<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

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

      For the quarterly period ended June 30, 2004.

                                       OR

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

      For the transition period from _________ to __________.

                         Commission file number: 0-24611

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

            Delaware                                             35-2042093
  (State or other jurisdiction                                (I.R.S. Employer
of incorporation or organization)                            Identification No.)

                     707 Ridge Road, Munster, Indiana 46321
                    (Address of principal executive offices)

                                 (219) 836-5500
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]

The Registrant had 12,308,434 shares of Common Stock issued and outstanding as
of August 6, 2004.

<PAGE>

                                CFS BANCORP, INC.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                              Page No.
                                                                                              --------
<S>                                                                                           <C>
                          PART I FINANCIAL INFORMATION

Item 1.    Financial Statements (Unaudited)................................................       3

Item 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations.......................................................      10

Item 3.    Quantitative and Qualitative Disclosures About Market Risk......................      29

Item 4.    Controls and Procedures.........................................................      30

                         PART II OTHER INFORMATION

Item 1.    Legal Proceedings...............................................................      30

Item 2.    Changes in Securities, Use of Proceeds from Registered Securities and
           Issuer Purchases of Equity Securities...........................................      30

Item 3.    Defaults upon Senior Securities.................................................      31

Item 4.    Submission of Matters to a Vote of Security Holders.............................      31

Item 5.    Other Information...............................................................      31

Item 6.    Exhibits and Reports on Form 8-K................................................      32

Signature Page ............................................................................      34

Certifications for Principal Executive Officer and Principal Financial Officer.............      35
</TABLE>

                                       2
<PAGE>

                                CFS BANCORP, INC.
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                                       JUNE 30, 2004   DECEMBER 31, 2003
                                                                       -------------   -----------------
                                                                        (Unaudited)
                                                                             (Dollars in thousands)
<S>                                                                    <C>             <C>
ASSETS
Cash and amounts due from depository institutions ..................   $     16,680       $    18,675
Interest-bearing deposits ..........................................          8,358           142,139
Federal funds sold .................................................          8,497            17,399
                                                                       ------------       -----------
   Cash and cash equivalents .......................................         33,535           178,213
Securities available-for-sale, at fair value .......................        347,479           327,789
Investment in Federal Home Loan Bank stock, at cost ................         27,397            26,766
Loans receivable, net of unearned fees .............................      1,008,081           981,994
   Allowance for losses on loans ...................................        (11,299)          (10,453)
                                                                       ------------       -----------
     Net loans .....................................................        996,782           971,541
Accrued interest receivable ........................................          6,599             6,623
Real estate owned ..................................................            776               206
Office properties and equipment ....................................         13,687            13,738
Investment in Bank-owned life insurance ............................         32,649            31,926
Prepaid expenses and other assets ..................................         11,403            11,132
Intangible assets ..................................................          1,462             1,494
                                                                       ------------       -----------
     Total assets ..................................................   $  1,471,769       $ 1,569,428
                                                                       ============       ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ...........................................................   $    879,102       $   975,369
Borrowed money .....................................................        418,432           418,490
Advance payments by borrowers for taxes and insurance ..............          6,316             5,595
Other liabilities ..................................................         13,392            14,021
                                                                       ------------       -----------
   Total liabilities ...............................................      1,317,242         1,413,475
Stockholders' equity:
Preferred stock, $0.01 par value; 15,000,000 shares authorized .....              -                 -
Common stock, $0.01 par value; 85,000,000 shares authorized;
   23,423,306 shares issued as of June 30, 2004 and December 31,
   2003; 12,290,934 and 12,200,015 shares outstanding as of
   June 30, 2004 and December 31, 2003, respectively ...............            234               234
Additional paid-in capital .........................................        189,727           189,879
Retained earnings, substantially restricted ........................        104,813           106,354
Treasury stock, at cost: 11,132,372 and 11,223,291 shares as of
   June 30, 2004 and December 31, 2003, respectively ...............       (131,805)         (132,741)
Unallocated common stock held by ESOP ..............................         (7,158)           (7,158)
Unearned common stock acquired by RRP ..............................           (187)           (1,523)
Accumulated other comprehensive income (loss), net of tax ..........         (1,097)              908
                                                                       ------------       -----------
   Total stockholders' equity ......................................        154,527           155,953
                                                                       ------------       -----------
     Total liabilities and stockholders' equity ....................   $  1,471,769       $ 1,569,428
                                                                       ============       ===========
</TABLE>

See accompanying notes.

                                       3
<PAGE>

                                CFS BANCORP, INC.
                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED              SIX MONTHS ENDED
                                                                        JUNE 30,                        JUNE 30,
                                                             -----------------------------   -----------------------------
                                                                 2004            2003            2004             2003
                                                             -------------   -------------   -------------   -------------
                                                                                      (Unaudited)
                                                                 (Dollars in thousands, except share and per share data)
<S>                                                          <C>             <C>             <C>             <C>
Interest income:
   Loans ..................................................  $     13,730    $     14,974    $     27,846    $     30,214
   Securities .............................................         2,601           1,818           5,271           4,334
   Other ..................................................           469             891           1,107           1,738
                                                             ------------    ------------    ------------    ------------
     Total interest income ................................        16,800          17,683          34,224          36,286
Interest expense:
   Deposits ...............................................         3,185           4,539           7,021           9,764
   Borrowings .............................................         6,263           6,672          12,526          13,272
                                                             ------------    ------------    ------------    ------------
     Total interest expense ...............................         9,448          11,211          19,547          23,036
                                                             ------------    ------------    ------------    ------------
Net interest income before provision for losses on loans...         7,352           6,472          14,677          13,250
Provision for losses on loans .............................         1,918             509           2,657             987
                                                             ------------    ------------    ------------    ------------
Net interest income after provision for losses on loans             5,434           5,963          12,020          12,263
Non-interest income:
   Service charges and other fees .........................         1,853           1,744           3,501           3,222
   Commission income ......................................           171             192             323             318
   Net realized losses on available-for-sale securities              (366)             (1)            (45)             (1)
   Net (loss) gain on sale of office properties ...........            (1)             24              (1)             24
   Income from Bank-owned life insurance ..................           365             367             723             729
   Other income ...........................................           253             322             687             606
                                                             ------------    ------------    ------------    ------------
     Total non-interest income ............................         2,275           2,648           5,188           4,898
Non-interest expense:
   Compensation and employee benefits .....................         4,638           4,427           9,525           8,866
   Net occupancy expense ..................................           615             578           1,257           1,200
   Professional fees ......................................         1,264             461           1,661             948
   Data processing ........................................           722             465           1,232             894
   Furniture and equipment expense ........................           456             480             919             957
   Marketing ..............................................           285             227             572             426
   Amortization of core deposit intangibles ...............            17               -              33               -
   Other general and administrative expenses ..............           975           1,017           2,049           1,947
                                                             ------------    ------------    ------------    ------------
     Total non-interest expense ...........................         8,972           7,655          17,248          15,238
                                                             ------------    ------------    ------------    ------------
Income (loss) before income taxes .........................        (1,263)            956             (40)          1,923
Income tax expense (benefit) ..............................          (906)            258            (927)            571
                                                             ------------    ------------    ------------    ------------
     Net income (loss) ....................................  $       (357)   $        698    $        887    $      1,352
                                                             ============    ============    ============    ============

Per share data:
   Basic earnings (loss) per share ........................  $      (0.03)   $       0.06    $       0.08    $       0.12
   Diluted earnings (loss) per share ......................         (0.03)           0.06            0.07            0.12
   Cash dividends declared per share ......................          0.11            0.11            0.22            0.22
Weighted average shares outstanding .......................    11,620,390      11,256,183      11,510,467      11,302,378
Weighted average diluted shares outstanding ...............    11,887,039      11,644,232      11,846,355      11,729,637
</TABLE>

See accompanying notes.

                                       4
<PAGE>

                                CFS BANCORP, INC.
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                             UNALLOC.  UNEARNED   ACCUM.
                                                                                              COMMON    COMMON    OTHER
                                                         ADDITIONAL                           STOCK     STOCK    COMPRE-
                                               COMMON     PAID IN     RETAINED    TREASURY     HELD    ACQUIRED  HENSIVE
                                               STOCK      CAPITAL     EARNINGS      STOCK    BY ESOP    BY RRP    INCOME     TOTAL
                                             ----------  ---------   ---------   ---------   -------   --------  --------  --------
                                                                                  (Unaudited)
                                                                 (Dollars in thousands, except per share data)
<S>                                          <C>         <C>         <C>         <C>         <C>       <C>       <C>       <C>
Balance January 1, 2003 ...................  $      234  $ 189,786   $ 107,598   $(125,650)  $(8,356)  $(2,827)  $  (123)  $160,662
Net income ................................           -          -       1,352           -         -         -         -      1,352
Other comprehensive income, net of tax:
  Change in unrealized appreciation on
  available-for-sale securities, net
  of reclassification adjustment ..........                                                                        1,064      1,064
                                                                                                                           --------
Total comprehensive income ................                                                                                   2,416
Purchase of treasury stock ................           -          -           -      (8,993)        -         -         -     (8,993)
Amortization or award under RRP ...........           -        (47)          -           -         -     1,302         -      1,255
Exercise of stock options .................           -       (207)          -       1,270         -         -         -      1,063
Tax benefit related to stock options
  exercised ...............................           -         26           -           -         -         -         -         26
Dividends declared on common stock
  ($0.22 per share) .......................           -          -      (2,388)          -         -         -         -     (2,388)
                                             ----------  ---------   ---------   ---------   -------   -------   -------   --------
Balance June 30, 2003 .....................  $      234  $ 189,558   $ 106,562   $(133,373)  $(8,356)  $(1,525)  $   941   $154,041
                                             ==========  =========   =========   =========   =======   =======   =======   ========

Balance January 1, 2004 ...................  $      234  $ 189,879   $ 106,354   $(132,741)  $(7,158)  $(1,523)  $   908   $155,953
Net income ................................           -          -         887           -         -         -         -        887
Other comprehensive loss, net of tax:
  Change in unrealized appreciation on
  available-for-sale securities, net of
  reclassification adjustment .............                                                                       (2,005)    (2,005)
                                                                                                                           --------
Total comprehensive loss ..................                                                                                  (1,118)
Purchase of treasury stock ................           -          -           -        (854)        -         -         -       (854)
Amortization or award under RRP ...........           -        (32)          -           -         -     1,336         -      1,304
Exercise of stock options .................           -       (258)          -       1,790         -         -         -      1,532
Tax benefit related to stock options
  exercised ...............................           -        138           -           -         -         -         -        138
Dividends declared on common stock
  ($0.22 per share) .......................           -          -      (2,428)          -         -         -         -     (2,428)
                                             ----------  ---------   ---------   ---------   -------   -------   -------   --------
Balance June 30, 2004                        $      234  $ 189,727   $ 104,813   $(131,805)  $(7,158)  $  (187)  $(1,097)  $154,527
                                             ==========  =========   =========   =========   =======   =======   =======   ========
</TABLE>

See accompanying notes.

