............................    112.29     112.29     114.49     107.96     105.84

Asset Quality Ratios:
Non-performing assets to total assets at end of period .....      0.36       0.49       0.49       0.79       0.77
Allowance for loan losses to non-performing loans ..........    187.89     172.71     197.91     159.15     197.66
Allowance for loan losses to loans receivable, gross .......      1.12       1.24       1.51       1.91       2.15

Capital Ratios:
Equity to total assets at end of period ....................     11.27      13.47      15.12      14.22       9.82
Average equity to average assets ...........................     12.06      14.02      15.14      10.00       9.06
Other Data:
Number of full-service offices .............................         3          3          3          2          2
</TABLE>

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

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

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

Forward Looking Statements

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

General

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


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<PAGE>

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

Business Strategy

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

      Highlights of our business strategy are as follows:

      o     Continuing  One- to  Four-Family  Residential  Real Estate  Lending.
            Historically,  we have  emphasized  one- to four-family  residential
            lending  within our market area.  As of December  31,  2004,  $115.6
            million,  or 70.0%, of our total loan portfolio consisted of one- to
            four-family  residential  real estate  loans.  During the year ended
            December  31,  2004,  we   originated   $22.4  million  of  one-  to
            four-family  residential real estate loans. We intend to continue to
            originate  one- to  four-family  loans because of our expertise with
            this type of lending.

      o     Reducing  Reliance on Subprime Loans. In 1994, we began  originating
            "subprime" loans through mortgage brokers to borrowers with impaired
            credit  histories.  Since  that  time and up to the end of  1999,  a
            significant number of our one- to four-family loan originations were
            subprime  loans  primarily  because they offered  higher yields than
            traditional  one- to  four-family  mortgage  loans.  At December 31,
            1999,  $54.9  million  of our loans,  comprising  49.1% of our total
            loans,  consisted of loans categorized as subprime loans.  Beginning
            in 2000, we  determined  to  de-emphasize  the  origination  of such
            loans, because they carry greater credit risk. At December 31, 2004,
            our subprime loans totaled $12.5 million, or 7.6% of total loans.

      o     Commercial  and  Multi-Family  Lending.  We intend to originate more
            commercial business and multi-family loans to complement our one- to
            four-family  residential real estate lending.  These loans will most
            likely encumber business real estate whenever possible,  however, we
            may use non-real estate based liens when  necessary.  As of December
            31, 2004  commercial  business and  multi-family  loans  represented
            $32.7  million or 19.8% of our loan  portfolio.  We  continue  to be
            committed to developing  our  commercial  business and  multi-family
            lending and our commercial business banking services.  We have added
            a senior  commercial  banking  officer to our staff  with  extensive
            experience in originating and servicing  commercial  business loans.
            We may add one or more additional  experienced  commercial  business
            lending personnel to our staff as circumstances  warrant. We believe
            that expanding our commercial and multi-family business lending will
            enable us to improve the yield on our loan  portfolio  and diversify
            our assets while continuing to meet the needs of our community.

      o     Establishing Our Commercial  Business  Banking.  We are committed to
            meeting the financial  needs of the communities in which we operate.
            In particular,  we have increased


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<PAGE>

            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.

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

Comparison of Financial Condition at December 31, 2004 and December 31, 2003

      Our total assets  increased by $32.5 million,  or 13.6%, to $270.9 million
at December 31, 2004 from $238.4  million at December  31,  2003.  Cash and cash
equivalents  decreased  $2.8  million or 14.0% to $17.0  million at December 31,
2004 from $19.8 million at December 31, 2003.  Certificates  of deposits held at
other financial  institutions  are $9.8 million at December 31, 2004, there were
no  investments  in  certificates  of deposit at December 31,  2003.  Securities
increased  $19.0  million or 44.5%,  to $61.6  million at December 31, 2004 from
$42.7 million at December 31, 2003. Loans  receivable  increased $7.7 million or
4.9% to $163.3 at December  31, 2004 from $155.6  million at December  31, 2003.
Securities  increased due to an arrangement  whereby the Company purchased $19.5
million in mortgage-backed  securities funded by cash and Federal Home Loan Bank
("FHLB")  advances.  The  mortgage-backed  securities  purchased  represent  the
Company's  attempt to lock in a spread between the interest  earned on the asset
and the lower interest paid on the FHLB advances.  Federal Home Loan Bank (FHLB)
stock  decreased $1.1 million,  to $12.5 million at December 31, 2004 from $13.6
million at December 31, 2003.

