UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





(Mark
One)





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


For the
fiscal year ended December 31, 2008.


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.
      Employerincorporation
      or organization)
                              
                              Identification
      No.)14757
      S. Cicero AvenueMidlothian, Illinois
                              
                              60445(Address
      of principal executive offices)
                              
                              (Zip
      Code)





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





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





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





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





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


YES
      £       NO
      T





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


YES
      £       NO
      T





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


YES
      T        NO
      £





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





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





Large
      accelerated filer £
                Accelerated
      filer  £Non-accelerated
      filer  £
                Smaller
      reporting company  T


(Do not
check if a smaller reporting company)





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





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, computed by reference to the last sale price
on June 30, 2008, as reported by the Nasdaq Capital Market, was approximately
$10.6 million.





As of
March 4, 2009, there was issued and outstanding 2,025,533 shares of the
Registrant’s Common Stock, including 1,227,544 shares owned by AJS Bancorp,
MHC.





DOCUMENTS
INCORPORATED BY REFERENCE:





(1) Proxy
Statement for the 2009 Annual Meeting of Stockholders of the Registrant (Part
III).


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













TABLE OF CONTENTS





ITEM
      1.
                DESCRIPTION OF BUSINESS
                1ITEM
      1A.
                RISK FACTORS
                30ITEM
      1B.
                UNRESOLVED STAFF COMMENTS
                30ITEM
      2.
                DESCRIPTION OF PROPERTIES
                30ITEM
      3.
                LEGAL PROCEEDINGS
                30ITEM
      4.
                SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
                30ITEM
      5.
                MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
                31ITEM
      6
                SELECTED FINANCIAL DATA
                32ITEM
      7
                MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS
                32ITEM
      7A.
                QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
                49ITEM
      8.
                FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
                49ITEM
      9.
                CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE
                49ITEM
      9A.
                CONTROLS AND PROCEDURES
                50ITEM
      9B.
                OTHER INFORMATION
                51ITEM
      10.
                DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE
                51ITEM
      11.
                EXECUTIVE COMPENSATION
                51ITEM
      12.
                SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND RELATED STOCKHOLDER MATTERS
                51ITEM
      13.
                CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
                51ITEM
      14.
                PRINCIPAL ACCOUNTANT FEES AND SERVICES
                51ITEM
      15.
                EXHIBITS
                52





Table of Contents





PART
I





ITEM
1. DESCRIPTION OF
BUSINESS





Forward
Looking Statements





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





General





AJS
Bancorp, Inc.





AJS
Bancorp, Inc. is a mid-tier stock holding company for A. J. Smith Federal
Savings Bank (the “Bank” or “A. J. Smith Federal”).  The business of
AJS Bancorp, Inc. consists of holding all of the outstanding common stock of A.
J. Smith Federal Savings Bank.  AJS Bancorp, Inc. is chartered under
federal law.  AJS Bancorp, Inc. has 1,227,544 issued and outstanding
shares of common stock to our mutual holding company parent, AJS Bancorp, MHC
(“MHC”), and 798,089 issued and outstanding shares to the public at December 31,
2008.  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, 2008, AJS Bancorp, Inc. had total consolidated
assets of $244.0 million, total deposits of $180.3 million, and stockholders’
equity of $27.1 million.  Our executive offices are located at 14757
South Cicero Avenue, Midlothian, Illinois 60445, and our telephone number is
(708) 687-7400.





A.
J. Smith Federal Savings Bank





A. J.
Smith Federal Savings Bank was founded in 1892 by Arthur J. Smith as a building
and loan cooperative organization.  In 1924 we were chartered as an
Illinois savings and loan association, and in 1934 we converted to a federal
charter.  In 1984 we amended our charter to become a federally
chartered savings bank.  We are a customer-oriented institution,
operating from a main office in Midlothian, Illinois, and two branch offices in
Orland Park, Illinois.  Our primary business activity is the
origination of one- to four-family real estate loans.  To a lesser
extent, we originate home equity and consumer loans.  We also invest
in securities, primarily United States Government Agency securities and
mortgage-backed securities.  In addition, we offer insurance and
investment products and services.  During the past year as short term
interest rates declined to near record lows, we reduced our cash and cash
equivalents and purchased short term investment securities to allow for greater
yields while preserving our liquidity.  At December 31, 2008,
investment securities have become a larger percentage of our assets, while loans
have become a smaller portion of our assets than has historically been the
case.  We believe that the repositioning of our assets in this manner
will position A. J. Smith Federal to take advantage of the changes in long-term
interest rates while reducing our interest rate and credit risk
profile.





1
 Table of Contents





Recent
Market Developments





In
response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, on October 3, 2008, the Emergency Economic Stabilization Act of
2008 (the “EESA”) was signed into law.  Under the EESA, the U.S.
Department of the Treasury was given the authority to, among other things,
purchase up to $700 billion of securities and certain other financial
instruments from financial institutions for the purpose of stabilizing and
providing liquidity to the U.S. financial markets.





On
October 14, 2008, the Treasury Department announced a Capital Purchase Program
under which it would acquire equity investments, usually preferred stock, in
banks and thrifts and their holding companies.  In conjunction with
the purchase of preferred stock, the Treasury Department also received warrants
to purchase common stock from participating financial
institutions.  Participating financial institutions also were required
to adopt the Treasury Department’s standards for executive compensation and
corporate governance for the period during which the department holds equity
issued under the Capital Purchase Program.  We have determined that we
would not participate in the Capital Purchase Program.





On
November 21, 2008, the FDIC adopted a final rule relating to a Temporary
Liquidity Guarantee Program, which the FDIC had previously announced as an
initiative to counter the system-wide crisis in the nation’s financial
sector.  Under the Temporary Liquidity Guarantee Program the FDIC will
(i) guarantee, through the earlier of maturity or June 30, 2012, certain newly
issued senior unsecured debt issued by participating institutions on or after
October 14, 2008, and before June 30, 2009 (“Debt Guarantee Program”) and (ii)
provide full FDIC deposit insurance coverage for non-interest bearing
transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”) accounts
paying less than 0.5% interest per annum and certain other accounts held at
participating FDIC-insured institutions through December 31, 2009 (“Transaction
Account Guarantee Program”).  Coverage under the Temporary Liquidity
Guarantee Program was available for the first 30 days without
charge.  The fee assessment for coverage of senior unsecured debt
ranges from 50 basis points to 100 basis points per annum, depending on the
initial maturity of the debt.  The fee assessment for deposit
insurance coverage is 10 basis points per quarter on amounts in covered accounts
exceeding $250,000.  We have elected to participate in the Transaction
Account Guarantee Program.





The
American Recovery and Reinvestment Act of 2009 (“ARRA”), more commonly known as
the economic stimulus or economic recovery package, was signed into law on
February 17, 2009, by President Obama.  ARRA includes a wide variety
of programs intended to stimulate the economy and provide for extensive
infrastructure, energy, health, and education needs.  In addition,
ARRA imposes certain new executive compensation and corporate expenditure limits
on all current and future Troubled Asset Relief Program (“TARP”) recipients
until the recipient has repaid the Treasury, which is now permitted under ARRA
without penalty and without the need to raise new capital, subject to the
Treasury’s consultation with the recipient’s appropriate regulatory
agency.





Market
Area





A. J.
Smith Federal has been, and continues to be, a community-oriented savings bank
offering a variety of financial products and services to meet the needs of the
communities we serve.  Our lending and deposit-generating area is
concentrated in the neighborhoods surrounding our three offices; our main office
in Midlothian, Illinois, and two branch offices in Orland Park,
Illinois.  Our offices are located in Cook County.  However,
we consider our market area to be the counties of Will and
Cook.  Midlothian is primarily a residential community, and its
largest employers are state and local governments and automobile
dealerships.  Orland Park has more retail businesses, as well as light
industrial companies.




2
 Table of Contents




Our
market area economy consists primarily of the services industry, wholesalers and
retailers and manufacturing.  Major employers in our market area
include the Orland Park School District, the Village of Orland Park, and various
retailers including J. C. Penney, Macy’s and Sears.  The economy in
our market area is not dependent on any single employer or type of
business.





Competition





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





Lending
Activities





General.  Our
loan portfolio is comprised mainly of one- to four-family residential real
estate loans.  The majority of these loans have fixed rates of
interest.  In addition to one- to four-family residential real estate
loans, our loan portfolio consists of multi-family loans and home equity lines
of credit.  At December 31, 2008, our gross loans totaled $129.1
million, of which $84.4 million, or 65.4%, were secured by one- to four-family
residential real estate, $32.1 million, or 24.8%, were secured by multi-family
residential and commercial real estate, $12.3 million, or 9.5%, were home equity
loans, and $323,000, or 0.3%, 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.





3
 Table of Contents





Loan Portfolio
Composition.  The following table shows the composition of our
loan portfolio in dollar amounts and in percentages as of the dates
indicated.





At December 31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Amount
              
              
              Percent
              
              
              Amount
              
              
              Percent
              
              
              Amount
              
              
              Percent
              
              
              Amount
              
              
              Percent
              
              
              Amount
              
              
              Percent(Dollars
      in thousands)Real
      estate loans:One-
      to four-family residential
              
              $
              84,411
              
              
              
              65.41
              %
              
              $
              85,803
              
              
              
              63.87
              %
              
              $
              86,024
              
              
              
              61.49
              %
              
              $
              101,325
              
              
              
              66.03
              %
              
              $
              115,598
              
              
              
              70.02
              %Multi-family
      and commercial
              
              
              32,064
              
              
              
              24.84
              
              
              
              33,888
              
              
              
              25.22
              
              
              
              41,194
              
              
              
              29.45
              
              
              
              38,317
              
              
              
              24.97
              
              
              
              32,713
              
              
              
              19.82Total
      real estate loans
              
              
              116,475
              
              
              
              
              
              
              
              119,691
              
              
              
              
              
              
              
              127,218
              
              
              
              
              
              
              
              139,642
              
              
              
              
              
              
              
              148,311Other
      Loans:Consumer
      loans
              
              
              323
              
              
              
              0.25
              
              
              
              258
              
              
              
              0.19
              
              
              
              482
              
              
              
              0.34
              
              
              
              502
              
              
              
              0.33
              
              
              
              649
              
              
              
              0.39Home
      equity
              
              
              12,261
              
              
              
              9.50
              
              
              
              14,406
              
              
              
              10.72
              
              
              
              12,198
              
              
              
              8.72
              
              
              
              13,279
              
              
              
              8.67
              
              
              
              16,126
              
              
              
              9.77Total
      loans
              
              
              129,059
              
              
              
              100.00
              %
              
              
              134,355
              
              
              
              100.00
              %
              
              
              139,898
              
              
              
              100.00
              %
              
              
              153,423
              
              
              
              100.00
              %
              
              
              165,086
              
              
              
              100.00
              %Less:Allowance
      for loan losses
              
              
              (2,734
              )
              
              
              
              
              
              
              (1,539
              )
              
              
              
              
              
              
              (1,619
              )
              
              
              
              
              
              
              (1,701
              )
              
              
              
              
              
              
              (1,847
              )Deferred
      loan (fees) costs
              
              
              74
              
              
              
              
              
              
              
              156
              
              
              
              
              
              
              
              107
              
              
              
              
              
              
              
              56
              
              
              
              
              
              
              
              69Deferred
      gain on real estate contract
              
              
              (4
              )
              
              
              
              
              
              
              (6
              )
              
              
              
              
              
              
              (9
              )
              
              
              
              
              
              
              (10
              )
              
              
              
              
              
              
              (17
              )Total
      loans receivable, net
              
              $
              126,395
              
              
              
              
              
              
              $
              132,966
              
              
              
              
              
              
              $
              138,377
              
              
              
              
              
              
              $
              151,768
              
              
              
              
              
              
              $
              163,291





4
 Table of Contents





Maturity of Loan
Portfolio.  The following table sets forth certain information
regarding the dollar amounts maturing and the interest rate sensitivity of our
loan portfolio at December 31, 2008.  Mortgages which have adjustable
or renegotiable interest rates are shown as maturing in the period during which
the contract is due.  The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.





One- to Four-Family
                      
                      
                      Multi-Family and Commercial
                      
                      
                      Consumer
                      
                      
                      Home Equity
                      
                      
                      TotalAmount
                      
                      
                      WeightedAverage
    Rate
                      
                      
                      Amount
                      
                      
                      WeightedAverage
    Rate
                      
                      
                      Amount
                      
                      
                      WeightedAverage
    Rate
                      
                      
                      Amount
                      
                      
                      WeightedAverage
    Rate
                      
                      
                      Amount
                      
                      
                      WeightedAverage
    Rate(Dollars
      in thousands)1
      year or less
                      
                      $
                      2,256
                      
                      
                      
                      5.91
                      %
                      
                      $
                      14,982
                      
                      
                      
                      5.06
                      %
                      
                      $
                      65
                      
                      
                      
                      5.56
                      %
                      
                      $
                      1.373
                      
                      
                      
                      3.82
                      %
                      
                      $
                      18,676
                      
                      
                      
                      5.07
                      %Greater
      than 1 to 3 years
                      
                      
                      2,891
                      
                      
                      
                      6.46
                      
                      
                      
                      11,543
                      
                      
                      
                      7.05
                      
                      
                      
                      184
                      
                      
                      
                      5.26
                      
                      
                      
                      4,361
                      
                      
                      
                      4.99
                      
                      
                      
                      18,979
                      
                      
                      
                      6.47Greater
      than 3 to 5 years
                      
                      
                      3,915
                      
                      
                      
                      6.11
                      
                      
                      
                      3,858
                      
                      
                      
                      6.93
                      
                      
                      
                      74
                      
                      
                      
                      5.02
                      
                      
                      
                      6,527
                      
                      
                      
                      5.21
                      
                      
                      
                      14,374
                      
                      
                      
                      5.92Greater
      than 5 to 10 years
                      
                      
                      16,803
                      
                      
                      
                      5.50
                      
                      
                      
                      661
                      
                      
                      
                      7.40
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      17,464
                      
                      
                      
                      5.57Greater
      than 10 to 20 years
                      
                      
                      18,218
                      
                      
                      
                      5.36
                      
                      
                      
                      1,020
                      
                      
                      
                      6.91
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      19,238
                      
                      
                      
                      5.44More
      than 20 years
                      
                      
                      40,328
                      
                      
                      
                      5.62
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      40,328
                      
                      
                      
                      5.62Total
                      
                      $
                      84,411
                      
                      
                      
                      
                      
                      
                      $
                      32,064
                      
                      
                      
                      
                      
                      
                      $
                      323
                      
                      
                      
                      
                      
                      
                      $
                      12,261
                      
                      
                      
                      
                      
                      
                      $
                      129,059





The total
amount of loans due after December 31, 2009 which have predetermined interest
rates is $83.3 million, while the total amount of loans due after such date
which have floating or adjustable interest rates is $27.1 million.