                                       5
<PAGE>

                                CFS BANCORP, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                      SIX MONTHS ENDED JUNE 30,
                                                                      -------------------------
                                                                         2004           2003
                                                                      ----------     ----------
                                                                              (Unaudited)
                                                                        (Dollars in thousands)
<S>                                                                   <C>            <C>
Operating activities:
   Net income .....................................................   $     887      $   1,352
   Adjustments to reconcile net income to net cash provided by
     operating activities:
       Provision for losses on loans ..............................       2,657            987
       Depreciation and amortization ..............................         765            844
       Net premium amortization on securities available-for-sale...       1,514          3,902
       Deferred income tax benefit ................................        (642)        (1,187)
       Amortization of cost of stock benefit plans ................       1,304          1,255
       Tax benefit from exercises of nonqualified stock options             138             26
       Change in deferred income ..................................         168            493
       Increase in interest receivable ............................          24            571
       Decrease in accrued interest payable .......................        (298)          (113)
       Proceeds from sale of loans held-for-sale ..................       5,612          6,580
       Origination of loans held-for-sale .........................      (5,390)        (7,312)
       Net loss realized on securities available-for-sale .........          45              1
       Decrease (increase) in prepaid expenses and other assets              70         (1,147)
       (Decrease) increase in other liabilities ...................         (96)         2,247
                                                                      ---------      ---------
         Net cash provided by operating activities ................       6,758          8,499
                                                                      ---------      ---------

Investing activities:
   Proceeds from maturities, paydowns and sales of securities .....     134,486        287,559
   Purchases of securities available-for-sale .....................    (159,045)      (215,916)
   Redemption of Federal Home Loan Bank stock .....................           -             12
   Net loan originations and principal payments received ..........     (32,207)       (42,541)
   Proceeds from sale of real estate owned ........................       3,349          1,445
   Purchases of property and equipment ............................        (685)          (379)
   Disposal of property and equipment .............................           4            769
                                                                      ---------      ---------
     Net cash (used for) provided by investing activities .........     (54,098)        30,949
                                                                      ---------      ---------

Financing activities:
   Proceeds from exercise of stock options ........................       1,532          1,063
   Dividends paid on common stock .................................      (2,412)        (2,612)
   Purchase of treasury stock .....................................        (854)        (8,993)
   Net increase in savings and money market accounts ..............      38,724         32,046
   Net decrease in certificates of deposit ........................    (134,991)       (62,929)
   Net increase in advance payments by borrowers for taxes and
     insurance ....................................................         721          2,524
   Net decrease in borrowed funds .................................         (58)           (54)
                                                                      ---------      ---------
       Net cash flows used for financing activities ...............     (97,338)       (38,955)
                                                                      ---------      ---------
(Decrease) increase in cash and cash equivalents ..................    (144,678)           493
Cash and cash equivalents at beginning of period ..................     178,213        210,141
                                                                      ---------      ---------
Cash and cash equivalents at end of period ........................   $  33,535      $ 210,634
                                                                      =========      =========

Supplemental disclosure of non-cash activities:
   Loans transferred to real estate owned .........................   $   3,919      $     838
   Cash paid for interest on deposits .............................       7,250          9,804
   Cash paid for interest on borrowings ...........................      12,595         13,345
   Cash paid for taxes ............................................           -          1,374
</TABLE>

See accompanying notes.

                                       6
<PAGE>

                                CFS BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1. BASIS OF FINANCIAL STATEMENTS PRESENTATION

      The consolidated financial statements of CFS Bancorp, Inc. (including its
consolidated subsidiaries, the Company) included herein are unaudited; however,
such information reflects all adjustments (consisting only of normal recurring
adjustments), which are, in the opinion of management, necessary for a fair
presentation for the interim periods. The financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X.

      The results of operations for the three and six months ended June 30, 2004
are not necessarily indicative of the results expected for the full year ending
December 31, 2004. The accompanying consolidated financial statements are
unaudited and do not include information or footnotes necessary for a complete
presentation of financial condition, results of operations or cash flows in
accordance with accounting principles generally accepted in the United States.
The June 30, 2004 consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes for the year
ended December 31, 2003 included in the Company's Annual Report on Form 10-K.

      The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 income and expense during
the reported period. Actual results could differ from these estimates.

      Certain reclassifications have been made to prior period's consolidated
financial statements to conform to the current period's consolidated financial
statements.

2. STOCK-BASED COMPENSATION

      The Company accounts for its stock options in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued by Employees (APB
No. 25). Under APB No. 25, because the exercise price of the Company's
employees' stock options, which have been granted, equals the market price of
the underlying stock on the date of grant, no compensation expense is
recognized. Compensation expense for shares granted under the Recognition and
Retention Plan (RRP) is ratably recognized over the period of service, usually
the vesting period, based on the fair value of the stock on the date of grant.

                                       7
<PAGE>

      Pursuant to Financial Accounting Standards Board (FASB) Statement No. 123,
Accounting for Stock-Based Compensation (FAS No. 123), pro forma net income and
pro forma earnings per share are presented in the following table as if the fair
value method of accounting for stock-based compensation plans had been utilized.
The effects of applying FAS No. 123 in this pro forma disclosure are not
indicative of future amounts.

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED         SIX MONTHS ENDED
                                                           JUNE 30,                JUNE 30,
                                                     ------------------       ------------------
                                                       2004       2003          2004       2003
                                                     --------   --------      --------   --------
                                                     (Dollars in thousands except per share data)
<S>                                                  <C>        <C>           <C>        <C>
Net income (loss) (as reported)...................   $  (357)   $   698       $   887    $ 1,352
Stock-based compensation expense determined
   using fair value method, net of tax............      (128)      (211)         (292)      (404)
                                                     -------    -------       -------    -------
Pro forma net income (loss).......................   $  (485)   $   487       $   595    $   948
                                                     =======    =======       =======    =======
Basic earnings (loss) per share (as reported).....   $ (0.03)   $  0.06       $  0.08    $  0.12
Pro forma basic earnings (loss) per share.........     (0.04)      0.04          0.05       0.08
Diluted earnings (loss) per share (as reported)...     (0.03)      0.06          0.07       0.12
Pro forma diluted earnings (loss) per share.......     (0.04)      0.04          0.05       0.08
</TABLE>

      The fair value of the option grants for the three and six months ended
June 30, 2004 and 2003 was estimated using the Black-Scholes option value model,
with the following assumptions:

<TABLE>
<CAPTION>
                                     THREE MONTHS ENDED   SIX MONTHS ENDED
                                          JUNE 30,            JUNE 30,
                                     ------------------  ------------------
                                       2004      2003      2004      2003
                                     --------  --------  --------  --------
<S>                                  <C>       <C>       <C>       <C>
Dividend yield...................        3.3%      3.1%      3.3%      3.1%
Expected volatility..............       27.4      30.2      27.4      30.2
Risk-free interest...............        6.9       3.9       6.9       3.9
Original expected life...........    6 years   7 years   6 years   7 years
</TABLE>

      The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. Option valuation models such as the Black-Scholes
require the input of highly subjective assumptions including the expected stock
price volatility.


                                       8
<PAGE>

3. COMPREHENSIVE INCOME

      Change in the fair value of securities available-for-sale is presented on
a net basis on the Consolidated Statement of Changes in Stockholders' Equity.
The following tables disclose the changes in the components of other accumulated
comprehensive income (loss) for the six months ended June 30, 2004 and 2003.

<TABLE>
<CAPTION>
                                                                 JUNE 30, 2004
                                                        -----------------------------
                                                        BEFORE TAX   TAX    AFTER TAX
                                                          AMOUNT    EFFECT    AMOUNT
                                                        ----------  ------  ---------
                                                            (Dollars in thousands)
<S>                                                     <C>         <C>     <C>
Unrealized holding losses on securities
  available-for-sale:
  Unrealized holding losses, net ....................    $(3,115)   $1,081  $ (2,034)
  Less: reclassification adjustment for net losses...
    included in net income ..........................        (45)       16       (29)
                                                         -------    ------  --------
Unrealized losses, net ..............................    $(3,070)   $1,065  $ (2,005)
                                                         =======    ======  ========
</TABLE>

<TABLE>
<CAPTION>
                                                                 JUNE 30, 2003
                                                        -----------------------------
                                                        BEFORE TAX   TAX    AFTER TAX
                                                          AMOUNT    EFFECT    AMOUNT
                                                        ----------  ------  ---------
                                                           (Dollars in thousands)
<S>                                                     <C>         <C>     <C>
Unrealized holding gains on securities
  available-for-sale:
  Unrealized holding gains, net .....................    $ 1,651    $(588)  $  1,063
  Less: reclassification adjustment for net losses
    included in net income ..........................         (1)       -         (1)
                                                         -------    -----   --------
Unrealized gains, net ...............................    $ 1,652    $(588)  $  1,064
                                                         =======    =====   ========
</TABLE>

4. EARNINGS PER SHARE

      The following table sets forth the computation of basic and diluted
earnings per share for the three and six months ended June 30, 2004 and 2003:

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED             SIX MONTHS ENDED
                                                          JUNE 30,                      JUNE 30,
                                               ----------------------------   ---------------------------
                                                   2004            2003           2004           2003
                                               -------------   ------------   ------------   ------------
                                                     (Dollars in thousands, except per share data)
<S>                                            <C>             <C>            <C>            <C>
Net income (loss) ...........................  $       (357)   $        698   $        887   $      1,352
                                               ============    ============   ============   ============

Weighted average common shares outstanding...    11,620,390      11,256,183     11,510,467     11,302,378
Common share equivalents (1) ................       266,649         388,049        335,888        427,259
                                               ------------    ------------   ------------   ------------
Weighted average common shares and common
  share equivalents outstanding .............    11,887,039      11,644,232     11,846,355     11,729,637
                                               ============    ============   ============   ============

Basic earnings (loss) per share .............  $      (0.03)   $       0.06   $       0.08   $       0.12
Diluted earnings (loss) per share ...........         (0.03)           0.06           0.07           0.12
</TABLE>

(1)   Assuming exercise of dilutive stock options and a portion of the unearned
      awards under the RRP.

