-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HuhIbcvCjkZHUmeuMxOAOVZbZXsvC7efCQtM6KnHz4WSRk+LvYdPU7NRRjVvfYB2 f5RrRY/Zxy/o+siuNsaBIw== 0000914317-07-000828.txt : 20070322 0000914317-07-000828.hdr.sgml : 20070322 20070322120045 ACCESSION NUMBER: 0000914317-07-000828 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070322 DATE AS OF CHANGE: 20070322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AJS BANCORP INC CENTRAL INDEX KEY: 0001144515 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-33405 FILM NUMBER: 07711070 BUSINESS ADDRESS: STREET 1: 14757 SOUTH CICERO AVE. CITY: MIDLOTHIAN STATE: IL ZIP: 60455 BUSINESS PHONE: 7086877400 MAIL ADDRESS: STREET 1: 14757 SOUTH CICERO AVE. CITY: MIDLOTHIAN STATE: IL ZIP: 60455 10-K 1 form10k-82174_ajs.htm FORM 10-K Form 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2006
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 No. 000-33405

AJS Bancorp, Inc.
(Exact name of registrant as specified in its charter)

United States
  
36-4485429
(State or other jurisdiction of
  
(I.R.S. Employer
incorporation or organization)
  
Identification Number)
     
14757 S. Cicero Avenue, Midlothian, Illinois
  
60445
(Address of Principal Executive Offices)
  
Zip Code

(708) 687- 7400
(Registrant’s telephone number)

Securities Registered Pursuant to Section 12(b) of the Act:
None

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES ¨   NO x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES ¨   NO x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES x   NO¨.

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

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

Large Accelerated Filer ¨
Accelerated Filer ¨
Non-Accelerated Filer x

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

As of March 9, 2007, there were issued and outstanding 2,134,204 shares of the Registrant’s Common Stock.

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, 2006, as reported by the Over The Counter Bulletin Board, was approximately $16.6 million.

DOCUMENTS INCORPORATED BY REFERENCE

(1)
Proxy Statement for the 2007 Annual Meeting of Stockholders of the Registrant (Part III).
 


TABLE OF CONTENTS
 
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PART I


Forward Looking Statements

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

General

AJS Bancorp, Inc.

Following completion of our mutual holding company and stock offering on December 26, 2001, AJS Bancorp, Inc. became the mid-tier stock holding company for A. J. Smith Federal Savings Bank (the “Bank” 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. As part of our reorganization, we issued 1,227,544 shares of common stock to our mutual holding company parent, AJS Bancorp, MHC (“MHC”), and sold 1,179,406 shares to the public. Under federal regulations, so long as AJS Bancorp, MHC exists, it will own at least 50.1% of the voting stock of AJS Bancorp, Inc. At December 31, 2006, AJS Bancorp, Inc. had total consolidated assets of $266.5 million, total deposits of $202.2 million, and stockholders’ equity of $28.7 million. Our executive offices are located at 14757 South Cicero Avenue, Midlothian, Illinois 60445, and our telephone number is (708) 687-7400.

Beginning with the first quarterly report, which we file in 2007, we intend to elect to comply with the reporting requirements applicable to small business filers pursuant to the Exchange Act of 1934 as amended and applicable SEC regulations.

A. J. Smith Federal Savings Bank

A. J. Smith Federal Savings Bank was founded in 1892 by Arthur J. Smith as a building and loan cooperative organization. In 1924 we were chartered as an Illinois savings and loan association, and in 1934 we converted to a federal charter. In 1984 we amended our charter to become a federally chartered savings bank. We are a customer-oriented institution, operating from a main office in Midlothian, Illinois, and two branch offices in Orland Park, Illinois. Our primary business activity is the origination of one- to four-family real estate loans. To a lesser extent, we originate multi-family, commercial real estate and consumer loans. As part of our current business plan, we intend to develop our business banking by offering commercial loans and deposit products and services to business customers. We also invest in securities, primarily United States Government Agency securities and mortgage-backed securities. In addition, we offer insurance and investment products and services. During the past two years, as the interest yield cure flattened and then inverted, we allowed the overall composition of our assets to become more liquid. Investment securities and cash have become a larger percentage of our
 
 
assets in 2006, while loans and mortgage-backed securities have become smaller portions of our assets than have historically been the case. We believe that the repositioning of our assets in this manner will position A.J. Smith Federal to take advantage of the changes in long-term interest rates while reducing our interest rate risk profile.
 
Market Area
 
A. J. Smith Federal has been, and continues to be, a community-oriented savings bank offering a variety of financial products and services to meet the needs of the communities we serve. Our lending and deposit-generating area is concentrated in the neighborhoods surrounding our three offices; our main office in Midlothian, Illinois, and two branch offices in Orland Park, Illinois. Our office locations are located in Cook County. However, we consider our market area to be the counties of Will and Cook. Midlothian is primarily a residential community, and its largest employers are state and local governments and automobile dealerships. Orland Park has more retail businesses, as well as light industrial companies. Our market area economy consists primarily of the services industry, wholesalers and retailers and manufacturing. Major employers in our market area include the Andrew Corporation, the Orland Park School District, the Village of Orland Park, and various retailers including J. C. Penney, 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 primarily of multi-family loans and home equity lines of credit. At December 31, 2006, our gross loans totaled $138.4 million, of which $86.0 million, or 61.5%, were secured by one- to four-family residential real estate, $41.2 million, or 29.5%, were secured by multi-family residential and commercial real estate, $12.2 million, or 8.7%, were home equity loans, and $482,000, 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.
 

Loan Portfolio Composition. The following table shows the composition of our loan portfolio in dollar amounts and in percentages (before deductions for loans in process, deferred fees and allowances for losses) as of the dates indicated.
 
   
At December 31,
  
   
2006
  
2005
  
2004
  
2003
  
2002
  
                                           
   
Amount
  
Percent
  
Amount
  
Percent
  
Amount
  
Percent
  
Amount
  
Percent
  
Amount
  
Percent
  
   
(Dollars in thousands)
  
Real estate loans:
                                          
One-to four-family residential(1)
  
$
86,024
    
61.49
%
$
101,325
    
66.03
%
$
115,598
    
70.02
%
$
120,810
    
76.64
%
$
115,880
    
83.84
%
Multi-family and commercial
    
41,194
    
29.45
    
38,317
    
24.97
    
32,713
    
19.82
    
24,066
    
15.27
    
13,187
    
9.54
  
Total real estate loans
    
127,218
          
139,642
          
148,311
          
144,876
          
129,067
        
                                                               
Other Loans:
                                                              
Consumer loans
    
482
    
0.34
    
502
    
0.33
    
649
    
0.39
    
696
    
0.44
    
782
    
0.56
  
Home equity
    
12,198
   
8.72
    
13,279
    
8.67
    
16,126
    
9.77
    
12,056
    
7.65
    
8,374
    
6.06
  
Total loans
    
139,898
    
100.00
%
  
153,423
    
100.00
%
  
165,086
    
100.00
%
  
157,628
    
100.00
%
  
138,223
    
100.00
%
                                                               
Less:
                                                              
Allowance for loan losses
    
(1,619
)
        
(1,701
)
        
(1,847
)
        
(1,962
)
        
(2,082
)
      
Deferred loan (fees) costs
    
107
          
56
          
69
          
(16
)
        
24
        
Deferred gain on real estate contract
    
(9
)
        
(10
)
        
(17
)
        
(22
)
        
(31
)
      
Total loans receivable, net
  
$
138,377
        
$
151,768
        
$
163,291
        
$
155,628
        
$
136,134
        
________________
(1)
Subprime real estate loans totaled $5.2 million, $7.8 million, $12.5 million, $18.3 million and $31.2 million at December 31, 2006, 2005, 2004, 2003 and 2002, respectively.
 
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, 2006. Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.

           
Multi-Family
                          
   
One- to Four-Family
  
and Commercial
  
Consumer
  
Home Equity
  
Total
  
       
Weighted
      
Weighted
      
Weighted
      
Weighted
      
Weighted
  
       
Average
      
Average
      
Average
      
Average
      
Average
  
   
Amount
  
Rate
  
Amount
  
Rate
  
Amount
  
Rate
  
Amount
  
Rate
  
Amount
  
Rate
  
   
(Dollars in thousands)
  
                                           
1 year or less
  
$
710
    
6.57
%
$
7,099
    
8.99
%
$
145
    
5.55
%
$
1,084
    
8.04
%
$
9,038
    
8.63
%
Greater than 1 to 3 years
    
4,758
    
6.30
    
19,291
    
6.52
    
110
    
6.16
    
5,424
    
8.10
    
29,583
    
6.77
  
Greater than 3 to 5 years
    
3,910
    
6.77
    
10,140
    
6.95
    
227
    
5.59
    
5,684
    
7.99
    
19,961
    
7.20
  
Greater than 5 to 10 years
    
14,991
    
5.78
    
1,757
    
6.72
    
-
    
-
    
6
    
8.00
    
16,754
    
5.88
  
Greater than 10 to 20 years
    
22,949
    
5.45
    
669
    
6.08
    
-
    
-
    
-
    
-
    
23,618
    
5.47
  
More than 20 years
    
38,706
    
5.33
    
2,238
    
7.10
    
-
    
-
    
-
    
-
   
40,944
    
5.43
  
                                                               
Total
  
$
86,024
        
$
41,194
        
$
482
        
$
12,198
        
$
139,898
        

The total amount of loans due after December 31, 2007 which have predetermined interest rates is $95.9 million, while the total amount of loans due after such date which have floating or adjustable interest rates is $35.0 million.


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, 2006, these loans totaled $86.0 million, or 61.5% 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, 2006, $65.0 million, or 75.6% of our one- to four-family residential real estate loans had fixed rates of interest, and $21.0 million, or 24.4% 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 30 years. We also offer loans which generally have balloon payment features after 3 or 5 years. Our balloon loans generally amortize over periods of 15 years or more. One- to four-family residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers have the right to refinance or prepay their loans.

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

Regulations limit the amount that a savings association may lend relative to the appraised value of the real estate securing the loan, as determined by an appraisal of the property at the time the loan is originated. For loans greater than $175,000 we utilize outside independent appraisers. For loans up to $175,000, in-house appraisers perform appraisals. For borrowers who do not obtain private mortgage insurance, our lending policies limit the maximum loan to value ratio on both fixed rate and adjustable rate mortgage loans to 80% of the appraised value of the property that is collateral for the loan (and up to 85% with respect to second fixed-rate mortgage loans). For one- to four-family residential real estate loans with loan to value ratios of between 80% and 97%, we require the borrower to obtain private mortgage insurance. For loans in excess of $75,000, we require the borrower to obtain title insurance. For first mortgage loan products under $75,000, we conduct a title search. For second mortgage type products in excess of $200,000, title insurance is required. For second mortgage type products under $200,000, we conduct a title search. We also require homeowners’ insurance and fire and casualty insurance on properties securing real estate loans. In the past, a more significant portion of our one-to-four family loans consisted of subprime loans. Beginning in 1998, management determined to reduce the risks inherent in our loan portfolio consistent with safety and soundness, and in this regard, we decided to reduce our reliance on subprime lending. Starting in 2001, management made the decision to broaden the scope of our loan products and services to enhance profitability, and expanded our commercial business lending and business banking services. There can be no assurances that we will successfully implement our strategy. At December 31, 2006 $5.2 million of our one-to-four residential loans consisted of subprime loans. There were four non-performing subprime loans totaling $199,000 at December 31, 2006.
 

Multi-Family Loans and Commercial Lending. At December 31, 2006, $41.2 million, or 29.5% of our total loan portfolio, consisted of loans secured by multi-family and commercial real estate properties, virtually all of which are located in the state of Illinois. Our multi-family loans are secured by multi-family and mixed use properties. Our commercial real estate loans are secured by improved property such as offices, small business facilities, unimproved land, warehouses and other non-residential buildings. Our multi-family and commercial real estate loans are offered with fixed or floating rates based upon the prime rate. Our fixed rate multi-family and commercial real estate loans are offered with amortization schedules of up to 25 years, and generally have three- and five-year balloon features. At December 31, 2006, the average balance of our multi-family and commercial real estate loans was $330,000. We generally will make multi-family and commercial real estate loans for up to 80% of the lesser of cost or the appraised value of the property securing the loan.

Prior to funding a loan secured by multi-family, mixed use or commercial property, we generally obtain an environmental assessment from an independent, licensed environmental engineer to ascertain the existence of any environmental risks that may be associated with the property. The level of the environmental consultant’s evaluation of a property will depend on the facts and circumstances relating to the specific loan, but generally the environmental consultant’s actions will range from a Phase 1 Environmental Site Assessment to a Phase II environmental report. The underwriting process for multi-family and commercial real estate loans includes an analysis of the debt service coverage of the collateral property. We typically require a debt service coverage ratio of 120% or higher. We also require personal guarantees by the principals of the borrower and a cash flow analysis when applicable.

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

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

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

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

Home Equity Lines of Credit. We offer home equity lines of credit, the total of which amounted to $12.2 million, or 8.7% of our total loan portfolio, as of December 31, 2006. Home equity lines of credit are generally made for owner-occupied homes, and are secured by first or second mortgages on residences. We generally offer these loans with a maximum loan to appraised value ratio of 90% (including senior liens on the collateral property). We currently offer these lines of credit for a period of 5 years, and generally at rates tied to the prevailing prime interest rate. Our home equity lines of credit are generally underwritten in the same manner as our one- to four-family residential loans.

Consumer Loans. We are authorized to make loans for a variety of personal and consumer purposes. As of December 31, 2006, consumer loans totaled $482,000, and consisted primarily of automobile loans and loans secured by deposit accounts. Automobile loans accounted for $340,000 of our consumer loans and loans secured by deposit accounts were $139,000 at December 31, 2006. 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. 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,
  
   
2006
  
2005
  
2004
  
   
(In thousands)
  
Loans receivable, beginning of period
  
$
153,423
  
$
165,086
  
$
157,628
  
Originations by type:
                   
Real estate- one to four-family
    
11,137
    
17,005
    
22,405
  
Multi-family and commercial
    
14,487
    
20,698
    
17,337
  
Non-real estate -consumer
    
1,046
    
445
    
329
  
Home equity
    
8,532
    
7,614
    
12,280
  
Total loans originated
    
35,202
    
45,762
    
52,351
  
                     
Sales
    
(3,310
)
  
(1,977
)
  
-
  
                     
Principal repayments:
   
(45,417
)
  
(55,448
)
  
(44,893
)
                     
Loans receivable, at end of period
  
$
139,898
  
$
153,423
  
$
165,086
  
 

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

Loans-to-One-Borrower. Federal savings banks are subject to the same loans-to-one-borrower limits as those applicable to national banks, which restrict loans to one borrower to an amount equal to 15% of unimpaired capital and unimpaired surplus on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and unimpaired surplus if the loan is secured by readily marketable collateral (generally, financial instruments and bullion, but not real estate). At December 31, 2006, our lending limit was $4.5 million. At December 31, 2006, our largest lending relationship to one borrower totaled $4.1 million. At December 31, 2006, we had 29 lending relationships in which the total amount outstanding exceeded $500,000. All of the loans under these large lending relationships were performing in accordance with their terms.

Asset Quality 

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

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

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


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

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

As of December 31, 2006, our total non-accrual loans were $540,000, compared to $394,000 at December 31, 2005, and $983,000 at December 31, 2004.
 
The following table sets forth our loan delinquencies by type, amount and percentage at December 31, 2006.

   
Loans Delinquent For:
  
   
60-89 Days
  
90 Days and Over
  
Total Delinquent Loans
  
   
Number
  
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
    
3
  
$
408
    
0.47
%
  
3
  
$
132
    
0.15
%
  
6
  
$
540
    
0.63
%
Multi-family and commercial
    
1
    
23
    
0.06
    
1
    
278
    
0.67
    
2
    
301
    
0.73
  
Consumer and other
    
1
    
3
    
0.62
    
1
    
1
    
-
    
2
    
4
    
0.83
  
Home equity
    
1
    
20
    
0.16
    
2
    
129
    
1.06
    
3
    
149
    
1.22
  
                                                         
Total
    
6
  
$
454
    
0.32
%
  
7
  
$
540
    
0.39
%
  
13
  
$
994
    
0.71
%
 
The table below sets forth the amounts and categories of non-performing assets in our loan portfolio. For all years presented, we had no troubled debt restructurings within the meaning of Statement of Financial Accounting Standards No. 15. For the periods presented, we had no accruing loans delinquent more than 90 days. Foreclosed assets include assets acquired in settlement of loans.

   
At December 31,
  
   
2006
  
2005
  
2004
  
2003
  
2002
  
   
(Dollars In thousands)
  
Non-accruing loans:
                      
One- to four-family
  
$
132
  
$
326
  
$
981
  
$
1,116
  
$
860
  
Multi-family and commercial
    
278
    
-
    
-
    
3
    
113
  
Consumer and other
    
1
    
1
    
2
    
17
    
-
  
Home equity
    
129
    
67
    
-
    
-
    
79
  
Total non-accruing loans
    
540
    
394
    
983
    
1,136
    
1,052
  
                                 
Total non-performing loans
    
540
    
394
    
983
    
1,136
    
1,052
  
                                 
Real estate owned
    
-
    
-
    
-
    
23
    
43
  
Total non-performing assets
  
$
540
  
$
394
  
$
983
  
$
1,159
  
$
1,095
  
                                 
Total as a percentage of total assets
    
0.20
%
  
0.15
%
  
0.36
%
  
0.49
%
  
0.49
%
                                 
Non-performing loans as percentage of gross loans receivable
    
0.39
%
  
0.26
%
  
0.60
%
  
0.72
%
  
0.76
%
 

For the year ended December 31, 2006, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $50,000. The amount that was included in interest income totaled $25,000 for the year ended December 31, 2006.

Real Estate Owned. Real estate owned consists of property acquired through formal foreclosure or by deed in lieu of foreclosure, and is recorded at the lower of recorded investment or fair value. Write-downs from recorded investment to fair value, which are required at the time of foreclosure, are charged to the allowance for loan losses. After transfer, the property is carried at the lower of recorded investment or fair value, less estimated selling expenses. Adjustments to the carrying value of the properties that result from subsequent declines in value are charged to operations in the period in which the declines occur. At December 31, 2006, 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, 2006, we had classified $546,000 as substandard, and $515,000 as special mention.
 