5
 Table of Contents





One- to
Four-Family Residential Real Estate Loans.  Our primary lending
activity consists of originating one- to four-family, owner-occupied, first and
second residential mortgage loans, virtually all of which are secured by
properties located in our market area.  At December 31, 2008, these
loans totaled $84.4 million, or 65.4% of our total loan portfolio.





We
currently offer one- to four-family residential real estate loans with terms up
to 40 years, although we emphasize the origination of one- to four-family
residential loans with terms of 15 years or less.  We offer our one-
to four-family residential loans with adjustable or fixed interest
rates.  At December 31, 2008, $67.2 million, or 79.6% of our one- to
four-family residential real estate loans had fixed rates of interest, and $17.2
million, or 20.4% of our one- to four-family residential real estate loans, had
adjustable rates of interest.  Our fixed rate loans include loans that
generally amortize on a monthly basis over periods between 7 to 40
years.  We also offer loans which generally have balloon payment
features after 3 or 5 years.  Our balloon loans generally amortize
over periods of 15 years or more.  One- to four-family residential
real estate loans often remain outstanding for significantly shorter periods
than their contractual terms because borrowers have the right to refinance or
prepay their loans.





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





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





6
 Table of Contents





Multi-Family
Loans and Commercial  Lending.  At December 31, 2008,
$32.1 million, or 24.8% of our total loan portfolio, consisted of loans secured
by multi-family and commercial real estate properties, virtually all of which
are located in the state of Illinois.  Our multi-family loans are
secured by multi-family and mixed use properties.  Our commercial real
estate loans are secured by improved property such as offices, small business
facilities, unimproved land, warehouses and other non-residential
buildings.  Due to the current economic conditions and their adverse
effect on commercial real estate, we stopped offering multi-family and
commercial real estate loans in mid-2008, however, we do refinance or renew
existing multi-family and commercial loans.  At December 31, 2008, the
average balance of our multi-family and commercial real estate loans was
$305,000.In the past,
we generally made multi-family and commercial real estate loans for up to 80% of
the lesser of cost or the appraised value of the property securing the
loan.





In the
past, prior to funding a loan secured by multi-family, mixed use or commercial
property, we generally obtained an environmental assessment from an independent,
licensed environmental engineer to ascertain the existence of any environmental
risks that may be associated with the property.  The level of the
environmental consultant’s evaluation of a property will depend on the facts and
circumstances relating to the specific loan, but generally the environmental
consultant’s actions will range from a Phase I Environmental Site Assessment to
a Phase II environmental report.  The underwriting process for
multi-family and commercial real estate loans includes an analysis of the debt
service coverage of the collateral property.  We typically required a
debt service coverage ratio of 120% or higher.  We also required
personal guarantees by the principals of the borrower and a cash flow analysis
when applicable.  However, we no longer originate multi-family or
commercial loans.





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.





In the
past, our underwriting standards for commercial business loans included 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.





Home Equity Lines
of Credit.  We offer home equity lines of credit, the total of
which amounted to $12.3 million, or 9.5% of our total loan portfolio, as of
December 31, 2008.  Home equity lines of credit are generally made for
owner-occupied homes, and are secured by first or second mortgages on
residences.  During 2008, we generally offered these loans with a
maximum loan to appraised value ratio of 90% (including senior liens on the
collateral property), however due to the decline in real estate values, during
the third quarter of 2008 we revised the maximum loan to appraised value ratio
that we will originate to 80% when combined with the first lien loan
amount.  We currently offer these lines of credit




7
 Table of Contents




for a
period of 5 years, and generally at rates tied to the prevailing prime interest
rate.  Our home equity lines of credit are generally underwritten in
the same manner as our one- to four-family residential loans.





Consumer
Loans.  We are authorized
to make loans for a variety of personal and consumer purposes.  As of
December 31, 2008, consumer loans totaled $323,000, and consisted primarily of
automobile loans and loans secured by deposit accounts.  Automobile
loans accounted for $258,000 of our consumer loans and loans secured by deposit
accounts were $65,000 at December 31, 2008.  Our procedure for
underwriting consumer loans includes an assessment of the applicant’s credit
history and ability to meet existing obligations and payments of the proposed
loan, as well as an evaluation of the value of the collateral security, if
any.  Consumer loans generally entail greater risk than residential
mortgage loans, particularly in the case of loans that are unsecured or are
secured by assets that tend to depreciate in value, such as
automobiles.  In these cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan, and the remaining value often does not warrant further
substantial collection efforts against the borrower.





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





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





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





Years Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006(In
      thousands)Loans
      receivable, beginning of period
                  
                  $
                  134,355
                  
                  
                  $
                  139,898
                  
                  
                  $
                  153,423Originations
      by type:Real
      estate- one to four-family
                  
                  
                  16,542
                  
                  
                  
                  14,730
                  
                  
                  
                  11,137Multi-family
      and commercial
                  
                  
                  5,145
                  
                  
                  
                  8,120
                  
                  
                  
                  14,487Non-real
      estate -consumer
                  
                  
                  186
                  
                  
                  
                  319
                  
                  
                  
                  1,046Home
      equity
                  
                  
                  3,934
                  
                  
                  
                  8,991
                  
                  
                  
                  8,532Total
      loans originated
                  
                  
                  25,807
                  
                  
                  
                  32,160
                  
                  
                  
                  35,202Sales
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (3,310
                  )Transfer
      to OREO
                  
                  
                  (179
                  )
                  
                  
                  (261
                  )
                  
                  
                  -Charge-offs
                  
                  
                  (3,200
                  )
                  
                  
                  (280
                  )
                  
                  
                  (82
                  )Principal
      repayments:
                  
                  
                  (27,724
                  )
                  
                  
                  (37,162
                  )
                  
                  
                  (45,335
                  )Loans
      receivable, at end of period
                  
                  $
                  129,059
                  
                  
                  $
                  134,355
                  
                  
                  $
                  139,898





Loan Approval
Procedures and Authority.Our lending activities are subject
to written, non-discriminatory underwriting standards and loan origination
procedures adopted by management and the Board of Directors.  A loan
officer initially reviews all loans, regardless of size or
type.  Loans up to the Fannie Mae single family loan limit, currently
$417,000, must be reviewed and approved by a loan




8
 Table of Contents




underwriter
or a Vice President of the loan department.  All loans of $417,000 or
less that do not meet our standard underwriting ratios and credit criteria must
be reviewed by the Vice President or in their absence, the President or the
Officers’ Loan Committee.  The Officers’ Loan Committee, which
consists of Raymond Blake, Edward Milen, Lyn G. Rupich, and Donna Manuel, has
the authority to approve all loans up to $750,000.  The Chief
Executive Officer and the Board of Directors must approve loans in excess of
$750,000.





Loans-to-One-Borrower.  Federal
savings banks are subject to the same loans-to-one-borrower limits as those
applicable to national banks, which restrict loans to one borrower to an amount
equal to 15% of unimpaired capital and unimpaired surplus on an unsecured basis,
and an additional amount equal to 10% of unimpaired capital and unimpaired
surplus if the loan is secured by readily marketable collateral (generally,
financial instruments and bullion, but not real estate).  At December
31, 2008, our lending limit was $4.3 million.  At December 31, 2008,
our largest lending relationship to one borrower totaled $4.0
million.  At December 31, 2008, we had 22 lending relationships in
which the total amount outstanding exceeded $500,000.   Six of
these lending relationships totaling $10.1 million are impaired, while two
lending relationship totaling $1.1 million are on the Company’s watch list as of
December 31, 2008.  The Company’s watch list includes any commercial
loan that has for the past twelve months been late paying three times or
more.





Asset
Quality





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





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 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.





9
 Table of Contents





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. Non-performing loans and impaired loans are defined
differently.  A loan is impaired when, based on current information
and events, it is probable that a creditor will be unable to collect all amounts
due according to the contractual termsofthe loan agreement. A loan is non-performing
when it is greater than ninety days past due.  Some loans may be
included in both categories, whereas other loans may only be included in one
category.Specific
allocations are made for loans that are determined to be impaired.Company policy requires
that all non-homogeneous loans past due greater than ninety days be classified
as impaired and non-performing. However, loans past due
less than 90 days may also be classified as impaired when management does not
expect to collect all amounts due according to thecontractual terms of the
loan agreement.  Impairment is measured bydetermining the present
value of expected future cash flows or, for collateral-dependent loans, the fair
value of the collateral adjusted for market conditions and selling expenses as
compared to the loan carrying value.





The
Company has not originated, nor has it invested in, interest-only, negative
amortization or payment option ARM loans.  Further, the Company has
not originated or invested in sub-prime or Alt-A loans.





As of
December 31, 2008, our total non-accrual loans were $3.7 million, compared to
$934,000 at December 31, 2007.





The
following table sets forth our loan delinquencies by type, amount and percentage
at December 31, 2008.





Loans Delinquent For:60-90 Days
              
              
              Over 90 Days
              
              
              Total Delinquent
LoansNumber
              
              
              Amount
              
              
              Percent of Loan Category
              
              
              Number
              
              
              Amount
              
              
              Percent of Loan Category
              
              
              Number
              
              
              Amount
              
              
              Percent of Loan Category(Dollars
      in thousands)Real
      estate:One-
      to four-family
              
              
              8
              
              
              $
              955
              
              
              
              1.13
              %
              
              
              3
              
              
              $
              322
              
              
              
              0.38
              %
              
              
              11
              
              
              $
              1,277
              
              
              
              1.51
              %Multi-family
      and commercial
              
              
              4
              
              
              
              1,055
              
              
              
              3.29
              
              
              
              5
              
              
              
              3,368
              
              
              
              10.50
              
              
              
              9
              
              
              
              4,423
              
              
              
              13.79Consumer
      and other
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Home
      equity
              
              
              2
              
              
              
              113
              
              
              
              0.92
              
              
              
              3
              
              
              
              46
              
              
              
              0.38
              
              
              
              5
              
              
              
              159
              
              
              
              1.30Total
              
              
              14
              
              
              $
              2,123
              
              
              
              1.64
              %
              
              
              11
              
              
              $
              3,736
              
              
              
              2.89
              %
              
              
              25
              
              
              $
              5,859
              
              
              
              4.54
              %





10
 Table of Contents





The table
below sets forth the amounts and categories of non-performing assets in our loan
portfolio.  During 2008 we restructured three loans totaling $3.5
million, which are classified as impaired loans at December 31,
2008.  For the previous years presented of 2004, 2005, 2006 and 2007,
we had no troubled debt restructurings within the meaning of Statement of
Financial Accounting Standards No. 15.  For the periods presented, we
had no accruing loans delinquent more than 90 days.  Foreclosed assets
include assets acquired in settlement of loans.





At December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(Dollars
      in thousands)Non-performing
      loans:One-
      to four-family
                
                $
                322
                
                
                $
                774
                
                
                $
                132
                
                
                $
                326
                
                
                $
                981Multi-family
      and commercial
                
                
                3,368
                
                
                
                68
                
                
                
                278
                
                
                
                -
                
                
                
                -Consumer
      and other
                
                
                -
                
                
                
                -
                
                
                
                1
                
                
                
                1
                
                
                
                2Home
      equity
                
                
                46
                
                
                
                92
                
                
                
                129
                
                
                
                67
                
                
                
                -Total
      non-performing loans
                
                
                3,736
                
                
                
                934
                
                
                
                540
                
                
                
                394
                
                
                
                983Other
      real estate owned
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      non-performing assets
                
                $
                3,736
                
                
                $
                934
                
                
                $
                540
                
                
                $
                394
                
                
                $
                983Total
      as a percentage of total assets
                
                
                1.53
                %
                
                
                0.38
                %
                
                
                0.20
                %
                
                
                0.15
                %
                
                
                0.36
                %Non-performing
      loans as percentage of gross loans receivable
                
                
                2.89
                %
                
                
                0.70
                %
                
                
                0.39
                %
                
                
                0.26
                %
                
                
                0.60
                %





For the
year ended December 31, 2008, gross interest income which would have been
recorded had the non-performing loans been current in accordance with their
original terms amounted to $541,000.  The amount that was included in
interest income totaled $190,000 for the year ended December 31,
2008.





The
Company has six single-family loans on non-accrual status, one of which is also
impaired, as of December 31, 2008.  The Company has two commercial
lending relationships with principal balances in excess of $500,000 that are
impaired and on non-accrual as of December 31, 2008.  Additionally,
the Company has five commercial lending relationships that are impaired, but are
not more than 90 days delinquent at December 31, 2008, two of which have
principal balances in excess of $500,000.  The following paragraphs
detail further information on the large commercial loans.  The Company
has no other large single family or other loans that are impaired or more than
90 days delinquent as of December 31, 2008.





The
Company has a $4.0 million participation interest in a $26.2 million loan
secured by vacant land that the borrower intended to develop into a
residential/commercial site.  The borrower defaulted on the loan and
the property is now in foreclosure proceedings.  The lead lender
conducted an appraisal of the property in the fourth quarter of 2008 that
reflects a range of fair values based upon city zoning and the retention of the
property’s tax incentive (“TIF”) status.  Based on the appraisal and
consideration of all known facts, the Company has charged off $2.3 million of
the outstanding loan balance at December 31, 2008.





The
Company has three mortgage loans to one borrower totaling $2.7 million secured
by two retail office space commercial buildings.  The borrower
defaulted on these mortgage loans, therefore the properties are currently in
foreclosure proceedings. During the fourth quarter, management obtained updated
appraisals on these properties.  Based on deterioration in fair
values, as detailed in the appraisal, the Company charged off $957,000 of the
outstanding loan balance as of December 31, 2008.