                                      9
<PAGE>

5. NEW ACCOUNTING PRONOUNCEMENTS

The Meaning of Other-Than-Temporary and Its Application to Certain Investments
------------------------------------------------------------------------------

      In January 2003, the Emerging Issues Task Force (EITF) began a project to
provide additional guidance on when a market value decline on debt and
marketable equity securities should be considered other-than-temporary.
Currently, declines in market value that are considered to be
other-than-temporary require that a loss be recognized through the income
statement. The EITF issued additional guidance in March 2004 establishing
criteria for recognition and measurement under this pronouncement to be
effective for reporting periods beginning after June 15, 2004. This additional
guidance was used in our evaluation of securities available-for-sale for
other-than-temporary losses.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

FORWARD LOOKING STATEMENTS

      When used in this Form 10-Q or future filings by the Company with the SEC,
in the Company's press releases or other public or stockholder communications,
the words or phrases "would be," "will allow," "intends to," "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project," or similar expressions, or the negative thereof, are intended to
identify "forward-looking statements" within the meaning of the Private
Litigation Reform Act of 1995.

      The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including regional and national economic
conditions, changes in levels of market interest rates, credit and other risks
which are inherent in the Company's lending and investment activities,
legislative changes, changes in the cost of funds, demand for loan products and
financial services, changes in accounting principles and competitive and
regulatory factors, could affect the Company's financial performance and could
cause the Company's actual results for future periods to differ materially from
those anticipated or projected. Such forward-looking statements are not
guarantees of future performance. The Company does not undertake, and
specifically disclaims any obligation, to update any forward-looking statements
to reflect occurrences or unanticipated events or circumstances after the date
of such statements.

OVERVIEW

      During the second quarter of 2004, the Company continued to make progress
on various strategic initiatives resulting in the following:

      -     net interest margin increased to 2.05% for the second quarter of
            2004 from 1.98% for the first quarter of 2004 and from 1.73% for the
            second quarter of 2003,

      -     low-cost core deposit totals increased 5.1% from the first quarter
            of 2004 through the Company's continued promotional efforts and
            retail incentives, and

                                       10
<PAGE>

      -     total loan and line of credit originations for the second quarter of
            2004 were over $130 million and represented a 65% increase from the
            first quarter of 2004.

      However, the Company's second quarter earnings were adversely impacted by
the following:

      -     a $1.9 million provision for losses on loans for the second quarter
            of 2004,

      -     legal expenses of $939,000 related to the Company's goodwill
            litigation against the U.S. Government, and

      -     a $343,000 write-down in the cost basis of a trust preferred
            security deemed to be partially impaired during the second quarter
            of 2004.

      Primarily as a result, the Company reported a net loss of $357,000 for the
second quarter of 2004 as compared to net income of $698,000 reported in the
second quarter of 2003.

      During the second quarter of 2004, the Company took advantage of an
extremely steep yield curve by repositioning its fixed-income bond portfolio.
The Company was able to increase the weighted-average yield on this segment of
the portfolio from 2.47% at the end of March 2004 to 3.01% at the end of June
2004 by selling over $60 million of short-term securities and purchasing
securities with a longer term. While the Company recognized a net loss of
$23,000 on the sales of these securities, management expects that the
repositioning of the portfolio will add to pre-tax income throughout the
remainder of 2004.

      Although the Company's net interest margin improved for the quarter, the
margin and the Company's earnings continue to be impacted by the putable
fixed-rate Federal Home Loan Bank (FHLB) borrowings. The weighted-average cost
of these borrowings remained relatively stable at 6.02% during the second
quarter of 2004 as compared to 5.96% for the second quarter of 2003. Management,
under the guidance of the Board of Directors, continues to explore the
possibility of refinancing these borrowings at current market rates including
reviewing the prepayment penalties associated with the borrowings. As of June
30, 2004, the prepayment penalty was estimated at $37.2 million.

CRITICAL ACCOUNTING POLICIES

      The Company's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States and follow
general practices within the industry in which it operates. Application of these
principles requires management to make estimates or judgments that affect the
amounts reported in the financial statements and accompanying notes. These
estimates are based on information available as of the date of the financial
statements; accordingly, as this information changes, the financial statements
could reflect different estimates or judgments. Certain policies inherently have
a greater reliance on the use of estimates, and as such have a greater
possibility of producing results that could be materially different than
originally reported. Estimates or judgments are necessary when assets and
liabilities are required to be recorded at fair value, when a decline in the
value of an asset not carried on the financial statements at fair value warrants
an impairment write-down or valuation reserve to be established, or when an
asset or liability needs to be recorded contingent upon a future event. Carrying
assets and liabilities at fair value inherently results in more financial

                                       11
<PAGE>

statement volatility. The fair values and the information used to record
valuation adjustments for certain assets and liabilities are based either on
quoted market prices or are provided by other third-party sources, when
available. When third-party information is not available, valuation adjustments
are estimated in good faith by management primarily through the use of internal
cash flow modeling techniques.

      The most significant accounting policies followed by the Company are
presented in Note 1 to the consolidated financial statements. These policies
along with the disclosures presented in the other financial statement notes and
in this Management's Discussion and Analysis, provide information on the
methodology and policies relating to the valuation of significant assets and
liabilities. Management views critical accounting policies to be those which are
highly dependent on subjective or complex judgments, estimates and assumptions,
and where changes in those estimates and assumptions could have a significant
impact on the financial statements. Management currently views the determination
of the allowance for losses on loans to be a critical accounting policy.

      Allowance for Losses on Loans. The allowance for losses on loans
represents management's estimates of probable credit losses inherent in the loan
portfolio, which is the largest asset type on the Company's consolidated balance
sheet. Estimating the amount of the allowance for losses on loans requires
significant judgments using estimates such as 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.
Loan losses are charged off against the allowance, while recoveries of amounts
previously charged off are credited to the allowance. The Company establishes
provisions for losses on loans, which are charged to operations, in order to
maintain the allowance for losses on loans at a level which is deemed
appropriate to absorb losses inherent in the portfolio.

      In determining the appropriate level of the allowance for losses on loans,
among other factors, management considers:

      -     past and anticipated loss experience,

      -     evaluations of real estate collateral,

      -     current and anticipated economic conditions,

      -     volume and type of lending, and

      -     levels of non-performing and other classified loans.

      The amount of the allowance is based on estimates, and the amount of
losses ultimately recognized may vary from such estimates. Management assesses
the allowance for losses on loans on a quarterly basis and makes appropriate
provisions to maintain the allowance at an appropriate level. The actual
determination of the total provision is the combination of specific reserves,
which may be established from time to time on individual classified assets, and
a general reserve that is based in part on certain loss factors applied to
various loan pools as stratified by the Company considering historical
charge-offs and delinquency levels. To the extent that actual outcomes differ
from management estimates, an additional provision for losses on loans could be
required that could adversely affect earnings or the Company's financial
position in future periods. In addition, various regulatory agencies, as an
integral part of their

                                       12
<PAGE>

examination processes, periodically review the provision for losses on loans for
Citizens Financial Services, FSB (the Bank or Citizens) and the carrying value
of its other non-performing assets, based on information available to them at
the time of their examinations. Any of these agencies could require the Bank to
make additional provisions for losses on loans in the future.

      Additionally, the Company engages an independent third party to
periodically review its commercial business and commercial real estate loans.
The recommendations of this review are reviewed and compared to the Company's
asset classification, and adjustments are made as deemed appropriate by
management.

AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID

      The following tables provide information regarding (i) the Company's
interest income recognized from interest-earning assets and their related
average yields; (ii) the amount of interest expense realized on interest-bearing
liabilities and their related average rates; (iii) net interest income; (iv)
interest rate spread; and (v) net interest margin. Information is based on
average daily balances during the indicated periods.