      Total  deposits  increased  $14.2  million,  or 7.7%, to $198.1 million at
December  31, 2004 from  $183.8  million at December  31,  2003.  Our new branch
facility which opened in December of 2002 has total deposits of $15.1 million as
of December  31,  2004.  Transaction  and savings  accounts  increased  to $85.0
million  at  December  31,  2004  from  $82.5  million  at  December  31,  2003;
certificate of deposit accounts increased to $113.0 million at December 31, 2004
from $101.4 million at December 31, 2003.

      Federal Home Loan Bank advances increased to $36.3 million at December 31,
2004 from $17.0 million at December 31, 2003.  The increase in FHLB advances was
primarily used to fund the purchase of mortgage  backed  securities  that paid a
higher yield than our cost of the advances.

      At December  31, 2004 the  Company had  non-performing  assets of $983,000
compared to $1.2 million as of December 31, 2003.  The allowance for loan losses
was $1.8 million at December  31,  2004,  and $2.0 million at December 31, 2003.
This  represents a ratio of allowance for loan losses to gross loans  receivable
of 1.12% at December 31, 2004 and 1.24% at December 31, 2003.  The allowance for
loan losses to  non-performing  loans was 188.1% at December 31, 2004 and 172.7%
at December 31, 2003. Total stockholders' equity decreased $1.6 million to $30.5
million at  December  31,  2004 from $32.1  million at December  31,  2003.  The
decrease was primarily  the result of the Company's  purchase of $3.0 million in
common  stock and  recording  a  liability  for the put  option  feature  on the
allocated  portion of the Employee Stock Option Plan (ESOP).  The Company's ESOP
allows the  employee to "put" the common  stock back to the Company in the event
that there is not an actively traded market for the Company's stock. Equity also
decreased  due  to  a  $443,000   change  in   unrealized   gain  on  securities
available-for-sale.  These  decreases  were offset by net income of $1.6 million
for the year ended December 31, 2004.


                                       34
<PAGE>

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

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

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

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

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

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

Comparison  of  Operating  Results  for the Years  Ended  December  31, 2004 and
December 31, 2003

      General. Net income increased $187,000,  or 13.4%, to $1.6 million for the
year ended December 31, 2004,  from $1.4 million for the year ended December 31,
2003.  The  increase in net income  resulted  from an  increase in net  interest
income,  a decrease in non-interest  expense and a decrease in the provision for
loan losses, partially offset by a decrease in non-interest income.

      Interest Income.  Total interest income increased to $12.7 million for the
twelve  months ended  December 31, 2004,  up $390,000 or 3.2% from $12.3 million
for the same period in 2003. The increase in interest income resulted  primarily
from increases in interest  earned on deposits and, to a lesser extent  interest
earned on loans, partially offset by a decrease in income on federal funds sold.


                                       35
<PAGE>

      Interest  income from loans  increased  by $59,000 to $9.4 million for the
year ended December 31, 2004,  from $9.3 million for the year ended December 31,
2003.  The  increase  in  interest  income  from loans was due to an increase in
average  outstanding  loan balances during the year.  Average loan balances were
$163.5  million during the year ended December 31, 2004 compared to average loan
balances of $148.9  million during the year ended December 31, 2003. The average
yield on loans  decreased  to 5.8%  during  2004,  from 6.3%  during  2003.  The
decrease in yield was primarily due to overall  declining  interest rates in the
marketplace. We expect the yield on loans to stabilize during 2005.

      Interest  income from  securities  decreased by $8,000 to $2.2 million for
the year ended December 31, 2004 compared to 2003. The decrease was due to lower
interest  rates  earned  on these  assets  due to a  general  decline  in market
interest  rates.  The average  balance in securities  increased  during the year
ended  December  31, 2004 to $56.8  million from $48.7  million  during the year
ended  December  31,  2003.  Our  average  yield was 3.9%  during the year ended
December 31, 2004, compared to an average yield of 4.6% for 2003.

      Interest income from  interest-earning  deposits  increased  $368,000,  or
55.0%,  to $1.0 million for the year ended December 31, 2004,  from $669,000 for
the year ended  December 31, 2003.  The increase  resulted from increases in the
average outstanding balance to $23.5 million from $20.8 million, and an increase
in the average yield to 4.4% from 3.2%.  The increase in the average  balance of
interest  earning deposits is caused primarily by investments in certificates of
deposit and money market accounts at other financial institutions. These are new
accounts  opened  during 2004.  The  certificates  of deposit  portfolio  had an
average yield of 3.1%, and the money market account had an average yield of 2.0%
during 2004. These investments along with a higher average investment in Federal
Home Loan Bank (FHLB) stock during the year ended December 31, 2004,  caused our
average yield for  interest-earning  deposits as a whole to increase rather than
to  decline  as  would  be  expected  given  the  lower  interest  rates  in the
marketplace.  The average  investment in FHLB stock was $13.6 million during the
year ended December 31, 2004, compared to an average investment of $11.3 million
during the year ended December 31, 2003.