The
Company has a $3.0 million or 3.3% participation in a $91.5 million loan secured
by an indoor water park.  Though the borrower continued to pay
interest through December 2008, they previously indicated that they were in
financial difficulty and wanted to restructure the interest-only
loan.  Several troubled debt restructuring options have been
presented; however, the most recent plans have not





11
 Table of Contents





been
accepted.  Due to negative cash flows and identified concerns with the
borrower, the Company has recorded a $600,000 impairment reserve on this
property as of December 31, 2008.





The
Company has a $2.9 million mortgage loan on a 46 unit apartment building in
Chicago that is deemed to be impaired, but in which the borrower is current in
its payments as of December 31, 2008.  The borrower had experienced
financial difficulty and requested the loan be restructured in the fourth
quarter of 2008.  The Company restructured the interest rate on the
loan and obtained an appraisal on the property in December of
2008.  Accordingly, the Company has recorded a $600,000 impairment
reserve on this property as of December 31, 2008.





While these properties are in the midst
of foreclosure or possible restructuring there is no guarantee that the fair
value of the properties will not decline further.  Therefore, although
the Company recorded its best estimate of probable losses expected at December
31, 2008, there may be additional losses on these properties in the
future.





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 less estimated costs to sell.  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.  During 2008,
one residential real estate property was transferred into other real estate and
was subsequently sold at an immaterial loss. At December 31, 2008, we did not
have any real estate owned.





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





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





On the
basis of management’s review of our assets at December 31, 2008, we had
classified assets of $10.6 million as substandard.





12
 Table of Contents





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





Years Ended December 31,2008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004(Dollars
      in thousands)Balance
      at beginning of period
                
                $
                1,539
                
                
                $
                1,619
                
                
                $
                1,701
                
                
                $
                1,847
                
                
                $
                1,962Charge-offs:One-
      to four-family
                
                
                (80
                )
                
                
                -
                
                
                
                (7
                )
                
                
                (70
                )
                
                
                (115
                )Multi-family
      and commercial
                
                
                (3,120
                )
                
                
                (228
                )
                
                
                (75
                )
                
                
                -
                
                
                
                -Consumer
      and other
                
                
                -
                
                
                
                (2
                )
                
                
                -
                
                
                
                (1
                )
                
                
                -Home
      equity
                
                
                -
                
                
                
                (50
                )
                
                
                -
                
                
                
                -
                
                
                
                -Total
      charge-offs
                
                
                (3,200
                )
                
                
                (280
                )
                
                
                (82
                )
                
                
                (71
                )
                
                
                (115
                )Recoveries:One-
      to four-family loans
                
                
                40
                
                
                
                21
                
                
                
                28
                
                
                
                55
                
                
                
                112Multi-family
      and commercial
                
                
                27
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
      recoveries
                
                
                67
                
                
                
                21
                
                
                
                28
                
                
                
                55
                
                
                
                112Net
      charge-offs
                
                
                (3,133
                )
                
                
                (259
                )
                
                
                (54
                )
                
                
                (16
                )
                
                
                (3
                )Provisions
      (recoveries) for loan losses
                
                
                4,328
                
                
                
                179
                
                
                
                (28
                )
                
                
                (130
                )
                
                
                (112
                )Balance
      at end of period
                
                $
                2,734
                
                
                $
                1,539
                
                
                $
                1,619
                
                
                $
                1,701
                
                
                $
                1,847Net
      charge-offs during the period to average loans outstanding during the
      period
                
                
                2.33
                %
                
                
                0.19
                %
                
                
                0.04
                %
                
                
                0.01
                %
                
                
                -
                %Net
      charge-offs during the period to non-performing loans
                
                
                83.86
                
                
                
                27.73
                
                
                
                10.00
                
                
                
                4.06
                
                
                
                0.31Non-performing
      assets to total assets at end of period
                
                
                1.53
                
                
                
                0.38
                
                
                
                0.20
                
                
                
                0.15
                
                
                
                0.36Allowance
      for loan losses to non-performing loans
                
                
                73.18
                
                
                
                164.78
                
                
                
                299.81
                
                
                
                431.73
                
                
                
                187.89Allowance
      for loan losses to loans receivable, gross
                
                
                2.12
                
                
                
                1.15
                
                
                
                1.16
                
                
                
                1.11
                
                
                
                1.12





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, the estimated value of the underlying collateral and current
economic and market trends.  There may be other factors that may
warrant our consideration in maintaining an allowance at a level sufficient to
provide for probable losses.  This evaluation is inherently subjective
as it requires estimates that are susceptible to significant revisions as more
information becomes available or as future events change.  Although we
believe that we have established and maintained the allowance for loan losses at
adequate levels, future additions may be necessary if economic and other
conditions in the future differ substantially from the current operating
environment.





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





13
 Table of Contents





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





At
      December 31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Amount
      of Loan Loss Allowance
              
              
              Loan
      Amounts by Category
              
              
              Percent
      of Loans in Each Category to Total
    Loans
              
              
              Amount
      of Loan Loss Allowance
              
              
              Loan
      Amounts by Category
              
              
              Percent
      of Loans in Each Category to Total
    Loans
              
              
              Amount
      of Loan Loss Allowance
              
              
              Loan
      Amounts by Category
              
              
              Percent
      of Loans in Each Category to Total
    Loans
              
              
              Amount
      of Loan Loss Allowance
              
              
              Loan
      Amounts by Category
              
              
              Percent
      of Loans in Each Category to Total
    Loans
              
              
              Amount
      of Loan Loss Allowance
              
              
              Loan
      Amounts by Category
              
              
              Percent
      of Loans in Each Category to Total
    Loans(Dollars
      in thousands)One-
      to four-family
              
              $
              765
              
              
              $
              84,411
              
              
              
              65.41
              %
              
              $
              778
              
              
              $
              85,803
              
              
              
              63.87
              %
              
              $
              786
              
              
              $
              86,024
              
              
              
              61.49
              %
              
              $
              949
              
              
              $
              101,325
              
              
              
              66.04
              %
              
              $
              1,098
              
              
              $
              115,598
              
              
              
              70.02
              %Multi-family
      and commercial
              
              
              1,725
              
              
              
              32,064
              
              
              
              24.84
              
              
              
              456
              
              
              
              33,888
              
              
              
              25.22
              
              
              
              561
              
              
              
              41,194
              
              
              
              29.45
              
              
              
              538
              
              
              
              38,317
              
              
              
              24.97
              
              
              
              353
              
              
              
              32,713
              
              
              
              19.82Consumer
      and other
              
              
              3
              
              
              
              323
              
              
              
              0.25
              
              
              
              2
              
              
              
              258
              
              
              
              0.19
              
              
              
              5
              
              
              
              482
              
              
              
              0.34
              
              
              
              8
              
              
              
              502
              
              
              
              .33
              
              
              
              7
              
              
              
              649
              
              
              
              0.39Home
      equity
              
              
              115
              
              
              
              12,261
              
              
              
              9.50
              
              
              
              155
              
              
              
              14,406
              
              
              
              10.72
              
              
              
              125
              
              
              
              12,198
              
              
              
              8.72
              
              
              
              145
              
              
              
              13,279
              
              
              
              8.66
              
              
              
              258
              
              
              
              16,126
              
              
              
              9.77Unallocated
              
              
              126
              
              
              
              -
              
              
              
              -
              
              
              
              148
              
              
              
              -
              
              
              
              -
              
              
              
              142
              
              
              
              -
              
              
              
              -
              
              
              
              61
              
              
              
              -
              
              
              
              -
              
              
              
              131
              
              
              
              -
              
              
              
              -Total
      loans
              
              $
              2,734
              
              
              $
              129,059
              
              
              
              100.00
              %
              
              $
              1,539
              
              
              $
              134,355
              
              
              
              100.00
              %
              
              $
              1,619
              
              
              $
              139,898
              
              
              
              100.00
              %
              
              $
              1,701
              
              
              $
              153,423
              
              
              
              100.00
              %
              
              $
              1,847
              
              
              $
              165,086
              
              
              
              100.00
              %





14
 Table of Contents





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





Investment
Activities





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





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





Trading
securities at December 31, 2008 consist of securities classified as trading upon
adoption of FAS 159.  These trading securities are carried at fair
value with unrealized gains and losses recorded through earnings.  We
typically do not use a trading account with the intent to purchase and sell
securities. 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.  Our trading securities are not a material portion of our
investment portfolio.





All of
our securities carry market risk insofar as increases in market rates of
interest may cause a decrease in their fair 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.





15
 Table of Contents





Securities
classified as held to maturity, excluding mortgage-backed securities, totaled
$320,000 at December 31, 2008.Our securities
classified as available-for-sale, other than mortgage-backed securities, totaled
$20.2 million at December 31, 2008, and consisted of Federal agency obligations,
primarily Federal Farm Credit Bank (FFCB) notes, Federal Home Loan Bank (FHLB),
Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage
Corporation (FHLMC) obligations with maturities of one to twenty
years.





We also
have a $2.5 million investment in FHLB stock at December 31, 2008, which is
classified separately for securities due to the restrictions on sale or
transfer.  For further information regarding our securities portfolio,
see Note 2 to Consolidated Financial Statements.





16
 Table of Contents





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





At
      December 31,2008
                            
                            
                            2007
                            
                            
                            2006Carrying Value
                            
                            
                            % of Total
                            
                            
                            Fair Value
                            
                            
                            % of Total
                            
                            
                            Carrying Value
                            
                            
                            % of Total
                            
                            
                            Fair Value
                            
                            
                            % of Total
                            
                            
                            CarryingValue
                            
                            
                            % of Total
                            
                            
                            Fair Value
                            
                            
                            % of Total(Dollars
      in thousands)Trading
      securities
                            
                            $
                            18
                            
                            
                            
                            0.08
                            %
                            
                            $
                            18
                            
                            
                            
                            0.08
                            %
                            
                            $
                            -
                            
                            
                            
                            -
                            %
                            
                            $
                            -
                            
                            
                            
                            -
                            %
                            
                            $
                            -
                            
                            
                            
                            -
                            %
                            
                            $
                            -
                            
                            
                            
                            -
                            %Securities
      classified as held to maturity (at amortized cost):State
      and municipal bonds
                            
                            
                            320
                            
                            
                            
                            1.39
                            
                            
                            
                            311
                            
                            
                            
                            1.35
                            
                            
                            
                            65
                            
                            
                            
                            0.16
                            
                            
                            
                            65
                            
                            
                            
                            0.16
                            
                            
                            
                            130
                            
                            
                            
                            0.35
                            
                            
                            
                            130
                            
                            
                            
                            0.35Securities
      classified as available for sale (at fair value):Mutual
      fund
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            11,437
                            
                            
                            
                            28.12
                            
                            
                            
                            11,437
                            
                            
                            
                            28.12
                            
                            
                            
                            10,904
                            
                            
                            
                            29.24
                            
                            
                            
                            10,904
                            
                            
                            
                            29.24FHLB
                            
                            
                            12,160
                            
                            
                            
                            52.90
                            
                            
                            
                            12,160
                            
                            
                            
                            52.92
                            
                            
                            
                            23,120
                            
                            
                            
                            56.85
                            
                            
                            
                            23,120
                            
                            
                            
                            56.85
                            
                            
                            
                            19,770
                            
                            
                            
                            53.01
                            
                            
                            
                            19,770
                            
                            
                            
                            53.01FFCB
                            
                            
                            4,015
                            
                            
                            
                            17.47
                            
                            
                            
                            4,015
                            
                            
                            
                            17.47
                            
                            
                            
                            3,524
                            
                            
                            
                            8.66
                            
                            
                            
                            3,524
                            
                            
                            
                            8.66
                            
                            
                            
                            3,979
                            
                            
                            
                            10.67
                            
                            
                            
                            3,979
                            
                            
                            
                            10.67FNMA
      and FHLMC
                            
                            
                            4,023
                            
                            
                            
                            17.50
                            
                            
                            
                            4,023
                            
                            
                            
                            17.51
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Equity
      investments
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            76
                            
                            
                            
                            0.19
                            
                            
                            
                            76
                            
                            
                            
                            0.19
                            
                            
                            
                            62
                            
                            
                            
                            0.16
                            
                            
                            
                            62
                            
                            
                            
                            0.16Subtotal
                            
                            
                            20,536
                            
                            
                            
                            89.34
                            
                            
                            
                            20,527
                            
                            
                            
                            89.34
                            
                            
                            
                            38,222
                            
                            
                            
                            93.98
                            
                            
                            
                            38,222
                            
                            
                            
                            93.98
                            
                            
                            
                            34,845
                            
                            
                            
                            93.43
                            
                            
                            
                            34,845
                            
                            
                            
                            93.43FHLB
      stock
                            
                            
                            2,450
                            
                            
                            
                            10.66
                            
                            
                            
                            2,450
                            
                            
                            
                            10.66
                            
                            
                            
                            2,450
                            
                            
                            
                            6.02
                            
                            
                            
                            2,450
                            
                            
                            
                            6.02
                            
                            
                            
                            2,450
                            
                            
                            
                            6.57
                            
                            
                            
                            2,450
                            
                            
                            
                            6.57Total
      securities and FHLB stock
                            
                            $
                            22,986
                            
                            
                            
                            100.00
                            %
                            
                            $
                            22,977
                            
                            
                            
                            100.00
                            %
                            
                            $
                            40,672
                            
                            
                            
                            100.00
                            %
                            
                            $
                            40,672
                            
                            
                            
                            100.00
                            %
                            
                            $
                            37,295
                            
                            
                            
                            100.00
                            %
                            
                            $
                            37,295
                            
                            
                            
                            100.00
                            %Average
      remaining life of securities
                            
                            51.1months
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            9.8
      months
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            10.9
      monthsOther
      interest-earning assets:Interest-earning
      deposits with banks
                            
                            $
                            8,874
                            
                            
                            
                            99.35
                            %
                            
                            $
                            8,874
                            
                            
                            
                            99.35
                            %
                            
                            $
                            6,622
                            
                            
                            
                            98.85
                            %
                            
                            $
                            6,622
                            
                            
                            
                            98.85
                            %
                            
                            $
                            38,061
                            
                            
                            
                            84.03
                            %
                            
                            $
                            38,061
                            
                            
                            
                            84.03
                            %Federal
      funds sold
                            
                            
                            58
                            
                            
                            
                            0.65
                            
                            
                            
                            58
                            
                            
                            
                            0.65
                            
                            
                            
                            77
                            
                            
                            
                            1.15
                            
                            
                            
                            77
                            
                            
                            
                            1.15
                            
                            
                            
                            7,231
                            
                            
                            
                            15.97
                            
                            
                            
                            7,231
                            
                            
                            
                            15.97Total
                            
                            $
                            8,932
                            
                            
                            
                            100.00
                            %
                            
                            $
                            8,932
                            
                            
                            
                            100.00
                            %
                            
                            $
                            6,699
                            
                            
                            
                            100.00
                            %
                            
                            $
                            6,714
                            
                            
                            
                            100.00
                            %
                            
                            $
                            45,292
                            
                            
                            
                            100.00
                            %
                            
                            $
                            45,292
                            
                            
                            
                            100.00
                            %





17
 Table of Contents





Mortgage-Backed
Securities





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





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





At
December 31, 2008, our mortgage-backed securities totaled $69.3 million, which
represented 28.4% of our total assets at that date.  At December 31,
2008, a majority of our mortgage-backed securities were classified as
available-for-sale.  At that date, 96.5% of our mortgage-backed
securities had fixed rates of interest.  We purchased $36.2 million of
mortgage-backed securities during the year ended December 31, 2008, and $16.9
million during the year ended December 31, 2007.