                                       13
<PAGE>

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED JUNE 30,
                                           ------------------------------------------------------------------------
                                                           2004                                 2003
                                           -----------------------------------  -----------------------------------
                                             AVERAGE                 AVERAGE      AVERAGE                 AVERAGE
                                             BALANCE     INTEREST   YIELD/COST    BALANCE     INTEREST   YIELD/COST
                                           -----------  ----------  ----------  -----------  ----------  ----------
                                                                    (Dollars in thousands)
<S>                                        <C>           <C>        <C>         <C>          <C>         <C>
Interest-earning assets:
   Loans receivable (1)..................  $   999,818  $   13,730      5.52%   $   956,481  $   14,974      6.28%
   Securities (2)................. ......      342,194       2,601      3.06        317,453       1,818      2.30
   Other interest-earning assets (3).....       98,227         469      1.92        227,634         891      1.57
                                           -----------  ----------              -----------  ----------
     Total interest-earning assets.......    1,440,239      16,800      4.69      1,501,568      17,683      4.72

Non-interest earning assets..............       74,719                               81,659
                                           -----------                          -----------
Total assets.............................  $ 1,514,958                          $ 1,583,227
                                           ===========                          ===========

Interest-bearing liabilities:
   Deposits:
     Checking accounts...................  $    96,960          58      0.24%   $    93,367         254      1.09%
     Money market accounts...............      137,240         304      0.89        150,462         409      1.09
     Savings accounts....................      209,192         175      0.34        215,782         377      0.70
     Certificates of deposit.............      430,820       2,648      2.47        451,729       3,499      3.11
                                           -----------  ----------              -----------  ----------
       Total deposits....................      874,212       3,185      1.47        911,340       4,539      2.00

   Borrowings............................      418,436       6,263      6.02        449,380       6,672      5.96
                                           -----------  ----------              -----------  ----------
     Total interest-bearing
       liabilities.......................    1,292,648       9,448      2.94      1,360,720      11,211      3.30
                                                        ----------                           ----------
Non-interest bearing deposits............       42,452                               35,172
Non-interest bearing liabilities.........       20,282                               32,246
                                           -----------                          -----------
Total liabilities........................    1,355,382                            1,428,138
Stockholders' equity.....................      159,576                              155,089
                                           -----------                          -----------
Total liabilities and stockholders'
   equity ...............................  $ 1,514,958                          $ 1,583,227
                                           ===========                          ===========
Net interest-earning assets..............  $   147,591                          $   140,848
                                           ===========                          ===========
Net interest income / interest
   rate spread...........................               $    7,352      1.75%                $    6,472      1.42%
                                                        ==========    ======                 ==========    ======
Net interest margin......................                               2.05%                                1.73%
                                                                      ======                               ======
Ratio of average interest-earning
   assets to average interest-bearing
   liabilities...........................                             111.42%                              110.35%
                                                                      ======                               ======
</TABLE>

(1)   The average balance of loans receivable is net of unearned fees and
      includes non-performing loans, interest on which is recognized on a cash
      basis.

(2)   Average balances of securities are based on historical costs.

(3)   Includes money market accounts, federal funds sold and interest-earning
      bank deposits.

                                       14

<PAGE>

<TABLE>
<CAPTION>
                                                                    SIX MONTHS ENDED JUNE 30,
                                           ------------------------------------------------------------------------
                                                           2004                                 2003
                                           -----------------------------------  -----------------------------------
                                             AVERAGE                 AVERAGE      AVERAGE                 AVERAGE
                                             BALANCE     INTEREST   YIELD/COST    BALANCE     INTEREST   YIELD/COST
                                           -----------  ----------  ----------  -----------  ----------  ----------
                                                                    (Dollars in thousands)
<S>                                        <C>           <C>        <C>         <C>          <C>         <C>
Interest-earning assets:
   Loans receivable (1)..................  $   992,449  $   27,846      5.64%   $   949,169  $   30,214      6.42%
   Securities (2)........................      336,218       5,271      3.15        329,226       4,334      2.65
   Other interest-earning assets (3).....      134,957       1,107      1.65        229,906       1,738      1.52
                                           -----------  ----------              -----------  ----------
     Total interest-earning assets.......    1,463,624      34,224      4.70      1,508,301      36,286      4.85

Non-interest earning assets..............       72,975                               81,118
                                           -----------                          -----------
Total assets.............................  $ 1,536,599                          $ 1,589,419
                                           ===========                          ===========

Interest-bearing liabilities:
   Deposits:
     Checking accounts...................  $    95,015         124      0.26%   $    91,856         535      1.17%
     Money market accounts...............      131,310         593      0.91        141,167         823      1.18
     Savings accounts....................      207,550         385      0.37        214,617         888      0.83
     Certificates of deposit.............      466,338       5,919      2.55        469,474       7,518      3.23
                                           -----------  ----------              -----------  ----------
       Total deposits....................      900,213       7,021      1.57        917,114       9,764      2.15

   Borrowings............................      418,450      12,526      6.02        449,393      13,272      5.96
                                           -----------  ----------              -----------  ----------
     Total interest-bearing
       liabilities.......................    1,318,663      19,547      2.98      1,366,507      23,036      3.40
                                                        ----------                           ----------
Non-interest bearing deposits............       40,125                               34,892
Non-interest bearing liabilities.........       19,584                               31,673
                                           -----------                          -----------
Total liabilities........................    1,378,372                            1,433,072
Stockholders' equity.....................      158,227                              156,347
                                           -----------                          -----------
Total liabilities and stockholders'
   equity ...............................  $ 1,536,599                          $ 1,589,419
                                           ===========                          ===========
Net interest-earning assets..............  $   144,961                          $   141,794
                                           ===========                          ===========
Net interest income / interest
   rate spread...........................               $   14,677      1.72%                $   13,250      1.45%
                                                        ==========    ======                 ==========    ======
Net interest margin......................                               2.02%                                1.77%
                                                                      ======                               ======
Ratio of average interest-earning
assets to average interest-bearing
   liabilities...........................                             110.99%                              110.38%
                                                                      ======                               ======
</TABLE>

(1)   The average balance of loans receivable is net of unearned fees and
      includes non-performing loans, interest on which is recognized on a cash
      basis.

(2)   Average balances of securities are based on historical costs.

(3)   Includes money market accounts, federal funds sold and interest-earning
      bank deposits.

                                       15
<PAGE>

RATE /VOLUME ANALYSIS

      The following tables detail the effects of changing rates and volumes on
the Company's net interest income. Information is provided with respect to (i)
effects on interest income attributable to changes in rate (changes in rate
multiplied by prior volume); (ii) effects on interest income attributable to
changes in volume (changes in volume multiplied by prior rate); and (iii)
changes in rate/volume (changes in rate multiplied by changes in volume).

<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED JUNE 30,
                                                     ---------------------------
                                                        2004 COMPARED TO 2003
                                            -------------------------------------------
                                                     INCREASE (DECREASE) DUE TO
                                            -------------------------------------------
                                                                             TOTAL NET
                                                                   RATE/     INCREASE /
                                              RATE      VOLUME     VOLUME    (DECREASE)
                                            --------   --------   --------   ----------
                                                      (Dollars in thousands)
<S>                                         <C>        <C>        <C>        <C>
Interest-earning assets:
   Loans receivable .....................   $(1,839)   $   678    $   (83)    $(1,244)
   Securities ...........................       595        142         46         783
   Other interest-earning assets ........       196       (507)      (111)       (422)
                                            -------    -------    -------     -------
     Total net change in income on
       interest-earning assets ..........    (1,048)       313       (148)       (883)
Interest-bearing liabilities:
   Deposits:
     Checking accounts ..................      (198)        10         (8)       (196)
     Money market accounts ..............       (76)       (36)         7        (105)
     Savings accounts ...................      (196)       (12)         6        (202)
     Certificates of deposit ............      (722)      (162)        33        (851)
                                            -------    -------    -------     -------
       Total deposits ...................    (1,192)      (200)        38      (1,354)
   Borrowings ...........................        54       (459)        (4)       (409)
                                            -------    -------    -------     -------
     Total net change in expense on
       interest-bearing liabilities......    (1,138)      (659)        34      (1,763)
                                            -------    -------    -------     -------
Net change in net interest income .......   $    90    $   972    $  (182)    $   880
                                            =======    =======    =======     =======
</TABLE>

                                       16
<PAGE>

<TABLE>
<CAPTION>
                                                      SIX MONTHS ENDED JUNE 30,

                                                        2004 COMPARED TO 2003
                                            -------------------------------------------
                                                     INCREASE (DECREASE) DUE TO
                                            -------------------------------------------
                                                                             TOTAL NET
                                                                   RATE/     INCREASE /
                                              RATE      VOLUME     VOLUME    (DECREASE)
                                            --------   --------   --------   ----------
                                                      (Dollars in thousands)
<S>                                         <C>        <C>        <C>        <C>
Interest-earning assets:
   Loans receivable .....................   $(3,583)   $ 1,378    $  (163)    $(2,368)
   Securities ...........................       827         92         18         937
   Other interest-earning assets ........       148       (718)       (61)       (631)
                                            -------    -------    -------     -------
     Total net change in income on
       interest-earning assets ..........    (2,608)       752       (206)     (2,062)
Interest-bearing liabilities:
   Deposits:
     Checking accounts ..................      (415)        18        (14)       (411)
     Money market accounts ..............      (186)       (57)        13        (230)
     Savings accounts ...................      (490)       (29)        16        (503)
     Certificates of deposit ............    (1,559)       (50)        10      (1,599)
                                            -------    -------    -------     -------
       Total deposits ...................    (2,650)      (118)        25      (2,743)
   Borrowings ...........................       180       (914)       (12)       (746)
                                            -------    -------    -------     -------
     Total net change in expense on
       interest-bearing liabilities......    (2,470)    (1,032)        13      (3,489)
                                            -------    -------    -------     -------
Net change in net interest income .......   $  (138)   $ 1,784    $  (219)    $ 1,427
                                            =======    =======    =======     =======
</TABLE>

RESULTS OF OPERATIONS

      Net Income. The Company had a net loss for the second quarter of 2004
totaling $357,000, as compared to net income of $698,000 reported in the same
quarter of the previous year. The Company's net income for the six months ended
June 30, 2004 was $887,000, as compared to net income of $1.4 million for the
first six months of 2003. The reduced income levels from the comparable periods
in the prior year was mainly a result of the impact of the increased provision
for losses on loans, increased legal expenses and the write-down in the cost
basis of a trust preferred security during the second quarter of 2004.

      Net Interest Income. Net interest income is the principal source of
earnings for the Company and consists of interest income on loans and investment
securities less interest expense on deposits and borrowed funds. Net interest
income is a function of the Company's interest rate spread, which is the
difference between the average yield earned on the Company's interest-earning
assets and the average rate paid on its interest-bearing liabilities, and the
relative amount of interest-earning assets and interest-bearing liabilities. The
Company's interest rate spread increased for the three and six month periods
ended June 30, 2004 to 1.75% and 1.72%, respectively, from 1.42% and 1.45% for
comparable periods ended June 30, 2003.