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,
  
   
2006
  
2005
  
2004
  
2003
  
2002
  
   
(Dollars In thousands)
  
Balance at beginning of period
  
$
1,701
  
$
1,847
  
$
1,962
  
$
2,082
  
$
2,508
  
                                 
Charge-offs:
                                
One- to four-family
    
(7
)
  
(70
)
  
(115
)
  
(110
)
  
(306
)
Multi-family and commercial
    
(75
)
  
-
    
-
    
-
    
(90
)
Consumer and other
    
-
    
(1
)
  
-
    
-
    
-
  
Home equity
    
-
    
-
    
-
    
(10
)
  
(50
)
Total charge-offs
    
(82
)
  
(71
)
  
(115
)
  
(120
)
  
(446
)
Recoveries:
                                
One- to four-family loans
    
28
    
55
    
112
    
61
    
—
  
                                 
Net charge-offs
    
(54
)
  
(16
)
  
(3
)
  
(59
)
  
(446
)
Provisions for loan losses
    
(28
)
  
(130
)
  
(112
)
  
(61
)
  
20
  
Balance at end of period
  
$
1,619
  
$
1,701
  
$
1,847
  
$
1,962
  
$
2,082
  
                                 
Net charge-offs during the period to average loans outstanding during the period
    
.04
%
  
0.01
%
  
-
%
  
0.04
%
  
0.33
%
                                 
Net charge-offs during the period to non-performing loans
    
10.00
    
4.06
    
0.31
    
5.19
    
42.40
  
                                 
Non-performing assets to total assets at end of period
    
0.20
    
0.15
    
0.36
    
0.49
    
0.49
  
                                 
Allowance for loan losses to non-performing loans
    
299.81
    
431.73
    
187.89
    
172.71
    
197.91
  
                                 
Allowance for loan losses to loans receivable, gross
    
1.16
    
1.11
    
1.12
    
1.24
    
1.51
  

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

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

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


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,
  
   
2006
  
2005
  
2004
  
2003
  
2002
  
   
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
  
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
  
$
786
  
$
86,024
    
61.49
%
$
949
  
$
101,325
    
66.04
%
$
1,098
  
$
115,598
    
70.02
%
$
1,450
  
$
120,800
    
76.64
%
$
1,655
  
$
115,880
    
83.84
%
Multi-family and commercial
    
561
    
41,194
    
29.45
    
538
    
38,317
    
24.97
    
353
    
32,713
    
19.82
    
190
    
24,066
    
15.27
    
58
    
13,187
    
9.54
  
Consumer and other
    
5
    
482
    
0.34
    
8
    
502
    
.33
    
7
    
649
    
0.39
    
7
    
696
    
0.44
    
3
    
782
    
0.56
  
Home equity
    
125
    
12,198
    
8.72
    
145
    
13,279
    
8.66
    
258
    
16,126
    
9.77
    
227
    
12,056
    
7.65
    
278
    
8,374
    
6.06
  
Unallocated
    
142
    
-
    
-
    
61
    
-
    
-
    
131
    
-
    
-
    
88
    
-
    
-
    
88
    
-
    
-
  
Total loans
  
$
1,619
  
$
139,898
    
100.00
%
$
1,701
  
$
153,423
    
100.00
%
$
1,847
  
$
165,086
    
100.00
%
$
1,962
  
$
157,618
    
100.00
%
$
2,082
  
$
138,223
    
100.00
%


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

Investment Activities

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

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

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

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

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


Securities classified as held to maturity, excluding mortgage-backed securities, totaled $130,000 at December 31, 2006. Our securities classified as available-for-sale, other than mortgage-backed securities, totaled $34.7 million at December 31, 2006, and consisted of Federal agency obligations, primarily Federal Farm Credit Bank notes and Federal Home Loan Bank obligations with maturities of one to five years, and an ARM mutual fund. At December 31, 2006, we had $10.9 million invested in an adjustable rate mortgage mutual fund that invests primarily in adjustable rate mortgage backed securities, and collateralized mortgage obligations.
 
We also have a $2.5 million investment in Federal Home Loan Bank stock at December 31, 2006. For further information regarding our securities portfolio, see Note 2 to Consolidated Financial Statements.


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,
 
   
2006
  
2005
  
2004
  
   
Carrying Value
  
% of
Total
  
Fair
Value
  
% of
Total
  
Carrying
Value
  
% of
Total
  
Fair
Value
  
% of
Total
  
Carrying Value
  
% of
Total
  
Fair
Value
  
% of
Total
  
   
(Dollars in thousands)
  
Securities classified as held to  maturity (at amortized cost):
                                                  
Municipal bonds
  
$
130
    
0.35
%
$
130
    
0.35
%
$
200
    
0.52
%
$
200
    
0.52
%
$
-
    
-
%
$
-
    
-
%
Securities classified as available for sale (at fair value):
                                                                          
Shay ARM mutual fund
    
10,904
    
29.24
    
10,904
    
29.24
    
8,473
    
21.88
    
8,473
    
21.88
    
5,297
    
13.68
    
5,297
    
13.68
  
FHLB
    
19,770
    
53.01
    
19,770
    
53.01
    
23,633
    
61.03
    
23,633
    
61.03
    
16,955
    
43.80
    
16,955
    
43.80
  
FFCB
    
3,979
    
10.67
    
3,979
   
10.67
    
1,959
    
5.06
    
1,959
    
5.06
    
1,955
    
5.05
    
1,955
    
5.05
  
Fannie Mae
    
-
    
-
    
-
    
-
    
988
    
2.55
    
988
    
2.55
    
1,987
    
5.13
    
1,987
    
5.13
  
Other equity investments
    
62
    
0.16
    
62
    
0.16
    
56
    
0.14
    
56
    
0.14
    
56
    
0.14
    
56
    
0.14
  
Subtotal
    
34,845
    
93.43
    
34,845
    
93.43
    
35,309
    
91.18
    
35,309
    
91.18
    
26,250
    
67.81
    
26,250
    
67.81
  
FHLB stock
    
2,450
    
6.57
    
2,450
    
6.57
    
3,416
    
8.82
    
3,416
    
8.82
    
12,459
    
32.19
    
12,459
    
32.19
  
Total securities and FHLB stock
  
$
37,295
    
100.00
%
$
37,295
    
100.00
%
$
38,725
    
100.00
%
$
38,725
    
100.00
%
$
38,709
    
100.00
%
$
38,709
    
100.00
%
                                                                           
Average remaining life of securities
  
10.9 months
            
13.2 months
            
13.3 months
            
Other interest-earning assets:
                                                                          
Interest-earning deposits with banks
  
$
38,061
    
84.03
%
$
38,061
    
84.03
%
$
20,061
    
97.79
%
$
20,061
    
97.79
%
$
20,534
    
86.10
%
$
20,534
    
86.10
%
Federal funds sold
    
7,231
    
15.97
    
7,231
    
15.97
    
454
    
2.21
    
454
    
2.21
    
3,314
    
13.90
    
3,314
    
13.90
  
Total
  
$
45,292
    
100.00
%
$
45,292
    
100.00
%
$
20,515
    
100.00
%
$
20,515
    
100.00
%
$
23,848
    
100.00
%
$
23,848
    
100.00
%



Mortgage-Backed Securities

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

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

At December 31, 2006, our mortgage-backed securities totaled $34.1 million, which represented 12.8% of our total assets at that date. At December 31, 2006, a majority of our mortgage-backed securities were classified as available-for-sale. At that date, virtually all of our mortgage-backed securities had fixed rates of interest. We purchased $4.7 million of mortgage-backed securities during the year ended December 31, 2006, and $9.6 million during the year ended December 31, 2005.

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,
  
   
2006
  
2005
    2004  
   
Carrying
  
% of
  
Carrying
  
% of
  
Carrying
  
% of
  
   
Value
  
Total
  
Value
  
Total
  
Value
  
Total
  
   
(Dollars in thousands)
  
Mortgage-backed securities classified as held to maturity (at amortized cost):
                          
Ginnie Mae
  
$
74
    
0.22
%
$
95
    
0.26
%
$
132
    
0.37
%
Mortgage-backed securities classified as available for sale (at fair value):
                                      
Fannie Mae
    
29,310
    
85.87
    
30,300
    
83.65
    
29,685
    
83.94
  
Freddie Mac
    
4,749
    
13.91
    
5,830
    
16.09
    
5,548
    
15.69
  
                                       
Total
  
$
34,133
    
100.00
%
$
36,225
    
100.00
%
$
35,365
    
100.00
%
 

Carrying Values, Yields and Maturities. The composition and maturities of our debt securities portfolio and of our mortgage-backed securities, excluding equity investments and FHLB stock, are indicated in the following table. Cost represents the amortized cost of the securities and mortgage-backed securities at December 31, 2006.

   
At December 31, 2006
  
   
Less Than
  
1 to 5
  
5 to 10
  
Over
          
   
1 Year
  
Years
  
Years
  
10 Years
  
Total Securities
  
   
Amortized
  
Amortized
  
Amortized
  
Amortized
  
Amortized
      
   
Cost
  
Cost
  
Cost
  
Cost
  
Cost
  
Fair Value
  
   
(Dollars in thousands)
  
                           
Securities
  
$
8,037
  
$
16,042
  
$
-
  
$
-
  
$
24,079
  
$
23,879
  
Mortgage-backed securities
    
-
    
1,207
    
17,451
    
16,470
    
35,128
    
34,133
  
Total securities
  
$
8,037
  
$
17,249
  
$
17,451
  
$
16,470
  
$
59,207
  
$
58,012
  
                                       
Weighted average yield
    
3.05
%
  
4.29
%
  
4.35
%
  
4.76
%
  
3.67
%
      

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,
  
   
2006
  
2005
  
2004
  
   
(Dollars in thousands)
  
               
Opening balance
  
$
190,407
  
$
198,056
  
$
183,847
  
Deposits
    
408,178
    
422,686
    
464,289
  
Withdrawals
    
(400,369
)
  
(435,519
)
  
(453,205
)
Interest credited
    
3,960
    
5,184
    
3,125
  
                     
Ending balance
  
$
202,176
  
$
190,407
  
$
198,056
  
                     
Net increase (decrease)
  
$
11,769
  
$
(7,649
)
$
14,209
  
                     
Percent increase (decrease)
  
$
6.18
%
  
(3.86
)%
  
7.73
%


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,
 
 
 
2006
 
2005
 
2004
 
 
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
 
 
(Dollars in thousands)
  
Transactions and Savings Deposits:
                          
                           
Checking accounts
  
$
4,152
    
2.05
%
$
3,273
    
1.72
%
$
3,879
    
1.96
%
Passbook accounts
    
40,463
    
20.02
    
46,854
    
24.61
    
50,651
    
25.57
  
NOW accounts
    
18,946
    
9.37
    
18,947
    
9.95
    
19,905
    
10.05
  
Money market accounts
    
9,336
    
4.62
    
8,446
    
4.44
    
10,575
    
5.34
  
                                       
Total non-certificates
    
72,897
    
36.06
    
77,520
    
40.72
    
85,010
    
42.91
  
                                       
Certificates:
                                      
                                       
0.00 - 3.99%
    
33,103
    
16.37
    
71,214
    
37.40
    
80,997
    
40.90
  
4.00 - 5.99%
    
95,392
    
47.18
    
40,942
    
21.50
    
23,660
    
11.95
  
6.00 - 7.99%
    
762
    
0.37
    
711
    
0.37
    
8,370
    
4.23
  
8.00 - 9.99%
    
22
    
0.02
    
20
    
0.01
    
19
    
0.01
  
                                       
Total certificates
    
129,279
    
63.94
    
112,887
    
59.28
    
113,046
    
57.09
  
Total deposits
  
$
202,176
    
100.00
%
$
190,407
    
100.00
%
$
198,056
    
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, 2006.

   
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, 2007
  
$
15,413
  
$
19,236
  
$
67
  
$
-
  
$
34,716
    
26.85
%
June 30, 2007
    
6,342
    
28,553
    
272
    
-
    
35,167
    
27.20
  
September 30, 2007
    
1,875
    
18,851
    
-
    
-
    
20,726
    
16.03
  
December 31, 2007
    
748
    
9,362
    
-
    
-
    
10,110
    
7.82
  
March 31, 2008
    
2,350
    
3,247
    
-
    
6
    
5,603
    
4.33
  
June 30, 2008
    
2,259
    
1,275
    
-
    
-
    
3,534
    
2.73
  
September 30, 2008
    
920
    
936
    
-
    
-
    
1,856
    
1.44
  
December 31, 2008
    
455
    
1,171
    
376
    
-
    
2,002
    
1.55
  
March 31, 2009
    
390
    
2,207
    
-
    
16
    
2,613
    
2.02
  
June 30, 2009
    
322
    
1,529
    
-
    
-
    
1,851
    
1.43
  
September 30, 2009
    
255
    
1,050
    
-
    
-
    
1,305
    
1.01
  
December 31, 2009
    
242
    
823
    
10
    
-
    
1,075
    
0.83
  
March 31, 2010
    
1,046
    
1,713
    
-
    
-
    
2,759
    
2.13
  
                                       
Thereafter
    
486
    
5,440
    
36
    
-
    
5,962
    
4.61
  
                                       
Total
  
$
33,103
  
$
95,393
  
$
761
  
$
22
  
$
129,279
    
100.00
%
                                       
Percent of total
    
25.60
%
  
73.79
%
  
0.59
%
  
0.02
%
          
 

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, 2006.

   
Maturity
  
   
3 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
  
$
24,889
  
$
26,760
  
$
20,260
  
$
21,309
  
$
93,218
  
Certificates of deposit of $100,000 or more
    
9,116
    
8,308
    
6,093
    
7,250
    
30,767
  
Public funds (1)
    
710
    
100
    
4,484
    
-
    
5,294
  
                                 
Total certificates of deposit
  
$
34,715
  
$
35,168
  
$
30,837
  
$
28,559
  
$
129,279
  
______________________
(1)  Deposits from governmental and other public entities. The amounts shown under public funds include deposits of $100,000 or more totaling $5.1 million.

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

The following table sets forth the maximum month-end balance and average balance of Federal Home Loan Bank advances for the periods indicated.


   
Years Ended December 31,
  
   
2006
  
2005
  
2004
  
   
(In thousands)
  
Maximum balance:
              
FHLB advances
  
$
32,750
  
$
36,250
  
$
36,250
  
                     
Average balance:
                    
FHLB advances
  
$
29,963
  
$
34,167
  
$
27,358
  

The following table sets forth the balances of, and weighted average interest rate on, certain borrowings at the dates indicated.
 
   
At December 31,
  
   
2006
  
2005
  
2004
  
   
(Dollars In thousands)
  
               
FHLB advances
  
$
28,750
  
$
32,750
  
$
36,250
  
                     
Weighted average interest rate of FHLB advances
    
4.25
%
  
4.06
%
  
4.05
%
 

Employees

At December 31, 2006, we had a total of 53 full-time and 11 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have good relationships with our employees.

Regulations

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, 2006, 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, 2006, we maintained 78.29% 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. 
 
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, 2006, we were in compliance with these regulations.

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

Standards for Safety and Soundness.  Federal law requires each federal banking agency to prescribe for all insured depository institutions standards relating to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency
 
 
deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under the Federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, and compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan.
 
Regulatory Guidance Relating to Subprime Lending. The Federal bank regulatory agencies have issued regulatory guidance relating to the examination of financial institutions that are engaged in significant subprime lending activities. The purpose of the guidance is to provide regulatory agencies with expanded guidelines when examining savings institutions that have significant subprime lending programs.

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

Capital Requirements

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

The risk-based capital standard for savings institutions requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card
 
 
relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets, and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.
 
The capital regulations also incorporate an interest rate risk component. Savings institutions with “above normal” interest rate risk exposure are subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. For the present time, the Office of Thrift Supervision has deferred implementation of the interest rate risk capital charge. At December 31, 2006, 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 any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

Insurance of Deposit Accounts

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

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

On November 2, 2006, the Federal Deposit Insurance Corporation adopted final regulations establishing a risk-based assessment system that will enable the Federal Deposit Insurance Corporation to more closely tie each financial institution’s premiums to the risk it poses to the deposit insurance fund. Under the new risk-based assessment system, which becomes effective in the beginning of 2007, the Federal Deposit Insurance Corporation will evaluate the risk of each financial institution based on three
 
 
primary sources of information: (1) its supervisory rating, (2) its financial ratios, and (3) its long-term debt issuer rating, if the institution has one. The new rates for nearly all of the financial institution industry will vary between five and seven cents for every $100 of domestic deposits. At the same time, the Federal Deposit Insurance Corporation also adopted final regulations designating the reserve ratio for the deposit insurance fund during 2007 at 1.25% of estimated insured deposits.
 
Effective March 31, 2006, the Federal Deposit Insurance Corporation merged the Bank Insurance Fund and the Savings Association Insurance Fund into a single insurance fund called the Deposit Insurance Fund. The merger of the two separate insurance funds did not affect the authority of the Financing Corporation, a mixed-ownership government corporation, to impose and collect, with approval of the Federal Deposit Insurance Corporation, assessments for anticipated payments, insurance costs and custodial fees on bonds issued by the Financing Corporation in the 1980s to recapitalize the Federal Savings and Loan Insurance Corporation. The bonds issued by the Financing Corporation are due to mature in 2017 through 2019. For the quarter ended December 31, 2006, the Financing Corporation assessment was equal to 1.24 basis points for each $100 in domestic deposits maintained at an institution.

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, 2006, we were in compliance with this requirement. The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. On February 10, 2005 the FHLB announced that the Federal Housing Finance Board, the regulator for the FHLB, accepted their business plan. Included in the business plan were guidelines for a new dividend policy requiring its dividend payout ratio in a given quarter not to exceed 90% of Adjusted Core Net Income for that quarter. In addition, quarterly dividends of greater than 5.5%, on an annualized basis, will require regulatory approval. On October 18, 2005 the Federal Home Loan Bank of Chicago announced a policy to discontinue excess capital stock redemptions or “voluntary” stock redemptions. Voluntary stock is stock held by members beyond the amount required as a condition of membership or to support advance borrowings.

Federal Reserve System

Federal Reserve Board regulations require savings institutions to maintain noninterest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts. At December 31, 2006, we were in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the Office of Thrift Supervision.