      Interest  income on federal  funds sold  decreased to $69,000 for the year
ended December 31, 2004,  from $98,000 for the same period in 2003.  This is due
to lower average  federal fund balances for 2004.  Our yield was 1.2% on average
federal fund  balances of $2.7 million for December 31, 2004,  whereas the yield
was 1.1% on average federal fund balances of $9.0 million for December 31, 2003.

      Interest Expense.  Interest expense on deposits decreased by $164,000,  or
3.9% to $4.0 million for the year ended December 31, 2004, from $4.2 million for
2003.  The  decrease in our cost of deposits  was due to the general  decline in
market interest rates and certificates of deposit maturing and renewing at lower
rates during 2004.  Average  deposits  increased to $194.8  million for the year
ended  December  31,  2004,  from $184.2  million for 2003.  Our average cost of
deposits  decreased  to 2.1%  from  2.3% for the  respective  periods.  Interest
expense on  borrowings  increased  to $1.1  million for the twelve  months ended
December 31, 2004,  from $859,000 for the same period during 2003.  This was due
to additional Federal Home Loan Bank borrowings.

      Net Interest Income.  Net interest income increased by $281,000 or 3.9% to
$7.6 million for the twelve  months ended  December 31, 2004,  from $7.3 million
for the same period in 2003.  Our net  interest  rate spread  decreased 16 basis
points to 2.77% from 2.93%,  while our net  interest  margin  decreased 17 basis
points to 3.03%  from  3.20%.  The ratio of average  interest-earning  assets to
average  interest-bearing  liabilities  remained stable at 112.29% for the years
ended December 31, 2004 and 2003.

      Provision for Loan Losses. We establish  provisions for loan losses, which
are charged to  operations,  at a level  management  believes is  appropriate to
absorb probable incurred credit losses in the loan portfolio.  In evaluating the
level of the allowance for loan losses,  management  considers  historical


                                       36
<PAGE>

loss  experience,  the  types  of  loans  and the  amount  of  loans in the loan
portfolio,  adverse  situations that may affect the borrower's ability to repay,
estimated  value  of  any  underlying   collateral,   and  prevailing   economic
conditions.  This evaluation is inherently  subjective as it requires  estimates
that  are  susceptible  to  significant  revision  as more  information  becomes
available or as future events change.  Based on our evaluation of these factors,
we made a negative  provision of $112,000  for the year ended  December 31, 2004
and a negative  $61,000  provision  for the same period in 2003.  The  provision
decreased  due to an  overall  improvement  in the  quality of our assets as our
subprime  loan  balances  continued to decrease to $12.5 million at December 31,
2004, from $18.3 million at December 31, 2003. We used the same  methodology and
generally  similar  assumptions  in assessing  the adequacy of the allowance for
both periods. The allowance for loan losses was $1.8 million, or 1.12%, of loans
outstanding  at December 31, 2004, as compared with $2.0 million,  or 1.24%,  of
loans  outstanding  at December 31,  2003.  The  non-performing  assets to total
assets at December 31, 2004 was 0.36% as compared to 0.49% at December 31, 2003.
The level of the  allowance  is based on estimates  and the ultimate  losses may
vary from the estimates.

      Management assesses the allowance for loan losses on a quarterly basis and
makes  provisions for loan losses as necessary in order to maintain the adequacy
of the  allowance.  While  management  uses  available  information to recognize
losses on loans,  future loan loss  provisions may be necessary based on changes
in economic conditions. In addition, various regulatory agencies, as an integral
part of their examination  process,  periodically  review the allowance for loan
losses and may  require us to  recognize  additional  provisions  based on their
judgment of information available to them at the time of their examination.  The
allowance  for loan losses as of December 31, 2004 is maintained at a level that
represents  management's best estimate of inherent losses in the loan portfolio,
and such losses were both probable and reasonably estimable.