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





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





At December 31,2008
                  
                  
                  2007
                  
                  
                  2006CarryingValue
                  
                  
                  % ofTotal
                  
                  
                  CarryingValue
                  
                  
                  % ofTotal
                  
                  
                  CarryingValue
                  
                  
                  % ofTotal(Dollars
      in thousands)Mortgage-backed
      securities classified as held to maturity (at amortized
    cost):Ginnie
      Mae
                  
                  $
                  47
                  
                  
                  
                  0.07
                  %
                  
                  $
                  60
                  
                  
                  
                  0.14
                  %
                  
                  $
                  74
                  
                  
                  
                  0.22
                  %Mortgage-backed
      securities classified as available for sale (at fair
    value):Ginnie
      Mae
                  
                  
                  1,014
                  
                  
                  
                  1.46Fannie
      Mae
                  
                  
                  57,401
                  
                  
                  
                  82.78
                  
                  
                  
                  34,767
                  
                  
                  
                  80.43
                  
                  
                  
                  29,310
                  
                  
                  
                  85.87Freddie
      Mac
                  
                  
                  10,877
                  
                  
                  
                  15.69
                  
                  
                  
                  8,398
                  
                  
                  
                  19.43
                  
                  
                  
                  4,749
                  
                  
                  
                  13.91Total
                  
                  $
                  69,339
                  
                  
                  
                  100.00
                  %
                  
                  $
                  43,225
                  
                  
                  
                  100.00
                  %
                  
                  $
                  34,133
                  
                  
                  
                  100.00
                  %





18
 Table of Contents





Carrying Values,
Yields and Maturities.  The composition and maturities of our
debt securities portfolio and of our mortgage-backed securities are indicated in
the following table.  Cost represents the amortized cost of the
securities and mortgage-backed securities at December 31, 2008.





At December 31, 2008Less
      Than 1
      Year
                          
                          
                          1
      to 5 Years
                          
                          
                          5
      to 10 Years
                          
                          
                          Over
      10
    Years
                          
                          
                          Total
      SecuritiesAmortized
      Cost
                          
                          
                          Amortized
      Cost
                          
                          
                          Amortized
      Cost
                          
                          
                          Amortized
      Cost
                          
                          
                          Amortized
      Cost
                          
                          
                          Fair
      Value(Dollars
      in thousands)Securities
                          
                          $
                          12,989
                          
                          
                          $
                          1,000
                          
                          
                          $
                          3,161
                          
                          
                          $
                          3,170
                          
                          
                          $
                          20,320
                          
                          
                          $
                          20,509Mortgage-backed
      securities
                          
                          
                          41
                          
                          
                          
                          8,358
                          
                          
                          
                          44,003
                          
                          
                          
                          14,887
                          
                          
                          
                          67,289
                          
                          
                          
                          69,341Total
      securities
                          
                          $
                          13,030
                          
                          
                          $
                          9,358
                          
                          
                          $
                          47,164
                          
                          
                          $
                          18,057
                          
                          
                          $
                          87,609
                          
                          
                          $
                          89,850Weighted
      average yield
                          
                          
                          4.81
                          %
                          
                          
                          4.29
                          %
                          
                          
                          4.70
                          %
                          
                          
                          3.94
                          %
                          
                          
                          4.73
                          %





Sources
of Funds





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





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





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








Years Ended December 31,2008
                  
                  
                  2007
                  
                  
                  2006(Dollars
      in thousands)Opening
      balance
                  
                  $
                  190,534
                  
                  
                  $
                  202,176
                  
                  
                  $
                  190,407Deposits
                  
                  
                  446,472
                  
                  
                  
                  409,277
                  
                  
                  
                  408,178Withdrawals
                  
                  
                  (459,112
                  )
                  
                  
                  (428,913
                  )
                  
                  
                  (400,369
                  )Interest
      credited
                  
                  
                  2,397
                  
                  
                  
                  7,994
                  
                  
                  
                  3,960Ending
      balance
                  
                  $
                  180,291
                  
                  
                  $
                  190,534
                  
                  
                  $
                  202,176Net
      increase (decrease)
                  
                  $
                  (10,243
                  )
                  
                  $
                  (11,642
                  )
                  
                  $
                  11,769Percent
      increase (decrease)
                  
                  
                  (5.38
                  )%
                  
                  
                  (5.76
                  )%
                  
                  
                  6.18
                  %





19
 Table of Contents





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





At December 31,2008
                    
                    
                    2007
                    
                    
                    2006Amount
                    
                    
                    Percent
                    
                    
                    Amount
                    
                    
                    Percent
                    
                    
                    Amount
                    
                    
                    Percent(Dollars
      in thousands)Transactions and Savings
      Deposits:Checking
      accounts
                    
                    $
                    3,118
                    
                    
                    
                    1.73
                    %
                    
                    $
                    3,681
                    
                    
                    
                    1.93
                    %
                    
                    $
                    4,152
                    
                    
                    
                    2.05
                    %Passbook
      accounts
                    
                    
                    38,952
                    
                    
                    
                    21.61
                    
                    
                    
                    38,103
                    
                    
                    
                    20.00
                    
                    
                    
                    40,463
                    
                    
                    
                    20.02NOW
      accounts
                    
                    
                    17,904
                    
                    
                    
                    9.93
                    
                    
                    
                    18,702
                    
                    
                    
                    9.81
                    
                    
                    
                    18,946
                    
                    
                    
                    9.37Money
      market accounts
                    
                    
                    13,006
                    
                    
                    
                    7.21
                    
                    
                    
                    7,291
                    
                    
                    
                    3.83
                    
                    
                    
                    9,336
                    
                    
                    
                    4.62Total
      non-certificates
                    
                    
                    72,980
                    
                    
                    
                    40.48
                    
                    
                    
                    67,777
                    
                    
                    
                    35.57
                    
                    
                    
                    72,897
                    
                    
                    
                    36.06Certificates:0.00
      - 3.99%
                    
                    
                    91,619
                    
                    
                    
                    50.82
                    
                    
                    
                    31,877
                    
                    
                    
                    16.73
                    
                    
                    
                    33,103
                    
                    
                    
                    16.374.00
      - 5.99%
                    
                    
                    15,088
                    
                    
                    
                    8.37
                    
                    
                    
                    90,325
                    
                    
                    
                    47.41
                    
                    
                    
                    95,392
                    
                    
                    
                    47.186.00
      - 7.99%
                    
                    
                    591
                    
                    
                    
                    0.33
                    
                    
                    
                    543
                    
                    
                    
                    0.28
                    
                    
                    
                    762
                    
                    
                    
                    0.378.00
      - 9.99%
                    
                    
                    13
                    
                    
                    
                    0.01
                    
                    
                    
                    12
                    
                    
                    
                    0.01
                    
                    
                    
                    22
                    
                    
                    
                    0.02Total
      certificates
                    
                    
                    107,311
                    
                    
                    
                    59.52
                    
                    
                    
                    122,757
                    
                    
                    
                    64.43
                    
                    
                    
                    129,279
                    
                    
                    
                    63.94Total
      deposits
                    
                    $
                    180,291
                    
                    
                    
                    100.00
                    %
                    
                    $
                    190,534
                    
                    
                    
                    100.00
                    %
                    
                    $
                    202,176
                    
                    
                    
                    100.00
                    %








Deposit Maturity
Schedule.  The following table presents, by rate category, the
remaining period to maturity of time deposit accounts outstanding as of December
31, 2008.





0-3.99%
              
              
              4.00-5.99%
              
              
              6.00-7.99%
              
              
              8.00%- or greater
              
              
              Total
              
              
              Percent of Total(Dollars
      in thousands)Certificate accounts maturing in quarter
      ending:March
      31, 2009
              
              $
              32,291
              
              
              $
              2,583
              
              
              $
              -
              
              
              $
              7
              
              
              $
              34,881
              
              
              
              32.50
              %June
      30, 2009
              
              
              20,573
              
              
              
              1,412
              
              
              
              
              
              
              
              -
              
              
              
              21,985
              
              
              
              20.49September
      30, 2009
              
              
              10,577
              
              
              
              1,453
              
              
              
              -
              
              
              
              -
              
              
              
              12,030
              
              
              
              11.21December
      31, 2009
              
              
              11,085
              
              
              
              992
              
              
              
              12
              
              
              
              -
              
              
              
              12,089
              
              
              
              11.27March
      31, 2010
              
              
              3,891
              
              
              
              1,854
              
              
              
              -
              
              
              
              -
              
              
              
              5,745
              
              
              
              5.35June
      30, 2010
              
              
              871
              
              
              
              1,487
              
              
              
              40
              
              
              
              -
              
              
              
              2,398
              
              
              
              2.23September
      30, 2010
              
              
              791
              
              
              
              513
              
              
              
              -
              
              
              
              -
              
              
              
              1,304
              
              
              
              1.22December
      31, 2010
              
              
              2,793
              
              
              
              578
              
              
              
              -
              
              
              
              -
              
              
              
              3,371
              
              
              
              3.14March
      31, 2011
              
              
              806
              
              
              
              721
              
              
              
              78
              
              
              
              6
              
              
              
              1,611
              
              
              
              1.50June
      30, 2011
              
              
              2,167
              
              
              
              615
              
              
              
              -
              
              
              
              -
              
              
              
              2,782
              
              
              
              2.59September
      30, 2011
              
              
              83
              
              
              
              229
              
              
              
              -
              
              
              
              -
              
              
              
              312
              
              
              
              0.29December
      31, 2011
              
              
              117
              
              
              
              302
              
              
              
              -
              
              
              
              -
              
              
              
              419
              
              
              
              0.39March
      31, 2012
              
              
              -
              
              
              
              913
              
              
              
              -
              
              
              
              -
              
              
              
              913
              
              
              
              0.85Thereafter
              
              
              5,574
              
              
              
              1,436
              
              
              
              461
              
              
              
              -
              
              
              
              7,471
              
              
              
              6.97Total
              
              $
              91,619
              
              
              $
              15,088
              
              
              $
              591
              
              
              $
              13
              
              
              $
              107,311
              
              
              
              100.00
              %Percent
      of total
              
              
              85.38
              %
              
              
              14.06
              %
              
              
              0.55
              %
              
              
              0.01
              %





20
 Table of Contents





Large
Certificates.  The following table indicates the amount of our
certificates of deposit and other deposits by time remaining until maturity as
of December 31, 2008.





Maturity3 Months or Less
              
              
              Over 3 to 6 Months
              
              
              Over 6 to 12 Months
              
              
              Over 12 Months
              
              
              Total(In
      thousands)Certificates
      of deposit less than $100,000
              
              $
              25,072
              
              
              $
              15,042
              
              
              $
              14,470
              
              
              $
              19,694
              
              
              $
              74,278Certificates
      of deposit of $100,000 or more
              
              
              9,174
              
              
              
              6,422
              
              
              
              5,122
              
              
              
              6,632
              
              
              
              27,350Public
      funds (1)
              
              
              634
              
              
              
              521
              
              
              
              4,528
              
              
              
              -
              
              
              
              5,683Total
      certificates of deposit
              
              $
              34,880
              
              
              $
              21,985
              
              
              $
              24,120
              
              
              $
              26,326
              
              
              $
              107,311


_____________________


(1)
            Deposits
      from governmental and other public entities.  The amounts shown
      under public funds include deposits of $100,000 or more totaling $5.6
      million.





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





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








Years Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006(In
      thousands)Maximum balance:FHLB
      advances
                      
                      $
                      35,575
                      
                      
                      $
                      28,750
                      
                      
                      $
                      32,750Average balance:FHLB
      advances
                      
                      $
                      31,692
                      
                      
                      $
                      25,614
                      
                      
                      $
                      29,963





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





At December 31,2008
                  
                  
                  2007
                  
                  
                  2006(Dollars
      in thousands)FHLB
      advances
                  
                  $
                  30,175
                  
                  
                  $
                  23,350
                  
                  
                  $
                  28,750Weighted
      average interest rate of FHLB advances
                  
                  
                  3.95
                  %
                  
                  
                  4.45
                  %
                  
                  
                  4.25
                  %





Employees





At
December 31, 2008, we had a total of 49 full-time and 18 part-time
employees.  Our employees are not represented by any collective
bargaining group.  Management believes that we have good relationships
with our employees.





21
 Table of Contents





Regulation





Loans-to-One-Borrower. Federal savings banks
generally may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of unimpaired capital and unimpaired surplus on an
unsecured basis.  An additional amount may be lent, equal to 10% of
unimpaired capital and unimpaired surplus, if the loan is secured by readily
marketable collateral, which is defined to include certain securities and
bullion, but generally does not include real estate.  As of December
31, 2008, 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,
2008, we maintained 87.92% of our portfolio assets in qualified thrift
investments and, therefore, we met the qualified thrift lender
test.