Holding Company Regulation

General. AJS Bancorp, MHC and AJS Bancorp, Inc. are non-diversified savings and loan holding companies within the meaning of the Home Owners’ Loan Act. As such, AJS Bancorp, MHC and AJS Bancorp, Inc. are registered with the Office of Thrift Supervision and are subject to Office of Thrift Supervision regulations, examinations, supervision and reporting requirements. In addition, the
 
 
Office of Thrift Supervision has enforcement authority over AJS Bancorp, Inc. and AJS Bancorp, MHC and their subsidiaries. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. As federal corporations, AJS Bancorp, Inc. and AJS Bancorp, MHC are generally not subject to state business organization laws.
 
Permitted Activities. Pursuant to Section 10(o) of the Home Owners’ Loan Act and Office of Thrift Supervision regulations and policy, a mutual holding company, such as AJS Bancorp, MHC, and a federally chartered mid-tier holding company such as AJS Bancorp, Inc. may engage in the following activities: (i) investing in the stock of a savings association; (ii) acquiring a mutual association through the merger of such association into a savings association subsidiary of such holding company or an interim savings association subsidiary of such holding company; (iii) merging with or acquiring another holding company, one of whose subsidiaries is a savings association; (iv) investing in a corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where the subsidiary savings association or associations share their home offices; (v) furnishing or performing management services for a savings association subsidiary of such company; (vi) holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company; (vii) holding or managing properties used or occupied by a savings association subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix) any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Director, by regulation, prohibits or limits any such activity for savings and loan holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987; (x) any activity permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act, including securities and insurance underwriting; and (xi) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the Director. If a mutual holding company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger or acquisition may only invest in assets and engage in activities listed in (i) through (xi) above, and has a period of two years to cease any nonconforming activities and divest of any nonconforming investments.

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 event AJS Bancorp, MHC converts to stock form. On November 25, 2005 the Company paid an initial quarterly dividend of $0.10 cents per share to stockholders of record on November 10, 2005. In conjunction with Office of Thrift Supervision’s approval, AJS Bancorp, MHC waived 80% of the quarterly dividend due on its 1,227,554 shares. During the twelve months ended 2006 the Company paid three regular quarterly dividends of $0.10 per share and one regular quarterly dividend of $0.11 per share to stockholders of record. In conjunction with the Office of Thrift Supervision approval, AJS Bancorp, MHC waived 100% of the dividends due on its 1,227,554 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 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 recent accounting scandals. The stated goals of the Sarbanes-Oxley Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Sarbanes-Oxley Act generally applies to all companies that file or are required to file periodic reports with the SEC, under the Securities Exchange Act of 1934.

The Sarbanes-Oxley Act includes very specific additional disclosure requirements and new corporate governance rules requiring the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules, and mandates further studies of certain issues by the SEC. The Sarbanes-Oxley Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees. Recently, the SEC created a committee to evaluate Sarbanes-Oxley issues that may affect small public companies. Specifically being reviewed are the requirements under Sarbanes-Oxley section 404, which require significant oversight of a public company’s internal control over the financial statements. On December 15, 2006 the SEC issued a final rule to further extend the Sarbanes-Oxley Section 404 compliance dates for nonaccelerated filers. The final rule now requires nonaccelerated filers to provide management’s report on internal control over financial reporting for the first fiscal year ending on or after December 15, 2007. The rule further extends the deadline for the external auditor’s attestation report on internal control over financial reporting to be required for the first fiscal year ending on or after December 15, 2008. The Company cannot accurately predict what additional expenses may be incurred in complying with the provisions of the Sarbanes-Oxley Act

TAXATION

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

As a result of the enactment of the Small Business Job Protection Act of 1996, all savings banks and savings associations may convert to a commercial bank charter, diversify their lending, or merge into a commercial bank without having to recapture any of their pre-1988 tax bad debt reserve accumulations. However, transactions which would require recapture of the pre-1988 tax bad debt reserve include redemption of A. J. Smith Federal’s stock, payment of dividends or distributions in excess of earnings and profits, or failure by the institution to qualify as a bank for federal income tax purposes. At December 31, 2006, 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. During 2005, the Illinois Department of Revenue (IDOR) audited the Company’s and the Bank’s Illinois tax returns for the years ended 2004, 2003 and 2002. IDOR recommended the Company file unitary tax returns, or consolidated returns with the Bank and MHC, for the years audited and for future filings. This change resulted in no effect for 2002 and an immaterial refund for 2003 and 2004, respectively. We expect this change to minimally decrease the Company’s Illinois revenue taxes in the future.

MANAGEMENT

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

Name
  
Age
  
Position
         
Thomas R. Butkus
  
59
  
Chairman of the Board and Chief Executive Officer
         
Lyn G. Rupich
  
44
  
President
         
W. Anthony Kopp
  
56
  
Senior Vice President
 
        
Pamela N. Favero
  
43
  
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

Changing Interest Rates May Cause Net Earnings to Decline.

In the event that interest rates rise, our net interest margin and interest rate spread will be adversely affected by the high level of assets with fixed rates of interest which we retain in our portfolio. As market interest rates rise, we will have competitive pressures to increase the rates we pay on deposits, which will result in a decrease of our net interest income. Furthermore, the value of our loans will be less should we choose to sell such loans in the secondary market. Since as a general matter our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, an increase in interest rates generally would result in a decrease in our average interest rate spread and net interest income.

If Our Allowance for Loan Losses is Not Sufficient to Cover Actual Loan Losses, Our Earnings Could Decrease.

Our loan customers may not repay their loans according to their terms, and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant loan losses, which could have a material adverse effect on our operating results. We make various assumptions and judgments about the collectibility of our portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans.

In determining the amount of the allowance for loan losses, we review individual delinquent multi-family and commercial real estate loans for potential impairments in their carrying value. Additionally, we apply a factor to the loan portfolio principally based on historical loss experience applied to the composition of the loan portfolio and integrated with our perception of risk in the economy. Since we must use assumptions regarding individual loans and the economy, our current allowance for loan losses may not be sufficient to cover actual loan losses, and increases in the allowance may be necessary. Consequently, we may need to significantly increase our provision for losses on loans, particularly if one or more of our larger loans or credit relationships becomes delinquent of if we expand our non-residential, multi-family or commercial business lending. In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize loan charge-offs.

If Economic Conditions Deteriorate, Our Earnings Could be Adversely Impacted as Borrowers’ Ability to Repay Loans Declines and the Value of the Collateral Securing Our Loans Decreases.

Our financial results may be adversely affected by changes in prevailing economic conditions, including decreases in real estate values, changes in interest rates which may cause a decrease in interest rate spreads, adverse employment conditions, the monetary and fiscal policies of the federal government and other significant external events. Since we have a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral. Advance changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings.

Our Public Shareholders Do Not Exercise Voting Control Over AJS Bancorp, Inc.

A majority of the voting stock of AJS Bancorp, Inc. is owned by AJS Bancorp, MHC. AJS Bancorp, MHC is controlled by its board of directors, which consist of those persons who are members of the board of directors of AJS Bancorp, Inc. and A. J. Smith Federal Savings Bank. AJS Bancorp, MHC elects all members of the board of directors of AJS Bancorp, Inc., and, as a general matter, will control
 
 
the outcome of all matters presented to the stockholders of AJS Bancorp, Inc. for resolution by vote, except for matters that require a vote greater than a majority vote. Consequently, AJS Bancorp, MHC, acting through its board of directors, is able to control the business and operations of AJS Bancorp, Inc. and may be able to prevent any challenge to the ownership or control of AJS Bancorp, Inc. by stockholders other than AJS Bancorp, MHC. There is no assurance that AJS Bancorp, MHC will not take actions that the public stockholders believe are against their interests.

Strong Competition Within Our Market Area May Limit Our Growth and Profitability.

Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater resources and lending limits than we do and may offer certain services that we do not or cannot provide. Our profitability depends upon our continued ability to successfully compete in our market area.

We Operate in a Highly Regulated Environment and May be Adversely Affected by Changes in Laws and Regulations.

We are subject to extensive regulation, supervision and examination by the Office of Thrift Supervision, our chartering authority, and by the Federal Deposit Insurance Corporation, as insurer of deposits. As federally chartered holding companies, AJS Bancorp, Inc. and AJS Bancorp, MHC are subject to regulation and oversight by the Office of Thrift Supervision. Such regulation and supervision govern the activities in which an institution and its holding companies may engage and are intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, including changes in the regulations governing mutual holding companies, could have a material impact on A. J. Smith Federal Savings Bank, AJS Bancorp, Inc., and our operations.

Item 1.B     Unresolved Staff Comments

None.

ITEM 2.     PROPERTIES

Properties

At December 31, 2006, 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, 2006, the net book value of our office locations was $4.2 million.

ITEM 3.     LEGAL PROCEEDINGS

We are involved, from time to time, as plaintiff or defendant in various legal actions arising in the normal course of our business. At December 31, 2006, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.


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

None. 

PART II

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

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

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 2006 the Company paid three regular quarterly dividends of $0.10 cents per share, and one regular quarterly dividend of $0.11 cents per share to stockholders of record. In conjunction with Office of Thrift Supervision approval, AJS Bancorp, MHC (the “MHC”) waived 100% of the quarterly dividends due on its 1,227,554 shares. The Company paid an initial quarterly dividend of $0.10 cents per share on November 25, 2005, to stockholders of record on November 10, 2005, of which the MHC waived 80% of the quarterly dividend due on it’s 1,227,554 shares.

   
 Prices of Common Stock
  
   
High
  
Low
  
Calendar Quarter Ended
          
March 31, 2005
  
$
24.40
  
$
23.75
  
June 30, 2005
    
24.25
    
23.30
  
September 30, 2005
    
25.00
    
23.00
  
December 31, 2005
    
23.60
    
22.50
  
March 31, 2006
    
23.90
    
23.00
  
June 30, 2006
    
25.00
    
23.55
  
September 30, 2006
    
25.00
    
23.50
  
December 31, 2006
    
26.50
    
24.60
  


As of December 31, 2006, the Company had 382 stockholders of record.

The Company's second repurchase plan was announced on May 18, 2004 and allowed for the repurchase of 117,000 shares of the Company's stock, which represented approximately 5% of the Company's outstanding shares. Subsequently, the Company announced increases in the repurchase plan of 100,000 and 50,000 shares on March 22, 2005 and October 18, 2005, respectively. As of December 31, 2006 there are 58,037 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 plan
  
                   
October 1-October 31
    
-
  
$
-
    
207,695
    
267,000
  
November 1-November 30
    
1,268
    
24.25
    
208,963
    
267,000
  
December 1- December 31
    
-
    
-
    
208,963
    
267,000
  

 
Set forth below is certain information as of December 31, 2006 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 plan
Equity compensation plans approved by stockholders
102,885 options
20,868 nonvested restricted stock
$ 18.81 (1)
7,456 (options)/900 (restricted stock)
Equity compensation plans not approved by stockholders
-
-
-
Total
123,753
$ 18.81 (1)
7,456 (options)/900 (restricted stock)
(1) Represents the exercise price of options awarded under the stock option plan. 


Stock Performance Graph

Set forth hereunder is a performance graph comparing (a) the total return on the common stock of the Company for the period beginning on December 31, 2001 through December 31, 2006, (b) the cumulative total return on stocks included in the United States Nasdaq Composite Index over such period, and (c) the cumulative total return on stocks included in the SNL Over the Counter-Bulletin Board and pink sheet traded thrifts with total assets between $100 million up to $500 million over such period, and (d) the cumulative total return on stocks included in the SNL Mutual Holding Company Thrifts Index over such period. The graph assumes that the value of the investment in each index was $100 on December 26, 2001 and that all dividends were reinvested.
 
Assuming an initial investment in the common stock of the Company of $100.00 on December 31, 2001, the cumulative total value of the investment on December 31, 2006 would be $203.15. There can be no assurance that the Company’s stock performance will continue in the future with the same or similar trend depicted in the graph. The Company will not make or endorse any predictions as to future stock performance.

Total Return Performance

 
 
   
 Period Ending
  
Index
  
12/31/01
  
12/31/02
  
12/31/03
  
12/31/04
  
12/31/05
  
12/31/06
  
AJS Bancorp, Inc.
   
100.00
    
132.32
    
174.90
    
182.51
    
175.67
    
203.15
  
NASDAQ Composite
    
100.00
    
68.76
    
103.67
    
113.16
    
115.57
    
127.58
  
SNL Thrift Pink
    
100.00
    
124.49
    
184.21
    
196.23
    
205.20
    
254.86
  
SNL Thrift MHCs
    
100.00
    
143.59
    
242.83
    
274.86
    
282.40
    
386.74
  
 

ITEM 6.     SELECTED FINANCIAL DATA

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

   
At December 31,
  
   
2006
  
2005
  
2004
  
2003
  
2002
  
   
(Dollars in thousands)
  
Selected Financial Condition Data:
                      
Total assets
  
$
266,513
  
$
257,905
  
$
270,869
  
$
238,384
  
$
222,570
  
Loans receivable, net
    
138,377
    
151,768
    
163,291
    
155,628
    
136,134
  
Mortgage-backed securities:
                                
Held to maturity
    
74
    
95
    
132
    
177
    
269
  
Available for sale
    
34,059
    
36,130
    
35,233
    
13,854
    
15,770
  
Securities:
                                
Held to maturity
    
130
    
200
    
-
    
-
    
91
  
Available for sale
    
34,715
    
35,109
    
26,250
    
28,621
    
36,133
  
Deposits
    
202,176
    
190,407
    
198,056
    
183,847
    
169,008
  
Total borrowings
    
28,750
    
32,750
    
36,250
    
17,000
    
16,000
  
Equity
    
28,749
    
28,252
    
30,530
    
32,105
    
33,646
  
 
   
Years Ended December 31,
  
   
2006
  
2005
  
2004
  
2003
  
2002
  
   
(Dollars in thousands)
  
                       
Selected Operations Data:
                      
Total interest income
  
$
13,589
  
$
12,948
  
$
12,737
  
$
12,347
  
$
13,113
  
Total interest expense
    
7,017
    
6,023
    
5,178
    
5,069
    
5,426
  
Net interest income
    
6,572
    
6,925
    
7,559
    
7,278
    
7,687
  
Provision for loan losses
    
(28
)
  
(130
)
  
(112
)
  
(61
)
  
20
  
Net interest income after provision for loan losses
    
6,600
    
7,055
    
7,671
    
7,339
    
7,667
  
Noninterest income
    
939
    
936
    
933
    
1,091
    
1,599
  
Noninterest expense
    
6,088
    
6,200
    
6,191
    
6,255
    
5,855
  
Income before income taxes
    
1,451
    
1,791
    
2,413
    
2,175
    
3,411
  
Income taxes
    
540
    
694
    
833
    
782
    
1,296
  
Net income
  
$
911
  
$
1,097
  
$
1,580
  
$
1,393
  
$
2,115
  
Earnings per share
                                
Basic
  
$
0.43
  
$
0.51
  
$
0.70
  
$
0.60
  
$
0.90
  
Diluted
    
0.43
    
0.50
    
0.69
    
0.60
    
0.90
  
 
 
   
Years Ended December 31,
  
   
2006
  
2005
  
2004
  
2003
  
2002
  
       
Selected Financial Ratios and Other Data:
                      
                       
Performance Ratios:
                      
Return on assets (ratio of net income to average total assets)
    
0.36
%
  
0.42
%
  
0.61
%
  
0.58
%
  
0.98
%
Return on equity (ratio of net income to average equity)
    
3.40
    
3.75
    
5.07
    
4.15
    
6.50
  
Interest rate spread information:
                                
Average during period
    
2.29
    
2.41
    
2.78
    
2.93
    
3.39
  
Net interest margin (1)
    
2.62
    
2.71
    
3.03
    
3.20
    
3.78
  
Ratio of operating expense to average total assets
    
2.43
    
2.35
    
2.39
    
2.62
    
.72
  
Efficiency ratio (2)
    
81.05
    
78.87
    
72.90
    
74.74
    
73.04
  
Ratio of average interest-earning assets to average interest-bearing liabilities
    
111.96
    
112.45
    
112.29
    
112.29
    
14.49
  
                                 
Asset Quality Ratios:
                                
Non-performing assets to total assets at end of period
    
0.20
    
0.15
    
0.36
    
0.49
    
0.49
  
Allowance for loan losses to non-performing loans
    
299.81
    
431.73
    
187.89
    
172.71
    
197.91
  
Allowance for loan losses to loans receivable, gross
    
1.16
    
1.11
    
1.12
    
1.24
    
1.51
  
                                 
Capital Ratios:
                                
Equity to total assets at end of period
    
10.79
    
10.95
    
11.27
    
13.47
    
15.12
  
Average equity to average assets
    
10.68
    
11.08
    
12.06
    
14.02
    
15.14
  
                                 
Other Data:
                                
Number of full-service offices
    
3
    
3
    
3
    
3
    
3
  
 
(1)
Net interest income divided by average interest earning assets.
(2)
Efficiency ratio represents noninterest expense as a percentage of net interest income plus noninterest income.

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

Forward Looking Statements

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

General

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

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

Highlights of our business strategy are as follows:

 
•
Continuing One-to-Four Family Residential Real Estate Lending. Historically, we have emphasized one-to-four family residential lending within our market area. As of December 31, 2006, $86.0 million, or 61.5%, of our total loan portfolio consisted of one- to four-family residential real estate loans. During the year ended December 31, 2006, we originated $11.1 million of one-to-four family residential real estate loans. We intend to continue to originate one-to-four family loans because of our expertise with this type of lending.
 
 
•
Commercial and Multi-Family Real Estate Lending. We intend to originate more commercial business and multi-family loans to complement our one- to four-family residential real estate lending. These loans will most likely encumber business real estate whenever possible, however, we may use non-real estate based liens when necessary. As of December 31, 2006 commercial real estate and multi-family loans represented $41.2 million or 29.5% of our loan portfolio. We continue to be committed to developing our commercial business and multi-family lending and our commercial business banking services. We believe that expanding our commercial and multi-family business lending will enable us to improve the yield on our loan portfolio and diversify our assets while continuing to meet the needs of our community.