      Noninterest Income.  Noninterest income decreased to $933,000 for the year
ended December 31, 2004,  from $1.1 million for the  comparable  period in 2003.
The $158,000  decrease was the result of reductions  in service fees,  insurance
commission income, gain on the sale of loans and gain on the sale of securities.
These  decreases were offset by increases in  correspondent  fees of $13,000 and
other noninterest income of $13,000.  Service fees declined due to reductions in
late fees  collected of $29,000,  and lower payoff fees  collected of $5,000 and
reduced  amortization  of previously  deferred loan fees.  Insurance  commission
income  fell  $82,000  due  to  lower  sales  of  annuity  products  during  the
twelve-month period ended December 31, 2004, when compared to the same period in
2003. Gain on the sale of loans decreased  $53,000,  as there were no loan sales
during  2004,  however,  we may sell  loans in the  future.  Gain on the sale of
securities  decreased $34,000, as there were no sales of securities during 2004.
The increase in  correspondent  fees is due to more loans being  originated with
the intention to have them funded through our correspondent  sources during 2004
then were originated as  correspondent  loans in 2003.  Correspondent  loans are
typically loans that do not qualify under the Company's underwriting  guidelines
and, as such, the Company does not make an underwriting  decision on them. Other
noninterest  income  increased  primarily  due to the  settlement of $6,000 of a
forgery  case during the year ended  December  31,  2004.  The forgery  loss was
previously thought uncollectable and therefore it was written off.

      Noninterest Expense. Noninterest expense decreased $64,000 to $6.2 million
for the year ended December 31, 2004, from $6.3 million in 2003. Occupancy costs
accounted for $87,000 of this decrease,  professional  fees  decreased  $20,000,
postage  and  supplies  decreased  $37,000,  offset in part by  advertising  and
promotion costs, which increased $63,000.

      Occupancy  costs  decreased  during  the  year  ended  December  31,  2004
primarily due to decreased  real estate tax expense,  and decreased  maintenance
expense,  offset by an increase in  depreciation  costs,  when compared with the
previous  year.  Real estate  taxes  decreased  due to actual real estate  taxes
charged


                                       37
<PAGE>

at less than the Company's original estimated taxes. Maintenance costs decreased
during the year ended  December  31,  2004 when  compared  to the same period in
2003,  due to the complete  repainting of the office and the  replacement  of an
ejector  pump  at our  80th  avenue  branch  office  facility  in  Orland  Park.
Offsetting   these  decreases  was  an  increase  in  depreciation   costs.  Our
depreciation  costs  increased  primarily  due to the  replacement  of aging and
obsolete computer equipment.

      Professional  fees  decreased due to lower legal fees incurred  during the
year ended December 31, 2004 when compared with the same period in 2003. Postage
and supplies decreased during 2004 due to the opening of our new branch facility
in December of 2002.  Increased postage and supplies were used during 2003 as we
promoted the opening of the new facility.  Advertising  costs  increased  during
2004 due to the  continued  promotion  of our new  branch  facility,  as well as
several  promotion  specials that took place during the year ended  December 31,
2004.

      During 2004, FASB Statement 123R, Accounting for Stock-Based Compensation,
was  approved.  This  statement  will  require the  expensing  of stock  options
beginning July 1, 2005. The future impact of adopting of this standard cannot be
predicted and is based on the future granting of options and the values of these
options.

      Provision  for Income Taxes.  The provision for income taxes  increased to
$833,000,  or 34.5%,  of income before income taxes for the year ended  December
31,  2004 from  $782,000  or 35.9% of income  before  taxes,  for the year ended
December 31, 2003, due to an increase in pretax earnings.

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

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

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

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

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

      Interest income from  interest-earning  deposits  increased  $279,000,  or
71.5%,  to $669,000 for the year ended December 31, 2003,  from $390,000 for the
year ended  December  31,  2002.  The increase  resulted  from  increases in the
average outstanding balance to $20.8 million from $15.4 million, and an


                                       38
<PAGE>

increase in the average  yield to 3.2% from 2.5%.  This reflects our decision to
carry an investment of $13.6 million in FHLB stock,  which had a relatively high
yield of 6.50% for the last three months of 2003. This relatively higher earning
asset  caused our  average  yield for  interest-bearing  deposits  as a whole to
increase  rather than to decline as would be expected  given the lower  interest
rates in the  marketplace.  Our FHLB stock totaled $13.6 million at December 31,
2003, compared to $4.5 million at December 31, 2002.