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





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





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





22
 Table of Contents





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





Our
authority to extend credit to executive officers, directors and 10%
stockholders, as well as entities controlled by these persons, is currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and its
implementing regulation, Regulation O.  Among other things, this
regulation generally requires these loans to be made on terms substantially the
same as those offered to unaffiliated individuals and do not involve more than
the normal risk of repayment.  However, the regulation permits
executive officers and directors to receive the same terms through benefit or
compensation plans that are widely available to other employees, as long as the
director or executive officer is not given preferential treatment compared to
other participating employees. Regulation O also places individual and aggregate
limits on the amount of loans we may make to these persons based, in part, on
our capital position, and requires approval procedures to be
followed.  At December 31, 2008, we were in compliance with these
regulations.





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





Standards for
Safety and Soundness. Federal law requires
each federal banking agency to prescribe for all insured depository institutions
standards relating to, among other things, internal controls, information
systems and audit systems, loan documentation, credit underwriting, interest
rate risk exposure, asset growth, compensation, and other operational and
managerial standards as the agency deems appropriate.  The federal
banking agencies adopted Interagency Guidelines Prescribing Standards for Safety
and Soundness to implement the safety and soundness standards required under the
federal law.  The guidelines set forth the safety and soundness
standards that the federal banking agencies use to identify and address problems
at insured depository institutions before capital becomes
impaired.  The guidelines address internal controls and information
systems, internal audit systems, credit underwriting,




23
 Table of Contents




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.





Capital
Requirements





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





The
risk-based capital standard for savings institutions requires the maintenance of
Tier 1 (core) and total capital (which is defined as core capital and
supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation based on the risks believed inherent in the type of asset. Core
capital is defined as common stockholders’ equity (including retained earnings),
certain noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card relationships. The
components of supplementary capital currently include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the allowance for loan and
lease losses limited to a maximum of 1.25% of risk-weighted assets, and up to
45% of unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core
capital.  At December 31, 2008, A.J. Smith Federal met each of its
capital requirements.





Prompt
Corrective Regulatory Action





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




24
 Table of Contents




any one
of a number of discretionary supervisory actions against undercapitalized
institutions, including the issuance of a capital directive and the replacement
of senior executive officers and directors.





Insurance
of Deposit Accounts





Deposit
accounts in A.J. Smith Federal are insured by the Federal Deposit Insurance
Corporation, generally up to a maximum of $100,000 per separately insured
depositor and up to a maximum of $250,000 for self-directed retirement
accounts.  However, pursuant to its statutory authority, the Board of
the Federal Deposit Insurance Corporation recently increased the deposit
insurance available on deposit accounts to $250,000 effective until December 31,
2009. Congress has recently proposed legislation to make the $250,000 deposit
insurance amount permanent.  A.J. Smith Federal’s deposits are subject
to Federal Deposit Insurance Corporation deposit insurance assessments. The
Federal Deposit Insurance Corporation has adopted a risk-based system for
determining deposit insurance assessments.





The
Federal Deposit Insurance Corporation imposes an assessment against institutions
for deposit insurance.  This assessment is based on the risk category
of the institution and ranges from 5 to 43 basis points of the institution’s
deposits.  On December 22, 2008, the Federal Deposit Insurance
Corporation published a final rule raising the current deposit insurance
assessment rates uniformly for all institutions by 7 basis points (to a range
from 12 to 50 basis points) for the first quarter of 2009 and
thereafter.  However, the FDIC approved an extension of the comment
period on the parts of the proposed rulemaking that would become effective on
April 1, 2009.  The FDIC expects to issue a second final rule early in
2009, to be effective April 1, 2009, to change the way that the FDIC’s
assessment system differentiates for risk and to set new assessment rates
beginning with the second quarter of 2009.





On March
2, 2009 the FDIC announced an interim rule approving a special assessment of 20
basis points for the June 30, 2009 quarter to be paid September 30,
2009.  Comments on this interim rule are due by April 2,
2009.  If the rule stands as currently published, assuming the
Company’s risk category does not change and the deposit base remains relatively
stable, we estimate the total FDIC premium expense incurred during 2009 to be
approximately $650,000.  The FDIC has indicated that it would reduce
the special assessment to 10 basis points in the event congress provided the
FDIC with greater borrowing authority.  There can be no assurances
that the risk category will remain the same or that the deposit base will remain
stable.  If the risk category increases or the deposit base increases,
the FDIC premium will also increase.





In
addition to the Federal Deposit Insurance Corporation assessments, the Financing
Corporation (“FICO”) is authorized to impose and collect, with the approval of
the Federal Deposit Insurance Corporation, assessments for anticipated payments,
issuance costs and custodial fees on bonds issued by the FICO in the 1980s to
recapitalize the former Federal Savings and Loan Insurance
Corporation.  The bonds issued by the FICO are due to mature in 2017
through 2019.  For the year ended December 31, 2008, the annualized
FICO assessment was equal to 1.75 basis points for each $100 in domestic
deposits maintained at an institution.





In
October 2008, the FDIC announced the Temporary Liquidity Guarantee Program,
under which any participating depository institution would be able to provide
full deposit insurance coverage for non-interest bearing transaction accounts,
regardless of the dollar amount.  Under the program, effective
November 14, 2008, insured depository institutions that have not opted out of
the FDIC Temporary Liquidity Guarantee Program will be subject to a 0.10%
surcharge applied to non-interest bearing transaction deposit account balances
in excess of $250,000, which surcharge will be added to the institution’s
existing risk-based deposit insurance assessments.  A.J. Smith Federal
chose to participate in the Transaction Account Guarantee Program portion of the
FDIC Temporary Liquidity Guaranty Program.





25
 Table of Contents





Federal
Home Loan Bank System





We are a
member of the Federal Home Loan Bank System, which consists of 12 regional
Federal Home Loan Banks.  The Federal Home Loan Bank System provides a
central credit facility primarily for member institutions.  As a
member of the Federal Home Loan Bank of Chicago (FHLB), we are required to
acquire and hold shares of capital stock in the Federal Home Loan Bank in an
amount equal to at least 1% of the aggregate principal amount of our unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 1/20 of our borrowings from the FHLB, whichever is
greater.  As of December 31, 2008, we were in compliance with this
requirement. The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts and to contribute funds for affordable housing
programs.  These requirements could reduce the amount of dividends
that the Federal Home Loan Banks pay to their members and could also result in
the Federal Home Loan Banks imposing a higher rate of interest on advances to
their members.  On October 18, 2005 the Federal Home Loan Bank of
Chicago announced a policy to discontinue excess capital stock redemptions or
“voluntary” stock redemptions.  Voluntary stock is stock held by
members beyond the amount required as a condition of membership or to support
advance borrowings.  The FHLB has not paid a dividend on the FHLB
stock since the third quarter of 2007 and there are no plans to do so in the
near future.  The Company holds $2.5 million of FHLB stock as of
December 31, 2008.





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, 2008, we were in compliance with these reserve requirements. The
balances maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements imposed by the
Office of Thrift Supervision.





Holding
Company Regulation





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





Permitted
Activities.  Pursuant to Section 10(o) of the Home Owners’ Loan
Act and Office of Thrift Supervision regulations and policy, a mutual holding
company, such as AJS Bancorp, MHC, and a federally chartered mid-tier holding
company such as AJS Bancorp, Inc. may engage in the following activities: (i)
investing in the stock of a savings association; (ii) acquiring a mutual
association through the merger of such association into a savings association
subsidiary of such holding company or an interim savings association subsidiary
of such holding company; (iii) merging with or acquiring another holding
company, one of whose subsidiaries is a savings association; (iv) investing in a
corporation, the capital stock of which is available for purchase by a savings
association under federal law or under the law of any state where the subsidiary
savings association or associations share their home offices; (v) furnishing or
performing management services for a savings association subsidiary of such
company; (vi) holding, managing or liquidating assets owned or acquired from a
savings subsidiary of such company; (vii) holding or managing properties used or
occupied by a savings association subsidiary of




26
 Table of Contents




such
company; (viii) acting as trustee under deeds of trust; (ix) any other activity
(A) that the Federal Reserve Board, by regulation, has determined to be
permissible for bank holding companies under Section 4(c) of the Bank Holding
Company Act of 1956, unless the Director, by regulation, prohibits or limits any
such activity for savings and loan holding companies; or (B) in which multiple
savings and loan holding companies were authorized (by regulation) to directly
engage on March 5, 1987; (x) any activity permissible for financial holding
companies under Section 4(k) of the Bank Holding Company Act, including
securities and insurance underwriting; and (xi) purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding company is approved by
the Director.  If a mutual holding company acquires or merges with
another holding company, the holding company acquired or the holding company
resulting from such merger or acquisition may only invest in assets and engage
in activities listed in (i) through (xi) above, and has a period of two years to
cease any nonconforming activities and divest of any nonconforming
investments.





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





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





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




27
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event AJS
Bancorp, MHC converts to stock form.  During the twelve months ended
2008 the Company paid four regular quarterly dividends of $0.11 per share, and
one special dividend of $0.50 per share to stockholders of record.  In
conjunction with the Office of Thrift Supervision approval, AJS Bancorp, MHC
waived 100% of the dividends due on its 1,227,544 shares.  The Company
anticipates that AJS Bancorp, MHC will waive 100% of dividends in the
foreseeable future.





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





The
USA PATRIOT Act





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





Sarbanes-Oxley
Act of 2002





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





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




28
 Table of Contents




affect
small public companies.  Specifically being reviewed are the
requirements under Sarbanes-Oxley section 404, which require significant
oversight of a public company’s internal control over the financial
statements.  The Company will be subject to Section 404 compliance for
the year ending December 31, 2009, therefore, costs for compliance with the
Sarbanes-Oxley Act will increase.  At this time the Company cannot
accurately predict what additional expenses may be incurred in complying with
all of the provisions of the Sarbanes-Oxley Act.





Taxation





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





As a
result of the enactment of the Small Business Job Protection Act of 1996, all
savings banks and savings associations may convert to a commercial bank charter,
diversify their lending, or merge into a commercial bank without having to
recapture any of their pre-1988 tax bad debt reserve
accumulations.  However, transactions which would require recapture of
the pre-1988 tax bad debt reserve include redemption of A. J. Smith Federal’s
stock, payment of dividends or distributions in excess of earnings and profits,
or failure by the institution to qualify as a bank for federal income tax
purposes.  At December 31, 2008, 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.





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.





29
 Table of Contents





MANAGEMENT





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





Name
                          
                          Age
                          
                          PositionThomas
      R. Butkus
                          
                          61
                          
                          Chairman
      of the Board and Chief Executive OfficerLyn
      G. Rupich
                          
                          46
                          
                          PresidentPamela
      N. Favero
                          
                          45
                          
                          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 1A. RISK
FACTORS





Not
applicable.





ITEM 1B. UNRESOLVED STAFF
COMMENTS





Not
applicable.





ITEM 2. DESCRIPTION OF
PROPERTIES





Properties





At
December 31, 2008, 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, 2008, the net book value of our office
locations was $4.0 million.





ITEM3. 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, 2008,
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.





30
 Table of Contents





PART
II





ITEM5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES





The
Company’s Common Stock is quoted on the electronic bulletin board under the
symbol “AJSB”.





The
following table sets forth the range of the high and low bid prices of the
Company’s Common Stock for the prior eight calendar quarters and is based upon
information set forth on the over the counter electronic bulletin board. During
the twelve months ended December 31, 2008 the Company paid four regular
quarterly dividends of $0.11 cents per share, and one special dividend on August
19, 2009 of $0.50 per share, to stockholders of record.  In
conjunction with Office of Thrift Supervision approval, AJS Bancorp, MHC (the
“MHC”) waived 100% of the quarterly dividends due on its 1,227,544
shares.





Prices of Common
StockHigh
                
                
                LowCalendar
      Quarter EndedMarch
      31, 2007
                
                27.12
                
                
                24.14June
      30, 2007
                
                24.83
                
                
                24.53September
      30, 2007
                
                25.25
                
                
                23.16December
      31, 2007
                
                25.36
                
                
                19.89March
      31,2008
                
                29.90
                
                
                19.25June
      30, 2008
                
                21.50
                
                
                18.45September
      30, 2008
                
                19.00
                
                
                14.28December
      31, 2008
                
                18.00
                
                
                11.70





As of
December 31, 2008, the Company had 337 stockholders of record.





The
Company's second repurchase plan was announced on May 18, 2004 and allowed for
the repurchase of 117,000 shares of the Company's stock, which represented
approximately 5% of the Company's outstanding shares.  Subsequently,
the Company announced increases in the repurchase plan of 100,000, 50,000,
50,000 and 50,000 shares on March 22, 2005, October 18, 2005, August 21, 2007,
and February 26, 2008, respectively.  As of December 31, 2008 there
are 53,302 shares remaining to be purchased under the current repurchase
plan.





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





Total number shares
      purchased
                
                
                Average price paid per
      share
                
                
                Total number of shares purchased under publicly
      announced plan
                
                
                Maximum number of shares that may be purchased
      under the repurchase planOctober
      1– October 31
                
                
                -
                
                
                $
                -
                
                
                
                309,172
                
                
                
                367,000November
      1- November  30
                
                
                1,326
                
                
                
                14.75
                
                
                
                310,498
                
                
                
                367,000December
      1- December  31
                
                
                3,200
                
                
                
                14.05
                
                
                
                313,698
                
                
                
                367,000





31
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Set forth
below is certain information as of December 31, 2008 regarding equity
compensation to directors and executive officers of the Company approved by
stockholders.  Other than the employee stock ownership plan, the
Company did not have any equity plans in place that were not approved by
stockholders.





Plan
                  
                  Number of securities to be issued upon exercise of
      outstanding options and rights
                  
                  
                  Weighted average exercise
    price
                  
                  
                  Number of securities remaining available for
      issuance under planEquity
      compensation plans approved by stockholders
                  
                  90,485
      options
                  
                  
                  $
                  $18.82
                  (1)
                  
                  17,456
      (options)/900 (restricted stock)Equity
      compensation plans not approved by stockholders
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  
                  90,485
                  
                  
                  $
                  18.82
                  (1)
                  
                  17,456
      (options)/900 (restricted stock)


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





ITEM 6 SELECTED FINANCIAL
DATA





Not
applicable.