 
•
Establishing Our Commercial Business Banking. We are committed to meeting the financial needs of the communities in which we operate. In particular, we have increased our emphasis on business banking, and we now offer commercial deposit products, such as transaction accounts, to our business customers. Our objective is to actively market our business banking products and services to our existing customers, as well as new businesses within our market area.
 
Comparison of Financial Condition at December 31, 2006 and December 31, 2005

 Total assets as of December 31, 2006 were $266.5 million, an increase of $8.6 million or 3.3% from $257.9 million at December 31, 2005. The increase was primarily due to an increase in cash and cash equivalents offset by decreases in certificates of deposit, securities, loans receivable, and Federal Home Loan Bank (FHLB) stock. Deposits at other financial institutions consisting of certificates of deposit decreased $3.1 million or 36.0% to $5.5 million at December 31, 2006 from $8.6 million at December 31, 2005. The decrease was due to the certificates maturing. Securities decreased $2.5 million
 
 
or 3.6% to $69.0 million at December 31, 2006 from $71.5 million at December 31, 2005. Loans receivable decreased $13.4 million or 8.8% to $138.4 million at December 31, 2006 from $151.8 million at December 31, 2005. Federal Home Loan Bank stock decreased $966,000 or 28.3% to $2.4 million at December 31, 2006 from $3.4 million at December 31, 2005. The Company continued to decrease its investment in Federal Home Loan Bank stock due to liquidity and dividend policy changes at the Federal Home Loan Bank. There was no gain or loss on the sale of the Federal Home Loan Bank stock. The change in our asset composition reflects management’s decision to have a more liquid asset mix during the current inverted interest rate environment.
 
Total deposits increased $11.8 million or 6.2% to $202.2 million at December 31, 2006 from $190.4 million at December 31, 2005. The increase was primarily in certificates of deposit, offset by a decrease in passbook savings accounts. Certificates of deposit increased to $129.3 million at December 31, 2006 from $112.9 million at December 31, 2005. Passbook savings accounts decreased $6.4 million to $40.5 million at December 31, 2006 compared to $46.9 million at December 31, 2005.

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

At December 31, 2006 our securities available for sale portfolio had gross unrealized losses of $1.4 million compared to gross unrealized losses of $1.8 million at December 31, 2005. Our available for sale mortgage-backed securities accounted for $1.0 million of the gross unrealized losses at December 31, 2006, while our available for sale U.S. governmental agency securities had $215,000 gross unrealized losses at December 31, 2006. Our mutual fund, which holds adjustable rate mortgage securities and mortgage-backed securities, had gross unrealized losses of $201,000 at December 31, 2006 compared to gross unrealized losses of $183,000 at December 31, 2005. We have reviewed and analyzed our available for sale portfolio to determine if any security within the portfolio may have suffered an other-than-temporary impairment. Staff Accounting Bulletin topic 5M provides guidance on making other-than-temporary impairment decisions, and requires an evidence-based evaluation when an investment declines below cost. It references the length of time that market value has been less than cost (duration of impairment) and the extent to which market value has been less than cost (severity of impairment). We concluded that the cause of the unrealized loss was interest-rate driven and does not reflect any impairment related to the financial condition and near-term prospects of the issuer that could effect the earnings potential of the investment. In addition, we also have the intent and ability to hold the securities through the expected recovery period. Therefore, we anticipate leveling or declining interest rates will result in the recovery of the available for sale securities market value.

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

Total stockholders’ equity increased $497,000 to $28.7 million at December 31, 2006 from $28.3 million at December 31, 2005. The increase in stockholders’ equity during the past twelve months primarily resulted from net income of $911,000, as well as an increase in other comprehensive income due to the increased market value of the available for sale securities portfolio. These increases were partially offset by the repurchase of shares of our stock during the twelve months ended December 31, 2006. Stock compensation and ESOP related transactions increased equity a net total of $90,000. In addition, during the year we declared and paid three quarterly dividends of $0.10 cents per share, and one quarterly dividend of $0.11 cents per share totaling $363,000. With the non-objection of the Office of
 
 
Thrift Supervision (“OTS”) AJS Bancorp, MHC (the “MHC”) waived 100% of the quarterly dividend due on its 1,227,544 shares. The Company has requested and received a non-objection letter from the OTS on the waiver of the quarterly dividend payments due on the MHC shares through the quarter ended September 30, 2007.
 
Comparison of Financial Condition at December 31, 2005 and December 31, 2004

Total assets decreased by $13.0 million, or 4.8%, to $257.9 million at December 31, 2005 from $270.9 million at December 31, 2004. The decrease was primarily due to decreases in loans receivable, Federal Home Loan Bank (FHLB) stock, federal funds sold, and earning deposits, offset by an increase in securities. Loans receivable decreased $11.5 million or 7.1% to $151.8 at December 31, 2005 from $163.3 million at December 31, 2004. FHLB stock decreased $9.1 million or 72.6% to $3.4 million at December 31, 2005 from $12.5 million at December 31, 2004. Federal funds sold decreased $2.8 million or 86.3% to $454,000 at December 31, 2005 from $3.3 million at December 31, 2004. Certificates of deposit held at other financial institutions decreased $1.2 million or 12.3% to $8.6 million at December 31, 2005, from $9.8 million at December 31, 2004. Securities increased $9.9 million or 16.1% to $71.5 million at December 31, 2005 from $61.6 million at December 31, 2004. The Company decreased its investment in FHLB stock due to uncertainty regarding the payment and level of the FHLB dividend. There was no gain or loss on the sale of the FHLB stock. The Company invests in federal funds sold in the event that there is no more profitable, highly liquid investment available or if the Company anticipates an increase in funding needs within the near future. Therefore, the balance in federal funds sold can and does fluctuate. Certificates of deposit held at other financial institutions decreased as maturities were not being reinvested. Securities increased due to purchases of fixed-rate government-backed notes and bonds, an additional investment in the adjustable-rate ARM fund, and mortgage-backed securities. The notes and bonds mature in three years or less, the ARM fund can be redeemed at any time and reprices on average every six months to a year, and the mortgage-backed securities are expected to mature in less than ten years, however prepayments may cause them to pay down at a faster pace. 

Total deposits decreased $7.6 million, or 3.9%, to $190.4 million at December 31, 2005 from $198.1 million at December 31, 2004. Transaction and savings accounts decreased to $77.5 million at December 31, 2005 from $85.0 million at December 31, 2004; certificate of deposit accounts decreased to $112.9 million at December 31, 2005 from $113.0 million at December 31, 2004.
 
Federal Home Loan Bank advances decreased to $32.8 million at December 31, 2005 from $36.3 million at December 31, 2004. The decrease in FHLB advances was due to maturing advances that were not renewed or replaced.

At December 31, 2005 the Company’s available for sale portfolio had gross unrealized losses of $1.8 million compared to gross unrealized losses of $232,000 at December 31, 2004. The Company’s available for sale mortgage-backed securities accounted for $1.2 million of the gross unrealized losses at December 31, 2005, while the Company’s available for sale U.S. governmental agency securities had $410,000 gross unrealized losses at December 31, 2005. The Company has reviewed and analyzed its available for sale portfolio to determine if any security within the portfolio may have suffered an other-than-temporary impairment. SAB topic 5M provides guidance on making other-than-temporary impairment decisions, and requires an evidence-based evaluation when an investment declines below cost. It references the length of time that market value has been less than cost (duration of impairment) and the extent to which market value has been less than cost (severity of impairment). We concluded that the cause of the unrealized loss was interest-rate driven and does not reflect any impairment related to the financial condition and near-term prospects of the issuer that could effect the earnings potential of the investment. In addition, the Company also has the intent and ability to hold the securities through the
 
 
expected recovery period. Therefore, the Company anticipates leveling or declining interest rates will result in the recovery of the available for sale securities market value.
 
At December 31, 2005 the Company had non-performing assets of $394,000 compared to $983,000 as of December 31, 2004. The allowance for loan losses was $1.7 million at December 31, 2005, and $1.8 million at December 31, 2004. This represents a ratio of allowance for loan losses to gross loans receivable of 1.11% at December 31, 2005 and 1.12% at December 31, 2004. The allowance for loan losses to non-performing loans was 431.7% at December 31, 2005 and 187.9% at December 31, 2004. Total stockholders’ equity decreased $2.3 million to $28.3 million at December 31, 2005 from $30.5 million at December 31, 2004. The decrease in stockholders’ equity during the past twelve months primarily resulted from the repurchase of shares of the Company’s stock, as well as a decrease in other comprehensive income due to the decreased market value of the available for sale securities portfolio. These decreases were offset by net income of $1.1 million for the twelve months ended December 31, 2005. In addition, the Company declared an initial quarterly dividend of $0.10 cents per share, payable on November 25, 2005, to stockholders of record on November 10, 2005. With the approval of the Office of Thrift Supervision AJS Bancorp, MHC waived 80% of the quarterly dividend due on its 1,227,554 shares.

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

General. Net income decreased $186,000, or 17.0%, to $911,000 for the year ended December 31, 2006, from $1.1 million for the year ended December 31, 2005. The decrease in net income resulted primarily from a decrease in net interest income. The 2005 to 2006 changes in provision, non-interest income, non-interest expense and income taxes were only a net $134,000. Non-interest expense decreased slightly during 2006 and non-interest income remained relatively stable.
 
Interest Income. Total interest income increased to $13.6 million for the twelve months ended December 31, 2006, up $641,000 or 5.0% from $12.9 million for the same period in 2005. The increase in our interest income is primarily due to a higher average yield earned on all categories of our interest-earning assets.

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

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

Interest income from interest-earning deposits increased $152,000, or 14.1%, to $1.2 million for the year ended December 31, 2006, from $1.1 million for the year ended December 31, 2005. The increase resulted from increases in the average balances and an increase in the interest rate earned on the deposits. Average balances increased to $26.2 million from $24.6 million, while the average yield increased to 4.7% from 4.4% for the comparable twelve-month periods. The increase in the average balance of interest earning deposits was caused primarily by an increase in money market account
 
 
balances at one financial institution, offset by a decrease in our of certificates of deposit balances held at other financial institutions and a decrease in our investment in FHLB stock. The average investment in the money market account was $14.5 million during the twelve months ended December 31, 2006 with an average yield of 5.2% for the period ended December 31, 2006 compared to a balance investment of $5.8 million with an average yield of 3.4% for the same period in 2005. Our certificates of deposit with other financial institutions had an average balance of $6.7 million with an average yield of 3.8% for the period ended December 31, 2006 compared to an average balance of $9.5 million with an average yield of 3.4% for the same period in 2005. The average balance of FHLB stock decreased to $3.0 million during the year ended December 31, 2006, while the average balance was $6.7 million during the year ended December 31, 2005. The average yield for the investment in FHLB stock was 3.3% for the twelve months ended December 31, 2006 while the average yield for the comparable period in 2005 was 6.8%.
 
Interest Expense. Interest expense on deposits increased by $1.1 million, or 24.5% to $5.7 million for the year ended December 31, 2006, from $4.6 million for 2005. The increase in our cost of deposits reflected the higher short term market interest rates, and certificates of deposit maturing and renewing at higher rates during 2006, as well as an increase in average deposit balances during the year. Average deposits increased to $194.0 million for the year ended December 31, 2006, from $193.4 million for 2005. Our average cost of deposits increased to 3.0% from 2.4% for the respective periods. Interest expense on borrowings decreased to $1.3 million for the twelve months ended December 31, 2006, from $1.4 million for the same period during 2005, which was due to a decrease in the average Federal Home Loan Bank borrowings.

Net interest income decreased by $353,000 or 5.1% to $6.6 million for the year ended December 31, 2006 from $6.9 million for the same period in 2005. Average interest earning assets were $250.7 million and $256.0 million during the comparative 2006 and 2005 twelve-month periods while the average yield was 5.42% and 5.06%, respectively. Our net interest rate spread decreased 12 basis points to 2.29% from 2.41% while our net interest margin decreased 9 basis points to 2.62% from 2.71%. The ratio of average interest-earning assets to average interest-bearing liabilities decreased to 111.96% for the year ended 2006 from 112.45% for the year ended December 31, 2005. The decrease in our net interest rate spread and net interest margin reflects the fact that during the year ended December 31, 2006 the cost of average interest-bearing liabilities increased at a faster pace than the yield earned on interest-earning assets.
 
Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. Based on our evaluation of these factors, we made a negative provision of $28,000 for the year ended December 31, 2006 and a negative $130,000 provision for the same period in 2005. The negative provision decreased due to concerns related to market risk that may be imbedded in the loan portfolio as real estate values stabilize or trend slightly downwards. Our balance of subprime loan balances continued to decrease to $5.2 million for the year ended December 31, 2006, from $7.8 million for the year ended December 31, 2005. We used the same methodology while updating credit risk assumptions in assessing the adequacy of the allowance. The allowance for loan losses was $1.6 million or 1.16% of loans outstanding at December 31, 2006 compared to $1.7 million, or 1.11%, of loans outstanding at December 31, 2005. The non-performing assets to total assets at December 31, 2006 was 0.20% as compared to 0.15% at December 31, 2005. The level of the allowance is based on estimates and the ultimate losses may vary from the estimates. 

 
Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the adequacy of the allowance. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of December 31, 2006 is maintained at a level that represents management’s best estimate of inherent losses in the loan portfolio, and such losses were both probable and reasonably estimable.

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

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

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

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

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

Comparison of Operating Results for the Years Ended December 31, 2005 and December 31, 2004

General. Net income decreased $483,000, or 30.6%, to $1.1 million for the year ended December 31, 2005, from $1.6 million for the year ended December 31, 2004. The decrease in net income resulted from a decrease in net interest income, while non-interest income and non-interest expense remained relatively stable.

Interest Income. Total interest income increased to $12.9 million for the twelve months ended December 31, 2005, up $211,000 or 1.7% from $12.7 million for the same period in 2004. The increase
 
 
in interest income resulted primarily from increases in the average balances outstanding for securities and interest-earning deposits offset by decreases in average balances in loans receivable and federal funds.
 
Interest income from loans decreased by $278,000 to $9.1 million for the year ended December 31, 2005, from $9.4 million for the year ended December 31, 2004. The decrease in interest income from loans was due to a decrease in average outstanding loan balances during the year. Average loan balances were $156.8 million during the year ended December 31, 2005 compared to average loan balances of $163.5 million during the year ended December 31, 2004. The average yield on loans remained stable at 5.8% during 2005 and 2004. We expect the average yield on loans to remain stable or trend slightly higher during 2006.

Interest income from securities increased by $456,000 to $2.7 million for the year ended December 31, 2005 compared to $2.2 million for the year ended December 31, 2004. The increase was due to higher average outstanding securities balances during the year. Average securities balances were $72.3 million during the year ended December 31, 2005 compared to average securities balances of $56.8 million during the year ended December 31, 2004. Our average yield was 3.7% during the year ended December 31, 2005, compared to an average yield of 3.9% for 2004.

Interest income from interest-earning deposits increased $38,000, or 3.7%, to $1.1 million for the year ended December 31, 2005, from $1.0 million for the year ended December 31, 2004. The increase resulted from an increase in the average outstanding balance to $24.6 million from $23.5 million, while the average yield remained stable at 4.4% for the comparable twelve-month periods. The increase in the average balance of interest earning deposits is caused primarily by investments in certificates of deposit and money market accounts at other financial institutions, offset by a decrease in the investment in FHLB stock. The certificates of deposit portfolio had an average yield of 3.4% for the period ended December 31, 2005 compared to an average yield of 3.1% for the same period in 2004. The money market account had an average yield of 3.4% for the period ended December 31, 2005 compared to an average yield of 2.0% for the same period in 2004. The average investment in FHLB stock decreased to $6.7 million during the year ended December 31, 2005, while the average investment was $13.6 million during the year ended December 31, 2004. The average yield for the investment in FHLB stock was 6.8% for the twelve months ended December 31, 2005 while the average yield for the comparable period in 2004 was 6.2%. The Company decreased its investment in FHLB stock due to uncertainty regarding the payment and level of the FHLB dividend. On October 18, 2005 the Federal Home Loan Bank of Chicago announced a policy to discontinue excess capital stock redemptions or “voluntary” stock redemptions. Voluntary stock is stock held by members beyond the amount required as a condition of membership or to support advance borrowings. The most recent fourth quarter Federal Home Loan Bank of Chicago dividend announced on January 18, 2006 was at an annualized rate of 3.00%.

Interest Expense. Interest expense on deposits increased by $560,000, or 13.8% to $4.6 million for the year ended December 31, 2005, from $4.0 million for 2004. The increase in our cost of deposits was due to the increase in short term market interest rates and certificates of deposit maturing and renewing at higher rates during 2005. Average deposits decreased to $193.4 million for the year ended December 31, 2005, from $194.8 million for 2004. Our average cost of deposits increased to 2.4% from 2.1% for the respective periods. Interest expense on borrowings increased to $1.4 million for the twelve months ended December 31, 2005, from $1.1 million for the same period during 2004. This was due to an increase in the average Federal Home Loan Bank borrowings.

Net Interest Income. Net interest income decreased by $634,000 or 8.4% to $6.9 million for the twelve months ended December 31, 2005, from $7.6 million for the same period in 2004. Our net interest rate spread decreased 37 basis points to 2.41% from 2.78%, while our net interest margin decreased 32 basis points to 2.71% from 3.03%. The ratio of average interest-earning assets to average interest-bearing
 
 
liabilities increased to 112.45% for the year ended December 31, 2005 compared to 112.29% for the same period in 2004.
 
Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations, at a level management believes is appropriate to absorb probable incurred credit losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as future events change. Based on our evaluation of these factors, we made a negative provision of $130,000 for the year ended December 31, 2005 and a negative $112,000 provision for the same period in 2004. The provision decreased due to an overall improvement in the quality of our assets as our subprime loan balances continued to decrease to $7.8 million at December 31, 2005, from $12.5 million at December 31, 2004. We used the same methodology and generally similar assumptions in assessing the adequacy of the allowance for both periods. The allowance for loan losses was $1.7 million, or 1.11%, of loans outstanding at December 31, 2005, as compared with $1.8 million, or 1.12%, of loans outstanding at December 31, 2004. The non-performing assets to total assets at December 31, 2005 was 0.15% as compared to 0.36% at December 31, 2004. The level of the allowance is based on estimates and the ultimate losses may vary from the estimates.

Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses as necessary in order to maintain the adequacy of the allowance. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to recognize additional provisions based on their judgment of information available to them at the time of their examination. The allowance for loan losses as of December 31, 2005 is maintained at a level that represents management’s best estimate of inherent losses in the loan portfolio, and such losses were both probable and reasonably estimable.

Non-interest Income. Non-interest income remained relatively stable at $936,000 for the year ended December 31, 2005, compared to $933,000 for the comparable period in 2004. The $3,000 increase was the result of increases in service fees and other non-interest income items. The other non-interest items included primarily rental income, gain on the sale of loans, and gain on the sale of fixed assets. A decrease in insurance commissions and other non-interest income items, primarily correspondent fees, offset these increases.

Service fees increased due to increases in collection of NOW account fees and debit card fees. NOW account service fees did not individually increase, however, the Company did not waive service fees due as regularly as was done during 2004. The increase in debit card revenues is due to the Company’s customer base becoming more familiar with and using the debit cards more often since their inception in September of 2003.

Rental income increased due to the leasing during the twelve-months ended December 31, 2005 of a previously vacant unit in one of the branch offices. Gain on the sale of loans increased $27,000 during the twelve-month period ended December 31, 2005 due to the Company’s sale of fixed-rate mortgage loans. The loans were sold servicing-retained and we intend to continue to sell fixed-rate mortgage loans in the future. There were no loan sales during 2004. The gain on the sale of fixed assets occurred due to the sale of a Company-owned automobile. The Company recognized a $13,000 gain on the sale.

 
Insurance commission income fell $37,000 due to lower sales of annuity products during the twelve-month period ended December 31, 2005, when compared to the same period in 2004. Correspondent fees declined $11,000 for the twelve-month period ended 2005 when compared to the same period ended 2004. The decrease was due to fewer loans being originated with the intention to have them funded through our correspondent sources during 2005 then were originated as correspondent loans in 2004. Correspondent loans are typically loans that do not qualify under the Company’s underwriting guidelines and, as such, the Company does not make an underwriting decision on them.

Non-interest Expense. Non-interest expense remained constant at $6.2 million for the year ended December 31, 2005 and 2004. Occupancy costs increased $116,000, advertising and promotion costs increased $32,000, and data processing cost increased $14,000. These increases were offset by a decrease in salaries and employee benefits of $140,000, and a decrease in other non-interest expense items of $13,000.

Occupancy costs increased during the year ended December 31, 2005 primarily due to increased real estate tax expense when compared with the previous year. Real estate tax assessments were higher than the Company originally estimated.

Advertising costs increased during 2005 as we continued to promote our newer branch facility in Orland Park, as well as several promotion specials that took place during the year ended December 31, 2005.
 
Salaries and employee benefits decreased primarily due to a reduction in the number of full time equivalent employees to 64 at December 31, 2005 from 66 at December 31, 2004. In addition, the recognition and retention plan (“RRP”) expense decreased $44,000 during the twelve-months ended 2005 when compared to the same period in 2004.

During 2004, FASB Statement 123R, Accounting for Stock-Based Compensation, was approved. This statement will require the expensing of stock options beginning January 1, 2006. The future adoption of this standard is not expected to materially affect the Company's operating results.

Provision for Income Taxes. The provision for income taxes decreased to $694,000, or 38.7%, of income before income taxes for the year ended December 31, 2005 from $833,000 or 34.5% of income before taxes for the year ended December 31, 2004. The decrease was primarily due to a decrease in pretax earnings. The taxes due as a percentage of pretax earnings increased due to the Company increasing its tax accrual based on revisions to certain estimated deferred and permanent tax items from what had been previously estimated.


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, 2006. 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,
  
   
2006
  
2005
  
2004
  
   
Average
  
Interest
      
Average
  
Interest
      
Average
  
Interest
      
   
Outstanding
  
Earned/
      
Outstanding
  
Earned/
      
Outstanding
  
Earned/
      
   
Balance
  
Paid
  
Yield/Rate
  
Balance
  
Paid
  
Yield/Rate
  
Balance
  
Paid
  
Yield/Rate
  
   
(Dollars in thousands)
  
Interest-earning assets:
                                      
Loans receivable
  
$
149,394
  
$
9,250
    
6.19
%
$
156,832
  
$
9,127
    
5.82
%
$
163,468
  
$
9,405
    
5.75
%
Securities
    
70,338
    
2,874
    
4.09
    
72,301
    
2,682
    
3.71
    
56,801
    
2,226
    
3.92
  
Interest-earning deposits and other
    
26,156
    
1,227
    
4.69
    
24,613
    
1,075
    
4.36
    
23,506
    
1,037
    
4.41
  
Federal funds
    
4,859
    
238
    
4.90
    
2,230
    
64
    
3.00
    
5,702
    
69
    
1.21
  
Total interest-earning assets
  
$
250,747
    
13,589
    
5.42
  
$
255,976
    
12,948
    
5.06
  
$
249,477
    
12,737
    
5.11
  
                                                         
Interest-bearing liabilities:
                                                        
Passbook savings
  
$
42,686
    
468
    
1.10
  
$
48,713
    
487
    
1.00
  
$
51,421
    
407
    
0.79
  
NOW accounts
    
22,005
    
69
    
0.31
    
22,958
    
77
    
0.34
    
23,946
    
58
    
0.24
  
Money market accounts
    
8,717
    
246
    
2.82
    
8,347
    
170
    
2.04
    
9,238
    
80
    
0.87
  
Time deposits
    
120,588
    
4,953
    
4.11
    
113,424
    
3,872
    
3.41
    
110,200
    
3,501
    
3.18
  
Total deposits
    
193,996
    
5,736
    
2.96
    
193,442
    
4,606
    
2.38
    
194,805
    
4,046
    
2.08
  
FHLB advances
    
29,963
    
1,281
    
4.28
    
34,184
    
1,416
    
4.14
    
27,358
    
1,132
    
4.14
  
Total interest-bearing liabilities
  
$
223,959
    
7,017
    
3.13
  
$
227,626
    
6,023
    
2.65
  
$
222,163
    
5,178
    
2.33
  
                                                         
Net interest income
        
$
6,572
              
$
6,925
              
$
7,559
        
Net interest rate spread
                
2.29
%
              
2.41
%
              
2.78
%
Net earning assets
  
$
26,788
              
$
28,350
              
$
27,314
              
Net yield on average interest- earning assets
                
2.62
%
              
2.71
%
              
3.03
%
Average interest-earning assets to average interest-bearing liabilities
                
111.96
%
              
112.45
%
              
112.29
%
 

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,
  
   
2006 vs. 2005
  
2005 vs. 2004
  
   
Increase/(Decrease)
  
Total
  
Increase/(Decrease)
  
Total
  
   
Due to
  
Increase
  
Due to
  
Increase
  
   
Volume
  
Rate
  
(Decrease)
  
Volume
  
Rate
  
(Decrease)
  
   
(In thousands)
  
Interest-earning assets
                          
Loans receivable
  
$
(445
)
$
568
  
$
123
  
$
(385
)
$
107
  
$
(278
)
Securities
    
(74
)
  
266
    
192
    
580
    
(124
)
  
456
  
Interest-earning deposits and other
    
70
    
83
    
153
    
48
    
(12
)
  
36
  
Federal funds
    
109
    
65
    
174
    
(60
)
  
58
    
(2
)
Total interest-earning assets
  
$
(340
)
$
986
  
$
642
  
$
183
  
$
29
  
$
212
  
                                       
Interest-bearing liabilities
                                      
Transaction and savings deposits
    
(59
)
  
108
    
49
    
(32
)
  
221
    
189
  
Certificate accounts
    
245
    
836
    
1,081
    
102
    
269
    
371
  
Borrowings
    
(175
)
  
40
    
(135
)
  
282
    
2
    
284
  
Total interest-bearing liabilities
  
$
11
  
$
984
  
$
995
  
$
352
  
$
492
  
$
844
  
                                       
Net interest income
  
$
(351
)
$
(2
)
$
(353
)
$
(169
)
$
(463
)
$
(634
)

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

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


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

The table below sets forth, as of December 31, 2006 (the latest date for which information is available), the estimated changes in our net portfolio value that would result from the designated instantaneous changes in the United States Treasury yield curve.
 
               
Net Portfolio Value as
  
               
a % of Present Value of
  
   
Net Portfolio Value
  
Assets/Liabilities
  
Change in
                      
Interest Rates
  
Estimated
  
Amount of
              
(Basis Points)
  
NPV
  
Change
  
Percent
  
NPV Ratio
  
Change(1)
  
   
  (Dollars in thousands)
  
                       
+300
  
$
27,958
  
$
(8,610
)
  
(24
)%
  
10.69
%
  
(263
)
+200
    
30,930
    
(5,638
)
  
(15
)
  
11.63
    
(169
)
+100
    
33,841
    
(2,727
)
  
(7
)
  
12.52
    
(80
)
0
    
36,568
    
-
    
-
    
13.32
      -  
-100
    
38,678
    
2,110
    
6
    
13.90
    
58
  
-200
    
39,754
    
3,186
    
9
    
14.15
    
84
  
(1)  Expressed in basis points.

The table above indicates that at December 31, 2006, in the event of a 200 basis point decrease in interest rates, we would experience a 9% increase in net portfolio value. In the event of a 200 basis point increase in interest rates, we would experience a 15% 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.
 

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

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

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

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

There are many factors affecting the allowance for loan losses; some are quantitative while others require qualitative judgment. Although management believes its process for determining the allowance adequately considers all of the potential factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for credit losses could be required that could adversely affect earnings or financial position in future periods.


Liquidity and Capital Resources

We maintain liquid assets at levels we consider adequate to meet our liquidity needs. Our liquidity ratio averaged 22.1% and 19.1% for the years ended December 31, 2006 and 2005. 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 $1.6 million at December 31, 2006 and $2.1 million at December 31, 2005. For additional information about cash flows from our operating, financing, and investing activities, see Consolidated Statements of Cash Flows included in the consolidated financial statements.

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

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Chicago which provide an additional source of funds. At December 31, 2006, we had $28.8 million in advances from the Federal Home Loan Bank of Chicago. Of this amount, $5.4 million is due within one year, $17.8 million is due between one and three years, $4.6 million is due between four and five years and $1.0 million is due after five years.

At December 31, 2006, we had outstanding commitments of $5.0 million to originate loans. This amount does not include the unfunded portion of loans in process. At December 31, 2006, certificates of deposit scheduled to mature in less than one year totaled $100.7 million. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In addition, the cost of such deposits may be significantly higher upon renewal in a rising interest rate environment. We intend to utilize our high levels of liquidity to fund our lending activities.
 
Liquidity. We are required to maintain liquid assets in an amount that would ensure our safe and sound operation. Our liquidity ratio at December 31, 2006 was 27.1%.


The following table sets forth our contractual obligations and commercial commitments at December 31, 2006.
 
   
 
Total
  
Less than
1 year
  
 
1-3 Years
  
 
4-5 years
  
After 5 Years
  
   
(In thousands)
  
                       
FHLB advances
  
$
28,750
  
$
5,400
  
$
17,800
  
$
4,550
  
$
1,000
  
Time deposits
    
129,279
    
100,719
    
19,839
    
8,721
    
-
  

   
Total Amounts Committed
  
Less than
1 year
  
 
1-3 Years
  
 
4-5 years
  
Over 5 Years
  
   
(In thousands)
  
                       
Lines of credit
  
$
15,580
  
$
1,980
  
$
7,012
  
$
6,339
  
$
249
  
Standby letters of credit (1)
    
150
    
60
    
90
    
-
    
-
  
Other commitments to extend credit (1)
    
4,953
    
4,953
    
-
    
-
    
-
  
Total
  
$
20,683
  
$
6,993
  
$
7,102
  
$
6,339
  
$
249
  
___________________
(1)
Represents amounts committed to customers. 

Impact of Inflation and Changing Prices

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

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See ITEM 7 “Management’s Discussion and Analysis of Financial Consolidation and Results of Operations—Management of Market Risk.” 

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

ITEM 9A.    CONTROLS AND PROCEDURES 

(a)   Evaluation of disclosure controls and procedures.

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

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

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

ITEM 9B.    OTHER INFORMATION

None.

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

ITEM 11.     EXECUTIVE COMPENSATION
 
Information concerning executive compensation is incorporated herein by reference from the Company’s Proxy Statement, specifically the section captioned “Executive Compensation.”

ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 14.     PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

PART IV

ITEM 15.     EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

(a)(1)  Financial Statements

 
•
Report of Independent Registered Public Accounting Firm
 
•
Consolidated Statements of Financial Condition at December 31, 2006 and 2005
 
•
Consolidated Statements of Income for the Years Ended
   
December 31, 2006, 2005 and 2004
 
•
Consolidated Statements of Stockholders’ Equity for the
   
Years Ended December 31, 2006, 2005 and 2004
 
•
Consolidated Statements of Cash Flows for the
   
Years Ended December 31, 2006, 2005 and 2004
 
•
Notes to Consolidated Financial Statements.

(a)(2)  Financial Statement Schedules

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

(a)(3)  Exhibits

 
10.1
Employment Agreement with Thomas R. Butkus(1)
 
10.2
Employment Agreement with Lyn G. Rupich(2)
 
10.3
AJS Bancorp, Inc. 2003 Stock Option Plan(3)
 
10.4
AJS Bancorp, Inc. 2003 Recognition and Retention Plan(3)
 
10.5
Amendments to 2003 Stock Option Plan(4)
 
13
Financial Statements
 
14
Code of Ethics(1)
21
Subsidiaries of the Registrant
 
23
Consent of Auditors to incorporate financial statements into Form S-8
 
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
31.2
Certification of President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
31.3
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
(b)
The exhibits listed under (a)(3) above are filed herewith.
 
(c)
Not applicable.
___________________
 
(1)
Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
 
(2)
Incorporated by reference to the Company’s Current Report on Form 8-K filed on October 25, 2005.
 
(3)
Incorporated by reference to the Company’s registration statement on Form S-8 (commission file number 333-105598, filed on May 28, 2003).
 
(4)
Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.


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 22, 2007
By:
/s/ Thomas R. Butkus
   
Thomas R. Butkus,
   
Chairman of the Board and
   
Chief Executive Officer

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

 
By:
/s/ Thomas R. Butkus
  
By:
/s/ Lyn G. Rupich
 
Thomas R. Butkus, Chairman of the Board
    
Lyn G. Rupich, President
 
and Chief Executive Officer
    
(Principal Executive Officer)
         
         
Date:
March 22, 2007
  
Date:
March 22, 2007
         
         
By:
/s/ Pamela N. Favero
  
By:
/s/ Roger L. Aurelio
 
Pamela N. Favero, Chief Financial Officer
    
Roger L. Aurelio, Director
         
Date:
March 22, 2007
  
Date:
March 22, 2007
         
         
By:
/s/ Raymond J. Blake
  
By:
/s/ Richard J. Nogal
 
Raymond J. Blake, Director
    
Richard J. Nogal, Director
         
Date:
March 22, 2007
  
Date:
March 22, 2007
         
         
By:
/s/ Edward S. Milen
      
 
Edward S. Milen, Director
      
         
Date:
March 22, 2007
      
 
 
54
 EX-13 2 ex13.htm EX-13 EX-13

EXHIBIT 13
 

FINANCIAL STATEMENTS
 
 

AJS BANCORP, INC.
Midlothian, Illinois

CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005


CONTENTS


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
F-2
   
CONSOLIDATED FINANCIAL STATEMENTS
  
   
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
F-3
   
CONSOLIDATED STATEMENTS OF INCOME
F-4
   
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
F-5
   
CONSOLIDATED STATEMENTS OF CASH FLOWS
F-7
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-9


All schedules are omitted as the required information either is not applicable or is included in the consolidated financial statements or related notes.

 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors
AJS Bancorp, Inc.
Midlothian, Illinois


We have audited the accompanying consolidated statements of financial condition of AJS Bancorp, Inc. as of December 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AJS Bancorp, Inc. as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

 
 
 /s/ Crowe Chizek and Company LLC
   
 
 Crowe Chizek and Company LLC
   
   
Oak Brook, Illinois
March 7, 2007
 
F-2

AJS BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 2006 and 2005
(Dollars in thousands)

   
2006
  
2005
  
ASSETS
          
Cash and cash equivalents
          
Cash and due from banks (interest-earning: 2006 - $32,571; 2005 - $11,477)
  
$
36,617
  
$
14,776
  
Federal funds sold
    
7,231
    
454
  
Total cash and cash equivalents
    
43,848
    
15,230
  
               
Certificates of deposit
    
5,490
    
8,584
  
Securities available for sale
    
68,774
    
71,239
  
Securities held to maturity (fair value: 2006 - $204; 2005 - $295)
    
204
    
295
  
Loans, net of allowance of $1,619 - 2006 and $1,701 - 2005
    
138,377
    
151,768
  
Federal Home Loan Bank stock
    
2,450
    
3,416
  
Premises and equipment
    
4,342
    
4,541
  
Accrued interest receivable
    
1,021
    
960
  
Other assets
    
2,007
    
1,872
  
               
Total assets
  
$
266,513
  
$
257,905
  
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
              
Liabilities
              
Deposits
  
$
202,176
  
$
190,407
  
Federal Home Loan Bank advances
    
28,750
    
32,750
  
Advance payments by borrowers for taxes and insurance
    
1,655
    
1,746
  
Other liabilities and accrued interest payable
    
5,183
    
4,750
  
Total liabilities
    
237,764
    
229,653
  
 
              
Commitments and contingent liabilities (note 14)
              
               
Stockholders’ equity
              
Preferred stock, $.01 par value, 20,000,000 shares authorized; none issued
    
-
    
-
  
Common stock, $.01 par value, 50,000,000 shares authorized; 2,444,521 shares issued
    
24
    
24
  
Additional paid-in capital
    
10,428
    
10,839
  
Treasury stock, at cost (2006 - 310,217 shares; 2005 - 296,714 shares)
    
(7,256
)
  
(6,931
)
Unearned RRP shares
    
-
    
(486
)
Retained earnings
    
26,368
    
25,820
  
Accumulated other comprehensive loss
    
(815
)
  
(1,014
)
Total stockholders’ equity
    
28,749
    
28,252
  
               
Total liabilities and stockholders’ equity
  
$
266,513
  
$
257,905
  
 
 
See accompanying notes to consolidated financial statements.