      The Company's net interest margin (which is net interest income as a
percentage of average interest-earning assets) improved to 2.05% for the three
months ended June 30, 2004 as compared to 1.73% for the same period in 2003. Net
interest margin for the first half of 2004 was 2.02%, up from 1.77% during the
first half of 2003.

                                       17
<PAGE>

      The Company's net interest income for the second quarter of 2004 was $7.4
million, up 13.6% from $6.5 million for the second quarter of 2003. Net interest
income for the six months ended June 30, 2004 was $14.7 million, up 10.8% from
$13.3 million for comparable period in the prior year. The increase in net
interest income was primarily due to a lower cost of funds as over $180 million
of certificates of deposit with above-market interest rates either repriced at
lower current market rates or were withdrawn at maturity during the second
quarter of 2004. The Company expects its net interest income and net interest
margin to continue to improve during the remainder of 2004 as a result of
continued loan growth, the effects of the repositioning of its securities
portfolio and increased core deposits.

      Interest Income. Total interest income of $16.8 million for the three
months ended June 30, 2004 decreased by $883,000 from $17.7 million for the
second quarter of 2003. Interest income for the first six months of 2004 totaled
$34.2 million as compared to $36.3 million for the first six months of 2003. The
decrease in interest income for the quarter and the six month period in 2004 was
a result of the lower rate environment during 2004 as compared to 2003. The
average balances of interest-earning assets also decreased for the quarter and
six months ended June 30, 2004 by 4.1% and 3.0%, respectively, from the
comparable 2003 periods.

      The Company's average yield on interest-earning assets remained relatively
stable during the second quarter of 2004 at 4.69% as compared to 4.72% during
the second quarter of 2003. For the six months ended June 30, 2004, the average
yield on interest-earning assets was 4.70% as compared to 4.85% for the
comparable prior year period.

      The average yields on loans receivable decreased 76 basis points during
the second quarter of 2004 from the second quarter of 2003 and 78 basis points
during the first six months of 2004 from the first six months of 2003. The main
reason for the decreased loan yields was a result of the lower interest rate
environment experienced during 2004. The decrease in yields on loans receivable
was offset by an increase in average yields on the Company's securities and
other interest-earning assets to 2.81% from 2.00% for the second quarter of 2003
and to 2.72% from 2.19% for the six months ended June 30, 2003. These increases
resulted from reduced premium amortization on the Company's investment portfolio
combined with a decrease in total funds invested in low-yielding overnight funds
during 2004.

      Interest Expense. Total interest expense of $9.4 million for the three
months ended June 30, 2004 represented a decrease of $1.8 million from $11.2
million incurred for the second quarter of 2003. Interest expense was $19.5
million for the six months ended June 30, 2004, a decrease of $3.5 million from
$23.0 million for the six months ended June 30, 2003.

      The average balance of interest-bearing liabilities decreased 5.0% and the
average cost of interest-bearing liabilities decreased 36 basis points during
the second quarter of 2004 as compared to the second quarter of 2003. For the
six months ended June 30, 2004, the average balance of interest-bearing
liabilities decreased 3.5% and the average cost of interest-bearing liabilities
decreased 42 basis points as compared to the six months ended June 30, 2003.

      The average cost of interest-bearing deposits for the quarter ended June
30, 2004 was down 53 basis points to 1.47% from 2.00% for the second quarter of
2003. The average cost of these deposits was also down 58 basis points to 1.57%
for the six months ended June 30, 2004

                                       18
<PAGE>

from 2.15% for the same comparable 2003 period. The lower cost of deposits is
mainly a result of over $180 million of above-market rate certificates of
deposit either being repriced to lower current market rates or withdrawn at
maturity during the second quarter of 2004 combined with the lower interest rate
environment during 2004. Also contributing to the lower cost of deposits is an
increase in low-cost core deposits of 5.1% and 8.5% at June 30, 2004 from the
levels existing at March 31, 2004 and December 31, 2003, respectively.

      Provision for losses on loans. The Company's provision for losses on loans
was $1.9 million for the second quarter of 2004 as compared to $509,000 for the
second quarter of 2003. The provision for the six months ended June 30, 2004 was
$2.7 million, up from $987,000 for the comparable period in 2003. See additional
discussion regarding the increases in the provision included in the "Allowance
for Losses on Loans" and the "Critical Accounting Policies" sections in this
Form 10-Q.

      Non-interest income. Non-interest income was $2.3 million for the quarter
ended June 30, 2004, a decrease of $373,000 from the second quarter of 2003.
This decrease was mainly the result of a $343,000 write-down in the cost basis
of a $1.1 million trust preferred security that was deemed to be partially
impaired during the second quarter of 2004. For further discussion related to
this impaired security, see the "Securities" section in this Form 10-Q. In
addition, the Company incurred $23,000 of net losses on the sale of
approximately $60 million of available-for-sale securities during the second
quarter of 2004 as part of the repositioning of its portfolio.

      Non-interest income for the six months ended June 30, 2004 was $5.2
million, up from $4.9 million for the comparable prior year period. The increase
is mainly a result of the increase in service charges and other fees which
includes fees related to the Company's Overdraft Protection Program.

      Non-interest expense. Non-interest expense for the second quarter and
first six months of 2004 was $9.0 million and $17.2 million, respectively,
representing increases of $1.3 million and $2.0 million, respectively, from the
second quarter and first six months of 2003. These increases were primarily
related to the legal expenses associated with the Company's goodwill litigation
case that went to trial during June 2004. The legal expenses incurred during the
second quarter and first six months of 2004 related to this case were $939,000
and $1.0 million, respectively. These 2004 expenses were significantly higher
than the expenses related to this litigation that were incurred during the
second quarter and first six months of 2003 totaling $44,000 and $55,000,
respectively. The Company estimates that the legal expenses related to the
goodwill case for the remainder of 2004 will be approximately $300,000. See Item
1 of Part II in this Form 10-Q for a discussion of the litigation.

      In addition, the Company's data processing expenses increased $257,000 and
$338,000, respectively, during the second quarter and first six months of 2004
due to its migration to a new core data processor during the second quarter of
2004. Since these increased costs were related to the actual conversion and
migration to the new processor, management anticipates a reduction in overall
core processing costs while obtaining enhanced functionality within the system.

      Income Tax Expense. The Company's income tax benefit for the three months
ended June 30, 2004 was $906,000 or 71.7% of pre-tax losses compared to income
tax expense of $258,000 or 27.0% of pre-tax income for the three months ended
June 30, 2003. The income tax

                                       19
<PAGE>

benefit for the six months ended June 30, 2004 was $927,000 compared to income
tax expense of $571,000 for the six months ended June 30, 2003. The significant
decrease in income tax expense was a result of the lower pre-tax income for the
three and six month periods ended June 30, 2004 combined with the application of
available tax credits, the effects of permanent tax differences on the Company's
pre-tax earnings and the reversal of tax accruals no longer considered
necessary. The Company anticipates that these tax credits and permanent
differences will continue to have a favorable impact on the income tax expense
for the remainder of 2004.

CHANGES IN FINANCIAL CONDITION

      General. At June 30, 2004, the Company's total assets had decreased by
$97.7 million to $1.47 billion from $1.57 billion at December 31, 2003. The
significant changes in the composition of the balance sheet during the six
months ended June 30, 2004 included a decrease in cash and cash equivalents of
$144.7 million. This decrease was a result of a decrease in total deposits of
$96.3 million as the Company allowed higher costing certificates of deposit to
runoff which was combined with increases in net loans receivable of $25.2
million and securities of $19.7 million.

      Securities. Amortized cost of the Company's securities and their fair
values were as follows at June 30, 2004 and December 31, 2003:

<TABLE>
<CAPTION>
                                                               GROSS      GROSS
                                                 AMORTIZED  UNREALIZED  UNREALIZED    FAIR
                                                   COST       GAINS       LOSSES      VALUE
                                                 ---------  ----------  ----------  ---------
                                                            (Dollars in thousands)
<S>                                              <C>        <C>         <C>         <C>
At June 30, 2004:
   Agency securities, corporate bonds, and
     commercial paper .........................  $ 188,286  $      129  $  (1,354)  $ 187,061
   Mortgage-backed securities .................     84,365         533       (540)     84,358
   Collateralized mortgage obligations ........     67,388         451       (252)     67,587
   Trust preferred securities .................      5,699           -       (461)      5,238
   Equity securities ..........................      3,453           -       (218)      3,235
                                                 ---------  ----------  ---------   ---------
                                                 $ 349,191  $    1,113  $  (2,825)  $ 347,479
                                                 =========  ==========  =========   =========

At December 31, 2003:
   Agency securities, corporate bonds, and
     commercial paper .........................  $ 132,127  $      692  $       -   $ 132,819
   Mortgage-backed securities .................    108,468         888       (255)    109,101
   Collateralized mortgage obligations ........     75,245         626        (73)     75,798
   Trust preferred securities .................      6,148           -       (562)      4,667
   Equity securities ..........................      4,443         178       (136)      5,404
                                                 ---------  ----------  ---------   ---------
                                                 $ 326,431  $    2,384  $  (1,026)  $ 327,789
                                                 =========  ==========  =========   =========
</TABLE>

      During the latter part of the second quarter of 2004, the Company took
advantage of an extremely steep yield curve and repositioned a portion of its
securities portfolio. Over $60 million of fixed-income bonds were sold and
replaced with securities having a weighted-average maturity of 42 months. The
weighted-average maturity and weighted-average yield on this segment of the
portfolio increased from 26.7 months and 2.47% at the end of March 2004 to 30.8
months and 3.01% at the end of the second quarter of 2004. None of these newly
purchased

                                       20
<PAGE>

securities is callable before its stated maturity. While the Company recognized
a net loss of approximately $23,000 on these securities sales during the second
quarter, management expects that the repositioning of the portfolio will improve
pre-tax income over the remainder of 2004.

      Also during the second quarter of 2004, management identified one impaired
trust preferred security with a cost basis of $1.1 million and an estimated fair
value of $497,000 as of June 30, 2004. Based on a credit analysis performed on
the parent company of the issuer, the Company took a $343,000 write-down in the
cost basis of this security during the second quarter of 2004.