ITEM7 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 typically depend primarily on our net interest
income.  Net interest income is the difference between the interest
income we earn on our interest-earning assets, consisting primarily of loans,
investment securities and interest-earnings deposits with other financial
institutions, and the interest we pay on our interest-bearing liabilities,
consisting primarily of savings accounts, time deposits and
borrowings.  Our results of operations are also affected by our
provisions for loans losses, other income and other expense.  Other
income consists primarily of insurance commissions and service charges on
deposit accounts.  Other expense consists primarily of noninterest
expense, including salaries and employee benefits, occupancy, equipment, data
processing and deposit insurance premiums.  Our results of operations
may also be affected significantly by general and local economic and competitive
conditions, changes in market interest rates, governmental policies and actions
of regulatory authorities. The Company’s exposure to credit risk is
significantly affected by changes in the economy of Chicago and its suburban
areas.





32
 Table of Contents





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 with the ability to originate FHA loans.  In the
past, we broadened the scope of our loan products and services to include
commercial real estate based loans, however, in light of the recent economic
conditions and their impact on commercial real estate in particular, we have
discontinued our commercial lending services.. There can be no assurances that
we will successfully implement our strategy.





Highlights
of our business strategy are as follows:





•
            Continuing One- to four-family
      Residential Real Estate Lending.  Historically, we have
      emphasized one- to four-family residential lending within our market
      area.  As of December 31, 2008, $84.4 million, or 65.4%, of our
      total loan portfolio consisted of one- to four-family residential real
      estate loans.  During the year ended December 31, 2008, we
      originated $16.5 million of one- to four-family residential real estate
      loans.  We intend to continue to originate one- to four-family
      loans because of our expertise with this type of
  lending.








•
            Providing an outlet for
      Federal Housing Authority (“FHA”) loans.  We are
      committed to meeting the financial needs of the communities in which we
      operate.  In particular, we have begun accepting applications
      for FHA loans. The Company compiles all the necessary underwriting
      documents for FHA loans and then forwards those documents to an
      unaffiliated third party for underwriting and funding.  We do
      not carry any FHA loans in our loan portfolio. Our objective is to
      actively market our FHA loan services to our existing customers, as well
      as new customers within our market
area.





Comparison
of Financial Condition at December 31, 2008 and December 31, 2007





Total
consolidated assets as of December 31, 2008 were $244.0 million, a decrease of
$4.4 million or 1.8% from $248.3 million at December 31, 2007.  The
decrease was primarily due to a decrease in cash and cash equivalents and loans
receivable, partially offset by an increase in certificates of deposits at other
financial institutions and securities.  Loans receivable decreased
$6.6 million or 4.9% to $126.4 million at December 31, 2008 from $133.0 million
at December 31, 2007.  The decrease in loans was primarily due to
increases in the allowance for loan losses, payoffs and more stringent
underwriting and credit standards in the commercial and home equity loan
categories, reflecting management’s decision to be more conservative in its loan
originations during the severe economic downturn.  Certificates of
deposit increased $3.8 million or 126.8% to $6.8 million at December 31, 2008
from $3.0 million at December 31, 2007.  The Company invested $4.0
million during the first quarter of 2008 in certificates of deposit at other
financial institutions.  The certificates were invested in maximum
increments of $100,000 with yields ranging from 3.25% to 3.40% and maturities
ranging from nine months to three years.  Securities increased $8.4
million or 10.4% to $89.9 million at December 31, 2008 from $81.4 million at
December 31, 2007.  The increase in securities primarily reflects
purchases of $13.0 million of fixed-rate government-backed notes and bonds, of
which $10.0 million had call features, and $36.2 million in mortgage-backed
securities. The average term to maturity of the fixed-rate note and bond
securities was 90 months; the average term to maturity of the mortgage-backed
securities was 114 months.





33
 Table of Contents





Total
deposits decreased $10.2 million to $180.3 million at December 31, 2008 from
$190.5 million at December 31, 2007.  The decrease in deposits
occurred in the certificates of deposit category, while the balances of passbook
and money market accounts both increased.  Certificates of deposit
decreased $15.4 million to $107.3 million at December 31, 2008 from $122.8
million at December 31, 2007.  Passbook savings accounts increased
$849,000 to $39.0 million at December 31, 2008 compared to $38.1 million at
December 31, 2007.  Money market accounts increased to $13.0 million
at December 31, 2008 from $7.3 million at December 31, 2007.





FHLB
advances increased $6.8 million or 29.2% to $30.2 million at December 31, 2008
from $23.4 million at December 31, 2007.  The Bank borrowed $13.8
million in fixed-rate advances from the FHLB during 2008.  The
advances had maturities of two to five years with a weighted average cost of
3.3%.





The
Company had non-performing assets of $3.7 million as of December 31, 2008 and
$934,000 as of December 31, 2007.  The increase in non-performing
assets resulted mainly from an increase in non-performing commercial real estate
loans.  The allowance for loan losses totaled $2.7 million at December
31, 2008 and $1.5 million at December 31, 2007.  This represents a
ratio of the allowance for loan losses to gross loans receivable of 2.12% at
December 31, 2008 and 1.15% at December 31, 2007.  The allowance for
loan losses to non-performing loans was 73.2% at December 31, 2008 and 164.8% at
December 31, 2007.





The
Company has six single-family loans on non-accrual status, one of which is also
impaired, as of December 31, 2008.  The Company has two commercial
lending relationships with principal balances in excess of $500,000 that are
impaired and on non-accrual as of December 31, 2008.  Additionally,
the Company has five commercial lending relationships that are impaired, but are
not more than 90 days delinquent at December 31, 2008, two of which have
principal balances in excess of $500,000.  The following paragraphs
detail further information on the large commercial loans.  The Company
has no large single family or other loans that are impaired or more than 90 days
delinquent as of December 31, 2008.





The
Company has a $4.0 million participation interest in a $26.2 million loan
secured by vacant land that the borrower intended to develop into a
residential/commercial site.  The borrower defaulted on the loan and
the property is now in foreclosure proceedings.  The lead lender
conducted an appraisal of the property in the fourth quarter of 2008 that
reflects a range of fair values based upon city zoning and the retention of the
property’s tax incentive (“TIF”) status.  Based on the appraisal and
consideration of all known facts, the Company has charged off $2.3 million of
the outstanding loan balance at December 31, 2008.





The
Company has three mortgage loans to one borrower totaling $2.7 million secured
by two retail office space commercial buildings.  The borrower
defaulted on these mortgage loans, therefore the properties are currently in
foreclosure proceedings. During the fourth quarter, management obtained updated
appraisals on these properties.  Based on deterioration in fair
values, as detailed in the appraisal, the Company charged off $957,000 of the
outstanding loan balance as of December 31, 2008.





The
Company has a $3.0 million or 3.3% participation in a $91.5 million loan secured
by an indoor water park.  Though the borrower continued to pay
interest through December 2008, they previously indicated that they were in
financial difficulty and wanted to restructure the interest-only
loan.  Several troubled debt restructuring options have been
presented; however, the borrower has not agreed to restructure the
loan.  Due to negative cash flows and identified concerns with the
borrower, the Company has recorded a $600,000 impairment reserve on this
property as of December 31, 2008.





34
 Table of Contents





The
Company has a $2.9 million mortgage loan on a 46 unit apartment building in
Chicago that is deemed to be impaired, but in which the borrower is current in
its payments as of December 31, 2008.  The borrower had experienced
financial difficulty and requested the loan be restructured in the fourth
quarter of 2008.  The Company restructured the interest rate on the
loan and obtained an appraisal on the property in December of
2008.  Accordingly, the Company has recorded a $600,000 impairment
reserve on this property as of December 31, 2008.





While
these properties are in the midst of foreclosure or possible restructuring there
is no guarantee that the fair value of the properties will not decline
further.  Therefore, although the Company recorded its best estimate
of probable losses expected at December 31, 2008, there may be additional losses
on these properties in the future.





Total
stockholders’ equity decreased $831,000 to $27.1 million at December 31, 2008
from $27.9 million at December 31, 2007.  The decrease in
stockholders’ equity primarily resulted from the net loss of $2.1 million during
the twelve months ended December 31, 2008 and the repurchase of shares of the
Company’s stock during the twelve months ended December 31, 2008, offset by an
increase in other comprehensive income due to the increased fair value of the
available for sale securities portfolio.  The Company repurchased
11,239 shares of its common stock at a cost of $197,000 during the twelve months
ended December 31, 2008.  In addition, during the year the Company
declared and paid four quarterly dividends of $0.11 cents per share, and one
special dividend of $0.50 per share.  With the non-objection of the
Office of Thrift Supervision (“OTS”) AJS Bancorp, MHC (the “MHC”) waived 100% of
the dividends due on its 1,227,544 shares.  The fair value, net of
taxes, of the available for sale securities portfolio increased $1.5 million at
December 31, 2008 compared to a tax effective increase in fair value of $695,000
at December 31, 2007.





Comparison
of Financial Condition at December 31, 2007 and December 31, 2006





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





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




35
 Table of Contents




from
$129.3 million at December 31, 2006.  Passbook savings accounts
decreased $2.4 million to $38.1 million at December 31, 2007 compared to $40.5
million at December 31, 2006.





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





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





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





Comparison
of Operating Results for the Years Ended December 31, 2008 and December 31,
2007





General.  The
Company recorded a net loss of $2.1 million for the year ended December 31, 2008
compared to net income of $559,000 for the year ended December 31,
2007.  As discussed in more detail below, the net loss in 2008
compared with net income in 2007 reflects an increase in the provision for loan
losses, a decrease in net interest income, and a decrease in non-interest
income, offset by a decrease in non-interest expense.





Interest
Income.  Total interest income decreased to $12.0 million for
the twelve months ended December 31, 2008, down $1.9 million or 13.6% from $13.9
million for the same period in 2007.  The decrease in our interest
income is primarily due to a lower average yield earned on all categories of our
interest-earning assets.





Interest
income from loans decreased by $755,000 to $7.7 million for the year ended
December 31, 2008, from $8.5 million for the year ended December 31,
2007.  The decrease in interest income from loans was primarily due to
a decrease in the average yield earned on loan balances during the
year.  The average yield on loans decreased to 5.75% during 2008 from
6.30% during 2007.  Average loan balances remained stable at $134.7
million during the year ended December 31, 2008 and 2007.





Interest
income from interest-earning deposits decreased $1.0 million, or 69.3%, to
$447,000 for the year ended December 31, 2008, from $1.5 million for the year
ended December 31, 2007.  The decrease resulted from decreases in the
average balances and in the interest rate earned on the
deposits.  Average balances decreased to $17.7 million from $29.0
million, while the average yield decreased to 2.53% from 5.03% for the
comparable twelve-month periods.  The decrease in the average balance
of




36
 Table of Contents




interest
earning deposits was caused primarily by a decrease in demand account balances
at other financial institutions and the FHLB, offset by an increase in our of
certificates of deposit balances held at other financial
institutions.





Interest
income from federal funds sold decreased $96,000, or 64.4%, to $53,000 for the
year ended December 31, 2008, from $149,000 for the year ended December 31,
2007.  The decrease resulted from reductions in the average balances
and in the average yield earned on federal funds sold.  Average
balances decreased to $1.6 million from $2.9 million, while the average yield
decreased to 3.3% from 5.1% for the comparable twelve-month
periods.  The decrease in average balances was due to a reduction in
the Company’s cash balances as interest rates earned on federal funds reached
record lows during the fourth quarter of 2008.





Interest
Expense.  Interest expense on deposits decreased by $1.9
million, or 29.4% to $4.6 million for the year ended December 31, 2008, from
$6.6 million for 2007.  The decrease in our cost of deposits reflected
the lower average market interest rates during 2008, certificates of deposit
maturing and renewing at lower rates during 2008, as well as a decrease in
average deposit balances during the year.  Average deposits decreased
to $181.9 million for the year ended December 31, 2008, from $196.3 million for
2007.  Our average cost of deposits decreased to 2.55% from 3.34% for
the respective periods.  Interest expense on borrowings increased to
$1.3 million for the twelve months ended December 31, 2008, from $1.1 million
for the same period during 2007, which was due to an increase in average FHLB
borrowings.





Net
interest income decreased by $125,000 or 2.0% to $6.1 million for the year ended
December 31, 2008 from $6.2 million for the same period in
2007.  Average interest earning assets were $234.7 million and $249.1
million during the comparative 2008 and 2007 twelve-month periods while the
average yield was 5.11% and 5.58% respectively.  Our net interest rate
spread increased 23 basis points to 2.34% from 2.11% while our net interest
margin increased 11 basis points to 2.59% from 2.48% reflecting a more
pronounced downward repricing of our interest-bearing liabilities as compared
with our interest-earning assets.  The ratio of average
interest-earning assets to average interest-bearing liabilities decreased to
109.88% for the year ended 2008 from 112.24% for the year ended December 31,
2007.  The increase in our net interest rate spread and net interest
margin reflects the fact that during the year ended December 31, 2008 the cost
of average interest-bearing liabilities decreased at a faster pace than the
yield earned on average interest-earning assets





Provision for Loan
Losses.  We established a provision 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 upon our
evaluation, there was a provision for loan losses of $4.3 million for the twelve
months ended December 31, 2008 compared to a loan loss provision of $179,000 for
the twelve months ended December 31, 2007.  The loan loss provision
made for the twelve months ended December 31, 2008 were based, in part, on the
continuation of negative economic trends, as well as, charge-offs and impairment
reserves recorded on commercial loan properties.  The Company recorded
charge-offs of $3.2 million and recoveries of $67,000 during the twelve months
ended December 31, 2008.  These loans and the properties securing
these loans are discussed in-depth in the preceding paragraphs.  The
Company had a 2.12% allowance for loan loss to gross loans receivable at
December 21, 2008 compared to 1.15% allowance for loan loss to gross loans
receivable at December 31, 2007.  At December 31, 2008 the FAS 5
portion of the allowance




37
 Table of Contents




was
1.08%, whereas at December 31, 2007 the FAS 5 portion of the allowance was
1.15%.  Based on economic and real estate downturns and with
consideration to the increase in Company charge offs, the Company has increased
its FAS 5 general reserve allocations.  The comparative year over year
decrease in the FAS 5 general reserve is the result of $10.3 million of
primarily commercial loans with the highest FAS 5 allocation that were included
in the FAS 5 general reserve at December 31, 2007 that are now specifically
evaluated for impairment under FAS 114.  Had these loans remained in
the FAS 5 general reserve at December 31, 2008, the FAS 5 general reserve to
gross loans would have been 0.15% higher, or 1.23%.  Any loan loss
provisions made are to maintain the allowance at levels that reflect
management’s estimate of known and inherent losses in our loan
portfolio.