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

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

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

      Provision for Loan Losses. We establish  provisions for loan losses, which
are charged to  operations,  at a level  management  believes is  appropriate to
absorb probable incurred credit losses in the loan portfolio.  In evaluating the
level of the allowance for loan losses,  management  considers  historical  loss
experience,  the types of loans and the  amount of loans in the loan  portfolio,
adverse  situations that may affect the borrower's  ability to repay,  estimated
value of any underlying  collateral,  and prevailing economic  conditions.  This
evaluation  is  inherently   subjective  as  it  requires   estimates  that  are
susceptible to significant  revision as more information becomes available or as
future  events  change.  Based on our  evaluation  of these  factors,  we made a
negative provision of $61,000 for the year ended December 31, 2003 and a $20,000
provision for the same period in 2002. The provision decreased due to an overall
improvement  in the quality of our assets as our subprime  loan balances fell to
$18.3 million at December 31, 2003,  from $31.2 million at December 31, 2002. We
used the same  methodology  and generally  similar  assumptions in assessing the
adequacy of the  allowance  for both  periods.  Originations  of subprime  loans
during the year ended December 31, 2003 and 2002 were $462,000 and $1.1 million,
respectively. The allowance for loan losses was $2.0 million, or 1.24%, of loans
outstanding  at December 31, 2003, as compared with $2.1 million,  or 1.51%,  of
loans  outstanding  at December 31, 2002. The level of the allowance is based on
estimates and the ultimate losses may vary from the estimates.

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


                                       39
<PAGE>

represents  management's best estimate of inherent losses in the loan portfolio,
and such losses were both probable and reasonably estimable.

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

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

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

      Occupancy costs  increased  during the year ended December 31, 2003 due to
increased  real  estate  tax  expense,   increased   maintenance  and  increased
depreciation expense, when compared with the previous year, offset by a decrease
in furniture  and fixture  depreciation  expense.  Increased  real estate taxes,
maintenance and building  depreciation costs all rose due to the purchase of our
new branch office in Orland Park.  Offsetting  these increases was a decrease in
furniture and fixture depreciation costs. Our depreciation costs declined due to
a group of our assets reaching fully depreciated  status in mid-2002.  We expect
furniture and fixture depreciation costs to increase in 2004 as we replace aging
and obsolete computer equipment.  Advertising costs increased during 2003 due to
the promotion of our new branch  facility.  Data  processing  costs decreased in
2003 as a result of the renegotiation of our service contract.

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


                                       40
<PAGE>

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, 2004. 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.

<TABLE>
<CAPTION>
                                                                  At December 31, 2004
                                                               ---------------------------
                                                               Actual Balance   Yield/Rate
                                                               --------------   ----------
                                                                  (Dollars in thousands)
<S>                                                              <C>                 <C>
Interest-earning assets:
  Loans receivable (1) .....................................     $ 165,086           5.62%
  Securities ...............................................        61,969           3.97
  Interest-earning deposits ................................        32,993           4.00
  Federal Funds and other ..................................         3,482           2.08
                                                                 ---------       --------
    Total interest-earning assets ..........................     $ 263,530           4.98
                                                                 =========       ========
Interest-bearing liabilities:
  Passbook savings .........................................     $  50,651            .79
  NOW accounts .............................................        19,905            .24
  Checking accounts ........................................         3,879             --
  Money market accounts ....................................        10,575            .86
                                                                                 --------
  Time deposits ............................................       113,046           3.18
                                                                 ---------       --------
    Total deposits .........................................       198,056           2.09
  FHLB advances ............................................        36,250           4.05
                                                                 ---------       --------
    Total interest-bearing liabilities .....................     $ 234,306           2.39
                                                                 =========       ========

Net interest income ........................................         7,559
Net interest rate spread ...................................                         2.59%
                                                                                 ========
Net earning assets .........................................     $  29,224
                                                                 =========
Interest-earning assets to average interest-liabilities ....                       112.47%
                                                                                 ========
</TABLE>

----------
(1)   Yield at December 31, 2004 excludes loan fees.


                                       41
<PAGE>

Average Balance Sheets

<TABLE>
<CAPTION>
                                                             Years Ended December 31,
                                      ----------------------------------------------------------------------
                                                     2004                                2003
                                      ----------------------------------  ----------------------------------
                                        Average    Interest                 Average    Interest
                                      Outstanding   Earned/               Outstanding   Earned/
                                        Balance      Paid     Yield/Rate    Balance      Paid     Yield/Rate
                                        -------      ----     ----------    -------      ----     ----------
                                                                 (Dollars in thousands)
<S>                                    <C>            <C>        <C>       <C>         <C>           <C>
Interest-earning assets:
    Loans receivable ...............   $ 163,468       9,405       5.75%   $ 148,862   $   9,346       6.28%
    Securities .....................      56,801       2,226       3.92       48,748       2,234       4.58
    Interest-bearing deposits
      and other ....................      23,506       1,037       4.41       20,809         669       3.21
    Federal funds ..................       5,702          69       1.21        9,008          98       1.09
                                       ---------   ---------   --------    ---------   ---------   --------
       Total interest-earning
         assets ....................   $ 249,477      12,737       5.11    $ 227,427      12,347       5.43
                                       =========   ---------   --------    =========   ---------   --------