F-3

AJS BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2006, 2005, and 2004
(Dollars in thousands, except per share data)
 
   
2006
  
2005
  
2004
  
Interest and dividend income
              
Loans
  
$
9,250
  
$
9,127
  
$
9,405
  
Securities
    
2,874
    
2,682
    
2,226
  
Interest-earning deposits and other
    
1,227
    
1,075
    
1,037
  
Federal funds sold
    
238
    
64
    
69
  
Total interest income
    
13,589
    
12,948
    
12,737
  
                     
Interest expense
                    
Deposits
    
5,736
    
4,606
    
4,046
  
Federal Home Loan Bank advances and other
    
1,281
    
1,417
    
1,132
  
Total interest expense
    
7,017
    
6,023
    
5,178
  
                     
Net interest income
    
6,572
    
6,925
    
7,559
  
                     
Provision for loan losses
    
(28
)
  
(130
)
  
(112
)
                     
Net interest income after provision for loan losses
    
6,600
    
7,055
    
7,671
  
                     
Noninterest income
                    
Service fees
    
509
    
514
    
502
  
Gain on sale of other real estate
    
2
    
6
    
2
  
Insurance commissions
    
188
    
195
    
232
  
Gain on sale of loans
    
54
    
27
    
-
  
Rental income
    
139
    
124
    
109
  
Correspondent fees
    
4
    
15
    
26
  
Other
    
43
    
55
    
62
  
Total noninterest income
    
939
    
936
    
933
  
                     
Noninterest expense
                    
Compensation and employee benefits
    
3,460
    
3,481
    
3,621
  
Occupancy expense
    
850
    
897
    
781
  
Data processing expense
    
368
    
392
    
378
  
Advertising and promotion
    
322
    
404
    
372
  
Professional
    
217
    
224
    
147
  
Postage and supplies
    
203
    
163
    
175
  
Bank security
    
130
    
130
    
124
  
Other
    
538
    
509
    
593
  
Total noninterest expense
    
6,088
    
6,200
    
6,191
  
                     
Income before income taxes
    
1,451
    
1,791
    
2,413
  
                     
Income taxes
    
540
    
694
    
833
  
                     
Net income
  
$
911
  
$
1,097
  
$
1,580
  
                     
Earnings per share
                   
Basic
 
$
.43
  
$
.51
  
$
.70
  
Diluted
    
.43
    
.50
    
.69
  
 
 
See accompanying notes to consolidated financial statements.

F-4

AJS BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years ended December 31, 2006, 2005, and 2004
(Dollars in thousands, except per share data)

                           
Accumulated
      
           
Additional
  
Unearned
  
Unearned
      
Other
      
   
Common
  
Paid-In
  
Treasury
  
Stock
  
ESOP
  
Retained
  
Comprehensive
      
   
Stock
  
Capital
  
Stock
  
Awards
  
Shares
  
Earnings
  
Income (Loss)
  
Total
  
                                   
Balance at January 1, 2004
  
$
24
    
$
10,972
    
$
(1,075
)  
$
(924
)  
$
(377
)  
$
23,257
    
$
228
    
$
32,105
  
Purchase of 125,864 shares of treasury stock
   
-
    
-
    
(3,000
)
  
-
    
-
    
-
    
-
    
(3,000
)
ESOP shares earned
    
-
    
272
    
-
    
-
    
188
    
-
    
-
    
460
  
Reclassification due to changes in fair value of common stock in ESOP subject to contingent repurchase obligation
   
-
    
(438
)
  
-
    
-
    
-
    
-
    
-
    
(438
)
Stock awards earned
    
-
    
24
    
-
    
242
    
-
    
-
    
-
    
266
  
Comprehensive income
                                                  
Net income
    
-
    
-
    
-
    
-
    
-
    
1,580
    
-
    
1,580
  
Change in unrealized gain (loss) on securities available for sale, net of taxes
    
-
    
-
    
-
    
-
    
-
    
-
    
(443
)
  
(443
)
Total comprehensive income
                                             1,137  
                                                   
Balance at December 31, 2004
    
24
    
10,830
    
(4,075
)
  
(682
)
  
(189
)
  
24,837
    
(215
)
  
30,530
  
Purchase of 124,950 shares of treasury stock
   
-
    
-
    
(2,976
)
  
-
    
-
    
-
    
-
    
(2,976
)
Allocation of stock awards
    
-
    
2
    
-
    
(2
)
  
-
    
-
    
-
    
-
  
ESOP shares earned
    
-
    
258
    
-
    
-
    
189
    
-
    
-
    
447
  
Reclassification due to changes in fair value of common stock in ESOP subject to contingent repurchase obligation
    
-
    
(298
)
  
-
    
-
    
-
    
-
    
-
    
(298
)
Stock awards earned
    
-
    
55
    
-
    
198
    
-
    
-
    
-
    
253
  
Stock options exercised
    
-
    
(8
)
  
120
    
-
    
-
    
-
    
-
    
112
  
Cash dividend ($0.10 per share)
    
-
    
-
    
-
    
-
    
-
    
(114
)
  
-
    
(114
)
Comprehensive income
                                                  
Net income
    
-
    
-
    
-
    
-
    
-
    
1,097
    
-
    
1,097
  
Change in unrealized gain (loss) on securities available for sale, net of taxes
    
-
    
-
    
-
    
-
    
-
    
-
    
(799
)
  
(799
)
Total comprehensive income
                                             298  
 

(Continued)

F-5
 
AJS BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Years ended December 31, 2006, 2005, and 2004
(Dollars in thousands, except per share data)
 
                           
Accumulated
      
       
Additional
      
Unearned
  
Unearned
      
Other
      
   
Common
  
Paid-In
  
Treasury
  
Stock
  
ESOP
  
Retained
  
Comprehensive
      
   
Stock
  
Capital
  
Stock
  
Awards
  
Shares
  
Earnings
  
Income (Loss)
  
Total
  
                                   
Balance at December 31, 2005
    
24
      
10,839
      
(6,931
)  
 
(486
)  
 
-
      
25,820
      
(1,014
)  
 
28,252
  
Transfer to additional paid-in capital
    
-
    
(486
)
  
-
   
486
    
-
    
-
    
-
    
-
  
Purchase of 14,503 shares treasury stock
    
-
    
-
    
(340
)
  
-
    
-
    
-
    
-
    
(340
)
Allocation of stock awards
    
-
    
(11
)
  
11
    
-
    
-
    
-
    
-
    
-
  
Reclassification due to changes in fair value of common stock in ESOP subject to contingent repurchase obligation
    
-
    
(199
)
  
-
    
-
    
-
    
-
    
-
    
(199
)
Stock awards earned
    
-
    
229
    
(28
)
  
-
    
-
    
-
    
-
    
201
  
Stock options exercised
    
-
    
(2
)
  
32
    
-
    
-
    
-
    
-
    
30
  
Stock option compensation expense
    
-
    
58
    
-
    
-
    
-
    
-
    
-
    
58
  
Cash dividend ($0.41 per share)
    
-
    
-
    
-
    
-
    
-
    
(363
)
  
-
    
(363
)
Comprehensive income
                                                  
Net income
    
-
    
-
    
-
    
-
    
-
    
911
    
-
    
911
  
Change in unrealized gain on securities available for sale, net of taxes
    
-
    
-
    
-
    
-
    
-
    
-
    
199
    
199
  
Total comprehensive income
                                             1,110  
                                                   
Balance at December 31, 2006
  
$
24
  
$
10,428
  
$
(7,256
)
$
-
  
$
-
  
$
26,368
  
$
(815
)
$
28,749
  
 

See accompanying notes to consolidated financial statements.

F-6

AJS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2006, 2005, and 2004
(Dollars in thousands)
 
   
2006
  
2005
  
2004
  
Cash flows from operating activities
              
Net income
  
$
911
  
$
1,097
  
$
1,580
  
Adjustments to reconcile net income to net cash provided by operating activities
                    
Depreciation
    
267
    
298
    
310
  
Provision for loan losses
    
(28
)
  
(130
)
  
(112
)
Deferred income taxes
    
(62
)
  
(403
)
  
298
  
Premium amortization on securities, net
    
113
    
83
    
89
  
Stock award compensation expense
    
201
    
253
    
266
  
ESOP compensation expense
    
-
    
447
    
460
  
Stock option compensation expense
    
58
    
-
    
-
  
Federal Home Loan Bank stock dividends
    
-
    
(457
)
  
(847
)
Dividend reinvestments on securities available for sale
    
(447
)
  
(288
)
  
(124
)
Gain on sale of loans
    
(54
)
  
(27
)
  
-
  
Changes in
                    
Accrued interest receivable
    
(61
)
  
9
    
(2
)
Other assets
    
114
    
(609
)
  
394
  
Accrued interest payable
    
253
    
5
    
59
  
Other liabilities
    
(334
)
  
817
    
(586
)
Net cash (used in) provided by   operating activities
    
931
    
1,095
    
1,785
  
                     
Cash flows from investing activities
                    
Securities available for sale
                    
Purchases
    
(16,695
)
  
(23,484
)
  
(35,706
)
Maturities and principal payments
    
19,821
    
12,627
    
16,009
 
Securities held to maturity
                    
Purchases
    
-
    
(200
)
  
-
  
Maturities and principal payments
    
91
    
37
    
45
  
Purchase of certificates of deposit
    
-
    
(1,195
)
  
(9,783
)
Maturities of certificates of deposit
    
3,094
    
2,394
    
-
  
Loan originations, net
    
10,109
    
9,676
    
(7,549
)
Proceeds from loan sales
    
3,364
    
2,004
    
-
  
Proceeds from sale of other real estate
    
-
    
-
    
21
  
Purchase of equipment
    
(68
)
  
(79
)
  
(195
)
Proceeds from the sale of Federal Home Loan Bank stock
    
966
    
9,500
    
2,000
  
Net cash provided by (used in) investing activities
    
20,682
    
11,280
    
(35,158
)
 

(Continued)
 
F-7

AJS BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2006, 2005, and 2004
(Dollars in thousands)
 
   
2006
  
2005
  
2004
  
Cash flows from financing activities
              
Dividends paid
  
$
(363
)
$
(114
)
$
-
  
Net change in deposits
    
11,769
    
(7,649
)
  
14,209
  
Purchases of Federal Home Loan Bank advances
    
-
    
1,000
    
23,450
  
Maturities of Federal Home Loan Bank advances
    
(4,000
)
  
(4,500
)
  
(4,200
)
Purchase of common stock
    
(340
)
  
(2,976
)
  
(3,000
)
Proceeds from exercise of stock options
    
30
    
112
    
-
  
Net change in advance payments by borrowers for taxes and insurance
    
(91
)
  
(49
)
  
144
  
Net cash provided by (used in) financing activities
    
7,005
    
(14,176
)
  
30,603
  
                     
Net change in cash and cash equivalents
    
28,618
    
(1,801
)
  
(2,770
)
                     
Cash and cash equivalents at beginning of year
    
15,230
    
17,031
    
19,801
  
                     
Cash and cash equivalents at end of year 
  
$
43,848
  
$
15,230
  
$
17,031
  
                     
Supplemental disclosures of cash flow information
                    
Cash paid during the year for
                    
Interest
  
$
6,764
  
$
6,018
  
$
5,119
  
Income taxes
    
688
    
1,069
    
616
  
 

See accompanying notes to consolidated financial statements.

F-8

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include the accounts of AJS Bancorp, Inc. (“the Company”) and its wholly owned subsidiary, A. J. Smith Federal Savings Bank (“the Bank”). All significant intercompany balances and transactions have been eliminated. The Company is 57.5% owned by a mutual holding company, AJS Bancorp, MHC. These consolidated financial statements do not include AJS Bancorp, MHC and its results or financial condition.

Nature of Operations: The only business of the Company is ownership of the Bank. The Bank is a federally chartered savings bank with operations located in Midlothian and Orland Park, Illinois. The Bank provides single-family residential and home equity loans and commercial loans to customers and accepts deposits from customers located in the southern suburbs of Chicago, Illinois. Substantially all of the loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flows from operations of businesses. There are no significant concentrations of loans to any one industry or customer. However, the ability of the customers to repay their loans is dependent on the real estate and general economic conditions in the area.

Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements, and the disclosures provided and future results could differ. The allowance for loan losses and fair values of financial instruments are particularly subject to change.

Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions with original maturities of less than 90 days, and federal funds sold. Net cash flows are reported for loan and deposit transactions.

Securities: Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities are classified as available for sale when they might be sold before maturity. Equity securities with readily determinable fair values are classified as available for sale. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. Other securities such as Federal Home Loan Bank stock are carried at cost.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage backed securities where prepayments are anticipated. Gains

(Continued)

F-9

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

and losses on sales are based on the amortized cost of the security sold. Securities are written down to fair value when a decline in fair value is not temporary.

Declines in the fair value of securities below their cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers: the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, and the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the cost allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold. At December 31, 2006 and December 31, 2005, there were no loans held for sale.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses.

Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the contractual loan term. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. Interest income on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Consumer and credit card loans are typically charged off no later than 120 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience; known and inherent losses in the nature and volume of the portfolio that are both probable and estimable; information about specific borrower situations; and estimated

(Continued)

F-10

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Loan losses are charged against the allowance where management believes that the uncollectiblity of a loan balance is confirmed.
 
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired or loans otherwise classified as substandard or doubtful. The general component covers non-classified loans and is based on historical loss experience adjusted for current factors.

A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage and consumer loans and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using primarily the straight-line method and is provided over the estimated useful lives of 15 to 50 years for premises and 1 to 10 years for equipment.

Servicing Rights: Servicing rights are recognized as assets for the allocated value of retained servicing rights on loans sold. Servicing rights are expensed in proportion to and over the period of estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates and prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. Servicing rights are not material and are included with other assets on the consolidated statement of financial condition.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.

Other Real Estate Owned: Real estate properties acquired through or in lieu of loan foreclosure are recorded at the lower of cost or fair value less estimated costs to sell. Costs relating to improvement of property are capitalized, whereas costs relating to holding property are expensed.

(Continued)

F-11

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Valuations are periodically performed by management, and an allowance for losses is established by a charge to income if the carrying value of a property exceeds its estimated fair value less estimated costs to sell. There was no other real estate owned at December 31, 2006 or 2005.

Long-term Assets: Premises and equipment, core deposit and other intangible assets, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

Loan Commitments and Related Financial Statements: Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Earnings Per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Employee stock ownership plan shares are considered outstanding for this calculation unless unearned. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options and the vesting of stock awards. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements.

(Continued)

F-12

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, which are also recognized as separate components of stockholders’ equity.

Employee Stock Ownership Plan (“ESOP”): The cost of shares issued to the ESOP but not yet allocated to participants is presented in the consolidated statement of financial condition as a reduction of stockholders’ equity. Compensation expense is recorded based on the market price of the shares as they are committed to be released for allocation to participant accounts. The difference between the market price and the cost of the shares committed to be released is recorded as an adjustment to paid-in capital. Dividends on ESOP shares reduce retained earnings; dividends on unearned ESOP shares are used to reduce debt service. Shares are considered outstanding in the earnings per share calculations as they are committed to be released; unallocated shares are not considered outstanding. Because participants may require the Company to purchase their ESOP shares upon termination of their employment and certain predetermined dates according to the ESOP plan document, the fair value of the put-able allocated ESOP shares is reclassified from stockholders’ equity and included in other liabilities.

Stock Compensation: Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share Based Payment.” The Company elected to utilize the modified prospective transition method; therefore, prior period results were not restated. The Company has recorded stock-based employee compensation cost using the fair value method starting in 2006. For 2006, adopting this standard resulted in a reduction of income before income taxes of $58,000, a reduction in net income of $36,000, and a decrease in basic and diluted earnings per share of $0.02 and $0.01.

Prior to January 1, 2006, employee compensation expense under stock options was reported  using the intrinsic value method; therefore, no stock-based compensation cost is reflected in net income for the years ending December 31, 2005 and 2004, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant.

(Continued)
 
F-13

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, for the years ending December 31, 2005 and 2004.

   
2005
  
2004
  
           
Net income as reported
  
$
1,097
  
$
1,580
  
Deduct: Stock-based compensation expense determined under fair value based method
    
(24
)
  
(24
)
               
Pro forma net income
  
$
1,073
  
$
1,556
  
               
Basic earnings per share as reported
  
$
.51
  
$
.70
  
Pro forma basic earnings per share
    
.50
    
.69
  
               
Diluted earnings per share as reported
    
.50
    
.69
  
Pro forma diluted earnings per share
    
.49
    
.68
  

Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company or by the holding company to the stockholders. These restrictions pose no practical limit on the ability of the bank or the holding company to pay dividends at historical levels.

Operating Segment: Internal financial information is primarily reported and aggregated in a single line of business, banking. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Reclassifications: Certain items on the prior year financial statements have been reclassified with no effect on net income to conform to the current year presentation.

Adoption of New Accounting Standards: Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-based Payment. See “Stock Compensation” above for further discussion of the effect of adopting this standard.

SAB 108: In September 2006, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108), which is effective for fiscal years ending on or after November 15, 2006. SAB 108 provides guidance on how the effects of prior-year uncorrected financial statement misstatements should be considered in quantifying a

(Continued)
 
F-14

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
current year misstatement. SAB 108 requires public companies to quantify misstatements using both an income statement (rollover) and balance sheet (iron curtain) approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. If prior year errors that had been previously considered immaterial now are considered material based on either approach, no restatement is required so long as management properly applied its previous approach and all relevant facts and circumstances were considered. Adjustments considered immaterial in prior years under the method previously used, but now considered material under the dual approach required by SAB 108, are to be recorded upon initial adoption of SAB 108. The amount so recorded is shown as a cumulative effect adjustment and recorded in opening retained earnings as of January 1, 2006. The adoption of SAB 108 had no effect on the Company’s financial statements for the year ending December 31, 2006.
 
Effect of Newly Issued But Not Yet Effective Accounting Standards: In February 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments-an amendment to FASB Statements No. 133 and 140. This Statement permits fair value re-measurement for any hybrid financial instruments, clarifies which instruments are subject to the requirements of Statement No. 133, and establishes a requirement to evaluate interests in securitized financial assets and other items. The new standard is effective for financial assets acquired or issued after the beginning of the entity’s first fiscal year that begins after September 15, 2006. Management has determined that the adoption of this statement on January 1, 2007 will not have a material impact on its consolidated financial position or results of operations.