      In June 2004, the issuer of the security announced that it had elected to
defer the regularly scheduled distributions on these securities and does not
expect to resume distributions until it determines that the issuer's
profitability can support these payments. Although the issuer has the right to
suspend distributions without being in default, the decision to forego the
distribution, the fact that there is limited public data available other than
annual reports and the limited marketability of this issue caused the Company to
review this investment for impairment. The issuer has changed its business
strategy in recent years which has adversely affected the issuer's earnings.
Since the change in strategy, the issuer has had decreasing profits and has been
subject to various regulatory operating restrictions and enforcement actions. On
March 31, 2004, the issuer completed a revised Business Plan covering the
remainder of 2004 as well as 2005. The Company will continue to monitor the
activities of the issuer throughout the workout timeframe and will re-evaluate
the impairment as new information becomes available.

      Management does not believe that any other individual unrealized loss as
of June 30, 2004 represents an other-than-temporary impairment. The unrealized
losses reported for the remainder of the portfolio are attributable to changes
in interest rates and the current low interest rate environment.

      Loans. Loans receivable, net of unearned fees, and the percentage of loans
by category are presented below as of June 30, 2004 and December 31, 2003:

<TABLE>
<CAPTION>
                                               JUNE 30, 2004          DECEMBER 31, 2003
                                           ----------------------  ----------------------
                                             AMOUNT    PERCENTAGE    AMOUNT    PERCENTAGE
                                           ----------  ----------  ----------  ----------
                                                        (Dollars in thousands)
<S>                                        <C>         <C>         <C>         <C>
Commercial and construction loans:
  Commercial real estate ................  $  411,337     40.8%    $  427,462     43.5%
  Construction and land development......     156,493     15.5        127,760     13.0
  Commercial and industrial .............      47,970      4.8         36,222      3.7
                                           ----------    -----     ----------    -----
  Total commercial loans ................     615,800     61.1        591,444     60.2

Retail loans:
  Single-family residential .............     296,037     29.3        316,768     32.3
  Home equity loans .....................      88,596      8.8         71,360      7.3
  Other .................................       7,648      0.8          2,422      0.2
                                           ----------    -----     ----------    -----
  Total retail loans ....................     392,281     38.9        390,550     39.8
                                           ----------    -----     ----------    -----

Total loans receivable ..................  $1,008,081    100.0%    $  981,994    100.0%
                                           ==========    =====     ==========    =====
</TABLE>

                                       21
<PAGE>

      Total loans increased 2.7% during the first six months of 2004 as the
Company continued its efforts to increase total commercial loans which grew over
4% since December 31, 2003. Total loan originations for the second quarter of
2004 were strong with over $130 million in new loan and line of credit
originations. This was a 65% increase over the first quarter of 2004. The
Company believes its loan pipeline at the end of the second quarter remains
strong with over $82 million of commercial and retail loan commitments as of
June 30, 2004.

      Allowance for Losses on Loans. At June 30, 2004, the Bank's allowance for
losses on loans amounted to $11.3 million or 47.83% and 1.12% of the Bank's
non-performing loans and total loans receivable, respectively. Management of the
Bank believes that, as of June 30, 2004, the allowance for losses on loans was
adequate.

      The following is a summary of changes in the allowance for losses on loans
for the periods presented:

<TABLE>
<CAPTION>
                                           SIX MONTHS ENDED JUNE 30,
                                           -------------------------
                                              2004           2003
                                           -----------    ----------
                                            (Dollars in thousands)
<S>                                        <C>            <C>
Balance at beginning of period...........  $   10,453     $   8,674
Provision for losses on loans............       2,657           987
Charge-offs..............................      (2,035)         (324)
Recoveries...............................         224           149
                                           ----------     ---------
Balance at end of period.................  $   11,299     $   9,486
                                           ==========     =========
</TABLE>

      During the second quarter of 2004, the Company increased its provision for
losses on loans due to the following:

-     An additional provision of $400,000 on a $4.5 million non-performing
      commercial real estate loan which was secured by a motel. During the
      second quarter, the Company foreclosed on the collateral, incurred a $1.8
      million charge-off to reduce the carrying value to its net realizable
      value and then sold the asset for $2.7 million.

-     A classification downgrade with respect to an $8.8 million commercial real
      estate loan secured by a hotel in Michigan. The Company is seeking to
      obtain additional collateral to reduce the risk of loss, if any. The
      change in the classification resulted in a $660,000 additional provision
      increasing the allowance for losses on loans.

-     The requirement by the Office of Thrift Supervision (OTS) to establish a
      $715,000 general reserve for one commercial real estate loan participation
      purchased from a lending company that has filed for bankruptcy and is
      under investigation for fraud. While the Company currently believes its
      $2.9 million loan is not substantially at risk of loss, the Company has
      nevertheless established this general reserve in accordance with OTS
      requirements.

                                       22
<PAGE>

      Non-performing Assets. The following table provides information relating
to the Company's non-performing assets as of the dates indicated.

<TABLE>
<CAPTION>
                                                       JUNE 30, 2004  DECEMBER 31, 2003
                                                       -------------  -----------------
                                                            (Dollars in thousands)
<S>                                                    <C>            <C>
Non-accrual loans:
   Commercial loans:
     Commercial real estate..........................  $     13,905     $     11,460
     Construction and land development...............         3,525            4,180
     Commercial and industrial.......................         1,058            1,205
                                                       ------------     ------------
     Total commercial loans..........................        18,488           16,845

   Retail loans:
     Single-family residential.......................         4,962            5,584
     Home equity.....................................           128              272
     Other...........................................            44               19
                                                       ------------     ------------
     Total retail loans..............................         5,134            5,875
                                                       ------------     ------------
     Total non-accruing loans........................        23,622           22,720
Other real estate owned, net.........................           776              206
                                                       ------------     ------------
   Total non-performing assets.......................  $     24,398     $     22,926
                                                       ============     ============

Performing troubled debt restructurings..............  $         42     $        296

Non-performing assets to total assets................          1.66%            1.46%
Non-performing loans to total loans..................          2.34             2.31
Total non-performing assets and troubled debt
   restructurings to total assets....................          1.66             1.48
</TABLE>

      The increase in non-performing commercial real estate loans at June 30,
2004 from December 31, 2003 relates to the transfer of the $8.7 million loan
secured by a full-service hotel in the Chicago metropolitan area to
non-performing status in April 2004. The Company is in the process of assessing
the value of the collateral and anticipates completing that process by the end
of the third quarter. Also contributing to the increase is the transfer of two
loans totaling $2.2 million which are secured by a country club in Indiana. The
Company has begun foreclosure proceedings on the collateral, believes it is
fully collateralized with no risk of loss and anticipates resolution of these
two loans by the end of 2004.

      Partially offsetting the increase in non-performing commercial loans was
the foreclosure on and transfer of the $4.5 million motel loan to real estate
owned prior to it being sold in the second quarter of 2004 and the full payoff
of a $3.8 million loan secured by a strip mall that had been classified as
non-performing during the fourth quarter of 2003.

      One non-performing construction and land development loan totaling
$560,000 was paid in full during the second quarter of 2004 decreasing the total
non-performing loans in this category from December 31, 2003.

                                       23
<PAGE>

      Deposits and Borrowed Money. The following table sets forth the dollar
amount of and the percentage of total deposits in each deposit category offered
by the Bank at the dates indicated.

<TABLE>
<CAPTION>
                                           JUNE 30, 2004         DECEMBER 31, 2003
                                      ----------------------  ----------------------
                                        AMOUNT    PERCENTAGE    AMOUNT    PERCENTAGE
                                        ------    ----------    ------    ----------
                                                  (Dollars in thousands)
<S>                                   <C>         <C>         <C>         <C>
Checking accounts:
   Non-interest bearing.............  $   46,941      5.3%    $   36,358      3.7%
   Interest bearing.................      95,638     10.9         91,618      9.4
Money market accounts...............     143,588     16.3        123,851     12.7
Savings accounts....................     209,005     23.8        204,621     21.0
                                      ----------    -----     ----------    -----
     Core deposits..................     495,172     56.3        456,448     46.8
Certificates of deposit:
   $100,000 or less.................     296,541     33.8        391,327     40.1
   Over $100,000....................      87,389      9.9        127,594     13.1
                                      ----------    -----     ----------    -----
     Time Deposits..................     383,930     43.7        518,921     53.2
                                      ----------    -----     ----------    -----
       Total Deposits...............  $  879,102    100.0%    $  975,369    100.0%
                                      ==========    =====     ==========    =====
</TABLE>

      Deposits were $879.1 million at June 30, 2004 compared to $975.4 million
at December 31, 2003. The decrease of $96.3 million was primarily the result of
a reduction of $135.0 million in certificates of deposit, partially offset by an
increase in core deposits of $38.7 million. The decrease in the certificates was
primarily due to the runoff of above-market rate certificates as these
certificates matured during the second quarter of 2004.

      The Company has made progress in reducing the cost of its deposits by
increasing its non-interest bearing deposits by 29% since December 31, 2003.
Total core deposits are also up over 5% during the second quarter of 2004 and 8%
for the first six months of 2004 as compared to March 31, 2004 and December 31,
2003, respectively. These increases are a direct result of the Company's
promotional efforts and retail incentive programs which have focused on the
generation of low-cost deposits.

      Borrowed money consists of the following:

<TABLE>
<CAPTION>
                                                      JUNE 30, 2004     DECEMBER 31, 2003
                                                   ------------------  ------------------
                                                   WEIGHTED            WEIGHTED
                                                   AVERAGE             AVERAGE
                                                    RATE      AMOUNT     RATE     AMOUNT
                                                   --------  --------  --------  --------
                                                           (Dollars in thousands)
<S>                                                <C>       <C>       <C>       <C>
Secured advances from FHLB - Indianapolis:
   Maturing in 2010 - fixed-rate...............      5.92%   $400,000    5.92%   $400,000
   Maturing in 2014 - fixed-rate...............      6.71       1,244    6.71       1,244
   Maturing in 2018 - fixed-rate...............      5.54       2,911    5.54       2,911
   Maturing in 2019 - fixed-rate...............      6.32       7,777    6.32       7,835
Secured advances from FHLB - Chicago:
   Maturing in 2008 - fixed-rate...............      5.26       6,500    5.26       6,500
                                                             --------            --------
                                                             $418,432            $418,490
                                                             ========            ========
Weighted-average stated interest rate..........      5.92%               5.92%
</TABLE>

                                       24
<PAGE>

      Advances with final maturities in 2008 and 2010 contain quarterly call
dates by the FHLB through maturity. Advances maturing in 2019 are amortizing
notes.