Interest-bearing liabilities:
    Passbook savings ...............   $  51,421         407       0.79    $  48,624         518       1.07
    NOW accounts ...................      23,946          58       0.24       23,098          66       0.29
    Money market accounts ..........       9,238          80       0.87        8,878          75       0.84
    Time deposits ..................     110,200       3,501       3.18      103,555       3,551       3.43
                                       ---------   ---------               ---------   ---------
       Total deposits ..............     194,805       4,046       2.08      184,155       4,210       2.29
    FHLB advances ..................      27,358       1,132       4.14       18,373         859       4.68
                                       ---------   ---------   --------    ---------   ---------   --------
       Total interest-bearing
         liabilities ...............   $ 222,163       5,178       2.33    $ 202,528       5,069       2.50
                                       =========   ---------   --------    =========   ---------   --------
Net interest income ................               $   7,559                           $   7,278
                                                   =========                           =========
Net interest rate spread ...........
                                                                   2.78%                               2.93
Net earning assets .................   $  27,314               =========  $  24,899               =========
                                       =========                           =========
Net yield on average interest-
  earning assets ...................                               3.03%                               3.20%
                                                               =========                          =========
Average interest-earning assets
  to average interest-bearing
  liabilities ......................                             112.29%                             112.29%
                                                               =========                          =========

<CAPTION>
                                           Years Ended December 31,
                                      -----------------------------------
                                                     2002
                                      -----------------------------------
                                        Average    Interest
                                      Outstanding   Earned/
                                        Balance      Paid      Yield/Rate
                                        -------      ----      ----------

<S>                                    <C>         <C>            <C>
Interest-earning assets:
    Loans receivable ...............   $ 133,745   $   9,745        7.29%
    Securities .....................      51,022       2,917        5.72
    Interest-bearing deposits
      and other ....................      15,358         390        2.54
    Federal funds ..................       3,500          61        1.74
                                       ---------   ---------    --------
       Total interest-earning
         assets ....................   $ 203,625      13,113        6.44
                                       =========   ---------    --------

Interest-bearing liabilities:
    Passbook savings ...............   $  42,996         652        1.52
    NOW accounts ...................      21,146          91        0.43
    Money market accounts ..........       8,483         137        1.61
    Time deposits ..................      91,228       3,771        4.13
                                       ---------   ---------
       Total deposits ..............     163,853       4,651        2.84
    FHLB advances ..................      14,000         775        5.54
                                       ---------   ---------    --------
       Total interest-bearing
         liabilities ...............   $ 177,853       5,426        3.05
                                       =========   ---------    --------
Net interest income ................               $   7,687
                                                   =========
Net interest rate spread ...........                                3.39%
                                                                ========
Net earning assets .................   $  25,772
                                       =========
Net yield on average interest-
  earning assets ...................                                3.78%
                                                                ========
Average interest-earning assets
  to average interest-bearing
  liabilities ......................                              114.49%
                                                                ========
</TABLE>


                                       42
<PAGE>

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.

<TABLE>
<CAPTION>
                                                                        Years Ended December 31,
                                                  --------------------------------------------------------------------
                                                           2004 vs. 2003                       2003 vs. 2002
                                                  --------------------------------    --------------------------------
                                                   Increase/(Decrease)                 Increase/(Decrease)
                                                         Due to            Total             Due to            Total
                                                  --------------------    Increase    --------------------    Increase
                                                   Volume       Rate     (Decrease)    Volume       Rate     (Decrease)
                                                                              (In thousands)
<S>                                               <C>         <C>         <C>         <C>         <C>         <C>
Interest-earning assets
   Loans receivable ...........................   $    876    $   (817)   $     59    $  1,033    $ (1,432)   $   (399)
   Securities .................................        341        (349)         (8)       (125)       (558)       (683)
   Interest-bearing deposits and other ........         95         273         368         159         120         279
   Federal funds ..............................        (39)         10         (29)         67         (30)         37
                                                  --------    --------    --------    --------    --------    --------
       Total interest-earning assets ..........   $  1,273    $   (883)   $    390    $  1,134    $ (1,900)   $   (766)
                                                  ========    ========    ========    ========    ========    ========