In March 2006, the FASB issued Statement No. 156, Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140. This Statement provides the following: 1) revised guidance on when a servicing asset and servicing liability should be recognized; 2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; 3) permits an entity to elect to measure servicing assets and servicing liabilities at fair value each reporting date and report changes in fair value in earnings in the period in which the changes occur; 4) upon initial adoption, permits a one time reclassification of available-for-sale securities to trading securities for securities which are identified as offsetting the entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value; and 5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional footnote disclosures. This standard is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006 with the effects of initial adoption being reported as a cumulative-effect adjustment to retained earnings.

(Continued)
 
F-15

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Management has determined that the adoption of this statement on January 1, 2007 will not have a material impact on its consolidated financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (FIN 48), which prescribes a recognition
threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has determined that the adoption of FIN 48 will not have a material effect on the financial statements.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. The Company has not completed its evaluation of the impact of the adoption of this standard.

In September 2006, FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R). This Statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its balance sheet, beginning with year end 2006, and to recognize changes in the funded status in the year in which the changes occur through comprehensive income beginning in 2007. Additionally, defined benefit plan assets and obligations are to be measured as of the date of the employer’s fiscal year-end, starting in 2008. The Company has determined that the adoption of FAS 158 will not have a material effect on the financial statements.

(Continued)
 
F-16

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 2 - SECURITIES

The fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

       
Gross
  
Gross
  
   
Fair
  
Unrealized
  
Unrealized
  
   
Value
  
Gains
  
Losses
  
December 31, 2006
              
U.S. governmental agencies
  
$
23,749
  
$
15
  
$
(215
)
Mortgage-backed
    
34,059
    
31
    
(1,026
)
Mutual fund
    
10,904
    
2
    
(201
)
Equity investment
    
62
    
61
    
-
  
                     
Total
  
$
68,774
  
$
109
  
$
(1,442
)
                     
December 31, 2005
                    
U.S. governmental agencies
  
$
26,580
  
$
1
  
$
(410
)
Mortgage-backed
    
36,130
    
36
    
(1,159
)
Mutual fund
    
8,473
    
-
    
(183
)
Equity investment
    
56
    
55
    
-
  
                     
Total
  
$
71,239
  
$
92
  
$
(1,752
)
 
The amortized cost, unrecognized gains and losses, and fair values of securities held to maturity follow:

       
Gross
  
Gross
      
   
Amortized
  
Unrecognized
  
Unrecognized
  
Fair
  
   
Cost
  
Gains
  
Losses
  
Value
  
December 31, 2006
                  
Mortgage-backed
  
$
74
  
$
-
  
$
-
  
$
74
  
State and municipal
    
130
    
-
    
-
    
130
  
                           
   
$
204
  
$
-
  
$
-
  
$
204
  
                           
December 31, 2005
                          
Mortgage-backed
  
$
95
  
$
-
  
$
-
  
$
95
  
State and municipal
    
200
    
-
    
-
    
200
  
                           
   
$
295
  
$
-
  
$
-
  
$
295
  

(Continued)
 
F-17

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 2 - SECURITIES (Continued)

Contractual maturities of securities at December 31, 2006 were as follows. Securities not due at a single maturity date, including mortgage-backed securities and mutual funds, are shown separately.

   
Available
  
Held to
  
   
for Sale
  
Maturity
  
   
Fair
  
Amortized
  
Fair
  
   
Value
  
Cost
  
Value
  
               
Due in one year or less
  
$
7,918
  
$
65
  
$
65
  
Due after one year through five years
    
15,831
    
65
    
65
  
Due after five years
    
-
    
-
    
-
  
Mortgage-backed securities
    
34,059
    
74
    
74
  
Mutual fund
    
10,904
    
-
    
-
  
Equity investment
    
62
    
-
    
-
  
                     
   
$
68,774
  
$
204
  
$
204
  

Securities with a carrying value of approximately $9,903 and $9,879 at December 31, 2006 and 2005 were pledged to secure public deposits and for other purposes as required or permitted by law. There were no security sales were recorded during 2006, 2005, or 2004.

Securities with unrealized losses at year end not recognized in income are as follows:

   
Less Than 12 Months
  
12 Months or More
  
Total
  
   
Fair
  
Unrealized
  
Fair
  
Unrealized
  
Fair
  
Unrealized
  
   
Value
  
Loss
  
Value
  
Loss
  
Value
  
Loss
  
2006
                          
U.S. government agencies
  
$
6,959
  
$
(13
)
$
13,786
  
$
(202
)
$
20,745
  
$
(215
)
Mortgage-backed
    
1,990
    
(1
)
  
28,749
    
(1,025
)
  
30,739
    
(1,026
)
Mutual fund
    
292
    
(1
)
  
8,400
    
(200
)
  
8,692
    
(201
)
                                       
Total temporarily impaired
  
$
9,241
  
$
(15
)
$
50,935
  
$
(1,427
)
$
60,176
  
$
(1,442
)
                                       
2005
                                      
U.S. government agencies
  
$
12,821
  
$
(165
)
$
12,757
  
$
(245
)
$
25,578
  
$
(410
)
Mortgage-backed
    
11,575
    
(251
)
  
23,523
    
(908
)
  
35,098
    
(1,159
)
Mutual fund
    
3,191
    
(41
)
  
5,226
    
(142
)
  
8,417
    
(183
)
                                       
Total temporarily impaired
  
$
27,587
  
$
(457
)
$
41,506
  
$
(1,295
)
$
69,093
  
$
(1,752
)
 

(Continued)
 
 
F-18

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 2 - SECURITIES (Continued)

Unrealized losses have not been recognized into income because the issuer’s bonds are of high credit quality and/or they are backed by the government, such as Fannie Mae or Freddie Mac bonds and mortgage-backed securities. In addition, management has the intent and ability to hold them for the foreseeable future and the decline in fair value is largely due to increases in market interest rates. The fair value is expected to recover as the securities approach their maturity date and/or market rates change. The mutual fund, which holds adjustable rate mortgage securities, holds mortgage-backed securities and is inversely sensitive to short-term rates. The fund is expected to recover as short-term interest rates stabilize or decline.


NOTE 3 - LOANS

Loans consist of:
   
2006
  
2005
  
Mortgage loans:
          
Secured by one-to-four-family residences
  
$
86,024
  
$
101,325
  
Multi-family and other loans secured by other properties
    
41,194
    
38,317
  
Home equity loans
    
12,198
    
13,279
  
Consumer and other loans
    
482
    
502
  
     
139,898
    
153,423
  
Allowance for loan losses
    
(1,619
)
  
(1,701
)
Net deferred costs and other
    
98
    
46
  
               
Loans, net
  
$
138,377
  
$
151,768
  

The Bank’s mortgage loan portfolio includes “subprime” loans made to borrowers with weakened credit characteristics, such as prior payment delinquencies, foreclosures, bankruptcies, or diminished repayment ability. These subprime loans totaled $5,239 and $7,755 at December 31, 2006 and 2005.

Changes in the allowance for loan losses follow:

   
2006
  
2005
  
2004
  
               
Beginning balance
  
$
1,701
  
$
1,847
  
$
1,962
  
Provision for loan losses
    
(28
)
  
(130
)
  
(112
)
Charge-offs
    
(82
)
  
(71
)
  
(115
)
Recoveries
    
28
    
55
    
112
  
                     
Ending balance
  
$
1,619
  
$
1,701
  
$
1,847
  

(Continued)
 
F-19

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 3 - LOANS (Continued)

Impaired loans were as follows:
 
 
  
2006
  
2005
  
2004
  
Impaired loans with no allocated allowance for loan losses
  
$
454
  
$
98
  
$
70
  
                     
Average of impaired loans during the year
    
893
    
161
    
216
  
Interest income recognized during impairment
    
25
    
7
    
28
  
Cash-basis interest income recognized
    
17
    
7
    
28
  

Nonperforming loans were as follows:

   
2006
  
2005
  
2004
  
               
Nonaccrual loans
  
$
540
  
$
394
  
$
983
  
Loans past due over 90 days still on accrual
    
-
    
-
    
-
  

Nonperforming loans and impaired loans are defined differently. Some loans may be included in both categories, whereas other loans may only be included in one category. There were no impaired loans with an allocated allowance for loan losses.

Certain directors and executive officers of the Bank and companies with which they are affiliated have obtained loans from the Bank on various occasions. A summary of such loans made by the Bank is as follows:
 
   
2006
  
2005
  
2004
  
               
Beginning balance
  
$
1,552
  
$
1,563
  
$
1,735
  
New loans
    
-
    
583
    
410
  
Effect of changes in related parties
    
-
    
-
    
(128
)
Repayments
    
(57
)
  
(594
)
  
(454
)
                     
Ending balance
  
$
1,495
  
$
1,552
  
$
1,563
  
 

(Continued)
 
F-20

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 3 - LOANS (Continued)

Mortgage loans serviced for others are not included in the consolidated statements of financial condition. The unpaid principal balances of these loans follows:

   
2006
 
2005
  
Mortgage loan portfolios serviced for:
          
Fannie Mae
  
$
8,048
  
$
5,736
  
Freddie Mac
    
90
    
95
  
               
Balance, end of year
  
$
8,138
  
$
5,831
  

The carrying value of mortgage servicing rights is $57 and $20 at December 31, 2006 and 2005. Custodial escrow balances maintained in connection with the foregoing loan servicing were approximately $221 and $310 at December 31, 2006 and 2005.


NOTE 4 - PREMISES AND EQUIPMENT

Premises and equipment consist of:
 
 
 
2006
 
2005
  
           
Land
  
$
1,351
  
$
1,351
  
Office buildings and improvements
    
5,252
    
5,233
  
Furniture, fixtures, and equipment
    
1,717
    
1,700
  
     
8,320
    
8,284
  
Less accumulated depreciation
    
3,978
    
3,743
  
               
   
$
4,342
  
$
4,541
  


NOTE 5 - DEPOSITS

Certificates of deposit in denominations of $100,000 or more were $35,880, $29,699, and $30,389 at December 31, 2006, 2005, and 2004. Depending on how ownership of the account is listed, some deposit amounts in excess of $100,000 may not be federally insured.

(Continued)
 
F-21

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 5 - DEPOSITS (Continued)

Deposit accounts are summarized as follows:
 
 
  
2006
  
2005
  
           
Passbook accounts
  
$
40,463
  
$
46,854
  
NOW and checking accounts
    
23,098
    
22,220
  
Money market accounts
    
9,336
    
8,446
  
Certificates of deposit
    
129,279
    
112,887
  
               
Total deposits
  
$
202,176
  
$
190,407
  


Scheduled maturities of time certificates at December 31, 2006 are as follows:
 
Year
      
2007
  
$
100,719
  
2008
    
12,995
  
2009
    
6,844
  
2010
    
6,548
  
2011
    
2,173
  
         
   
$
129,279
  

Interest expense on deposits is summarized as follows:

   
2006
  
2005
  
2004
  
               
NOW
  
$
69
  
$
77
  
$
58
  
Money market
    
246
    
170
    
80
  
Passbook
    
468
    
621
    
407
  
Certificates of deposit
    
4,953
    
3,738
    
3,501
  
                     
   
$
5,736
  
$
4,606
  
$
4,046
  

Non-interest-bearing deposits (NOW accounts) totaled $13,361 and $11,808 at December 31, 2006 and 2005. Deposit accounts held by directors and executive officers totaled $926 and $852 at December 31, 2006 and 2005.

(Continued)

F-22

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES

Advances from the Federal Home Loan Bank consist of:
 
 
  
Fixed
  
 
  
 
  
Maturity Date
  
Rate
  
2006
  
2005
  
               
January 23, 2006
    
2.02
%   
$
-
     
$
500
  
January 27, 2006
    
2.71
          
500
  
March 23, 2006
    
1.93
          
500
  
April 26, 2006
    
2.61
          
1,000
  
May 8, 2006
    
2.91
          
500
  
July 24, 2006
    
3.69
          
500
  
November 13, 2006
    
3.43
          
500
  
January 23, 2007
    
2.69
    
500
    
500
  
January 29, 2007
    
3.26
    
400
    
400
  
March 23, 2007
    
2.53
    
500
    
500
  
April 26, 2007
    
3.35
    
1,000
    
1,000
  
May 7, 2007
    
3.57
    
1,000
    
1,000
  
July 23, 2007
    
4.06
    
500
    
500
  
November 13, 2007
    
3.74
    
500
    
500
  
November 27, 2007
    
5.28
    
1,000
    
1,000
  
January 23, 2008
    
3.21
    
500
    
500
  
January 28, 2008
    
3.68
    
400
    
400
  
March 24, 2008
    
2.96
    
625
    
625
  
April 28, 2008
    
3.84
    
1,000
    
1,000
  
May 7, 2008
    
4.08
    
1,000
    
1,000
  
June 18, 2008
    
4.33
    
1,000
    
1,000
  
July 22, 2008
    
4.41
    
500
    
500
  
November 13, 2008
    
4.16
    
500
    
500
  
November 17, 2008
    
3.64
    
400
    
400
  
November 27, 2008
    
5.48
    
1,000
    
1,000
  
March 20, 2009
    
5.63
    
3,000
    
3,000
  
March 23, 2009
    
3.35
    
625
    
625
  
June 17, 2009
    
4.40
    
1,000
    
1,000
  
June 22, 2009
    
4.67
    
1,000
    
1,000
  
June 25, 2009
    
4.61
    
1,000
    
1,000
  
July 1, 2009
    
4.54
    
1,000
    
1,000
  
August 10, 2009
    
3.88
    
650
    
650
  
September 16, 2009
    
3.68
    
600
    
600
  
September 28, 2009
    
3.79
    
2,000
    
2,000
  

(Continued)
 
F-23

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES (Continued)


   
Fixed
          
Maturity Date
  
Rate
  
2006
  
2005
  
               
March 23, 2010
    
3.71
%   
$
250
     
$
250
  
July 2, 2010
    
4.69
    
1,000
    
1,000
  
October 25, 2010
    
4.16
    
1,000
    
1,000
  
July 7, 2011
    
4.61
    
800
    
800
  
October 26, 2011
    
4.02
    
400
    
400
  
November 17, 2011
    
4.31
    
1,100
    
1,100
  
January 10, 2012
    
4.36
    
1,000
    
1,000
  
                     
         
$
28,750
  
$
32,750
  

The advances are secured by a blanket lien on qualifying first mortgage loans in an amount equal to at least 170% of the amount of outstanding advances. The advances are also subject to a prepayment penalty equivalent to the unpaid interest cash flows at rates effective at the time of the prepayment.

Maturities over the next five years and thereafter are as follows:

2007
  
$
5,400
  
2008
    
6,925
  
2009
    
10,875
  
2010
    
2,250
  
2011
    
2,300
  
2012 and thereafter
    
1,000
  
         
   
$
28,750
  
 

(Continued)
 
F-24

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 7 - INCOME TAXES

Income tax expense was as follows:
 
   
2006
  
2005
  
2004
  
Current
             
Federal
  
$
607
  
$
971
  
$
483
  
State
    
55
    
126
    
52
  
Deferred
    
(122
)
  
(403
)
  
298
  
                     
Total
  
$
540
  
$
694
  
$
833
  

Effective tax rates differ from federal statutory rates applied to financial statement income due to the following.

   
2006
  
2005
  
2004
  
               
Income tax at federal statutory rate
  
$
493
  
$
609
  
$
820
  
Effect of
                    
State taxes, net of federal benefit
    
24
    
50
    
73
  
Other, net
    
23
    
35
    
(60
)
                     
Total
  
$
540
  
$
694
  
$
833
  
                     
Effective tax rate
    
37.2
%
  
38.7
%
  
34.5
%

The net deferred tax assets included in other assets in the consolidated statements of financial condition are as follows:

 
 
2006
 
2005
  
Deferred tax assets
          
Allowance for loan losses
  
$
684
  
$
695
  
Accrued expenses
    
781
    
729
  
Unrealized loss on securities available for sale
    
518
    
644
  
Other
    
41
    
34
  
     
2,024
    
2,102
  
Deferred tax liabilities
              
Premises and equipment
    
(312
)
  
(321
)
Federal Home Loan Bank stock dividends
    
(186
)
  
(259
)
Deferred loan fees
    
(129
)
  
(121
)
     
(627
)
  
(701
)
               
Net deferred tax asset
  
$
1,397
  
$
1,401
  

(Continued)

F-25
 
AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 7 - INCOME TAXES (Continued)

Federal income tax laws provided additional bad debt deductions through 1987 totaling $2,372. Accounting standards do not require a deferred tax liability to be recorded on this amount, which liability otherwise would total $921 at December 31, 2006. If the Bank were liquidated or otherwise ceased to be a bank or if tax laws were to change, this amount would be expensed.

NOTE 8 - EMPLOYEE BENEFITS

The Bank maintains a contributory profit sharing plan for its employees. To be eligible to participate, an employee must have completed one year of service, be credited with 1,000 hours of service during that period, and have attained the age of 18. Bank contributions to the plan are discretionary and determined by the Board of Directors. Profit sharing expense was $150 for the year ended December 31, 2006, and $10 for the years ended 2005 and 2004.

The Bank sponsors nonqualified unfunded retirement plans for certain directors and officers, which provide annual benefit payments to directors upon retirement. The Bank’s liability for the plans totaled $2,011 and $1,877 at December 31, 2006 and 2005. Expense related to the plans totaled $117, $104, and $101 for the years ended December 31, 2006, 2005, and 2004.

NOTE 9 - EMPLOYEE STOCK OWNERSHIP PLAN

As part of the conversion transaction, the Company established an ESOP for the benefit of substantially all employees. The ESOP borrowed $944 from the Company and used those funds to acquire 94,352 shares of the Company’s stock at $10 per share.

Shares issued to the ESOP are allocated to ESOP participants based on principal and interest repayments made by the ESOP on the loan from the Company. The loan was secured by shares purchased with the loan proceeds and was repaid by the ESOP with funds from the Company’s discretionary contributions to the ESOP and earnings on the ESOP’s assets. Principal payments were scheduled to occur over a ten-year period; however, the Company elected to prepay the loan and as of December 31, 2005, the loan is paid in full. There are no plans to adopt another Employee Stock Option Plan at this time.