      The high cost of these advances continued to have a significant adverse
impact on the Company's net interest margin. As such, the Company is currently
analyzing the potential risks and rewards of prepaying these advances. The
prepayment penalty is calculated and set by the FHLB pursuant to a specified
formula which makes the FHLB financially indifferent to the Company's decision
to prepay the advance. As of June 30, 2004, the prepayment penalty was estimated
at $37.2 million.

      As part of the analysis of potential risks and rewards, the Company's
Asset/Liability Committee (ALCO) is evaluating various options to generate the
liquidity needed to pay the principal due along with the penalty. The
Committee's analysis includes the potential use of new fixed-rate FHLB advances
with maturities ranging from one to three years, new variable-rate FHLB
advances, brokered and retail deposits, and asset sales to generate the needed
liquidity.

      If the advances are prepaid, the penalty would have a significant adverse
impact on the Company's financial results for the quarter and the year in which
the debt is repaid; however, the Company would begin to realize reduced interest
expense and a corresponding increase in its net interest margin. There can be no
assurances that the Company will prepay these advances or at what the specific
amount the prepayment penalty will be in the event that the Company does prepay
these borrowings.

      Pursuant to collateral agreements with the Federal Home Loan Bank of
Indianapolis (FHLB-IN), advances are secured by the following assets as of June
30, 2004:

<TABLE>
<CAPTION>
                                   AMOUNT
DESCRIPTION OF COLLATERAL          PLEDGED
-------------------------        -----------
                                 (Dollars in
                                  thousands)
<S>                              <C>
FHLB-IN stock                    $    27,072
First mortgage loans                 301,022
Mortgage-backed securities           105,526
Agency securities                     65,593
                                 -----------
                                 $   499,213
                                 ===========
</TABLE>

      Pursuant to collateral agreements with the Federal Home Loan Bank of
Chicago (FHLB-C), advances are secured by stock in the FHLB-C and FHLB corporate
notes with a carrying value of $14.8 million as of June 30, 2004.

      As of June 30, 2004, the Company had two lines of credit with a maximum of
$25.0 million and $15.0 million, respectively, in unsecured overnight federal
funds at the market rate for the purchase of federal funds at the time of
request. The lines were not used during the six months ended June 30, 2004.

                                       25
<PAGE>

      Capital Resources. Stockholders' equity was $154.5 million at June 30,
2004 as compared to $156.0 million at December 31, 2003. The decrease was
primarily due to:

-     a shift from an unrealized gain of $908,000 at December 31, 2003 to an
      unrealized loss of $1.1 million at June 30, 2004,

-     dividends declared during the first six months of 2004 totaling $2.4
      million, and

-     repurchases of the Company's common stock during the first six months of
      2004 totaling $854,000.

Partially offsetting the above decreases in stockholders' equity, the Company
also realized during the first six months of 2004:

-     year to date net income of $887,000,

-     vesting of $1.3 million of common stock under the Company's Recognition
      and Retention Plan, and

-     stock option exercises totaling $1.5 million.

      Primarily during the early part of the second quarter of 2004, the Company
repurchased 55,459 shares of its common stock at an average price of $14.01 per
share pursuant to the share repurchase programs announced in July 2002 and March
2003. Since its initial public offering, the Company has repurchased an
aggregate of 11,591,504 shares of its common stock at an average price of $11.75
per share. As of June 30, 2004, the Company has 1,181,268 of shares remaining
for repurchase in its current share repurchase program.

         At June 30, 2004, the Bank's regulatory capital was in excess of
regulatory limits set by the OTS. The current requirements and the Bank's actual
levels at June 30, 2004 and at December 31, 2003 are provided below:

<TABLE>
<CAPTION>
                                                                     TO BE WELL-CAPITALIZED
                                                                          UNDER PROMPT
                                               FOR CAPITAL ADEQUACY    CORRECTIVE ACTION
                                   ACTUAL           PURPOSES               PROVISIONS
                             ----------------  --------------------  ----------------------
                              AMOUNT    RATIO     AMOUNT   RATIO        AMOUNT     RATIO
                             --------  ------    --------  ------      ---------  -------
                                                  (Dollars in thousands)
<S>                          <C>       <C>     <C>         <C>         <C>        <C>
As of June 30, 2004:
   Risk-based..............  $142,025  12.96%    $ 87,664  >8.00%      $ 109,580  >10.00%
   Tangible................   130,890   8.96       21,906  >1.50          29,207   >2.00
   Core....................   130,890   8.96       58,415  >4.00          73,018   >5.00

As of December 31, 2003:
   Risk-based..............  $141,974  13.04%    $ 87,083  >8.00%      $ 108,854  >10.00%
   Tangible................   131,521   8.46       23,307  >1.50          31,076   >2.00
   Core....................   131,521   8.46       62,152  >4.00          77,690   >5.00
</TABLE>

                                       26
<PAGE>

LIQUIDITY AND COMMITMENTS

      The Company's liquidity, represented by cash and cash equivalents, is a
product of operating, investing and financing activities. The Company's primary
historical sources of funds are:

      -     deposits,

      -     scheduled payments of amortizing loans and mortgage-related
            securities,

      -     prepayments and maturities of outstanding loans and mortgage-related
            securities,

      -     maturities of investment securities and other short-term
            investments,

      -     funds provided from operations, and

      -     borrowings from the FHLB.

      Scheduled payments from the amortization of loans, mortgage-related
securities, maturing investment securities, and short-term investments are
relatively predictable sources of funds, while deposit flows and loan
prepayments are greatly influenced by market interest rates, economic conditions
and competitive rate offerings. In addition, the Company invests excess funds in
federal funds sold and other short-term interest-earning assets which provide
liquidity to meet lending requirements.

      At June 30, 2004, the Company had cash and cash equivalents of $33.5
million which was a decrease of $144.7 million from December 31, 2003. The
decrease was mainly caused by the following:

      -     a decrease in total deposits of $96.3 million,

      -     loan originations, net of principal payments received, of $32.2
            million, and

      -     net purchases of securities totaling $24.6 million.

Cash flows from operating activities also provided $6.8 million of liquidity to
slightly offset the above decreases in cash and cash equivalents.

      The Company uses its sources of funds primarily to meet its ongoing
commitments, fund loan commitments, pay maturing certificates of deposit and
savings withdrawals, and maintain a securities portfolio. The Company
anticipates that it will continue to have sufficient funds to meet its current
commitments. Should the Company choose to repay the FHLB advances prior to
maturity, the Company would generate liquidity through various options including
brokered certificates of deposit, borrowing from the FHLB and utilizing the
liquidity in its investment portfolio. Through the Company's ALCO, options for
borrowing funds at both fixed- and variable-rates with staggered maturities
would be considered in an effort to minimize the interest rate risk associated
with taking on new debt.

      The liquidity needs of the parent company, CFS Bancorp, Inc., consist
primarily of operating expenses, dividend payments to stockholders and stock
repurchases. The primary sources of liquidity are securities available-for-sale
and dividends from the Bank. Under regulations of the OTS, without prior
approval, these dividends are limited to the extent of the Bank's cumulative
earnings for the year. On a parent company-only basis, at June 30, 2004, the

                                       27
<PAGE>

Company had $5.6 million in securities available-for-sale. These sources of
liquidity can also be supplemented by fees assessed by the Company to the Bank.

      CONTRACTUAL OBLIGATIONS. The following table presents significant fixed
and determinable contractual obligations to third parties by payment date as of
June 30, 2004.

<TABLE>
<CAPTION>
                                                         PAYMENTS DUE BY PERIOD
                                        -------------------------------------------------------
                                                    OVER ONE    OVER THREE
                                        ONE YEAR     THROUGH     THROUGH    OVER FIVE
                                        OR LESS    THREE YEARS  FIVE YEARS    YEARS     TOTAL
                                        --------   -----------  ----------  ---------  --------
                                                        (Dollars in thousands)
<S>                                     <C>        <C>          <C>         <C>        <C>
Federal Home Loan Bank advances(1)...   $    211     $    467    $  7,035   $ 410,719  $418,432
Operating leases ....................        578          846         219           -     1,643
                                        --------     --------    --------   ---------  --------
                                        $    789     $  1,313    $  7,254   $ 410,719  $420,075
                                        ========     ========    ========   =========  ========
</TABLE>

--------------------
(1)   Does not include interest expense at the weighted-average stated rate of
      5.92% for the periods presented.

      See the "Deposits and Borrowed Money" section for further discussion
surrounding the Company's FHLB advances. The Company's operating lease
obligations reflected above include the future minimum rental payments, by year,
required under the lease terms for premises and equipment. Many of these leases
contain renewal options, and certain leases provide options to purchase the
leased property during or at the expiration of the lease period at specific
prices.

      The Company also has commitments to fund maturing certificates of deposit
which are scheduled to mature within one year or less. These deposits total
$292.1 million at June 30, 2004. Based on historical experience and the fact
that these deposits are at current market rates, management believes that a
significant portion of the maturing deposits will remain with the Bank.

      OFF-BALANCE SHEET OBLIGATIONS. The Company is a party to financial
instruments with off-balance sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized in
the balance sheet. The Company's exposure to credit loss in the event of
non-performance by the third party for commitments to extend credit and letters
of credit is represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.

      The following table details the amounts and expected maturities of
significant commitments as of June 30, 2004.