Interest-bearing liabilities
   Transaction and savings deposits ...........         33        (147)       (114)         92        (313)       (221)
   Certificate accounts .......................        228        (278)        (50)        471        (691)       (220)
   Borrowings .................................        420        (147)        273         217        (133)         84
                                                  --------    --------    --------    --------    --------    --------
       Total interest-bearing liabilities .....   $    681    $   (572)   $    109    $    780    $ (1,137)   $   (357)
                                                  ========    ========    ========    ========    ========    ========

Net interest income ...........................   $    592    $   (311)   $    281    $    354    $   (763)   $   (409)
</TABLE>

Management of Market Risk

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

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


                                       43
<PAGE>

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

      The table below sets forth,  as of September 30, 2004 (the latest date for
which  information  is  available),  the estimated  changes in our net portfolio
value that would result from the designated  instantaneous changes in the United
States Treasury yield curve.

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

     +300         $ 28,813      $ (9,290)       (24)%      10.76%       (267)
     +200           32,179        (5,924)       (16)       11.78        (165)
     +100           35,469        (2,634)        (7)       12.72         (71)
       0            38,103                                 13.43
     -100           39,055           952          3        13.59          16

(1)   Expressed in basis points.

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

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


                                       44
<PAGE>

Critical Accounting Policies and Estimates

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

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

      The  allowance for loan losses  consists of an allocated  component and an
unallocated component. The components of the allowance for loan losses represent
an  estimation  done  pursuant  to  either  Statement  of  Financial  Accounting
Standards No. (SFAS) 5, Accounting for Contingencies, or SFAS 114, Accounting by
Creditors for Impairment of a Loan. The allocated component of the allowance for
loan losses reflects  expected losses resulting from analyses  developed through
specific credit  allocations for individual loans and historical loss experience
for each loan category  adjusted for trends and credit risk. 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 unallocated portion of the allowance reflects management's estimate of
probable   inherent  but   undetected   losses   within  the  portfolio  due  to
uncertainties in economic conditions, delays in obtaining information, including
unfavorable  information about a borrower's financial condition,  the difficulty
in identifying  triggering  events that correlate  perfectly to subsequent  loss
rates,  and  risk  factors  that  have  not yet  manifested  themselves  in loss
allocation factors. In addition,  the unallocated allowance includes a component
that  accounts for the  inherent  imprecision  in loan loss models.  Uncertainty
surrounding the strength and timing of economic cycles also affects estimates of
loss.  The  historical  losses  used  in  the  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.


                                       45
<PAGE>

Liquidity and Capital Resources

      We  maintain  liquid  assets at levels we  consider  adequate  to meet our
liquidity  needs.  Our liquidity  ratio  averaged  16.3% and 21.7% for the years
ended December 31, 2004 and 2003. We adjust our liquidity levels to fund deposit
outflows,  pay real estate taxes on mortgage loans,  repay our borrowings and to
fund loan commitments. We also adjust liquidity as appropriate to meet asset and
liability management objectives.

      Our primary sources of liquidity are deposits, amortization and prepayment
of loans and mortgage-backed securities, maturities of investment securities and
other short-term  investments,  and earnings and funds provided from operations.
While scheduled principal repayments on loans and mortgage-backed securities are
a relatively predictable source of funds, deposit flows and loan prepayments are
greatly  influenced  by  general  interest  rates,   economic  conditions,   and
competition.  We set the  interest  rates on our  deposits to maintain a desired
level of total  deposits.  In addition,  we invest  excess  funds in  short-term
interest-earning  investments and other assets,  which provide liquidity to meet
lending requirements. Short-term interest-bearing deposits with the Federal Home
Loan Bank of Chicago  amounted  to $4.1  million at  December  31, 2004 and $9.8
million at December 31, 2003. For additional  information  about cash flows from
our operating,  financing, and investing activities, see Consolidated Statements
of Cash Flows included in the consolidated financial statements.

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

      Liquidity  management is both a daily and  long-term  function of business
management.  If we require funds beyond our ability to generate them internally,
borrowing  agreements  exist with the  Federal  Home Loan Bank of Chicago  which
provide an additional source of funds. At December 31, 200, we had $36.3 million
in advances  from the Federal Home Loan Bank of Chicago.  Of this  amount,  $4.5
million is due within one year, $9.4 million is due between one and three years,
$17.8  million is due between  four and five years and $4.6 million is due after
five years.