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, 2008 is
maintained at a level that represents management’s best estimate of inherent
losses in the loan portfolio, and such losses were both probable and reasonably
estimable.





Non-interest
Income.  Non-interest income decreased $93,000 or 10.8% to
$765,000 for the year ended December 31, 2008 from $858,000 for the year ended
2007.  The decrease was primarily due to a $87,000 decrease in service
fees, a $89,000 decrease in insurance commissions, and a $28,000 decrease in
rental income offset by a $94,000 increase in earnings on bank owned life
insurance, and a $17,000 gain on the sale of securities available for
sale.





Service
fee income decreased $87,000 or $17.5% to $410,000 for the year ended December
31, 2008 from $497,000 for the same period in 2007.  The decrease was
primarily due to decreases in prepayment penalties and late fees paid during the
year ended December 31, 2008 compared to the same period in 2007.





Insurance
commission income decreased $89,000 or 62.2% primarily due to a decrease in the
sale of fixed and variable rate annuities for the comparable periods as
investors avoided most non-insured financial market instruments.





Rental
income decreased $28,000 or 23.3% primarily due to one of the Company’s larger
rental units remaining vacant throughout 2008, while in 2007 it was occupied for
the majority of the year.  Had the unit remained occupied for all of
2008 rental income would have increased by approximately $34,000.





Earnings
on bank owned life insurance increased $94,000 or 174.1% primarily due to an
increase in the cash surrender value of the Company’s bank owned life
insurance.  The Company purchased $3.0 million of BOLI in August of
2007.





Non-interest
Expense.Non-interest expense decreased $55,000 or 0.9% to
$6.0 million for both years ended December 31, 2008 and 2007.  The
decrease primarily reflects decreases in salaries and employee benefits, loss on
the sale of other real estate owned, and loss on the impairment of a mutual
fund, offset by increases in occupancy expense, loss on the sale of mutual fund,
and other non-interest expense items.





Salaries
and employee benefits decreased $145,000 or 4.5% to $3.1 million for the year
ended December 31, 2008 compared to $3.3 million for the same period last
year.  Salaries and employee benefits decreased primarily due to a
reduction in the cost of the recognition and retention and stock




38
 Table of Contents




option
plans.  The awards under these plans were fully vested as of May 21,
2008, and accordingly, the benefit expense decreased $168,000 for the comparable
periods.





Loss on
sale of other real estate owned decreased $56,000 due to the foreclosure and
subsequent sale of one commercial loan property that occurred during the 2007
year.  The Company did not take a loss on the sale of other real
estate owned during 2008.





The
Company recorded a $244,000 loss related to an other than temporary impairment
on the Company’s Shay AMF Ultra Short Mortgage fund (“mutual fund”) during
2007.  In April of 2008, the Company recorded a $192,000 loss on the
sale of 100% of its investment in this mutual fund.  The Company sold
the mutual fund to avoid expected further declines in fair value, which did
occur.  The Company has not experienced an other than temporary
impairment on any of its securities held as of December 31, 2008.





Occupancy
expense increased $70,000 or 9.0% to $849,000 for the year ended December 31,
2008 compared to $779,000 for the same period in 2007.  The increase
reflects the Company’s successful appeal of the real estate tax assessment and
the resulting refund of real estate taxes received during the year ended
December 31, 2007, as well as an increase in maintenance expenses on the
buildings for the year ended December 31, 2008 when compared to the same period
in 2007.





Other
non-interest expense items increased $65,000 or 11.1% to $652,000 for the twelve
months ended December 31, 2008 compared to $587,000 for the same period last
year.  Loan fees increased $20,000, depreciation on automobiles
increased $15,000, and loss on fair value of securities increased $13,000,
respectively, for the comparable periods.  The increase in loan fees
was primarily due to increased costs associated with obtaining appraisals
on distressed properties, fees charged in conjunction with foreclosures on
participation loans.  Depreciation on automobiles increased due to the
purchase of an automobile during the first quarter of 2008.





Provision
for Income Taxes.  The Company had a federal and state tax benefit of
$1.4 million for the year ended December 31, 2008 and a tax expense of $275,000
during the same period of 2007.  The $1.7 million change is due to the
pre-tax loss recognized during the period.





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





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





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





Interest
income from loans decreased by $758,000 to $8.5 million for the year ended
December 31, 2007, from $9.3 million for the year ended December 31,
2006.  The decrease in interest income from loans was due to a
decrease in the average loan balances during the year.  The average
yield




39
 Table of Contents




on loans
increased to 6.3% during 2007 from 6.2% during 2006. Average loan balances were
$134.7 million during the year ended December 31, 2007 compared to average loan
balances of $149.4 million during the year ended December 31, 2006.





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





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





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





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





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





40
 Table of Contents





Provision for Loan
Losses.  We establish provisions for loan losses, which are
charged to operations, at a level management believes is appropriate to absorb
probable incurred credit losses in the loan portfolio.  In evaluating
the level of the allowance for loan losses, management considers historical loss
experience, the types of loans and the amount of loans in the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral, and prevailing economic
conditions.  This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available or as future events change.  Based on our evaluation
of these factors, we made a provision of $179,000 for the year ended December
31, 2007 and a negative $28,000 provision for the same period in
2006.  The loan loss provision made for the year ended December 31,
2007 was based, in part, on concerns regarding economic conditions as real
estate values trend downwards and increased commercial loan credit risk that may
be imbedded in the portfolio, as well as, additional specific reserves allocated
for on commercial and single-family properties.  The Company recorded
a $197,000 specific reserve on two commercial office buildings, with a lending
relationship totaling $2.7 million, owned by the same entity that in October
2007 reported increased vacancies and weaknesses in cash flow.  The
loans secured by the commercial office buildings are currently performing,
however the Company felt a $197,000 loss on these properties was
necessary.  The Company has a commercial lending relationship totaling
$294,000 that is impaired and one commercial lending relationship totaling $2.9
million that is on the Company’s watch list as of December 31,
2007.  The Company’s watch list includes any commercial loan that has
for the past twelve months been late paying three times or more.  We
used the same methodology while updating credit risk assumptions in assessing
the adequacy of the allowance.  The allowance for loan losses was $1.5
million or 1.15% of loans outstanding at December 31, 2007 compared to $1.6
million, or 1.16%, of loans outstanding at December 31, 2006.  The
non-performing assets to total assets at December 31, 2007 was 0.38% as compared
to 0.20% at December 31, 2006.  The level of the allowance is based on
estimates and the ultimate losses may vary from the estimates.





Management
assesses the allowance for loan losses on a quarterly basis and makes provisions
for loan losses as necessary in order to maintain the adequacy of the
allowance.  While management uses available information to recognize
losses on loans, future loan loss provisions may be necessary based on changes
in economic conditions.  In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the allowance
for loan losses and may require us to recognize additional provisions based on
their judgment of information available to them at the time of their
examination.  The allowance for loan losses as of December 31, 2007 is
maintained at a level that represents management’s best estimate of inherent
losses in the loan portfolio, and such losses were both probable and reasonably
estimable.





Non-interest Income.Non-interest income decreased $81,000 or 8.6% to $858,000 for the year
ended December 31, 2007 from $939,000 for the year ended 2006.  The
decrease was primarily due to a $45,000 decrease in insurance commissions, a
$54,000 decrease in gain on the sale of loans, and a $19,000 decrease in rental
income, offset by a $51,000 increase in other non-interest income.





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





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




41
 Table of Contents




their
leases. The termination of these four leases will result in reduced rental
income of approximately $18,000 per quarter.  Accordingly, the Company
expects the rental income to decline in the future.





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





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





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





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





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





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





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





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




42
 Table of Contents




Financial Assets and Financial
Liabilities as of January 1, 2008 for the Company’s equity securities,
which will include the mutual fund, therefore, further changes in the market
value of this fund will flow through earnings.





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





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





43
 Table of Contents





Average
Balance Sheets





The
following tables present for the periods indicated the total dollar amount of
interest income on average interest-earning assets and the resultant yields, the
interest expense on average interest-bearing liabilities, expressed both in
dollars and rates, as well as yields and costs at December 31,
2008.  No tax equivalent adjustments were made.  All average
balances are monthly average balances.  Non-accruing loans have been
included in the table as loans carrying a zero yield.





Years Ended December
      31,2008
                
                
                2007
                
                
                2006Average Outstanding Balance
                
                
                Interest Earned/ Paid
                
                
                Yield/Rate
                
                
                Average Outstanding Balance
                
                
                Interest Earned/ Paid
                
                
                Yield/Rate
                
                
                Average Outstanding Balance
                
                
                Interest Earned/ Paid
                
                
                Yield/Rate(Dollars
      in thousands)Interest-earning
      assets:Loans
      receivable
                
                $
                134,654
                
                
                $
                7,737
                
                
                
                5.75
                %
                
                $
                134,709
                
                
                $
                8,492
                
                
                
                6.30
                %
                
                $
                149,394
                
                
                $
                9,250
                
                
                
                6.19
                %Securities
                
                
                80,689
                
                
                
                3,762
                
                
                
                4.66
                
                
                
                82,526
                
                
                
                3,791
                
                
                
                4.59
                
                
                
                70,338
                
                
                
                2,874
                
                
                
                4.09Interest-earning depositsand
      other
                
                
                17,688
                
                
                
                447
                
                
                
                2.53
                
                
                
                28,996
                
                
                
                1,458
                
                
                
                5.03
                
                
                
                26,156
                
                
                
                1,227
                
                
                
                4.69Federal
      funds
                
                
                1,625
                
                
                
                53
                
                
                
                3.26
                
                
                
                2,881
                
                
                
                149
                
                
                
                5.17
                
                
                
                4,859
                
                
                
                238
                
                
                
                4.90Total
      interest-earning assets
                
                $
                234,656
                
                
                
                11,999
                
                
                
                5.11
                
                
                $
                249,112
                
                
                
                13,890
                
                
                
                5.58
                
                
                $
                250,747
                
                
                
                13,589
                
                
                
                5.42Interest-bearing
      liabilities:Passbook
      savings
                
                $
                38,880
                
                
                
                352
                
                
                
                0.91
                
                
                $
                39,258
                
                
                
                448
                
                
                
                1.14
                
                
                $
                42,686
                
                
                
                468
                
                
                
                1.10NOW
      accounts
                
                
                22,728
                
                
                
                38
                
                
                
                0.17
                
                
                
                22,741
                
                
                
                58
                
                
                
                0.26
                
                
                
                22,005
                
                
                
                69
                
                
                
                0.31Money
      market accounts
                
                
                10,396
                
                
                
                159
                
                
                
                1.53
                
                
                
                8,949
                
                
                
                259
                
                
                
                2.89
                
                
                
                8,717
                
                
                
                246
                
                
                
                2.82Time
      deposits
                
                
                109,851
                
                
                
                4,086
                
                
                
                3.72
                
                
                
                125,374
                
                
                
                5,796
                
                
                
                4.62
                
                
                
                120,588
                
                
                
                4,953
                
                
                
                4.11Total
      deposits
                
                
                181,855
                
                
                
                4,635
                
                
                
                2.55
                
                
                
                196,322
                
                
                
                6,561
                
                
                
                3.34
                
                
                
                193,996
                
                
                
                5,736
                
                
                
                2.96FHLB
      advances and other
                
                
                31,692
                
                
                
                1,299
                
                
                
                4.10
                
                
                
                25,614
                
                
                
                1,139
                
                
                
                4.45
                
                
                
                29,963
                
                
                
                1,281
                
                
                
                4.28Total
      interest-bearing liabilities
                
                $
                213,547
                
                
                
                5,934
                
                
                
                2.78
                
                
                $
                221,936
                
                
                
                7,700
                
                
                
                3.47
                
                
                $
                223,959
                
                
                
                7,017
                
                
                
                3.13Net
      interest income
                
                
                
                
                
                $
                6,065
                
                
                
                
                
                
                
                
                
                
                $
                6,190
                
                
                
                
                
                
                
                
                
                
                $
                6,572Net
      interest rate spread
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2.11
                %
                
                
                
                
                
                
                
                
                
                
                2.29
                %Net
      earning assets
                
                $
                21,109
                
                
                
                
                
                
                
                2.34
                %
                
                $
                27,176
                
                
                
                
                
                
                
                
                
                
                $
                26,788Net
      yield on average interest- earning assets
                
                
                
                
                
                
                
                
                
                
                2.59
                %
                
                
                
                
                
                
                
                
                
                
                2.48
                %
                
                
                
                
                
                
                
                
                
                
                2.62
                %Average interest-earning assets to
      average interest-bearing liabilities
                
                
                
                
                
                
                
                
                
                
                109.88
                %
                
                
                
                
                
                
                
                
                
                
                112.24
                %
                
                
                
                
                
                
                
                
                
                
                111.96
                %





44
 Table of Contents





Rate/Volume
Analysis





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





Years Ended December 31,2008 vs. 2007
                
                
                2007 vs. 2006Increase/(Decrease)
                
                
                Total
                
                
                Increase/(Decrease)
                
                
                TotalDue to
                
                
                Increase
                
                
                Due to
                
                
                IncreaseVolume
                
                
                Rate
                
                
                (Decrease)
                
                
                Volume
                
                
                Rate
                
                
                (Decrease)(In
      thousands)Interest-earning
      assetsLoans
      receivable
                
                $
                (3
                )
                
                $
                (752
                )
                
                $
                (755
                )
                
                $
                (923
                )
                