                                       28
<PAGE>

<TABLE>
<CAPTION>
                                                           OVER ONE    OVER THREE
                                               ONE YEAR     THROUGH     THROUGH    OVER FIVE
                                               OR LESS    THREE YEARS  FIVE YEARS    YEARS     TOTAL
                                               --------   -----------  ----------  ---------  --------
                                                               (Dollars in thousands)
<S>                                            <C>        <C>          <C>         <C>        <C>
Commitments to extend credit:
   Commercial ...............................  $ 41,057     $     -     $      -     $     -  $ 41,057
   Retail ...................................    19,105           -            -           -    19,105
Commitments to purchase loans:
   Commercial ...............................    22,500           -            -           -    22,500
   Retail ...................................         -           -            -           -         -
Commitments to fund unused construction
   Loans ....................................    36,303           -            -           -    36,303
Commitments to fund unused lines of
   credit:
   Commercial ...............................    51,736           -            -           -    51,736
   Retail ...................................    76,071           -            -           -    76,071
Letters of credit ...........................     5,744       1,030          287           -     7,061
Credit enhancements .........................         -       6,578        8,887      33,641    49,106
                                               --------     -------     --------    --------  --------
                                               $252,516     $ 7,608     $  9,174    $ 33,641  $302,939
                                               ========     =======     ========    ========  ========
</TABLE>

      The above listed commitments do not necessarily represent future cash
requirements, in that these commitments often expire without being drawn upon.

      Letters of credit include credit enhancements which are related to the
issuance by municipalities of taxable and nontaxable revenue bonds. The proceeds
from the sale of such bonds are loaned to for-profit and not-for-profit
companies for economic development projects. In order for the bonds to receive a
triple-A rating which provides for a lower interest rate, the FHLB-IN issues, in
favor of the bond trustee, an Irrevocable Direct Pay Letter of Credit for the
account of the Bank. Since the Bank, in accordance with the terms and conditions
of a Reimbursement Agreement between the FHLB-IN and the Bank, would be required
to reimburse the FHLB-IN for draws against the Letter of Credit, these
facilities are analyzed, appraised, secured by real estate mortgages, and
monitored as if the Bank funded the project initially.

      The Company has not used, and has no intention of using, any significant
off-balance sheet financing arrangements for liquidity purposes. In addition,
the Company has not had, and has no intention to have, any significant
transactions, arrangements or other relationships with any unconsolidated,
limited purpose entities that could materially affect the Company's liquidity or
capital resources. The Company has not traded in and has no intention of trading
in derivatives or commodity contracts.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

      For a discussion of the Company's asset and liability management policies
as well as the potential impact of interest rate changes upon the market value
of the Company's portfolio equity, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's annual report to
stockholders for the year ended December 31, 2003. There has been no material
change in the Company's assessment of market risk since December 31, 2003.

                                       29
<PAGE>

ITEM 4. CONTROLS AND PROCEDURES

      No change in the Company's internal control over financial reporting (as
defined in Rule 13a - 15(f) or 15(d) - 15(f) under the Securities Exchange Act
of 1934, as amended) occurred during the last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.

      Management evaluated, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, the effectiveness of its
disclosure controls and procedures (as defined in Rules 13a - 15(e) or 15(d) -
15(e) under the Securities Exchange Act of 1934, as amended) as of the end of
the period covered by this report. Based on such evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and regulations and are
operating in an effective manner.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

      The Bank's suit that was filed against the U.S. government during 1993
went to trial in June 2004 in the U.S. Court of Claims. The Bank had already
been granted summary judgment on its breach of contract claim, leaving for trial
the issue of damages. The trial concluded in early July 2004. The Bank
anticipates a ruling in early 2005 following additional briefings. The Bank is
unable to predict the outcome of its damage claim against the United States and
the amount of damages that may be awarded to the Bank, if any, in the event that
a judgment is rendered in the Bank's favor. Consequently, the Bank cannot give
assurances as to the results of this claim or the timing of any proceedings in
relation thereto. The cost, including attorneys' fees, experts' fees and related
expenses, of the litigation was approximately $939,000 for the second quarter of
2004. The Bank estimates that the expenses related to this case will be $300,000
for the remainder of 2004.

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS FROM REGISTERED SECURITIES AND
        ISSUER PURCHASES OF EQUITY SECURITIES

      (a) - (d) Not applicable.

      (e) The following table presents information related to purchases made by
or on behalf of the Company of shares of the Company's common stock during the
indicated periods.

                                       30
<PAGE>

<TABLE>
<CAPTION>
                                                                      MAXIMUM NUMBER OF
                                                  TOTAL NUMBER OF    SHARES THAT MAY YET
                                                SHARES PURCHASED AS           BE
                   TOTAL NUMBER  AVERAGE PRICE    PART OF PUBLICLY     PURCHASED UNDER
                    OF SHARES         PAID        ANNOUNCED PLANS        THE PLANS OR
     PERIOD         PURCHASED      PER SHARE        OR PROGRAMS          PROGRAMS(1)
----------------   ------------  -------------  -------------------  -------------------
<S>                <C>           <C>            <C>                  <C>
April 1-30, 2004      20,524       $   14.77          20,524              1,216,203
May 1-31, 2004             -               -               -              1,216,203
June 1-30, 2004       34,935           13.56          34,935              1,181,268
                      ------       ---------          ------              ---------
           Total      55,459       $   14.01          55,459              1,181,268
                      ======       =========          ======              =========
</TABLE>

---------------
(1)   The Company instituted a repurchase program for 1,300,000 shares in July
      2002 which was publicly announced on July 23, 2002. Prior to April 1,
      2004, a total of 1,263,273 shares had been repurchased under that program.
      A total of 20,524 and 16,203 shares were purchased in open-market
      transactions in April and June, 2004, respectively under this program
      which was completed with the June purchases. A repurchase program for an
      additional 1,200,000 shares was publicly announced on March 17, 2003.
      Prior to April 1, 2004, no shares had been repurchased under this program.
      During June 2004, 18,732 shares were purchased under this program. This
      program does not have an expiration date.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

      None.

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

      (a) An annual meeting of stockholders of the Company was held on April 27,
2004 ("Annual Meeting").

      (b) None.

      (c) There were 12,254,223 shares of Common Stock of the Company eligible
to be voted at the Annual Meeting, and 10,814,913 shares were represented at the
meeting by the holders thereof, which constituted a quorum. The items voted upon
at the Annual Meeting and the vote for each proposal were as follows:

      (1) Election of directors for a three-year term.

      Frank D. Lester      9,803,774      FOR   1,011,139  WITHHELD
      Thomas F. Prisby     9,989,495      FOR     825,418  WITHHELD

      (d) None.

ITEM 5. OTHER INFORMATION

      None.

                                       31
<PAGE>

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

      (a)     List of exhibits (filed herewith unless otherwise noted).

      3.1     Certificate of Incorporation of CFS Bancorp, Inc.*

      3.2     Bylaws of CFS Bancorp, Inc.*

      4.0     Form of Stock Certificate of CFS Bancorp, Inc.*

      10.1    Employment Agreement entered into between Citizens Financial
              Services, FSB and Thomas F. Prisby**

      10.2    Employment Agreement entered into between Citizens Financial
              Services, FSB and James W. Prisby**

      10.4    Employment Agreement entered into between CFS Bancorp, Inc. and
              Thomas F. Prisby**

      10.5    Employment Agreement entered into between CFS Bancorp, Inc. and
              James W. Prisby**

      10.7    CFS Bancorp, Inc. Amended and Restated 1998 Stock Option Plan***

      10.8    CFS Bancorp, Inc. Amended and Restated 1998 Recognition and
              Retention Plan and Trust Agreement***

      10.9    CFS Bancorp, Inc. 2003 Stock Option Plan****

      10.10   Employment Agreement entered into between Citizens Financial
              Services, FSB and Charles V. Cole*****

      10.11   Employment Agreement entered into between Citizens Financial
              Services, FSB and Thomas L. Darovic*****

      10.12   Employment Agreement entered into between CFS Bancorp, Inc. and
              Charles V. Cole*****

      10.13   Employment Agreement entered into between CFS Bancorp, Inc. and
              Thomas L. Darovic*****

      31.1    Rule 13a-14(a) Certification of Chief Executive Officer

      31.2    Rule 13a-14(a) Certification of Chief Financial Officer

      32.0    Section 1350 Certifications

----------------
*      Incorporated by Reference from the Company's Registration Statement on
       Form S-1 filed on March 26, 1998, as amended and declared effective on
       May 14, 1998.

**     Incorporated by Reference from the Company's report on Form 10-Q for the
       quarterly period ended June 30, 2003.

***    Incorporated by Reference from the Company's Definitive Proxy Statement
       for the Annual Meeting of Stockholders filed on March 23, 2001.

****   Incorporated by Reference from the Company's Definitive Proxy Statement
       for the Annual Meeting of Stockholders filed on March 31, 2003.

*****  Incorporated by Reference from the Company's annual report on Form 10-K
       for the year ended December 31, 2003.

                                       32
<PAGE>

      (b) Reports filed on Form 8-K.

      On April 27, 2004, the Company filed a Current Report on Form 8-K, dated
April 27, 2004, furnishing its report of earnings for the quarter ended March
31, 2004.

      On May 19, 2004, the Company filed a Current Report on Form 8-K, dated May
18, 2004, in connection with the announcement of two new Company directors.

      On May 26, 2004, the Company filed a Current Report on Form 8-K, dated May
24, 2004, in connection with the change in its certifying accountant.

      On May 28, 2004, the Company filed a Current Report on Form 8-K, dated May
27, 2004, in connection with the engagement of the Company's new auditors.

      On June 3, 2004, the Company filed a Current Report on Form 8-K, dated
June 2, 2004, in connection with the completion of its seventh stock repurchase
program.

                                       33
<PAGE>

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

CFS BANCORP, INC.

Date: August 9, 2004                   By: /s/ Thomas F. Prisby
                                           -------------------------------------
                                           Thomas F. Prisby, Chairman and
                                           Chief Executive Officer

Date: August 9, 2004                   By: /s/ Charles V. Cole
                                           -------------------------------------
                                           Charles V. Cole, Executive Vice
                                           President and Chief Financial Officer

                                       34