Participants receive the shares at the end of employment. A participant may require stock received to be repurchased unless the stock is traded on an established market.

(Continued)

F-26
 
AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 9 - EMPLOYEE STOCK OWNERSHIP PLAN (Continued)

During 2005 and 2004, approximately 18,870 shares per year of stock with an average fair value of $23.65 and $24.38 per share were committed to be released, resulting in ESOP compensation expense of $447 and $460. At December 31, 2006, all ESOP shares have been allocated. Shares held by the ESOP at December 31 are as follows:

 
 
2006
 
2005
  
           
Allocated shares
  
$
83,427
  
$
86,152
  
Shares distributed from plan
    
10,925
    
8,200
  
               
Total ESOP shares
    
94,352
    
94,352
  
               
Fair value of allocated shares subject to repurchase obligation recorded in other liabilities
  
$
2,182
  
$
1,981
  

NOTE 10 - EMPLOYEE STOCK BENEFITS

At December 31, 2006 the Company had a stock option plan and a recognition and retention plan.

Stock Option Plan

Under the stock option plan, certain key employees are granted options to purchase shares of the Company’s Common Stock at fair value at the date of the grant. All stock options have an exercise price that is at least equal to the fair market value of the Company’s stock on the date the options were granted.  The Company adopted the stock plan in May 2003 under the terms of which options for 114,685 shares of the Company’s common stock were granted to directors, officers, and employees. The options generally become exercisable in equal installments over a five-year period from the date of grant, and they expire ten years from the date of grant. No option may be exercised if such exercise would cause the mutual holding company to own fewer than a majority of the total number of shares outstanding. There are a total of 7,456 options available for future grant under the stock option plan.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. (Employee and management options are tracked separately.) The expected term of options
 
(Continued)

F-27

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 10 - EMPLOYEE STOCK BENEFITS (Continued)
 
granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
 
The fair value of options granted during 2006 was determined using the following weighted-average assumptions as of grant date. There were no stock options granted during 2005 and 2004.

   
2006
  
       
Risk-free interest rate
    
4.71
%
Expected option life
    
2.2
 years
Expected stock price volatility
    
10.11
%
Dividend yield
    
1.68
%

A summary of the activity in the stock option plan for 2006 follows:
 
   
Shares
  
Weighted
Average
Exercise
Price
  
Weighted
Average
Remaining
Contractual
Term
  
Aggregate
Intrinsic
Value
  
                   
Outstanding at beginning of year
    
105,685
  
$
18.75
              
Granted
    
1,200
    
23.75
              
Exercised
    
(1,600
)
  
18.75
              
Forfeited or expired
    
(2,400
)
  
18.75
              
Outstanding at end of year
    
102,885
  
$
18.81
    
6.4
  
$
755
  
                           
Exercisable at end of year
    
61,411
  
$
18.79
    
6.4
  
$
452
  

Information related to the stock option plan during each year follows:

   
2006
  
2005
  
2004
  
               
Intrinsic value of options exercised
  
$
8
  
$
32
  
$
-
  
Cash received from option exercises
    
30
    
112
    
-
  
Tax benefit realized from option exercises
    
3
    
12
    
-
  
Weighted average fair value of options granted
    
2.40
    
-
    
-
  
 

(Continued)
 
F-28

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 10 - EMPLOYEE STOCK BENEFITS (Continued)

As of December 31, 2006 there was $80 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.4 years.

Share Award Plan

Pursuant to its 2003 stock-based incentive plan, the Company awarded 58,971 shares of restricted stock in May 2003. These shares normally vest over a five-year period, unless certain circumstances occur that trigger earlier vesting according to the approved Recognition and Retention Plan (“RRP”). The unamortized cost of shares not yet earned (vested) is reported as a reduction of stockholders’ equity.

A summary of the activity in the RRP is as follows:

Nonvested Shares
  
Shares
  
Weighted-Average
Grant-Date
Fair Value
  
           
Nonvested at January 1, 2006
    
32,002
  
$
18.75
  
Granted
    
600
    
23.75
  
Vested
    
(10,534
)
  
18.85
  
Forfeited
    
(1,200
)
  
18.75
  
               
Nonvested at December 31, 2006
    
20,868
  
$
18.85
  

As of December 31, 2006, there was $280 of total unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 1.4 years. The total fair value of shares vested during the years ended December 31, 2006, 2005 and 2004 was $201, $253 and $266.

(Continued)

F-29

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 11 - FAIR VALUES OF FINANCIAL INSTRUMENTS

The carrying amount and estimated fair value of financial instruments were as follows.

   
December 31, 2006
  
December 31, 2005
  
   
Carrying
  
Fair
  
Carrying
  
Fair
  
   
Amount
  
Value
  
Amount
  
Value
  
Financial assets
                  
Cash and cash equivalents
  
$
43,848
  
$
43,848
  
$
15,230
  
$
15,230
  
Certificates of deposit
    
5,490
    
5,490
    
8,584
    
8,584
  
Securities available for sale
    
68,774
    
68,774
    
71,239
    
71,239
  
Securities held to maturity
    
204
    
204
    
295
    
295
  
Loans, net
    
138,377
    
137,851
    
151,768
    
150,458
  
Federal Home Loan Bank stock
    
2,450
    
2,450
    
3,416
    
3,416
  
Accrued interest receivable
    
1,021
    
1,021
    
960
    
960
  
                           
Financial liabilities
                          
Deposits
    
(202,176
)
  
(202,236
)
  
(190,407
)
  
(190,341
)
Advances from Federal Home Loan Bank
    
(28,750
)
  
(28,267
)
  
(32,750
)
  
(32,258
)
Advances from borrowers for taxes and insurance
    
(1,655
)
  
(1,655
)
  
(1,746
)
  
(1,746
)
Accrued interest payable
    
(401
)
  
(401
)
  
(148
)
  
(148
)

The methods and assumptions used to estimate fair value are described as follows.

Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings, Federal Home Loan Bank stock, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. Security fair value is based on market prices or dealer quotes and, if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. Fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements.

(Continued)

F-30

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 12 - REGULATORY CAPITAL

The Bank is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

The Bank’s actual and required capital amounts and ratios are presented below:

                   
To Be Well
  
                   
Capitalized Under
  
 
 
 
 
 
 
For Capital
 
Prompt Corrective
 
 
 
Actual
 
Adequacy Purposes
 
Action Provisions
 
 
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
  
                           
As of December 31, 2006
                          
Total capital to risk-weighted assets
 
$
29,944
    
23.7
%
$
10,122
    
8.0
%
$
12,652
    
10.0
%
Tier I (core) capital to risk- weighted assets
    
28,362
    
22.4
    
5,061
    
4.0
    
7,591
    
6.0
  
Tier I (core) capital to adjusted total assets
    
28,362
    
10.6
    
10,708
    
4.0
    
13,385
    
5.0
  
                                       
As of December 31, 2005
                                      
Total capital to risk-weighted assets
 
$
30,333
    
23.1
%
$
10,483
    
8.0
%
$
13,104
    
10.0
%
Tier I (core) capital to risk- weighted assets
    
28,695
    
21.9
    
5,241
    
4.0
    
7,862
    
6.0
  
Tier I (core) capital to adjusted total assets
    
28,695
    
11.1
    
10,379
    
4.0
    
12,974
    
5.0
  

The Qualified Thrift Lender test requires that at least 65% of assets be maintained in housing-related finance and other specified areas. If this test is not met, limits are placed on growth, branching, new investments, Federal Home Loan Bank advances, and dividends or the Bank must convert to a commercial bank charter. Management believes that this test is met.

(Continued)
 
F-31
 
AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 

NOTE 12 - REGULATORY CAPITAL (Continued)

As of December 31, 2006, the most recent notification from the Office of Thrift Supervision (“the OTS”) categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.

During 2006, the Company paid a cash dividend of $0.10 per share during the first three quarters of the year, and $0.11 per share for the last quarter of the year. During 2005, the Company paid a cash dividend of $0.10 per share. The OTS approved a waiver of dividends on the shares held by the mutual holding company. The amount of dividends waived, totaling $503 for 2006, and $98 for 2005, is a restriction on retained earnings of the Company.
 
NOTE 13 - EARNINGS PER COMMON SHARE

A reconciliation of the numerator and denominator of the earnings per common share computation for the year ended December 31 follows:

   
2006
  
2005
  
Basic
          
Net income
  
$
911
  
$
1,097
  
               
Weighted average common shares outstanding
   
2,118,093
    
2,168,196
  
Less: average unallocated ESOP shares
    
-
    
9,435
  
               
Average shares
    
2,118,093
    
2,158,761
  
               
Basic earnings per common share
  
$
.43
  
$
.51
  
               
Diluted
              
Net income
  
$
911
  
$
1,097
  
               
Weighted average common shares outstanding for basic earnings per common share
    
2,118,093
    
2,158,761
  
Add: dilutive effects of assumed exercises of stock options and stock awards
    
20,779
    
24,989
  
               
Average shares and dilutive potential common shares
    
2,138,872
    
2,183,750
  
               
Diluted earnings per common share
  
$
.43
  
$
.50
  

At December 31, 2006 and 2005, there were no antidilutive shares.

(Continued)

F-32

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 14 - OFF-BALANCE-SHEET ACTIVITIES

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

The contractual amount of financial instruments with off-balance-sheet risk was as follows at year end:
 
   
2006
  
2005
  
   
Fixed
  
Variable
  
Fixed
  
Variable
  
   
Rate
  
Rate
  
Rate
  
Rate
  
                   
Commitments to make loans
  
$
413
  
$
4,540
  
$
2,438
  
$
907
  
Unused lines of credit and letters of credit
    
-
    
15,730
    
-
    
14,725
  

Commitments to make loans are generally made for periods of 120 days or less. The fixed rate loan commitments have interest rates ranging from 5.25% to 7.75% and the commitments are to extend credit ranging from 10 to 30 years.

The Bank has previously sold fixed rate mortgages to Fannie Mae and Freddie Mac with and without recourse. Recourse obligations on sold loans are recorded at fair value.

   
2006
  
2005
  
   
Contract
  
Carrying
  
Contract
  
Carrying
  
   
Amount
  
Value
  
Amount
  
Value
  
                   
Loans sold with recourse
  
$
123
  
$
123
  
$
191
  
$
191
  

In the normal course of business, there are various outstanding contingent liabilities, such as claims and legal actions that are not reflected in the financial statements. In the opinion of management, no material losses are anticipated as a result of these actions or claims.

(Continued)
 
F-33

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 15 - OTHER COMPREHENSIVE INCOME

Other comprehensive income components and related taxes were as follows:

   
2006
  
2005
  
2004
  
               
Unrealized holding gains and losses on securities available for sale
  
$
327
  
$
(1,306
)
$
(724
)
Less reclassification adjustments for gains and losses later recognized in income
    
-
    
-
    
-
  
Net unrealized gains and losses
    
327
    
(1,306
)
  
(724
)
                     
Tax effect
    
(128
)
  
507
    
281
  
                     
Other comprehensive income (loss)
  
$
199
  
$
(799
)
$
(443
)


NOTE 16 - PARENT COMPANY CONSOLIDATED FINANCIAL STATEMENTS

The following are the condensed balance sheets and statements of income and cash flows for AJS Bancorp, Inc. without subsidiary.

CONDENSED BALANCE SHEETS
December 31, 2006 and 2005

   
2006
  
2005
  
ASSETS
          
Cash and cash equivalents
  
$
3,363
  
$
2,522
  
Investment in bank subsidiary
    
27,548
    
27,680
  
               
   
$
30,911
  
$
30,202
  
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
              
Liabilities
  
$
2,162
  
$
1,950
  
Stockholders’ equity
    
28,749
    
28,252
  
               
   
$
30,911
  
$
30,202
  

(Continued)

F-34

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 16 - PARENT COMPANY CONSOLIDATED FINANCIAL STATEMENTS
  (Continued)

CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 2006, 2005, and 2004

   
2006
  
2005
  
2004
  
Income
              
ESOP loan
  
$
-
  
$
12
  
$
17
  
Deposits in financial institutions
    
133
    
68
    
31
  
Dividends from subsidiary
    
1,500
    
1,500
    
3,000
  
                     
Total income
    
1,633
    
1,580
    
3,048
  
Other expenses
                    
Other operating expenses
    
132
    
162
    
121
  
                     
Income before income taxes and equity in undistributed earnings
    
1,501
    
1,418
    
2,927
  
                     
Income taxes
    
-
    
(32
)
  
(27
)
                     
Income before equity in undistributed earnings of bank subsidiary
    
1,501
    
1,450
    
2,954
  
                     
Dividends in excess of earnings
    
(590
)
  
(353
)
  
(1,374
)
                     
Net income
  
$
911
  
$
1,097
  
$
1,580
  

(Continued)
 
F-35

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 16 - PARENT COMPANY CONSOLIDATED FINANCIAL STATEMENTS
  (Continued)

CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2006, 2005, and 2004

   
2006
  
2005
  
2004
  
Operating activities
              
Net income
  
$
911
  
$
1,097
  
$
1,580
  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                    
Equity in undistributed earnings of bank subsidiary
    
590
    
353
    
1,374
  
Change in other assets and liabilities
    
13
    
(33
)
  
(8
)
Net cash provided by (used in) operating activities
    
1,514
    
1,417
    
2,946
  
                     
Financing activities
                    
Dividends paid
    
(363
)
  
(114
)
  
-
  
Payment received on loan to ESOP
    
-
    
189
    
189
  
Purchase of common stock
    
(340
)
  
(2,976
)
  
(3,000
)
Proceeds for exercising stock options
    
30
    
112
    
-
  
Net cash used in financing activities
    
(673
)
  
(2,789
)
  
(2,811
)
                     
Net change in cash and cash equivalents
    
841
    
(1,372
)
  
135
  
                     
Cash and cash equivalents at beginning of year
    
2,522
    
3,894
    
3,759
  
                     
Cash and cash equivalents at end of year
  
$
3,363
  
$
2,522
  
$
3,894
  

(Continued)
 
F-36

AJS BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 and 2005
(Dollars in thousands, except per share data)
 
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)

   
Interest
Income
  
Net Interest
Income
  
Net
Income
  
Earnings
Per Share
Basic and
Diluted
  
2006
                  
First quarter
  
$
3,239
  
$
1,652
  
$
254
  
$
.12
  
Second quarter
    
3,325
    
1,639
    
240
    
.11
  
Third quarter
    
3,460
    
1,675
    
248
    
.12
  
Fourth quarter
    
3,565
    
1,606
    
169
    
.08
  
                           
2005
                          
First quarter
  
$
3,276
  
$
1,837
  
$
371
  
$
.17
  
Second quarter
    
3,218
    
1,723
    
329
    
.15
  
Third quarter
    
3,237
    
1,717
    
253
    
.12
  
Fourth quarter
    
3,216
    
1,647
    
144
    
.07
  

 
F-37
 EX-21 3 ex21.htm EX-21 Unassociated Document

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT
 
 
 
 

SUBSIDIARIES OF THE REGISTRANT
 
Subsidiary
 
Ownership
 
State of Incorporation
         
A. J. Smith Federal Savings Bank
  
100%
  
Federal
   
 
  
 
A. J. S Insurance, LLC
  
100%
  
Illinois
 
 
 EX-23 4 ex23.htm EX-23
 
EXHIBIT 23
 
CONSENT OF AUDITORS TO INCORPORATE
FINANCIAL STATEMENTS INTO FORM S-8
 
 
 
 
 
 
 
 
 
 
 
Exhibit 23


 


CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


 

We consent to the incorporation by reference in Registration Statement No. 333-105598 on Form S-8 pertaining to the AJS Bancorp, Inc. 2003 Stock Option Plan and the 2003 Recognition and Retention Plan of our report dated March 7, 2007 on the consolidated financial statements of AJS Bancorp, Inc., which report is included in Form 10-K of AJS Bancorp, Inc. for the year ended December 31, 2006.




 
/s/ Crowe Chizek and Company LLC 
   
 
Crowe Chizek and Company LLC

Oak Brook, Illinois
March 22, 2007


 EX-31.1 5 ex31_1.htm EX-31.1 Unassociated Document

Exhibit 31.1

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

I, Thomas R. Butkus, certify that

1.
I have reviewed this annual report on Form 10-K of AJS Bancorp, Inc.;

2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
 
 
a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
 
b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
c)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


March 22, 2007
/s/ Thomas R. Butkus
Date
Thomas R. Butkus
 
Chairman of the Board and Chief Executive Officer
 
 
 EX-31.2 6 ex31_2.htm EX-31.2 EX-31.2

Exhibit 31.2

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

I, Lyn G. Rupich, certify that:

1.
I have reviewed this annual report on Form 10-K of AJS Bancorp, Inc.;

2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
 
 
a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
 
b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
c)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
 
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


March 22, 2007
/s/ Lyn G. Rupich
Date
Lyn G. Rupich
 
President and Chief Operating Officer
 
 
EX-31.3 7 ex31_3.htm EX-31.3 Unassociated Document

Exhibit 31.3

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

I, Pamela N. Favero, certify that

1.
I have reviewed this annual report on Form 10-K of AJS Bancorp, Inc.;

2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
 
 
a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
 
b)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
c)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
 
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 
March 22, 2007
/s/ Pamela N. Favero
Date
Pamela N. Favero
 
Chief Financial Officer
 
 
EX-32 8 ex32.htm EX-32 Unassociated Document

Exhibit 32


Certification pursuant to
18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002


Thomas R. Butkus, Chairman of the Board and Chief Executive Officer, Lyn G. Rupich, President and Pamela N. Favero, Chief Financial Officer of AJS Bancorp, Inc. (the “Company”) each certify in their capacity as officers of the Company that they have reviewed the annual report of the Company on Form 10-K for the fiscal year ended December 31, 2006 and that to the best of their knowledge:

1.
the report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

2.
the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.

The purpose of this statement is solely to comply with Title 18, Chapter 63, Section 1350 of the United States Code, as amended by Section 906 of the Sarbanes-Oxley Act of 2003.


March 22, 2007
/s/ Thomas R. Butkus
  
Date
Chairman of the Board and Chief
 
 
Executive Officer
  
     
     
March 22, 2007
/s/ Lyn G. Rupich
  
Date
President and Chief Operating Officer
  
     
     
March 22, 2007
/s/ Pamela N. Favero
  
Date
Chief Financial Officer
  

 
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