                $
                165
                
                
                $
                (758
                )Securities
                
                
                (85
                )
                
                
                56
                
                
                
                (29
                )
                
                
                534
                
                
                
                383
                
                
                
                917Interest-earning
      deposits and other
                
                
                (444
                )
                
                
                (567
                )
                
                
                (1,011
                )
                
                
                139
                
                
                
                92
                
                
                
                231Federal
      funds
                
                
                (52
                )
                
                
                (44
                )
                
                
                (96
                )
                
                
                (102
                )
                
                
                13
                
                
                
                (89
                )Total
      interest-earning assets
                
                $
                (584
                )
                
                $
                (1,307
                )
                
                $
                (1,891
                )
                
                $
                (352
                )
                
                $
                653
                
                
                $
                301Interest-bearing
      liabilitiesTransaction
      and savings deposits
                
                
                33
                
                
                
                (249
                )
                
                
                (216
                )
                
                
                (30
                )
                
                
                12
                
                
                
                (18
                )Certificate
      accounts
                
                
                (718
                )
                
                
                (992
                )
                
                
                (1,710
                )
                
                
                197
                
                
                
                646
                
                
                
                843Borrowings
                
                
                270
                
                
                
                (110
                )
                
                
                160
                
                
                
                (186
                )
                
                
                44
                
                
                
                (142
                )Total
      interest-bearing liabilities
                
                $
                (415
                )
                
                $
                (1,351
                )
                
                $
                (1,766
                )
                
                $
                (19
                )
                
                $
                702
                
                
                $
                683Net
      interest income
                
                $
                (169
                )
                
                $
                44
                
                
                $
                (125
                )
                
                $
                (333
                )
                
                $
                (49
                )
                
                $
                (382
                )





Management
of Market Risk





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





We have
sought to manage our interest rate risk by more closely matching the maturities
of our interest rate sensitive assets and liabilities.  In particular,
we offer one, three-, five- and seven-year adjustable rate mortgage loans, and
three- and five-year balloon loans.  In a low interest rate
environment, borrowers typically prefer fixed-rate loans to adjustable-rate
mortgages.  We may sell our originations of longer-term fixed-rate
loans into the secondary market.  We do not solicit high-rate jumbo
certificates of deposit or brokered funds.





Net Portfolio
Value.  In past years, many savings associations have measured
interest rate sensitivity by computing the “gap” between the assets and
liabilities which are expected to mature or reprice within certain time periods
based on assumptions regarding loan prepayment and deposit decay rates formerly
provided by the Office of Thrift Supervision.  However, the Office of
Thrift Supervision now requires the computation of amounts by which the net
present value of an institution’s cash flow




45
 Table of Contents




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 50 to 300 basis points.  (A basis point equals
one-hundredth of one percent, and 100 basis points equals one
percent.  An increase in interest rates from 7% to 8% would mean, for
example, a 100 basis point increase in the “Change in Interest Rates” column
below).  The Office of Thrift Supervision provides us the results of
the interest rate sensitivity model, which is based on information we provide to
the Office of Thrift Supervision to estimate the sensitivity of our net
portfolio value.





The table
below sets forth, as of September 30, 2008 (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
                                                        
                                                        
                                                        Net
      Portfolio Value as a % of
      Present Value ofAssets/LiabilitiesChange
      in Interest Rates (Basis
      Points)
                                                        
                                                        Estimated
      NPV
                                                        
                                                        
                                                        Amount
      of Change
                                                        
                                                        
                                                        Percent
                                                        
                                                        
                                                        NPV Ratio
                                                        
                                                        
                                                        Change(1)(Dollars
      in thousands)+300
                                                        
                                                        $
                                                        28,824
                                                        
                                                        
                                                        $
                                                        (5.959
                                                        )
                                                        
                                                        
                                                        (17
                                                        )%
                                                        
                                                        
                                                        11.61
                                                        %
                                                        
                                                        
                                                        (186
                                                        )+200
                                                        
                                                        
                                                        30,991
                                                        
                                                        
                                                        
                                                        (3,792
                                                        )
                                                        
                                                        
                                                        (11
                                                        )
                                                        
                                                        
                                                        12.31
                                                        
                                                        
                                                        
                                                        (116
                                                        )+100
                                                        
                                                        
                                                        33,072
                                                        
                                                        
                                                        
                                                        (1,711
                                                        )
                                                        
                                                        
                                                        (5
                                                        )
                                                        
                                                        
                                                        12.96
                                                        
                                                        
                                                        
                                                        (51
                                                        )+50
                                                        
                                                        
                                                        33,822
                                                        
                                                        
                                                        
                                                        (961
                                                        )
                                                        
                                                        
                                                        (3
                                                        )
                                                        
                                                        
                                                        13.18
                                                        
                                                        
                                                        
                                                        (29
                                                        )0
                                                        
                                                        
                                                        34,783
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        13.47
                                                        
                                                        
                                                        
                                                        --50
                                                        
                                                        
                                                        34,913
                                                        
                                                        
                                                        
                                                        130
                                                        
                                                        
                                                        
                                                        0
                                                        
                                                        
                                                        
                                                        13.47
                                                        
                                                        
                                                        
                                                        0-100
                                                        
                                                        
                                                        35,184
                                                        
                                                        
                                                        
                                                        401
                                                        
                                                        
                                                        
                                                        1
                                                        
                                                        
                                                        
                                                        13.53
                                                        
                                                        
                                                        
                                                        6


(1)
Expressed in basis points.





The table
above indicates that at September 30, 2008, in the event of a 100 basis point
decrease in interest rates, we would experience a 1% increase in net portfolio
value.  In the event of a 200 basis point increase in interest rates,
we would experience an 11% decrease in net portfolio value.





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





46
 Table of Contents





Critical
Accounting Policies and Estimates





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





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





The
allowance for loan losses consists of specific allocations on impaired loans
under Statement of Financial Accounting Standards (SFAS) 114 and general
allocation for inherent credit risks under SFAS 5.   The SFAS 114
component of the allowance for loan losses reflects expected losses resulting
from analyses developed through specific credit allocations for individual
loans.  The SFAS 5 component of the allowance reflects historical loss
experience for each loan category adjusted for trends and credit
risks.  The specific credit allocations are based on analyses
involving a high degree of judgment in estimating the amount of loss associated
with specific loans, including estimating the amount and timing of future cash
flows and collateral values.  The historical loss analysis is
performed quarterly and loss factors are updated regularly based on actual
experience and trends and credit risk.





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





There are
many factors affecting the allowance for loan losses; some are quantitative
while others require qualitative judgment.  Although management
believes its process for determining the allowance adequately considers all of
the potential factors that could potentially result in credit losses, the
process includes subjective elements and may be susceptible to significant
change.  To the extent actual outcomes differ from management
estimates, additional provision for credit losses could be required that could
adversely affect earnings or financial position in future
periods.  Significant influences currently impacting the Company’s
allowance for loan losses are rising real estate inventories which is applying
downward pressure in real estate values and general economic
conditions.  Management continues to monitor these credit risk trends
during each quarterly allowance for loan loss analysis.





Other
Than Temporary Impairment. We review investment securities with
significant declines in fair value for potential other-than-temporary impairment
pursuant to the guidance set forth in Statement of Financial Accounting
Standards 115, “Accounting for Certain Investments in Debt and Equity
Securities”




47
 Table of Contents




(“SFAS
115”) on a quarterly basis. We have developed a methodology for conducting
quarterly impairment evaluation with consideration given to (1) the length of
time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent
and ability to retain the investment for a period of time sufficient to allow
for any anticipated recovery in fair value.





Liquidity
and Capital Resources





We
maintain liquid assets at levels we consider adequate to meet our liquidity
needs.  Our liquidity ratio averaged 16.1% and 20.4% for the years
ended December 31, 2008 and 2007.  We adjust our liquidity levels to
fund deposit outflows, pay real estate taxes on mortgage loans, repay our
borrowings and to fund loan commitments.  We also adjust liquidity as
appropriate to meet asset and liability management objectives.





Our
primary sources of liquidity are deposits, amortization and prepayment of loans
and mortgage-backed securities, maturities of investment securities and other
short-term investments, and earnings and funds provided from
operations.  While scheduled principal repayments on loans and
mortgage-backed securities are a relatively predictable source of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions, and competition.  We set the interest rates on
our deposits to maintain a desired level of total deposits.  In
addition, we invest excess funds in short-term interest-earning investments and
other assets, which provide liquidity to meet lending
requirements.  Short-term interest-earning deposits with the Federal
Home Loan Bank of Chicago amounted to $1.5 million at December 31, 2008 and $3.2
million at December 31, 2007.  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.  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,
2008, we had $30.2 million in advances from the Federal Home Loan Bank of
Chicago.  Of this amount, $10.9 million is due within one year, $14.3
million is due between one and three years, $5.0 million is due between four and
five years.





At
December 31, 2008, we had outstanding commitments of $4.6 million to originate
loans.  This amount does not include the unfunded portion of loans in
process.  At December 31, 2008, certificates of deposit scheduled to
mature in less than one year totaled $81.0 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.





48
 Table of Contents





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, 2008 was
11.8%.





The
following table sets forth our contractual obligations and commercial
commitments at December 31, 2008.





Total
              
              
              Less than 1 year
              
              
              1-3 Years
              
              
              4-5 years
              
              
              After 5 Years(In
      thousands)FHLB
      advances
              
              $
              30,175
              
              
              $
              10,875
              
              
              $
              14,300
              
              
              $
              5,000
              
              
              $
              -Time
      deposits
              
              
              107,311
              
              
              
              80,985
              
              
              
              17,942
              
              
              
              8,384
              
              
              
              -Non-qualified,
      unfunded retirement plan
              
              
              1,555
              
              
              
              96
              
              
              
              -
              
              
              
              -
              
              
              
              1,459





Total Amounts
    Committed
              
              
              Less than 1 year
              
              
              1-3 Years
              
              
              4-5 years
              
              
              Over 5 Years(In
      thousands)Lines
      of credit (1)
              
              $
              14,263
              
              
              $
              2,505
              
              
              $
              3,105
              
              
              $
              8,343
              
              
              $
              310Standby
      letters of credit (1)
              
              
              190
              
              
              
              190
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
      commitments to extend credit (1)
              
              
              4,599
              
              
              
              4,599
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              19,052
              
              
              $
              7,294
              
              
              $
              3,105
              
              
              $
              8,343
              
              
              $
              310


________________________________


(1)
            Represents
      amounts committed to customers.





Not
included above is the $1.3 million liability for the Employee Stock Ownership
Plan   (“ESOP”) put option. This option allows the ESOP
participant, following termination of their employment, to ‘put’ their stock
back to the Company at the fair value as determined by an independent
appraisal.  It is unlikely that all of the plan participants will put
their stock back to the Company at any one time, however, should they choose to
do so the participants could put their stock back to the Company during
2009.





Impact
of Inflation and Changing Prices





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





ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK





Not
applicable.





ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA





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





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





None.





49
 Table of Contents





ITEM 9A. CONTROLS AND
PROCEDURES





(a)
            Evaluation
      of disclosure controls and
procedures.





Under the
supervision and with the participation of our management, including our Chief
Executive Officer, President and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end
of the fiscal year (the “Evaluation Date”). Based upon that evaluation, the
Chief Executive Officer, President and Chief Financial Officer concluded that,
as of the Evaluation Date, our disclosure controls and procedures were effective
in timely alerting them to the material information relating to us (or our
consolidated subsidiaries) required to be included in our periodic SEC
filings.





(b)
            Management’s
      annual report on internal control over financial
  reporting





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





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





Management
has assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2008, based on the framework set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.  Based on that assessment,
management concluded that, as of December 31, 2008, the Company’s internal
control over financial reporting was effective based on the criteria established
in the Internal Control-Integrated Framework.





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





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(c)
            Changes
      in internal controls.





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





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





ITEM 9B. OTHER
INFORMATION





None.





PART
III





ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE





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 AND RELATED STOCKHOLDER
MATTERS





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





ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





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





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.





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ITEM 15. EXHIBITS





3.1
              Certificate
      of Incorporation of AJS Bancorp, Inc.(1)


3.2
            Bylaws
      of AJS Bancorp, Inc.(1)


4
              Form
      of Common Stock Certificate of AJS Bancorp, Inc.(1)


10.1
            Employment
      Agreement with Thomas R. Butkus(2)


10.2
              Employment
      Agreement with Lyn G. Rupich(3)


10.3
            AJS
      Bancorp, Inc. 2003 Stock Option Plan(4)


10.4
              AJS
      Bancorp, Inc. 2003 Recognition and Retention Plan(4)


10.5
            Amendments
      to 2003 Stock Option Plan(5)


13
              Financial
      Statements


14
            Code
      of Ethics(2)


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


___________________


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


(2)
              Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on June 23,
      2008


(3)
              Incorporated
      by reference to the Company’s Current Report on Form 8 - K filed on
      October 24, 2008.


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


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





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 Table of Contents





SIGNATURES





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





AJS
      Bancorp, Inc.











Date:
                March
      16, 2009
                By:
                /s/ Thomas R. ButkusThomas
      R. Butkus,Chairman
      of the Board andChief
      Executive Officer





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











By:
                        /s/ Thomas R. Butkus
                        By:
                        /s/ Lyn G. RupichThomas
      R.  Butkus, Chairman of the Board
                        
                        Lyn
      G. Rupich, Presidentand
      Chief Executive Officer
                        
                        Principal
      Operating Officer(Principal Executive Officer)Date:
                        March
      16, 2009
                        Date:
                        March
      16, 2009By:
                        /s/ Pamela N. Favero
                        By:
                        /s/ Roger L. AurelioPamela
      N. Favero, Chief Financial Officer
                        
                        Roger
      L. Aurelio, DirectorDate:
                        March
      16, 2009
                        Date:
                        March
      16, 2009By:
                        /s/ Raymond J. Blake
                        By:
                        /s/ Richard J. NogalRaymond
      J. Blake, Director
                        
                        Richard
      J. Nogal, DirectorDate:
                        March
      16, 2009
                        Date:
                        March
      16, 2009By:
                        /s/ Edward S. MilenEdward
      S. Milen, DirectorDate:
                        March
      16, 2009






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