      At December 31, 2004, we had  outstanding  commitments  of $6.5 million to
originate  loans.  This amount does not include the unfunded portion of loans in
process.  At December 31, 2004,  certificates of deposit  scheduled to mature in
less than one year totaled $63.6 million. Based on prior experience,  management
believes  that a  significant  portion of such  deposits  will  remain  with us,
although there can be no assurance that this will be the case. In addition,  the
cost of such  deposits  may be  significantly  higher  upon  renewal in a rising
interest rate environment.  We intend to utilize our high levels of liquidity to
fund our lending activities.

      Liquidity.  We are  required to maintain  liquid  assets in an amount that
would ensure our safe and sound  operation.  Our liquidity ratio at December 31,
2004 was 18.0%.


                                       46
<PAGE>

      The following table sets forth our contractual  obligations and commercial
commitments at December 31, 2004.

<TABLE>
<CAPTION>
                                                            Less than                               After 5
                                                 Total       1 year      1-3 Years    4-5 years      Years
                                               ---------    ---------    ---------    ---------    ---------
                                                                      (In thousands)
<S>                                            <C>          <C>          <C>          <C>          <C>
FHLB advances .............................    $  36,250    $   4,500    $   9,400    $  17,800    $   4,550
Time deposits .............................      113,046       63,645       36,801       12,570           30

<CAPTION>
                                                 Total
                                                Amounts     Less than                                Over 5
                                               Committed      1 year     1-3 Years    4-5 years      Years
                                               ---------    ---------    ---------    ---------    ---------
                                                                      (In thousands)
<S>                                            <C>          <C>          <C>          <C>          <C>
Lines of credit ...........................    $  13,324    $     583    $   2,904    $   9,767    $      70
Standby letters of credit (1) .............           88           88           --           --           --
Other commitments to extend credit (1) ....        6,469        6,469           --           --           --
                                               ---------    ---------    ---------    ---------    ---------
   Total ..................................    $  19,881    $   7,140    $   2,904    $   9,767    $      70
                                               =========    =========    =========    =========    =========
</TABLE>

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

Impact of Inflation and Changing Prices

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------

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

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

         None.

ITEM 9A. CONTROLS AND PROCEDURES
--------------------------------

      (a)   Evaluation of disclosure controls and procedures.

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


                                       47
<PAGE>

Chief Executive  Officer,  President and Chief Financial Officer concluded that,
as of the Evaluation Date, our disclosure controls and procedures were effective
in timely  alerting  them to the  material  information  relating  to us (or our
consolidated subsidiaries) required to be included in our periodic SEC filings.

      (b)   Changes in internal controls.

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

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

ITEM 9B. OTHER INFORMATION
--------------------------

      None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-----------------------------------------------------------

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

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

ITEM 11. EXECUTIVE COMPENSATION
-------------------------------

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-----------------------------------------------------------------------

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------

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


                                       48
<PAGE>

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.

                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
---------------------------------------------------

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

      (a)(1) Financial Statements
             --------------------

            o     Report of Independent Registered Public Accounting Firm

            o     Consolidated Statements of Financial Condition at December 31,
                  2004 and 2003

            o     Consolidated Statements of Income for the Years Ended December
                  31, 2004, 2003 and 2002

            o     Consolidated  Statements of Stockholders' Equity for the Years
                  Ended December 31, 2004, 2003 and 2002

            o     Consolidated  Statements  of Cash  Flows for the  Years  Ended
                  December 31, 2004, 2003 and 2002

            o     Notes to Consolidated Financial Statements.

      (a)(2) Financial Statement Schedules
             -----------------------------

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

      (a)(3) Exhibits
             --------

            10.1  Employment Agreement with Thomas R. Butkus(1)

            10.2  AJS Bancorp, Inc. 2003 Stock Option Plan(2)

            10.3  AJS Bancorp, Inc. 2003 Recognition and Retention Plan(2)

            13    Financial Statements

            14    Code of Ethics(1)

            21    Subsidiaries of the Registrant

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

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


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

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

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

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

         (c) Not applicable.


                                       49
<PAGE>

----------
(1)   Incorporated by reference to the Company's  Annual Report on Form 10-K for
      the year ended December 31. 2003.

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


                                       50
<PAGE>

                                   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 30, 2005                         By:  /s/ Thomas R. Butkus
                                                   -----------------------------
                                                   Thomas R. Butkus,
                                                   Chairman of the Board and
                                                   Chief Executive Officer

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

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

Date:  March 30, 2005                                    Date:  March 30, 2005


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

Date:  March 30, 2005                                    Date:  March 30, 2005


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

Date:  March 30, 2005                                    Date:  March 30, 2005


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

Date:  March 30, 2005
</TABLE>


                                       51